a50741500.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, 2013

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
 
91-1313292
 (State or other jurisdiction of 
incorporation or organization)   
 
  (IRS Employer
Identification Number)
 
19950 7th Avenue NE, Suite 200, 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 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 x    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer         o                                                                Accelerated Filer               x                            
Non-accelerated Filer  o                              Smaller Reporting Company    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)Yeso    No   x

Partnership units outstanding at September 30, 2013: 4,442,511
 
 
 
 

 
 
Pope Resources
Index to Form 10-Q Filing
For the Nine Months Ended September 30, 2013

  Description
 
Page Number
  Part I. Financial Information
   
     
  Item 1 Financial Statements (unaudited)
   
  Condensed Consolidated Balance Sheets
 
4
  Condensed Consolidated Statements of Comprehensive Income  (Loss)
 
5
  Condensed Consolidated Statements of Cash Flows
 
6
  Notes to Condensed Consolidated Financial Statements
 
7
     
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
13
     
  Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
37
     
  Item 4. Controls and Procedures
 
37
     
  Part II. Other Information
   
      
  Item 1. Legal Proceedings
 
38
     
  Item 1A. Risk Factors
 
38
     
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
41
     
  Item 3. Defaults Upon Senior Securities
 
41
      
  Item 4. Submission of Matters to a Vote of Security Holders
 
41
     
  Item 5. Other Information
 
41
     
  Item 6. Exhibits
 
41
     
  Signatures
 
43
 
 
 

 
 
 
 
 

 
P A R T I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS


 
 
3

 

 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
September 30, 2013 and December 31, 2012
(in thousands)
 
   
2013
 
2012
 
ASSETS
           
Current assets
           
   Partnership cash and cash equivalents
  $ 5,932     $ 2,517  
     ORM Timber Funds cash and cash equivalents
    1,128       1,262  
    Cash and cash equivalents
    7,060       3,779  
 Accounts receivable, net
    2,421       1,208  
 Land held for sale
    9,078       1,179  
   Prepaid expenses and other
    1,362       1,088  
        Total current assets
    19,921       7,254  
Properties and equipment, at cost
               
   Timber and roads, net of accumulated depletion
               
   of $90,887 and $82,094
    175,221       183,287  
Timberland
    40,726       41,201  
 Land held for development
    27,321       29,039  
   Buildings and equipment, net of accumulated
               
  depreciation of $6,351 and $6,012
    5,907       6,154  
     Total properties and equipment, at cost
    249,175       259,681  
                 
Other assets
    456       564  
Total assets
  $ 269,552     $ 267,499  
                 
LIABILITIES, PARTNERS' CAPITAL AND NONCONTROLLING INTERESTS
       
Current liabilities
               
Accounts payable
  $ 1,905     $ 1,673  
Accrued liabilities
    4,285       2,866  
   Current portion of long-term debt
    116       125  
 Deferred revenue
    1,105       2,065  
 Other current liabilities
    712       993  
Total current liabilities
    8,123       7,722  
   Long-term debt, net of current portion
    57,628       43,710  
 Other long-term liabilities
    13,249       13,426  
Partners' capital and noncontrolling interests
               
    General partners' capital (units issued and outstanding 60 and 60)
    956       902  
    Limited partners' capital (units issued and outstanding 4,312 and 4,299)
    67,108       63,321  
Noncontrolling interests
    122,488       138,418  
      Total partners' capital and noncontrolling interests
    190,552       202,641  
Total liabilities, partners' capital, and noncontrolling interests
  $ 269,552     $ 267,499  
                 
See accompanying notes to condensed consolidated financial statements.
         
                 
 
 
4

 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  (Unaudited)
Pope Resources, a Delaware Limited Partnership
For the Three Months and Nine Months Ended September 30, 2013 and 2012
(in thousands, except per unit data)
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenue
  $ 11,724     $ 14,595     $ 51,639     $ 41,189  
Cost of sales
    (7,769 )     (7,037 )     (28,718 )     (22,157 )
Operating expenses
    (3,483 )     (3,314 )     (9,401 )     (8,200 )
Real estate environmental remediation
    -       -       -       (12,500 )
General and administrative expenses
    (1,002 )     (832 )     (3,433 )     (3,000 )
     Income (loss) from operations
    (530 )     3,412       10,087       (4,668 )
                                 
Other expense
                               
  Interest expense, net
    (385 )     (352 )     (1,083 )     (1,120 )
                                 
Income (loss) before income taxes
    (915 )     3,060       9,004       (5,788 )
Income tax benefit (expense)
    202       (201 )     218       (335 )
     Net income (loss)
    (713 )     2,859       9,222       (6,123 )
                                 
Net loss attributable to noncontrolling
                               
   interests - ORM Timber Funds
    638       816       315       1,709  
     Net income (loss) attributable to unitholders
    (75 )     3,675       9,537       (4,414 )
Other comprehensive income
    -       -       -       -  
     Comprehensive income (loss) attributable to unitholders
  $ (75 )   $ 3,675     $ 9,537     $ (4,414 )
                                 
                                 
Allocable to general partners
  $ (1 )   $ 51     $ 131     $ (61 )
Allocable to limited partners
    (74 )     3,624       9,406       (4,353 )
     Comprehensive income (loss) attributable to unitholders
  $ (75 )   $ 3,675     $ 9,537     $ (4,414 )
                                 
Basic and diluted earnings (loss) per unit attributable
                               
     to unitholders
  $ (0.03 )   $ 0.81     $ 2.09     $ (1.03 )
                                 
Basic and diluted weighted average units outstanding
    4,371       4,354       4,369       4,350  
                                 
Distributions per unit
  $ 0.55     $ 0.45     $ 1.45     $ 1.25  
                                 
See accompanying notes to condensed consolidated financial statements.
   
 
 
5

 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Nine Months Ended September 30, 2013 and 2012
(in thousands)
 
   
2013
   
2012
 
Net income (loss)
  $ 9,222     $ (6,123 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities
               
     Depletion
    8,700       7,214  
     Timber depletion on land sale
    296       -  
     Real Estate project expenditures
    (6,859 )     (1,316 )
     Equity-based compensation
    988       629  
     Depreciation and amortization
    525       825  
     Deferred taxes
    (262 )     (124 )
     Cost of land sold
    1,529       348  
     (Gain) loss on disposal of property and equipment
    57       (2,752 )
Cash flows from changes in operating accounts
               
     Accounts receivable, net
    (1,213 )     646  
     Contracts receivable
    72       184  
     Prepaid expenses and other current assets
    (19 )     17  
     Accounts payable and accrued liabilities
    1,652       416  
     Deferred revenue
    (960 )     6  
     Environmental remediation
    (441 )     11,998  
     Other current and long-term liabilities
    (12 )     (38 )
       Net cash provided by operating activities
    13,275       11,930  
                 
Cash flows from investing activities
               
     Reforestation and roads
    (1,399 )     (1,003 )
     Buildings and equipment
    (205 )     (240 )
     Proceeds from sale of property and equipment
    -       2,873  
       Net cash provided by (used in) investing activities
    (1,604 )     1,630  
                 
Cash flows from financing activities
               
     Repayment of line of credit, net
    -       (4,956 )
     Proceeds from issuance of long-term debt
    14,000       -  
     Repayment of long-term debt
    (91 )     (25 )
     Payroll taxes paid on unit net settlements
    (241 )     (300 )
     Cash distributions to unitholders
    (6,443 )     (5,514 )
     Cash distributions - ORM Timber Funds, net of distributions to Partnership
    (15,752 )     (2,865 )
     Capital call - ORM Timber Funds, net of Partnership contribution
    137       1,391  
     Other
    -       (16 )
       Net cash used in financing activities
    (8,390 )     (12,285 )
                 
Net increase in cash and cash equivalents
    3,281       1,275  
     Cash and cash equivalents at beginning of period
    3,779       2,653  
     Cash and cash equivalents at end of period
  $ 7,060     $ 3,928  
                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
6

 
 
POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2013

1.
The condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012 and the related condensed consolidated statements of comprehensive income (loss) for the three- and nine-month periods and cash flows for the nine-month periods ended September 30, 2013 and 2012 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 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, 2012, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2012, and should be read in conjunction with such financial statements and notes. The results of operations for the interim periods are not indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2013.
 
In December 2012, we changed the classification of certain Real Estate operating costs related to rental revenue to Real Estate cost of sales.  As such, we have reclassified $312,000 and $936,000 from operating expenses to cost of sales for the quarter and nine months ended September 30, 2012, respectively, to conform to the current year periods.  The reclassifications had no impact on total expenses or income from operations. 

2.
The financial statements in the Partnership's 2012 annual report on Form 10-K include a summary of significant accounting policies of the Partnership and should be read in conjunction with this Quarterly Report on Form 10-Q.
 
3.
The Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In total, these two entities own 60,000 partnership units. The allocation of distributions, profits and losses between the general and limited partners is pro rata across all units outstanding.

4.
ORM Timber Fund I, LP (Fund I), ORM Timber Fund II, Inc. (Fund II), and ORM Timber Fund III (REIT) Inc. (Fund III), collectively “the Funds”, were formed by Olympic Resource Management LLC (ORMLLC), a wholly owned subsidiary of Pope Resources, for the purpose of attracting capital to purchase timberlands. The objective of these Funds is to generate a return on investments through the acquisition, management, value enhancement and sale of timberland properties. Each Fund will operate for a term of ten years from the end of the respective drawdown period, with Fund I terminating in August 2017, Fund II terminating in March 2021, and Fund III terminating on the tenth anniversary of the completion of its drawdown period.  Fund III’s drawdown period will end at the earlier of placement of all committed capital or July 31, 2015. During the fourth quarter of 2012, Fund III acquired 19,000 acres of northern California timberland for a purchase price of $45.1 million which represented a deployment of 25% of the Fund III committed capital.

 
Pope Resources and ORMLLC together own 20% of Fund I and Fund II and 5% of Fund III. The Funds are consolidated into the Partnership’s financial statements based in part on ORMLLC’s controlling role as the general partner or managing member of the Funds. The Funds’ statements of operations for the quarters ended September 30, 2013 and 2012 reflect operating income of $134,000 and loss of $306,000, respectively. These operating results exclude management fees paid by the Funds to ORMLLC of $701,000 and $515,000 for the third quarters of 2013 and 2012, respectively, which are eliminated in consolidation. The Funds’ statements of operations for the nine months ended September 30, 2013 and 2012 reflect operating income of $2.4 million and loss of $8,000, respectively. These operating results exclude management fees paid by the Funds to ORMLLC of $2.1 million and $1.6 million for the nine months ended September 30, 2013 and 2012, respectively, which are eliminated in consolidation. The portion of these fees, among other items of income and expense, attributed to third-party investors is reflected as an adjustment to income in the Partnership’s Condensed Consolidated Statement of Comprehensive Income under the caption “Net loss attributable to noncontrolling interests - ORM Timber Funds.”
 
 
7

 

 
The Partnership’s condensed consolidated balance sheet included assets and liabilities of the Funds as of September 30, 2013 and December 31, 2012, which were as follows:

 
(in thousands)
 
September 30, 2013
   
December 31, 2012
   
 
Assets:
             
 
Cash
  $ 1,128     $ 1,262    
 
Other current assets
    1,061       691    
 
  Total current assets
    2,189       1,953    
 
Timber, timberland and roads (net of $27,279 and $20,664 of accumulated depletion)
    169,714       175,410    
 
Other long-term assets
    100       111    
 
    Total assets
  $ 172,003     $ 177,474    
 
Liabilities and equity:
                 
 
Current liabilities excluding long-term debt
  $ 1,697     $ 1,413    
 
Current portion of long-term debt
    11       34    
 
Total current liabilities
    1,708       1,447    
 
Long-term debt
    25,000       11,002    
 
  Total liabilities
    26,708       12,449    
 
Funds' equity
    145,295       165,025    
 
    Total liabilities and equity
  $ 172,003     $ 177,474    
 
5.
In the presentation of the Partnership’s revenue and operating income (loss) by segment, all intersegment revenue and expense is eliminated to determine operating income (loss) reported externally. The following tables reconcile internally reported income (loss) from operations to externally reported income (loss) from operations by business segment, for the three and nine months ended September 30, 2013 and 2012:
 
 
8

 
 
    Fee Timber    
Timberland
                   
Three Months Ended
 
Pope
Resources
   
ORM
Timber
   
Total Fee
   
Management
&
   
Real
             
September 30, (in thousands)
 
Timber
   
Funds
   
Timber
   
Consulting
   
Estate
   
Other
   
Consolidated
 
2013
                                         
Revenue internal
  $ 5,167     $ 5,300     $ 10,467     $ 701     $ 1,454     $ -     $ 12,622  
Eliminations
    (168 )     -       (168 )     (701 )     (29 )     -       (898 )
Revenue external
    4,999       5,300       10,299       -       1,425       -       11,724  
                                                         
Cost of sales
    (2,374 )     (4,475 )     (6,849 )     -       (920 )     -       (7,769 )
                                                         
Operating, general and
                                                       
   administrative expenses internal
    (1,231 )     (1,386 )     (2,617 )     (649 )     (1,087 )     (1,030 )     (5,383 )
Eliminations
    1       695       696       174       -       28       898  
Operating, general and
                                                       
   administrative expenses external
    (1,230 )     (691 )     (1,921 )     (475 )     (1,087 )     (1,002 )     (4,485 )
                                                         
Income (loss) from operations
                                                 
   internal
    1,562       (561 )     1,001       52       (553 )     (1,030 )     (530 )
Eliminations
    (167 )     695       528       (527 )     (29 )     28       -  
Income (loss) from operations
                                                 
   external
  $ 1,395     $ 134     $ 1,529     $ (475 )   $ (582 )   $ (1,002 )   $ (530 )
                                                         
2012
                                                       
Revenue internal
  $ 6,006     $ 3,499     $ 9,505     $ 515     $ 5,242     $ -     $ 15,262  
Eliminations
    (140 )     -       (140 )     (515 )     (12 )     -       (667 )
Revenue external
    5,866       3,499       9,365       -       5,230       -       14,595  
                                                         
Cost of sales
    (2,797 )     (3,259 )     (6,056 )     -       (981 )     -       (7,037 )
                                                         
Operating, general and
                                                       
   administrative expenses internal
    (1,120 )     (1,061 )     (2,181 )     (512 )     (1,288 )     (832 )     (4,813 )
Eliminations
    12       515       527       140       -       -       667  
Operating, general and
                                                       
   administrative expenses external
    (1,108 )     (546 )     (1,654 )     (372 )     (1,288 )     (832 )     (4,146 )
                                                         
Income (loss) from operations
                                                 
   internal
    2,089       (821 )     1,268       3       2,973       (832 )     3,412  
Eliminations
    (128 )     515       387       (375 )     (12 )     -       -  
Income (loss) from operations
                                                 
   external
  $ 1,961     $ (306 )   $ 1,655     $ (372 )   $ 2,961     $ (832 )   $ 3,412  
                                                         
 
 
9

 
 
      Fee Timber    
Timberland
                   
Nine Months Ended
 
Pope
Resources
   
ORM
Timber
   
Total Fee
   
Management
&
   
Real
             
September 30, (in thousands)
 
Timber
   
Funds
   
Timber
   
Consulting
   
Estate
   
Other
   
Consolidated
 
2013
                                         
Revenue internal
  $ 24,924     $ 19,378     $ 44,302     $ 2,114     $ 7,898     $ -     $ 54,314  
Eliminations
    (449 )             (449 )     (2,114 )     (112 )     -       (2,675 )
Revenue external
    24,475       19,378       43,853       -       7,786       -       51,639  
                                                         
Cost of sales
    (10,394 )     (15,235 )     (25,629 )     -       (3,089 )     -       (28,718 )
                                                         
Operating, general and
                                                       
   administrative expenses internal
    (3,378 )     (3,888 )     (7,266 )     (1,939 )     (2,784 )     (3,520 )     (15,509 )
Eliminations
    25       2,108       2,133       455       -       87       2,675  
Operating, general and
                                                       
   administrative expenses external
    (3,353 )     (1,780 )     (5,133 )     (1,484 )     (2,784 )     (3,433 )     (12,834 )
                                                         
Income (loss) from operations
                                                 
   internal
    11,152       255       11,407       175       2,025       (3,520 )     10,087  
Eliminations
    (424 )     2,108       1,684       (1,659 )     (112 )     87       -  
Income (loss) from operations
                                                 
   external
  $ 10,728     $ 2,363     $ 13,091     $ (1,484 )   $ 1,913     $ (3,433 )   $ 10,087  
                                                         
2012
                                                       
Revenue internal
  $ 24,881     $ 10,854     $ 35,735     $ 1,603     $ 5,905     $ -     $ 43,243  
Eliminations
    (415 )     -       (415 )     (1,603 )     (36 )     -       (2,054 )
Revenue external
    24,466       10,854       35,320       -       5,869       -       41,189  
                                                         
Cost of sales
    (11,149 )     (9,402 )     (20,551 )     -       (1,606 )     -       (22,157 )
                                                         
Operating, general and
                                                       
   administrative expenses internal
    (3,106 )     (3,063 )     (6,169 )     (1,594 )     (14,991 ) *     (3,000 )     (25,754 )
Eliminations
    36       1,603       1,639       415       -       -       2,054  
Operating, general and
                                                       
   administrative expenses external
    (3,070 )     (1,460 )     (4,530 )     (1,179 )     (14,991 )     (3,000 )     (23,700 )
                                                         
Income (loss) from operations
                                                 
   internal
    10,626       (1,611 )     9,015       9       (10,692 )     (3,000 )     (4,668 )
Eliminations
    (379 )     1,603       1,224       (1,188 )     (36 )     -       -  
Income (loss) from operations
                                                 
   external
  $ 10,247     $ (8 )   $ 10,239     $ (1,179 )   $ (10,728 )   $ (3,000 )   $ (4,668 )
                                                         
*Includes $12.5 MM of environmental remediation expense
                         
 
6.
Basic and diluted earnings per unit are calculated by dividing net income attributable to unitholders, adjusted for non-forfeitable distributions paid out to unvested restricted unitholders and Fund II preferred shareholders, by the weighted average units outstanding during the period.
 
 
10

 
 
The following table shows how we arrived at basic and diluted income per unit:
 
   
Quarter Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands, except per unit amounts)
 
2013
   
2012
   
2013
   
2012
 
Net income (loss) attributable to Pope Resources' unitholders
  $ (75 )   $ 3,675     $ 9,537     $ (4,414 )
Less:
                               
  Net income attributable to unvested restricted unitholders
    (39 )     (144 )     (402 )     (71 )
  Fund II preferred share dividends
    (4 )     (4 )     (12 )     (12 )
    Net income (loss) for calculation of EPS
  $ (118 )   $ 3,527     $ 9,123     $ (4,497 )
                                 
Weighted average units outstanding:
                               
Basic
    4,371       4,354       4,369       4,350  
Dilutive effect of unit equivalents
    -       -       -       -  
Diluted
    4,371       4,354       4,369       4,350  
                                 
Earnings (loss) per unit: Basic
  $ (0.03 )   $ 0.81     $ 2.09     $ (1.03 )
Earnings (loss) per unit: Diluted
  $ (0.03 )   $ 0.81     $ 2.09     $ (1.03 )
 
As of September 30, 2013 and 2012 there were no options outstanding.
 
7.
In January 2013, the Partnership granted 30,200 restricted units pursuant to the management incentive compensation program. These restricted units vest ratably over four years with the grant date fair value equal to the market price on the date of grant. Simultaneous with the restricted unit grant to management, members of our Board of Directors received 6,000 restricted units. Restricted units granted to directors are not part of the management incentive compensation program, but are included in the calculation of total equity compensation expense. These awards to directors vest 50% on the third anniversary and 50% on the fourth anniversary of the date of grant. Total equity compensation expense is recognized over the shorter of the vesting period or the period from the date of grant to the point of retirement eligibility. We recognized $225,000 and $110,000 of equity compensation expense in the third quarter of 2013 and 2012, respectively, related to these incentive compensation programs. For the first nine months of 2013 and 2012, we recognized equity compensation expense of $988,000 and $629,000, respectively.
 
8.
Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $973,000 and $1.1 million for the nine months ended September 30, 2013 and 2012, respectively. During the nine months ended September 30, 2013 the Partnership received a net income tax refund of $172,000 compared to $261,000 paid during the nine months ended September 30, 2012.

9.
The Partnership’s financial instruments include cash and cash equivalents and accounts receivable, for which the carrying amount of each represents fair value based on current market interest rates or their short-term nature. Carrying amounts of contracts receivable, although long-term, also approximate fair value based on current market rates.

Fund II has a timberland mortgage with two tranches totaling $25 million with MetLife Insurance Company. The tranches are non-amortizing loans that both mature in September, 2020.  The original $11 million tranche bears interest at 4.85% and the additional tranche of $14 million that we added in August 2013 bears interest at 3.84%. The loan agreement allows for, but does not require, annual principal payments of up to 10% of outstanding principal without incurring a make-whole premium.
 
 
11

 
 
The Partnership’s and the Funds’ fixed-rate debt collectively have a carrying value of $57.7 million and $43.8 million as of September 30, 2013 and December 31, 2012, respectively.   The estimated fair value of this debt, based on current interest rates for similar instruments (Level 2 inputs in the Fair Value Hierarchy), is approximately $60.9 million and $50.1 million, as of September 30, 2013 and December 31, 2012, respectively.

10.
The Partnership, together with the State of Washington’s Department of Ecology (DOE), announced in March 2013 that the two parties had agreed in principle on the scope for the remaining environmental clean-up effort in and around Port Gamble Bay, a process that began in 2002.  In September 2013, the Partnership and DOE reached a tentative agreement on a draft consent decree and clean-up action plan.  The consent decree outlines the terms under which the Partnership will perform the environmental remediation.  It also details the protections that will be afforded the Partnership and any subsequent buyers of the Partnership-owned property from new actions brought by DOE for the same areas and chemical constituents, which include wood waste, carcinogenic polycyclic aromatic hydrocarbons (CPAH) (believed to be sourced from the bay’s creosote pilings) and dioxins.  Included in the consent decree are all Partnership-owned tidelands and state-owned tidelands, as well as submerged lands in the bay.  Additional testing for dioxins will be performed on the former mill site, town, and adjoining upland forests.  As these areas are analyzed further, they will be added to the consent decree.

The clean-up action plan outlines the actions necessary to perform the remediation.  These actions include dredging of the intertidal and sub-tidal sediments, removal of creosote pilings, and the placement of a layer of clean sand in certain locations.

The draft consent decree and clean-up action plan documents were released for a 30 day comment period starting on October 11, 2013.  Assuming there are no significant comments, the documents could be executed in December 2013 and become effective in February 2014.

Clean-up construction activities are expected to begin in the summer of 2015 following the issuance of the necessary permits from local, state, and federal agencies and could take several years to complete.  The total clean-up effort is estimated to cost $17 million.  We expect this cost will be shared by Pope Resources and the Washington State Department of Natural Resources (DNR), the other Potentially Liable Party as determined by DOE.  The Partnership and DNR have had preliminary discussions regarding how costs for the clean-up effort will be shared.

The Partnership had an accrual for estimated environmental remediation costs of $13.5 million as of September 30, 2013 and $13.9 million as of December 31, 2012. The environmental remediation liability represents primarily an estimate of the Partnership’s share of payments necessary to monitor and remedy certain areas in and around the town site and mill site at Port Gamble, Washington, and secondarily at Port Ludlow, Washington.

The environmental liability at September 30, 2013 includes an estimate of $455,000 that management expects to expend in the next 12 months and $13.0 million thereafter. In developing its estimate of the Port Gamble environmental liability, management has employed a Monte Carlo statistical simulation model that suggests a potential aggregate range of clean-up cost from $11.5 million to $16.1 million, which corresponds to a two-standard-deviation range from the mean of possible outcomes generated by the simulation model. This range may change as new information becomes available.


 
12

 

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 management’s estimates based upon our current goals, in light of management’s knowledge of existing circumstances and expectations about future developments. Statements about expectations and future performance are “forward looking statements” which describe our goals, objectives and anticipated performance. These statements 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 differ from our current expectations, and under various circumstances these deviations 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 “Risk Factors” in PART II, ITEM 1A below. Some of the issues that may have an adverse and material impact on our business, operating results and financial condition include economic conditions that affect consumer demand for our products and the prices we receive for them both domestically and overseas, particularly in certain parts of Asia; our ability to consummate previously announced transactions, particularly within our Real Estate segment, and the net proceeds received upon the closing of those transactions; our ability to identify, and to estimate accurately the economic effects of, environmental and other liabilities associated with our assets and operations; government regulation that affects our ability to access our timberlands and harvest logs from those lands; the implications of indirect sales to overseas customers, including currency translation, regulatory and tax matters; the effect of financial market conditions on our investment portfolio and related liquidity; environmental and land use regulations that limit our ability to harvest timber and develop property; the impacts of climate change and natural disasters on our timberlands and on surrounding areas; and the potential impacts of fluctuations in foreign currency exchange rates as they affect demand for our products and customers’ ability to pay. From time to time we identify other risks and uncertainties in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates and expectations as of the date of the report, and we cannot undertake to update these statements as our business operations and environment change.

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

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), is 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. This segment includes timberlands owned directly by the Partnership and operations of the three private equity funds (“Funds”). When we refer to the timberland owned by the Partnership, we describe it as the Partnership’s tree farms. We refer to timberland owned by the Funds as the Funds’ tree farms. When referring collectively to the Partnership’s and Funds’ timberland we will refer to them as the Combined tree farms. Operations in this segment consist of growing timber to be harvested as logs for sale to export brokers and domestic 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 by selling larger parcels to buyers who will take the land further up the value chain, either to home buyers or to developers and lessors of commercial property. Since these land projects span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed, and will not recognize operating income until that project is sold. In addition, within this segment we sometimes negotiate and sell development rights in the form of conservation easements (CE’s) on Fee Timber properties to preclude future development. Our third business, which we refer to as Timberland Management & Consulting, or “TM&C,” is engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership.
 
 
13

 
 
Our current strategy for adding timberland acreage is centered on our private equity timber fund business model. We have closed and invested capital from three timber funds, with assets under management totaling $233 million in value based on appraisals for Funds I and II as of December 31, 2012 and an appraisal for Fund III as of June 30, 2013. Our original 20% co-investments in Funds I and II, and our 5% co-investment in Fund III, which collectively totaled $31 million as of September 30, 2013, afford us a share of the Funds’ operating cash flows while also allowing us to earn asset management and timberland management fees, as well as potential future incentive fees, based upon the overall success of each fund. Management also believes that this strategy allows us to maintain more sophisticated expertise in timberland acquisition, valuation, and management more cost-effectively than could be maintained for the Partnership’s timberlands alone. We believe our co-investment strategy also enhances our credibility with existing and prospective investors by demonstrating that we have both an operational and a financial commitment to the Funds’ success.

We have closed on $180 million of committed capital for Fund III, $9 million of which represents our co-investment commitment.  In the fourth quarter of 2012 we acquired a property in northern California which represented our first acquisition with this committed capital.  As of September 30, 2013, $134 million of undrawn capital commitment remains which includes a commitment to Fund III by the Partnership of nearly $7 million.

The Funds are consolidated into our financial statements, but then income or loss attributable to equity owned by third parties is removed from consolidated results in our Condensed Consolidated Statements of Comprehensive Income (Loss) under the caption “Net loss attributable to non-controlling interests-ORM Timber Funds” to arrive at comprehensive income (loss) attributable to unitholders of the Partnership.

Land held for sale in western Washington by our Real Estate segment represents property that has been deemed suitable for residential and commercial building sites. The markets for these resources suffered during the global financial crisis along with regional and national markets, producing a decline in segment sales, and although we have announced a number of pending transactions that we expect to complete during the fourth quarter of 2013, the timing and success of those transactions cannot be assured. The challenge for our Real Estate segment centers around how and when to “harvest” a parcel of land and optimize value realization by selling the property, balancing the long-term risks and costs of carrying and developing a property against the potential for income and positive cash flows upon sale.

In September 2013, we entered into a purchase and sale agreement with a buyer who will acquire 36 finished lots from our Harbor Hill development in Gig Harbor, Washington for $4 million.  The agreement also contains an option for the buyer to acquire up to an additional 128 finished lots broken down in three phases of at least 36 lots each at amounts ranging from $115,000 to $127,000 per lot.
 
Third quarter highlights

 
·
Harvest volume was 16.1 million board feet (MMBF) in Q3 2013 compared to 17.1 MMBF in Q3 2012, a 6% decrease.  Harvest volume for the first nine months of 2013 was 69.4 MMBF compared to 61.8 MMBF for the first nine months of 2012, a 12% increase.   These harvest volume figures do not include two timber deed sales, one for 1.8 MMBF sold by one of our timber funds in 2013 and the other from a Partnership tree farm in Q2 2012 for 4.4 MMBF.  The harvest volume and log price realization metrics cited below also exclude these timber deed sales.
 
 
14

 

 
 
·
Fund properties contributed 53% of Q3 2013 harvest volume, compared to 41% in Q3 2012.  For the first nine months of 2013, Fund properties contributed 46% of harvest volume, compared to 34% for the first nine months of 2012.

 
·
Mix of harvest volume sold to export markets in Q3 2013 increased to 45% from 14% in Q3 2012, while the mix of harvest volume sold to domestic markets decreased to 36% in Q3 2013 from 71% in Q3 2012.  For the first nine months of 2013, the relative percentages of harvest volume sold to export and domestic markets were 33% and 49%, respectively, compared to 23% and 61% in 2012.

 
·
The percentage of total harvest comprised of Douglas-fir sawlogs dropped to 50% in Q3 2013 from 59% in Q3 2012, with a corresponding increase in the whitewood component to 28% in Q3 2013 from 25% in Q3 2012. Similarly, for the first nine months of 2013, the relative mix of Douglas-fir and whitewood was 61% and 20%, respectively, compared to 66% and 18% for the first nine months of 2012. This shift in species mix is consistent with the higher weighting of total harvest toward Fund properties in both 2013’s third quarter and year-to-date periods compared to the prior year.

 
·
Average realized log price per thousand board feet (MBF) was $591 in Q3 2013 compared to $525 per MBF in Q3 2012, a 13% increase.  For the first nine months of 2013, the average realized log price per MBF was $609 compared to $537 per MBF for the first nine months of 2012, also a 13% increase.

 
·
The $5.4 million of Real Estate development expenditures incurred at our Gig Harbor project enabled recognition of $448,000 of deferred profit on a Q4 2012 sale that is accounted for on a percentage-of-completion basis and sets the stage for expected further sales from this project later this year.

We expect our harvest volume for the full year 2013 to be between 88 and 90 MMBF, with the final total depending on log market conditions for the balance of the year. The projected split of this total annual harvest is approximately 54% from Partnership tree farms and 46% from Fund tree farms.  Generally speaking, we aim to set our annual Partnership tree farm harvest level at a long-term sustainable level, which approximates 44 MMBF based on our current timberland holdings.  During the depths of the housing downturn in 2008 through 2010, however, we deferred considerable harvest volume.  Now that markets appear to be recovering, we have been metering in that deferred volume.  With respect to Fund tree farms, our harvest targets are less guided by long-term sustainability models and more by ten-year harvest plans developed during property acquisition due diligence. These ten-year harvest plans are designed at a fund portfolio level to generate cash flows during the holding period with a view to optimizing total return over each Fund’s ten-year life.  Relative to the planned harvest level for the Fund tree farms, harvest volume was also deferred during the housing downturn, which we are also metering in as markets allow.

We anticipate that a number of land sales currently in the pipeline to close in the fourth quarter of 2013 will increase net income for 2013 significantly above 2012 levels.
 
RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income (loss) for the respective quarter and year-to-date periods ended September 30, 2013 and 2012.  In addition to the table’s numerical analysis, the explanatory text that follows the table describes in detail certain of these changes by business segment.
 
 
15

 
 
         
Nine Months
 
   
Quarter Ended
   
Ended
 
(in thousands)
 
September 30,
   
September 30,
 
Net income (loss) attributable to Pope Resources' unitholders:
           
2013 period
  $ (75 )   $ 9,537  
2012 period
    3,675       (4,414 )
   Variance
  $ (3,750 )   $ 13,951  
Detail of variance:
               
Fee Timber
               
Log volumes (A)
  $ (552 )   $ 4,075  
Log price realizations (B)
    1,061       4,998  
Timber deed sales
    253       (655 )
Production costs
    (619 )     (3,592 )
Depletion
    (174 )     (1,486 )
Other Fee Timber
    (95 )     (488 )
Timberland Management & Consulting
    (103 )     (305 )
Real Estate
               
Land sales
    (2,795 )     1,835  
Conservation easement sales
    (985 )     (985 )
Timber depletion on land sale
    22       (354 )
Other Real Estate
    215       (355 )
Environmental remediation costs
    -       12,500  
General & administrative costs
    (170 )     (433 )
Net interest expense
    (33 )     37  
Other (taxes and noncontrolling interest)
    225       (841 )
Total variances
  $ (3,750 )   $ 13,951  
                 
(A) Volume variance calculated by extending change in sales volume by the average log sales
         
   price for the comparison period.
               
(B)  Price variance calculated by extending the change in average realized price by current
         
   period sales volume.
               
 
Fee Timber
 
Fee Timber results include operations from 111,000 acres of timberland owned by the Partnership and 80,000 acres of timberland owned by the Funds. Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands which are located in western Washington, northwestern Oregon, and northern California, and to a lesser extent, from the ground leases for cellular communication towers, gravel mines and quarries, together with the sale of other resources from our timberlands. Our Fee Timber revenue is driven primarily by the volume of timber harvested and the average log price realized on the sale of that harvested timber. Our volume harvested is typically based on manufactured log sales to mills or log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms. During the second quarter of 2012, we executed a timber deed sale from the Partnership’s timberland, and in the second and third quarters of 2013, we sold volume under the terms of a much smaller timber deed sale from the Funds’ timberland. The metrics used to calculate volumes sold and average price realized during the reporting periods exclude the timber deed sales, except where called out as including it. Harvest volumes are generally expressed in million board feet (MMBF) increments and harvest revenue and related costs are generally expressed in terms of revenue or cost per thousand board feet (MBF). Fee Timber cost of sales, which consist predominantly of harvest, haul, and depletion costs, vary with harvest volume and the resulting revenue. Revenue and cost data related to harvest activities on timberland owned by the Funds are included in this discussion of operations.
 
 
16

 
 
When discussing our Fee Timber operations, we compare the current quarter results to both the previous quarter and the corresponding quarter of the prior year, as well as the current year-to-date results to the prior year-to-date. These comparisons provide an opportunity to note harvest and log price trends that affect Fee Timber operating results. Revenue and operating income for the Fee Timber segment for the quarters ended September 30, 2013, June 30, 2013, and September 30, 2012, were as follows:
 
 
(in millions)
Quarter ended
 
Log Sale
Revenue
   
Mineral,
Cell Tower
& Other
Revenue
   
Total Fee
Timber
Revenue
   
Operating
Income
 
Harvest
Volume
(MMBF)
 
 
Partnership tree farms
  $ 4.6     $ 0.4     $ 5.0     $ 1.4       7.6  
 
Funds' tree farms
    4.8       0.5       5.3       0.1       8.5  
 
Total Fee Timber September 30, 2013
  $ 9.4     $ 0.9     $ 10.3     $ 1.5       16.1  
                                           
 
Partnership tree farms
  $ 8.1     $ 0.3     $ 8.4     $ 3.8       12.9  
 
Funds' tree farms
    8.6       0.1       8.7       1.4       14.0  
 
Total Fee Timber June 30, 2013
  $ 16.7     $ 0.4     $ 17.1     $ 5.2       26.9  
                                           
 
Partnership tree farms
  $ 5.5     $ 0.4     $ 5.9     $ 1.9       10.1  
 
Funds' tree farms
    3.5       -       3.5       (0.3 )     7.0  
 
Total Fee TimberSeptember 30, 2012
  $ 9.0     $ 0.4     $ 9.4     $ 1.6       17.1  
 
Comparing Q3 2013 to Q2 2013. Fee Timber revenue in Q3 2013 decreased $6.8 million, or 40%, from $17.1 million in Q2 2013 to $10.3 million in Q3 2013. This decrease was primarily attributable to a 40% decrease in harvest volume as well as a 5% decrease in realized log prices, which combined for a 44% decrease in the log sale component of revenue from Q2 2013 to Q3 2013. The decline in harvest volume is attributable to front-loading volume into the first half of 2013 due to strong markets. The market price for logs typically declines during the summer months when favorable weather conditions bring increased supply to the market, resulting in weaker prices. We will often throttle back our harvest operations during the third quarter, saving the volume for seasonally stronger markets during other times of the year.  This capability to vary our harvest plan seasonally is made possible because a high proportion of our Combined acres are at lower elevations. Partially offsetting the decrease in log sale revenue was a $135,000 increase in timber deed sale revenue from $118,000 in Q2 2013 to $253,000 in Q3 2013, all of which came from one of the Funds’ tree farms. Note that revenue from this timber deed sale is recognized as the timber is harvested and appears in the table above in the “Mineral, Cell Tower & Other Revenue” column.
 
Operating income of $1.5 million for Q3 2013 was $3.7 million, or 71%, lower than Q2 2013 primarily as a result of the aforementioned 40% decrease in harvest volume.  Cost of sales declined only 33%, or $3.4 million, from $10.2 million in Q2 2013 to $6.8 million in Q3 2013 due to a 19% increase in harvest, haul, and other costs on a per MBF basis due to more expensive logging systems employed during Q3 2013 versus Q2 2013.
 
Fee Timber revenue from the Funds decreased $3.4 million, or 39%, from $8.7 million in Q2 2013 to $5.3 million in Q3 2013 due to a 5.5 MMBF decrease in harvest volume and seasonally weaker log pricing, partially offset by the aforementioned $135,000 increase in revenue from a timber deed sale. These same factors caused operating income for the Funds to drop $1.3 million, or 91%, from $1.4 million in Q2 2013 to $134,000 in Q3 2013.
 
 
17

 
 
Comparing Q3 2013 to Q3 2012. Fee Timber revenue increased $934,000, or 10%, from $9.4 million in Q3 2012 to $10.3 million Q3 2013. The increase was the result of several offsetting factors; a decrease in volume of 1.0 MMBF from 17.1 MMBF in Q3 2012 to 16.1 MMBF in Q3 2013, an increase in realized log prices of $66/MBF, or 13%, from $525/MBF in Q3 2012 to $591/MBF in Q3 2013, and $253,000 of revenue generated from a timber deed sale which had no counterpart in Q3 2012. Revenue from timber deed sales appears in the table above in the “Mineral, Cell Tower & Other Revenue” column. The increase in realized log prices is attributable to stronger demand in both the export and domestic log markets compared to a year ago. Operating income declined $126,000, or 8%, from Q3 2012 to Q3 2013, in line with the 6% decrease in harvest volume.
 
Fee Timber revenue from the Funds increased $1.8  million, or 51%, from Q3 2012 to Q3 2013 on a 1.5 MMBF increase in harvest volume and the aforementioned $253,000 timber deed sale in Q3 2013, partially offset by weaker log prices. Operating income increased $440,000 from negative $306,000 in Q3 2012 to positive $134,000 in Q3 2013 due to the increase in revenue.
 
Revenue and operating income for the Fee Timber segment for the nine months ended September 30, 2013, and September 30, 2012, were as follows:
 
 
(in millions)
Nine Months Ended
 
Log Sale
Revenue
   
Mineral,
Cell Tower
& Other
Revenue
   
Total Fee
Timber
Revenue
   
Operating
Income
 
Harvest
Volume
(MMBF)
 
 
Partnership tree farms
  $ 23.5     $ 1.0     $ 24.5     $ 10.7       37.4  
 
Funds' tree farms
    18.8       0.6       19.4       2.4       32.0  
 
Total Fee Timber September 30, 2013
  $ 42.3     $ 1.6     $ 43.9     $ 13.1       69.4  
                                           
 
Partnership tree farms
  $ 22.4     $ 2.1     $ 24.5     $ 10.2       40.6  
 
Funds' tree farms
    10.8       -       10.8       -       21.2  
 
Total Fee Timber September 30, 2012
  $ 33.2     $ 2.1     $ 35.3     $ 10.2       61.8  
 
Comparing YTD 2013 to YTD 2012. Fee Timber revenue for the first nine months of 2013 increased by $8.5 million, or 24%, to $43.9 million from $35.3 million during the comparable period in 2012. The increase is attributable to increased log sale revenue due to stronger export and domestic log markets in 2013 relative to 2012 leading to a 7.6 MMBF, or 12%, increase in harvest volume, combined with a $72/MBF, or 13%, increase in realized log price. Partially offsetting the increased log sale revenue was a $637,000 decrease in revenue from timber deed sales from $1.0 million in the first nine months of 2012 to $371,000 in the first nine months of 2013, which is included in the “Mineral, Cell Tower & Other Revenue” column in the above table. These factors combined to lead to a $2.9 million, or 28%, increase in operating income in the first nine months of 2013 compared to the comparable period in 2012. The improved operating income would have been more pronounced if not for the Funds’ share of harvest volume increasing from 34% in the first nine months of 2012 to 46% in the first nine months of 2013, which led to an increase in depletion expense on a per MBF basis. The Funds’ tree farms have a higher basis and higher depletion rate as they were acquired more recently than the Partnership’s tree farms.
 
 
18

 
 
Log Volume
 
We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned timber deed sales, for the quarters ended September 30, 2013, June 30, 2013, and September 30, 2012:
 
Volume (in MMBF)
 
Quarter Ended
Sawlogs
   
Sep-13
% Total
 
Jun-13
% Total
 
Sep-12
% Total
 
Douglas-fir
    8.1     50 %     15.7     58 %     10.1     59 %
 
Whitewood
    4.4     27 %     6.1     23 %     4.2     25 %
 
Cedar
    0.5     3 %     0.4     1 %     0.2     1 %
 
Hardwood
    0.6     4 %     0.8     3 %     0.4     2 %
Pulpwood
                                         
 
All Species
    2.5     16 %     3.9     15 %     2.2     13 %
Total
      16.1     100 %     26.9     100 %     17.1     100 %
 
Comparing Q3 2013 to Q2 2013. Harvest volume decreased 10.8 MMBF, or 40%, from 26.9 MMBF in Q2 2013 to 16.1 MMBF in Q3 2013. This is reflective of the third quarter typically being our lowest-volume quarter as generally favorable weather conditions allow for access to all elevations of timberland throughout the Pacific Northwest. This increase in log supply often leads to a decrease in log prices. Accordingly, we concentrate our harvest in periods when prices tend to be stronger.  Douglas-fir harvest volume, as a percent of overall harvest, decreased from 58% in Q2 2013 to 50% in Q3 2013, while whitewood harvest volume increased from 23% in Q2 2013 to 27% in Q3 2013. This shift in mix from Douglas-fir to whitewood is due to continued stable demand for whitewood from the China export market, which resulted in whitewood sawlog prices declining less than Douglas-fir sawlog prices during Q3 2013.
 
 Comparing Q3 2013 to Q3 2012. Harvest volume decreased by 1.0 MMBF, or 6%, from 17.1 MMBF in Q3 2012 to 16.1 MMBF in Q3 2013. This slight decrease is due to more pronounced front loading of harvest volume in the first half of 2013 when markets were generally stronger, compared to the first half of 2012. The share of Douglas-fir harvest volume decreased from 59% in Q3 2012 to 50% in Q3 2013. Correspondingly, all other species of sawlogs, as well as pulpwood, experienced small increases in their shares of harvest volume from Q3 2012 to Q3 2013. These changes in species mix are largely attributable to the mix of volume coming from Fund properties increasing from 41% in Q3 2012 to 53% in Q3 2013 and the mix of stands harvested in Q3 2013. The Funds’ tree farms have a heavier mix of whitewood relative to the Partnership’s tree farms.
 
We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned timber deed sales, for the nine months ended September 30, 2013, and September 30, 2012:
 
Volume (in MMBF)
 
Nine Months Ended
Sawlogs
   
Sep-13
% Total
 
Sep-12
% Total
 
Douglas-fir
    42.0     61 %     40.5     65 %
 
Whitewood
    14.1     20 %     10.9     18 %
 
Cedar
    1.3     2 %     0.6     1 %
 
Hardwood
    2.0     3 %     1.9     3 %
Pulpwood
                           
 
All Species
    10.0     14 %     7.9     13 %
Total
      69.4     100 %     61.8     100 %
 
Comparing YTD 2013 to YTD 2012. Harvest volume increased 7.6 MMBF, or 12%, in the first nine months of 2013 versus the corresponding period in 2012. The increase in volume is in response to a stronger domestic market that was cutting lumber for the improving U.S. housing market, as well as improved demand and pricing for logs from Asian export markets.  The slight shift in mix from Douglas-fir in 2012 to whitewood in 2013 is attributable to the decline in relative harvest volume off the Partnership’s timberland from 66% in 2012 to 54% in 2013 and commensurate increase in relative harvest volume off the Funds’ timberland from 34% in 2012 to 46% in 2013.
 
 
19

 
 
Log Prices
 
Logs from the Combined tree farms serve a number of different domestic and export markets, with domestic mills historically representing our largest market destination. This customer mix shifted in 2010, when log exporters in the Pacific Northwest began shipping more volume to China, which accepts lower quality logs, than had traditionally been exported to other markets such as Japan. As a result, significant volumes that theretofore had been sold to domestic mills instead flowed to the China market.  Following a surge in shipments to China in 2011, log inventories built up to a point where shipment volumes declined significantly during the first half of 2012.  With normalized inventory levels in China by the middle of 2012, demand from China has remained strong from mid-2012 through 2013, albeit at reduced levels from the peaks achieved in 2011, while demand from Japan has increased ahead of a boost  in that country’s consumption tax scheduled for April 2014.

We realized the following log prices by species for the quarters ended September 30, 2013, June 30, 2013, and September 30, 2012:

     
Quarter Ended
 
     
Sep-13
 
Jun-13
 
Sep-12
Average price realizations (per MBF):
       
Sawlogs
                   
 
Douglas-fir
  $ 657     $ 697     $ 577  
 
Whitewood
    615       620       486  
 
Cedar
    1,087       1,253       1,087  
 
Hardwood
    555       521       592  
Pulpwood
All Species
    252       265       273  
Overall
      591       620       525  
 
 
The following table compares the dollar and percentage change in log prices from Q2 2013 and Q3 2012 to Q3 2013:

      Change to September 2013 from Quarter Ended
     
Jun-13
 
Sep-12
     
$/MBF
   
%
 
$/MBF
   
%
Sawlogs
Douglas-fir
  $ (40 )     -6 %   $ 80       14 %
 
Whitewood
    (5 )     -1 %     129       27 %
 
Cedar
    (166 )     -13 %     -       0 %
 
Hardwood
    34       7 %     (37 )