a51049870.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2014
or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to________
 
Commission File No. 1-9035

Pope Resources, A Delaware Limited Partnership
(Exact name of registrant as specified in its charter)
 
 
Delaware
(State of Organization)
 91-1313292
(IRS Employer I.D. No.)
 
 19950 Seventh Avenue NE, Suite 200, Poulsbo, WA 98370
(Address of principal executive offices, Zip Code)
 
Registrant's telephone number, including area code: (360) 697-6626

Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Name of each exchange on which registered
  Depositary Receipts (Units) NASDAQ
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o No x
 
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 than 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 o
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not  be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o Accelerated Filer x
Non-Accelerated Filer o (Do not check if a smaller reporting company) Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Act). Yes o  No x
 
At June 30, 2014, the aggregate market value of the non-voting equity units of the registrant held by non-affiliates was approximately $226,424,782.

The number of the registrant’s limited partnership units outstanding as of February 17, 2015 was 4,335,573.

Documents incorporated by reference: None
 
 
1

 
 
Pope Resources, A Delaware Limited Partnership
Form 10-K
For the Fiscal Year Ended December 31, 2014
Index
 
Part I
   
Page
       
 
 
 
 
 
 
       
Part II
     
       
   
   
 
   
   
 
 
   
   
 
 
       
Part III
     
       
 
 
   
   
 
 
       
Part IV
     
       
 
   
 
 
2

 
 
PART I

Item 1.   BUSINESS
 
OVERVIEW

When we refer to the “Partnership,” the “Company,” “we,” “us,” or “our,” we mean Pope Resources, A Delaware Limited Partnership and its consolidated subsidiaries. References to notes to the financial statements refer to the Notes to the Consolidated Financial Statements of Pope Resources, A Delaware Limited Partnership included in Item 8 of this form. The Partnership was formed in 1985 as a result of the spinoff of certain timberlands and development properties from Pope & Talbot, Inc.

The Partnership currently operates in three primary business segments: (1) Fee Timber, (2) Timberland Management and (3) Real Estate. Fee Timber operations consist of growing and harvesting timber from the 191,000 acres that we own or co-own with our timber fund investors as tree farms. Our Timberland Management segment is engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership. Our Real Estate segment’s operations are focused on a portfolio of approximately 2,600 acres in the west Puget Sound region of Washington. This segment’s activities consist of efforts to enhance the value of our land by obtaining the entitlements and, in some cases, building the infrastructure necessary to enable further development. Our Real Estate operations also include ownership and management of Port Gamble, Washington, now an historic town.  Port Gamble was established by Pope & Talbot in 1853 and was operated as a company town and logging mill for more than 100 years.  Copies of the Partnership’s reports filed or furnished under the Securities Exchange Act, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, and all amendments to these reports, are available free of charge at www.poperesources.com. The information contained in or connected to our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with or furnished to the Securities and Exchange Commission. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at www.sec.gov that also contains our current and periodic reports and all of our other securities filings.

DESCRIPTION OF BUSINESS SEGMENTS

Fee Timber

Operations. As indicated above, our Fee Timber operations consist primarily of growing, harvesting, and marketing timber. Statements of intention, belief or expectation reflect intent, beliefs and expectations of our executive officers as of the date of this report, based on information known to them as of that date.  Delivered log sales to domestic manufacturers and export brokers represent the overwhelming majority of Fee Timber revenue, but we also occasionally sell rights to harvest timber (timber deed sale) from our tree farms.  In addition, our tree farms generate revenue from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries. The 191,000 timberland acres that we own or manage under the banner of this segment break down into two categories. The first of these categories consists of the approximately 69,000-acre Hood Canal tree farm, located in the Hood Canal area of Washington, and the 42,000-acre Columbia tree farm located in southwest Washington. Management views the Hood Canal and Columbia tree farms as the Partnership’s core holdings, and manages them as a single operating unit. When we refer to these two tree farms, we will describe them as the “Partnership’s tree farms”. We have owned the Hood Canal tree farm, substantially as currently comprised, since our formation in 1985, while we acquired the bulk of the Columbia tree farm in 2001.

This segment also includes as a second category the operations of ORM Timber Fund I, LP (Fund I), ORM Timber Fund II, Inc. (Fund II), and ORM Timber Fund III (REIT), Inc. (Fund III), which are consolidated into our financial statements.  When referring to all the Funds collectively, depending on context, we will use the designations “Fund” or “the Funds” interchangeably.  The Funds’ assets consist of 80,000 acres of timberland located in western Washington, northwestern Oregon and northern California. The Partnership’s ownership interest is 20% in both Funds I and II and is 5% in Fund III.  The Fund’s tree farms consist of the following:
 
 
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Acquisition
               
Fund
 
Date
 
Location
 
Acres
   
Sold
 
Fund I
    Q4 2006  
Western Washington
    15,000       Q4 2014  
      Q4 2006  
Western Washington
    9,000       Q4 2014  
Fund II
    Q4 2009  
Northwestern Oregon
    11,000       N/A  
      Q3 2010  
Western Washington
    13,000       N/A  
      Q3 2010  
Northwestern Oregon
    13,000       N/A  
Fund III
    Q4 2012  
Northern California
    19,000       N/A  
      Q4 2013  
Southwestern Washington
    11,000       N/A  
      Q4 2014  
Northwestern Oregon
    13,000       N/A  
 
When referring to the Partnership and Fund tree farms together we will refer to them as the “Combined tree farms”. When referring to the combination of the Partnership’s tree farms and the aggregate proportion of each of the Funds owned by the Partnership, we will refer to the sums as “Look-through totals”.  Our Fee Timber segment produced 75%, 79% and 84% of our consolidated revenue in 2014, 2013 and 2012, respectively.

Inventory. Timber volume is generally expressed in thousand board feet (MBF) or million board feet (MMBF). In the discussion below, we present merchantable volume, productive acres and projected harvest level data for the Partnership’s and Funds’ tree farms on both a stand-alone and Look-through basis. On our Washington and Oregon tree farms, we define “merchantable volume” to mean timber inventory in productive stands that are 35 years of age and older.  On our California tree farm, which has historically utilized uneven age management wherein stands consist of trees of a variety of age classes, we classify merchantable volume based on the tree’s diameter at breast height (DBH).  Trees with a DBH greater than or equal to 16 inches are considered merchantable and less than 16 inches are considered pre-merchantable.  Accordingly, merchantable volume from our California tree farm is reflected in the tables below as “16+”.
 
Partnership merchantable volume (in MMBF) as of December 31:
       
   
2014
       
Merch Class
 
Sawtimber
   
Pulpwood
   
Total
   
2013 Total
 
35 to 39 yrs.
    122       26       148       117  
40 to 44 yrs.
    54       8       62       71  
45 to 49 yrs.
    31       4       35       38  
50 to 54 yrs.
    4       1       5       6  
55 to 59 yrs.
    5       1       6       8  
60 to 64 yrs.
    8       1       9       14  
65+ yrs.
    26       3       29       35  
      250       44       294       289  
 
 
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Fund merchantable volume (in MMBF) as of December 31:
       
   
2014
       
Merch Class
 
Sawtimber
   
Pulpwood
   
Total
   
2013 Total
 
35 to 39 yrs.
    84       9       93       123  
40 to 44 yrs.
    114       14       128       112  
45 to 49 yrs.
    69       9       78       67  
50 to 54 yrs.
    40       5       45       45  
55 to 59 yrs.
    17       1       18       26  
60 to 64 yrs.
    1       0       1       6  
65+ yrs.
    7       1       8       18  
16+ inches
    177       0       177       174  
      509       39       548       571  
 
Look-through merchantable volume (in MMBF) as of December 31:
             
   
2014 Volume
   
2013 Volume
 
   
Partnership
         
Partnership
       
     100%    
Share of
   
Look-
    100%    
Share of
   
Look-
 
Merch Class
 
Owned
   
Funds
   
through
   
Owned
   
Funds
   
through
 
35 to 39 yrs.
    148     15     163     117     23     140  
40 to 44 yrs.
    62     19     81     71     18     89  
45 to 49 yrs.
    35     13     48     38     12     50  
50 to 54 yrs.
    5     8     13     6     8     14  
55 to 59 yrs.
    6     3     9     8     5     13  
60 to 64 yrs.
    9     0     9     14     1     15  
65+ yrs.
    29     1     30     35     3     38  
16+ inches
    0     9     9     0     9     9  
      294     68     362     289     79     368  
 
Merchantable volume estimates are updated annually. Of the timber stands older than 24 years, 10% to 20% are physically re-measured each year using a statistical sampling process called “cruising”. Adjustments are made for depletion of areas harvested, growth, changes in acres, and associated timber volume resulting from acquisitions, dispositions, and reclassification of acres as available or unavailable for harvest.
 
The dominant timber species on the Partnership’s tree farms is Douglas-fir, which has unique structural characteristics that make it generally preferable to other softwoods and hardwoods for the production of construction grade lumber and plywood. A secondary softwood conifer species on the Partnership’s tree farms is western hemlock, which is similar in color and structural characteristics to a number of other minor softwood conifer timber species, including Sitka spruce and the true firs. These secondary species are thus purchased and manufactured into lumber generically, and referred to as “whitewoods”. There is also a minor amount of another softwood conifer species, western red cedar, which is used in siding and fencing. Hardwood species on the Partnership’s tree farms include red alder and minor volumes of other hardwood species.

The merchantable timber inventory on Fund properties contains a greater proportion of whitewoods than do the Partnership’s timberlands.  With the acquisition of timberland by Fund III in northern California, we added ponderosa pine and white fir to the Combined species inventory mix.  Ponderosa pine is used for shelving, lumber, and parts for windows, doors, and furniture.  White fir is a member of the whitewood species group and is used primarily for lumber and core layers in plywood.
 
 
5

 
 
Look-through merchantable volume (in MMBF) as of December 31:
       
   
2014 Volume
 
   
Partnership
             
    100%    
Share of
   
Look-
   
Percent
 
Species
 
Owned
   
Funds
   
through
   
of total
 
Douglas-fir
    215       29       244       67 %
Western hemlock
    27       20       47       13 %
Western red cedar
    14       1       15       4 %
Pine
    0       3       3       1 %
Other conifer
    16       12       28       8 %
Red alder
    19       3       22       6 %
Other hardwood
    3       0       3       1 %
Total
    294       68       362       100 %
 
Look-through merchantable volume (in MMBF) as of December 31:
       
   
2013 Volume
 
   
Partnership
             
   
100%
   
Share of
   
Look-
   
Percent
 
Species
 
Owned
   
Funds
   
through
   
of total
 
Douglas-fir
    207       36       243       66 %
Western hemlock
    34       22       56       15 %
Western red cedar
    14       0       14       4 %
Pine
    0       3       3       1 %
Other conifer
    12       15       27       7 %
Red alder
    19       3       22       6 %
Other hardwood
    3       0       3       1 %
Total
    289       79       368       100 %
 
The Partnership’s tree farms as of December 31, 2014 consist of approximately 111,000 acres. Of this total, approximately 93,400 acres are designated as productive acres, meaning land that is capable of growing merchantable timber and where the harvesting of that timber is not constrained by physical, environmental or regulatory restrictions. The Funds’ tree farms as of December 31, 2014 totaled approximately 80,000 acres, of which almost 70,600 were designated as productive acres.  Productive acres on a Look-through basis, as of December 31, 2014, were 101,700 acres.  Approximately 33% of the Partnership’s acreage and 16% of the Funds’ Washington and Oregon acreage is in the 25-34 year age class, much of which will begin moving from pre-merchantable to merchantable timber volume over the next five years. There is no age-class associated with the California tree farm and its productive acres are shown in the following tables under the heading “California.”

 
6

 
 
Look-through productive acres are spread by timber age-class as follows as of December 31, 2014:

   
12/31/2014 Productive Acres (in thousands)
 
Age
  100%          
Share of
         
Look-
       
Class
 
Owned
 
%
     
Funds
   
%
   
through
   
%
 
Clear-cut
    2.0     2 %     0.3     4 %     2.3     2 %
0 to 4
    7.3     8 %     0.7     8 %     8.0     8 %
5 to 9
    9.2     10 %     0.7     8 %     9.9     10 %
10 to 14
    9.6     10 %     0.5     6 %     10.1     10 %
15 to 19
    13.6     15 %     0.3     4 %     13.9     14 %
20 to 24
    4.6     5 %     0.7     8 %     5.3     5 %
25 to 29
    15.8     17 %     0.6     7 %     16.4     16 %
30 to 34
    15.4     16 %     0.7     8 %     16.1     16 %
35 to 39
    9.1     10 %     0.9     11 %     10.0     10 %
40 to 44
    3.2     3 %     1.0     12 %     4.2     4 %
45 to 49
    1.6     2 %     0.6     7 %     2.2     2 %
50 to 54
    0.2     0 %     0.3     4 %     0.5     0 %
55 to 59
    0.4     0 %     0.1     1 %     0.5     0 %
60 to 64
    0.3     0 %     -     0 %     0.3     0 %
65+
    1.1     1 %     -     0 %     1.1     1 %
California
    -     0 %     1.0     12 %     1.0     1 %
      93.4             8.4             101.8        
 
Look-through productive acres are spread by timber age-class as follows as of December 31, 2013:
 
   
12/31/2013 Productive Acres (in thousands)
 
Age
  100%        
Share of
         
Look-
       
Class
 
Owned
 
%
   
Funds
   
%
   
through
   
%
 
Clear-cut
    1.8     2 %     0.4     3 %     2.2     2 %
0 to 4
    7.0     8 %     0.7     6 %     7.7     7 %
5 to 9
    9.9     11 %     0.7     6 %     10.6     10 %
10 to 14
    9.3     10 %     0.8     7 %     10.1     10 %
15 to 19
    11.8     13 %     0.5     4 %     12.3     12 %
20 to 24
    7.7     8 %     1.3     11 %     9.0     9 %
25 to 29
    15.3     16 %     1.4     12 %     16.7     16 %
30 to 34
    14.7     16 %     1.2     10 %     15.9     15 %
35 to 39
    7.6     8 %     1.5     13 %     9.1     9 %
40 to 44
    3.7     4 %     1.1     9 %     4.8     5 %
45 to 49
    1.8     2 %     0.6     5 %     2.4     2 %
50 to 54
    0.4     0 %     0.3     3 %     0.7     1 %
55 to 59
    0.5     1 %     0.2     2 %     0.7     1 %
60 to 64
    0.5     1 %     -     0 %     0.5     0 %
65+
    1.3     1 %     0.1     1 %     1.4     1 %
California
    -     0 %     0.9     8 %     0.9     1 %
      93.3             11.7             105.0        

Site Index.  The site index for a given acre of timberland is a measure of the soil’s potential to grow timber. In the Partnership’s operating region, site index is expressed in feet and is a measure of the tree’s projected height at age 50. Current tree heights and age are collected during the cruising process and used to calculate site index. Site index is an important input into the models used for projecting harvest levels on a tree farm. The Partnership’s properties have an estimated weighted average site index of 115 feet and on a Look-through basis the weighted average site index is 112 feet.
 
 
7

 
 
Long-term Harvest Planning. Long-term harvest plans for the Partnership’s tree farms and the Funds’ tree farms reflect the different ownership time horizons associated with each group.  Plans for the Partnership timberlands are designed to maintain sustainable harvest levels, assuming perpetual ownership. Plans for the Funds’ tree farms, on the other hand, reflect the 10-13 year combined investment and drawdown term of each fund, and take into account further the different mix of age classes in each fund. The harvest level for the Funds’ tree farms is developed to maximize the total return during each of the Fund’s respective investment periods by blending harvest income with the value of the portfolio upon disposition. This will result in more harvest variability between years than is the case with the Partnership’s tree farms.

Assuming full operations on the Funds’ existing tree farms, at December 31, 2014 the long-term planned annual harvest level for the Partnership and Fund tree farms (and on a Look-through basis) can be found in the table below:
 
(amounts in MMBF)
       
Look-through
 
   
Planned annual
   
planned annual
 
   
harvest volume
   
harvest volume
 
Partnership Properties
    44       44  
Fund Properties
    55       7  
Total
    99       51  
 
Marketing and Markets. The following marketing and markets discussion applies to the Combined tree farms.  We market timber by selling finished logs to wood manufacturers or to export brokers.  To do so, we engage independent logging and trucking contractors to harvest the standing timber, manufacture it into logs, and deliver it to our customers on the open market. We retain title to the logs until delivery takes place, which normally occurs at a customer log yard.

Historically, Japanese customers have paid a premium for the highest quality logs from which visually appealing beams for residential construction are produced. U.S. mills, on the other hand, manufacture mostly framing lumber requiring structural integrity for wall systems that are concealed by drywall and do not need to have as high of an aesthetic quality. Accordingly, those logs sold to the domestic market are more of a commodity relative to logs headed for the Japanese market, and thus command a lower price.

Beginning in 2010, the reduction in China’s log imports from Russia opened up an opportunity for North American log producers to supply a larger portion of the growing Chinese market. This resulted in the migration of the U.S. Pacific Northwest (PNW) export market from one almost exclusively focused on Japan to a market that now comprises China, Japan, and Korea with China representing the largest market within those countries. This export market has provided support to log prices over the last few years of weak domestic housing markets. Sawlogs sold to China are used chiefly for concrete forms, pallets, and other low-end uses that can be satisfied with the commoditized logs traditionally purchased by domestic sawmills. The lower average sawlog quality and more diverse species mix flowing to China, combined with the limited volume of high-quality Douglas-fir flowing to Japan, has narrowed the overall export premium received for sales of logs into these export markets relative to the domestic market.

The logs that we sell to China, Japan, and Korea are actually sold to U.S.-based brokers who in turn sell directly to offshore customers. Our decision to sell through intermediaries is predicated on risk management. Mitigation of foreign exchange risk, loss prevention, and minimizing cash collection risks inform our decision to sell through brokers.
 
 
8

 
 
Customers. Logs from the Combined tree farms are sold to a number of customers in both the domestic and export markets. Domestic customers include lumber mills and other wood fiber processors located throughout western Washington, western Oregon, and northern California. Export customers consist of intermediaries located at the ports of Longview, Tacoma, Port Angeles, and Olympia, Washington and St. Helens and Astoria, Oregon. Whether destined for export or domestic markets, the cost of transporting logs limits the destinations to which the Partnership can profitably deliver and sell its logs.

The ultimate decision on where to sell logs is based on the net proceeds we receive after taking into account both the delivered log prices paid by a prospective customer and the hauling cost needed to deliver logs to that customer. In instances where harvest operations are closer to a domestic mill than the log yard of an export broker, we may earn a higher net stumpage from selling to a domestic mill even though the delivered log price is lower. As such, realized log price movements are influenced by marketing decisions predicated on net stumpage values rather than focusing exclusively on the delivered log price. In such instances our reported log realizations may reflect more of our own proximity to customers rather than the broader market trend.

Weyerhaeuser was the largest customer for our Fee Timber segment in 2014, representing 12% of segment revenue, followed by Pacific Lumber & Shipping which represented 11% of segment revenue. The Combined tree farms delivered logs to 54 separate customers during 2014, compared to 41 during 2013.

Competition. Most of our competitors are comparable in size or larger. Log sellers like the Partnership compete on the basis of quality, pricing, and the ability to satisfy volume demands for various types and grades of logs to particular markets. Management believes that the location, type, and grade of timber from the Combined tree farms will enable it to compete effectively in these markets. However, our products are subject to some competition from a variety of non-wood and engineered wood products as well as competition from foreign-produced logs and lumber.

Forestry and Stewardship Practices. Timberland management activities on the Combined tree farms include reforestation, control of competing brush in young stands, thinning of the timber to achieve optimal spacing after stands are established, and road maintenance. During 2014, we planted 1.4 million seedlings on 3,900 acres of the Combined tree farms compared to 1.2 million seedlings on 3,300 acres in each of 2013 and 2012. Seedlings are generally planted from December to April, depending on weather and soil conditions, to restock plantations that were harvested during the preceding twelve months. Planting will vary from year to year based upon harvest level, the timing of harvest, and seedling availability. Management’s policy is to return all timberlands to productive status in the first planting season after harvest.

 All harvest and road construction activities are conducted in compliance with federal environmental laws and state forest practice laws and regulations. Many of these regulations are programmatic and include, for example; limitations on the size of clearcuts, reforestation following harvest, retention of trees for wildlife and water quality, and sediment management on forest roads.  The regulations also require project-specific permits or notifications that govern a defined set of forest operations. An application for harvest or road construction may require more specific guidance to avoid potential impact to public resources.  For example, we often consult third-party, state-qualified geo-technical specialists for operations that have the potential to impact unstable slopes in order to avoid, minimize, or mitigate risks to safety and public resources.

Sustainable Forestry Initiative (SFI®). Since 2003, we have been a member of the SFI forest certification program, an independent environmental review and certification program that promotes sustainable forest management, focusing on water quality, biodiversity, wildlife habitat, and species protection. With our voluntary entry into this certification program, we have been subject to annual independent audits of the required standards for the program. Management views this certification as an important indication of our commitment to manage our lands sustainably while continually seeking ways to improve our management practices. We believe this commitment is an important business practice that contributes positively to our reputation and to the long-term value of our assets.
 
 
9

 
 
Our certifications are current for all of the Combined tree farms. We believe this certification allows us to obtain the broadest market penetration for our logs while protecting the core timberland assets of the Partnership and the Funds.

Timberland Management

Background. In 1997, the Partnership formed two wholly owned subsidiaries, ORM, Inc. and Olympic Resource Management LLC (“ORMLLC”), to facilitate the Timberland Management activities. Our Timberland Management segment earns management fees and incurs expenses resulting from raising, investing, and managing capital invested in PNW timberland on behalf of third-party investors. Since the launch of our timberland private equity fund strategy in 2003, the activities in this segment have consisted of attracting third-party investment capital for the Funds and then acquiring and managing properties on their behalf.  When we discuss the Timberland Management properties we will refer to either the acquisition values, defined as contractually agreed-upon prices paid for the properties, or the value of assets under management, defined as the current appraised value of the properties.  As of December 31, 2014, we manage 80,000 acres of timberland properties in Washington, Oregon, and California in this business segment with combined appraised values of $312 million.

In total, ORMLLC has called $271 million of equity capital and borrowed $57 million of debt capital for the Funds.  Our cumulative co-investment in the Funds totaled $35 million prior to the sale of Fund I’s two tree farms.  Subsequent to these sales, our cumulative co-investment in the Funds as of December 31, 2014 is $23 million. In July 2012 we completed our final close of Fund III with commitments totaling $180 million, including our co-investment commitment of $9 million. Fund III has $51 million of remaining committed capital, including our co-investment of $3 million. In 2014 we sold the two properties held by Fund I which marks our first Fund liquidation event.  The following table provides detail behind cumulative committed and called capital by the Funds as of December 31, 2014.
 
   
Total Fund
   
Co-investment
 
(in millions)
 
Commitment
   
Called Capital
   
Commitment
   
Called Capital
   
Distributions
Received
 
Fund I *
  $ 62     $ 59     $ 12     $ 12     $ 13  
                                         
Fund II
  $ 84     $ 83     $ 17     $ 17     $ 7  
                                         
Fund III
  $ 180     $ 129     $ 9     $ 6     $ 0  
Total
  $ 326     $ 271     $ 38     $ 35     $ 20  
 
* Fund I assets were sold in Q3 2014 and Q4 2014.

Operations. The Timberland Management segment’s key activity is to provide investment and timberland management services to the Funds. We anticipate growth in this segment as we continue to manage the Funds, together with any future funds established by the Partnership. The Timberland Management segment represented less than 1% of consolidated revenue for each of the three years ended December 31, 2012 through 2014, as fee revenue is eliminated in consolidation.

The Partnership benefits in a number of ways from this segment.  First, we benefit through the opportunity to co-invest in each of these funds, such that we are also able to diversify our market exposure across more tree farms than we could by investing only for the Partnership.  We also benefit from the economies of scale generated through managing these additional acres of timberland, which accrue to both the Partnership and Fund timberlands.  The contribution margin from the fees charged to the funds lowers the management costs on the Partnership’s timberlands.  Lastly, we are able to retain additional expertise that neither the Partnership nor the Funds’ timberlands could maintain on a stand-alone basis.

We earn annual asset management fees for managing this capital once timberland properties are acquired.  We also earn annual timberland management fees on acres owned by the Funds and log marketing fees based on harvest volume from Fund tree farms. At the end of a Fund term, if a Fund achieves threshold return levels, we earn a carried interest incentive fee.
 
 
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Accounting rules require that all fees generated from managing the Funds and corresponding operating expenses for the Fee Timber segment are eliminated as a result of consolidation of the Funds into the Partnership’s financial statements. The elimination of these fees and corresponding operating expenses results in a decrease in the otherwise reported cost per acre of managing Fund tree farms under our Fee Timber segment as well as eliminating the revenue generated from managing the Funds in the Timberland Management segment. An effect of these eliminations is to make the Fee Timber results look stronger and the Timberland Management results look correspondingly weaker.
 
Marketing. When raising capital for a new Fund, we market these opportunities to accredited investors who have an interest in investing alongside a manager with a specific regional specialization and expertise in the timberland asset class. Our Funds fill a unique niche among timberland investment management organizations due to our regional specialization, degree of co-investment, smaller fund sizes, and the targeting of relatively small transactions. Additional marketing and business development efforts include regular contact with forest products industry representatives, non-industry owners, and others who provide key financial services to the timberland sector. Our acquisition and disposition activities keep management informed of changes in timberland ownership that can represent opportunities for us to market our services.

Customers. The Funds are the primary customers and users of Timberland Management services.

Competition. We compete against both larger and comparably sized companies providing similar timberland investment management services. There are over 20 established timberland investment management organizations competing against us in this business. The companies in this group have access to established sources of capital and, in some cases, increased economies of scale that can put us at a disadvantage. Our value proposition to investors is centered on the differentiation we provide relative to other managers, as described above, as well as our long track record of success in the Pacific Northwest.
 
Real Estate

Background. The Partnerships real estate activities are closely associated with the management of its timberlands. Management continually evaluates timberlands in terms of the best economic use, whether this means continuing to grow and harvest timber, seeking a rezone of the property for sale or development, or working with conservation organizations and the public on a sale. After timberland has been logged, management has a choice between four primary alternatives for the underlying land: reforest and continue to use as timberland, sell as undeveloped property, undertake some level of development to prepare the land for sale as improved property, or hold as property slated for later development or sale. Generally speaking, the Real Estate segment’s activities consist of investing in and later reselling improved properties, and holding properties for later development and sale. As a result, revenue from this segment tends to fluctuate substantially, and is characterized by relatively long periods in which revenue is relatively low, while expenses incurred to increase the value of the Partnership’s development properties may be higher. During periods of diminished demand, entitlement related costs and infrastructure investment are managed so as to minimize negative cash flows, but segment expenses do not trend directly with segment revenues. When improved properties are sold, income is recognized in the form of sale price net of acquisition and development costs. The Partnership has an 2,600-acre portfolio of properties for which management believes there to be a higher and better use than timberland.

Operations. Real Estate operations focus on maximizing the value of this 2,600-acre portfolio mentioned above. For Real Estate projects, management secures entitlements and/or infrastructure necessary to make development possible and then sells the entitled property to a party who will construct improvements. In addition, this segment’s results reflect management’s successful efforts to negotiate conservation easements (CE) that typically encumber Fee Timber properties and preclude future development on that land so encumbered. The third and final area of operations in this segment includes leasing residential and commercial properties in Port Gamble, Washington, and leasing out a portion of a commercial office building in Poulsbo, Washington. The Real Estate segment represented 25%, 21% and 16% of consolidated revenue in 2014, 2013 and 2012 respectively.
 
 
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Management recognizes the significant value represented by the Partnership’s Real Estate holdings and is focused on adding to that value. The means and methods of adding value to this portfolio vary considerably depending on the specific location and zoning of each parcel. Our properties range from land that has commercial activity zoning where unit values are valued on a per-square-foot basis to large lots of recently harvested timberland where value is measured in per-acre terms. In general, value-adding activities that allow for the highest-and-best-use of the properties include: working with communities and elected officials to develop grass roots support for entitlement efforts, securing favorable comprehensive plan designation and zoning, acquiring easements, and obtaining plat approvals.

Development Properties – Planned Communities

Planned communities in Gig Harbor, Port Gamble, Kingston, Bremerton, Hansville and Port Ludlow, Washington make up approximately half of the acres in our development property portfolio. Due to each property’s size, development complexity, and regulatory environment, the projects are long-term in nature and require extensive time and capital investments to maximize returns.

Gig Harbor. Gig Harbor, a suburb of Tacoma, Washington, is the site of Harbor Hill, a mixed-use development project that includes 42 acres of commercial/retail sites, 50 acres of business park lots, and 200 acres of land with residential zoning. At December 31, 2014, 18.5 acres of commercial/retail, 11.5 acres of business park and 144 acres of residential lots remained to be sold.  A 20-year development agreement was approved in late 2010.  Key provisions of the development agreement and plat approval include: (a) extending the project approval from 7 to 20 years; (b) reserving sufficient domestic water supply, sanitary sewer, and traffic trip capacity on behalf of the project’s 824 residential units; and (c) waiver of park impact fees in exchange for a 7-acre parcel of land for City park purposes. All components of this project have transportation, water and sewer capacities reserved for full build-out.  We received preliminary plat approval in early 2011 for the then 200-acre residential portion of this project that included 554 single-family and 270 multi-family units.  At December 31, 2014, 421 single-family and 98 multi-family units remained to be sold.

Port Gamble. Port Gamble fits within both the development and commercial properties aspects of our Real Estate operations.  Port Gamble is located northwest of Kingston on the Kitsap Peninsula.  Founded in 1853 by the company that became Pope & Talbot, Inc. (“P&T”), Port Gamble served as a millsite, logging port and company town for nearly 150 years and several of its buildings still stand.  The 130-acre town and millsite were transferred from P&T to Pope Resources at the time of our formation in 1985.  The operation and management of the town of Port Gamble is discussed under “Commercial Properties” below.
With respect to our development plans for the site, Port Gamble has been designated a “Rural Historic Town” under Washington’s Growth Management Act since 1999. This designation allows for substantial new commercial, industrial, and residential development using historic land use patterns and densities while maintaining the town’s unique architectural character. Our plans are focused on bringing back the New England-style homes that have slowly disappeared since Port Gamble’s heyday in the 1920s.  In 2012, we substantially completed a plat application to Kitsap County that, if approved as proposed, will allow for between 200 and 240 additional residential units and 200,000 to 260,000 square feet of additional commercial building space. We submitted this master plan for the 114-acre townsite and adjoining 205-acre agrarian district in January 2013, kicking off what has proven to be a multi-year period of environmental impact review and public comment.  The proposal calls for development of homes, an inn, a dock, waterfront trails, and an agricultural area with greenhouses, orchard and winery. Walking trails along the shoreline, through the adjoining forestlands and along pastoral farmland would contribute to the lifestyle of residents and should enhance Port Gamble as a unique tourist attraction. During the first half of 2015, our efforts are focused on constructing a new membrane bioreactor wastewater treatment plant with a large onsite sewer system which will be turned over to Kitsap County’s Public Utility District at completion.  Once operational, the existing treatment plant will no longer discharge wastewater to the Hood Canal through the currently permitted outfall pipe.  Official de-commissioning of the outfall will commence after the new plant is operational.  A State-provided appropriation grant of $2 million is available to partially fund the project, provided it is completed by June 30, 2015.  The total project cost is expected to be approximately $3.5 million.
 
 
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Kingston. The Partnership owns a 364-acre property in Kingston that is named “Arborwood” with plans for the development of 663 single-family lots and 88 multi-family units. Final approval of a preliminary plat and a 15-year development agreement was completed in February 2010. Further development will not proceed until the local market demonstrates an increased appetite for residential lots.

Bremerton. The West Hills area of Bremerton, Washington is the site of a 46-acre industrial park which was being developed in two phases totaling 24 lots. Construction on the 9 lots that make up Phase I was completed in 2007. One lot has been sold from Phase I and the industrial market remains weak at this time. In 2013, management obtained a comprehensive plan designation change from industrial to residential for the 36-acre Phase II portion of this property.  In 2014, Phase II was rezoned to single-family residential and we plan to submit a preliminary plat for approximately 150 lots in 2015.

Hansville. The Partnership owns a 149-acre residential development project in Hansville called “Chatham”, with 19 parcels ranging from 3 to 10 acres in size. Construction was completed in late 2007 and the lots are currently being marketed for sale. To date, one lot has sold from this project.

Port Ludlow. Port Ludlow represents a 256-acre property located just outside the Master Planned Resort boundary of Port Ludlow, Washington. We currently expect preliminary plat approval in 2015 that, if obtained, will allow for up to 54 lots ranging from 1 to 1.5 acres each, with the balance of the property designated as open space. Development beyond the point of plat approval will not commence until demand for rural residential lots improves.

Development Properties – Other

Rural Residential. We have a number of properties where rural residential development represents a higher and better use compared to continuing to manage them as timberland.  These properties are typically non-contiguous smaller lots ranging in size between 5 and 40 acres with zoning ranging from one dwelling unit per 5 acres to one per 80 acres. Development and disposition strategies vary depending on the property’s unique characteristics. Development efforts and costs expended to ready these properties for sale include work to obtain development entitlements that will increase the property’s value as residential property as well as making improvements to existing logging roads, constructing new roads, extending dry utilities, and sometimes establishing gated entrances. As is the case with much of the Real Estate portfolio, investments in the rural residential program have been restricted to costs necessary to achieve entitlements, while deferring construction costs until such time when market conditions for the sale of rural land improve.

North Kitsap County. Since 2011, the Partnership has been formally engaged with a coalition of approximately 30 entities to conserve up to 6,500 acres of the Partnership’s land in north Kitsap County.  This effort, known as the Kitsap Forest & Bay Project, realized two closings in 2014.  The first occurred in February and was the sale of approximately 535 acres and 1.5 miles of waterfront in Port Gamble Bay.   In December, the Partnership closed on the sale of an additional 366 acres which lie adjacent to both an existing county park and the Arborwood project.
 
 
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Skamania County.  The Partnership has been engaged with the Columbia Land Trust (CLT) in a multi-phase conservation project that includes both fee and conservation easement sales.  In tandem with this project the Partnership has been working with Skamania County to rezone the majority of our holdings in the county.  In the second half of 2014 the county approved a rezone of approximately 14,000 acres.  The effect of the rezone was to allow for the development of 20-acre lots.  In December, the Partnership closed its third conservation sale within this project. Included in the sale were 2,877 acres of conservation easement (having the effect of eliminating development rights while allowing for ongoing timberland management) which sold for $743,000.  An additional 210 acres were sold in fee along Pine Creek for $357,000.   The funding for this conservation sale was primarily through the Washington Wildlife and Recreation Program (WWRP). CLT has applied for additional conservation easement grants for the final 7,899 acres of this project through the Forest Legacy Program.  If awarded, the Forest Legacy grant will be funded for a 2016 closing.

Commercial Properties

Poulsbo. In May 2011, we purchased a 30,000-square-foot commercial office building in Poulsbo, on a 2-acre parcel of land.  At the time, the building was fully leased to Union Bank on a five-year, triple-net lease with a lease expiration of October 2015.  In November 2012, we moved our headquarters to the new building, sharing the space with the aforementioned tenant.  Union Bank announced recently it will be closing most of their Kitsap County branches by the end of February 2015 and, as such, will be vacating our building.  We are actively seeking replacement tenants and evaluating how much expansion space we may need for our future use.

Port Gamble. As described above under “Development Properties”, the Partnership owns and operates the town of Port Gamble where 25 residential buildings and approximately 46,000 square feet of commercial building space are currently rented to third parties.  In addition, the Partnership operates a wedding and events business, with another 8,000 square feet in its venues, that leverages the charm of the townsite to attract clientele.  These commercial activities serve as placeholders to help offset the costs of maintaining the town until the master plan process (also described above) progresses.

Environmental Remediation.  As noted above, P&T and its corporate predecessors operated a sawmill at Port Gamble from 1853 to 1995.  P&T continued to operate various portions of the site under leases from the Partnership until 2002, when it finally concluded its operations at Port Gamble. During that time, P&T also conducted logging and shipping operations in the tidal and subtidal waters of Port Gamble Bay under a lease from the Washington State Department of Natural Resources (DNR) that lasted from 1974 to 2004. Both the upland and submerged portions of the site are believed to have become contaminated with various hydrocarbons, heavy metals and other contaminants during P&T’s operations there.

Following the mill shutdown, the Washington State Department of Ecology (DOE) began to examine the environmental conditions at Port Gamble.  Under Washington law, both Pope Resources and P&T were considered by DOE to be “potentially liable persons” (PLPs), the Partnership because of its current ownership of the site, and P&T because of its historic ownership and operation of the site.  DNR is also considered a PLP because of its ownership and leasing of the submerged beds in Port Gamble Bay to P&T.  We also contend that DNR is liable for a significant portion of cleanup costs by virtue of its having permitting P&T to operate the tidal and submerged portions of the site, and by failing to properly enforce the then-existing environmental laws in a manner that the Partnership believes would have substantially mitigated the contamination that occurred during P&T’s operations at the site.
 
 
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P&T and Pope Resources entered into a settlement agreement in 2002 that allocated responsibility for environmental contamination at the townsite, millsite, a solid waste landfill, and adjacent waters, with P&T assuming a substantial portion of the liability for cleanup costs owing to the length of its ownership and to the operations it conducted there.  At that time, the parties estimated the aggregate cleanup costs allocable to both parties to be between $10 and $13 million.  In the settlement agreement, P&T assumed all responsibility for remediation of toxins in Port Gamble Bay.  Those processes were expected to amount to approximately 90% of the overall project costs.

In 2005, both Pope Resources and P&T received Environmental Excellence Awards from DOE for their work in remediating the contamination that had existed at the Port Gamble townsite and landfill. DOE also issued letters to both parties in 2006 indicating that the agency expected to take no further action regarding conditions at those portions of the site. Pope Resources continued the process of cleaning up the remaining contamination at the millsite, although by late 2005 that portion of the site, too, had been largely cleaned and the remaining aspects of that project consisted of test well monitoring and modest additional remediation.  The Port Gamble Bay area and related tidelands, for which P&T was responsible under the parties’ settlement agreement, had not yet been remediated, but P&T filed for bankruptcy protection in 2007 and was eventually liquidated in bankruptcy, leaving the Partnership and DNR as the only remaining PLPs. Because the environmental liabilities are joint and several, the result of P&T’s bankruptcy was to leave substantial portions of the liability with the Partnership, as one of the two remaining solvent PLPs.  At that time, the Partnership increased its reserve for remediation liabilities by $1.9 million to reflect the resulting increase in risk.

In connection with this change in circumstances, the Partnership also adopted a more sophisticated statistical risk assessment model that we have referred to as the “Monte Carlo simulation” model. This model is intended to measure a combination of the estimated likelihood of various possible outcomes and the estimated costs associated with those outcomes. The Partnership has continued to use that model through the present day, and has adjusted its reserves from time to time by applying that model to ongoing developments.

Beginning in approximately 2010, DOE began to revisit its previously announced expectations regarding the level of cleanup that would be required for the Port Gamble Bay portion of the project. In accordance with Washington Administrative Regulations, DOE invited the participation of interested citizens and groups, one of the most prominent of which has been the S’Klallam Tribe. Also participating have been numerous environmental groups and concerned citizens. In response to input from these groups, DOE established remediation levels that were far greater than either DOE or the Partnership had contemplated previously. This culminated in significant modifications to the draft Port Gamble Baywide and Millsite Remedial Investigation and Feasibility Study issued by DOE in May 2012 and we recorded a $12.5 million increase in our accrual for the environmental remediation liability in the second quarter of 2012.

In December 2013, the Partnership and DOE entered into a consent decree that included a cleanup action plan (CAP) requiring the removal of docks and pilings, excavation and backfilling of intertidal areas, subtidal dredging and monitoring, and certain other specific remediation steps. Throughout 2014, we evaluated the requirements of the CAP and conducted additional sampling and investigation in order to develop the design of the remediation project.  In November 2014, we submitted a draft engineering design report, or EDR, to DOE, followed by supplemental material in December, which established our proposed means for complying with the CAP. The EDR has not been approved or finalized, and the specific methodologies and cleanup level requirements remain subject to negotiation with DOE. However, during the fourth quarter of 2014, we had completed sufficient analysis to reach a conclusion that the existing reserve for environmental liabilities was insufficient. Accordingly, we accrued an additional $10.0 million in December 2014. Additional information regarding this accrual, the aggregate environmental remediation liability, the changes in expected cleanup levels that necessitated the increase in the liability, and the methodology used to monitor the adequacy of the existing accrual, is set forth in Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” “—Real Estate,” and “—Critical Accounting Policies and Estimates”.
 
 
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Marketing. Marketing efforts for Development Properties in 2014 and 2013 were focused primarily on our Harbor Hill development and conservation land sales.  Marketing efforts for Development Properties in 2012 were centered on residential, commercial, and industrial lands for sale through traditional brokerage and real estate listing services.  Efforts were also expended in the last several years to sell North Kitsap lands for conservation.

Customers. Management typically markets properties from the Real Estate portfolio to private individuals, residential contractors, and developers of commercial property. Customers for rental space in the Port Gamble townsite consist of both residential and commercial tenants.

Competition. Development and Commercial Properties compete with local and regional peers that offer land for sale or property for lease.

Transportation. Land values for the Real Estate portfolio are influenced by transportation options between the west side of Puget Sound where our properties are located and the Seattle-Tacoma metropolitan corridor. Transportation options between these areas separated by bodies of water include the Tacoma Narrows Bridge or one of several car/passenger ferries. Ferry transportation within the market area currently utilizes vessels that carry both automobiles and passengers from each of the communities of Kingston, Bremerton, and Bainbridge Island, respectively, to and from Edmonds and Seattle.
 
Employees
 
As of December 31, 2014, the Partnership employed 54 full-time, salaried employees and 6 part-time and seasonal personnel, who are distributed among the segments as follows:
 
Segment
 
Full-Time
   
Part-Time/
Seasonal
   
Total
 
Fee Timber
    23       -       23  
Timberland Management
    4       -       4  
Real Estate
    17       5       22  
General & Administrative
    10       1       11  
 Totals
    54       6       60  

None of our employees are subject to a collective bargaining agreement and the Partnership has no knowledge that any steps toward unionization are in progress. Management considers the Partnership’s relations with its employees to be good.

Government Regulation

The timberland and real estate assets we own and manage are subject to federal, state, and local environmental laws and regulations, including extensive permitting or notification processes.  Changes in these laws and regulations can affect regional or local harvest levels and market values of timber-based raw materials, and the ability to develop real estate.  These include federal, state, and local pollution controls, solid and hazardous waste management, disposal and remediation laws, and regulations in each segment and all geographic regions in which we have operations.

Forest Management Practices. Federal laws and regulations that have the potential to impact forest practices include, for example, the Endangered Species Act (ESA) and the Clean Water Act (CWA).   State laws and regulations such as the Washington, Oregon, and California Forest Practice Acts also directly regulate forest management operations.  Collectively, these laws and regulations increasingly affect present or future harvest and forest management activities.
 
 
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Each state in which we own or manage timberlands has developed “best management practices” to reduce the effects of forest practices on water quality and plant and animal habitats. Additional, more stringent regulations may be adopted in order to achieve the following: enhance water quality standards under the federal Clean Water Act, protect fish and wildlife habitat, or advance other public policy objectives.

The following are examples of potential changes to the regulatory climate that could affect forest practices in Washington, Oregon, and California:

Listing of plants and animals under state and federal Endangered Species Acts.

A number of fish and wildlife species that inhabit geographic areas near or within our timberlands have been listed as threatened or endangered under the federal Endangered Species Act (ESA) or similar state laws. Federal ESA listings include the Northern Spotted Owl, marbled murrelet, numerous salmon species, bull trout, and steelhead trout in the Pacific Northwest. Listings of additional species or populations, such as the pacific fisher,  may result from pending or future citizen petitions or be initiated by federal or state agencies. Federal and state requirements to protect habitat for threatened and endangered species have resulted in restrictions on timber harvest on some timberlands, including some of our timberlands. Additional listings of fish and wildlife species as endangered, threatened, or sensitive under the ESA and similar state laws as well as regulatory actions taken by federal or state agencies to protect habitat for these species may, in the future, result in the following: an increase in operating costs; additional restrictions on timber harvests and a resulting reduction in available acres; impacts to forest management practices or real estate development activities; and potential impact on timber supply and prices.

Compliance for state and federal endangered species is achieved through a combination of adherence to state regulations and our best management practices to preserve endangered species and their habitat.

In June 2006, the U.S. Fish & Wildlife Service (USFWS) and NOAA Fisheries signed a 50-year Forest Practices Habitat Conservation Plan (HCP) covering forestry activities in Washington State.  The HCP is supported by the State’s forest practice regulatory structure established by the Forests and Fish Law.  Together, they provide landowners assurance that forestry activities comply with both the federal ESA and the Clean Water Act (CWA) to protect Washington's native fish and aquatic species and assure clean water compliance.

Washington State’s forest practice rules are monitored for their effectiveness at meeting resource objectives and are designed to change, if needed, based on research.  If USFWS were to assert that there is scientific evidence that the rules need to be adjusted, new or modified regulations could result in increased costs, additional capital expenditures, and reduced operating flexibility.

In 2009, the California Board of Forestry adopted the Anadromous Salmonid Protection Rules that were intended to protect, maintain, and improve riparian habitats for state and federally listed anadromous salmonid species. These rules are permanent regulations and replace the interim Threatened or Impaired Watershed Rules which were originally adopted in July 2000 and readopted six times.

Changes in state water quality regulations such as water quality standards, total maximum daily loads, new permitting requirements, and herbicide use.

A 2011 lawsuit in Oregon let to a ruling by the 9th Circuit Court of Appeals that water channeling structures such as culverts on logging roads are, in fact, point sources of pollution, with the potential impact of requiring the Environmental Protection Agency (EPA) to issue discharge permits under the National Pollutant Discharge Elimination System (NPDES), numbering millions of such permits across the nation. On December 12, 2011 the U.S. Supreme Court issued an order calling for the views of the U.S. Solicitor General on certiorari petitions filed by the state of Oregon and by the Oregon Forest Industry Council. The petitions asked the Supreme Court to review and reverse the 9th Circuit’s decision that storm water runoff from forest roads is a “point source” pollutant requiring a federal pollution discharge permit.  On March 20, 2013, the U.S. Supreme Court ruled that an EPA rule exempts stormwater discharges on logging roads from requiring NPDES permits. In late 2012, just as the U.S. Supreme Court was to begin deliberations on whether to hear the appeal, EPA issued new stormwater rules that excluded logging road discharges from discharges associated with industrial activity, thus those activities would not require a NPDES permit.  A lawsuit was filed in January 2013 by the plaintiff in the original lawsuit, the Northwest Environmental Defense Center (NEDC), challenging the new EPA rule.  In light of the favorable ruling in Decker v. NEDC, we believe it is unlikely that NEDC’s new challenge to EPA’s 2012 amendment to the stormwater rules would result in additional permitting requirements.  In February 2014, Congress included language in the Farm Bill which will prevent NPDES permitting of forest roads and silvicultural activities, prevent citizen enforcement suits for other regulatory measures related to forest roads, and remove additional legal ambiguity regarding runoff on forest roads.
 
 
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On December 18, 2014 Natural Resources Defense Council and the Environmental Defense Center filed a petition for mandamus in the U.S. Court of Appeals for the Ninth Circuit to order EPA to decide if it will regulate forest roads under its Phase II stormwater authority and if so, to propose a new rule to regulate forest roads outside of the NPDES permit process.

The EPA also requires states to develop total maximum daily load (“TMDL”) allocations for pollutants in water bodies that have been determined to be “water quality impaired”.  The TMDL requirements set limits on pollutants that may be discharged to a body of water or set additional requirements, such as best management practices for nonpoint sources, including timberland operations, to reduce the amounts of pollutants in designated bodies of water.  These limits require tree farms to better minimize siltation of streams caused by roads, harvest operations and other management activities.  TMDL targets will be established for specific water bodies in the states where we operate and when set, the rules will ordinarily be implemented so as to achieve water quality standards within 10 years, when practicable.

The Forest Practices HCP in Washington State also promotes compliance with the Clean Water Act.  Changes to water quality regulations on forestland must be promulgated through the adaptive management program, and as such must be based on scientific information.  Additionally, TMDLs for forested watersheds are given a low priority for development based on the existing regulatory structure.  TMDL implementation plans in mixed use watersheds reference the existing regulatory structure for implementation plan recommendations on forestlands.

The Washington State Fish and Wildlife Commission is in the process of updating regulations that set standards for watercourse crossing construction. These regulations may, in turn, require changes to the Forest Practice Rules.  Similarly, the Oregon Board of Forestry is considering regulatory actions, including changes to buffer requirements, in order to reduce impacts on streams and fish.  California recently increased its regulation of silviculture to reduce impacts on streams, and regional water boards in that state also have the ability to restrict forest practice permits as a result of wastewater discharge.  As these rules grow more restrictive, we may face increasing costs associated with our silviculture, may find some areas of our tree farms inaccessible (either physically or because of economic inefficiency), and may face reductions in the portion of our timberlands that can be harvested because of setback requirements.

Further, the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) and similar state laws, are increasingly restricting the use of herbicides in a manner that may reduce our timber production.  Herbicides are used to promote reforestation and to optimize the growth of regenerated stands of trees.  These federal and state laws and regulations may reduce the efficiency with which we can produce timber, and they may ultimately reduce the volume of timber that is available for harvest.  Further, a reduction in insecticides or herbicides may make our tree farms more vulnerable to disease or infestations.

State Harvest Permit and Notifications Requirements.

Washington, Oregon, and California all have a permitting or notification system as part of their forest practice rules.  Changes in these processes can cause additional administrative expenses and/or delay project implementation.
 
 
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 California has as many as three separate permits that are required for conducting timber harvests including the Timber Harvest Plan (THP) administered by Cal Fire, Lake and Streambed Alteration Permit administered by the California Department of Fish and Wildlife for crossing watercourses, and various waivers of Reports of Waste Discharge administered by Regional Water Quality Control Boards. THPs may have multiple operations spanning several years.  Review of such plans is more comprehensive, involving archaeological, botanical, biological and other disciplines as well as a public comment period.  Only a Registered Professional Forester can sign a THP, a status that requires multidisciplinary training and testing.  Once approved, a THP has a seven-year life.

Washington has a Forest Practice Application, a permit administered by the Department of Natural Resources.   Forest practices that cross watercourses are also subject to regulations administered by the Department of Fish and Wildlife and until the end of 2013, subject to a permit called a Hydraulic Project Approval (HPA).  As a result of legislation in 2012, these regulations have been integrated into the Forest Practice Rules, negating the need for a HPA.

Oregon does not have a permit system, but does require landowners to provide a Forest Practice Notification to the Department of Forestry.  For certain activities, the Department does require a written plan describing specifically how certain elements of the regulations are to be met.

All three states where we operate periodically update their regulations and permitting processes.  The regulatory comment process can cause us to incur expenses, and new permitting regulations commonly require us to increase the level of research and expertise necessary to meet applicable requirements.  Substantive changes in these regulations may increase our harvest costs, may decrease the volume of our timber that is available for harvest, and may otherwise reduce our revenues or increase our costs of operations.

Climate Change Regulation

California has implemented a cap and trade program that limits the amount of greenhouse gasses emitted by certain stationary sources and will phase in transportation.  This may indirectly impact forest landowners through indirect costs of energy to our manufacturing customers and logging contractors.   The Washington State Legislature will be considering a similar regulation in 2015 which has the potential to impact customers, in particular pulp and paper manufactures, as well as logging contractors.

The regulatory and non-regulatory forest management programs described above have increased operating costs and resulted in changes in the value of the Combined timberlands. Management does not expect to be disproportionately affected by these programs in comparison with typical timberland owners. Likewise, management does not expect that these programs will significantly disrupt its planned operations over large areas or for extended periods.

Real Estate Development.  Many of the federal laws (ESA and CWA) that impact forest management can in a more limited circumstance also apply to real estate development.  Additionally, there are also state and local land use regulations that have additional permitting requirements and that limit development opportunities. For example, in Washington development rights are affected by the Growth Management Act, which requires counties to submit comprehensive plans that identify the future direction of growth and stipulate where population densities are to be concentrated. The purposes of the GMA include: (1) direction of population growth to population centers (Urban Growth Areas), (2) reduction of “suburban sprawl”, and (3) protection of historical sites. We work with local governments within the framework of the GMA to develop our real estate holdings to their highest and best use. Oregon also has growth management provisions in its land use laws which served as a model for Washington’s growth management provisions. Oregon's land use laws are generally more stringent outside of urban areas, especially in commercial forest lands where residential conversions are often outright disallowed without statutory action by the State legislature.  These regulations can impact the permitted density of a given area, which may affect the number of lots, dwellings, or commercial buildings that can be constructed in a given location. Any or all of which may affect our real estate revenues and the value of our real estate holdings.
 
 
19

 

 
Item 1A.         RISK FACTORS

We are subject to statutory and regulatory restrictions that currently limit, and may increasingly limit, our ability to generate income. Our ability to grow and harvest timber can be significantly impacted by legislation, regulations or court rulings that restrict or stop forest practices. For example, events that focus media attention upon natural disasters and damage to timberlands have at various times brought increasing public attention to forestry practices, often resulting in increasingly stringent laws and regulations that increase the size of wetlands buffers, limit silviculture activities, restrict harvests because of animal habitats, or requiring various actions to stabilize slopes. Additional regulations, whether or not adopted in response to such events, may make it more difficult or expensive for us to harvest timber and may reduce the amount of harvestable timber on our properties. These and other restrictions on logging, planting, road building, fertilizing, managing competing vegetation, and other activities can significantly increase the cost or reduce available inventory thereby reducing income. Further, while we manage our timberlands in accordance with the Sustainable Forestry Initiative and we follow forest management and risk mitigation procedures that we believe to be sound, and although all of our forestry operations comply with applicable forestry practices regulations, we cannot be certain we will not be the subject of claims based on allegations that we acted improperly in managing our property.  These claims may take the form of individual or class action litigation, regulatory or enforcement proceedings, or both. Any such claims could result in substantial defense costs and divert management’s attention from the ongoing operation of our business, and if any such claims were successful, may result in substantial damage awards, fines or civil penalties. Any such additional restrictions likely would have a similar effect on our Timberland Management operations, particularly in the case of the Funds.
 
Our real estate holdings are illiquid, and changes in economic and regulatory factors may affect the value of our properties or the timing of the proceeds, if any, that we expect to receive on the sale of such properties. The value of our real estate investments, and our income from Real Estate operations, is sensitive to changes in the economic and regulatory environment, as well as various land-use regulations and development risks, including the ability to obtain the necessary permits and land entitlements that would allow us to maximize the revenue from our real estate investments. Our real estate investments are long-term in nature, which raises the risk that unforeseen changes in the economy or laws surrounding development activities may have an adverse effect on our investments. These investments often are highly illiquid and thus may not generate cash flow if and when needed to support our other operations. Further, we occasionally announce contracts relating to the sale of our real estate holdings, but those agreements may contain contingencies and conditions that may delay or prevent the consummation of transactions even after we have agreed to sale terms.
 
We are sensitive to demand and price issues relating to our sales of logs in both domestic and foreign markets. We generate Fee Timber revenue primarily by selling softwood logs to domestic mills and to third-party intermediaries who resell them to the export market. The domestic market for logs in our operating area depends heavily on U.S. housing starts. Recently, the U.S. housing market has started to improve but, to the extent the recovery in the housing market should stall, such a turn of events could have a negative impact on our operating results. The export markets for Pacific Northwest logs are significantly affected by fluctuations in United States, Japanese and, increasingly, Chinese and Korean economies, as well as by the foreign currency exchange rate between these Asian currencies and the U.S. dollar, as well as ocean transportation costs.

We have certain environmental remediation liabilities associated with our Port Gamble and former Port Ludlow resort properties, and those liabilities may increase. We currently own certain real estate at Port Gamble on the Kitsap Peninsula and, until mid-2001, owned real estate within the resort community of Port Ludlow in Jefferson County in western Washington. Sediments adjacent to these properties were alleged to have been impacted by operations occurring prior to our acquisition of the properties, which occurred at the time of our spinoff from Pope & Talbot, Inc. in 1985.  The Partnership itself has never operated any of the contaminated sites.  However, as current owner of Port Gamble and based on conditions of our sale of the Port Ludlow assets, we have environmental liability for these properties under Washington State’s Model Toxics Control Act (MTCA). Under the MTCA, we are one of two “potentially liable parties,” or PLPs, for the conditions at the Port Gamble site, substantially all of which are in the tidal and submerged portions of Port Gamble Bay. The MTCA provides that each PLP is jointly and severally liable with all other PLPs for the entire cost of remediating contaminated properties. The Partnership had previously designed and had begun to implement a remediation program that management believed was sufficient to comply with applicable laws and regulations. However, recent actions by the Washington Department of Ecology (DOE) have imposed substantially higher cleanup standards than had previously been expected, thus increasing the level of activity and cost that will be required to achieve the required cleanup levels. In December 2013 the Partnership entered into a consent decree with DOE, which included a cleanup action plan, or CAP, that established general obligations for remediating the remaining conditions at Port Gamble. The final CAP, however, affords discretion to DOE to assess the site and to order additional actions.
 
 
20

 
 
Management continues to monitor the Port Gamble and Port Ludlow cleanup processes closely and increased the recorded liability by $10.0 million in the fourth quarter of 2014. The $21.7 million remediation accrual as of December 31, 2014 represents our current estimate of the remaining cleanup cost and most likely outcome to various contingencies within both locations. These estimates are predicated upon a variety of factors, including the proportion of costs that would be allocated to us in comparison to those allocable to the Washington Department of Natural Resources (DNR), which is the other known PLP for the Port Gamble site.  However, the actual amount of the ultimate cleanup costs, the cost of any litigation if we cannot reach a settlement with DNR, and the outcome of any such litigation, is uncertain. These liabilities are based upon a number of estimates and judgments that are subject to change as the project progresses.  Any litigation ensuing from this matter may result in adverse financial impacts and may distract management and other key personnel from day to day operations. Changes in circumstances may result in the need for additional adjustments to the existing liability, any of which would result in a charge to earnings in the period those changes occur.  These factors, alone or in combination with other challenges, may have a material adverse effect upon our assets, income and operations.

Our operation of our timberland private equity funds exposes us to management risk and may carry other risks. Our Timberland Management segment is involved in managing our timber private equity funds. Further, substantially all of our recent acquisitions of timberlands for our Fee Timber segment have been on behalf of these funds, and our results of operations from our Fee Timber segment are increasingly dependent upon the success of our Fund Tree Farms. If we cannot continue to raise investment capital to permit the Funds to acquire additional timberlands, then the growth of our Fee Timber operations will be limited by our own ability to reinvest our capital and to raise additional capital through debt or equity financing. A reduction in our ability to expand our timberland holdings would likely reduce our Fee Timber income and may also reduce our flexibility as to harvest timing. Additionally, we may face claims from one or more investors in the Funds that we have failed to properly manage the Funds or that we have misled investors about the merits, risks, or other aspects of an investment in the Funds. While we are aware of no basis for any such claims, any resulting claim would be a distraction to our management and may damage the Partnership’s reputation. Further, such outcomes could make it more difficult to raise additional capital for existing or future private equity funds, which would limit our ability to grow our Fee Timber or our Timberland Management revenues.
 
We rely on contract loggers and truckers who are in short supply and seeking consistent work at increasing rates.  We rely on contract loggers and truckers for the production and transportation, respectively, of our products to customers.  During the economic downturn of 2008 and 2009 most industrial forestry firms deferred harvest, which resulted in a shortfall in demand for the contract logging and trucking work force.  Many private logging and trucking companies did not survive the protracted economic downturn.  As the economy has improved and companies return to harvesting, a shortage of logging contractors and truckers has developed.  The remaining contractors who survived did so by reducing their workforce or, in the case of log truckers, converting their trucks to configurations suitable for highway freight hauling.  This decline in the pool of available contractors has resulted in a steady increase in harvest and haul costs and market forces that are stressing continuity of work when soliciting contractor bids for a job.  The commitment to more continuous work could preclude our ability to time markets, affecting total returns.   
 
 
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We benefit from certain tax treatment accorded to master limited partnerships, and if that status changes the holders of our units may realize less advantageous tax consequences. The Partnership is a Master Limited Partnership and is therefore not generally subject to U.S. federal income taxes. If a change in tax law (or interpretation of current tax law) caused the Partnership to become subject to income taxes, operating results would be adversely affected. We also have a handful of taxable subsidiaries. The estimation of income tax expense and preparation of income tax returns requires complex calculations and judgments. We believe the estimates and calculations used in this process are proper and reasonable and more likely than not would be sustained under examination by federal or state tax authorities, however if a federal or state taxing authority disagreed with the positions we have taken, a material change in provision for income taxes, net income, or cash flows could result.

We and our customers are dependent upon active credit markets to fund operations. We sell logs from our Fee Timber segment to mills and log brokers that in most circumstances rely upon an active credit market to fund their operations. Our Real Estate sales are also often dependent upon credit markets in order to fund acquisitions. To the extent borrowing restrictions impinge on customers’ access to debt, we expect those customers to respond by reducing their expenditures, and those reductions may have the effect of directly reducing our revenues and of indirectly reducing the demand for our products. Any such outcomes could materially and adversely impact our results of operations, cash flows, and financial condition.

We are controlled by our managing general partner. As a master limited partnership, substantially all of our day-to-day affairs are controlled by our managing general partner, Pope MGP, Inc. The board of directors of Pope MGP, Inc. serves as our board of directors, and by virtue of a stockholder agreement, each of the two individual shareholders of Pope MGP, Inc. have the ability to designate one of our directors and jointly appoint two others, with the fifth board position filled by our chief executive officer, who serves as a director by virtue of his executive position. Unitholders may remove the managing general partner only in limited circumstances, including, among other things, a vote by the holders of a two-thirds majority of the “qualified units,” which means the units that have been owned by their respective holders for at least five years prior to such vote. By virtue of the terms of our agreement of limited partnership, as amended, or “partnership agreement”, our managing general partner directly, and the general partner shareholders indirectly, have the ability to do the following: prevent or impede transactions that would result in a change of control of the Partnership; to prevent or, upon the approval of limited partners holding a majority of the units, to cause, the sale of the assets of the Partnership; and to cause the Partnership to take or refrain from taking certain other actions that one might otherwise perceive to be in the Partnership’s best interest. Under our partnership agreement, we are required to pay to Pope MGP, Inc. an annual management fee of $150,000, and to reimburse Pope MGP, Inc. for certain expenses incurred in managing our business.

We may incur losses as a result of natural disasters that may occur, or that may be alleged to have occurred, on our properties. Forests are subject to a number of natural hazards, including damage by fire, storms, insects and disease, volcanic activity, flooding and landslides. Changes in climate conditions may intensify these hazards. Severe weather conditions and other natural disasters can also reduce the productivity of timberlands and disrupt the harvesting and delivery of forest products. While damage from most natural causes is typically localized and would normally affect only a small portion of our timberlands at any one time, these hazards are unpredictable and losses might not be so limited. Consistent with the practices of other large timber companies, we do not maintain insurance against loss of standing timber on our timberlands due to natural disasters.

We compete with a number of larger competitors that may be better able than we to absorb price fluctuations, may be able to expend greater resources on production, may have greater access to capital, and may operate more efficiently than we can. We compete against much larger companies in each of our business segments. We compete with these companies for management and line personnel, as well as for purchases of relatively scarce capital assets such as land and standing timber and for sales of our products. These larger competitors may have access to larger amounts of capital and significantly greater economies of scale, and they may be better able to absorb the risks of our line of business. Moreover, the timber industry has experienced significant consolidation in recent years and, as that consolidation occurs, our relative market share decreases and the relative financial capacity of our competitors increases. While management believes the Partnership is at a competitive advantage over some of these companies because of our lack of vertical integration into forest products manufacturing, our advantageous tax structure, and management’s attempts to diversify our asset base, we cannot assure readers that competition will not have a material and adverse effect on our results of operations or our financial condition.
 
 
22

 
 
Consolidation of sawmills in our geographic operating area may reduce competition among our customers, which could adversely affect our log prices. In the past we have experienced, and may continue to experience, consolidation of sawmills and other wood products manufacturing facilities in the Pacific Northwest. Because a portion of our cost of sales in our Fee Timber segment, which encompasses the Combined tree farms, consists of transportation costs for delivery of logs to domestic sawmills, it becomes increasingly expensive to transport logs over longer distances for sales in domestic markets. As a result, a reduction in the number of sawmills, or in the number of sawmill operators, may reduce competition for our logs, increase transportation costs, or both. These consolidations thus may have a material adverse impact upon our Fee Timber revenue or income and, as that segment has traditionally represented our largest business unit, upon our results of operation and financial condition as a whole. Any such material adverse impact on timber revenue and income as a result of regional mill consolidations will also indirectly affect our Timberland Management segment in the context of raising capital for investment in Pacific Northwest-based timber funds.
 
Item 1B.         UNRESOLVED SECURITIES AND EXCHANGE COMMISSION COMMENTS

None

Item 2.    PROPERTIES

The following table reconciles acreage owned as of December 31, 2014 to acreage owned as of December 31, 2013. As noted previously, we own 20% of Funds I and II and 5% of Fund III.  This table includes the entire 80,000 acres of timberland owned by the Funds and also presents the acreage on a Look-through basis. Properties are typically transferred from Fee Timber to the Real Estate segment at the point in time when the Real Estate segment takes over responsibility for managing the properties with the goal of maximizing the properties’ value upon disposition.

   
Timberland Acres (in thousands) by Tree Farm
 
Description
 
2013
   
Acquisitions
   
Sales
   
Transfer
   
2014
 
Hood Canal tree farm (1)
    69.2       0.1       (0.5 )     -       68.8  
Columbia tree farm (1)
    41.3       0.6               -       41.9  
    Subtotal Partnership Timberland
    110.5       0.7       (0.5 )     -       110.7  
                                         
Fund I tree farms
    23.9       -       (23.9 )     -       -  
Fund II tree farms (2)
    37.2       -       -       -       37.2  
Fund III tree farms (2)
    29.6       13.0       -       -       42.6  
    Subtotal Funds' Timberland
    90.7       13.0       (23.9 )     -       79.8  
                                         
Total Fee Timber acres
    201.2       13.7       (24.4 )     -       190.5  
                                         
Partnership share of Funds
    13.7       0.7       (4.8 )     -       9.6  
Total Real Estate acres (see detail below)
    3.0       -       (0.4 )     -       2.6  
Combined Look-through total acres
    127.1       1.4       (5.7 )     -       122.9  
 
(1) A subset of this property is used as collateral for the Partnership's long-term debt, excluding debt of the Funds.
(2) A subset of these properties is used as collateral for the Funds' long-term debt.
 
 
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Real Estate Acres Detail
 
Project Location
 
2013
   
 Acquisitions
 
Sales
   
 Transfer
 
2014
 
                           
Bremerton
    46                     46  
Gig Harbor
    212           (38 )         174  
Hansville
    149                       149  
Kingston - Arborwood
    364                       364  
Kingston - 5-acre zoning
    366           (366 )         -  
Port Gamble LAMIRD townsite (a)
    114                       114  
Port Gamble Agrarian District (b )
    205                       205  
Port Ludlow
    256                       256  
Poulsbo
    2                       2  
Other Rural Residential
    1,253           (4 )         1,249  
Total
    2,967    
                -
    (408 )  
          -
    2,559  
 
The following table provides dwelling unit (DU) per acre zoning for the Partnership’s owned timberland and development properties as of December 31, 2014 and land sold during 2014. The table does not include sales of development rights or small timberland sales from tree farms properties:
 
Current Real Estate Land Inventory by Zoning Category
 
2014 Sales from RE Portfolio
Zoning Designation
 
Acres
 
Acres
 
$/Acre
 
Total Sales
Urban zoning - residential
    544       38     $ 24,211     $ 13,171  
Historic Rural Town
    114                          
Commercial/retail
    21                          
Business park/industrial
    22                          
1 DU per 5 acres
    375       366       5,473       2,003  
1 DU per 10 acres
    153                          
1 DU per 20 acres
    789                          
1 DU per 40 acres
    38       4       13,397       53  
1 DU per 80 acres
    298                          
Agrarian District
    205                          
Total
    2,559                     $ 15,227  
                                 
 
Item 3.            LEGAL PROCEEDINGS

The Partnership may from time to time be a defendant in lawsuits arising in the ordinary course of business. Management believes that loss to the Partnership, if any, will not have a material adverse effect on the Partnership’s consolidated financial condition or results of operations.

Item 4.            MINE SAFETY DISCLOSURES

Not applicable.

 
24

 
 
PART II

Item 5.            MARKET FOR REGISTRANT’S UNITS, RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Partnership’s equity securities are listed on NASDAQ and traded under the ticker symbol “POPE”. The following table sets forth the 2012 to 2014 quarterly ranges of low and high prices, respectively, for the Partnership’s units together with per unit distribution amounts by the period in which they were paid:
 
   
High
   
Low
   
Closing
   
Distributions
 
Year Ended December 31, 2012
                       
 First Quarter
  $ 45.78     $ 41.19     $ 43.70     $ 0.35  
 Second Quarter
    60.39       42.50       55.07       0.45  
 Third Quarter
    57.13       50.71       52.15       0.45  
 Fourth Quarter
    56.49       51.25       55.68       0.45  
Year Ended December 31, 2013
                               
 First Quarter
  $ 66.49     $ 56.15     $ 61.50     $ 0.45  
 Second Quarter
    74.99       59.97       70.00       0.45  
 Third Quarter
    73.07       60.07       67.69       0.55  
 Fourth Quarter
    69.65       63.01       67.00       0.55  
Year Ended December 31, 2014
                               
 First Quarter
  $ 70.50     $ 64.17     $ 66.99     $ 0.55  
 Second Quarter
    70.26       63.94       67.00       0.65  
 Third Quarter
    71.00       65.85       66.35       0.65  
 Fourth Quarter
    68.25       62.35       63.63       0.65  
 
Unitholders

As of January 31, 2015, there were 4,335,573 outstanding units, representing 229 holders of record. Units outstanding include 39,797 that are currently restricted from trading and that were granted to 18 holders of record who are either management employees or members of the managing general partner’s board of directors. The trading restriction for these units is lifted as the units vest. These restricted units vest over a four-year vesting schedule, either ratably over four years for management or 50% on the third anniversary of the grant date and the remaining 50% upon reaching the fourth anniversary for non-management Board members.

Distributions

All cash distributions are at the discretion of the Partnership’s managing general partner, Pope MGP, Inc. (the “Managing General Partner”). During 2014, the Partnership made one quarterly distribution of 55 cents per unit and three of 65 cents per unit that totaled $11.0 million in the aggregate. In 2013, we made two distributions of 45 cents per unit and two of 55 cents per unit, totaling $8.9 million in the aggregate.

Confidence in our ability to generate cash flow in 2014 and continued improvement in all of our markets served to inform a $0.10, or 18% increase in the quarterly distribution rate in the second quarter of 2014. This increase was in addition to a $0.10, or 22%, increase in the quarterly distribution rate in the third quarter of 2013. The Managing General Partner, in its discretion, determines the amount of the quarterly distribution and regularly evaluates distribution levels. As such, the quarterly determination of distribution amounts, if any, will reflect the expectations of management and the Managing General Partner for the Partnership’s liquidity needs.
 
 
25

 
 
Equity Compensation Plan Information

The Partnership maintains the Pope Resources 2005 Unit Incentive Plan, which authorizes the granting of nonqualified equity compensation in order to provide incentives to align the interests of management with those of unitholders. Pursuant to the plan, the Partnership issues restricted unit grants that vest over four years. As of December 31, 2014 there were 41,427 unvested and outstanding restricted units of which 12,930 units are scheduled to vest during 2015, and 921,289 limited partnership units remained issuable under the plan. Additional information regarding equity compensation arrangements is set forth in Note 6 to Consolidated Financial Statements and Item 11 - Executive Compensation. Such information is incorporated herein by reference.
 
Performance Graph

The following graph shows a five-year comparison of cumulative total unitholder returns for the Partnership, the Standard and Poor's 500 Index, the Standard and Poor's Smallcap 600 Index, the Standard and Poor’s Forest Products Index, the Wilshire 4500, and the Wilshire 5000 for the five years ended December 31, 2014. The total unitholder return assumes $100 invested at the beginning of the period in the Partnership’s units, the Standard and Poor's 500 Index, the Standard and Poor's Smallcap 600 Index, the Standard and Poor’s Forest Products Index, the Wilshire 4500, the Wilshire 5000, and  the Long-Term Incentive Plan Peer Group. The graph assumes distributions are reinvested.

Graph
 
 
26

 
 
Graph

 Issuance of Unregistered Securities

The Partnership did not conduct any unregistered offering of its securities in 2012, 2013, or 2014.

Repurchase of Equity Securities

On August 25, 2014 the Partnership repurchased 108,276 units at $68.00 per unit from a single third-party unitholder.

Item 6.            SELECTED FINANCIAL DATA

Actual Results. The financial information set forth below for each of the indicated years is derived from the Partnership’s audited consolidated financial statements. This information should be read in conjunction with the audited consolidated financial statements and related notes included with this report.
 
(In thousands, except per unit data)
 
Year Ended December 31,
 
Statement of operations data
 
2014
   
2013
   
2012
   
2011
   
2010
 
Revenue:
                             
Fee Timber
  $ 65,204     $ 56,035     $ 45,539     $ 52,729     $ 27,674  
Timberland Management
    -       -       7       -       31  
Real Estate
    22,266       14,657       8,497       4,545       3,487  
Total revenue
    87,470       70,692       54,043       57,274       31,192  
                                         
Operating income/(loss):
                                       
Fee Timber
    44,289       16,168       11,853       16,899       9,703  
Timberland Management
    (2,329 )     (1,950 )     (1,568 )     (1,515 )     (1,250 )
Real Estate (1)
    (2,720 )     3,276       (11,099 )     (349 )     (829 )
General and Administrative
    (3,781 )     (4,562 )     (4,170 )     (4,188 )     (4,711 )
Total operating income (loss)
    35,459       12,932       (4,984 )     10,847       2,913  
                                         
Net income (loss) attributable to unitholders
  $ 12,415     $ 13,135     $ (4,709 )   $ 8,754     $ 2,038  
                                         
Earnings (loss) per unit – diluted
  $ 2.82     $ 2.96     $ (1.11 )   $ 1.94     $ 0.43  
                                         
Distributions per unit
  $ 2.50     $ 2.00     $ 1.70     $ 1.20     $ 0.70  
                                         
Balance sheet data
                                       
Total assets
  $ 345,077     $ 310,908     $ 267,499     $ 230,408     $ 235,837  
Long-term debt, net of current portion
    84,872       75,581       43,710       45,793       50,468  
Partners’ capital
    64,216       69,445       64,223       75,759       70,990  
 
(1)  Real Estate operating results in 2014, 2013, 2012, 2011 and 2010 included $10.0 , $0, $12.5 million, $977,000 and $875,000 respectively, of environmental remediation charges.

Management uses adjusted cash available for distributions, a non-GAAP measure, as a meaningful indicator of liquidity for purposes of calibrating our distribution payout rate to unitholders and, as such, has provided this information in addition to the generally accepted accounting principles-based presentation of cash provided by operating activities.  Management recognizes that there are varying methods of calculating cash flow and has provided the information below to give transparency to this particular metric’s calculation.

 
27

 
 
(In thousands)
 
Year Ended December 31,
 
Adjusted cash available for distribution:
 
2014
   
2013
   
2012
   
2011
   
2010
 
Cash provided by operations
  $ 30,795     $ 17,949     $ 16,209     $ 21,660     $ 8,950  
Less: Maintenance capital expenditures (1)
    (1,249 )     (1,352 )     (1,284 )     (1,353 )     (858 )
Less: Required debt service
    (107 )     (98 )     (3 )     (6 )     (1,015 )
Less: Noncontrolling portion of Funds cash from operations (2)
    (8,759 )     (5,656 )     (3,270 )     (7,405 )     (733 )
Plus: Financed debt extinguishment costs (3)
    -       -       -       -       1,250  
Adjusted cash available for distribution (ACAD)
  $ 20,680     $ 10,843     $ 11,652     $ 12,896     $ 7,594  
                                         
Other data
                                       
Acres owned/managed (thousands)
    193       204       196       178       175  
Fee timber harvested (MMBF) (4)
    97       90       84       90       53  
 
(1)  
Capital expenditures from the cash flow statement less costs incurred to purchase and make leasehold improvements to the new corporate building less non-controlling interest share of Fund capital expenditures.
(2)  
Share of Funds’ operating income (loss), interest, tax, amortization, depreciation, and depletion expense, cost of land sold, change in working capital accounts, and cash from operations that are attributable to noncontrolling interests.  That share is 80% in the case of Funds I and II and 95% in the case of Fund III.
(3)  
Make-whole payments owed to prior lender that were added to total amount borrowed from new lender.
(4)  
Includes timber deed sales of 4.0 MMBF, 2.0 MMBF and 4.4 MMBF in 2014, 2013 and 2012, respectively.

The following table presents Fee Timber revenue, operating income, and harvest volume on a Look-through basis for each year in the three-year period ended December 31, 2014. This depiction reflects an adjustment to these GAAP financial items to reflect our proportionate ownership of each of the Funds, which for GAAP purposes are consolidated into our financial statements.

   
Revenue
                     
 
 
(in millions) Year ended
 
Log Sale
   
Other
 Revenue
   
Total Fee
Timber
   
Gain on
Sale
of Tree
Farms
   
Operating
Income
   
Harvest
Volume
(MMBF)
   
Timber
Deed Sale
Volume (MMBF)
 
Partnership
  $ 30.9     $ 2.9     $ 33.8     -     $ 14.4       47.1       -  
Share of Funds
    4.6       0.2       4.8       4.8       1.0       7.2       0.2  
Look-through 2014
  $ 35.5     $ 3.1     $ 38.6     $ 4.8     $ 15.4       54.3       0.2  
                                                         
Partnership
  $ 30.7     $ 1.5     $ 32.2     $ -     $ 14.1       48.5       -  
Share of Funds
    4.6       0.1       4.7       -       0.5       7.8       0.1  
Look-through 2013
  $ 35.3     $ 1.6     $ 36.9     -     $ 14.6       56.3       0.1  
                                                         
Partnership
  $ 26.3     $ 2.5     $ 28.8     -     $ 11.6       47.6       4.4  
Share of Funds
    3.3       -       3.3       -       -       6.4       -  
Look-through 2012
  $ 29.6     $ 2.5     $ 32.1     -     $ 11.6       54.0       4.4  
 
 
28

 
 
The following table presents log volume sold by species on a Look-through basis for each year in the three-year period ended December 31, 2014 as follows:
 
Volume (in MMBF)
       
 
                         
Sawlogs
 
2014
   
% Total
 
2013
   
% Total
 
2012
   
% Total
Douglas-fir
    32.8       61 %     36.6       65 %     38.8       72 %
Whitewood
    9.2       17 %     8.0       14 %     6.2       11 %
Pine
    0.2       0 %     -       -       -       -  
Cedar
    1.7       3 %     1.4       2 %     0.6       1 %
Hardwoods
    1.7       3 %     1.7       3 %     1.4       3 %
Pulpwood
                                               
All Species
    8.7       16 %     8.6       15 %     7.0       13 %
Total
    54.3       100 %     56.3       100 %     54.0       100 %
Average Price/MMBF
  $ 653             $ 627             $ 548          
 
The following table presents log price realized by species on a Look-through basis for each year in the three-year periods ended December 31, 2014 as follows:
 
     
Fiscal Year
 
           
∆ from 2013 to 2014
   
 
   
∆ from 2012 to 2013
   
 
 
     
2014
   
$/MBF
   
%
   
2013
   
$/MBF
   
%
   
2012
 
Sawlogs
Douglas-fir
  $ 719     $ 24       3 %   $ 695     $ 108       18 %   $ 587  
 
Whitewood
    624       8       1 %     616       118       24 %     498  
 
Pine
    543       n/a               -       0               -  
 
Cedar
    1,369       207       18 %     1,162       145       14 %     1,017  
 
Hardwood
    621       68       12 %     553       (35 )     -6 %     588  
Pulpwood
All Species
    303       31       11 %     272       (58 )     -18 %     330  
Overall
    653       26       4 %     627       79       14 %     548  
 
The percentage of annual harvest volume by quarter on a Look-through basis for each year in the three-year period ended December 31, 2014 was as follows:

Year ended
Q1
Q2
Q3
Q4
2014
32%