10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q
 
( X )
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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

Commission File Number 1-9035

POPE RESOURCES, A DELAWARE
LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware
91-1313292
(State or other jurisdiction of 
incorporation or organization) 
(IRS Employer
Identification Number)
 
19950 7th Avenue NE, Suite 200, Poulsbo, WA 98370
Telephone: (360) 697-6626
(Address of principal executive offices including zip code)
(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x          No 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x         No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer o
Accelerated Filer x
 
 
Non-accelerated Filer o
Smaller Reporting Company o
 
                                                                                                           
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    
Yes o          No x

Partnership units outstanding at October 30, 2015: 4,336,323





Pope Resources
Index to Form 10-Q Filing
For the Nine Months Ended September 30, 2015

Description
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





P A R T  I – FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Pope Resources, a Delaware Limited Partnership
September 30, 2015 and December 31, 2014
(in thousands)
 
2015
 
2014
ASSETS
 
 
 
Current assets
 
 
 
Partnership cash and cash equivalents
$
11,045

 
$
14,505

ORM Timber Funds cash
7,348

 
9,523

Cash and cash equivalents
18,393

 
24,028

Short-term investments

 
1,000

Accounts receivable, net
2,938

 
2,419

Land and timber held for sale
3,957

 
7,160

Prepaid expenses and other
1,152

 
2,873

    Total current assets
26,440

 
37,480

Properties and equipment, at cost
 

 
 

  Timber and roads, net of accumulated depletion (2015 -  $100,477; 2014 - $93,359)
223,852

 
227,144

Timberland
47,799

 
47,933

Land held for development
27,498

 
26,040

Buildings and equipment, net of accumulated depreciation (2015 - $7,268; 2014 - $6,849)
5,809

 
6,039

    Total property and equipment, at cost
304,958

 
307,156

 
 
 
 
Other assets
504

 
441

Total assets
$
331,902

 
$
345,077

 
 
 
 
LIABILITIES, PARTNERS' CAPITAL AND NONCONTROLLING INTERESTS
 

 
 

Current liabilities
 

 
 

Accounts payable
$
1,823

 
$
1,293

Accrued liabilities
3,949

 
3,196

Current portion of long-term debt
113

 
5,109

Deferred revenue
192

 
668

Current portion of environmental remediation liability
14,797

 
3,700

Other current liabilities
319

 
248

    Total current liabilities
21,193

 
14,214

Long-term debt, net of current portion
84,787

 
84,872

Environmental remediation and other long-term liabilities
5,417

 
18,362

Partners' capital and noncontrolling interests
 

 
 

General partners' capital (units issued and outstanding 2015 - 60; 2014 - 60)
1,018

 
1,003

Limited partners' capital (units issued and outstanding 2015 - 4,238; 2014 - 4,224)
64,186

 
63,213

Noncontrolling interests
155,301

 
163,413

    Total partners' capital and noncontrolling interests
220,505

 
227,629

Total liabilities, partners' capital and noncontrolling interests
$
331,902

 
$
345,077

See accompanying notes to condensed consolidated financial statements.

3



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Pope Resources, a Delaware Limited Partnership
For the Three and Nine Months Ended September 30, 2015 and 2014
(in thousands, except per unit data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
15,208

 
$
13,755

 
$
56,020

 
$
70,117

Cost of sales
(9,746
)
 
(9,125
)
 
(33,058
)
 
(39,426
)
Operating expenses
(4,030
)
 
(3,686
)
 
(10,889
)
 
(10,590
)
General and administrative expenses
(1,202
)
 
(941
)
 
(3,590
)
 
(2,713
)
Gain (loss) on sale of timberland
(1,103
)
 
9,188

 
(1,103
)
 
9,188

Income (loss) from operations
(873
)
 
9,191

 
7,380

 
26,576

 
 
 
 
 
 
 
 
Interest expense, net
(726
)
 
(659
)
 
(2,248
)
 
(1,862
)
 
 
 
 
 
 
 
 
Income (loss) before income taxes
(1,599
)
 
8,532

 
5,132

 
24,714

Income tax expense
(1
)
 
(259
)
 
(369
)
 
(485
)
Net income (loss)
(1,600
)
 
8,273

 
4,763

 
24,229

 
 
 
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests - ORM Timber Funds
2,215

 
(6,773
)
 
3,950

 
(8,642
)
Net and comprehensive income attributable to unitholders    
$
615

 
$
1,500

 
$
8,713

 
$
15,587

 
 
 
 
 
 
 
 
Allocable to general partners
$
9

 
$
21

 
$
122

 
$
214

Allocable to limited partners
606

 
1,479

 
8,591

 
15,373

Net and comprehensive income attributable to unitholders
$
615

 
$
1,500

 
$
8,713

 
$
15,587

 
 
 
 
 
 
 
 
Basic and diluted earnings per unit attributable to unitholders
$
0.13

 
$
0.34

 
$
2.01

 
$
3.52

 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,298

 
4,350

 
4,297

 
4,376

 
 
 
 
 
 
 
 
Distributions per unit
$
0.70

 
$
0.65

 
$
2.00

 
$
1.85

See accompanying notes to condensed consolidated financial statements.

4



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Pope Resources, a Delaware Limited Partnership
Nine Months Ended September 30, 2015 and 2014
(in thousands)
 
2015
 
2014
Net income
$
4,763

 
$
24,229

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 

Depletion
7,198

 
9,382

Equity-based compensation
722

 
698

Excess tax benefit of equity-based compensation
(5
)
 

Depreciation and amortization
466

 
542

Deferred taxes
199

 
207

Cost of land sold
9,246

 
8,377

(Gain) loss on sale of timberland
1,103

 
(9,188
)
Cash flows from changes in operating accounts
 

 
 

Accounts receivable, net
(519
)
 
(345
)
Prepaid expenses and other assets
1,510

 
13

Real estate project expenditures
(7,053
)
 
(3,438
)
Accounts payable and accrued liabilities
1,282

 
(1,527
)
Deferred revenue
(477
)
 
294

Environmental remediation
(1,579
)
 
(694
)
Other current and long-term liabilities
47

 
(159
)
Net cash provided by operating activities
16,903

 
28,391

 
 
 
 
Cash flows from investing activities
 

 
 

Purchase of short-term investments

 
(4,000
)
Maturity of short-term investments
1,000

 

Reforestation and roads
(1,473
)
 
(1,543
)
Buildings and equipment
(197
)
 
(253
)
Acquisition of timberland - Partnership
(4,851
)
 
(3,921
)
Proceeds from sale of timberland
1,001

 
38,147

Net cash provided by (used in) investing activities
(4,520
)
 
28,430

 
 
 
 
Cash flows from financing activities
 

 
 

Repayment of long-term debt
(5,081
)
 
(82
)
Unit repurchase

 
(7,363
)
Proceeds from preferred stock issuance - ORM Timber Funds

 
125

Payroll taxes paid on unit net settlements
(107
)
 
(196
)
Excess tax benefit of equity-based compensation
5

 

Cash distributions to unitholders
(8,672
)
 
(8,225
)
Cash distributions - ORM Timber Funds, net of distributions to Partnership
(4,163
)
 
(5,854
)
Net cash used in financing activities
(18,018
)
 
(21,595
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(5,635
)
 
35,226

Cash and cash equivalents at beginning of period
24,028

 
6,960

Cash and cash equivalents at end of period
$
18,393

 
$
42,186

See accompanying notes to condensed consolidated financial statements.


5



POPE RESOURCES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2015

1.
The condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 and the related condensed consolidated statements of comprehensive income for the three- and nine-month periods and cash flows for the nine-month periods ended September 30, 2015 and 2014 have been prepared by Pope Resources, A Delaware Limited Partnership (the “Partnership”), pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements are unaudited, but, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2014, is derived from the Partnership’s audited consolidated financial statements and notes thereto for the year ended December 31, 2014, and should be read in conjunction with such financial statements and notes. The results of operations for the interim periods are not indicative of the results of operations that may be achieved for the entire fiscal year ending December 31, 2015.

2.
The financial statements in the Partnership’s 2014 annual report on Form 10-K include a summary of significant accounting policies of the Partnership and should be read in conjunction with this Quarterly Report on Form 10-Q.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective on January 1, 2018.   Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Partnership is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Partnership has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The ASU amends the consolidation guidance for variable interest entities (VIEs) and general partners' investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. Management does not believe the adoption of ASU 2015-02 will have a material impact on the Partnership's consolidated financial position, results of operations or disclosure requirements of its consolidated financial statements.

3.
The Partnership has two general partners: Pope MGP, Inc. and Pope EGP, Inc. In total, these two entities own 60,000 partnership units. The allocation of distributions, profits and losses between the general and limited partners is pro rata across all units outstanding.

4.
ORM Timber Fund I, LP (Fund I), ORM Timber Fund II, Inc. (Fund II), and ORM Timber Fund III (REIT) Inc. (Fund III), collectively “the Funds”, were formed by Olympic Resource Management LLC (ORMLLC), a wholly owned subsidiary of Pope Resources, for the purpose of attracting capital to purchase timberlands. The objective of these Funds is to generate a return on investments through the acquisition, management, value enhancement and sale of timberland properties. Each Fund will operate for a term of ten years from the end of the respective investment period. Fund I has sold all its timberland holdings and will terminate in 2015, prior to its scheduled termination in August 2017. Fund II is scheduled to terminate in March 2021 and Fund III will terminate on the tenth anniversary of the completion of its investment period.  Fund III’s investment period will end at the earlier of placement of all committed capital or July 31, 2016.

Pope Resources and ORMLLC together own 20% of Funds I and II and 5% of Fund III. The Funds are consolidated into the Partnership’s financial statements based in part on ORMLLC’s controlling role as the general partner or managing member of the Funds. The consolidated financial statements exclude management fees paid by the Funds to ORMLLC as they are eliminated in consolidation. See note 5 for a breakdown of operating results before and after such eliminations. The portion of these fees, among other items of income and expense, attributed to third-party investors is reflected as an adjustment to income in the Partnership’s Condensed Consolidated Statement of Comprehensive Income under the caption “Net (income) loss attributable to noncontrolling interests - ORM Timber Funds.”

In October 2015, Fund I distributed $5.9 million to its investors, of which $1.1 million was the Partnership's portion. This distribution represents the remaining proceeds from the 2014 sale of Fund I's tree farms.



6



The Partnership’s condensed consolidated balance sheet included assets and liabilities of the Funds as of September 30, 2015 and December 31, 2014, which were as follows:
 
(in thousands)
September 30, 2015
 
December 31, 2014
Assets:
Cash
$
7,348

 
$
9,523

Other current assets
1,274

 
1,108

Total current assets
8,622

 
10,631

Properties and equipment, net of accumulated depletion and depreciation (2015 - $32,495; 2014 - $26,738)
223,254

 
230,123

Other long-term assets
140

 
156

Total assets
$
232,016

 
$
240,910

Liabilities and equity:
 

 
 

Current liabilities
$
2,203

 
$
1,891

Long-term debt
57,380

 
57,380

Total liabilities
59,583

 
59,271

Funds' equity
172,433

 
181,639

Total liabilities and equity
$
232,016

 
$
240,910


5.
In the presentation of the Partnership’s revenue and operating income (loss) by segment, all intersegment revenue and expense is eliminated to determine operating income (loss) reported externally. The following tables reconcile internally reported income (loss) from operations to externally reported income (loss) from operations by business segment, for the three and nine months ended September 30, 2015 and 2014:

7



 
Fee Timber
 
 
Three Months Ended September 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Management
 
Real Estate
 
Other
 
Consolidated
2015
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
6,506

$
4,910

$
11,416

 
$
779

 
$
3,931

 
$

 
$
16,126

Eliminations
(100
)

(100
)
 
(779
)
 
(39
)
 

 
(918
)
Revenue - external
6,406

4,910

11,316

 

 
3,892

 

 
15,208

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(2,463
)
(3,888
)
(6,351
)
 

 
(3,395
)
 

 
(9,746
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,678
)
(1,637
)
(3,315
)
 
(594
)
 
(1,005
)
 
(1,236
)
 
(6,150
)
Eliminations

779

779

 
100

 
5

 
34

 
918

Operating, general and administrative expenses - external
(1,678
)
(858
)
(2,536
)
 
(494
)
 
(1,000
)
 
(1,202
)
 
(5,232
)
Gain (loss) on sale of timberland

(1,103
)
(1,103
)
 

 

 

 
(1,103
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
2,365

(1,718
)
647

 
185

 
(469
)
 
(1,236
)
 
(873
)
Eliminations
(100
)
779

679

 
(679
)
 
(34
)
 
34

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
2,265

$
(939
)
$
1,326

 
$
(494
)
 
$
(503
)
 
$
(1,202
)
 
$
(873
)
 
 
 
 
 
 
 
 
 
 
 
 
2014
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
6,216

$
6,321

$
12,537

 
$
814

 
$
1,402

 
$

 
$
14,753

Eliminations
(154
)

(154
)
 
(814
)
 
(30
)
 

 
(998
)
Revenue - external
6,062

6,321

12,383

 

 
1,372

 

 
13,755

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(3,112
)
(4,932
)
(8,044
)
 

 
(1,081
)
 

 
(9,125
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(1,400
)
(1,671
)
(3,071
)
 
(695
)
 
(888
)
 
(971
)
 
(5,625
)
Eliminations

814

814

 
154

 

 
30

 
998

Operating, general and administrative expenses -external
(1,400
)
(857
)
(2,257
)
 
(541
)
 
(888
)
 
(941
)
 
(4,627
)
Gain (loss) on sale of timberland

9,188

9,188

 

 

 

 
9,188

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
1,704

8,906

10,610

 
119

 
(567
)
 
(971
)
 
9,191

Eliminations
(154
)
814

660

 
(660
)
 
(30
)
 
30

 

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - external
$
1,550

$
9,720

$
11,270

 
$
(541
)
 
$
(597
)
 
$
(941
)
 
$
9,191


8



 
Fee Timber
 
 
Nine Months Ended September 30, (in thousands)
Pope Resources
ORM Timber Funds
Total Fee Timber
 
Timberland Management
 
Real Estate
 
Other
 
Consolidated
2015
 
 
 
 
 
 
 
 
 
 
 
Revenue - internal
$
20,213

$
16,567

$
36,780

 
$
2,380

 
$
19,592

 
$

 
$
58,752

Eliminations
(246
)

(246
)
 
(2,380
)
 
(106
)
 

 
(2,732
)
Revenue - external
19,967

16,567

36,534

 

 
19,486

 

 
56,020

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(8,371
)
(13,420
)
(21,791
)
 

 
(11,267
)
 

 
(33,058
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(3,979
)
(4,267
)
(8,246
)
 
(2,254
)
 
(3,029
)
 
(3,682
)
 
(17,211
)
Eliminations

2,380

2,380

 
246

 
14

 
92

 
2,732

Operating, general and administrative expenses - external
(3,979
)
(1,887
)
(5,866
)
 
(2,008
)
 
(3,015
)
 
(3,590
)
 
(14,479
)
Gain (loss) on sale of timberland

(1,103
)
(1,103
)
 

 

 

 
(1,103
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
7,863

(2,223
)
5,640

 
126

 
5,296

 
(3,682
)
 
7,380

Eliminations
(246
)
2,380

2,134

 
(2,134
)
 
(92
)
 
92

 

Income (loss) from operations - external
$
7,617

$
157

$
7,774

 
$
(2,008
)
 
$
5,204

 
$
(3,590
)
 
$
7,380

 
 
 
 
 
 
 
 
 
 
 
 
2014
 

 

 

 
 

 
 

 
 

 
 

Revenue - internal
$
26,398

$
26,058

$
52,456

 
$
2,529

 
$
18,219

 
$

 
$
73,204

Eliminations
(469
)

(469
)
 
(2,529
)
 
(89
)
 

 
(3,087
)
Revenue - external
25,929

26,058

51,987

 

 
18,130

 

 
70,117

 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
(11,266
)
(18,217
)
(29,483
)
 

 
(9,943
)
 

 
(39,426
)
 
 
 
 
 
 
 
 
 
 
 
 
Operating, general and administrative expenses - internal
(3,930
)
(4,751
)
(8,681
)
 
(2,130
)
 
(2,777
)
 
(2,802
)
 
(16,390
)
Eliminations

2,529

2,529

 
469

 

 
89

 
3,087

Operating, general and administrative expenses - external
(3,930
)
(2,222
)
(6,152
)
 
(1,661
)
 
(2,777
)
 
(2,713
)
 
(13,303
)
Gain (loss) on sale of timberland

9,188

9,188

 

 

 

 
9,188

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations - internal
11,202

12,278

23,480

 
399

 
5,499

 
(2,802
)
 
26,576

Eliminations
(469
)
2,529

2,060

 
(2,060
)
 
(89
)
 
89

 

Income (loss) from operations - external
$
10,733

$
14,807

$
25,540

 
$
(1,661
)
 
$
5,410

 
$
(2,713
)
 
$
26,576



9



6.
Basic and diluted earnings per unit are calculated by dividing net income attributable to unitholders, adjusted for non-forfeitable distributions paid out to unvested restricted unitholders and preferred shareholders of Fund II and Fund III, by the weighted average units outstanding during the period.  There were no dilutive securities outstanding during the periods presented. The following table shows the calculation of basic and diluted income per unit:

 
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per unit amounts)
2015
 
2014
 
2015
 
2014
Net income attributable to Pope Resources' unitholders
$
615

 
$
1,500

 
$
8,713

 
$
15,587

Less:
 

 
 

 
 

 
 

Net income attributable to unvested restricted unitholders
(27
)
 
(23
)
 
(55
)
 
(168
)
Preferred share dividends - ORM Timber Funds
(8
)
 
(8
)
 
(23
)
 
(23
)
Net income for calculation of earnings per unit
$
580

 
$
1,469

 
$
8,635

 
$
15,396

 
 
 
 
 
 
 
 
Basic and diluted weighted average units outstanding
4,298

 
4,350

 
4,297

 
4,376

 
 
 
 
 
 
 
 
Basic and diluted earnings per unit
$
0.13

 
$
0.34

 
$
2.01

 
$
3.52


7.
In the first quarter of 2015, the Partnership granted 7,550 restricted units pursuant to the management incentive compensation program. These restricted units vest ratably over four years with the grant date fair value equal to the market price on the date of grant. Simultaneous with the restricted unit grant to management, members of our Board of Directors received 4,500 restricted units. Restricted units granted to directors are not part of the management incentive compensation program, but are included in the calculation of total equity compensation expense. These awards to directors vest 50% on the third anniversary and 50% on the fourth anniversary of the date of grant. Total equity compensation expense is recognized over the vesting period. Grants to retirement-eligible individuals on the date of grant are expensed immediately. We recognized $142,000 and $177,000 of equity compensation expense in the third quarter of 2015 and 2014, respectively, and $722,000 and $698,000 for the nine months ended September 30, 2015 and 2014, respectively, related to these incentive compensation programs.

8.
Supplemental disclosure of cash flow information: interest paid, net of amounts capitalized, totaled $2.3 million and $1.8 million for the first nine months of 2015 and 2014, respectively. The Partnership paid income taxes of $236,000 and $71,000 during the first nine months of 2015 and 2014, respectively.

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

The Partnership’s and the Funds’ fixed-rate debt collectively have a carrying value of $84.9 million and $90.0 million as of September 30, 2015 and December 31, 2014, respectively.   The estimated fair value of this debt, based on current interest rates for similar instruments (Level 2 inputs in the Fair Value Hierarchy), is approximately $90.8 million and $96.0 million, as of September 30, 2015 and December 31, 2014, respectively.

10.
The Partnership had an accrual for estimated environmental remediation costs of $20.1 million and $21.7 million as of September 30, 2015 and December 31, 2014, respectively. The environmental remediation liability represents management’s estimate of payments to be made to monitor and remediate certain areas in and around Port Gamble Bay, and at Port Ludlow, Washington.

In December of 2013, a consent decree and Clean-up Action Plan (CAP) related to Port Gamble were finalized with the Washington State Department of Ecology (DOE) and filed with Kitsap County Superior Court. The design of the remediation project was substantially completed in the second quarter of 2015 and, in the third quarter, the Partnership selected a contractor to complete the remediation work. Management's cost estimates for the project are based on amounts included in the construction contract and estimates for project management and other professional fees. Remediation activity began in late September of 2015 and will continue through 2017, followed by a period of monitoring activity.


10



The environmental remediation liability also includes estimated costs related to a separate remediation effort within the resort community of Port Ludlow. The liability for this project consists primarily of ongoing monitoring activity.

The environmental liability at September 30, 2015 is comprised of $14.8 million that management expects to expend in the next 12 months and $5.3 million thereafter.

Activity in the environmental liability is as follows:
 
(in thousands)
Balance at Beginning of the Period
 
Additions to Accrual
 
Expenditures for Remediation
 
Balance at Period-end
Year ended December 31, 2013
$
13,942

 
$

 
$
701

 
$
13,241

Year ended December 31, 2014
13,241

 
10,000

 
1,590

 
21,651

Quarter ended March 31, 2015
21,651

 

 
286

 
21,365

Quarter ended June 30, 2015
21,365

 

 
286

 
21,079

Quarter ended September 30, 2015
$
21,079

 
$

 
$
1,007

 
$
20,072



ITEM 2.

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

This report contains a number of projections and statements about our expected financial condition, operating results, and business plans and objectives. These statements reflect management’s estimates based upon our current goals, in light of management’s knowledge of existing circumstances and expectations about future developments. Statements about expectations and future performance are “forward looking statements” within the meaning of applicable securities laws, which describe our goals, objectives and anticipated performance. These statements can be identified by words such as “anticipate,” “believe,” “expect,” “intend” and similar expressions. These statements are inherently uncertain, and some or all of these statements may not come to pass. Accordingly, you should not interpret these statements as promises that we will perform at a given level or that we will take any or all of the actions we currently expect to take. Our future actions, as well as our actual performance, will vary from our current expectations, and under various circumstances these variations may be material and adverse. Some of the factors that may cause our actual operating results and financial condition to fall short of our expectations are set forth in the part of this report entitled “Risk Factors” in Part II, Item 1A below. Some of the issues that may have an adverse and material impact on our business, operating results and financial condition include economic conditions that affect consumer demand for our products and the prices we receive for them both domestically and overseas, particularly in certain parts of Asia; competition domestically and abroad, including as a result of changing status and uncertainties surrounding international and multinational treaties and accords; government regulation that affects our ability to access our timberlands and harvest logs from those lands; factors that affect the timing and amounts realized from the sales, if any, of our real estate holdings; the implications of significant indirect sales to overseas customers, including regulatory and tax matters; the effect of financial market conditions on our investment portfolio and related liquidity; the effects of competition, especially from larger, better-financed competitors; environmental and land use regulations that limit our ability to harvest timber and develop property; access to debt financing by our customers as well as ourselves; the impacts of climate change and natural disasters on our timberlands and on surrounding areas; factors that affect our ability to estimate accurately the extent of our environmental liabilities and the cost of remediating the known areas of exposure; and the potential impacts of fluctuations in foreign currency rates as they affect demand for our products. From time to time we identify other risks and uncertainties in our other filings with the Securities and Exchange Commission. The forward-looking statements in this report reflect our estimates and expectations as of the date of the report, and unless required by law, we do not undertake to update these statements as our business operations and environment change.

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

11



EXECUTIVE OVERVIEW

Pope Resources, A Delaware Limited Partnership (“we” or the “Partnership”), is engaged in three primary businesses. The first, and by far most significant segment in terms of owned assets and operations, is the Fee Timber segment. This segment includes timberlands owned directly by the Partnership and the three private equity funds (“Fund I”, “Fund II”, and “Fund III”, collectively, the “Funds”). Fund I’s assets were sold in 2014, and the fund is expected to be fully unwound in 2015. When we refer to the timberland owned by the Partnership, we describe it as the Partnership’s tree farms. We refer to timberland owned by the Funds as the Funds’ tree farms. When referring collectively to the Partnership’s and Funds’ timberlands we will refer to them as the Combined tree farms. Operations in this segment consist of growing timber to be harvested as logs for sale to domestic manufacturers and export brokers. The second most significant business in terms of total assets owned is the development and sale of real estate. Real Estate activities primarily take the form of securing permits, entitlements, and, in some cases, installing infrastructure for raw land development and then realizing that land’s value by selling larger parcels to buyers who will take the land further up the value chain, either to home buyers or to developers and lessors of commercial property. Since these projects span multiple years, the Real Estate segment may incur losses for multiple years while a project is developed, and will not recognize operating income until that project is sold. In addition, within this segment we sometimes negotiate and sell development rights in the form of conservation easements (CE’s) on Fee Timber properties to preclude future development. Our third business, which we refer to as Timberland Management, is engaged in organizing and managing private equity timber funds using capital invested by third parties and the Partnership.

Our current strategy for adding timberland acreage is centered on our private equity timber fund business model. We have closed and invested capital from three timber funds, with assets under management totaling approximately $310 million as of September 30, 2015 based on the most recent appraisals. Our 20% co-investments in Funds I and II, and our 5% co-investment in Fund III, which collectively totaled $35 million at time of acquisition, afford us a share of the Funds’ operating cash flows while also allowing us to earn asset management and timberland management fees, as well as potential future incentive fees, based upon the overall success of each fund. We also believe that this strategy allows us to maintain sophisticated expertise in timberland acquisition, valuation, and management more cost-effectively than we could maintain for the Partnership’s timberlands alone. We believe our co-investment strategy also enhances our credibility with existing and prospective investors by demonstrating that we have both an operational and a financial commitment to the Funds’ success.

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

The strategy for our Real Estate segment centers around how and when to “harvest” parcels of our 2,500-acre portfolio in western Washington to optimize value realization by selling the property, balancing the long-term risks and costs of carrying and developing a property against the potential for income and positive cash flows upon sale.
 
Third quarter highlights

Harvest volume was 18 million board feet (MMBF) in Q3 2015 compared to 19 MMBF in Q3 2014, a 6% decrease. Harvest volume for the first nine months of 2015 was 57 MMBF compared to 75 MMBF for 2014, a 23% decrease. These harvest volume figures do not include timber deed sales by Fund III of 0.6 MMBF in Q1 2015 and 1.9 MMBF in Q2 2014. The harvest volume and log price realization metrics cited below also exclude these timber deed sales.
Average realized log price per thousand board feet (MBF) was $579 in Q3 2015 compared to $568 per MBF in Q3 2014, an 2% increase. For the first nine months of 2015, the average realized log price was $587 per MBF compared to $643 per MBF for 2014, a 9% decrease.
Fund properties contributed 48% of Q3 2015 harvest volume, compared to 50% in Q3 2014. For the first nine months of 2015, Fund properties contributed 50% of harvest volume, compared to 52% for 2014.
As a percentage of total harvest, volume sold to export markets in Q3 2015 decreased to 26% from 28% in Q3 2014, while the mix of volume sold to domestic markets was 53% in Q3 2015 compared to 56% in Q3 2014. For the first nine months of 2015, the relative percentages of volume sold to export and domestic markets were 20% and 58%, respectively, compared to 35% and 49%, respectively, in 2014. Hardwood and pulpwood log sales make up the balance of total harvest volume.
The percentage of total harvest comprised of Douglas-fir sawlogs increased to 55% in Q3 2015 from 37% in Q3 2014, with a corresponding decrease in the whitewood sawlog component to 20% in Q3 2015 from 39% in Q3 2014. For the first nine months of 2015, the relative mix of Douglas-fir and whitewood sawlogs was 50% and 22%, respectively, compared to 48% and 32%, respectively, for 2014.

12



During Q3 2015 we closed on the sale of an 18-acre parcel zoned for multi-family residential use from our Harbor Hill development in Gig Harbor, Washington, for which we recognized $3.6 million in revenue using the percentage-of-completion method. We expect to recognize the remaining $605,000 of revenue in the fourth quarter of 2015.
Fund III sold 858 acres of timberland from its tree farm in western Washington for $1.0 million pursuant to an option agreement for a wind power project and recognized a loss of $1.1 million on the transaction, of which $55,000 was attributable to the Partnership.

Outlook

Due to the current weak log pricing environment, we have deferred a portion of our previously planned 2015 harvest and expect total annual log harvest and stumpage sale volume of between 79 and 84 MMBF for the full year. The vast majority of this deferral is attributable to tree farms owned by the Funds. We expect that log prices will remain relatively flat over the next several quarters, and in response, we may continue to defer some harvest volume.

We expect additional land sales from our Real Estate segment towards the end of the year, though the timing of some of these transactions could slip to early 2016.

RESULTS OF OPERATIONS

The following table reconciles and compares key revenue and cost elements that impacted our net income for the respective quarters and nine months ended September 30, 2015 and 2014.  The explanatory text that follows the table describes in detail certain of these changes by business segment.
(in thousands)
Quarter Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Net income attributable to Pope Resources' unitholders:
 
 
 
2015 period
$
615

 
$
8,713

2014 period
1,500

 
15,587

Variance
$
(885
)
 
$
(6,874
)
Detail of variance:
 

 
 

Fee Timber
 

 
 

Log volumes (A)
$
(682
)
 
$
(11,317
)
Log price realizations (B)
196

 
(3,214
)
Gain (loss) on sale of timberland
(10,291
)
 
(10,291
)
Timber deed sales

 
230

Production costs
1,013

 
5,429

Depletion
680

 
2,263

Other Fee Timber
(860
)
 
(866
)
Timberland Management
47

 
(347
)
Real Estate
 

 
 

Land sales
(498
)
 
(4,980
)
Conservation easement sales

 
4,311

Timber depletion on land sale

 
(140
)
Other Real Estate
592

 
603

General and administrative costs
(261
)
 
(877
)
Net interest expense
(67
)
 
(386
)
Income taxes
258

 
116

Noncontrolling interests
8,988

 
12,592

Total variances
$
(885
)
 
$
(6,874
)
(A)
Volume variance calculated by extending change in sales volume by the average log sales price for the comparison period.
(B)
Price variance calculated by extending the change in average realized price by current period sales volume.


13



Fee Timber
 
Fee Timber results include operations on 111,000 acres of timberland owned by the Partnership and 79,000 acres of timberland owned by the Funds. Fee Timber revenue is earned primarily from the harvest and sale of logs from these timberlands which are located in western Washington, northwestern Oregon, and northern California. This revenue source is driven primarily by the volume of timber harvested and the average log price realized on the sale of that timber. Our harvest volume is based typically on manufactured log sales to domestic mills and log export brokers. We also occasionally sell rights to harvest timber (timber deed sale) from the Combined tree farms. The metrics used to calculate volumes sold and average price realized during the reporting periods exclude the timber deed sales, except where stated otherwise. Harvest volumes are generally expressed in million board feet (MMBF) increments while harvest revenue and related costs are generally expressed in terms of revenue or cost per thousand board feet (MBF).

Fee Timber revenue is also derived from commercial thinning operations, ground leases for cellular communication towers, and royalties from gravel mines and quarries, all of which, along with timber deed sales, are included in other revenue below. Commercial thinning consists of the selective cutting of timber stands not yet of optimal harvest age.  However, they do have some commercial value, thus allowing us to earn revenue while at the same time improving the projected value at harvest of the remaining timber in the stand.

Revenue and operating income for the Fee Timber segment for the quarters ended September 30, 2015, June 30, 2015, and September 30, 2014 were as follows:
 
(in millions)
Quarter ended
 
Log Sale
Revenue
 
Other
Revenue
 
Total Fee
Timber
Revenue
 
Gain (Loss) on Sale of
Timberland
 
Operating
Income (loss)
 
Harvest
Volume
(MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
5.6

 
$
0.8

 
$
6.4

 
$

 
$
2.3

 
9.2

 

Funds
 
4.7

 
0.2

 
4.9

 
(1.1
)
 
(0.9
)
 
8.6

 

Total September 2015
 
$
10.3

 
$
1.0

 
$
11.3

 
$
(1.1
)
 
$
1.3

 
17.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
4.1

 
$
0.7

 
$
4.8

 
$

 
$
1.3

 
7.2

 

Funds
 
4.3

 
0.2

 
4.5

 

 
0.3

 
7.9

 

Total June 2015
 
$
8.4

 
$
0.9

 
$
9.3

 
$

 
$
1.6

 
15.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
5.4

 
$
0.7

 
$
6.1

 
$

 
$
1.6

 
9.5

 

Funds
 
5.3

 
1.0

 
6.3

 
9.2

 
9.7

 
9.5

 
1.9

Total September 2014
 
$
10.7

 
$
1.7

 
$
12.4

 
$
9.2

 
$
11.3

 
19.0

 
1.9

 
Operating Income
 
Comparing Q3 2015 to Q2 2015.  Operating income decreased $300,000, or 19%, from $1.6 million in Q2 2015 to $1.3 million in Q3 2015. Our Q3 2015 results reflect a $1.1 million loss on the September 2015 sale of 858 acres from Fund III’s timberland for $1.0 million. This sale occurred pursuant to a 2010 option agreement for a wind power project on a portion of the Willapa tree farm in western Washington that Fund III acquired in December 2013. The sale price under the option agreement was lower than Fund III's acquisition price for the property because the option price was based on market prices for timberland in 2010, adjusted for inflation, whereas Fund III's acquisition price was based on market prices in late 2013 and market prices appreciated much more rapidly than inflation during that time. As a result, Fund III recognized a loss on the transaction. This loss offset the impact of an 18% increase in harvest volume and a 3% increase in average realized log prices. Contributing further to the decline in operating income was a $690,000 increase in operating expenses and a 9% increase in cost of sales due to the higher harvest volume.
 
Comparing Q3 2015 to Q3 2014.  Operating income decreased $10 million, or 88%, from $11.3 million in Q3 2014 to $1.3 million in Q3 2015. The most significant factor to this decline is the $9.2 million gain on the sale of Fund I’s Green River tree farm in Q3 2014, while Q3 2015 results include the $1.1 million loss on the sale of 858 acres from Fund III’s Willapa tree farm described above. Contributing further to the decline in operating income was a 6% decrease in harvest

14



volume, a $576,000 decrease in other revenue, and a $279,000 increase in operating expenses. Partially offsetting these items was a 2% increase in average realized log prices and a 21% decrease in cost of sales due to the lower harvest volume.
 
Revenue
 
Comparing Q3 2015 to Q2 2015.  Log sale revenue in Q3 2015 increased $1.9 million, or 23%, from $8.4 million in Q2 2015 to $10.3 million in Q3 2015 on the heels of an 18% increase in harvest volume and a 3% increase in average realized log prices. The third quarter often represents one of our lowest quarters of the year in terms of harvest volume as we scale back our harvest in response to greater log supply in the market as the summer weather affords timberland owners at all elevations the opportunity to harvest on their properties. In the case of 2015, however, we were coming out of a weak Q2 during which time we deferred a portion of our harvest volume, resulting in higher harvest volume in Q3 compared to Q2. While U.S. housing starts continue to improve slowly, the looming expiration of the Softwood Lumber Agreement (SLA) between the U.S. and Canada created uncertainty in domestic log markets that had a dampened effect on third quarter 2015 log prices. Speculation during the quarter focused on a potential significant post-SLA expiration increase in lumber imports from Canada. We are just a few weeks into this post-SLA period and, thus far, lumber imports from Canada appear to be remaining stable. At the same time that our domestic markets are weak, demand from China remains soft as construction activity in that country has declined while a strengthening U.S. dollar makes our logs less competitive in export markets.

Comparing Q3 2015 to Q3 2014.  Log sale revenue in Q3 2015 decreased $400,000, or 4%, from $10.7 million in Q3 2014 to $10.3 million in Q3 2015, primarily as a result of a 6% decrease in harvest volume, offset partially by a 2% increase in average realized log prices. Most of the decline in harvest volume came from properties owned by the Funds as we deferred harvest volume in response to weak log markets. The decrease in other revenue is attributable primarily to $775,000 of timber deed sales in Q3 2014 that had no counterpart in Q3 2015.
 
Revenue and operating income for the Fee Timber segment for the nine months ended September 30, 2015 and 2014 were as follows:
 
(in millions) Nine Months Ended
 
Log Sale Revenue
 
Other Revenue
 
Total Fee Timber Revenue
 
Gain (Loss) on Sale of Timberland
 
Operating Income
 
Harvest Volume (MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
18.0

 
$
2.0

 
$
20.0

 
$

 
$
7.6

 
28.8

 

Funds
 
15.7

 
0.8

 
16.5

 
(1.1
)
 
0.2

 
28.6

 
0.6

Total September 2015
 
$
33.7

 
$
2.8

 
$
36.5

 
$
(1.1
)
 
$
7.8

 
57.4

 
0.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
23.5

 
$
2.4

 
$
25.9

 
$

 
$
10.7

 
36.2

 

Funds
 
24.6

 
1.5

 
26.1

 
9.2

 
14.8

 
38.8

 
1.9

Total September 2014
 
$
48.1

 
$
3.9

 
$
52.0

 
$
9.2

 
$
25.5

 
75.0

 
1.9

 
Operating Income
 
Comparing YTD 2015 to YTD 2014.  Operating income decreased by $17.7 million, or 69%, from $25.5 million in the first nine months of 2014 to $7.8 million in the first nine months of 2015, primarily as a result of a 23% decrease in harvest volume, a 9% decrease in average realized log prices, and a $10.3 million reduction in timberland sale profit. Also contributing to the decline in operating income was a $1.1 million reduction in other revenue. These declines in operating income were partially offset by a 26% decrease in cost of sales and a $286,000 reduction in operating expenses due primarily to the lower harvest volume.
 
Revenue
 
Comparing YTD 2015 to YTD 2014.  Log sale revenue decreased $14.4 million, or 30%, from $48.1 million in the first nine months of 2014 to $33.7 million in the first nine months of 2015. The reduction in revenue was the result of a 23% decrease in harvest volume and a 9% decrease in average realized log prices. Export markets in 2015 have been impacted negatively by a construction slowdown in China, unfavorable currency exchange rates, and high log inventories at China’s ports. These factors combined to drive down export prices. Domestic markets have been affected by unseasonably mild weather

15



in the Pacific Northwest early in the year, high log and lumber inventories, slower than expected recovery in the U.S. housing market, and uncertainty in log markets created by the expiration of the Softwood Lumber Agreement between the U.S. and Canada. In contrast, log markets during the first half of 2014, particularly in the first quarter, were at a multi-year cyclical high during which time we sold a large portion of our 2014 volume. Strong demand from Asia, combined with a slowly strengthening domestic market as U.S. housing starts rose to a rate of 1 million units per year, drove the strong log prices in 2014. The $1.1 million decrease in other revenue in 2015 compared to 2014 was due primarily to a reduction in timber deed sales and commercial thinning activity.

Log Volume

We harvested the following log volumes by species from the Combined tree farms, exclusive of timber deed sales, for the quarters ended September 30, 2015, June 30, 2015, and September 30, 2014:
 
Volume (in MMBF)
Quarter Ended
 
 
Sep-15
% Total
 
Jun-15
% Total

 
Sep-14
% Total
Sawlogs
Douglas-fir
9.9

55
%
 
7.8

52
%
 
7.0

37
%
 
Whitewood
3.5

20
%
 
3.0

20
%
 
7.5

39
%
 
Pine
0.1

1
%
 
1.1

7
%
 
1.3

7
%
 
Cedar
0.6

3
%
 
0.5

3
%
 
0.2

1
%
 
Hardwood
0.7

4
%
 
0.4

3
%
 
0.4

2
%
Pulpwood
All Species
3.0

17
%
 
2.3

15
%
 
2.6

14
%
Total
 
17.8

100
%
 
15.1

100
%
 
19.0

100
%
 
Comparing Q3 2015 to Q2 2015. Harvest volume increased 2.7 MMBF, or 18%, from 15.1 MMBF in Q2 2015 to 17.8 MMBF in Q3 2015. This increase from the second to third quarter is atypical for us and resulted from weak domestic and export log markets during Q2 2015, to which we responded by deferring harvest volume until later in the year or, in some cases, next year. In a typical year, we scale back our Q3 operations as prices are generally weaker due to the increase in log supply afforded by the summer weather. Species mix was relatively consistent between the two comparable quarters, with the exception of pine which, as a percent of overall harvest, decreased from 7% in Q2 2015 to 1% in Q3 2015. Pine volume in both quarters originated almost exclusively from Fund III’s McCloud tree farm in northern California, and our operations on that tree farm were reduced in Q3 2015 as compared to Q2 2015.
 
 Comparing Q3 2015 to Q3 2014. Harvest volume decreased 1.2 MMBF, or 6%, from 19.0 MMBF in Q3 2014 to 17.8 MMBF in Q3 2015. The decrease is primarily due to a reduction in harvest on Fund tree farms, which have a heavier component of whitewood volume compared to the Partnership tree farms. In addition, we shifted volume to Douglas-fir in response to a relatively weaker whitewood market during Q3 2015. As such, Douglas-fir harvest volume, as a percent of overall harvest, increased from 37% in Q3 2014 to 55% in Q3 2015, while the component of whitewood harvest volume decreased from 39% in Q3 2014 to 20% in Q3 2015. Pine harvest volume decreased from 7% in Q3 2014 to 1% in Q3 2015, with the decline being attributable to reduced operations on Fund III’s McCloud tree in the current year versus the prior year.
 
We harvested the following log volumes by species from the Combined tree farms, exclusive of the aforementioned timber deed sales, for the nine months ended September 30, 2015 and 2014:

Volume (in MMBF)
Nine Months Ended
 
 
Sep-15
% Total
 
Sep-14
% Total
Sawlogs:
Douglas-fir
29.0

50
%
 
35.9

48
%
 
Whitewood
12.4

22
%
 
23.8

32
%
 
Pine
1.3

2
%
 
1.8

2
%
 
Cedar
2.3

4
%
 
1.7

2
%
 
Hardwood
2.6

5
%
 
1.9

3
%
Pulpwood:
All Species
9.8

17
%
 
9.9

13
%
Total
 
57.4

100
%
 
75.0

100
%

16



 
Comparing YTD 2015 to YTD 2014. Harvest volume decreased 17.6 MMBF, or 23%, from 75.0 MMBF in the first nine months of 2014 to 57.4 MMBF in 2015. The decrease in harvest volume is attributable to weaker domestic and export markets in 2015 as compared to 2014 as described earlier. Species mix was relatively stable between 2014 and 2015, with the exception of whitewood. Harvest volume for whitewood, as a percentage of overall harvest, decreased from 32% in 2014 to 22% in 2015 due to our decision to defer harvest volume on Fund tree farms, which contain a heavier whitewood component, in response to the weak whitewood log markets in 2015 versus 2014.
 
Log Prices
 
Logs from the Combined tree farms serve a number of different domestic and export markets, with domestic mills historically representing our largest market destination. Export customers consist of log brokers who sell the logs primarily to Japan, China and, to a lesser degree, Korea.

We realized the following log prices by species for the quarters ended September 30, 2015, June 30, 2015, and September 30, 2014:
 
 
 
Quarter Ended
 
 
Sep-15
 
Jun-15
 
Sep-14
Average price realizations (per MBF):
 
 
Sawlogs:
Douglas-fir
$
623

 
$
608

 
$
637

 
Whitewood
522

 
541

 
590

 
Pine
420

 
552

 
514

 
Cedar
1,426

 
1,120

 
1,004

 
Hardwood
559

 
532

 
613

Pulpwood:
All Species
346

 
322

 
302

Overall
 
579

 
562

 
568


The following table compares the dollar and percentage change in log prices from each of Q2 2015 and Q3 2014 to Q3 2015:
   
 
 
Change to Q3 2015 from Quarter Ended
 
 
Jun-15
 
Sep-14
 
 
$/MBF
 
%
 
$/MBF
 
%
Sawlogs:
Douglas-fir
$
15

 
2
%
 
$
(14
)
 
(2
%)
 
Whitewood
(19
)
 
(4
%)
 
(68
)
 
(12
%)
 
Pine
(132
)
 
(24
%)
 
(94
)
 
(18
%)
 
Cedar
306

 
27
%
 
422

 
42
%
 
Hardwood
27

 
5
%
 
(54
)
 
(9
%)
Pulpwood:
All Species
24

 
7
%
 
44

 
15
%
Overall
 
17

 
3
%
 
11

 
2
%
 
Overall realized log prices in Q3 2015 were 3% higher than Q2 2015 and 2% higher than Q3 2014. Our overall average is influenced heavily by price movements for our two most prevalent species on the Combined tree farms, Douglas-fir and whitewood, and the relative mix of harvest volume between those two species. From Q2 2015 to Q3 2015, log prices for these two species increased 2% and decreased 4%, respectively. Douglas-fir benefited from an improvement in sort mix and stable demand for higher quality logs in the Japan export market. Whitewood was weighed down by continued weakness in export demand, particularly from China. Cedar, though only 3% of Q3 2015 production, experienced a 27% price increase which contributed to the overall increase in average realized log price. In Q2 2015, 45% of the cedar volume was lower-value incense cedar produced on Fund III’s McCloud tree farm, while in Q3 2015 all cedar volume was higher-value western red cedar produced primarily on the Partnership tree farms.


17



From Q3 2014 to Q3 2015, the increase in average realized log prices was attributable to a significant shift in species mix towards Douglas-fir from whitewood. As discussed above under “Log Volume”, Douglas-fir, as a percentage of total log volume, was up 18% and whitewood was down 19% from Q3 2014 to Q3 2015. This was a favorable shift, as average Douglas-fir prices declined only 2% while whitewood declined 12%, and Douglas-fir prices were at a 19% premium to whitewood prices in Q3 2015 versus 8% in Q3 2014. The significant increase in cedar prices, again on a small portion of our Combined harvest volume, is due to 18% of Q3 2014 cedar volume coming from lower-valued incense cedar produced on Fund III’s McCloud tree farm, while in Q3 2015 all cedar volume was higher-value western red cedar produced primarily on the Partnership tree farms.
 
The following table compares realized log prices by species for the first nine months of 2015 and 2014, as well as the dollar and percentage change in log prices between the two periods:
 
 
 
Nine Months Ended
 
 
Sep-15
 
 
 
 
 
Sep-14
 
 
 

 
∆ from Sep-15 to Sep-14
 
 

 
 
 
 
$/MBF
 
%
 
 
Sawlogs:
Douglas-fir
$
627

 
$
(92
)
 
(13
%)
 
$
719

 
Whitewood
542

 
(103
)
 
(16
%)
 
645

 
Pine
539

 
31

 
6
%
 
508

 
Cedar
1,405

 
110

 
8
%
 
1,295

 
Hardwood
606

 
4

 
1
%
 
602

Pulpwood:
All species
332

 
50

 
18
%
 
282

Overall
 
587

 
(56
)
 
(9
%)
 
643

 
Overall realized log prices decreased 9% in the first nine months of 2015 compared to the corresponding period of 2014. The overall average is influenced heavily by Douglas-fir and whitewood prices, which were down 13% and 16%, respectively. The decline in these species’ prices is attributable to harvesting a large portion of our 2014 volume in the first half of the year when log prices were at multi-year highs. Increases in the prices of our minor species and pulpwood served to offset a portion of the declines in Douglas-fir and whitewood.

Customers

The ultimate decision of whether to sell our logs into the export or domestic market is based on the net proceeds we receive after taking into account both the delivered log prices and the cost to deliver logs to the customer. As such, our reported log price realizations will reflect our properties’ proximity to customers as well as the broader log market.

The table below categorizes logs sold by customer type for the quarters ended September 30, 2015, June 30, 2015, and September 30, 2014:

 
Q3 2015
 
Q2 2015
 
Q3 2014
 
Volume
 
 

 
Volume
 
 
 
Volume
 
 
Destination
MMBF
%
 
Price
 
MMBF
%
 
Price
 
MMBF
%
 
Price
Export brokers
4.7

26
%
 
$
616

 
2.1

14
%
 
$
604

 
5.3

28
%
 
$
654

Domestic mills
9.4

53
%
 
638

 
10.3

68
%
 
608

 
10.7

56
%
 
588

Hardwood
0.7

4
%
 
559

 
0.4

3
%
 
532

 
0.4

2
%
 
613

Pulpwood
3.0

17
%
 
346

 
2.3

15
%
 
322

 
2.6

14
%
 
302

Subtotal
17.8

100
%
 
579

 
15.1

100
%
 
562

 
19.0

100
%
 
568

Timber deed sale

 

 

 

 

 

 
1.9

 

 
415

Total
17.8

 

 
 

 
15.1

 

 
 

 
20.9

 

 
 

 
Comparing Q3 2015 to Q2 2015. Volume sold to the export market increased to 26% of Q3 2015 harvest volume compared to 14% of Q2 2015 volume. Conversely, volume sold to the domestic market decreased to 53% of Q3 2015 harvest

18



volume compared to 68% of Q2 2015 harvest volume. This shift in customer mix reflects that we took advantage of a stronger Japan export market for Douglas-fir while the domestic log market was soft. Contributing further to the reduction in volume sold into the domestic market was a 1.8 MMBF reduction in harvest operations on Fund III’s McCloud tree farm, which typically serves the domestic market exclusively.

Comparing Q3 2015 to Q3 2014. Volume sold to our various customer types changed little from Q3 2014 to Q3 2015. In addition, timber deed sales volume declined from 1.9 MMBF in Q3 2014 on Fund III’s Willapa tree farm to none in Q3 2015. This is reflective of the tree farm transitioning from timber deed sales to delivered log sales in 2015.

The table below categorizes logs sold by customer type for the nine-month periods ended September 30, 2015 and 2014:

 
Nine Months Ended
 
September 2015
 
September 2014
 
Volume
 
 
Volume
 
Destination
MMBF
%
Price
 
MMBF
%
Price
Export brokers
11.5

20
%
$
634

 
26.3

35
%
$
742

Domestic mills
33.5

58
%
645

 
36.9

49
%
670

Hardwood
2.6

5
%
606

 
1.9

3
%
602

Pulpwood
9.8

17
%
332

 
9.9

13
%
282

Subtotal
57.4

100
%
587

 
75.0

100
%
643

Timber deed sale
0.6

 

389

 
1.9

 
415

Total
58.0

 

 

 
76.9

 
 

 
Comparing YTD 2015 to YTD 2014. Volume sold to export brokers as a percentage of total harvest decreased from 35% in the first nine months of 2014 to 20% in 2015.  Conversely, volume sold to the domestic market increased from 49% in the first nine months of 2014 to 58% in the comparable period of 2015. Timber deed sales volume of 0.6 MMBF during the first nine months of 2015 represented the conclusion of timber deed sale activity on Fund III’s Willapa tree farm during Q1 2015 that started in Q3 2014, as that tree farm transitions to delivered log sales.

Cost of Sales
 
Fee Timber cost of sales, which consist predominantly of harvest, haul and depletion costs, vary with harvest volume.  Commercial thinning costs are the primary component of Other cost of sales in the tables below.
 

19



Fee Timber cost of sales for the quarters ended September 30, 2015, June 30, 2015, and September 30, 2014, was as follows, with the first table expressing these costs in total dollars and the second table expressing those costs that are driven by volume on a per MBF basis:
 
(in thousands) Quarter Ended
 
Harvest, Haul and Tax
 
Depletion
 
Other
 
Total Fee Timber Cost of Sales
 
Harvest Volume (MMBF)
 
Timber Deed Sale Volume (MMBF)
Partnership
 
$
1,771

 
$
432

 
$
260

 
$
2,463

 
9.2

 

Funds
 
1,892

 
1,819

 
177

 
3,888

 
8.6

 

Total September 2015
 
$
3,663

 
$
2,251

 
$
437

 
$
6,351

 
17.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
1,669

 
$
348

 
$
284

 
$
2,301

 
7.2

 

Funds
 
2,189

 
1,309

 
39

 
3,537

 
7.9

 

Total June 2015
 
$
3,858

 
$
1,657

 
$
323

 
$
5,838

 
15.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Partnership
 
$
2,377

 
$
454

 
$
281

 
$
3,112

 
9.5

 

Funds
 
2,326

 
2,477

 
129

 
4,932

 
9.5

 
1.9

Total September 2014
 
$
4,703

 
$
2,931

 
$
410