Commitments and Contingencies Disclosure

3 Months Ended

Mar. 31, 2013

Commitments and Contingencies Disclosure

10.   The Partnership, together with the State of Washington’s Department of Ecology (DOE), announced in March 2013 that the two parties have agreed in principle on the scope for the remaining environmental clean-up effort in and around Port Gamble Bay, a process that began in 2002.

Pope Resources and DOE are working toward a mutually acceptable consent decree, a legally binding agreement that will lay out how the remaining cleanup of allegedly impacted in-water sediments will be carried out.

The agreement, which is outlined below in principle after lengthy negotiations, includes:

·   Removal of about 2,000 creosote pilings;

·   Excavation of intertidal areas and dredging of wood waste from the bottom of Port Gamble Bay;

·   Installation of a sand-cap of up to four feet in specific locations in Port Gamble Bay;

·   Removal of all existing docks and overwater structures on and around the former Pope & Talbot Port Gamble mill site by the fall of 2015.

The clean-up effort, which will likely take a few years to complete, is estimated to cost $17 million.  We expect this cost will be shared by Pope Resources and the Washington State Department of Natural Resources (DNR), the other Potentially Liable Party as determined by DOE.  The Partnership and DNR are engaged in preliminary discussions regarding how costs for the clean-up effort will be shared.

The Partnership had an accrual for estimated environmental remediation costs of $13.9 million as of March 31, 2013 and December 31, 2012. The environmental remediation liability primarily represents estimated payments to be made by the Partnership to monitor and remedy certain areas in and around the townsite and millsite at Port Gamble, Washington, and secondarily at Port Ludlow, Washington.

The environmental liability at March 31, 2013 includes an estimate of $671,000 that management expects to expend in the next 12 months and $13.2 million thereafter. In developing its estimate of the Port Gamble environmental liability, management has employed a Monte Carlo statistical simulation model that suggests a potential aggregate range of clean-up cost from $11.5 million to $16.1 million, which corresponds to a two-standard-deviation range from the mean of possible outcomes generated by the simulation model.