Commitments and Contingencies Disclosure

9 Months Ended

Sep. 30, 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 had agreed in principle on the scope for the remaining environmental clean-up effort in and around Port Gamble Bay, a process that began in 2002.  In September 2013, the Partnership and DOE reached a tentative agreement on a draft consent decree and clean-up action plan.  The consent decree outlines the terms under which the Partnership will perform the environmental remediation.  It also details the protections that will be afforded the Partnership and any subsequent buyers of the Partnership-owned property from new actions brought by DOE for the same areas and chemical constituents, which include wood waste, carcinogenic polycyclic aromatic hydrocarbons (CPAH) (believed to be sourced from the bay’s creosote pilings) and dioxins.  Included in the consent decree are all Partnership-owned tidelands and state-owned tidelands, as well as submerged lands in the bay.  Additional testing for dioxins will be performed on the former mill site, town, and adjoining upland forests.  As these areas are analyzed further, they will be added to the consent decree.

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

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

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

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

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