Edgar Filing: BARNWELL INDUSTRIES INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 December 31, 2009

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-5103

BARNWELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		72-0496921
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1100 Alakea Street, Suite 2900, Honolulu, Hawaii	96813
(Address of principal executive offices)	(Zip code)

(808) 531-8400

(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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer	o	Accelerated filer o
	Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by checkmark whether theregistrant is a shell company (as defined in Rule 12b-2of the Exchange Act.

o Yes x No

As of February 10, 2010 there were 8,277,160 shares of common stock, par value $0.50, outstanding.

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BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets - December 31, 2009 and September 30, 2009 (Unaudited)	3

	Condensed Consolidated Statements of Operations - three months ended December 31, 2009 and 2008 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows - three months ended December 31, 2009 and 2008 (Unaudited)	5

	Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) - three months ended December 31, 2009 and 2008 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 4T.	Controls and Procedures	32

PART II.	OTHER INFORMATION:

Item 6.	Exhibits	33

	Signature	33

	Index to Exhibits	34

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	December 31,				September 30,
	2009				2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	10,997,000			$	6,879,000
Accounts receivable, net of allowance for doubtful accounts of:
$48,000 at December 31, 2009; $47,000 at September 30, 2009		5,992,000				3,978,000
Current taxes receivable		1,003,000				653,000
Prepaid expenses		1,564,000				1,403,000
Deferred income taxes		212,000				272,000
Real estate held for sale		13,585,000				13,585,000
Other current assets		1,159,000				591,000
TOTAL CURRENT ASSETS		34,512,000				27,361,000
INVESTMENT IN RESIDENTIAL PARCELS		3,800,000				4,598,000
INVESTMENT IN JOINT VENTURES		1,920,000				1,920,000
INVESTMENT IN LAND INTERESTS		538,000				538,000
PROPERTY AND EQUIPMENT		217,826,000				212,215,000
ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION		(166,674,000		)		(160,528,000		)
PROPERTY AND EQUIPMENT, NET		51,152,000				51,687,000
TOTAL ASSETS		$	91,922,000			$	86,104,000

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	2,940,000			$	3,277,000
Accrued capital expenditures		592,000				588,000
Accrued incentive plan costs		1,420,000				1,427,000
Other accrued compensation costs		374,000				546,000
Payable to joint interest owners		1,329,000				1,001,000
Income taxes payable		1,006,000				619,000
Current portion of long-term debt		17,500,000				14,335,000
Other current liabilities		3,206,000				2,212,000
TOTAL CURRENT LIABILITIES		28,367,000				24,005,000
LONG-TERM DEBT		13,500,000				16,665,000
LIABILITY FOR RETIREMENT BENEFITS		4,982,000				4,848,000
ASSET RETIREMENT OBLIGATION		4,665,000				4,508,000
DEFERRED INCOME TAXES		3,815,000				2,858,000
TOTAL LIABILITIES		55,329,000				52,884,000

EQUITY:
BARNWELL INDUSTRIES, INC. STOCKHOLDERS’ EQUITY:
Common stock, par value $0.50 per share; Authorized, 20,000,000 shares:
8,445,060 issued at December 31, 2009; 8,403,060 issued at September 30, 2009		4,223,000				4,202,000
Additional paid-in capital		1,289,000				1,227,000
Retained earnings		32,452,000				30,500,000
Accumulated other comprehensive loss, net		(318,000		)		(1,349,000		)
Treasury stock, at cost:
167,900 shares at December 31, 2009; 162,900 shares at September 30, 2009		(2,286,000		)		(2,262,000		)
TOTAL BARNWELL INDUSTRIES, INC. STOCKHOLDERS’ EQUITY		35,360,000				32,318,000
Non-controlling interests		1,233,000				902,000
TOTAL EQUITY		36,593,000				33,220,000
TOTAL LIABILITIES AND EQUITY		$	91,922,000			$	86,104,000

See Notes to Condensed Consolidated Financial Statements

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended
	December 31,
	2009			2008
Revenues:
Oil and natural gas		$	7,144,000		$	7,711,000
Contract drilling		2,288,000			1,134,000
Sale of interest in leasehold land, net		1,091,000			-
Sale of development rights, net		2,497,000			833,000
Gas processing and other		145,000			244,000

		13,165,000			9,922,000
Costs and expenses:
Oil and natural gas operating		2,309,000			2,418,000
Contract drilling operating		1,632,000			1,141,000
General and administrative		2,387,000			1,944,000
Depreciation, depletion, and amortization		2,341,000			3,368,000
Reduction of carrying value of assets		798,000			-
Interest expense, net		297,000			230,000

		9,764,000			9,101,000

Earnings before income taxes		3,401,000			821,000

Income tax provision		974,000			257,000

NET EARNINGS		2,427,000			564,000

Less: Net earnings attributable to non-controlling interests		475,000			140,000

NET EARNINGS ATTRIBUTABLE TO BARNWELL INDUSTRIES, INC.		$	1,952,000		$	424,000

BASIC NET EARNINGS PER COMMON SHARE ATTRIBUTABLE TO BARNWELL INDUSTRIES, INC. STOCKHOLDERS		$	0.24		$	0.05

DILUTED NET EARNINGS PER COMMON SHARE ATTRIBUTABLE TO BARNWELL INDUSTRIES, INC. STOCKHOLDERS		$	0.24		$	0.05

WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
BASIC		8,264,021			8,241,285
DILUTED		8,267,075			8,380,489

See Notes to Condensed Consolidated Financial Statements

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended
	December 31,
	2009				2008
Cash flows from operating activities:
Net earnings		$	2,427,000			$	564,000
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation, depletion, and amortization		2,341,000				3,368,000
Deferred income tax expense		956,000				369,000
Reduction of carrying value of assets		798,000				-
Retirement benefits expense		202,000				144,000
Share-based compensation expense (benefit)		171,000				(481,000		)
Accretion of asset retirement obligation		77,000				65,000
Retirement benefits payments		(1,000		)		(1,000		)
Asset retirement obligation payments		(30,000		)		(81,000		)
Sale of interest in leasehold land, net		(1,091,000		)		-
Sale of development rights, net		(2,497,000		)		(833,000		)
Additions to residential lots under development		-				(1,644,000		)
Decrease from changes in current assets and liabilities		(2,290,000		)		(5,179,000		)

Net cash provided by (used in) operating activities		1,063,000				(3,709,000		)

Cash flows from investing activities:
Proceeds from sale of development rights		2,656,000				886,000
Proceeds from sale of interest in leasehold land, net of fees paid		1,091,000				-
Proceeds from sale of oil and natural gas property		539,000				-
Proceeds from gas over bitumen royalty adjustments		22,000				67,000
Refund of deposits on residential parcels		-				200,000
Investment in joint ventures		-				(16,000		)
Capital expenditures - oil and natural gas		(1,179,000		)		(3,281,000		)
Capital expenditures - all other		(30,000		)		(7,000		)

Net cash provided by (used in) investing activities		3,099,000				(2,151,000		)

Cash flows from financing activities:
Proceeds from long-term debt borrowings		-				3,111,000
Contributions from non-controlling interests		87,000				15,000
Proceeds from exercise of stock options		59,000				-
Payment of loan commitment fee		-				(60,000		)
Purchases of common stock for treasury		-				(97,000		)
Distributions to non-controlling interests		(231,000		)		-

Net cash (used in) provided by financing activities		(85,000		)		2,969,000

Effect of exchange rate changes on cash and cash equivalents		41,000				(617,000		)

Net increase (decrease) in cash and cash equivalents		4,118,000				(3,508,000		)
Cash and cash equivalents at beginning of period		6,879,000				13,618,000

Cash and cash equivalents at end of period		$	10,997,000			$	10,110,000

See Notes to Condensed Consolidated Financial Statements

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BARNWELL INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (LOSS)

Three months ended December 31, 2009 and 2008

(Unaudited)


													Accumulated
						Additional							Other
		Shares		Common		Paid-In		Comprehensive			Retained		Comprehensive				Treasury			Non-controlling					Total
	Outstanding			Stock		Capital		Income (Loss)			Earnings		Loss				Stock			Interests					Equity
Balance at September 30, 2008		8,252,860		$	4,202,000	$	1,222,000				$	54,862,000		$	3,143,000		$	(2,165,000	)		$	1,067,000		$	62,331,000
Share-based compensation costs							5,000																		5,000
Purchases of 12,700 common shares for treasury		(12,700	)															(97,000	)						(97,000	)
Contributions from non-controlling interests																						15,000			15,000
Comprehensive loss:
Net earnings								$	564,000			424,000										140,000			564,000
Other comprehensive loss –
foreign currency translation adjustments, net of $2,177,000 tax benefit									(6,247,000	)					(6,247,000	)									(6,247,000	)
Other comprehensive income –
retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of $12,000 of taxes									24,000						24,000										24,000
Total comprehensive loss									(5,659,000	)
Comprehensive income attributable to non-controlling interests									(140,000	)
Comprehensive loss attributable to Barnwell Industries, Inc.								$	(5,799,000	)
At December 31, 2008		8,240,160		$	4,202,000	$	1,227,000				$	55,286,000		$	(3,080,000	)	$	(2,262,000	)		$	1,222,000		$	56,595,000

Balance at September 30, 2009		8,240,160		$	4,202,000	$	1,227,000				$	30,500,000		$	(1,349,000	)	$	(2,262,000	)		$	902,000		$	33,220,000
Exercise of stock options - 42,000 shares, net of 5,000 shares tendered and placed in treasury		37,000		21,000		62,000											(24,000		)					59,000
Contributions from non-controlling interests																					87,000			87,000
Distributions to non-controlling interests																					(231,000		)	(231,000		)
Comprehensive income:
Net earnings								$	2,427,000		1,952,000										475,000			2,427,000
Other comprehensive income:
Foreign currency translation adjustments, net of taxes of $0								964,000						964,000										964,000
Retirement plans - amortization of accumulated other comprehensive loss into net periodic benefit cost, net of taxes of $0								67,000						67,000										67,000
Total comprehensive income								3,458,000
Comprehensive income attributable to non-controlling interests								(475,000		)
Comprehensive income attributable to Barnwell Industries, Inc.								$	2,983,000
At December 31, 2009		8,277,160		$	4,223,000	$	1,289,000				$	32,452,000		$	(318,000	)	$	(2,286,000	)		$	1,233,000		$	36,593,000

See Notes to Condensed Consolidated Financial Statements

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BARNWELL INDUSTRIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Barnwell Industries, Inc. and all majority-owned subsidiaries, including an indirect 77.6%-owned land investment general partnership and two 80%-owned joint ventures (collectively referred to herein as “Barnwell,” “we,” “our,” “us,” or the “Company”). All significant intercompany accounts and transactions have been eliminated. Investments in companies over which Barnwell has the ability to exercise significant influence, but not control, are accounted for using the equity method.

Unless otherwise indicated, all references to “dollars” in this Form 10-Q are to U.S. dollars.

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements and notes have been prepared by Barnwell in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in Barnwell’s September 30, 2009 Annual Report on Form 10-K. The Condensed Consolidated Balance Sheet as of September 30, 2009 has been derived from audited consolidated financial statements.

In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at December 31, 2009, results of operations for the three months ended December 31, 2009 and 2008, and cash flows for the three months ended December 31, 2009 and 2008, have been made. The results of operations for the period ended December 31, 2009 are not necessarily indicative of the operating results for the full year.

Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management of Barnwell to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.

Significant Accounting Policies

Barnwell’s significant accounting policies are described in the Notes to Consolidated Financial Statements included in Item 8 of the Company’s most recently filed Annual Report on Form 10-K.

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Reclassifications

Certain prior year amounts within this Form 10-Q have been reclassified to conform to the presentation adopted in the current year.

2. EARNINGS PER COMMON SHARE

Basic earnings per share excludes dilution and is computed by dividing net earnings attributable to Barnwell stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the potentially dilutive effect of outstanding common stock options.

Reconciliations between net earnings attributable to Barnwell stockholders and common shares outstanding of the basic and diluted net earnings per share computations for the three months ended December 31, 2009 and 2008 are as follows:

Three months ended December 31, 2009

Net Earnings

Per-Share

(Numerator)

(Denominator)

Amount

Basic net earnings per share

1,952,000

8,264,021

0.24

Effect of dilutive securities - common stock options

3,054

Diluted net earnings per share

1,952,000

8,267,075

0.24

	Three months ended December 31, 2008
	Net Earnings			Shares		Per-Share
	(Numerator)			(Denominator)		Amount
Basic net earnings per share		$	424,000		8,241,285		$	0.05

Effect of dilutive securities - common stock options		-			139,204

Diluted net earnings per share		$	424,000		8,380,489		$	0.05

Potential dilutive shares consist of the common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) using the treasury stock method. Potential dilutive shares are excluded from the computation of earnings per share if their effect is antidilutive. Options to purchase 556,000 and 171,033 shares of common stock were excluded from the computation of diluted shares for the three months ended December 31, 2009 and 2008, respectively, as their inclusion would have been antidilutive.

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3. SHARE-BASED PAYMENTS

The Company’s share-based compensation expense (benefit) and the related income tax effects for the three months ended December 31, 2009 and 2008 are as follows:

	Three months ended
	December 31,
		2009		2008

Share-based compensation expense (benefit)		$	171,000	$	(481,000	)

Income tax effect - provision		$	-	$	165,000

Share-based compensation expense (benefit) recognized in earnings for the three months ended December 31, 2009 and 2008 are reflected in “General and administrative” expenses in the Condensed Consolidated Statements of Operations. There was no impact on income taxes for the three months ended December 31, 2009 due to a full valuation allowance on the related deferred tax asset.

Equity-classified Awards

A summary of the activity in Barnwell’s equity-classified share options as of the beginning and end of the three months ended December 31, 2009 is presented below:

						Weighted-
						Average
			Weighted-			Remaining
			Average			Contractual		Aggregate
			Exercise			Term		Intrinsic
Options	Shares		Price			(in years)		Value
Outstanding at October 1, 2009	222,000			$	7.83
Granted	-
Exercised	(42,000	)		$	1.98
Expired	(120,000	)		$	9.48
Forfeited	-
Outstanding at December 31, 2009	60,000			$	8.62		4.9	$	-

Exercisable at December 31, 2009	60,000			$	8.62		4.9	$	-

Total share-based compensation expense for equity-classified awards vested in the three months ended December 31, 2009 and 2008 was nil and $5,000, respectively.

The total intrinsic value of equity options exercised during the three months ended December 31, 2009 was $115,000. No equity options were exercised during the three months ended December 31, 2008.

Liability-classified Awards

As of December 31, 2009, there was $1,093,000 of total unrecognized compensation cost related to nonvested liability-classified share options. That cost is expected to be recognized over 3.6 years. In December 2009, Barnwell granted stock options to acquire 337,500 shares of Barnwell’s common stock under a non-qualified plan at a purchase price of $4.32 per share (market price on date

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of grant). The stock options were issued under the 2008 Equity Incentive Plan. These options vest annually over four years commencing one year from the date of grant and expire in December 2019. These options have stock appreciation rights that permit the holders to receive stock, cash or a combination thereof equal to the amount by which the fair market value, at the time of exercise of the option, exceeds the option price.

The following assumptions were used in estimating fair value for all liability-classified share options outstanding during the three months ended December 31, 2009 and 2008:

	Three months ended December 31,
	2009	2008
Expected volatility range	45.2% to 60.6%	41.3% to 49.2%
Weighted-average volatility	49.5%	43.8%
Expected dividends	None	0.9% to 1.4%
Expected term (in years)	4.9 to 9.9	5.9 to 9.4
Risk-free interest rate	2.7% to 3.9%	1.7% to 2.1%
Expected forfeitures	None	None

The application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation, and consequently, the related costs reported in the Condensed Consolidated Statements of Operations.

A summary of the activity in Barnwell’s liability-classified share options as of the beginning and end of the three months ended December 31, 2009 is presented below:

					Weighted-
					Average
		Weighted-			Remaining
		Average			Contractual		Aggregate
		Exercise			Term		Intrinsic
Options	Shares	Price			(in years)		Value
Outstanding at October 1, 2009	496,000		$	10.89
Granted	337,500		$	4.32
Exercised	-
Forfeited/Expired	-
Outstanding at December 31, 2009	833,500		$	8.23		8.3	$	88,000

Exercisable at December 31, 2009	266,000		$	10.16		6.3	$	-

Total share-based compensation for liability-classified awards for the three months ended December 31, 2009 and 2008 was an expense of $171,000 and a benefit of $486,000, respectively. Included in share-based compensation for liability-classified awards for the three months ended December 31, 2009 and 2008 were $68,000 and $47,000, respectively, of compensation expense related to shares that vested during each respective period and a $103,000 expense and a $533,000 benefit, respectively, due to remeasurement at December 31, 2009 and 2008 of the fair value of previously vested shares.

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4. REAL ESTATE HELD FOR SALE AND INVESTMENT IN RESIDENTIAL PARCELS

Kaupulehu 2007, LLLP (“Kaupulehu 2007”) is a Hawaii limited liability limited partnership 80%-owned by Barnwell and 20%-owned by Nearco, Inc. (“Nearco”), a company controlled by a former director of Barnwell and non-controlling interest in certain of Barnwell’s business ventures (see further discussion on related party interests at Note 11 below).

Kaupulehu 2007 develops luxury residences for sale and invests in residential lots in the Lot 4A Increment I area located approximately six miles north of the Kona International Airport in the North Kona District of the island of Hawaii, adjacent to Hualalai Resort at Historic Ka’upulehu, between the Queen Kaahumanu Highway and the Pacific Ocean. At December 31, 2009, Kaupulehu 2007 owns four parcels - two completed luxury residences classified as “Real Estate Held for Sale” and two parcels held for investment classified as “Investment in Residential Parcels.”

In December 2008, Kaupulehu 2007 assigned its last remaining right to purchase an additional lot in the Lot 4A Increment I area to an unrelated party. As this assignment relieved Kaupulehu 2007 of its obligation to purchase the aforementioned parcel, Kaupulehu 2007 received a refund of its original $200,000 deposit for the lot in December 2008.

Kaupulehu 2007 capitalizes interest costs during development and construction and includes these costs in cost of sales when homes are sold. Interest costs capitalized for the three months ended December 31, 2008 totaled $116,000. As construction of the homes was completed during fiscal 2009, no interest was capitalized during the three months ended December 31, 2009.

Kaupulehu 2007 has an agreement with the son of a former director of Barnwell and non-controlling interest in certain of Barnwell’s ventures (see further discussion on related party interests at Note 11 below), under which he served as Kaupulehu 2007’s project manager. Kaupulehu 2007 also has an agreement with the independent building contractor that constructed the two luxury homes for Kaupulehu 2007; a significant provision of which is that each will receive 20% of the sales profit upon the sale of each of the two homes constructed by Kaupulehu 2007.

As a result of recent real estate sales prices and activity in the area where Barnwell’s investment in residential parcels is located, Barnwell determined that a reduction of the carrying value of its investment in residential parcels was necessary. Accordingly, Barnwell reduced the carrying value of its investment in residential parcels by $798,000 during the three months ended December 31, 2009. No reduction was recorded during the three months ended December 31, 2008.

5. INVESTMENT IN JOINT VENTURES

Kaupulehu Investors, LLC, a limited liability company 80%-owned by Barnwell and 20%-owned by Nearco, owns 1.5% passive minority interests in Hualalai Investors JV, LLC and Hualalai Investors II, LLC, owners of Hualalai Resort, and a 1.5% passive minority interest in Kona Village Investors, LLC, owner of Kona Village Resort. Kaupulehu Investors, LLC, accounts for its 1.5% passive investments under the cost method. These investments are classified as “Investment in Joint Ventures” at December 31, 2009 and September 30, 2009.

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6. INVESTMENT IN LAND INTERESTS

The land interests held by Barnwell at December 31, 2009 include:

· Development rights under option;

· Rights to receive payments from WB KD Acquisition, LLC (“WB”) and WB KD Acquisition II, LLC (“WBKD”) resulting from the sale of lots and/or residential units within approximately 870 acres in the Kaupulehu area by WB and WBKD;

· Approximately 1,000 acres of vacant leasehold land zoned conservation (“Lot 4C”) which is under a right of negotiation with WB and/or WBKD; and

· Lot acquisition rights in agricultural-zoned leasehold land in the upland area of Kaupulehu (“Mauka Lands”).

There is no assurance with regards to the amounts of future payments to be received, nor is there any assurance that WB and/or WBKD will enter into an agreement with Kaupulehu Developments regarding Lot 4C. Furthermore, there is no assurance that the required land use reclassification and rezoning from regulatory agencies will be obtained nor is there any assurance that the necessary development terms and agreements will be successfully negotiated for Lot 4C and the Mauka Lands. Barnwell’s cost of land interests at December 31, 2009 and September 30, 2009 is classified as “Investment in Land Interests” and consists of the following amounts:

Leasehold land zoned conservation – Lot 4C	$	50,000
Lot acquisition rights – Mauka Lands	488,000
Total investment in land interests	$	538,000

7. LONG-TERM DEBT

A summary of Barnwell’s long-term debt as of December 31, 2009 and September 30, 2009 is as follows:

	December 31,				September 30,
	2009				2009

Canadian revolving credit facility		$	15,000,000			$	15,000,000
Real estate revolving credit facility		16,000,000				16,000,000

		31,000,000				31,000,000
Less: current portion		(17,500,000		)		(14,335,000		)

Total long-term debt		$	13,500,000			$	16,665,000

Barnwell has a credit facility at Royal Bank of Canada, a Canadian bank, for $20,000,000 Canadian dollars, or approximately US$19,110,000 at the December 31, 2009 exchange rate. At December 31, 2009, borrowings under this facility were US$15,000,000, borrowed in U.S. dollars at the London Interbank Offer Rate plus 3.50%, and unused credit available under this facility was approximately US$4,110,000. The interest rate on the facility at December 31, 2009 was 3.74%.

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Under the financing agreement with Royal Bank of Canada, the facility is reviewed annually, with the next review planned for April 2010. Subject to that review, the facility may be extended one year with no required debt repayments for one year or converted to a two-year term loan by the bank. If the facility is converted to a two-year term loan, Barnwell has agreed to the following repayment schedule of the then outstanding loan balance: first year of the term period – 20% (5% per quarter), and in the second year of the term period – 80% (5% per quarter for the first three quarters and 65% in the final quarter). Based on the terms of the existing agreement, if Royal Bank of Canada were to convert the facility to a two-year term loan upon its next review in April 2010, Barnwell would be obligated to make quarterly principal and interest repayments beginning in July 2010. As such, two quarterly payments of 5% each would be due within one year of December 31, 2009 and accordingly, we have included $1,500,000, representing 10% of the outstanding loan balance at December 31, 2009, in the current portion of long-term debt.

A decline in the rate of exchange of the Canadian dollar to the U.S. dollar could result in Barnwell reaching the maximum amount of credit available under the Canadian revolving credit facility of $20,000,000 Canadian dollars. If exchange rates decline to the extent we exceed the maximum amount of credit available under the Canadian revolving credit facility, we will be required to make debt repayments to Royal Bank of Canada in the amount of the excess.

Barnwell, through its 80%-owned real estate joint venture, Kaupulehu 2007, has a credit facility with a Hawaii financial institution providing a $16,000,000 revolving line of credit with which Kaupulehu 2007 financed the acquisition of four parcels and a portion of the costs of home construction. Under the terms of the facility, financing for home construction is limited to a maximum of two unsold homes under construction at any given time. The term of the loan is 36 months and advances may not exceed: (i) 75% of the appraised as-is value of each parcel or (ii) 80% of the appraised value of the completed home and parcel for each home under construction. The interest rate available for borrowings under this facility is a floating rate equal to the financial institution’s floating base rate or the one-month London Interbank Offer Rate plus 2.50%.

At December 31, 2009, Kaupulehu 2007 has reached its maximum amount of borrowings under its revolving credit facility of $16,000,000. Kaupulehu 2007 will be required to make a principal payment upon the sale of a home and lot in an amount equal to 100% of the net sales proceeds of the home and lot; the loan agreement defines net sales proceeds as the gross sales price of the home and lot, less reasonable real estate commissions, closing costs, and fees of the building contractor and project manager, as approved by the financial institution. The credit facility, which is fully guaranteed by Barnwell and guaranteed 20% by Mr. Terry Johnston, is collateralized by, among other things, a first mortgage lien on the parcels and homes. Borrowings under the facility are subject to a loan advance limitation based on the appraised value of the underlying security. The loan advance limitation may be reduced as a result of a decrease in appraised value of the underlying security. If borrowings under the facility exceed the loan advance limitation, Barnwell will be required to make debt repayments in the amount of the excess.

Any unpaid principal balance and accrued interest is due in full on December 17, 2010. As such, the entire outstanding facility balance has been classified as a current liability. In addition to attempting to sell the homes, we are presently seeking to refinance or replace this facility in advance of its maturity. The continued uncertainty in the credit markets may negatively impact our ability to refinance or replace this debt.

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Interest costs for the three months ended December 31, 2009 and 2008 are summarized as follows:

	Three months ended
	December 31,
	2009			2008

Interest costs incurred		$	297,000		$	346,000
Less interest costs capitalized		-			116,000

Interest expense		$	297,000		$	230,000

8. SEGMENT INFORMATION

Barnwell operates four segments: 1) exploring for, developing, producing and selling oil and natural gas in Canada (oil and natural gas); 2) investing in leasehold land and other real estate interests in Hawaii (land investment); 3) drilling wells and installing and repairing water pumping systems in Hawaii (contract drilling); and 4) acquiring property for investment and development of homes for sale in Hawaii (residential real estate).

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The following is certain financial information related to Barnwell’s reporting segments. All revenues reported are from external customers with no intersegment sales or transfers.

	Three months ended
	December 31,
	2009				2008
Revenues:
Oil and natural gas		$	7,144,000			$	7,711,000
Land investment		3,588,000				833,000
Contract drilling		2,288,000				1,134,000
Other		136,000				189,000
Total before interest income		13,156,000				9,867,000
Interest income		9,000				55,000
Total revenues		$	13,165,000			$	9,922,000

Depreciation, depletion, and amortization:
Oil and natural gas		$	2,199,000			$	3,226,000
Contract drilling		115,000				103,000
Other		27,000				39,000
Total depreciation, depletion, and amortization		$	2,341,000			$	3,368,000

Reduction of carrying value of assets:
Residential real estate		$	798,000			$	-

Operating profit
(before general and administrative expenses):
Oil and natural gas		$	2,636,000			$	2,067,000
Land investment		3,588,000				833,000
Contract drilling		541,000				(110,000		)
Residential real estate		(798,000		)		-
Other		109,000				150,000
Total operating profit		6,076,000				2,940,000

General and administrative expenses		(2,387,000		)		(1,944,000		)
Interest expense		(297,000		)		(230,000		)
Interest income		9,000				55,000
Earnings before income taxes		$	3,401,000			$	821,000

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9. INCOME TAXES

The components of the income tax provision for the three months ended December 31, 2009 and 2008 are as follows:

	Three months ended
	December 31,
	2009			2008

Current		$	18,000		$	(112,000	)
Deferred		956,000			369,000

		$	974,000		$	257,000

Barnwell’s effective consolidated income tax rate, after adjusting earnings before income taxes to remove the portion attributable to non-controlling interests, was approximately 33% and 38%, respectively, for the three months ended December 31, 2009 and 2008.

Included in the income tax provision for the three months ended December 31, 2009 is a $1,252,000 benefit from a change in tax law enacted in November 2009 which expands the number of years Barnwell can carry back U.S. federal income tax losses. There was no such benefit in the same period of the prior year. Partially offsetting this benefit in the three months ended December 31, 2009 was an increase in deferred income tax expense due to valuation allowances on U.S. deferred tax assets generated during the period. There was no deferred income tax expense for valuation allowances on U.S. deferred tax assets in the same period of the prior year.

There were no significant changes in unrecognized tax benefits in the three months ended December 31, 2009. Unrecognized tax benefits consist primarily of Canadian federal and provincial audit issues that involve the timing of oil and natural gas capital expenditure deductions and transfer pricing adjustments. Because of a lack of clarity and uniformity regarding allowable transfer pricing valuations by differing jurisdictions, it is reasonably possible that the total amount of unrecognized tax benefits and any offsetting foreign tax credit benefits may significantly increase or decrease during fiscal 2010, and the estimated range of any such variance is not currently estimable based upon facts and circumstances as of December 31, 2009.

Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities:

Jurisdiction	Fiscal Years Open
U.S. federal		2006 – 2008
Various U.S. states		2006 – 2008
Canada federal		2001 – 2008
Various Canadian provinces		2001 – 2008

10. RETIREMENT PLANS

Barnwell sponsors a noncontributory defined benefit pension plan (“Pension Plan”) covering substantially all of its U.S. employees. Additionally, Barnwell sponsors a Supplemental Employee Retirement Plan (“SERP”), a noncontributory supplemental retirement benefit plan which covers certain current and former employees of Barnwell for amounts exceeding the limits allowed under the defined benefit pension plan and a postretirement medical insurance benefits plan (“Postretirement Medical”) covering eligible U.S. employees.

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The following table details the components of net periodic benefit cost for Barnwell’s retirement plans for the three months ended December 31, 2009 and 2008:

	Pension Plan								SERP						Postretirement Medical
	Three months ended December 31,
	2009				2008				2009			2008			2009			2008
Service cost		$	74,000			$	45,000			$	11,000		$	8,000		$	4,000		$	2,000
Interest cost		82,000				77,000				13,000			12,000			15,000			13,000
Expected return on plan assets		(63,000		)		(48,000		)		-			-			-			-
Amortization of prior service cost		1,000				1,000				1,000			1,000			34,000			34,000
Amortization of net
actuarial loss (gain)		27,000				6,000				3,000			-			-			(7,000		)

Net periodic benefit cost