Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis should be read in conjunction with the accompanying consolidated financial statements and related notes contained in "Item 8. Financial Statements and Supplemental Data" of this Annual Report on Form 10-K.
This Management's Discussion and Analysis contains forward‑looking statements that involve risks, uncertainties, and assumptions as described under the heading "Cautionary Note Regarding Forward‑Looking Statements," in Part I of this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated by these forward‑looking statements as a result of many factors, including those discussed under "Item 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-K.
The discussion of our general financial condition and results of operations for 2019 compared with 2018 can be found in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”). See Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2019 Annual Report for further information on our prior period results of operations.
Overview
We are a diversified mineral company that delivers potassium, magnesium, sulfur, salt, and water products essential for customer success in agriculture, animal feed and the oil and gas industry. We are the only U.S. producer of muriate of potash (sometimes referred to as potassium chloride or potash), which is applied as an essential nutrient for healthy crop development, utilized in several industrial applications, and used as an ingredient in animal feed. In addition, we produce a specialty fertilizer, Trio ® , which delivers three key nutrients, potassium, magnesium, and sulfate, in a single particle. We also provide water, magnesium chloride, brine and various oilfield products and services.
Our extraction and production operations are conducted entirely in the continental United States. We produce potash from three solution mining facilities: our HB solution mine in Carlsbad, New Mexico, our solution mine in Moab, Utah and our brine recovery mine in Wendover, Utah. We also operate our North compaction facility in Carlsbad, New Mexico, which compacts and granulates product from the HB mine. We produce Trio ® from our conventional underground East mine in Carlsbad, New Mexico. Until mid-2016, we also produced potash from our East and West mines in Carlsbad, New Mexico.
We have water rights in New Mexico under which we sell water primarily to support oil and gas development in the Permian Basin near our Carlsbad facilities. We continue to work to expand our sales of water. In May 2019, we acquired certain land, water rights, state grazing leases for cattle, and other related assets from Dinwiddie Cattle Company. We refer to these assets and operations as "Intrepid South." Due to the strategic location of Intrepid South, part of our long-term operating strategy is selling small parcels of land to other companies, where such sales provide a solution to a company's need.
We have three segments: potash, Trio ® , and oilfield solutions. We account for the sale of byproducts as revenue in the potash or Trio ® segment based on which segment generated the byproduct. For each of the years ended December 31, 2020, 2019, and 2018, a majority of our byproduct sales were accounted for in the potash segment.
Recent Developments
Reverse Stock Split
On July 24, 2020, we received notice from the NYSE that we were not in compliance with Section 802.01C of the NYSE Listed Company Manual that requires listed companies to maintain an average closing share price of at least $1.00 over a period of 30 consecutive trading days (the “July Notice”). Due to our reduced stock price, before we received notice of non-compliance we provided notice of a special meeting of stockholders to vote on four proposals that would allow our Board of Directors to effect a reverse stock split at a ratio between 1:3 and 1:15. On July 28, 2020, we held the special meeting and all the reverse stock split proposals were approved.
On August 10, 2020, the Board of Directors approved an amendment to our Certificate of Incorporation to effect a reverse stock split of our common stock, par value $0.001 per share, by a ratio of one-for-ten. The reverse stock split became effective August 14, 2020. Additionally, the total number of authorized shares of our common stock was reduced to 40,000,000 shares. Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying condensed consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.
We believe the reverse stock split was in the best interests of us and our stockholders by allowing us more flexibility to, among other things, potentially improve the marketability and liquidity of our common stock and regain compliance with the
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listing requirements of the NYSE, which will allow management to focus on our business strategy. We received notice from NYSE that we regained compliance with all listing standards on September 1, 2020.
Significant Business Trends and Activities
The novel strain of coronavirus (COVID-19) has surfaced in nearly all regions around the world. As an essential business we continued to operate through-out the COVID-19 pandemic to produce potash and Trio ® and serve oil and gas markets through our oilfield solutions business. The safety and protection of our workforce is our first and foremost priority. We continue to follow various procedures we implemented to help minimize the risks to our employees, including changes in our operating procedures to accommodate social distancing guidelines, additional cleaning and disinfection procedures and requiring those employees who can work from home to do so.
We continue to monitor the guidance from various authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. There may be developments outside our control that would require us to adjust our operating plans.
Our 2020 results were materially impacted by the COVID-19 pandemic, particularly our oilfield solutions segment as many of the actions taken to help prevent the spread of COVID-19 decreased demand for oil. While many areas of the country have relaxed restrictions since the summer of 2020, we expect the economic effects of the COVID-19 pandemic will persist through most of 2021 and possibly longer. Governmental authorities may reinstate other restrictive orders due to a continued resurgence of COVID-19 related cases. Such restrictive actions may lead to further or continued decreases in the demand for oil and may impact our other operations if expanded restrictions are deemed necessary to mitigate the public health effects of the COVID-19 pandemic. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations, liquidity or cash flows in the future. We expect that if governmental authorities increase other restrictive orders, such actions will have a material effect on revenue growth, financial condition, liquidity, and overall profitability in future reporting periods.
Our financial results have been, or are expected to be, impacted by several significant trends and activities, including impacts from the COVID-19 pandemic, as discussed below. We expect that the trends described below may continue to impact our results of operations, cash flows, and financial position.
• Potash pricing and demand. Potash remained a significant driver of our profitability, comprising 47% of our total sales in 2020. Our average net realized sales price for potash decreased in 2020 to $250 per ton compared to $284 per ton for 2019 due to multiple price decreases announced since the summer of 2019. The potash market has rebounded since the 2020 summer fill program with current posted price for agricultural potash now $140 per ton higher than the 2020 summer fill price after multiple price increases in the fourth quarter of 2020 and another price increase in February 2021.
Similar to previous price increases, customers were offered the opportunity to book tons for delivery through the first quarter of 2021 ahead of the $40 per ton price increase announced in December 2020. We have booked spot tons for immediate delivery in the first quarter of 2021 at the full December 2020 price increase and have seen full acceptance of that price level on our second quarter shipments. We booked our historic second quarter volumes ahead of the $50 per ton February price increase and expect to book additional spot tons at the full $140 per ton increase from summer-fill pricing as the spring season continues. We believe customers continue to see good value in potash at the current list prices due to strong and rising crop commodity values. Our price expectations could be affected by, among other things, weather, planting decisions, rail car availability, commodity price decreases as a result of the COVID-19 pandemic, and the price and availability of other potassium products.
Our sales volumes into industrial markets decreased in 2020 compared to the prior year. The majority of our industrial potash sales are into oil and gas markets and correlate to drilling and completion activity, which has slowed significantly during 2020 due to the containment actions taken to help reduce the spread of COVID-19. We have been successful in shifting sales towards our growing animal feed and organic markets and also continuing to expand our sales into high-margin agricultural areas near our operations. Additional or renewed restrictions enacted in response to the COVID-19 pandemic may impact our sales if such actions affect available labor, transportation logistics, or cause supply disruptions.
Global effective capacity continues to exceed demand and larger producers have worked to balance the market through production curtailments. Domestic pricing of our potash is influenced principally by the price established by our competitors. The interaction of global potash supply and demand, ocean, land, and barge freight rates, currency fluctuations, and crop commodity values and outlook, also influence pricing.
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• Trio ® pricing and demand. Our average net realized sales price for Trio ® was unchanged in 2020 compared to 2019. We sold more tons of Trio ® into domestic markets in 2020, compared to 2019, and our average net realized sales price per ton for Trio ® domestic sales is higher than our average net realized sales price per ton for Trio ® international sales due to lower freight and handling charges incurred for domestic sales. However, price decreases announced by competitors in late 2019 and in during the first half of 2020 negatively impacted our Trio ® average net realized sales price per ton during 2020.
Following the potash price increases announced in the fourth quarter of 2020, we have increased our posted price for Trio ® by $60 per ton compared to the 2020 summer fill price. Before the most recent $20 per ton price increase took effect in December 2020, we offered customers the opportunity to purchase tons for delivery through the first quarter of 2021. As a result we do not expect to realize the current posted price until the second quarter of 2021. Our ability to realize the increased prices may be affected by, among other things, weather, planting decisions, rail car availability, commodity price decreases as a result of the COVID-19 pandemic, and the price and availability of other potassium products.
Overall average net realized sales price per ton for Trio ® will continue to be impacted by the percentage of international sales, particularly to offshore markets. Competition from lower cost alternatives and freight costs continue to negatively impact our average net realized sales price per ton to offshore markets. We continued, and plan to continue, our efforts to implement a price-over-volume strategy internationally, by focusing on those international markets where we obtain the highest average net realized sales price per ton and thus the highest margin.
We experience seasonality in domestic Trio ® demand, with more purchases coming in the first and second quarters in advance of the spring application season in the U.S. In turn, we generally have increased inventory levels in the third and fourth quarters in anticipation of expected demand for the following year. We continue to operate our facilities at reduced production levels that approximate expected demand and allow us to manage inventory levels. If we experience reduced demand for Trio ® due to warehouse closures or other effects from the COVID-19 pandemic, we may need to further reduce production rates to manage inventory levels.
• Water sales. Water sales decreased in 2020 to $20.4 million, compared to $25.7 million in 2019, primarily due to the impact of the COVID-19 pandemic on oil and gas drilling activity. While economic activity and oil demand has improved from the summer of 2020, there continues to be significant impacts from the COVID-19 pandemic and oil and gas drilling activity in the areas in which we operate has not yet returned to the levels seen prior to the COVID-19 pandemic. Additional or renewed restrictions enacted in response to the COVID-19 pandemic may negatively impact the demand for oil and our expectations for water sales in 2021.
An update to legal proceedings concerning our water rights is contained in Note 14 to our audited consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
• Byproduct sales. Byproduct sales decreased to $20.5 million in 2020 compared to $26.5 million in 2019. Water and brine sales decreased due to the COVID-19 pandemic, which reduced well development and completion activities in the Permian Basin. Salt sales also decreased during 2020, as the salt shortages in certain parts of our country during 2019 abated, reducing our sales footprint. Record wet weather in the summer of 2019 in Wendover limited our production of magnesium chloride, reducing sales in the first half of 2020. While the market for magnesium chloride is somewhat weather dependent, we believe the overall demand for this product remains strong and we returned to average production and sales rates in the second half of 2020.
• Weather impact. Evaporation rates in 2020 were above average across our facilities which will increase production in the spring of 2021 when compared to the prior year. The production of magnesium chloride at our Wendover facility returned to historic averages in 2020 after an above average rainfall year in 2019 limited production during the first half of 2020.
• Diversification of products and services. We continued to diversify our products and services in 2020 particularly with the acquisition of Intrepid South in May 2019. In addition to water sales, Intrepid South also generates revenue from right-of-way agreements, surface damages and easements, caliche sales, brine sales, and a produced water royalty. These sales generated revenue of $4.2 million in 2020 and incur either minimal or no operating expense. We added the brine station at Intrepid South in February 2020 and we are reviewing opportunities to develop a produced water facility near Intrepid South, although the COVID-19 pandemic has made the timing of this development uncertain. Demand for our high-speed mixing service has also been negatively impacted as a result of the decrease in oil prices and oilfield activities.
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In March 2020, we sold approximately 320 acres of fee land from our Intrepid South property for $4.8 million and recognized a gain on the sale of the land of $4.7 million. The terms of the sale were highly restrictive and only allow the buyer to drill AGI wells on the property to dispose of natural gas with high concentrations of hydrogen sulfide (H 2 S). No water rights were included in the land sale, we retained surface access, and we restricted the use of caliche located on the property to the acreage that was sold in order to prevent sales to third parties or decrease future sales to the buyer. Our long-term strategic operating plan for Intrepid South includes selling small parcels of land to customers, where such sales provide a solution to a customer's specific needs. We may have additional strategic sales of small parcels of land to customers in the future.
In May 2020, we acquired an 11% equity stake in the W.D. Von Gonten Laboratories ("WDVGL"), a global industry leader in drilling and completion chemistry and a strong supporter of the use of potassium chloride in oil and gas drilling and completion activities. With this investment we plan to revitalize our industrial sales and high-speed mixing service given the poor performance of clay-inhibition chemical substitutes in certain formations. Our investment in WDVGL is also part of our strategy to leverage our existing oil and gas midstream businesses in southeast New Mexico and expand into additional oil and gas midstream and upstream activities. This expansion may be through organic growth, other strategic investments, partnerships, or acquisitions of complementary businesses that expand our product and service offerings beyond our existing assets or products. We believe that the long-term investment opportunities in the current market are generational and provide a unique opportunity to accelerate our pivot towards oil and gas through accretive transactions. Additionally, we may expand into oil and natural gas exploration and production or into new products or services in our current industry or other industries.
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Consolidated Results
(in thousands) Year Ended December 31,
2020 2019 2018
Sales 1
$ 196,954 $ 220,075 $ 208,270
Cost of Goods Sold $ 135,843 $ 126,110 $ 121,955
Gross Margin $ 10,530 $ 43,478 $ 38,271
Net (Loss) Income $ (27,154) $ 13,631 $ 11,783
Average Net Realized Sales Price per Ton 2
Potash $ 250 $ 284 $ 256
Trio ®
$ 195 $ 195 $ 199
1 Sales include sales of byproducts which were $20.5 million, $26.5 million and $19.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.
2 Average net realized sales price per ton is a non-GAAP measure. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measure."
Consolidated Results for the Years Ended December 31, 2020, and 2019
Our total sales decreased $23.1 million, or 11% in 2020, compared to 2019, as potash sales decreased $12.3 million, water sales decreased $5.3 million, salt sales decreased $4.2 million, high-speed mixing services decreased $1.4 million, and brine water sales decreased $0.7 million. These sales decreases were partially offset by a $1.0 million increase in Trio ® sales. Our potash sales decreased 12% in 2020 compared to 2019 as our average net realized sales price per ton decreased 12% due to the various potash price decreases announced by our competitors during 2020. Our water sales, high-speed mixing services and brine water sales all decreased in 2020 compared to 2019 due to the COVID-19 pandemic, which significantly decreased oil demand and decreased oil and gas activities during 2020. Our salt sales decreased in 2020 compared to 2019, as our 2019 salt sales benefited from salt shortages in various regions of the U.S. Our Trio ® sales increased 2% in 2020 as compared to 2019, as we sold 2% more tons of Trio ® .
Our cost of goods sold increased $9.7 million, or 8%, in 2020, as compared to 2019. The increase in cost of goods sold in 2020 compared to 2019 was due mainly to the increase in Trio ® cost of goods sold. During 2020, we operated at reduced rates to manage inventory levels and decreased Trio ® tons produced by 9% as compared to 2019. We also experienced increased losses in our pelletization process in 2020 compared to 2019. Reduced production and increased losses in the pelletization process both led to higher per-ton carrying costs. Finally, we also sold 2% more tons of Trio ® in 2020, as compared to 2019.
Our gross margin percentage decreased to 5% in 2020, compared to 20% in 2019. The decrease was driven primarily by a decrease in sales and an increase in cost of goods sold, as discussed above.
Net income decreased from $13.6 million in 2019, to a net loss of $27.2 million in 2020. The decrease is primarily due to a $32.9 million decrease in gross margin in 2020 compared to 2019, as discussed above, a $10.0 million litigation settlement entered into in 2020 as discussed below, partially offset by the gain recorded on the sale of land in 2020, as discussed below.
Selling and Administrative Expense
In 2020, selling and administrative expenses increased $1.9 million or 9% from 2019. This was due to a $3.7 million increase in legal and other professional services expenses in 2020, as compared to 2019, due to increased expenses associated with the settlement of outstanding litigation during 2020, and defending various protests to our water rights. The increase in legal and other professional services expenses was partially offset by decreases in certain employee benefits and a reduction in advertising expenses in 2020 compared to 2019.
Litigation Settlement
A settlement conference was held with Mosaic in late March 2020 related to ongoing litigation. Intrepid and Mosaic agreed to settle the matter and we paid Mosaic an aggregate of $10 million to dismiss all claims against us in this litigation, and the matter is now closed. Please see further information in Note 14 to our audited consolidated financial statements included in "Item 8. Financial Statements and Supplemental Data" of this Annual Report on Form 10-K.
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Gain on Sale of an Asset
In March 2020, we sold approximately 320 acres of fee land from our Intrepid South property for $4.8 million and recognized a gain on the sale of the land of $4.7 million. The terms of the sale were highly restrictive and only allow the buyer to drill AGI wells on the property to dispose of natural gas with high concentrations of H 2 S. No water rights were included in the land sale, we retained surface access, and we restricted the use of caliche located on the property to the acreage that was sold in order to prevent the buyer from selling caliche to third parties or decrease future caliche sales to the buyer. Our long-term strategic operating plan for Intrepid South includes selling small parcels of land to other customers, where such sales provide a solution to a customer's needs. We may have additional strategic sales of small parcels of land in the future.
Other Operating Expense
In 2020, we recognized other operating expense of $0.7 million compared to $1.4 million in 2019. In 2020, we recorded $0.4 million in care and maintenance expense and $0.3 million in other expenses. In 2019, we recorded $0.5 million in care and maintenance expenses, $0.2 million expense related to a product recall, $0.3 million in expense due to timing of remediation work, and $0.4 million in other expenses.
Interest Expense
Interest expense increased $1.3 million in 2020 compared to 2019, driven by the $1.9 million make-whole payment associated with the prepayment of the Series C Senior Notes in July 2020 and we maintained a higher average amount borrowed on our credit facility during 2020 compared to 2019, partially offset by the reduced principal balance outstanding on our Senior Notes during 2020. We repaid $20 million principal outstanding on our Series A Senior Notes at maturity in April 2020 and we prepaid $15 million principal outstanding on our Series C Senior Notes in July 2020.
Potash Segment Results
Year Ended December 31,
(in thousands) 2020 2019 2018
Sales 1
$ 108,060 $ 124,648 $ 124,058
Less: Freight costs 17,026 18,715 17,682
Warehousing and handling costs 4,857 4,745 5,046
Cost of goods sold 73,496 73,401 72,322
Lower of cost or NRV inventory adjustments 1,130 — —
Gross Margin $ 11,551 $ 27,787 $ 29,008
Depreciation, Depletion, and Amortization Incurred 2
$ 26,536 $ 25,796 $ 25,134
Potash Sales Volumes (tons in thousands) 317 319 364
Potash Production Volumes (tons in thousands) 308 328 344
Average Potash Net Realized Sales Price per Ton 3
$ 250 $ 284 $ 256
1 Potash segment sales include byproduct sales which were $15.6 million, $21.2 million and $16.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3 Average net realized sales price per ton is a non-GAAP measure. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measure."
Potash Segment Results for the Years Ended December 31, 2020, and 2019
Our total potash segment sales in 2020 decreased $16.6 million, or 13%, as compared to 2019, as potash sales recorded in the potash segment decreased 11% and potash segment byproduct sales decreased 26%.
Potash sales recorded in the potash segment decreased $10.9 million, or 11%, in 2020 compared to 2019, as the average potash net realized sales price per ton decreased 12% while potash tons sold were virtually unchanged. Our average potash net realized sales price per ton decreased due to the potash price decreases announced by our competitors in late 2019 and in 2020. Potash segment byproduct sales decreased $5.6 million, or 26%, in 2020 compared to 2019, due to a $3.9 million
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decrease in byproduct salt sales, a $1.1 million decrease in byproduct brine water sales and a $0.6 million decrease in byproduct water sales. Our salt sales decreased in 2020 as compared to 2019, as salt shortages in many parts of the U.S. during 2019, abated in 2020. Our potash byproduct brine water sales and our potash byproduct water sales decreased due to the containment measures that were adopted in response to the COVID-19 pandemic which reduced oil demand and slowed oil and gas exploration activities.
Potash segment freight expense decreased $1.7 million, or 9%, in 2020, as compared to 2019, mainly driven by an decrease in freight expense related to selling fewer tons of byproduct salt. Like most of our potash sales, we sell salt at a delivered price, which includes the freight expense incurred to ship the product to the customer, and in 2019 we incurred increased freight expense to ship salt to customers located farther from our facilities due to the salt shortages in various parts of the U.S. Our freight expense is also impacted by the rates charged by carriers, geographic distribution of our products and by the proportion of customers arranging for and paying their own freight costs.
Our potash segment gross margin decreased $16.2 million in 2020, compared to 2019, due mainly to the $16.6 million decrease in potash segment sales, as discussed above.
Potash Segment - Additional Information
The table below shows our potash sales mix for 2020, 2019, and 2018.
Year Ended December 31,
2020 2019 2018
Agricultural 79 % 74 % 74 %
Industrial 3 % 12 % 14 %
Feed 18 % 14 % 12 %
Historically, sales into the industrial and feed markets have carried a higher average net realized sales price per ton compared to sales into the agricultural market. As a result, we continue to work to increase the percentage of potash sales into the industrial and feed markets. However, the negative economic effects related to the COVID-19 pandemic reduced our industrial sales in 2020.
Trio ® Segment Results
Year Ended December 31,
(in thousands) 2020 2019 2018
Sales 1
$ 70,287 $ 69,551 $ 66,808
Less: Freight costs 20,431 20,514 19,370
Warehousing and handling costs
4,574 3,876 4,225
Cost of goods sold
50,902 42,251 45,284
Lower of cost or NRV inventory adjustments
2,885 1,810 1,711
Gross (Deficit) Margin $ (8,505) $ 1,100 $ (3,782)
Depreciation, Depletion, and Amortization incurred 2
$ 6,068 $ 6,163 $ 6,343
Sales Volumes (tons in thousands) 230 225 225
Production Volumes (tons in thousands) 213 228 217
Average Net Realized Sales Price per Ton 3
$ 195 $ 195 $ 199
1 Trio ® segment sales include byproduct sales which were $4.9 million, $5.3 million and $2.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.
2 Depreciation, depletion, and amortization incurred excludes depreciation, depletion, and amortization amounts absorbed in or (relieved from) inventory.
3 Average net realized sales price per ton is a non-GAAP measure. More information about this non-GAAP measure is below under the heading "Non-GAAP Financial Measure."
Trio ® Segment Results for the Years Ended December 31, 2020, and 2019
Our total Trio ® segment sales increased $0.7 million, or 1%, in 2020, as compared to 2019, as Trio ® sales increased 2%, partially offset by an 8% decrease in Trio ® segment byproduct sales.
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Our 2020 Trio ® sales increased $1.0 million, or 2%, in 2020, as compared to 2019, as we sold 2% more Trio ® tons. Trio ® tons sold domestically increased 17% in 2020, as compared to 2019. Good weather in most parts of the U.S. during the 2020 spring application season drove increased sales as many parts of the U.S. were negatively impacted by wet weather during the 2019 spring application season. Additionally, Trio ® domestic sales during the fourth quarter of 2020, as compared to 2019, were higher as fourth quarter 2019 sales were negatively impacted by uncertainty in fertilizer pricing and buyers were reluctant to purchase Trio ® believing prices would decline. The 2020 increase in domestic tons of Trio ® sold was partially offset by a decrease in international tons sold, as we focused sales on the domestic market.
Trio ® byproducts sales decreased $0.4 million, or 8% during 2020, as compared to the same period in 2019 driven by a $0.1 million decrease in Trio ® byproduct water sales and a $0.3 million decrease in Trio ® segment salt sales. Our 2020 Trio ® byproduct water sales were negatively impacted by the COVID-19 pandemic and our 2020 Trio ® byproduct salt sales decreased as salt shortages in many parts of the U.S. during 2019, abated in 2020.
Trio ® freight costs decreased slightly in 2020 as compared to 2019. We sold more tons in 2020 compared to 2019, but we sold fewer tons internationally. We incur more freight expense on international Trio ® sales compared to domestic Trio ® sales. Our freight expense is impacted by the geographic distribution of our Trio ® sales and by the proportion of customers arranging for and paying their own freight costs.
Our Trio ® warehouse and handling charges increased $0.7 million, or 18%, in 2020, as compared to 2019, as we incurred increased contract labor costs, increased chemical costs, and increased rental costs.
Our Trio ® cost of goods sold increased $8.7 million, or 20%, in 2020, as compared to 2019. During 2020, we operated at reduced production rates to manage inventory levels and decreased Trio ® tons produced by 7% as compared to 2019. We also experienced increased losses in our pelletization process in 2020 compared to 2019. Reduced production and increased losses in the pelletization process both led to higher per-ton carrying costs. Finally, we also sold 2% more tons of Trio ® in 2020, as compared to 2019.
We recorded lower of cost or net realized value inventory adjustments of $2.9 million in 2020 compared to $1.8 million in 2019. The increase in 2020 was driven by higher per-ton Trio ® carrying costs, as discussed above.
Our Trio ® segment generated a gross deficit of $8.5 million in 2020, compared to gross margin of $1.1 million in 2019, due to the factors discussed above.
Trio ® Segment - Additional Information
The table below shows the percentage of total Trio ® sales that were sold internationally in the past three years.
United States Export
For the year ended December 31, 2020 85 % 15 %
For the year ended December 31, 2019 74 % 26 %
For the year ended December 31, 2018 81 % 19 %
Oilfield Solutions Segment Results
Year Ended December 31,
(in thousands) 2020 2019 2018
Sales $ 18,929 $ 27,894 $ 17,404
Less: Warehouse and handling — — 10
Cost of goods sold 11,445 12,367 4,349
Gross Margin $ 7,484 $ 14,591 $ 13,045
Depreciation, Depletion, and Amortization incurred $ 2,663 $ 1,566 $ 343
Oilfield Solutions Segment Results for the Years Ended December 31, 2020, and 2019
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Our oilfield solutions segment sales decreased 32% in 2020, compared to 2019. Water and potash sales decreased as the COVID-19 pandemic pressured oil prices and U.S. producers substantially reduced or suspended drilling activity, particularly in the second and third quarters of 2020. Water sales decreased $4.6 million or 24% in 2020, compared to 2019, while potash sales in the oilfield segment decreased $3.0 million compared to 2019. Water sales in the oilfield segment improved significantly in the fourth quarter of 2020 to $4.0 million, compared to $2.0 million in the third quarter of 2020 as oil and gas activity and the outlook for oil prices continued to improve. Water we sell that was used in the production of potash and Trio ® is accounted for as byproduct water sales in the potash or Trio ® segments. Intrepid South also generated sales from right-of-way agreements, surface damages and easements, caliche sales, brine sales, a produced water royalty and oilfield services. These other sales totaled $4.2 million in 2020.
Cost of goods sold decreased $0.9 million in 2020, compared to 2019, as reduced expense related to our high-speed mixing service was offset by increased water transfer expenses and increased depreciation expense for our water assets. We also sold less water from our Pecos River water rights and from our other revenue sources, such as caliche and a produced water royalty, in 2020 compared to 2019. These sales generally have very low cost of goods sold, which is why the decrease in sales did not result in a comparable decrease in cost of goods sold.
Gross margin decreased $7.1 million, or 49%, compared to 2019, due to the factors described above.
Specific Factors Affecting Our Results
Sales
Our gross sales are derived from the sales of potash, Trio ® , water, salt, magnesium chloride, brine water and various other products and services offered to oil and gas producers. Total sales are determined by the quantities of product we sell and the sales prices we realize. For potash, Trio ® and salt, we quote prices to customers both on a delivered basis and on the basis of pick-up at our plants and warehouses. Freight costs are incurred on most of our potash, Trio ® and salt sales, but some customers arrange and pay for their own freight directly. When we arrange and pay for freight, our quotes and billings are based on expected freight costs to the points of delivery. When we calculate our potash and Trio ® average net realized sales price per ton, we deduct any freight costs included in sales before dividing by the number of tons sold. We believe the deduction of freight costs provides a more representative measure of our performance in the market due to variations caused by ongoing changes in the proportion of customers paying for their own freight, the geographic distribution of our products, and freight rates. Freight rates have been increasing, and if we are unable to pass the increased freight costs on to the customer, our average net realized sales price per ton is negatively affected. We manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price per ton we can by evaluating the product needs of our customers and associated logistics and then determining which of our production facilities can best satisfy these needs.
The volume of product we sell is determined by demand for our products and by our production capabilities. We operate our potash and Trio ® facilities at production levels that approximate expected demand and take into account current inventory levels and expect to continue to do so for the foreseeable future.
Our water sales and other products and services offered through our oilfield solutions segment are driven by demand from oil and gas exploration companies drilling in the Permian Basin. As such, demand for our water is generally stronger during a cyclical expansion of oil and gas drilling. Likewise, a cyclical contraction of oil and gas drilling may decrease demand for our water.
Cost of Goods Sold
Our cost of goods sold reflects the costs to produce our products. Many of our production costs are largely fixed and, consequently, our cost of sales per ton on a facility-by-facility basis tends to move inversely with the number of tons we produce, within the context of normal production levels. Our principal production costs include labor and employee benefits, maintenance materials, contract labor, and materials for operating or maintenance projects, natural gas, electricity, operating supplies, chemicals, depreciation and depletion, royalties, and leasing costs. There are elements of our cost structure associated with contract labor, consumable operating supplies, reagents, and royalties that are variable, which make up a smaller component of our cost base. Our costs often vary from period to period based on the fluctuation of inventory, sales, and production levels at our facilities.
Our production costs per ton are also impacted when our production levels change, due to factors such as changes in the grade of ore delivered to the plant, levels of mine development, plant operating performance, and downtime. We expect that our labor and contract labor costs in Carlsbad, New Mexico, will continue to be influenced most directly by the demand for labor in the local region where we compete for labor with another fertilizer company, companies in the oil and gas industry, and a nuclear waste processing and storage facility.
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We pay royalties to federal, state, and private lessors under our mineral leases. These payments typically equal a percentage of sales (less freight) of minerals extracted and sold under the applicable lease. In some cases, federal royalties for potash are paid on a sliding scale that vary with the grade of ore extracted. Our average royalty rate was 5.0%, 5.0%, and 4.6% in 2020, 2019, and 2018, respectively.
We incur costs to transfer water from our water source to our customers' facilities. Our operating costs depend on the distance and amount of water we must transfer. For water sold from certain of our water sources, we pay the State of New Mexico $0.11 per barrel of water sold. Additionally, water rights in New Mexico are subject to a stated purpose and place of use, and many of our water rights were originally issued for uses relating to our mining operations, or in the case of the water rights at Intrepid South, for agricultural uses. To sell water commercially under these rights, we must apply for a permit from the OSE to change the purpose and/or place of use of the underlying water rights. Third parties often protest decisions made by the OSE. As we have worked to sell more water commercially, we have incurred significant legal expenses associated with defending our water rights and obtaining water permits and approvals.
Income Taxes
We are a subchapter C corporation and, therefore are subject to U.S. federal and state income taxes on our taxable income. We recognize deferred tax assets and liabilities for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at enacted tax rates in effect when the related taxes are expected to be settled or realized. We also reduce deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining how much of a valuation allowance to recognize we consider our projections of future taxable income. All available evidence, both positive and negative, that may affect the realizability of deferred tax assets is identified and considered in determining the appropriate amount of the valuation allowance. We have concluded valuation allowances of $217.9 million and $211.6 million were required as of December 31, 2020 and 2019, respectively.
The amount of valuation allowance increased in 2020 as compared to 2019 primarily from offsetting increases to our deferred tax assets for revenue recognized for income tax purposes before recognition for GAAP purposes, and from our 2020 net operating losses. Our effective tax rate for the years ended December 31, 2020, 2019, and 2018 was 0.0%, 0.4%, and 0.9%, respectively. Our effective income tax rates are impacted primarily by changes in the underlying tax rates in jurisdictions in which we are subject to income tax, the need for a valuation allowance, and permanent differences between book and tax income for the period, including the benefit associated with the estimated effect of the percentage depletion deduction.
The effective tax rate for the years ended December 31, 2020, 2019, and 2018, respectively, differs from the U.S. federal statutory rate due to the valuation allowance.
During each of the years ended December 31, 2020, 2019, and 2018, we recognized an immaterial amount of income tax expense.
The estimated statutory income tax rates that are applied to our current and deferred income tax calculations are impacted most significantly by the states in which we conduct business. Changing business conditions for normal business transactions and operations as well as changes to state tax rate and apportionment laws potentially alter our apportionment of income among the states for income tax purposes. These changes in apportionment laws result in changes in the calculation of our current and deferred income taxes, including the valuation of our deferred tax assets and liabilities. The effects of any such changes are recorded in the period of the adjustment. These adjustments can increase or decrease the net deferred tax asset on the balance sheet and impact the corresponding deferred tax benefit or deferred tax expense on the income statement.
A valuation allowance is recognized for deferred tax assets if it is more likely than not that a portion or all of the net deferred tax assets will not be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. As of December 31, 2020, we were in a cumulative three-year loss position. The cumulative three-year loss position is significant negative evidence when evaluating the realizability of our deferred tax assets, and we have concluded it is more likely than not the deferred tax assets will not be realized. Thus, we continue to have a full valuation allowance as of December 31, 2020. However, if positive evidence trends, such as sustained profitability, were to emerge then this conclusion could change. If we were to determine that we would be able to realize our deferred tax assets for which a valuation allowance has been recorded, then an adjustment would be made to the deferred tax valuation allowance which would result in a reduction to the provision for income taxes or the recording of an income tax benefit.
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Liquidity and Capital Resources
Our operations have primarily been funded from cash on hand, cash generated by operations, and proceeds from debt and equity offerings. During 2020, we generated $31.1 million in cash flows from operating activities and we ended the year with $19.5 million of cash on hand, compared with cash on hand of $20.6 million at December 31, 2019.
In April 2020, we repaid the full $20 million principal on our Series A Senior Notes at maturity. In July 2020, we repaid the full $15 million of principal along with a reduced make-whole payment of $1.9 million on our Series C Senior Notes. As of December 31, 2020, we had outstanding $15 million of Series B Senior Notes due on April 14, 2023.
In April 2020, we received a $10 million loan under the CARES Act Paycheck Protection Program (the "PPP"). The loan matures on April 18, 2022 and bears interest at a rate of 1% per annum. We were required to begin monthly payments of principal and interest in the amount of $0.6 million in November 2020, but due to extensions of the program and delays in the forgiveness application process, we do not expect to make any payments on the loan until a decision is made regarding our forgiveness application. We may prepay the loan at any time prior to maturity with no prepayment penalties. We used the funds exclusively for allowed payroll, benefits and other expenses and expect the majority, if not all, of the loan will be forgiven. During the second quarter of 2020, the program was amended to allow borrowers to choose either an eight-week or 24-week period to use the funds. We elected to use the 24-week period, which ended in October 2020. The amount eligible for forgiveness is based on the amount of loan proceeds used by us (during the 24-week period after the lender makes the first disbursement of loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), subject to certain limitations and reductions in accordance with the CARES Act. We submitted our application for forgiveness of the full $10 million loan in November 2020. No assurance can be given that we will obtain forgiveness of the loan in whole or in part. In addition, as a borrower that received over $2.0 million, we expect to be subject to an audit to review our eligibility under the PPP. We submitted a response to a questionnaire regarding the necessity of our PPP loan in January 2021. The timing and scope of the audit or any additional review remains unclear and as a result we are not able to forecast when we can expect a decision on loan forgiveness. We do not expect the audit will impact our eligibility for forgiveness under the PPP. The loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the lender or breaching the terms of the loan documents.
As of December 31, 2020, we had $20.4 million available to borrow under our credit facility, $29.8 million in outstanding borrowings, and $1 million outstanding in a lette r of credit. With the remaining availability under our credit facility and expected cash generated from operations, we believe we have sufficient liquidity to meet our obligations for the next twelve months.
We continue to monitor our future sources and uses of cash and anticipate that we will adjust our capital allocation strategies when, and if, determined by our Board of Directors. We may, at any time we deem conditions favorable, attempt to improve our liquidity position by accessing debt or equity markets in accordance with our existing debt agreements. We also may raise capital in the future through the issuance of additional equity or debt securities, subject to prevailing market conditions. However, there is no assurance that we will be able to successfully raise additional capital on acceptable terms or at all.
The following summarizes our cash flow activity for the years ended December 31, 2020, 2019, and 2018:
Year ended December 31,
2020 2019 2018
(In thousands)
Cash flows provided by operating activities $ 31,145 $ 49,381 $ 64,237
Cash flows used in investing activities $ (15,157) $ (80,641) $ (16,781)
Cash flows (used in) provided by financing activities $ (17,043) $ 18,795 $ (15,301)
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Our debt agreements contain restrictions on our ability to declare and pay dividends. In general, the terms of our senior notes prohibit us from declaring and paying a dividend unless our leverage ratio is less than 3.5 to 1, our fixed charge coverage ratio after giving effect to the dividend would be greater than 1.3 to 1, and our cash on hand and availability under our credit facility after giving effect to the dividend, would not be less than $15 million. In addition, the terms of our credit facility prohibit us from declaring and paying a dividend unless availability under the credit facility after giving effect to the dividend and during a specified period before the dividend is more than $15 million. More information about how the financial ratios are calculated under our debt agreements is provided below under the heading "—Senior Notes."
Operating Activities
Total cash provided by operating activities for the year ended December 31, 2020, was $31.1 million, a decrease of $18.2 million compared with the year ended December 31, 2019. The decrease was mainly driven by the litigation settlement paid in May 2020 and decreased potash net realized sales price.
Investing Activities
Total cash used in investing activities decreased $65.5 million in 2020, compared to 2019, primarily related to the $56.2 million Intrepid South asset acquisition in May 2019. Other additions to property, plant, equipment, and mineral properties decreased $8.1 million in 2020, compared to 2019. Proceeds from sale increased $4.7 million due to a strategic sale of land on our Intrepid South property.
Financing Activities
Total cash flows used in financing activities increased $35.8 million in 2020, as compared to 2019. In April 2020, we paid $20.0 million to retire our Series A Senior Notes at maturity. In July 2020, we paid $16.9 million, including the make-whole payment, to retire our Series C Senior Notes. During 2020, we borrowed an additional $10.0 million under our credit facility and received $10.0 million under the CARES Act Paycheck Protection Program. During 2019, we made net borrowings under our credit facility of $19.8 million.
We routinely review the creditworthiness of our customers and make decisions to limit our exposure whenever possible. During 2020, we saw an increase in delinquencies from our smaller customers that purchase water and brine at our truck stations. These smaller customers mainly serve oil and gas exploration companies and the COVID-19 pandemic has dramatically decreased oil and gas drilling activity. We have not seen an increase in delinquencies from our larger water customers, who take delivery of water via pipeline or directly from our storage ponds or points of diversion, and are generally well-capitalized. We have also not seen an increase in the account receivable delinquencies from our potash and Trio ® customers. While we continue to monitor the creditworthiness of our customers and have made adjustments to reflect the increased uncertainty in specific markets, we don't believe this will have a material effect on our business.
Senior Notes
Senior Notes —As of December 31, 2020, we had outstanding $15.0 million of Series B Senior Notes due on April 14, 2023.
In April 2020, we repaid our Series A Senior Notes ($20 million) at maturity. In July 2020, we repaid our Series C Senior Notes. As part of the repayment, we repaid the full $15 million of principal along with a reduced make-whole payment of $1.9 million.
The agreement governing the Series B Senior Notes contains certain financial covenants including those discussed below:
• We are required to maintain a minimum fixed charge coverage ratio of 1.30 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our fixed charge coverage ratio as of December 31, 2020, was 2.9 to 1.0, therefore we were in compliance with this covenant.
• We are allowed a maximum leverage ratio of 3.5 to 1.0 as of the last day of each quarter, measured based on the previous four quarters. Our leverage ratio as of December 31, 2020, was 2.3 to 1.0, therefore we were in compliance with this covenant.
Fixed charge coverage ratio and leverage ratio are calculated in accordance with the agreement governing the Senior B Notes, each of which includes earnings before interest, taxes, depreciation and amortization ("EBITDA") as a component. Our EBITDA calculation for the twelve months ended December 31, 2020 has decreased from historical levels due to the economic contraction related to the COVID-19 pandemic, although we saw significant improvement in our fourth quarter 2020 EBITDA calculation when compared to the second and third quarters of 2020, as oil and gas activity improved and fertilizer demand and pricing showed considerable strength after the 2020 summer-fill program.
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For the year ended December 31, 2020, the interest rates on the Series B Senior Notes was 4.63%. This rate represents the lowest interest rates available under the Series B Senior Notes. The interest rate may adjust upward if we do not continue to meet certain financial covenants.
We have granted to the collateral agent for the noteholders a first lien on substantially all of our non-current assets and a second lien on substantially all of our current assets. We are required to offer to prepay the Series B Senior Notes with proceeds of dispositions of certain specified property and with the proceeds of certain equity issuances, as set forth in the agreement. The obligations under the Series B Senior Notes are unconditionally guaranteed by several of our subsidiaries.
We were in compliance with the applicable covenants under the agreement governing the Series B Senior Notes as of December 31, 2020.
Credit Facility
We maintain a secured revolving credit facility with Bank of Montreal. In August 2019, we amended and restated the credit facility to change it from an asset-backed facility to a cash-flow facility, to increase the amount available under the facility from $50 million to $75 million plus an additional $75 million accordion feature, and to extend the maturity date to August 1, 2024. The revolving credit facility also provides for a $7.5 million sublimit for the issuance of letters of credit. As of December 31, 2020 borrowings under the credit facility bore interest at LIBOR plus an applicable margin of 1.25% to 2.00% per annum, based on our leverage ratio. We have granted to Bank of Montreal a first lien on substantially all of our current assets and a second lien on substantially all of our non-current assets. The obligations under the credit facility are unconditionally guaranteed by several of our subsidiaries.
We occasionally borrow and repay amounts under the facility for near-term working capital needs or other purposes and may do so in the future. For the years ended December 31, 2020, and 2019, we borrowed $10.0 million and $30.3 million, respectively, and repaid $0.0 million and $10.5 million, respectively, under the facility. As of December 31, 2020, we had $29.8 million of borrowings outstanding and $1.0 million in an outstanding letter of credit under the facility. As of December 31, 2019, we had $19.8 million of borrowings outstanding and $1.0 million in an outstanding letter of credit under the facility. We have $20.4 million available under the facility as of December 31, 2020.
Our EBITDA calculation for the twelve months ended December 31, 2020 has decreased from historical levels due to the economic contraction related to the COVID-19 pandemic, although we saw significant improvement in our fourth quarter 2020 EBITDA calculation when compared to the second and third quarters of 2020, as oil and gas activity improved and fertilizer demand and pricing showed considerable strength after the 2020 summer-fill program.
We were in compliance with the applicable covenants under the facility as of December 31, 2020.
PPP Loan
In April 2020, received a $10 million loan under the CARES Act Paycheck Protection Program (the "PPP"). The loan matures on April 18, 2022 and bears interest at a rate of 1% per annum. We were required to begin monthly payments of principal and interest in the amount of $0.6 million in November 2020, but due to extensions of the program and delays in the forgiveness application process, we do not expect to make any payments on the loan until a decision is made on our forgiveness application. We may prepay the loan at any time prior to maturity with no prepayment penalties. We used the funds exclusively for allowed payroll, benefits and other expenses and expect the majority of the loan, if not all, will be forgiven.
During the second quarter of 2020, the program was amended to allow borrowers to choose either an eight-week or 24-week period to use the funds. We elected to use the 24-week period, which ended in October 2020. The amount eligible for forgiveness is based on the amount of loan proceeds used by us (during the 24-week period after the lender makes the first disbursement of loan proceeds) for the payment of certain covered costs, including payroll costs (including benefits), subject to certain limitations and reductions in accordance with the CARES Act. We submitted our application for forgiveness of the full $10 million loan in November 2020. No assurance can be given that we will obtain forgiveness of the loan in whole or in part. In addition, as a borrower that received over $2.0 million, we expect to be subject to an audit to review our eligibility under the PPP. We submitted a response to a questionnaire regarding the necessity of our PPP loan in January 2021. The timing and scope of the audit or any additional review remains unclear and as a result we are not able to forecast when we can expect a decision on loan forgiveness. We do not expect the audit will impact our eligibility for forgiveness under the PPP. The loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the lender or breaching the terms of the loan documents.
Capital Investments
During 2020, we paid cash of $16.4 million to acquire property, plant, equipment, mineral properties and intangible assets. Due to the economic uncertainty as a result of the COVID-19 pandemic, particularly in oil and gas markets near our operations, we limited our 2020 capital program to mostly sustaining capital projects.
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We expect to make capital investments in 2021 of $25 million to $35 million, although the trajectory of the COVID-19 pandemic and the recent volatility in oil and gas markets make this number difficult to estimate. We anticipate spending approximately $12 million to $15 million on sustaining capital projects in 2021 with the remainder of our estimated spending on opportunity projects. We have significant discretion over our opportunity capital investments in 2021 and we may adjust our investment plans as our expectations for 2021, particularly affected by the COVID-19 pandemic, change. We anticipate our 2021 operating plans and capital programs will be funded out of operating cash flows and existing cash. We may also use our revolving credit facility, to the extent available, to fund capital investments.
In the second quarter of 2020, we invested $3.5 million for an 11% equity stake in W.D. Von Gonten Laboratories ("WDVGL"). WDVGL is an industry leader in drilling and completion chemistry and a strong supporter of the use of potassium chloride in oil and gas drilling and completion activity.
Contractual Obligations
As of December 31, 2020, we had contractual obligations totaling $64.6 million on an undiscounted basis, as indicated below. Contractual commitments shown are for the full calendar year indicated unless otherwise indicated.
Payments Due By Period
Total 2021 2022 2023 2024 2025 More Than 5 Years
(In thousands)
Long-term debt $ 15,000 $ — $ — $ 15,000 $ — $ — $ —
Variable rate interest long-term debt 1,735 694 694 347 — — —
Operating lease obligations 4,376 2,168 1,515 402 190 101 —
Finance lease (incl interest) 1,265 1,265 — — — — —
Purchase commitments 3,867 3,867 — — — — —
Asset retirement obligation 23,872 — 5,347 1,400 1,400 — 15,725
Minimum Mineral Lease Payments 14,510 580 580 580 580 580 11,610
Total $ 64,625 $ 8,574 $ 8,136 $ 17,729 $ 2,170 $ 681 $ 27,335
1 See "Senior Notes" section above for more detail on the variable rate interest associated with our long-term debt. Amounts in the table above represent interest calculated at rates in effect as of December 31, 2020.
2 Amounts include all operating lease payments, inclusive of sales tax, for leases for office space, railcars, and other equipment.
3 Purchase commitments include the approximate amount due to vendors for non-cancelable purchase commitments for materials and services.
4 We are obligated to reclaim and remediate lands that our operations have disturbed, but, because of the long-term nature of our reserves and facilities, we estimate that the majority of those expenditures will not be required until after 2025. Although our reclamation obligation activities are not required to begin until after we cease operations, we anticipate certain activities to occur prior to then related to reclamation of facilities that have been replaced with newly constructed assets, as well as certain shaft closure activities for shafts that are no longer in use. Commitments shown are in today's dollars and are undiscounted.
5 Estimated annual minimum royalties due under mineral leases, assuming approximately a 25-year life, consistent with estimated useful lives of plant assets.
Off-Balance Sheet Arrangements
As of December 31, 2020, we had no material off-balance sheet arrangements aside from bonding obligations described in the Notes to the Consolidated Financial Statements in "Item 8. Financial Statements and Supplemental Data" of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements. Actual results could differ from our estimates and assumptions, and these differences could result in material changes to our financial statements.
Our significant accounting policies are further described in Note 2 to our audited consolidated financial statements included in "Item 8. Financial Statements and Supplemental Data" of this Annual Report on Form 10-K. We believe the following accounting policies include a higher degree of subjective and complex judgments in their application and are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.
Proven and Probable Reserves
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We prepare our proven and probable reserve estimates in accordance with SEC requirements. We have prepared these reserve life estimates and they have been reviewed and independently determined by mine consultants. We express tons of potash and langbeinite in the proven and probable reserves in terms of expected finished tons of product to be realized, net of estimated losses. Market price fluctuations of potash or Trio ® , as well as increased production costs or reduced recovery rates, could render proven and probable reserves containing relatively lower grades of mineralization uneconomic to exploit and might result in a reduction of reserves.
We deplete our mineral properties using the units-of production method. Under this method, we determine a depletion rate for one ton of finished product by dividing the total mineral properties net balance by the number expected finished tons of product, which is obtained from the proven and probable reserve estimates. Depletion expense is calculated by multiplying the number of tons of product produced by the depletion rate per ton.
Indefinite-lived Intangible Assets
Water rights are accounted for as indefinite-lived intangible assets and are not amortized. We test indefinite-lived intangible assets for impairment at least annually on October 1, and more frequently if circumstances require. We use a qualitative assessment to determine whether it is more likely than not that the fair value of the intangible is less than its carrying value. If our qualitative assessment indicates it is more likely than not that the fair value of the intangible asset is less than its carrying value, we estimate the fair value of the intangible asset and record an impairment loss based on the excess of the carrying amount of the intangible asset over its estimated fair value. Fair value is estimated using quoted market prices, if available. If quoted market prices are not available, the estimated fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. Changes in significant assumptions underlying fair value estimates may have a material effect on our financial position and results of operations.
Asset Retirement Obligations
All of our mining properties involve certain reclamation liabilities as required by the states in which they operate or by the BLM. Reclamation costs are initially recorded as a liability associated with the asset to be reclaimed or abandoned, based on applicable inflation assumptions and discount rates. The accretion of this discounted liability is recognized as expense over the life of the related assets, and the liability is periodically adjusted to reflect changes in the estimates of the time or amount of the reclamation and abandonment costs. These asset retirement obligations are reviewed and updated at least annually with any changes in balances recorded as adjustments to the related assets and liabilities. The estimates of amounts to be spent are subject to considerable uncertainty and long timeframes. Changes in these estimates could have a material impact on our results of operations and financial position.
Income Taxes
We are a subchapter C corporation and therefore are subject to U.S. federal and state income taxes. We recognize income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. We record a valuation allowance if it is deemed more likely than not that our deferred income tax assets will not be realized in full; such determinations are subject to ongoing assessment.
Non-GAAP Financial Measure
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, from time to time we use "average net realized sales price per ton," which is a non-GAAP financial measure. This non-GAAP financial measure should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. In addition, because the presentation of this non-GAAP financial measure varies among companies, our presentation of this non-GAAP financial measure may not be comparable to similarly titled measures used by other companies.
We believe average net realized sales price per ton provides useful information to investors for analysis of our business. We use this non-GAAP financial measure as one of our tools in comparing period-over-period performance on a consistent basis and when planning, forecasting, and analyzing future periods. We believe this non-GAAP financial measure is used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the potash mining industry. Many investors use the published research reports of these professional research analysts and others in making investment decisions.
We calculate average net realized sales price per ton for each of potash and Trio ® . Average net realized sales price per ton for potash is calculated as potash segment sales less potash segment byproduct sales and potash freight costs and then
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dividing that difference by the number of tons of potash sold in the period. Likewise, average net realized sales price per ton for Trio ® is calculated as Trio ® segment sales less Trio ® segment byproduct sales and Trio ® freight costs and then dividing that difference by Trio ® tons sold. We consider average net realized sales price per ton to be useful, and believe it to be useful for investors, because it shows our potash and Trio ® average per-ton pricing without the effect of certain transportation and delivery costs. When we arrange transportation and delivery for a customer, we include in revenue and in freight costs the costs associated with transportation and delivery. However, some of our customers arrange for and pay their own transportation and delivery costs, in which case these costs are not included in our revenue and freight costs. We use average net realized sales price per ton as a key performance indicator to analyze potash and Trio ® sales and price trends.
Below is a reconciliation of average net realized sales price per ton for potash and Trio ® and to the most directly comparable GAAP measure for the years ended December 31, 2020, 2019, and 2018 (in thousands, except per ton amounts):
Potash Segment
2020 2019 2018
Total Segment Sales $ 108,060 $ 124,648 $ 124,058
Less: Segment byproduct sales 15,560 21,245 16,586
Potash freight costs 13,270 12,936 14,194
Subtotal $ 79,230 $ 90,467 $ 93,278
Divided by:
Potash tons sold (in thousands) 317 319 364
Average net realized sales price per ton $ 250 $ 284 $ 256
Trio ® Segment
2020 2019 2018
Total Segment Sales
$ 70,287 $ 69,551 $ 66,808
Less: Segment byproduct sales 4,943 5,252 2,669
Trio ® freight costs
20,416 20,514 19,367
Subtotal
$ 44,928 $ 43,785 $ 44,772
Divided by:
Trio ® Tons sold (in thousands)
230 225 225
Average net realized sales price per ton $ 195 $ 195 $ 199