Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Management’s Discussion and Analysis of Financial Condition and Results of Operations listed in the Financial Table of Contents included in this report is incorporated herein by reference.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We have included a discussion about market risks under “Market Risk” in the Management’s Analysis that is included in this report in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. This information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements, the Notes to Consolidated Financial Statements, the report of our Independent Registered Public Accounting Firm, and the information under “Quarterly Results” listed in the Financial Table of Contents included in this report are incorporated herein by reference. All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable, and therefore, have been omitted.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
Item 9A. Controls and Procedures.
(a)Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 (the “Exchange Act”) is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosures. Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K. Our principal executive officer and our principal financial officer have concluded, based on such evaluations, that our disclosure controls and procedures were effective for the purpose for which they were designed as of the end of such period.
(b)Management’s Report on Internal Control Over Financial Reporting
We have included management’s report on internal control over financial reporting under “Management’s Report on Internal Control Over Financial Reporting” listed in the Financial Table of Contents included in this report.
We have included our registered public accounting firm’s attestation report on our internal controls over financial reporting under “Report of Independent Registered Public Accounting Firm” listed in the Financial Table of Contents included in this report.
This information is incorporated herein by reference.
(c)Changes in Internal Control Over Financial Reporting
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated any change in internal control over financial reporting that occurred during the quarter ended December 31, 2020 in accordance with the requirements of Rule 13a-15(d) promulgated by the SEC under the Exchange Act. There were no changes in internal control over financial reporting identified in connection with management’s evaluation that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
The information contained under the headings “Proposal No. 1—Election of Directors,” “Corporate Governance—Committees of the Board of Directors,” and “ Beneficial Ownership of Securities” included in our definitive proxy statement for our 2021 annual meeting of stockholders and the information contained under “Information About our Executive Officers” in Part I, Item 1, “Business,” in this report is incorporated herein by reference.
We have a Code of Business Conduct and Ethics within the meaning of Item 406 of Regulation S-K adopted by the SEC under the Exchange Act that applies to our principal executive officer, principal financial officer and principal accounting officer. Our Code of Business Conduct and Ethics is available on Mosaic’s website (www.mosaicco.com), and we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of our code of ethics by posting such information on our website. The information contained on Mosaic’s website is not being incorporated herein.
Item 11. Executive Compensation.
The information under the headings “Director Compensation” and “Executive Compensation” included in our definitive proxy statement for our 2021 annual meeting of stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information under the headings “Beneficial Ownership of Securities” and “Certain Relationships and Related Transactions” included in our definitive proxy statement for our 2021 annual meeting of stockholders is incorporated herein by reference. The table containing information related to equity compensation plans, set forth in Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” of this report is also incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information under the headings “Corporate Governance—Board Independence,” “Corporate Governance—Committees of the Board of Directors,” “Corporate Governance—Other Policies Relating to the Board of Directors—Policy and Procedures Regarding Transactions with Related Persons,” and “Certain Relationships and Related Transactions” included in our definitive proxy statement for our 2021 annual meeting of stockholders is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information included under “Audit Committee Report and Payment of Fees to Independent Registered Public Accounting Firm—Fees Paid to Independent Registered Public Accounting Firm” and “Audit Committee Report and Payment of Fees to Independent Registered Public Accounting Firm—Pre-approval of Independent Registered Public Accounting Firm Services” included in our definitive proxy statement for our 2021 annual meeting of stockholders is incorporated herein by reference.
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PART IV.
Item 15. Exhibits and Financial Statement Schedules.
(3) Reference is made to the Exhibit Index in (b) below.
(b) Exhibits
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10.iii.b(3) Description of Mosaic Management Incentive Program X
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51
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52
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21 Subsidiaries of the Registrant X
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24 Power of Attorney X
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) X
31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) X
95 Mine Safety Disclosures X
101 Interactive Data Files X
*********************************************
(3) Denotes management contract or compensatory plan.
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Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE MOSAIC COMPANY
(Registrant)
/s/ James “Joc” C. O’Rourke
James “Joc” C. O’Rourke
Chief Executive Officer and President
Date: February 22, 2021
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Name Title Date
James “Joc” C. O’Rourke
Clint C. Freeland
* Chairman of the Board of Directors February 22, 2021
Gregory L. Ebel
Cheryl K. Beebe
Oscar P. Bernardes
Nancy E. Cooper
Timothy S. Gitzel
Denise C. Johnson
Emery N Koenig
Luciano Siani Pires
David T. Seaton
Steven M. Seibert
Gretchen H. Watkins
Kelvin R. Westbrook
*By:
/s/ Mark J. Isaacson
Mark J. IsaacsonAttorney-in-Fact
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Financial Table of Contents
Page
Introduction F-2
Key Factors that can Affect Results of Operations and Financial Condition F-2
Results of Operations F-4
Overview F-5
Phosphates F-9
Potash F-11
Mosaic Fertilizantes F-12
Corporate, Elimination and Other F-13
Other Income Statement Items F-14
Impairment, Restructuring and Other F-14
Selling, General and Administrative Expenses F-14
Other Operating Expenses F-14
Interest Expense, Net F-14
Foreign Currency Transaction Gain (Loss) F-14
Other Income/Expense F-15
Equity in Net (Loss) Earnings of Nonconsolidated Companies F-15
Provision for (Benefit from) Income Taxes F-15
Critical Accounting Estimates F-15
Liquidity and Capital Resources F-17
Off-Balance Sheet Arrangements and Obligations F-19
Market Risk F-22
Environmental, Health, Safety and Security Matters F-25
Contingencies F-32
Related Parties F-32
Recently Issued Accounting Guidance F-32
Forward-Looking Statements F-32
Reports of Independent Registered Public Accounting Firm F-35
Consolidated Statements of Earnings (Loss) F-39
Consolidated Statements of Comprehensive Income (Loss) F-40
Consolidated Balance Sheets F-41
Consolidated Statements of Cash Flows F-42
Consolidated Statements of Equity F-44
Notes to Consolidated Financial Statements F-45
Quarterly Results (Unaudited) F-92
Five Year Comparison F-93
Schedule II - Valuation and Qualifying Accounts F-95
Management’s Report on Internal Control Over Financial Reporting F-96
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The Mosaic Company (before or after the Cargill Transaction, as defined below, “Mosaic”, and with its consolidated subsidiaries, “we”, “us”, “our”, or the “Company”) is the parent company of the business that was formed through the business combination (“Combination”) of IMC Global Inc. and the Cargill Crop Nutrition fertilizer businesses of Cargill, Incorporated and its subsidiaries (collectively, “Cargill”) on October 22, 2004. In May 2011, Cargill divested its approximately 64% equity interest in us in a split-off to its stockholders and a debt exchange with certain Cargill debt holders.
We produce and market concentrated phosphate and potash crop nutrients. We conduct our business through wholly and majority owned subsidiaries as well as businesses in which we own less than a majority or a non-controlling interest, including consolidated variable interest entities and investments accounted for by the equity method.
On January 8, 2018, we completed our acquisition (the “Acquisition”) of Vale Fertilizantes S.A. (now known as Mosaic Fertilizantes P&K S.A. or the “Acquired Business”). Upon completion of the Acquisition, we became the leading fertilizer producer and distributor in Brazil.
We are organized into the following business segments:
•Our Phosphates business segment owns and operates mines and production facilities in Florida, which produce concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and processing plants in Louisiana, which produce concentrated phosphate crop nutrients for sale domestically and internationally. As part of the Acquisition, we acquired an additional 40% economic interest in the Miski Mayo Phosphate Mine in Peru, which increased our aggregate interest to 75%. These results are consolidated in the Phosphates segment. The Phosphates segment also includes our 25% interest in the Ma'aden Wa'ad Al Shamal Phosphate Company (“MWSPC”), a joint venture to develop, own and operate integrated phosphate production facilities in the Kingdom of Saudi Arabia. We market approximately 25% of the MWSPC phosphate production. We recognize our equity in the net earnings or losses relating to MWSPC on a one-quarter reporting lag in our Consolidated Statements of Earnings (Loss).
•Our Potash business segment owns and operates potash mines and production facilities in Canada and the U.S. which produce potash-based crop nutrients, animal feed ingredients and industrial products. Potash sales include domestic and international sales. We are a member of Canpotex, Limited (“Canpotex”), an export association of Canadian potash producers through which we sell our Canadian potash outside the U.S. and Canada.
•Our Mosaic Fertilizantes business segment consists of the assets in Brazil that we acquired in the Acquisition, which include five phosphate rock mines, four phosphate chemical plants and a potash mine in Brazil. The segment also includes our legacy distribution business in South America which, consists of sales offices, crop nutrient blending and bagging facilities, port terminals and warehouses in Brazil and Paraguay. We also have a majority interest in Fospar S.A., which owns and operates a single superphosphate granulation plant and a deep-water crop nutrition port and throughput warehouse terminal facility in Brazil.
Intersegment eliminations, unrealized mark-to-market gains/losses on derivatives, debt expenses, Streamsong Resort® results of operations, and the results of the China and India distribution businesses are included within Corporate, Eliminations and Other. As of January 1, 2019, certain selling, general and administrative costs that are not controllable by the business segments are no longer allocated to segments and are included within Corporate, Eliminations and Other. Our operating results for the year ended 2018 were recast to reflect this change. See Note 26 of the Consolidated Financial Statements in this report for segment results.
Key Factors that can Affect Results of Operations and Financial Condition
Our primary products, phosphate and potash crop nutrients, are, to a large extent, global commodities that are also available from a number of domestic and international competitors, and are sold by negotiated contracts or by reference to published market prices. The markets for our products are highly competitive, and the most important competitive factor for our products is delivered price. Business and economic conditions and governmental policies affecting the agricultural industry and customer sentiment are the most significant factors affecting worldwide demand for crop nutrients. The profitability of
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our businesses is heavily influenced by worldwide supply and demand for our products, which affects our sales prices and volumes. Our costs per tonne to produce our products are also heavily influenced by fixed costs associated with owning and operating our major facilities, significant raw material costs in our Phosphates and Mosaic Fertilizantes businesses, and fluctuations in currency exchange rates.
Our products are generally sold based on the market prices prevailing at the time the sales contract is signed or through contracts which are priced at the time of shipment based on a formula. Additionally, in certain circumstances the final price of our products is determined after shipment based on the current market at the time the price is agreed to with the customer. Forward sales programs at fixed prices increase the lag between prevailing market prices and our average realized selling prices. The mix and parameters of these sales programs vary over time based on our marketing strategy, which considers factors that include, among others, optimizing our production and operating efficiency within warehouse limitations, as well as customer requirements. The use of forward sales programs and the level of customer prepayments may vary from period to period due to changing supply and demand environments, seasonality, and market sentiments.
World prices for the key raw material inputs for concentrated phosphate products, including ammonia, sulfur and phosphate rock, have an effect on industry-wide phosphate prices and production costs. The primary feedstock for producing ammonia is natural gas, and costs for ammonia are generally highly dependent on the supply and demand balance for ammonia. In North America, we purchase approximately one-third of our ammonia from various suppliers in the spot market with the remaining two-thirds either purchased through a long-term ammonia supply agreement (the “CF Ammonia Supply Agreement”) with an affiliate of CF Industries, Inc. (“CF”) or produced internally at our Faustina, Louisiana location. The CF Ammonia Supply Agreement provides for U.S. natural gas-based pricing that is intended to lessen pricing volatility. We entered into the agreement in late 2013, and we began purchasing under it in the second half of 2017. If the price of natural gas rises or the market price for ammonia falls outside of the range anticipated at execution of the agreement, we may not realize a cost benefit from the natural gas-based pricing over the term of the agreement, or the cost of our ammonia under the agreement could be a competitive disadvantage. At times, we have paid considerably more for ammonia under the agreement than what we would have paid had we purchased it in the spot market. However, we continue to expect the agreement will provide us a competitive advantage over its term, including by providing a reliable long-term ammonia supply. In Brazil, we purchase all of our ammonia from a single supplier.
Sulfur is a global commodity that is primarily produced as a by-product of oil refining. The market price is based primarily on the supply and demand balance for sulfur. There is currently tightness in the sulfur market which we are monitoring. At this time, we do not expect this to have a material impact on our business. We believe our current and future investments in sulfur transformation and transportation assets will enhance our competitive advantage. We produce and procure most of our phosphate rock requirements through either wholly or partly owned mines. In addition to producing phosphate rock, Mosaic Fertilizantes purchases phosphates, potash and nitrogen products which are either used to produce blended crop nutrients (“Blends”) or for resale.
Our per tonne selling prices for potash are affected by shifts in the product mix, geography and customer mix. Our Potash business is significantly affected by Canadian resource taxes and royalties that we pay to the Province of Saskatchewan in order for us to mine and sell our potash products. In addition, cost of goods sold is affected by a number of factors, including: fluctuations in the Canadian dollar; the level of periodic inflationary pressures on resources in western Canada, where we produce most of our potash; natural gas costs for operating our potash solution mine at Belle Plaine, Saskatchewan; and the operating costs we incur to manage salt saturated brine inflows at our potash mine at Esterhazy, Saskatchewan, which have been decreasing as we ramp up the K3 shaft. Production mining activities at the K3 shaft at our Esterhazy mine began in December 2018 with six four-rotor miners being commissioned and operational in 2020. K3 is expected to reach full capacity in 2022. As production continues to ramp up at the K3 shaft, this will provide us the opportunity to eliminate future brine inflow management costs.
Our results of operations are also affected by changes in currency exchange rates due to our international footprint. The most significant currency impacts are generally from the Canadian dollar and the Brazilian real.
A discussion of these and other factors that affected our results of operations and financial condition for the periods covered by this Management’s Discussion and Analysis of Financial Condition and Results of Operations is set forth in further detail below. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with the narrative description of our business in Item 1, and the risk factors described in Item 1A, of Part I of this annual report on Form 10-K, and our Consolidated Financial Statements, accompanying notes and other information listed in the accompanying Financial Table of Contents.
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This section of this Form 10-K discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's annual report on Form 10-K for the year ended December 31, 2019 and are incorporated by reference herein.
Throughout the discussion below, we measure units of production, sales and raw materials in metric tonnes which are the equivalent of 2,205 pounds, unless we specifically state that we mean short or long ton(s), which are the equivalent of 2,000 pounds and 2,240 pounds, respectively. In addition, we measure natural gas, a raw material used in the production of our products, in MMBTU, which stands for one million British Thermal Units (“BTU”). One BTU is equivalent to 1.06 Joules.
In the following table, there are certain percentages that are not considered to be meaningful and are represented by “NM”.
Results of Operations
The following table shows the results of operations for the years ended December 31, 2020, 2019, and 2018:
Diluted weighted average number of shares outstanding 381.3 383.8 386.4
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Overview of the Years ended December 31, 2020 and 2019
Net earnings (loss) attributable to Mosaic for the year ended December 31, 2020 was $666.1 million, or $1.75 per diluted share, compared to $(1.1) billion, or $(2.78) per diluted share for 2019.
In 2020, net earnings were positively impacted by $341 million, net of tax, or $0.88 per diluted share, related to notable items of which the significant items as follows (noted on a pre-tax basis with the exception of discrete income tax):
•Discrete income tax benefit of $609 million, or $1.60 per diluted share, which included the reversal of a tax valuation reserve established with the Acquisition
•Asset retirement obligation costs of $134 million, or $(0.21) per diluted share, related to revisions in the estimated costs of our asset retirement obligations
•Depreciation expense of $79 million, or $(0.12) per diluted share, related to the acceleration of the closure of our K1 and K2 mine shafts at our Esterhazy, Saskatchewan mine as we ramp up K3
•Other operating expenses of $69 million, or $(0.14) per diluted share, related to maintaining closed and indefinitely idled facilities
•Foreign currency transaction loss of $64 million, or ($0.10) per diluted share
•A change in the effective annual tax rate, creating a negative impact of $41 million, or ($0.11) per diluted share
•Other operating expenses of $35 million, or $(0.05) per diluted share related to an increase in an environmental remediation reserve at our New Wales, FL facility
•Unrealized gain on derivatives of $22 million, or $0.03 per diluted share
•Other non-operating income of $14 million, or $0.02 per diluted share, related to a realized gain on RCRA trust securities
•Idle plant costs of $13 million, or $(0.02) per diluted share, related to the government-mandated shutdown on March 16, 2020, of our Miski Mayo phosphate rock mine in Peru due to the Covid-19 outbreak, which reopened on May 13, 2020
•Other operating expenses of $20 million, or $(0.03) per share, related to an increase in reserves for legal contingencies of the Acquired Business, integration costs of our North American business operations and a write-down of assets in our Mosaic Fertilizantes segment
•Other operating income of $7 million, or $0.01 per diluted share, related to a legal settlement
Net earnings (loss) for 2019 included:
•Goodwill impairment write-off of $589 million, or $(1.34) per diluted share. There was a discrete income tax benefit of $80 million associated with this
•Expenses of $530 million, or $(0.71) per diluted share related to the indefinite idling of our Colonsay, Saskatchewan mine. There was a discrete income tax benefit of $263 million related to this action
•Plant City closing costs of $341 million, or $(0.67) per diluted share. There was a discrete income tax benefit of $81 million associated with this action
•Discrete income tax expense of $67 million, or $(0.18) per diluted share
•Unrealized gains on derivatives of $40 million, or $0.06 per diluted share
•Depreciation expense of $34 million, or $(0.04) per diluted share, related to the acceleration of the closure of our K1 and K2 mine shafts at our Esterhazy, Saskatchewan mine as we ramp up K3
•Asset retirement obligation costs of $32 million, or $(0.06) per diluted share, related to revisions in the estimated costs of our asset retirement obligations
•Other operating expenses of $31 million, or $(0.03) per diluted share, related to an increase in reserves for legal contingencies of the Acquired Business
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•Expenses of $23 million, or $(0.04) per diluted share, related to repairing the lateral movement at the Gypstack at our Uncle Sam facility in Louisiana
•Other operating expenses of $21 million, or $(0.04) per diluted share, related to the Acquisition and fixed asset write-offs, partially offset by income of $12 million, or $0.03 per diluted share, related to the reversal of our previously estimated and accrued earn-out obligation to Vale
•Foreign currency transaction gains of $21 million, or $0.02 per diluted share
•Expense of $14 million, or $(0.01) per share, related to the write-down of phosphate finished goods inventory to market value
•Non-operating income of $13 million related to a realized gain on RCRA trust securities, or $0.02 per diluted share
•Other operating income of $8 million, or $0.02 per diluted share, related to insurance proceeds for the 2017 flooding at the Miski Mayo mine
Additional significant factors that affected our results of operations and financial condition in 2020 and 2019 are listed below. These factors are discussed in more detail in the following sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Year ended December 31, 2020
Phosphates operating results for the year ended December 31, 2020 were favorably impacted by an increase in sales volumes compared to the prior year. Increased sales volumes were driven by strong spring and fall application seasons, as well as decreased competitor shipments into North America. Competitor shipments were impacted by anticipation of potential import duties against producers in Morocco and Russia which may result from the countervailing duty investigations, instituted by us in the United States, into imports of phosphate fertilizers. The benefit of increased sales volumes was partially offset by a decrease in phosphates average selling prices in the current year compared to the prior year. Although selling prices have risen from the low levels seen at the end of 2019, the average selling price is still below that of the prior year average. Prices have risen throughout 2020 due to tightness in global supply and demand. The increase in demand has been partially mitigated by suppliers, including Mosaic, increasing production in the second half of 2020 and carrying into the first quarter of 2021. Operating earnings in the current year also benefited from lower raw material costs, primarily sulfur and ammonia, which are driven by global supply and demand.
Potash operating results were unfavorably impacted by decreases in the average selling price in 2020 compared to the prior year, partially offset by higher sales volumes. Selling prices began declining in the first half of 2019 due to adverse weather conditions in North America. They continued to decline in the first half of 2020, due to lower export prices, as China and India contract prices set a floor for the market, and to new suppliers entering the marketplace. Prices began to strengthen in North America and Brazil in the fourth quarter of 2020, due to increased demand and tight supply; however, they are still below levels seen in the prior year. Operating results were favorably impacted by higher potash sales volumes in 2020 compared to 2019. Sales volumes were higher than the prior year as prior year demand was low due to adequate inventories, delayed contract settlements, and adverse weather conditions throughout North America.
Mosaic Fertilizantes operating results in 2020 were favorably impacted by increased sales volumes. Sales volumes increased compared to the prior year, due to strong market demand and efforts to grow our market share in the current year. Operating results were also favorably impacted by lower raw material costs in the current year compared to the prior year, driven by global supply and demand and the impact of foreign currency changes. The current year was also favorably impacted by lower production costs as the prior year was impacted by new tailings dam legislation, which resulted in higher idle and turnaround costs. Lower average selling prices, driven by international pricing trends, unfavorably impacted operating earnings in the current year compared to the prior year.
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Other highlights in 2020:
•We continue to transform our cost structure. Mosaic Fertilizantes exceeded the previously announced $50 million of transformational savings targeted for 2020. The Esterhazy K3 mine development project continues to progress, with the sixth automated miner commissioned during the year. We produced 1.3 million tonnes of MOP from the Esterhazy K3 mine in 2020. After achieving five of seven 2021 company cost targets in the second quarter of 2020, we announced new targets for 2023 in September.
•During the second quarter, MWSPCrefinanced its project level debt. The refinancing removes recourse to Mosaic by all lenders to MWSPC, and defers principal paydown until June 30, 2022, enhancing expected free cash flow. Mosaic's contractual commitment to make future cash contributions to MWSPC has also been eliminated.
•On June 26, 2020, we filed petitions with the U.S. Department of Commerce (“DOC”) and the U.S. International Trade Commission (“ITC”) that requested the initiation of countervailing duty investigations into imports of phosphate fertilizers from Morocco and Russia. The purpose of the petitions is to remedy the distortions that we believe foreign subsidies have caused or are causing in the U.S. market for phosphate fertilizers, and thereby restore fair competition. On August 7, 2020, the ITC preliminarily determined that there is a reasonable indication that the U.S. phosphate industry is materially injured by reason of imports of phosphate fertilizers that are allegedly subsidized by the governments of Morocco and Russia. On November 23, 2020, the DOC preliminarily determined that counteravailable subsidies were being provided by those governments and on February 9, 2021 the DOC determined final counteravailable subsidy rates. A final determination by the ITC as to whether these subsidized imports has harmed or threatens to harm the U.S. phosphate industry is expected in March 2021.
•In July, 2020, we extended the term and increased the limit of our revolving credit facility. As of December 31, 2020, we held a liquidity position in excess of $3.3 billion, including cash and available committed and uncommitted lines of credit, of $574 million, $2.2 billion and $600 million , respectively.
•In response to Covid-19, we implemented measures in 2020 that were intended to provide for the immediate health and safety of our employees, including working remotely and alternating work schedules, in order to minimize the number of employees at a single location. In an effort to contain the spread of the virus, many government authorities, at locations where we do business, issued “social distancing or shelter-in-place” orders. In accordance with such orders, operations at our Miski Mayo mine in Peru were closed on March 16, 2020 and resumed on May 13, 2020. Our Patrocino operations in Brazil were also closed for ten days, restarting operations on April 7, 2020. We also delayed planned maintenance at certain locations until the fourth quarter of 2020 which resulted in increased costs. These events resulted in minimal disruptions to our operations. Our response to the pandemic was effective throughout the year in limiting the impacts on our operating facilities, employees, supply chain and logistics.
Year ended December 31, 2019
Phosphates operating results for the year ended December 31, 2019 were unfavorably impacted by a decrease in phosphates selling prices compared to 2018. Phosphate prices began to decrease in the fourth quarter of 2018 due to the limited fall application season in North America and increased import activity that continued through the first half of 2019. Selling prices remained low throughout 2019 due to reduced demand as a result of the adverse weather conditions in North America throughout 2019, which significantly delayed planting and harvest as well as increased supply due to new capacity coming online. These factors also unfavorably impacted finished product sales volumes in 2019. Operating results were also negatively impacted by higher costs related to the temporary idling of the South Pasture, Florida mine in August 2018 and the Louisiana facility in the second half of 2019, operational challenges as we transitioned to new mining areas, and costs related to the permanent closure of our Plant City, Florida phosphate facility, announced in the second quarter of 2019. In December 2019, prices began increasing as demand began strengthening against supply in reaction to lower China exports and production curtailments, which resulted in a more constructive supply and demand balance as we moved in 2020.
Potash operating results were favorably impacted by increases in the average selling price in 2019 compared to 2018, though this benefit was primarily featured in the first half of the year. Potash prices in 2019 were at their highest at the outset of the year, and then declined through December and into the first several weeks of 2020. The decline in market prices was a function of weak demand in key markets, including North America, which was impacted by adverse weather conditions throughout 2019 and increased risks of a delay in the Chinese contract settlement. In response to this weaker demand and
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falling prices, many potash producers announced production curtailments in the second half of 2019. These actions resulted in a better balance of supply and demand at the start of 2020. Operating results were unfavorably impacted by lower potash sales volumes in 2019 compared to 2018. In 2019, domestic sales volumes declined due to the adverse weather conditions discussed above, that resulted in delayed plantings and harvest, as well as missed fertilizer applications. Operating results were also negatively impacted by higher fixed cost absorption due to lower production, as we idled the Colonsay mine and reduced production at the Esterhazy mine to control inventory, and higher Canadian resource taxes as a result of tax law changes that became effective in 2019.
Mosaic Fertilizantes operating results in 2019 were unfavorably impacted by expenses related to the temporary idling of three of our Brazilian phosphate mines for a large portion of the year, as we worked to comply with new legislation regarding tailings dams in Brazil. This resulted in increased raw material costs, as we imported rock to meet our production needs, increased conversion costs and idle plants costs. Operating results were favorably impacted by an increase in sales volumes in 2019 compared to 2018, driven by an increase in business-to-consumer sales in Brazil. Sales volumes also benefited from an increase in Brazilian trade with China in 2019.
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Phosphates Net Sales and Gross Margin
The following table summarizes the Phosphates segment’s net sales, gross margin, sales volume, selling prices and raw material prices:
Net sales:
Gross margin as a percentage of net sales 4.0 % (2.5) % 15.0 %
Sales volumes(a) (in thousands of metric tonnes)
Realized prices ($/tonne)
Average cost per unit consumed in cost of goods sold:
Blended rock (metric tonne) $ 61 $ 62 $ 58 $ (1) (2) % $ 4 7 %
(a)Includes intersegment sales volumes.
(b)Includes sales volumes of MicroEssentials® and animal feed ingredients.
(c) Sales volumes of rock are presented on a wet tonne basis based on average moisture levels of 3.5% to 4.5% as it exits the drying process and is prepared for shipping.
Year Ended 2020 compared to Year Ended December 31, 2019
The Phosphates segment’s net sales were $3.1 billion for the year ended December 31, 2020, compared to $3.2 billion for the same period a year ago. The decrease in net sales was primarily due to lower average selling prices, which resulted in a decrease in net sales of approximately $140 million. This was partially offset by higher sales volumes, which increased net sales by approximately $20 million.
Our average finished product selling price decreased 5%, to $360 per tonne for the year ended December 31, 2020, compared to $379 per tonne for the same period a year ago, due to the factors discussed in the Overview.
The Phosphates segment’s sales volumes of finished products increased to 8.5 million tonnes for the year ended December 31, 2020, compared to 8.2 million tonnes in 2019, due to the factors discussed in the Overview. The 62% decrease in the sales volumes of rock, shown in the table above,was due to the Miski Mayo mine being temporarily idled for a portion of the current year due to COVID-19. In addition, in the prior year, Mosaic Fertilizantes purchased rock from the Miski Mayo mine (included in our Phosphates segment) to supplement their production requirements, as Mosaic Fertilizantes' mines were temporarily idled for a portion of the prior year.
Gross margin for the Phosphates segment increased to $125.5 million in the current year compared with $(82.3) million for the prior year. The increase was primarily driven by the impact of lower raw material prices (primarily sulfur, ammonia, and
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blended rock) of approximately $260 million compared to the prior-year period. Gross margin was also favorably impacted in the current year by lower idle plant and turnaround costs of approximately $80 million. This was partially offset by unfavorable sales prices, which negatively impacted gross margin by approximately $140 million.
Our average consumed price for ammonia in our North American operations decreased to $287 per tonne in 2020 from $324 a year ago. The average consumed price for sulfur for our North American operations decreased to $83 per long ton for the year ended December 31, 2020 from $128 in the prior-year period. The purchase price of these raw materials is driven by global supply and demand. The consumed ammonia and sulfur prices also include transportation, transformation, and storage costs. The average consumed cost of purchased and produced rock decreased to $61 per tonne in the current year, from $62 a year ago.
The Phosphates segment’s production of crop nutrient dry concentrates and animal feed ingredients increased to 8.2 million tonnes for the year ended December 31, 2020, compared to 8.1 million in 2019. For the year ended December 31, 2020, our operating rate for processed phosphate production decreased to 82%, compared to 83% in the same period of the prior year.
Our North American phosphate rock production was 12.8 million tonnes in the current year compared with 12.2 million tonnes in the same period a year ago. In the prior year, production suffered due to challenges caused by weather, and operational challenges as we transitioned into new mining areas.
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Potash Net Sales and Gross Margin
The following table summarizes the Potash segment’s net sales, gross margin, sales volume and selling price:
Net sales:
Gross margin as a percentage of net sales 23.2 % 29.2 % 27.5 %
Sales volume(a) (in thousands of metric tonnes)
Realized prices ($/tonne)
(a)Includes intersegment sales volumes.
(b)Includes sales volumes of K-Mag, Aspire and animal feed ingredients.
Year Ended 2020 compared to Year Ended December 31, 2019
The Potash segment’s net sales decreased to $2.0 billion for the year ended December 31, 2020, compared to $2.1 billion in the same period a year ago. The decrease in net sales was driven by an unfavorable impact from lower sales prices of approximately $520 million, partially offset by favorable sales volumes of approximately $430 million.
Our average finished product selling price was $215 per tonne for the year ended December 31, 2020, a decrease of $55 per tonne compared with the prior year period, due to the factors discussed in the Overview.
The Potash segment’s sales volumes increased to 9.4 million tonnes for the year ended December 31, 2020, compared to 7.8 million tonnes in the same period a year ago, due to the factors discussed in the Overview.
Gross margin for the Potash segment decreased to $468.3 million in the current year, from $616.8 million in the prior year period. Gross margin was negatively impacted by $520 million related to the decrease in selling prices, partially offset by approximately $240 million due to higher sales volumes. Gross margin was also favorably impacted by lower fixed cost absorption and plant spending of approximately $140 million, due to higher production and decreased length of maintenance turnarounds compared to the prior year. Canadian resource taxes and other costs affecting gross margin are discussed in more detail below.
We had expense of $146.1 million from Canadian resource taxes for the year ended December 31, 2020, compared to $174.6 million in the prior year. Royalty expense decreased to $30.0 million for the year ended December 31, 2020, from $37.3 in the prior year. The fluctuations in Canadian resource taxes and royalties are due to lower average selling prices and margins in the current year, compared to the prior year.
We incurred $108.0 million in brine management expenses, including depreciation on brine assets, at our Esterhazy mine in 2020, compared to $137.6 million in 2019. The reduced costs in 2020 are a reflection of our management of brine inflow expense. We remain on track in our development of the K3 shaft at our Esterhazy mine, which is expected to reach full
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operational capacity by mid-2022. The completion of K3 will provide us the opportunity to eliminate future brine inflow management costs which are expected to drop to an immaterial level by the end of 2021.
For the year ended December 31, 2020, potash production increased to 8.4 million tonnes, compared to 7.9 million tonnes in the prior year period, and an operating rate of 87% for 2020, compared to 75% for 2019. Increased production in 2020 is primarily due to the ramp up at our Esterhazy K3 mine. Our production and operating rate in 2019 reflect the impact of timing and length of maintenance turnarounds, the temporary idling of the Colonsay mine during 2019, and inventory control downtime at our Esterhazy mine.
Mosaic Fertilizantes Net Sales and Gross Margin
The following table summarizes the Mosaic Fertilizantes segment’s net sales, gross margin, sales volume and selling price.
Gross margin as a percent of net sales 12.1 % 7.7 % 10.2 %
Sales volume (in thousands of metric tonnes)
Realized prices ($/tonne)
Purchases ('000 tonnes)
Average cost per unit consumed in cost of goods sold:
Year Ended December 31, 2020 compared to Year Ended December 31, 2019
The Mosaic Fertilizantes segment’s net sales were $3.5 billion for the year ended December 31, 2020, compared to $3.8 billion for 2019. The decrease in net sales was due to lower sales prices, which unfavorably impacted net sales by approximately $720 million. This was partially offset by an increase in sales volumes, favorably impacting net sales by approximately $590 million. Net sales were also negatively impacted by foreign currency impacts of approximately $170 million.
The overall average finished product selling price decreased $79 per tonne to $330 per tonne for 2020 due to the decline in global prices described in the Overview.
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The Mosaic Fertilizantes segment’s sales volume increased to 10.6 million tonnes for the year ended December 31, 2020, compared to 9.2 million tonnes for the prior year period, due to the factors discussed in the Overview.
Gross margin for the Mosaic Fertilizantes segment increased to $419.6 million for the year ended December 31, 2020, from $290.1 million in the prior year. The increase was driven by approximately $120 million of lower raw material and production costs and a benefit of $80 million related to higher sales volumes in the current year compared to the prior year. Gross margin was also favorably impacted by approximately $50 million due to lower idle costs in the current year. Idle and production costs were higher in 2019 as we temporarily idled our mines in Brazil to enable us to take steps to comply with new legislation regarding tailings dams. Gross margin also benefited from favorable foreign currency changes of approximately $130 million. These were partially offset by approximately $250 million, due to lower sales prices in 2020 compared to 2019.
The average consumed price for ammonia for our Brazilian operations was $336 per tonne for the year ended December 31, 2020, compared to $369 per ton in the prior year. The average consumed sulfur price for our Brazilian operations was $108 per long ton for the year ended December 31, 2020, compared to $181 in the prior year. The purchase price of these raw materials is driven by global supply and demand, and also include transportation, transformation, and storage costs.
Corporate, Eliminations and Other
In addition to our three operating segments, we assign certain costs to Corporate, Eliminations and Other, which is presented separately in Note 26 to our Notes to Consolidated Financial Statements. The Corporate, Eliminations and Other category includes, intersegment eliminations, including profit on intersegment sales, unrealized mark-to-market gains and losses on derivatives, debt expenses, Streamsong Resort® results of operations, and the results of the China and India distribution businesses. As of January 1, 2019, certain selling, general and administrative costs that are not controllable by the business segments were no longer allocated to segments and are included within Corporate, Eliminations and Other. Our operating results for 2018 have been recast to reflect this change.
Gross margin for Corporate, Eliminations and Other was a gain of $51.5 million for the year ended December 31, 2020, compared to a gain of $72.7 million in the same period a year ago. The change was driven by eliminations of losses on intersegment sales of $3.4 million in the current year period, compared to elimination of losses on intersegment sales of $38.2 million in the prior year period. Contributing to the change was a net unrealized gain of $22.0 million in the current year period, primarily on foreign currency derivatives for Canada, compared to a net unrealized gain of $39.9 million in the prior year period. Distribution operations in India and China had revenues and gross margin of $639.4 million and $58.7 million, respectively, for the year ended December 31, 2020, compared to revenues and gross margin of $575.6 million and $27.3 million, respectively, for the year ended December 31, 2019. The increase was primarily due to increased sales volumes in the current year compared to the prior year period. Sales volumes of finished products were 2.0 million tonnes and 1.5 million tonnes for the years ended December 31, 2020 and 2019, respectively.
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Other Income Statement Items
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $371.5 million for the year ended December 31, 2020, compared to $354.1 million for the same period a year ago. The increase was due to approximately $20 million of higher consulting and professional service expenses related to executing on our strategic priorities, and approximately $20 million of higher incentive compensation expense in the current year. These increases were partially offset by favorable foreign currency impacts of approximately $22 million, primarily driven by the Brazilian real.
Impairment, Restructuring and Other Expenses
Restructuring and other expenses include costs associated with asset impairments, employee severance and pension expense, and other exit costs to close or indefinitely idle facilities. In 2019, we recognized pre-tax costs of $341.3 million related to the permanent closure of our Plant City phosphates manufacturing facility in Hillsborough County, Florida and pre-tax costs of $529.7 million related to the indefinite idling of our Colonsay, Saskatchewan potash facility. We also recognized a goodwill impairment charge of $589 million in our Phosphates reporting unit in 2019.
Other Operating Expenses
Other operating expenses were $280.5 million for the year ended December 31, 2020, compared to $176.0 million for the prior-year period. Other operating expenses typically relate to five major categories: 1) Asset Retirement Obligations (“AROs”), 2) environmental and legal reserves, 3) idle facility costs, 4) insurance reimbursements and 5) gain/loss on sale or disposal of fixed assets. The current year includes $134 million of ARO expenses and adjustments, $69 million related to closed and indefinitely idled facility costs, and $35 million of costs related to an increase in an environmental reserve. The current year also includes $19 million of losses on fixed asset disposals and $10 million of costs related to transformation initiatives in our North America operations.
Interest Expense, Net
Net interest expense decreased to $180.6 million for the year ended December 31, 2020, compared to $182.9 million in 2019.
Foreign Currency Transaction (Loss) Gain
In 2020, we recorded a foreign currency transaction loss of $64.3 million, compared to a gain of $20.2 million in 2019. The loss was the result of the effect of the strengthening of the U.S. dollar relative to the Brazilian real on significant U.S. dollar-denominated payables held by our Brazilian subsidiaries, partially offset by the weakening of the U.S. dollar relative to the Canadian dollar on significant U.S. dollar-denominated intercompany loans and gains of foreign currency derivative positions related to the hedging of Brazilian real cash flows.
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Other Income/Expense
For the year ended December 31, 2020, we had other income of $12.9 million compared to expense of $1.5 million in the prior year. The change from the prior year is primarily related to a realized gain of $14 million on investments held in two financial assurance trust funds created in 2016 to provide additional financial assurance for the estimated costs of closure and long-term care of our Florida and Louisiana phosphogypsum management systems (the “RCRA Trusts”).
Equity in Net (Loss) Earnings of Nonconsolidated Companies
For the year ended December 31, 2020, we had a loss from equity of nonconsolidated companies of $93.8 million, net of tax, compared to a loss of $59.4 million, net of tax, for the prior year. The current year loss was primarily related to the operations of MWSPC, which resulted in a net loss of $97.3 million. This is because MWSPC is not yet operating at full capacity, and was also impacted by lower phosphate selling prices.
Provision for (Benefit from) Income Taxes
EffectiveTax Rate Provision forIncome Taxes
For all years, our income tax is impacted by the mix of earnings across jurisdictions in which we operate, by a benefit associated with depletion and by the impact of certain entities being taxed in both their foreign jurisdiction and the U.S., including foreign tax credits for various taxes incurred.
In the year ended December 31, 2020, tax expense specific to the period included a net benefit of ($609.0) million. The net benefit relates to the following: ($582.6) million for changes to valuation allowances in the U.S. and foreign jurisdictions, primarily related to Brazil, ($23.6) million related to certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), $5.5 million related to release of the sequestration on AMT and miscellaneous tax expense of $2.7 million. The change to the valuation allowance in Brazil related to the Acquired Business. As of December 31, 2020, the successful integration of the Acquired Business has resulted in cumulative income therefore we were able to rely on future forecasts of taxable income which support realization of its deferred tax assets.
In the year ended December 31, 2019, tax expense specific to the period included a benefit of ($355.6) million. This relates to various items, including benefits from the following pretax notable items: ($263.4) million related to the indefinite idle of the Colonsay mine, ($81.0) million related to the Plant City closure costs and ($79.6) million related to the phosphates goodwill impairment. These tax benefits are partially offset by tax expense of: $21.2 million for changes in certain provisions of the U.S. Tax Cuts and Jobs Act (“The Act”), $15.9 million for valuation allowances in the U.S. and foreign jurisdictions, $14.0 million related state tax rate changes; $12.5 million related to changes in estimates related to prior years (including changes in certain provisions of the Act), and miscellaneous tax expense of $4.8 million. The tax benefit of $21.2 million related to certain provisions of The Act is the reversal of the benefit recorded in December 31, 2018 that pertained to the one-time “deemed” repatriation.
Critical Accounting Estimates
We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America which requires us to make various judgments, estimates and assumptions that could have a significant impact on our reported results and disclosures. We base these estimates on historical experience and other assumptions we believe to be reasonable at the time we prepare our financial statements. Changes in these estimates could have a material effect on our Consolidated Financial Statements.
Our significant accounting policies can be found in Note 2 of our Notes to Consolidated Financial Statements. We believe the following accounting policies include a higher degree of judgment and complexity in their application and are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.
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Recoverability of Goodwill
Goodwill is the excess of the purchase price consideration over the estimated fair value of net assets of acquired businesses. The carrying value of goodwill in our reporting units is tested annually as of October 31 for possible impairment. We typically use an income approach valuation model, representing present value of future cash flows, to determine the fair value of a reporting unit. Growth rates for sales and profits are determined using inputs from our annual strategic and long range planning process. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on the Company’s industry, capital structure and risk premiums, including those reflected in the current market capitalization. When preparing these estimates, management considers each reporting unit’s historical results, current operating trends, and specific plans in place. These estimates are impacted by various factors, including inflation, the general health of the economy and market competition. In addition, events and circumstances that might be indicators of possible impairment are assessed during other interim periods. As of October 31, 2020, the date of our annual impairment testing, the Company concluded that the fair values of the reporting units which included goodwill were in excess of their respective carrying values and the goodwill for those units was not impaired. However, we determined that our Potash reporting unit had an estimated fair value that was not in significant excess of its carrying value. As a result, the goodwill assigned to the Potash reporting unit could be at risk of future impairment. Our Mosaic Fertilizantes reporting unit has substantial fair value in excess of its carrying value.
See Note 11 of our Notes to Consolidated Financial Statements for additional information regarding the goodwill impairment analysis, including the methodologies and assumptions used in estimating the fair values of our reporting units. As of December 31, 2020, we had $1.2 billion of goodwill.
Environmental Liabilities and Asset Retirement Obligations
We record accrued liabilities for various environmental and reclamation matters including the demolition of former operating facilities, and asset retirement obligations (“AROs”).
Contingent environmental liabilities are described in Note 24 of our Notes to Consolidated Financial Statements. Accruals for environmental matters are based primarily on third-party estimates for the cost of remediation at previously operated sites and estimates of legal costs for ongoing environmental litigation. We regularly assess the likelihood of material adverse judgments or outcomes, the effects of potential indemnification, as well as potential ranges or probability of losses. We determine the amount of accruals required, if any, for contingencies after carefully analyzing each individual matter. Estimating the ultimate settlement of environmental matters requires us to develop complex and interrelated assumptions based on experience with similar matters, our history, precedents, evidence, and facts specific to each matter. Actual costs incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating environmental exposures. As of December 31, 2020, and 2019, we had accrued $61.4 million and $39.3 million, respectively, for environmental matters.
As indicated in Note 15 of our Notes to Consolidated Financial Statements, we recognize AROs in the period in which we have an existing legal obligation, and the amount of the liability can be reasonably estimated. We utilize internal engineering experts as well as third-party consultants to assist in determining the costs of retiring certain of our long-term operating assets. Assumptions and estimates reflect our historical experience and our best judgments regarding future expenditures. The assumed costs are inflated based on an estimated inflation factor and discounted based on a credit-adjusted risk-free rate. For active facilities, fluctuations in the estimated costs (including those resulting from a change in environmental regulations), inflation rates and discount rates can have a significant impact on the corresponding assets and liabilities recorded in the Consolidated Balance Sheets. However, changes in the assumptions for our active facilities would not have a significant impact on the Consolidated Statements of Earnings in the year they are identified. For closed facilities, fluctuations in the estimated costs, inflation, and discount rates have an impact on the Consolidated Statements of Earnings in the year they are identified as there is no asset related to these items. Phosphate land reclamation activities in North America generally occur concurrently with mining operations; as such, we accrue and expense reclamation costs as we mine. As of December 31, 2020, and 2019, $1.4 billion and $1.3 billion, respectively, was accrued for AROs (current and noncurrent amounts) in North and South America. In August 2016, Mosaic deposited $630 million into two trust funds as financial assurance to support certain estimated future asset retirement obligations. See Note 15 of our Notes to Consolidated Financial Statements for additional information regarding the EPA RCRA Initiative.
Income Taxes
We make estimates for income taxes in three major areas: uncertain tax positions, valuation allowances, and U.S. deferred income taxes on our non-U.S. subsidiaries’ undistributed earnings.
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Due to Mosaic’s global operations, we assess uncertainties and judgments in the application of complex tax regulations in a multitude of jurisdictions. Future changes in judgment related to the expected ultimate resolution of uncertain tax positions will affect earnings in the quarter of such change. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, our liabilities for income taxes reflect what we believe to be the more likely than not outcome. We adjust these liabilities, as well as the related interest, in light of changing facts and circumstances, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation, and resolution of disputes arising from tax audits in the normal course of business. Settlement of any particular position may require the use of cash. Based upon an analysis of tax positions taken on prior year returns and expected positions to be taken on the current year return, management has identified gross uncertain income tax positions of $36.9 million as of December 31, 2020.
A valuation allowance is provided for deferred tax assets for which it is more likely than not that the related tax benefits will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances. The realization of the Company’s deferred tax assets is dependent on generating certain types of future taxable income, using both historical and projected future operating results, the source of future income, the reversal of existing taxable temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. As of December 31, 2020, and 2019, we had a valuation allowance of $0.7 billion and $1.5 billion, respectively. Changes in tax laws, assumptions with respect to future taxable income, tax planning strategies, resolution of matters under tax audit and foreign currency exchange rates could result in adjustment to these allowances.
Any dividends from controlled foreign corporations are tax-free from a U.S. income tax perspective. Additionally, there will not be any foreign tax credits associated with foreign dividends. Therefore, there are no federal U.S. implications of future repatriations on non-U.S. subsidiaries’ undistributed earnings. However, since there are no U.S. foreign tax credits associated with foreign dividends, any foreign withholding tax associated with a future repatriation will need to be accrued if the earnings are not permanently reinvested.
We have included a further discussion of income taxes in Note 14 of our Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
We define liquidity as the ability to generate or access adequate amounts of cash to meet current cash needs. We assess our liquidity in terms of our ability to fund working capital requirements, fund sustaining and opportunity capital projects, pursue strategic opportunities and make capital management decisions, which include making payments on and issuing indebtedness and making distributions to our shareholders, either in the form of share repurchases or dividends. Our liquidity is subject to general economic, financial, competitive and other factors that are beyond our control.
As of December 31, 2020, we had cash and cash equivalents of $0.6 billion, marketable securities held in trusts to fund future obligations of $0.7 billion, long-term debt including current maturities of $4.6 billion, short-term debt of $0.1 million and stockholders’ equity of $9.8 billion. In addition, we had $640.0 million of financing for certain customer purchases in Brazil through structured payable arrangements, as discussed in Note 12 of our Notes to Consolidated Financial Statements. We have a target liquidity buffer of up to $3.0 billion, including cash and available credit facilities. We expect our liquidity to fluctuate from time to time, especially in the first quarter of each year, to manage through the seasonality of our business. We also target debt leverage ratios that are consistent with investment grade credit metrics. Our capital allocation priorities include maintaining our target investment grade metrics and financial strength, sustaining our assets, including ensuring the safety and reliability of our assets, investing to grow our business, either through organic growth or taking advantage of strategic opportunities, and returning excess cash to shareholders, including paying our dividend. During 2020, we invested $1.2 billion in capital expenditures and returned cash to shareholders through cash dividends of $75.8 million.
All of our cash and cash equivalents are diversified in highly rated investment vehicles. Our cash and cash equivalents are held either in the U.S. or held by non-U.S. subsidiaries and are not subject to significant foreign currency exposures, as the majority are held in investments denominated in U.S. dollars as of December 31, 2020. These funds may create foreign currency transaction gains or losses, however, depending on the functional currency of the entity holding the cash. In addition, there are no significant restrictions that would preclude us from bringing funds held by non-U.S. subsidiaries back to the U.S., aside from withholding taxes.
We have certain contractual obligations that require us to make cash payments on a scheduled basis. These include, among other things, long-term debt payments, interest payments, operating leases, unconditional purchase obligations and funding
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requirements of pension and postretirement obligations. Our long-term debt has maturities ranging from one year to 23 years. Unconditional purchase obligations are our largest contractual cash obligations. These include obligations for capital expenditures related to our expansion projects, contracts to purchase raw materials such as sulfur, ammonia, phosphate rock and natural gas, obligations to purchase raw materials for our international distribution activities and equity contributions for or loans to nonconsolidated investments. Other large cash obligations are our AROs and other environmental obligations primarily related to our Phosphates and Mosaic Fertilizantes segments. We expect to fund our AROs, purchase obligations, long-term debt and capital expenditures with a combination of operating cash flows, cash and cash equivalents and borrowings. See Off-Balance Sheet Arrangements and Obligations below for the amounts owed by Mosaic under Contractual Cash Obligations and for more information on other environmental obligations, for more information on this matter.
Sources and Uses of Cash
The following table represents a comparison of the net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities for calendar years 2020, 2019 and 2018:
Years Ended December 31,
As of December 31, 2020, we had cash and cash equivalents and restricted cash of $0.6 billion. Funds generated by operating activities, available cash and cash equivalents and our revolving credit facility continue to be our most significant sources of liquidity. We believe funds generated from the expected results of operations and available cash, cash equivalents and borrowings either under our revolving credit facility or through long-term borrowings will be sufficient to finance our operations, including our expansion plans, existing strategic initiatives and expected dividend payments for the next 12 months. There can be no assurance, however, that we will continue to generate cash flows at or above current levels. At December 31, 2020, we had $2.19 billion available under our $2.20 billion revolving credit facility.
Operating Activities
Net cash flow from operating activities has provided us with a significant source of liquidity. For the year ended December 31, 2020, net cash provided by operating activities was $1.6 billion, compared to $1.1 billion in the prior year. Our results of operations, after non-cash adjustments to net earnings, contributed $1.1 billion to cash flows from operating activities during 2020, compared to $1.2 billion during 2019. During 2020, we had a favorable working capital change of $526.9 million, compared to an unfavorable change of $69.2 million during 2019.
The change in working capital for the year ended December 31, 2020 was primarily driven by favorable impacts from changes in accounts payable and accrued liabilities of $333.3 million, inventories of $191.4 million and other noncurrent liabilities of $89.7 million partially offset by an unfavorable change in accounts receivable of $153.6 million. The change in accounts payable and accrued liabilities was driven by an increase in material purchases in our international locations and an increase in customer prepayments in Brazil, revisions in estimates of AROs and environmental liabilities and an increase in incentive accruals compared to the prior year. The favorable change in inventories was driven by higher sales volumes toward the end the year which resulted in lower inventories on hand. The increase in other noncurrent liabilities was related to increases in estimates for our AROs and environmental liabilities. These changes were partially offset by an increase accounts receivable related to higher sales volumes and prices at the end of the current year compared to the prior year.
The change in working capital for the year ended December 31, 2019 was primarily driven by unfavorable impacts from the changes in accounts payable and accrued liabilities of $175.2 million , and in other current and noncurrent assets of $36.0 million, offset by the favorable impact of the change in inventories of $128.1 million. The change in accounts payable and accrued liabilities was primarily driven by lower activity, as a result of the idling of some of our potash and phosphate locations toward the end of 2019. The change in other current and noncurrent assets was primarily related to taxes receivable,
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as our estimated payments during the year were based on expected earnings and actual results were lower. The decrease in inventories was primarily related to decreased raw material and finished goods cost in Brazil, and a reduction in inventory volumes due to lower production across our segments at the end of 2019.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2020 was $1.2 billion, compared to $1.4 billion in the same period a year ago, primarily driven by capital expenditures of $1.2 billion in 2020, compared to $1.3 billion in 2019.
In 2019, we also purchased the Pine Bend distribution facility for $55.1 million.
Financing Activities
Net cash used in financing activities was $283.8 million for the year ended December 31, 2020. In 2020, we made net payments on short-term borrowings of $21.4 million and net payments on structured accounts payable of $118.8 million. Payments on our long-term debt, net of borrowings, were $62.2 million. We also paid dividends of $75.8 million in 2020.
In 2019, we made stock repurchases of $149.9 million and paid dividends of $67.2 million. We also received net proceeds from short-term borrowings of $36.8 million and net proceeds from structured accounts payable of $147.1 million. Payments on our long-term debt were $48.3 million in 2019.
Debt Instruments, Guarantees and Related Covenants
See Note 12 of our Notes to Consolidated Financial Statements for additional information relating to our financing arrangements, which is hereby incorporated by reference.
Financial Assurance Requirements
In addition to various operational and environmental regulations primarily related to our Phosphates segment, we incur liabilities for reclamation activities under which we are subject to financial assurance requirements. In various jurisdictions in which we operate, particularly Florida and Louisiana, we are required to pass a financial strength test or provide credit support, typically in the form of cash deposits, surety bonds or letters of credit. See Other Commercial Commitments under Off-Balance Sheet Arrangements and Obligations and Note 24 of our Notes to Consolidated Financial Statements for additional information about these requirements.
Off-Balance Sheet Arrangements and Obligations
Off-Balance Sheet Arrangements
In accordance with the definition under rules of the Securities and Exchange Commission (“SEC”), the following qualify as off-balance sheet arrangements:
•certain obligations under guarantee contracts that have “any of the characteristics identified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) paragraph ASC 460-10-15-4 (Guarantees Topic)”;
•a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
•any obligation, including a contingent obligation, under a contract that would be accounted for as derivative instruments except that it is both indexed to the registrant’s own stock and classified as equity; and
•any obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, the registrant, where such entity provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging or research and development services with the registrant.
Information regarding guarantees that meet the above requirements is included in Note 18 of our Notes to Consolidated Financial Statements and is hereby incorporated by reference. We do not have any contingent interest in assets transferred, derivative instruments, or variable interest entities that qualify as off-balance sheet arrangements under SEC rules.
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Contractual Cash Obligations
The following is a summary of our contractual cash obligations as of December 31, 2020:
Payments by Calendar Year
(in millions) Total Less than 1year 1 - 3years 3 - 5years More than 5years
______________________________
(a)Long-term debt primarily consists of unsecured notes, finance leases, unsecured debentures and secured notes.
(b)Based on interest rates and debt balances as of December 31, 2020.
(c)Based on prevailing market prices as of December 31, 2020. The majority of value of items more than 5 years is related to our CF Ammonia Supply Agreement. For additional information related to our purchase commitments, see Note 23 of our Notes to Consolidated Financial Statements.
(d)The 2021 pension plan payments are based on minimum funding requirements. For years thereafter, pension plan payments are based on expected benefits paid. The postretirement plan payments are based on projected benefit payments. The above amounts include our North America and Brazil plans.
We have also entered into various partnership and licensing arrangements, under which we have future cash commitments of up to $30 million.
Other Commercial Commitments
The following is a summary of our other commercial commitments as of December 31, 2020:
Commitment Expiration by Calendar Year
(in millions) Total Less than 1year 1 - 3years 3 - 5years More than 5years
Letters of credit $ 67.1 $ 67.1 $ — $ — $ —
The surety bonds and letters of credit generally expire within one year or less but a substantial portion of these instruments provide financial assurance for continuing obligations and, therefore, in most cases, must be renewed on an annual basis. We issue letters of credit through our revolving credit facility and bi-lateral agreements. As of December 31, 2020, we had $12.4 million of outstanding letters of credit through our credit facility and $54.7 million outstanding through bi-lateral agreements. We primarily incur liabilities for reclamation activities in our Florida operations and for phosphogypsum management system (“Gypstack”) closure in our Florida and Louisiana operations where, for permitting purposes, we must either pass a test of financial strength or provide credit support, typically in the form of cash deposits, surety bonds or letters of credit. As of December 31, 2020, we had $342.6 million in surety bonds and a $50 million letter of credit included in the amount above, outstanding for reclamation obligations, primarily related to mining in Florida, and a $243.2 million surety bond delivered to EPA as a substitute for the financial assurance provided through the Plant City Trust. The surety bonds generally require us to obtain a discharge of the bonds or to post additional collateral (typically in the form of cash or letters of credit) at the request of the issuer of the bonds.
We are subject to financial assurance requirements related to the closure and post-closure care of our Gypstacks in Florida and Louisiana. These requirements include Florida and Louisiana state financial assurance regulations, and financial assurance requirements under the terms of consent decrees that we have entered into with respect to our facilities in Florida and Louisiana. These include a consent decree (the “Plant City Consent Decree”) with the Environmental Protection Agency (“EPA”) and the Florida Department of Environmental Protection (“FDEP”) relating to the Plant City, Florida facility we
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acquired as part of the CF Phosphate Assets Acquisition (the “Plant City Facility”) and two separate consent decrees (collectively, the “2015 Consent Decrees”) with federal and state regulators that include financial assurance requirements for the closure and post-closure care of substantially all of our Gypstacks in Florida and Louisiana, other than those acquired as part of the CF Phosphate Assets Acquisition, which are discussed separately below.
See Note 15 of our Notes to Consolidated Financial Statements for additional information relating to our financial assurance obligations, including the Plant City Consent Decree and the 2015 Consent Decrees, which information is incorporated by reference.
Currently, state financial assurance requirements in Florida and Louisiana for the closure and post-closure care of Gypstacks are, in general terms, based upon the same assumptions and associated estimated values as the AROs recognized for financial reporting purposes. For financial reporting purposes, we recognize the AROs based on the estimated future closure and post-closure costs of Gypstacks, the undiscounted value of which is approximately $1.6 billion. The value of the AROs for closure and post-closure care of Mosaic’s Gypstacks, discounted to the present value based on a credit-adjusted risk-free rate, is reflected on our Consolidated Balance Sheets in the amount of approximately $669.9 million as of December 31, 2020. Compliance with the financial assurance requirements in Florida and Louisiana is generally based on the undiscounted Gypstack closure estimates.
We satisfy substantially all of our Florida, Louisiana and federal financial assurance requirements through compliance with the financial assurance requirements under the 2015 Consent Decrees, by providing third-party credit support in the form of surety bonds (including under the Plant City Consent Decree), and a financial test mechanism supported by a corporate guarantee (“Bonnie Financial Test”) related to a closed Florida phosphate concentrates facility in Bartow, Florida (the “Bonnie Facility”) as discussed below. We comply with our remaining state financial assurance requirements because our financial strength permits us to meet applicable financial strength tests. However, at various times we have not met the applicable financial strength tests and there can be no assurance that we will be able to meet the applicable financial strength tests in the future. In the event we do not meet either financial strength test, we could be required to seek an alternate financial strength test acceptable to state regulatory authorities or provide credit support, which may include surety bonds, letters of credit and cash escrows or trust funds. Cash escrows or trust funds would be classified as restricted cash on our Consolidated Balance Sheets. Assuming we maintain our current levels of liquidity and capital resources, we do not expect that these Florida and Louisiana requirements will have a material effect on our results of operations, liquidity or capital resources.
As part of the CF Phosphate Assets Acquisition, we assumed certain ARO related to Gypstack Closure Costs at both the Plant City Facility and the Bonnie Facility. Associated with these assets are two related financial assurance arrangements for which we became responsible and that provided sources of funds for the estimated Gypstack Closure Costs for these facilities, pursuant to federal or state law, which the government can draw against in the event we cannot perform such closure activities. One was initially a trust (the “Plant City Trust”) established to meet the requirements under a consent decree with EPA and the FDEP with respect to RCRA compliance at Plant City that also satisfied Florida financial assurance requirements at that site. Beginning in September 2016, as a substitute for the financial assurance provided through the Plant City Trust, we have provided financial assurance for Plant City in the form of a surety bond delivered to EPA (the “Plant City Bond”). The amount of the Plant City Bond is $243.2 million, at December 31, 2020, which reflects our closure cost estimates at that date. The other was also a trust fund (the “Bonnie Facility Trust”) established to meet the requirements under Florida financial assurance regulations that apply to the Bonnie Facility. On July 27, 2018, we received $21.0 million from the Bonnie Facility Trust by substituting the trust fund for the Bonnie Financial Test supported by a corporate guarantee as allowed by state regulations. Both financial assurance funding obligations require estimates of future expenditures that could be impacted by refinements in scope, technological developments, new information, cost inflation, changes in regulations, discount rates and the timing of activities. Under our current approach to satisfying applicable requirements, additional financial assurance would be required in the future if increases in cost estimates exceed the face amount of the Plant City Bond or the amount supported by the Bonnie Financial Test.
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Other Long-Term Obligations
The following is a summary of our other long-term obligations, including Gypstacks and land reclamation, as of December 31, 2020:
Payments by Calendar Year
(in millions) Total Less than 1year 1 - 3years 3 - 5years More than 5years
______________________________
(a)Represents the undiscounted estimated cash outflows required to settle the AROs. The corresponding present value of these future expenditures is $1.4 billion as of December 31, 2020, and is reflected in our accrued liabilities and other noncurrent liabilities in our Consolidated Balance Sheets.
In addition to the above, in 2014, we entered into five-year fertilizer supply agreements providing for Mosaic to supply ADM’s fertilizer needs in Brazil and Paraguay.
Most of our export sales of potash crop nutrients are marketed through a North American export association, Canpotex, which funds its operations in part through third-party financing facilities. As a member, Mosaic or our subsidiaries are, subject to certain conditions and exceptions, contractually obligated to reimburse Canpotex for their pro rata share of any operating expenses or other liabilities incurred. The reimbursements are made through reductions to members’ cash receipts from Canpotex.
Commitments are set forth in Note 23 of our Notes to Consolidated Financial Statements and are hereby incorporated by reference.
Income Tax Obligations
Gross uncertain tax positions as of December 31, 2020 of $36.9 million are not included in the other long-term obligations table presented above because the timing of the settlement of unrecognized tax benefits cannot be reasonably determined. For further discussion, refer to Note 14 of our Notes to Consolidated Financial Statements.
Market Risk
We are exposed to the impact of fluctuations in the relative value of currencies, fluctuations in interest rates, fluctuations in the purchase prices of natural gas, nitrogen, ammonia and sulfur consumed in operations, and changes in freight costs, as well as changes in the market value of our financial instruments. We periodically enter into derivatives in order to mitigate our interest rate risks, foreign currency risks and the effects of changing commodity prices and freight prices, but not for speculative purposes. Unrealized mark-to-market gains and losses on derivatives are recorded in Corporate, Eliminations and Other. Once realized, they are recorded in the related business segment.
Foreign Currency Exchange Rates
Due to the global nature of our operations, we are exposed to currency exchange rate changes, which may cause fluctuations in earnings and cash flows. Our primary foreign currency exposures are the Canadian dollar and Brazilian real. To reduce economic risk and volatility on expected cash flows that are denominated in the Canadian dollar and Brazilian real, we use financial instruments that may include forward contracts, zero-cost collars and/or futures.
The functional currency of several of our Canadian entities is the Canadian dollar. For those entities, sales are primarily denominated in U.S. dollars, but the costs are paid principally in Canadian dollars. We generally enter into derivative instruments for a portion of the currency risk exposure on anticipated cash inflows and outflows, including contractual outflows for our Potash expansion and other capital expenditures denominated in Canadian dollars. Mosaic hedges cash flows on a declining basis, up to 18 months for the Canadian dollar. We may also enter into hedges up to 36 months for expected Canadian dollar capital expenditures related to our Esterhazy K3 expansion program. A stronger Canadian dollar generally reduces these entities’ operating earnings. A weaker Canadian dollar has the opposite effect. Depending on the underlying exposure, such derivatives can create additional earnings volatility because we do not apply hedge accounting. Gains or losses on these derivative contracts, both for open contracts at quarter-end (unrealized) and settled contracts (realized), are recorded in either cost of goods sold or foreign currency transaction gain (loss).
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The functional currency for our Brazilian subsidiaries is the Brazilian real. We finance our Brazilian inventory purchases with U.S. dollar-denominated liabilities. We hedge cash flows on a declining basis, up to 12 months for the Brazilian real. Due to the Acquisition, our exposure to the Brazilian real has increased and, as a result, the amount of foreign derivatives that we have entered into related to the Brazilian real has increased. A stronger Brazilian real relative to the U.S. dollar has the impact of reducing these liabilities on a functional currency basis. When this occurs, an associated foreign currency transaction gain is recorded as non-operating income. A weaker Brazilian real generally has the opposite effect. We also enter into derivative instruments for a portion of our currency risk exposure on anticipated Brazilian real cash flows, and record an associated gain or loss in the foreign currency transaction gain (loss) line in the Consolidated Statements of Earnings. A stronger Brazilian real generally reduces our Brazilian subsidiaries operating earnings. A weaker Brazilian real has the opposite effect.
As discussed above, we have Canadian dollar, Brazilian real, and other foreign currency exchange contracts. As of December 31, 2020, and 2019, the fair value of our major foreign currency exchange contracts were $10.8 million and ($7.2) million, respectively. We recorded an unrealized gain of $14.1 million in cost of goods sold and recorded an unrealized gain of $7.0 million in foreign currency transaction gain (loss) in the Consolidated Statements of Earnings for 2020.
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The table below provides information about Mosaic’s significant foreign exchange derivatives.
Foreign Currency Exchange Forwards
Canadian Dollar $ 31.9 $ 7.6
Foreign Currency Exchange Collars
Canadian Dollar $ 0.4 $ 0.2
Notional (million US$) - long Canadian dollars $ — $ 30.3 $ — $ — $ — $ 22.8
Foreign Currency Exchange Non-Deliverable Forwards
Brazilian Real $ (19.4) $ (14.4)
Notional (million US$) - short Brazilian real $ 582.4 $ — $ — $ 464.4 $ — $ —
Weighted Average Rate - Brazilian real to U.S. dollar 5.2160 — — 4.1616 — —
Notional (million US$) - long Brazilian real $ 924.6 $ — $ — $ 366.5 $ — $ —
Weighted Average Rate - Brazilian real to U.S. dollar 5.3068 — — 4.0628 — —
Indian Rupee $ (2.1) $ (0.6)
Notional (million US$) - short Indian rupee $ 146.0 $ — $ — $ 115.4 $ — $ —
Weighted Average Rate - Indian rupee to U.S. dollar 74.5083 — — 71.9895 — —
Total Fair Value $ 10.8 $ (7.2)
Commodities
We use forward purchase contracts, swaps and occasionally three-way collars to reduce the risk related to significant price changes in our inputs and product prices. In addition, the natural gas-based pricing under the CF Ammonia Supply Agreement is intended to lessen ammonia pricing volatility.
All gains and losses on commodities contracts are recorded in cost of goods sold in the Consolidated Statements of Earnings.
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As of December 31, 2020, and 2019, the fair value of our major commodities contracts were $5.3 million and ($4.0) million, respectively. We recorded an unrealized gain of $8.0 million in cost of goods sold on the Consolidated Statements of Earnings for 2020.
Our primary commodities exposure relates to price changes in natural gas.
The table below provides information about Mosaic’s natural gas derivatives which are used to manage the risk related to significant price changes in natural gas.
Natural Gas Swaps $ 5.3 $ (4.0)
Total Fair Value $ 5.3 $ (4.0)
Interest Rates
We manage interest expense through interest rate contracts to convert a portion of our fixed-rate debt into floating-rate debt. From time to time, we also enter into interest rate swap agreements to hedge our exposure to changes in future interest rates related to anticipated debt issuances. As of December 31, 2020, and 2019, the fair value of our interest rate contracts was zero and $11.4 million, respectively. In April 2020, the interest swap contracts were terminated which resulted in net proceeds to us of approximately $35 million and an immaterial impact to our Consolidated Statement of Earnings (Loss).
Summary
Overall, there have been no material changes in our primary market risk exposures since the prior year. In 2021, we do not expect any material changes in our primary risk exposures. Additional information about market risk associated with our investments held in the RCRA Trusts is provided in Note 13 of our Notes to Consolidated Financial Statements. For additional information related to derivatives, see Notes 16 and 17 of our Notes to Consolidated Financial Statements.
Environmental, Health, Safety and Security Matters
We are subject to complex and evolving international, federal, state, provincial and local environmental, health, safety and security (“EHS”) laws that govern the production, distribution and use of crop nutrients and animal feed ingredients. These EHS laws regulate or propose to regulate: (i) conduct of mining, production and supply chain operations, including employee safety and facility security procedures; (ii) management or remediation of potential impacts to air, soil and water quality from our operations; (iii) disposal of waste materials; (iv) reclamation of lands after mining; (v) management and handling of raw materials; (vi) product content; and (vii) use of products by both us and our customers.
We have a comprehensive EHS management program that seeks to achieve sustainable, predictable and verifiable EHS performance. Key elements of our EHS program include: (i) identifying and managing EHS risk; (ii) complying with legal requirements; (iii) improving our EHS procedures and protocols; (iv) educating employees regarding EHS obligations; (v) retaining and developing professional qualified EHS staff; (vi) evaluating facility conditions; (vii) evaluating and enhancing safe workplace behaviors; (viii) performing audits; (ix) formulating EHS action plans; and (x) assuring accountability of all managers and other employees for EHS performance. Our business units are responsible for implementing day-to-day elements of our EHS program, assisted by an integrated staff of EHS professionals. We conduct audits to verify that each facility has identified risks, achieved regulatory compliance, improved EHS performance, and incorporated EHS management systems into day-to-day business functions.
New or proposed regulatory programs can present significant challenges in ascertaining future compliance obligations, implementing compliance plans, and estimating future costs until implementing regulations have been finalized and definitive regulatory interpretations have been adopted. New or proposed regulatory requirements may require modifications to our
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facilities or to operating procedures and these modifications may involve significant capital costs or increases in operating costs.
We have expended, and anticipate that we will continue to expend, substantial financial and managerial resources to comply with EHS standards and to continue to improve our environmental stewardship. In 2021, excluding capital expenditures arising out of the consent decrees referred to under “EPA RCRA Initiative” in Note 15 of our Notes to Consolidated Financial Statements, we expect environmental capital expenditures to total approximately $340 million, primarily related to: (i) modification or construction of waste management infrastructure and water treatment systems; (ii) construction and modification projects associated with Gypstacks and clay settling ponds at our Phosphates facilities and tailings management areas for our Potash mining and processing facilities; (iii) upgrading or new construction of air pollution control equipment at some of the concentrates plants; and (iv) capital projects associated with remediation of contamination at current or former operations. Additional expenditures for land reclamation, Gypstack closure and water treatment activities are expected to total approximately $130 million in 2021. In 2022, we estimate environmental capital expenditures will be approximately $300 million and expenditures for land reclamation activities, Gypstack closure and water treatment activities are expected to be approximately $170 million. We spent approximately $350 million in each of the years ended December 31, 2020 and 2019 for environmental capital expenditures, land reclamation activities, Gypstack closure and water treatment activities. No assurance can be given that greater-than-anticipated EHS capital expenditures or land reclamation, Gypstack closure or water treatment expenditures will not be required in 2021 or in the future.
Operating Requirements and Impacts
Permitting. We hold numerous environmental, mining and other permits and approvals authorizing operations at each of our facilities. Our ability to continue operations at a facility could be materially affected by a government agency decision to deny or delay issuing a new or renewed permit or approval, to revoke or substantially modify an existing permit or approval or to substantially change conditions applicable to a permit modification, or by legal actions that successfully challenge our permits.
Expanding our operations or extending operations into new areas is also predicated upon securing the necessary environmental or other permits or approvals. We have been engaged in, and over the next several years will be continuing, efforts to obtain permits in support of our anticipated Florida operations at certain of our properties. For years, we have successfully permitted properties and anticipate that we will be able to permit these properties as well.
A denial of our permits, the issuance of permits with cost-prohibitive conditions, substantial delays in issuing key permits, legal actions that prevent us from relying on permits or revocation of permits can prevent or delay our mining at the affected properties and thereby materially affect our business, results of operations, liquidity or financial condition.
In addition, in Florida, local community involvement has become an increasingly important factor in the permitting process for mining companies, and various counties and other parties in Florida have in the past filed and continue to file lawsuits or administrative appeals challenging the issuance of some of the permits we require. These actions can significantly delay permit issuance. Additional information regarding certain potential or pending permit challenges is provided in Note 24 to our Consolidated Financial Statements and is incorporated herein by reference.
Waters of the United States (“WOTUS”) Regulation. In June 2015, EPA and the U.S. Army Corps of Engineers (the “Corps”) jointly issued a final rule that proposed to clarify, but may actually expand, the scope of waters regulated under the federal Clean Water Act. The final rule (the “2015 Clean Water Rule”) became effective in August 2015, but has been challenged through numerous lawsuits. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order staying the effectiveness of the final rule nationwide pending adjudication of substantive challenges to the rule. In early 2017, the U.S. President issued an Executive Order directing EPA and the Corps to publish a proposed rule rescinding or revising the new rule. In June 2017, EPA and the Corps issued a proposed rule that would rescind the 2015 Clean Water Rule and re-codify regulatory text that existed prior to enactment of the 2015 Clean Water Rule. In November 2017, EPA issued a rule notice proposing to extend the applicability date of the 2015 Clean Water Rule for two years from the date of final action on the proposed rule, to provide continuity and regulatory certainty while agencies proceed to consider potential changes to the 2015 Clean Water Rule.
In January 2018, the U.S. Supreme Court unanimously held all challenges to the 2015 Clean Water Rule must be heard in federal district courts rather than in the federal courts of appeal, overruling a decision by the Sixth Circuit's Court of Appeals. With the Sixth Circuit Court of Appeals no longer having jurisdiction, that court lifted its 2015 nationwide stay in
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February 2018. After the nationwide stay was lifted, a number of U.S. District Courts revived dormant litigation that challenged the 2015 Clean Water Rule. In June 2018, the U.S. District Court for the Southern District of Georgia entered an injunction against implementation of the 2015 Clean Water Rule covering 11 states, including Florida. As of September 2018, federal district courts have put the 2015 Clean Water Rule on hold in 28 states, the District of Columbia and the U.S. territories.
On December 11, 2018, EPA and the Corps issued a proposed rule to replace the 2015 Clean Water Rule. The agencies’ stated interpretation for the proposed rule is to provide clarity, predictability and consistency so that the regulated community can better understand where the Clean Water Act applies and where it does not.
On September 12, 2019, EPA and the Corps jointly issued a final regulation that repealed the 2015 Clean Water Rule and restored the previous regulatory regime. This regulation reestablished national consistency by returning all jurisdictions to the longstanding regulatory framework that existed prior to the 2015 Clean Water Rule. The final rule and repeal of the 2015 Clean Water Rule took effect sixty (60) days after publication in the Federal Register.
The September 12, 2019 repeal of the 2015 Clean Water Rule was the first step in a two-step rulemaking process to define the scope of “waters of the United States” that are regulated under the Clean Water Act.The second step was completed in April 2020, when EPA and the Corps jointly issued the “Navigable Waters Protection Rule” published on April 21, 2020 (85 Fed. Reg. 22,250).By defining what constitutes “waters of the United States” under the federal Clean Water Act (“CWA”), the new rule distinguishes between federal waters and waters under the sole control of the States.It also clarifies the types of connections to perennial and intermittent tributaries that make lakes and ponds jurisdictional and clarifies the factors that determine when wetlands are considered “adjacent”.
The new “Navigable Waters Protection Rule” revised the definition of “waters of the United States” (WOTUS) under the CWA to include: (i) territorial seas and traditional navigable waters; (ii) perennial and intermittent tributaries to those waters; (iii) certain lakes, ponds, and impoundments; (iv) and wetlands adjacent to jurisdictional waters. According to EPA, “Congress, in the Clean Water Act, explicitly directed the Agencies to protect ‘navigable waters.’ The Navigable Waters Protection Rule regulates the nation’s navigable waters and the core tributary systems that provide perennial or intermittent flow into them.”
The new Navigable Waters Protection Rule is in effect in every state except for Colorado. The U.S. District of Colorado blocked implementation of the Navigable Waters Protection Rule in Colorado, holding that the Supreme Court’s decision in Rapanos v. United States foreclosed the interpretation the U.S. EPA and Corps had incorporated into the new regulation. On the same day, the U.S. District Court for the Northern District of California reached the opposite conclusion, instead denying a motion by a group of states and cities to block the rule’s nationwide implementation. Similar requests for relief have been made in other federal district courts, including Arizona, Washington and New Mexico, with more appeals expected in late 2020. To date, there have been 13 complaints filed in 11 different U.S. District Courts seeking to challenge final rule.
In August 2020, the Justice Department, an industry coalition, and individual landowners filed a Notice of Appeal with the U.S. Court of Appeals for the 10th Circuit to challenge the injunction entered by the Colorado District Court. Although oral argument was held, there has been no final ruling by the Court of Appeals, to date.
Water Quality Regulations for Nutrient Discharges. New nutrient regulatory initiatives could have a material effect on either us or our customers. For example, the Gulf Coast Ecosystem Restoration Task Force, established by executive order of the President and comprised of five Gulf States and eleven federal agencies, has delivered a final strategy for long-term ecosystem restoration for the Gulf Coast. The strategy calls for, among other matters, reduction of the flow of excess nutrients into the Gulf of Mexico through state nutrient reduction frameworks, new nutrient reduction approaches and reduction of agricultural and urban sources of excess nutrients. Implementation of the strategy will require legislative or regulatory action at the state level. We cannot predict what the requirements of any such legislative or regulatory action could be or whether or how it would affect us or our customers.
Reclamation Obligations. During phosphate mining, we remove overburden in order to retrieve phosphate rock reserves. Once we have finished mining in an area, we use the overburden and sand tailings produced by the beneficiation process to reclaim the area in accordance with approved reclamation plans and applicable laws. We have incurred and will continue to incur significant costs to fulfill our reclamation obligations.
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Management of Residual Materials and Closure of Management Areas. Mining and processing of potash and phosphate generate residual materials that must be managed both during the operation of the facility and upon and after facility closure. Potash tailings, consisting primarily of salt and clay, are stored in surface disposal sites. Phosphate clay residuals from mining are deposited in clay settling ponds. Processing of phosphate rock with sulfuric acid generates phosphogypsum that is stored in Gypstacks.
During the life of the tailings management areas, clay settling ponds and Gypstacks, we have incurred and will continue to incur significant costs to manage our potash and phosphate residual materials in accordance with environmental laws and regulations and with permit requirements. Additional legal and permit requirements will take effect when these facilities are closed. Our asset retirement obligations are further discussed in Note 15 of our Notes to Consolidated Financial Statements.
New Wales Water Loss Incident. In August 2016, a sinkhole developed under one of the two cells of the active Gypstack at our New Wales facility in Polk County, Florida, resulting in process water from the stack draining into the sinkhole. The incident was reported to the FDEP and EPA and in connection with the incident, our subsidiary, Mosaic Fertilizer, LLC (“Mosaic Fertilizer”), entered into a consent order (the “Order”) with the FDEP in October 2016 under which Mosaic Fertilizer agreed to, among other things, implement an approved remediation plan to close the sinkhole; perform additional water monitoring and if necessary, assessment and rehabilitation activities in the event of identified off-site impacts; provide financial assurance; and evaluate the risk of potential future sinkhole formation at our active Florida Gypstack operations. The incident and the Order are further discussed in Note 24 of our Notes to Consolidated Financial Statements.
Financial Assurance. Separate from our accounting treatment for reclamation and closure liabilities, some jurisdictions in which we operate have required us either to pass a test of financial strength or provide credit support, typically cash deposits, surety bonds, financial guarantees or letters of credit, to address phosphate mining reclamation liabilities and closure liabilities for clay settling areas and Gypstacks. See “Other Commercial Commitments” under “Off-Balance Sheet Arrangements and Obligations” above for additional information about these requirements. We also have obligations under certain consent decrees and a separate financial assurance arrangement relating to our facilities in Florida and Louisiana. Two consent decrees that became effective in 2016 resolved claims under the U.S. Resource Conservation and Recovery Act and state hazardous waste laws relating to our management of certain waste materials onsite at certain fertilizer manufacturing facilities in Florida and Louisiana. Under these consent decrees, in 2016 we deposited $630 million in cash into two trust funds to provide additional financial assurance for the estimated costs of closure and post-closure care of our phosphogypsum management systems. In addition, in 2017, we issued a letter of credit in the amount of $50 million to further support our financial assurance obligation under the Florida 2015 Consent Decree. While our actual Gypstack Closure Costs are generally expected to be paid by us in the normal course of our Phosphates business over a period that may not end until three decades or more after a Gypstack has been closed, the funds on deposit in the RCRA Trusts can be drawn by the applicable governmental authority in the event we cannot perform our closure and long term care obligations. If and when our estimated Gypstack Closure Costs with respect to the facilities associated with a RCRA Trust are sufficiently lower than the amount on deposit in that RCRA Trust, we have the right to request that the excess funds be released to us. The same is true for the RCRA Trust balance remaining after the completion of our obligations, which will be performed over a period that may not end until three decades or more after a Gypstack has been closed. See the discussion under “EPA RCRA Initiative” in Note 15 of our Notes to Consolidated Financial Statements for additional information about these matters.
We have accepted a proposal by the Province of Saskatchewan under which we would establish a trust valued at $25 million (Canadian dollars) in satisfaction of financial assurance requirements for closure of our Saskatchewan potash facilities. The trust is to be fully funded by us by 2021 in equal annual installments which began in July 2014.
In 2020, we executed a surety bond in the amount of approximately $82 million to establish financial assurance for closure of our Carlsbad, New Mexico potash facility with the U.S. Department of the Interior, Bureau of Land Management and the New Mexico Environment Department.
In February 2020, as part of a broader initiative under the financial assurance provisions of the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as CERCLA or the Superfund law, EPA issued a proposed decision concluding that no financial assurance was needed for the chemical manufacturing sector, which likely would include certain of our operations. In December 2020, EPA issued a final decision, consistent with its proposed decision. That became effective on January 4, 2021.
Examination of Working Places in Metal and Nonmetal Mines. The U.S. Mine Safety and Health Administration (“MSHA”) has reinstated the regulatory provisions for examinations of working places in metal and nonmetal mines that were originally
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published on January 23, 2017. The U.S. Court of Appeals for the District of Columbia Circuit issued an order on June 11, 2019, and a mandate on August 23, 2019, requiring this action. The reinstated final rule is effective on September 30, 2019, with implementation and compliance required by January 2020. In order to comply with these changes, we have adjusted our daily mine workplace examination procedures and added additional requirements for the documentation of adverse conditions when they are identified during the daily examinations.
Climate Change
We are committed to finding ways to meet the challenges of crop nutrient and animal feed ingredient production and distribution in the context of the need to reduce greenhouse gas emissions. While focused on helping the world grow the food it needs, we have proven our commitment to using our resources more efficiently and have implemented innovative energy recovery technologies that result in our generation of much of the energy we need, particularly in our U.S. Phosphates operations, from high efficiency heat recovery systems that result in lower greenhouse gas emissions.
Climate Change Regulation. Various governmental initiatives to limit greenhouse gas emissions are under way or under consideration around the world. These initiatives could restrict our operating activities, require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency or limit our output, require us to make capital improvements to our facilities, increase our energy, raw material and transportation costs or limit their availability, or otherwise adversely affect our results of operations, liquidity or capital resources, and these effects could be material to us.
The direct greenhouse gas emissions from our operations result primarily from:
•Combustion of natural gas to produce steam and dry potash products at our Belle Plaine, Saskatchewan, potash solution mine. To a lesser extent, at our potash shaft mines, natural gas is used as a fuel to heat fresh air supplied to the shaft mines and for drying potash products.
•The use of natural gas as a feedstock in the production of ammonia at our Faustina, Louisiana phosphates plant.
•Process reactions from naturally occurring carbonates in phosphate rock.
•Operation of transport trucks, mining and construction equipment, and other machinery powered by internal combustion engines utilizing fossil fuels.
In addition, the production of energy and raw materials that we purchase from unrelated parties for use in our business and energy used in the transportation of our products and raw materials are sources of greenhouse gas emissions.
Governmental greenhouse gas emission initiatives include, among others, the December 2015 agreement (the “Paris Agreement”) which was the outcome of the 21st session of the Conference of the Parties under the United Nations Framework Convention on Climate Change. The Paris Agreement, which was signed by nearly 200 nations including the United States and Canada, entered into force in late 2016 and sets out a goal of limiting the average rise in temperatures for this century to below 2 degrees Celsius. Each signatory is expected to develop its own plan (referred to as a Nationally Determined Contribution, or “NDC”) for reaching that goal.
In May 2017, the U.S. President announced that the United States would withdraw from the Paris Agreement.The country’s withdrawal was effective November 2020. However, on January 20, 2021 the new U.S. President rejoined the Paris Agreement, which could be effective as early as February 2021. In 2015, prior to this announcement,the United States had submitted an NDC aiming to achieve, by 2025, an economy-wide target of reducing greenhouse gas emissions by 26-28% below its 2005 level.The NDC also aims to use best efforts to reduce emissions by 28%.The U.S. target covers all greenhouse gases that were a part of the 2014 Inventory ofGreenhouse Gas Emissions and Sinks.While the future of U.S.’s involvement in the Paris Agreement and the status of this NDC are unclear, various legislative or regulatory initiatives relating to greenhouse gases have been adopted or considered by the U.S. Congress, EPA or various states and those initiatives already adopted may be used to implement a U.S. NDC.Additionally, more stringent laws and regulations may be enacted to accomplish the goals set out in the NDC.
Brazil ratified the Paris Agreement on September 21, 2016, committing to an NDC that includes an economy-wide target of 1.3 GtCO2e by 2025 and 1.2 GtCO2e by 2030. In 2020 Brazil submitted a new NDC, which reaffirms the country’s commitment to reducing total net greenhouse gas emissions by 37% in 2025 and by 43% in 2030. The NDC further commits to achieving climate neutrality in 2060. Since 2009, Brazil has a National Policy on Climate Change. This Policy is implemented by two instruments: the National Plan on Climate Change and the National Climate Change Fund. Additionally, sector-specific, such as the National Plan for Low Carbon Emission in Agriculture (ABC Plan). As part of its commitments in
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the Paris Agreement, Brazil enforced a Biofuels National Policy (RenovaBio) program in 2020, which sets a carbon credit mechanism based on emission reductions from the use of biofuels. Renovabio aims to increase biofuels rate in the country’s energy matrix and reached 97% of its target on the first year. The program demands fossil fuel distributor to compensate for the carbon emissions through the acquisition of CBIOS (decarbonization certificates), issued by biofuel producers (e.g. Ethanol plants). Since 2020 Congress became active in proposing other climate-related legislations and could approve new instruments to combat climate change in this current legislature.
Canada’s intended NDC aims to achieve, by 2030, an economy-wide target of reducing greenhouse gas emissions by 30% below 2005 levels. In late 2016, the federal government announced plans for a comprehensive tax on carbon emissions, under which provinces opting out of the tax would have the option of adopting a cap-and-trade system. In the plans, the federal government also committed to implementing a federal carbon pricing backstop system that will apply in any province or territory that does not have a carbon pricing system in place by 2018. As of January 1, 2019, a carbon tax of $20 per tonne increased to $30 per tonne on January 1, 2020 now applies in Canada for any emitter not covered under the federal backstop program or approved provincial program. In addition, the Province of Saskatchewan, in which our Canadian potash mines are located, has stated that a carbon pricing system will not be implemented in the province and is now pursuing legal action against the federal government. In December 2017, Saskatchewan announced a comprehensive plan to address climate change that does not include an economy-wide price on carbon but does include a system of tariffs and credits for large emitters. The plan was reviewed and approved, in part, by the federal government in October 2018. Our Saskatchewan Potash facilities will be subject to the Saskatchewan climate change plan regarding emissions at our facilities; however, indirect costs from the carbon tax associated with electricity, natural gas consumption, and transportation are currently passed through to Mosaic. As implementation of the Paris Agreement proceeds, more stringent laws and regulations may be enacted to accomplish the goals set out in Canada's NDC, such as the Clean Fuel Standard, which is now under development in Ottawa. We will also continue to monitor developments relating to the anticipated legislation, as well as the potential future effect on our operating activities, energy, raw material and transportation costs, results of operations, liquidity or capital resources.
It is possible that future legislation or regulation addressing climate change, including in response to the Paris Agreement or any new international agreements, could adversely affect our operating activities, energy, raw material and transportation costs, results of operations, liquidity or capital resources, and these effects could be material or adversely impact our competitive advantage. In addition, to the extent climate change restrictions imposed in countries where our competitors operate, such as China, India, Former Soviet Union countries or Morocco, are less stringent than in the United States or Canada, our competitors could gain cost or other competitive advantages over us.
Operating Impacts Due to Climate Change. The prospective impact of climate change on our operations and those of our customers and farmers remains uncertain. Scientists have hypothesized that the impacts of climate change could include changes in rainfall patterns, water shortages, changing sea levels, changing storm patterns and intensities, and changing temperature levels and that these changes could be severe. These impacts could vary by geographic location. Severe climate change could impact our costs and operating activities, the location and cost of global grain and oilseed production, and the supply and demand for grains and oilseeds. At the present time, we cannot predict the prospective impact of climate change on our results of operations, liquidity or capital resources, or whether any such effects could be material to us.
Remedial Activities
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") (aka Superfund) and state analogues impose liability, without regard to fault or to the legality of a party’s conduct, on certain categories of persons, including those who have disposed of “hazardous substances” at a location. Under Superfund, or its various state analogues, one party may be responsible for the entire site, regardless of fault or the locality of its disposal activity. We have contingent environmental remedial liabilities that arise principally from three sources which are further discussed below: (i) facilities currently or formerly owned by our subsidiaries or their predecessors; (ii) facilities adjacent to currently or formerly owned facilities; and (iii) third-party Superfund or state equivalent sites where we are alleged to have disposed of hazardous materials. Taking into consideration established accruals for environmental remedial matters of approximately $61.4 million as of December 31, 2020, expenditures for these known conditions currently are not expected, individually or in the aggregate, to have a material effect on our business or financial condition. However, material expenditures could be required in the future to remediate the contamination at known sites or at other current or former sites.
Remediation at Our Facilities. Many of our formerly owned or current facilities have been in operation for a number of years. The historical use and handling of regulated chemical substances, crop and animal nutrients and additives as well as
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by-product or process tailings at these facilities by us and predecessor operators have resulted in soil, surface water and groundwater impacts.
At many of these facilities, spills or other releases of regulated substances have occurred previously and potentially could occur in the future, possibly requiring us to undertake or fund cleanup efforts under Superfund or otherwise. In some instances, we have agreed, pursuant to consent orders or agreements with the appropriate governmental agencies, to undertake certain investigations, which currently are in progress, to determine whether remedial action may be required to address site impacts. At other locations, we have entered into consent orders or agreements with appropriate governmental agencies to perform required remedial activities that will address identified site conditions. Taking into account established accruals, future expenditures for these known conditions currently are not expected, individually or in the aggregate, to have a material adverse effect on our business or financial condition. However, material expenditures by us could be required in the future to remediate the environmental impacts at these or at other current or former sites.
Remediation at Third-Party Facilities. Various third parties have alleged that our historical operations have impacted neighboring off-site areas or nearby third-party facilities. In some instances, we have agreed, pursuant to orders from or agreements with appropriate governmental agencies or agreements with private parties, to undertake or fund investigations, some of which currently are in progress, to determine whether remedial action, under Superfund or otherwise, may be required to address off-site impacts. Our remedial liability at these sites, either alone or in the aggregate, taking into account established accruals, currently is not expected to have a material adverse effect on our business or financial condition. As more information is obtained regarding these sites, this expectation could change.
Liability for Off-Site Disposal Locations. Currently, we are involved or concluding involvement for off-site disposal at several Superfund or equivalent state sites. Moreover, we previously have entered into settlements to resolve liability with regard to Superfund or equivalent state sites. In some cases, such settlements have included “reopeners,” which could result in additional liability at such sites in the event of newly discovered contamination or other circumstances. Our remedial liability at such disposal sites, either alone or in the aggregate, currently is not expected to have a material adverse effect on our business or financial condition. As more information is obtained regarding these sites and the potentially responsible parties involved, this expectation could change.
Product Requirements and Impacts
International, federal, state and provincial standards require us to register many of our products before these products can be sold. The standards also impose labeling requirements on these products and require us to manufacture the products to formulations set forth on the labels. We believe that, when handled and used as intended, based on the available data, crop nutrient materials do not pose harm to human health or the environment and that any additional standards or regulatory requirements relating to product requirements and impacts will not have a material adverse effect on our business or financial condition.
Additional Information
For additional information about phosphate mine permitting in Florida, our environmental liabilities, the environmental proceedings in which we are involved, our asset retirement obligations related to environmental matters, and our related accounting policies, see Environmental Liabilities and AROs under Critical Accounting Estimates above and Notes 2, 15, and 24 of our Notes to Consolidated Financial Statements.
Sustainability
We are committed to making informed choices that improve our corporate governance, financial strength, operational efficiency, environmental stewardship, community engagement and resource management. Through these efforts, we intend to sustain our business and experience lasting success.
We have included, or incorporate by reference, throughout this annual report on Form 10-K discussions of various matters relating to our sustainability, in its broadest sense, that we believe may be material to our investors. These matters include, but are not limited to, discussions about: corporate governance, including the leadership and respective roles of our Board of Directors and its committees, and management; recent and prospective developments in our business; product development; risk, enterprise risk management and risk oversight; the regulatory and permitting environment for our business and ongoing regulatory and permitting initiatives; executive compensation practices; employee and contractor safety; and other EHS matters including climate change, water management, energy and other operational efficiency initiatives, reclamation and
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asset retirement obligations. Other matters relating to sustainability are included in our sustainability reports that are available on our website at www.mosaicco.com/ourresponsibility. Our sustainability reports are not incorporated by reference in this annual report on Form 10-K.
Contingencies
Information regarding contingencies in Note 24 of our Notes to Consolidated Financial Statements is incorporated herein by reference.
Related Parties
Information regarding related party transactions is set forth in Note 25 of our Notes to Consolidated Financial Statements and is incorporated herein by reference.
Recently Issued Accounting Guidance
Recently issued accounting guidance is set forth in Note 3 of our Notes to Consolidated Financial Statements and is incorporated herein by reference.
Cautionary Statement Regarding Forward Looking Information
All statements, other than statements of historical fact, appearing in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements include, among other things, statements about our expectations, beliefs, intentions or strategies for the future, including statements about proposed or pending future transactions or strategic plans, statements concerning our future operations, financial condition and prospects, statements regarding our expectations for capital expenditures, statements concerning our level of indebtedness and other information, and any statements of assumptions regarding any of the foregoing. In particular, forward-looking statements may include words such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "potential", "predict", "project" or "should". These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this filing.
Factors that could cause reported results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following:
•business and economic conditions and governmental policies affecting the agricultural industry where we or our customers operate, including price and demand volatility resulting from periodic imbalances of supply and demand;
•the impact of the novel coronavirus Covid-19 pandemic on the global economy and our business, suppliers, customers, employees and the communities in which we operate, as further described in Part I, Item 1A of this 10-K Report;
•the sudden and severe drop in oil demand, which could lead to a significant decline in production, and its impact on the availability and price of sulfur, a key raw material input for our Phosphate, segment operations;
•because of political and economic instability in Brazil or changes in government policy in Brazil, our operations could be disrupted as higher costs of doing business could result, including those associated with implementation of new freight tables and new mining legislation;
•changes in farmers’ application rates for crop nutrients;
•changes in the operation of world phosphate or potash markets, including consolidation in the crop nutrient industry, particularly if we do not participate in the consolidation;
•the expansion or contraction of production capacity or selling efforts by competitors or new entrants in the industries in which we operate, including the effects of actions by members of Canpotex to prove the production capacity of potash expansion projects, through proving runs or otherwise;
•political and economic instability in the Kingdom of Saudi Arabia and, in general, the future success of current plans for the MWSPC joint venture and any future changes in those plans;
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•build-up of inventories in the distribution channels for our products that can adversely affect our sales volumes and selling prices;
•the effect of future product innovations or development of new technologies on demand for our products;
•seasonality in our business that results in the need to carry significant amounts of inventory and seasonal peaks in working capital requirements, which may result in excess inventory or product shortages;
•changes in the costs, or constraints on supplies, of raw materials or energy used in manufacturing our products, or in the costs or availability of transportation for our products;
•declines in our selling prices or significant increases in costs that can require us to write down our inventories to the lower of cost or market, or require us to impair goodwill or other long-lived assets, or establish a valuation allowance against deferred tax assets;
•the effects on our customers of holding high cost inventories of crop nutrients in periods of rapidly declining market prices for crop nutrients;
•the lag in realizing the benefit of falling market prices for the raw materials we use to produce our products that can occur while we consume raw materials that we purchased or committed to purchase in the past at higher prices;
•disruptions to existing transportation or terminaling facilities, including those of Canpotex or any joint venture in which we participate;
•shortages or other unavailability of railcars, tugs, barges and ships for carrying our products and raw materials;
•the effects of and change in trade, monetary, environmental, tax and fiscal policies, laws and regulations;
•foreign exchange rates and fluctuations in those rates;
•tax regulations, currency exchange controls and other restrictions that may affect our ability to optimize the use of our liquidity;
•other risks associated with our international operations, including any potential and actual adverse effects related to the Miski Mayo mine;
•adverse weather conditions affecting our operations, including the impact of potential hurricanes, excessive heat, cold, snow, rainfall or drought;
•difficulties or delays in receiving, challenges to, increased costs of obtaining or satisfying conditions of, or revocation or withdrawal of required governmental and regulatory approvals, including permitting activities;
•changes in the environmental and other governmental regulation that applies to our operations, including federal legislation or regulatory action expanding the types and extent of water resources regulated under federal law and the possibility of further federal or state legislation or regulatory action affecting or related to greenhouse gas emissions, including carbon taxes or other measures that may be implemented in Canada or other jurisdictions in which we operate, or of restrictions or liabilities related to elevated levels of naturally-occurring radiation that arise from disturbing the ground in the course of mining activities or possible efforts to reduce the flow of nutrients into the Gulf of Mexico, the Mississippi River basin or elsewhere;
•the potential costs and effects of implementation of federal or state water quality standards for the discharge of nitrogen and/or phosphorus into Florida waterways;
•the financial resources of our competitors, including state-owned and government-subsidized entities in other countries;
•the possibility of defaults by our customers on trade credit that we extend to them or on indebtedness that they incur to purchase our products and that we guarantee;
•any significant reduction in customers’ liquidity or access to credit that they need to purchase our products;
•the effectiveness of the processes we put in place to manage our significant strategic priorities, including the expansion of our Potash business and our investment in MWSPC, and to successfully integrate and grow acquired businesses;
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•actual costs of various items differing from management’s current estimates, including, among others, asset retirement, environmental remediation, reclamation or other environmental obligations and Canadian resource taxes and royalties, or the costs of MWSPC or its existing or future funding;
•the costs and effects of legal and administrative proceedings and regulatory matters affecting us, including environmental, tax or administrative proceedings, complaints that our operations are adversely impacting nearby farms, businesses, other property uses or properties, settlements thereof and actions taken by courts with respect to approvals of settlements, costs related to defending and resolving global audit, appeal or court activity, and other, and other further developments in legal proceedings and regulatory matters;
•the success of our efforts to attract and retain highly qualified and motivated employees;
•strikes, labor stoppages or slowdowns by our work force or increased costs resulting from unsuccessful labor contract negotiations, and the potential costs and effects of compliance with new regulations affecting our workforce, which increasingly focus on wages and hours, healthcare, retirement and other employee benefits;
•brine inflows at our Esterhazy, Saskatchewan potash mine;
•accidents or other incidents involving our properties or operations, including potential fires, explosions, seismic events, sinkholes, unsuccessful tailings management, ineffective mine safety procedures, or releases of hazardous or volatile chemicals;
•terrorism or other malicious intentional acts, including cybersecurity risks such as attempts to gain unauthorized access to, or disable, our information technology systems, or our costs of addressing malicious intentional acts;
•other disruptions of operations at any of our key production and distribution facilities, particularly when they are operating at high operating rates;
•actions by the holders of controlling equity interests in businesses in which we hold a noncontrolling interest;
•changes in our relationships with other members of Canpotex or any joint venture in which we participate or their or our exit from participation in Canpotex or any such export association or joint venture, and other changes in our commercial arrangements with unrelated third parties;
•difficulties in realizing benefits under our long-term natural gas based pricing ammonia supply agreement with CF Industries, Inc., including the risks that the cost savings initially anticipated from the agreement may not be fully realized over the term of the agreement or that the price of natural gas or the market price for ammonia during the agreement's term are at levels at which the agreement’s natural gas based pricing is disadvantageous to us, compared with purchases in the spot market; and
•other risk factors reported from time to time in our Securities and Exchange Commission reports.
Material uncertainties and other factors known to us are discussed in Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2020 and incorporated by reference herein as if fully stated herein.
We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise any of these statements, whether as a result of changes in underlying factors, new information, future events or other developments.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
The Mosaic Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Mosaic Company and subsidiaries (the Company) as of December 31, 2020 and December 31, 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), cash flows, and equity for each of the years in the three-year period ended December 31, 2020, and the related notes and Schedule II-Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and December 31, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the recoverability of the carrying value of goodwill for the Potash and Mosaic Fertilizantes reporting units
As discussed in Note 11 of the consolidated financial statements, the goodwill balance as of December 31, 2020 was $1,173.0 million. Of this amount, $1,063.2 million and $97.7 million was allocated to the Potash and Mosaic Fertilizantes reporting units, respectively, with the remaining $12.1 million allocated to the Corporate, Eliminations and Other reporting unit. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances may indicate that the carrying value of a reporting unit might exceed its fair value.
We identified the assessment of the recoverability of the carrying value of goodwill for the Potash and Mosaic Fertilizantes reporting units as a critical audit matter. The estimated fair value of the Potash and Mosaic Fertilizantes reporting units exceeded the carrying value for each reporting unit, however fluctuations in the Company’s stock price and the carrying value of its assets being in excess of the market capitalization during the year indicated a higher risk that
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the goodwill may be impaired and, therefore, also resulted in the application of greater auditor judgment. For each reporting unit, certain selling prices, raw material prices, sales volume growth rates, terminal value growth rates and discount rates used in the fair value measurement of the reporting units have been identified as significant assumptions. These significant assumptions were challenging to evaluate as changes to those assumptions may impact the Company’s assessment of the recoverability of the carrying value of the goodwill.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s goodwill impairment assessment process. This included controls related to the Company’s development of the significant assumptions noted above. We performed sensitivity analyses over the significant assumptions for each reporting unit to assess the impact of changes in those assumptions on the Company’s determination of the fair value of each reporting unit. We evaluated certain selling prices and raw material prices used by the Company to assess the recoverability of goodwill by comparing them to external forecasts from industry publications and to actual results of the Company. We compared prior selling prices of the products and raw material prices to the Company’s subsequent results to assess the Company’s ability to accurately forecast. We evaluated the terminal value growth rate used for each reporting unit by comparing it to forecasted long-term growth rates from industry publications. We compared the Company’s assumptions of sales volume growth rates to trends in the historical financial results and relevant industry data including current and projected economic conditions. In addition, we involved valuation professionals with specialized skills and knowledge who assisted in:
•evaluating the Company’s discount rate, by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities