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Edited Transcript of IPI earnings conference call or presentation 12-Mar-19 2:00pm GMT

Q4 2018 Intrepid Potash Inc Earnings Call

DENVER Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Intrepid Potash Inc earnings conference call or presentation Tuesday, March 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex J. Wagner

Intrepid Potash, Inc. - VP of Business Development - Oilfield Services

* Joseph G. Montoya

Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer

* Matt Preston

Intrepid Potash, Inc. - IR Officer

* Robert P. Jornayvaz

Intrepid Potash, Inc. - Executive Chairman, President & CEO

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Conference Call Participants

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* Christopher Silvio Perrella

Bloomberg Intelligence - Research Analyst

* DeForest R. Hinman

Walthausen & Co., LLC - Research Analyst

* Jason Ursaner

* Jeremy Noah Rosenberg

Morgan Stanley, Research Division - Research Associate

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* John Ezekiel E. Roberts

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals

* Jonathan R. Evans

SG Capital Management LLC - Research Analyst & Portfolio Manager

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Welcome to the Intrepid Potash Fourth Quarter and Year-End 2018 Earnings Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead, sir.

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Matt Preston, Intrepid Potash, Inc. - IR Officer [2]

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Thanks, Gloria. Good morning, and welcome, everyone. I remind you that parts of our discussion today will include forward-looking statements as defined by the U.S. securities laws. These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable. These statements are based on the information available to us today, and we assume no obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the SEC.

During today's call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in this morning's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com.

Presenting on the call today are Bob Jornayvaz, our Co-Founder, Executive Chairman, President and CEO; and Joseph Montoya, Vice President and Chief Accounting Officer. Mark McDonald, Vice President of Sales and Marketing; and Alex Wagner, Vice President of Business Development for Oilfield Solutions are also available for questions.

I'll now turn the call over to Bob.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [3]

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Thank you, Matt, and good morning to everyone, and we appreciate you joining us. As you know, we delivered a solid fourth quarter, highlighted by improvements in net income and cash flow, continued strength in our potash segment and a return to positive gross margin for our Trio segment.

Net income improved $9.3 million and $34.4 million in the fourth quarter and full year of 2018 compared with the same periods last year, while full year operating cash flow increased $47.5 million year-over-year. Total cash received for water ended the year at $30.2 million. Our improved liquidity position has allowed us to actively pursue opportunities to grow our diverse business lines, and we recently announced details on our pending acquisition of a 51% undivided interest in the Dinwiddie Jal Ranch and related assets. This pending acquisition, which will operate as the Intrepid South Ranch, will add water rights, surface rights, saltwater disposal and other oilfield-related assets to our existing portfolio in the perfect location to the south, to fully complement and now allow us to further expand our footprint. The significant infrastructure announcements of tens of millions of dollars of pipelines and frac ponds on the east side of our property, to which we will market additional water, will allow for the continued expansion of current sales from our existing rights or legacy rights as some have referred to them. The location and diverse set of revenues from the Dinwiddie Ranch are a great strategic fit as we grow our water supply and develop the more complete midstream water infrastructure system for our partners in Southeast New Mexico. The Dinwiddie assets have a strong history of generating positive cash flow with revenue of approximately $13 million in 2018. The property includes approximately 70,000 acres of owned and leased land in the Northern Delaware Basin, part of one of the most productive oil and gas basins in the world. 750 acre feet of currently permitted water rights as well as additional incremental water rights to permit, produce and market. It also includes a significant royalty interest in an operating saltwater disposal well and multiple surface and road use locations with oil and gas operators. There are currently over 600 wells permitted on the ranch alone and at least 1,500 acres permitted around us. We expect our 51% undivided interest in this property will quickly contribute to our bottom line in addition to the existing diversified cash stream -- cash flow streams.

As we mentioned earlier, we believe there's meaningful growth potential for the property through additional water permitting and sales, saltwater disposal wells and the addition of produced water transportation in the future. The location of the property puts us near our midstream and water solution company partners, and given our unique set of assets, we are currently pursuing multiple ways to further utilize our water rights, while allowing us to grow our other oilfield offerings.

The close proximity to our HB and East mines will also allow us to leverage our existing highly trained workforce, and we believe we have the opportunity to hit the ground running hard. We expect to see the benefit of some of these opportunities as early as the second quarter of 2019 and believe there's room to grow this revenue -- this revenue run rate in subsequent quarters.

Further, EOG has waived its right of first refusal on the property, and we expect that the Dinwiddie acquisition will close later this month. We will finance our portion with cash on hand and our existing credit facility. This property also complements our existing offerings of water, heavy brine, KCI mixing and trucking services, which are included in our new oilfield solutions segment. These high-margin touch points with the oil and gas companies, while not moving the needle significantly on our overall revenue, more than pay for themselves and allow us to better serve our customers and increase our presence in the oil and gas operations around our mines.

For the fourth quarter and full year of 2018, year-over-year sales growth in the oilfield solutions segment was largely attributable to an increase in water sales, while fourth quarter results also benefited from an increase in KCl mixing revenue.

During the fourth quarter, we saw continued growth in our water business. We've put in place a diverse set of arrangements aimed at generating long-term recurring revenue from our water sales. Our water customer partners are investing significant capital to develop and enhance the infrastructure around our mines to deliver this water to end users in the oil and gas industry. We're excited about the potential of this growing business segment and the large footprint that we have now created in the Northern Delaware Basin that covers the entire part of Southeast New Mexico.

For the full year 2019, we expect cash received from our total company water sales, including byproducts, but excluding the acquisition of the Dinwiddie Ranch, of between $25 million and $35 million, and revenue between $20 million and $30 million. We expect to update these numbers throughout the year as we have more insight into frac schedules, more partner relationships, infrastructure investments of our water partners that are currently under construction and other opportunities afforded to us by our pending Dinwiddie acquisition and expanded footprint in the Delaware Basin.

Looking at the rest of our business, we're pleased with results from our potash segment, where price and sales increases drove year-over-year sales and margin improvements. During the fourth quarter, potash net realized price continued to increase, up 9% compared to the fourth quarter of last year. We expect a strong spring season with fourth quarter price increases accepted in the market and continued healthy domestic demand for both potash and byproducts. An above average of evaporation season has us well positioned to capitalize on this demand through wet weather -- though wet weather is delaying field work across the country, which will push some sales into the second quarter.

For Trio, year-over-year price increases help buoy us to a positive gross margin for the segment for the first time since 2016. Similar to our potash sales, wet weather in many parts of the country could push some sales into early second quarter, but we don't expect any impact to overall volumes for the first half of the year.

Internationally, we've seen meaningful price increases in certain markets where we'll work to grow our business and maximize freight savings into those areas. Over the last several years, we've diversified our cash flows for our efforts to maximize the value of our assets as evidenced by the growth in byproducts and the creation of our oilfield solutions segment. Heading into 2019, we've already taken a big step towards further cash flow diversification with the pending acquisition of the Dinwiddie Ranch. We believe these steps strengthen our overall platform, adding more resilience to our overall business model and enhancing overall shareholder value. We believe these strategic moves combined with stability in potash and Trio prices, growth in byproducts and an above average 2018 evaporation season have us well positioned to continue to generate strong cash flows and allow us to pursue additional growth opportunities.

I'll now turn the call over to Joseph, who will discuss our financial results and outlook.

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [4]

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Thank you, Bob, and good morning, everyone. During the fourth quarter, we generated net income of $7.6 million or $0.06 per diluted share, as improved pricing for potash and Trio continue to improve our bottom line compared to previous periods. That brings our full year net income to $11.8 million and EPS of $0.09 per share.

This success is also due in part to growing our oilfield solutions business. Accordingly, in our press release filed this morning, you'll notice a few changes to our consolidated and segment presentation compared to prior quarters. We are now presenting oilfield solutions as a third segment in addition to the potash and Trio segments. The new oilfield solutions segment includes certain sales of water, high-speed KCl mixing, saltwater disposal, trucking and other activities associated with oil and gas production. While not included in the 2018 results, going forward, the results of the pending acquisition will also be included in this segment. Additionally, we are now recording the sales of byproducts as revenue instead of as a credit to the cost of goods sold. Prior period amounts have been recast to be consistent with current presentation and quarterly figures for the past 2 years will be available on our website later this week.

Our potash segment generated $10.7 million in gross margin during the quarter as price increases and increased sales volumes propelled our potash segment to another great quarter. We produced slightly less potash during the fourth quarter than the previous year due to a decrease in run time across our facilities, but we still anticipate producing more tons in the 2018, '19 solar production year due to above average evaporation during 2018. As we enter the spring season, we expect to benefit from recent price increases and increased spring truck sales, which generally carry lower freight costs. In the first quarter of 2019, we expect this will drive a $15 to $20 increase in our average net realized sales price when compared to the fourth quarter of 2018.

Our Trio segment generated a gross margin of $700,000 in the fourth quarter because of the increase in fuel pricing, increased byproduct sales and fewer international sales. This was an improvement of $4.1 million compared to the year-ago period and continues the significant improvement in overall profitability for this segment that we saw during the third quarter. Reduced international sales combined with recent domestic price increases led to an increase in our average net realized sales price in the fourth quarter of 2018. Heading into the first quarter of 2019, we expect a slightly lower average net realized sales price per ton than the fourth quarter due to increased international shipments, somewhat offset by higher domestic prices.

Trio sales volumes were down 21,000 tons in the fourth quarter compared with last year, primarily due to the timing of a large international shipment close to the end of 2017. Changes associated with the adoption of the new revenue rec standard altered the timing of revenue recognized for this shipment, and instead of recording the sale in 2018 as we had under the old standard, we've recasted back to 2017 in conjunction with the adoption of the new standard. Improved ore grades drove a 10% increase in the fourth quarter Trio production compared to prior year. Full year production decreased 11% compared to prior year due to the reduced production schedule, which began in the second half of 2017.

Our oilfield solutions segment delivered strong results in the fourth quarter, led by water sales of $3.5 million compared to $2.9 million in the fourth quarter of 2017. Fourth quarter also saw an increase in demand of our high-speed mixing services, a trend that has continued into 2019. Gross margin as a percentage of sales decreased in 2018 due to an increase in mixing and trucking, which on average carry lower margins than our water sales. We also incurred increased legal fees related to the permitting process and third-party protests of our water rights. As a reminder, a portion of the water we sell is a byproduct from the potash and Trio operations and the sale of that water is recorded to those respective segments. Total company water sales across the 3 segments were $19.8 million for 2018. Total cash received related to water sales was $30.2 million, inclusive of $11.9 million in cash received for future water deliveries, which is reflected as a contract liability at year-end.

Fourth quarter SG&A expense was similar to prior year as increased legal expenses were offset by cost savings as we did not meet the pre-established targets required to pay bonuses under our bonus program in 2018. We expect 2019 SG&A expense will be between $24 million and $27 million due to increased stock comp, legal expenses and bonus compensation.

Interest expense increased during the quarter due to a make whole payment and write-off of deferred financing fees associated with our scheduled $10 million prepayment made on the senior notes in the fourth quarter of 2018. We expect to remain in the most favorable financing tier in our senior notes for all of 2019.

We ended the year with $33 million in cash and no outstanding balance on the $50 million credit facility. As Bob mentioned earlier, we expect to finance the Dinwiddie acquisition with cash on hand and some short-term borrowing under our credit facility. With a good spring season ahead and continued strength in our water and byproduct business, we expect to remain in a favorable liquidity position for all of 2019. That concludes our prepared remarks, and operator, we're ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mark Connelly with Stephens.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [2]

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Two questions. Could you give us a sense of the incremental investment cost that you referenced for the ongoing business development? I mean, looking at that ex, the acquisition cost, is it going to be higher in '19 versus '18? And is it a meaningful number?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [3]

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Well, I don't remotely understand your question. Are you talking about the Dinwiddie? Or are you talking about the pipelines being built on the East? Mark, can you clarify what you're asking.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [4]

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Sure. I mean, in the release, you talk about ongoing development activity in 2018, and now you've picked up this new acquisition. So I'm just trying to figure out, is there a lot of additional spending that's going to come along with this?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [5]

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No. In fact, it's really quite small in terms of the returns achieved. I mean, we're talking minimal amounts, significantly less than $4 million, $5 million.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [6]

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Okay, okay, that's fine. It was hard to say -- to tell from the release whether the spending has already happened or not. Okay, so that's the first thing. Can you talk generally, Bob, about how you think about development of oil and gas activity in the geographies that are relevant to you? This is relatively new business over the last couple of years, and how do you think about the longevity of this business? It's clearly coming your way now, right?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [7]

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Well, it's in our backyard. And depending upon which article you read, we've got decades and decades of reserves, thousands of wells that are being permitted that totally surround us in just the Northern Delaware Basin in Southeast New Mexico. And so we've really focused on making sure that we can service, and it turns out that the northern portion of the Delaware in Southeast New Mexico, because of the multiplicity of pay zones, has become the most prolific area overall. So we've really concentrated on having our footprint as we're pretty much surrounded, being able to service the east side of our property with certain water groups that are now putting in tens of millions of dollars of pipelines, frac ponds, et cetera, to greatly expand our water sales to the north and the east. The Dinwiddie fits in as it connects all this together on the south, and then we handle everything on the west, if you will, with excess water that comes off some of our Caprock infrastructure as well as our Pecos River rights. So we now have a very well thought-out strategic footprint, so that we can service what has become largest oil fields in the world.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [8]

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Right, okay, that's super helpful. And if I can just squeeze one more question in. You talked about the shifting mix of export where you're going to try to focus that business on the markets with better returns and better freight. How is that process going? You've talked about that for the last couple of quarters.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [9]

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It's going really well. I mean, we've just has been highly selective. We've said no to certain sales. We've got some good sales that are booked in the second quarter going into South America that we feel very, very good about. We've seen the price increases stick and with larger volumes, we've been able to bring down freight costs. So on that -- in that arena, I think we've done a good job of really focusing on our netbacks and maximizing margin.

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Operator [10]

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Our next question is from John Roberts with UBS.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [11]

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Will you report a minority interest line now after you close this next deal and the margins on the new acquisition here, Dinwiddie, is it similar to your current water segment or do you expect it to be the same?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [12]

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Yes, the answer to both of your questions. We'll be consolidating the revenue of the Dinwiddie assets, but as we only own 51%, we'll be showing a minority interest. And I'll let Bob or Alex take the second part of the question, but I believe the answer relative to returns on that property transactions will be similar to our current.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [13]

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Yes, I would say because we have virtually no basis in our water rights up near the mine, our margins on those are significant, but the price, because of the location of the Dinwiddie property, the price of water is going for, in some cases, 2 to 3x what we're getting to the north. So it's more than offset. So when you look at water strategically, the key is just like in real estate, location, location, location. And as we're now surrounded by oil and gas production of the highest quality in the world, we want to have a footprint in all of those areas and recognize the ability to turn it into one more major system, if you will, or massive system that can supply, not only the water logistics companies but dealing directly with oil companies themselves. So it takes us to a whole another level.

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John Ezekiel E. Roberts, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst, Chemicals [14]

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And then is Sherbrooke just a passive financial minority partner? And do you have any rights to buy them out over time?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [15]

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We do have a right of first refusal, and Sherbrooke is a company that brought us the deal. And so as we were -- everyone's out looking in this part of the world and they approached us. And so they're paying for 49% for 49% interest, and we're paying 51% for a 51%, we'll operate the property. And the beauty is because of our labor force, the machinery that we have just 20 minutes down the road, all the equipment that we have in place, our ability to take advantage of anything from the millions of dollars of caliche sales, the ability to build the roads, to build pads, to service the water infrastructure, to lay the water infrastructure, I mean, it's just starting in terms of the number of permits that are just on the ranch itself.

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Operator [16]

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Our next question is from Vincent Andrews with Morgan Stanley.

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [17]

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This is Jeremy on for Vincent. First question on Trio. I was wondering, were there any onetime items that drove the positive gross margin in the quarter? And if not, do you think that can remain positive in '19?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [18]

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Thanks for the question. I feel -- the first -- the answer to your first question is no. Very kind of standard stable quarter, if you will. As to the second part of your question, it really all depends on how successful we are relative to our volume -- our price over volume strategy. If that continues, as Bob said it, we've been successful, then that will continue. As I mentioned in my prepared remarks, we will have some international sales in Q1 that will bring that down a little bit, but in the long run period-over-period, year-over-year, it should start to stabilize.

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [19]

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Okay, got it. And then...

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [20]

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There will be some fluctuation from quarter to quarter is my point.

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Jeremy Noah Rosenberg, Morgan Stanley, Research Division - Research Associate [21]

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Right. In terms of oilfield services, just trying to understand if you could quantify what percentage of that is the water business versus some of the other lines you mentioned like trucking, like oil and gas?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [22]

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The vast majority is water. And due to new accounting rules, that's why you're seeing it reported the way it is. And so we apologize if it appears complicated, but as you know, the accounting profession continues to move the bar and change the rules, so we have to act accordingly. So we'll do our best to simplify it and try to make it as understandable by breaking it into the segments that we are forced to do so by the new accounting rule.

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [23]

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What you'll see and helpful -- will be helpful for you as you're working on modeling, Jeremy, is the additional disclosures that we put in our 10-K this year relative to the new revenue recognition standard in note, where you'll see a lot more information than we've put in before that will help break out exactly what we're generating from water, which we haven't ever done before. So I think that will be helpful for you and other folks as well.

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Operator [24]

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Our next question comes from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [25]

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Potash costs were a lot higher in Q4, but those costs are kind of similar to the first half of the year. So looking at 2019, what is sort of the right run rate for potash costs are? Will it look more like the Q4 number or Q3 number, maybe you can help.

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [26]

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Again -- and I'm not trying to be opaque by any sense of the word, Joel, but what will be helpful for you and the teams that are modeling will be all the detail that we put on the website later this week because what's happening is, you're looking -- probably if you're just taking the Q3 10-Q or earnings reported where the byproducts were reported as a reduction of cost of goods sold, and so therefore, cost of goods sold look lower, and now we're reporting it as revenue. So therefore, it's making our cost of goods sales -- cost of goods sold look higher. If you look at the gross margin, there's no change because net-net, they both get to the same bottom line of gross margin. But it -- I hate to sound like Bob here, but because of the revenue recognition changes that we've reported, it's becoming a little bit confusing. So...

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [27]

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Joel, so you're very, very aware of the accounting rule changes given your position. And so that's why we changed it -- had to change it in the fourth quarter. And so instead of having byproduct sales, it's reported differently. So net-net, it's still the same numbers.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [28]

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Okay. And Bob when you look at your strategy now for water, are you happy with what you have? Are there some holes you still want to fill in the next couple of years? I mean, what do you have? Or what more do you want?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [29]

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A lot. It's working really, really well. And so we're marketing a fraction of what we have. And when you look at what the -- the infrastructure that's been around us to service not only our water rights that are farther to the north, we couldn't be in a better position to service Southeast New Mexico in its entirety. So we're very excited about what's going on in Southeast New Mexico, the various companies that are spending tens of millions of dollars on water delivery infrastructure that we are participating in by providing water into that infrastructure. So we're very pleased with how it's playing out. And we look forward to the significant growth that we're going to see in 2019 and 2020 as this plays out.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [30]

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And finally, I think you were looking at maybe helping to partially fund a pilot plant, I think, at Wendover to investigate whether you have that commercial lithium brine potential, could be in lithium. Could you give an update on that, please?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [31]

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Yes. We've actually -- we're talking to several groups. As you well know, the complex -- producing lithium from complex brines is difficult, to say the least. And so rather than us -- there are a lot of companies, both Canadian juniors that you're very familiar with, as well as folks down in South America that are trying to produce lithium from complex brines. So there's interest in participating because the knowledge from the technology is what's most valuable.

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Operator [32]

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Our next question is from Christopher Perrella with Bloomberg Intelligence.

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Christopher Silvio Perrella, Bloomberg Intelligence - Research Analyst [33]

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On the outstanding debt, is there any payments scheduled for 2019, sizable ones? And is there anything in that, when you reworked the debt, that precludes you from repurchasing shares or issuing a dividend going forward?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [34]

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So no, the answer to your question relative to requirements for debt payments in 2019. The first tranche of our debt, as you know, comes due in 2020. That will be the $20 million tranche and then nothing due again until 2023 and 2025. Because of the very favorable rates that we are enjoying at present, we don't have any immediate plans to do any restructuring of the debt, but given the successful results that we're reporting, we have opportunities, but we don't have any plans.

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Christopher Silvio Perrella, Bloomberg Intelligence - Research Analyst [35]

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All right. And then, with a year of the water sales under your belt and a good handle on what's coming down, how should we think about seasonality of cash generation, the cadence over 2019 here? Is there a big slug when you -- in 2Q, 3Q now? Or is it more smooth because of the water sales?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [36]

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My guess is you're going to just see it get smoother and smoother and smoother as additional infrastructure gets built out as we're working more directly with both the water transmission companies and the actual oil companies setting out their frac schedules. I would say in Southeast New Mexico, there was a brief hiatus while the legislature met. People came up with their 2019 budgets. But I think, like in any situation, as you see the pipelines that have had -- there was a condensate pipeline that was converted to an oil pipeline, so the takeaway capacity in certain parts of the Delaware are getting better and better. So as you see the infrastructure built out, the takeaway capacity being added onto, we feel like we're in a perfect position to grow this at a very rapid pace as we move into the next several quarters.

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Christopher Silvio Perrella, Bloomberg Intelligence - Research Analyst [37]

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All right. And then, one quick one. Is it only the big contract that has the disconnect between the revenue and the cash generation? Or with this acquisition, are you -- similar deals where there's a lag between the revenue recognition and the earnings recognition and when you get the cash on the books?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [38]

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I tell you, whenever we can organize a take-or-pay contract, which -- there are folks that like them. Take-or-pay contracts create that delta between cash receipt and revenue recognition. So right now, it's only that one primary contract, but there are other folks that we're talking about take-or-pays with. So if we enter into more take-or-pays, it will create that slight offset, if you will. It all comes out in the wash at the end of the day, but that's just what a take-or-pay does because they're paying you for the right to have availability of water.

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Operator [39]

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The next question comes from DeForest Hinman with Walthausen & Company.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [40]

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Impressive quarter. Just some more color on the Dinwiddie Ranch. You mentioned $18 million of revenue in prepared remarks. Can you help us understand...

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [41]

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I think I said $13 million.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [42]

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Okay, $13 million, excuse me. Can you help us understand what that is? Is it primarily water? Is it some sort of rental revenue you received for some of these frac ponds? I just want a better understanding of what is that right now?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [43]

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Well, it was -- in 2018, it was a combination of some water, some caliche, some damages. This -- we bought this from a family that's owned it for decades and decades and decades and ran it as a cattle ranch. And so as the activity increased around them, there was tremendous opportunity for -- that we saw, to expand it significantly. And so that's what we're excited about, is instead of having a rancher managing it, that's a cattle rancher, you now have Intrepid that has 400-plus employees 20 miles up the road, we own all the equipment, we own everything to significantly improve all the various opportunities for revenue, whether it's saltwater disposal, freshwater delivery, caliche sales, road use, pad building, just a very robust set of diverse income opportunities. I hope that sort of answered your question.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [44]

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No, that's helpful. So when we hear about the $13 million, that's kind of the base that's going to get clearly built off going forward.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [45]

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That's how I see it.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [46]

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Okay. And then, when we're thinking about that $13 million, is that a gross number? And then as that grows, there's the royalty part of the business that's related to that, that would be a subtraction from that? Or is the $13 million the...

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [47]

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The royalty only applies in the event we drill saltwater disposal and is proportionately reduced to the interest. So in other words -- it's not a straight royalty off any freshwater caliche. It's very specifically related to saltwater disposal, which generated very -- a small amount of that revenue, but we've got plans to expand that opportunity pretty significantly. So I just want to make it clear that, that royalty that they're reserving is only on future saltwater disposal pieces.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [48]

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Okay. I did want to explore that a little bit, if you can help us understand that. What is the opportunity to put saltwater wells on that ranch? I guess, from a comparative -- it sounds like there is some well -- saltwater well or wells, plural, on that property already. How many saltwater wells could there be? And what is the cost to drill a saltwater well in that area?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [49]

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It really depends on which zone you're looking at. I mean if you're looking at a Devonian well, which we're not really as -- I mean, you're asking a very broad geologic question, whether you're talking about going into the Devonian. We've got some other thoughts that we're not going to go into right now, about a much better way to handle the saltwater disposal piece. But that's the good news, is that there is a very significant opportunity that exists that in future quarters, as that matures and the potential joint ventures that we're discussing with adjacent ranch owners and oil and gas companies, we just think it's a very significant opportunity, we'll give you more color on as that opportunity develops.

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [50]

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Yes, DeForest, I guess, along those lines, you should basically consider no royalty in any modeling that you're going to do since we currently don't have any saltwater disposals in any of the numbers. And as Bob says, as we start building those out and giving you more information, at that point, it would be appropriate to introduce the royalty.

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DeForest R. Hinman, Walthausen & Co., LLC - Research Analyst [51]

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Okay, that's very helpful. I'm just trying to better a handle on the strategy. And then, as it relates to EOG not exercising their right of first refusal, it's obviously positive to get the deal closed, but when I read that, it made me think there's some sort of contract relationship with them from a supply perspective. It wasn't clearly stated, I guess, from the last answer from the previous questioner, but do we have a supply contract with EOG when we close this deal or not?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [52]

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In terms of supplying water and access to them, the answer is yes, but it has virtually no impact on -- it would have had no impact on 2018 revenues and would have minimal impact. And if you go to EOG's website, you're reading their press releases or any of their IR presentations, EOG is very specifically trying to get out of their ancillary businesses and focus primarily on oil and gas drilling and then buying their services, rather than building them out themselves. So it was -- it's a great fit, it's a great new relationship with EOG that we're excited about. And so just it simply didn't fit into their announced -- publicly announced plans, which are easily and readily available throughout their IR presentations in their website.

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Operator [53]

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Our next question is from Jason Ursaner with Bumbershoot Holdings.

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Jason Ursaner, [54]

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Just first on the potash, wanted to follow up on Joel's question. You're now seeing all the byproducts as revenue, but some of that is in the new segment, but you still have about $5 million that looks like it came through within the potash segment. So if I look at -- you gave kind of the full breakdown of water, mag chloride, salt, brines and other. Is there any high-level way to think about which of those is kind of going into each segment?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [55]

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I would say minimal amount. I guess, probably the best way to look at it, Jason, will be to take the total water number and then compare that to the segment number and then it's probably split relatively evenly between Trio and potash. What you're really going to see in the difference, kind of a follow on to Joel's question, is really less to do with water and more to do with the other byproducts that primarily relate to potash, specifically the magnesium chloride that we've had for years and years and we'll continue to have, and the salt and the brines.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [56]

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And Jason, I just want to make it clear, you'll see a new IR deck coming out trying to clean up some of this, so that it makes it very easy to understand, and we'll be on the road in a pretty significant fashion, so that you can just physically see from maps, and when you see the infrastructure that's been built and our current infrastructure and how it fits into it, the whole situation in Southeast New Mexico makes so much more sense. So we apologize for any temporary confusion, but we're going to do our best to get a new IR deck out that really makes it simpler to understand and then we'll be on the road quite a bit showing people the jigsaw puzzle that we feel we've put together.

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Jason Ursaner, [57]

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Sure. But just I guess, on the potash side, the $5 million-or-so of byproduct, if I'm looking at it from a cost perspective, if I kind of took that the old way as a credit, I mean, it looks, from a cost perspective, like you'll still be well below $100 a ton, but now that you're reporting it as revenue, is it kind of fair, the success you're having in growing the byproducts is actually kind of hurting your reported cash cost now even though it's helping gross margin?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [58]

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Yes, that's exactly -- although I would say it's more transparent, I would say now, than it has been in the past because that number was buried before in cost of sales. And now we are disclosing it exactly, and so...

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [59]

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But your answer is totally -- your question is totally on line that the byproduct revenues are increasing and they're doing better, and they're becoming a larger percentage and that's why they are being reported the way they are because of the success.

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [60]

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Agreed. And we -- as you recall, we discussed that. I mentioned that we would be doing that on the third quarter call, and so this is just further execution of that strategy and now accounting aligned with that strategy execution.

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Jason Ursaner, [61]

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Okay. And then, just on the sales side, looking forward into next year, you talked about the weather issues kind of delaying, I guess, some sales into Q2 given the wetter weather. Is there any issue on the production side with the weather in terms of rains that you guys had that would impact the evaporation rates you saw?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [62]

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No. In fact, we kind of had the ideal situation. So we had the right amount of evaporation in Carlsbad and Moab that we wanted. We had precipitation in Utah, in Wendover, in wintertime, which is what you want. So I would say 2018 ranks as one of the better evaporation seasons that we've ever had.

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Jason Ursaner, [63]

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Okay. So the production being down year-to-year, that was more just, I think, Joseph, you've mentioned the timing issue of when the plants reopen, not a weather related?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [64]

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Yes, not weather-related, more timing of following -- or harvesting, sorry, production.

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Jason Ursaner, [65]

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Okay. And then on the water. I guess, just first on the Dinwiddie acquisition. I guess, going back, Bob, you'd talked a lot about how the existing water you had. I think most of what you're doing is based on around 1/3 of your water rights and that you had a very, very broad footprint to begin with. So I guess, just -- you talked a lot about the East, the acquisition should handle, I guess, parts of the East of the plant. Maybe you could talk a little bit more about where the footprint now builds out in terms of what the acquisitions you see there.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [66]

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Our Caprock water wells, which are on the north side of our property, service the oil and gas activity on the north side and have on the east side, but didn't take us farther southeast. So there have been at least 2 major public announcements of infrastructure projects that border the east side of our property and take water south, which we will be participating in. The first major 1 million-barrel frac pond is actually filling up with water as we speak today. The second 1 million-barrel pond is under construction, and the third one has had the civil work done and everything should be up and operational on the east side of our mine, I would say, within the next 90 days, which then allows us to market more water off the Caprock side where we own approximately 16,000 acre feet on the north and east side. And then, if you go over to the west side, we service some of that with pipeline that comes off the Caprock system that goes a little bit to the west and then we have our Pecos River rights, which help us service even farther west into the Southwest. And then, the Dinwiddie, which is due south, really complements the entire Northern Delaware or the entire part of Southeast New Mexico that has oil and gas production. So we now -- if you can think of in terms of a giant square or rectangle, we now have the ability to deliver water literally where there has now been thousands of wells permitted, not to mention the number of docks.

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Jason Ursaner, [67]

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And the infrastructure projects, I know, Select Energy, very specifically talked about building a $25 million pipeline that's supported by a take-or-pay contract, and they said that it's finding the customer with an active development program kind of in that area is not the challenge, it's finding the freshwater right, availability. I mean, when you talk about participating in these, is it fair to say that, I guess, you are a part of that discussion and would be part of that?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [68]

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That's very fair to say.

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Jason Ursaner, [69]

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Okay. And in terms of growth in the water, the guidance is kind of flat year-to-year on an organic basis. When you think about growth, I mean, obviously, you've tried to remain conservative. Is it organic growth? Or is it all going to be mostly acquisition growth?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [70]

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It should all be organic. If you include -- if you assume we're going to close the Dinwiddie, that's going to have its own growth projection. But the organic growth should really begin to take off as a variety of these projects get hooked up and online and producing. So when you go from using lay flat to -- lay flat on the surface to service certain areas to a massive 24-inch buried pipeline with 3 million-barrel frac ponds, it's just -- it's a whole different style of infrastructure that allows you to move much greater quantities of water.

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Jason Ursaner, [71]

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Okay. And just last question for me. A lot has been made about recycling the water versus freshwater. I guess, just at a high level, what's -- a lot of what you're doing at this point has been in the freshwater. It seems like you're moving in the direction of doing a lot more things, but just, I guess, what's your take on some of these operators using freshwater versus recycled water?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [72]

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We're seeing people attempt -- make the attempt, but we're still seeing significant waters and -- we literally are -- we've got a group going to Midland literally every week talking with just the vast number of oil companies that we're now dealing with in Southeast New Mexico. And so there is a lot being talked about, about trying to use produced water and use recycled water. But we're -- the technology is just not there yet on a commercial basis. Alex, you've been looking at this for literally a decade, given your experience at Halliburton and other companies, if you want to give some color to that?

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Alex J. Wagner, Intrepid Potash, Inc. - VP of Business Development - Oilfield Services [73]

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Certainly. So the issue with produced water is primarily logistics concern. And so while there is quite a few different companies out there that have developed proprietary technologies in and around how to reuse the water, the biggest challenge remains aggregating it in sufficient volumes in order to be able to use it. And so with the current freshwater supply and delivery infrastructure in place, it's difficult for produced water to compete.

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Operator [74]

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Our next question is from Jon Evans with SG Capital.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [75]

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Can you talk just a little bit about, just a clarification again, on potash realization sequentially from the $270? What do you think it will be up again, roughly, in a range?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [76]

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$15. We said $15 to $20 in the prepared remarks, so somewhere around $285.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [77]

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Great. And then just on the volume side, you grew about 3% and the other gentleman talked about the production being down. If demand is strong enough in the market, which it seems like for potash, can you guys grow 2% to 3% again in volumes this year?

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [78]

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That's a tough question to answer. A lot depends on the evaporation rates. We've had a good year, and it fluctuates from year to year. We have some ability to increase production, but I would be reluctant to give too much upside on that.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [79]

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Okay, and then just the last question...

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [80]

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But we rightsized -- if I can just add a little bit of color. We rightsized our facilities in the 2016 time frame. We were -- we shortened the kind of range of available production and gave us the opportunity to decrease the circumference to which we were selling in and increase our pricing. And so that was the strategy that we set out and we're executing on.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [81]

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And then the last question. Just could you update us, since the filing hasn't come out, just what is left on the deferred that you have to the large customer as you come into the next year and then we receive...

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [82]

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$11 million.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [83]

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I'm sorry.

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [84]

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That was in the prepared remarks, it's $11 million.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [85]

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Okay. And so can you just help me understand that of -- I know -- when do you get to realize that? Is there a time period where your accountant...

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [86]

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There would be take-or-pay contract there. I don't want to get into too much accounting detail because I'll bore everyone else on the call. But there is a point in time, at which we will start recognizing the revenue, even if we didn't deliver the water. The request for water, the forecast from our customer and the need in that area is just so robust we don't think we're going to get there. We think we're going to deliver the water before accounting rules would kick in and let us take it. But still be a little while before that kicks in.

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Jonathan R. Evans, SG Capital Management LLC - Research Analyst & Portfolio Manager [87]

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Okay. And then, the last question relative to that. Will you still get the $15 million payment for 2019 then? Will you get it all upfront, again? Or is it going to be over quarters? Or how is the cash flow in that take-or-pay contract?

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [88]

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As it's always been from its announcement, it's been quarterly. Well, thank you for the question.

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Joseph G. Montoya, Intrepid Potash, Inc. - VP, CAO & Principal Financial Officer [89]

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I would say, we are expecting to receive the range of cash that we've disclosed.

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Operator [90]

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This concludes the question-and-answer session. I would like to turn the conference back over to Bob Jornayvaz for any closing remarks.

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Robert P. Jornayvaz, Intrepid Potash, Inc. - Executive Chairman, President & CEO [91]

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Thank you, everyone, for taking the time to dial in today. We really appreciate your interest in Intrepid and look forward to speaking with everybody in the near future.

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Operator [92]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.