CHS INC.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") is intended to provide a reader of our financial
statements with a narrative from the perspective of our management regarding our
financial condition and results of operations, liquidity and certain other
factors that may affect our future results. Our MD&A is presented in the
following sections:
•Overview
•Business Strategy
•Fiscal 2022 Highlights
•Fiscal 2023 Outlook
•Operating Metrics
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Policies
•Recent Accounting Pronouncements
Our MD&A should be read in conjunction with the accompanying audited financial
statements and notes to those financial statements and the Cautionary Statement
regarding forward-looking statements found in Part I, Item 1A of this Annual
Report on Form 10-K.
Overview
CHS Inc. is a diversified company that provides grain, food, agronomy and
energy resources to businesses and consumers on a global scale. As a
cooperative, we are owned by farmers, ranchers and member cooperatives across
the United States . We also have preferred shareholders who own our five series
of preferred stock, all of which are listed and traded on the Global Select
Market of The Nasdaq Stock Market LLC . We operate in the following three
reportable segments:
•Energy. Produces and provides primarily for the wholesale distribution and
transportation of petroleum products.
•Ag. Purchases and further processes or resells grain and oilseed originated by
our country operations and global grain businesses, by our member cooperatives
and by third parties. It also includes our renewable fuels business and serves
as a wholesaler and retailer of agronomy products.
•Nitrogen Production. Produces and distributes nitrogen fertilizer. It consists
of our equity method investment in CF Nitrogen and allocated expenses.
In addition, our financing and hedging businesses, along with our nonconsolidated food production and distribution and wheat milling joint ventures, have been aggregated within our Corporate and Other category.
The consolidated financial statements include the accounts of CHS and all subsidiaries and limited liability companies in which we have a controlling interest. The effects of all significant intercompany transactions have been eliminated.
Corporate administrative expenses and interest are allocated to each reporting
segment, and Corporate and Other, based on direct use of services, such as
information technology and legal, and other factors or considerations relevant
to the costs incurred.
Management's Focus. When evaluating our operating performance, management
focuses on gross profit and income before income taxes ("IBIT"). As a company
that operates heavily in global commodities, there is significant
unpredictability and volatility in pricing, costs and global trade volumes.
Consequently, we focus on managing the margin we can earn and the resulting
IBIT. We also focus on ensuring balance sheet strength through appropriate
management of financial liquidity, leverage, capital allocation and cash flow
optimization.
Seasonality. Many of our business activities are highly seasonal and our
operating results vary throughout the year. Our revenues generally trend lower
during the second and fourth fiscal quarters and higher during the first and
third fiscal quarters; however, our IBIT does not necessarily follow the same
trend due to weather and other events that can impact profitability. For
example, in our Ag segment, our country operations business generally
experiences higher volumes and revenues during the fall harvest and spring
planting seasons, which generally correspond to our first and third fiscal
quarters, respectively. Additionally, our agronomy business generally
experiences higher volumes and revenues during the spring planting season. Our
global grain and processing operations are subject to fluctuations in volumes
and revenues based on
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producer harvests, world grain prices, demand and international trade
relationships. Our Energy segment generally experiences higher volumes and
revenues in certain operating areas, such as refined products, in the spring,
summer and early fall when gasoline and diesel fuel use by agricultural
producers is highest and is subject to global supply and demand forces. Other
energy products, such as propane, generally experience higher volumes and
revenues during the winter heating and fall crop-drying seasons. The graphs
below depict the seasonality inherent in our businesses.
[[Image Removed: chscp-20220831_g1.jpg]]
[[Image Removed: chscp-20220831_g2.jpg]]* The COVID-19 pandemic started during the second quarter of fiscal 2020.
Pricing and Volumes. Our revenues, assets and cash flows can be significantly affected by global market prices and sales volumes of commodities such as petroleum products, natural gas, grain, oilseed products and agronomy products. Changes in market prices for commodities we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Similarly, increased or decreased sales volumes without a corresponding change in the purchase and selling prices of those products can affect revenues and operating earnings. Commodity prices and sales volumes are affected by a wide range of factors beyond our control, including weather, crop damage due to plant disease or insects, drought, availability/adequacy of supply of a commodity, availability of reliable rail and river transportation networks, disease outbreaks, government regulations and policies, global trade disputes, wars and civil unrest, and general political and/or economic conditions.
Business Strategy
Our business strategies focus on an enterprisewide effort to create an
experience that empowers customers to make CHS their first choice, expand market
access to add value for our owners, and transform and evolve our core businesses
by capitalizing on changing market dynamics. To execute these strategies, we are
focused on implementing agile, efficient and sustainable new technology
platforms; building robust and efficient supply chains; hiring, developing and
retaining high-performing, diverse and passionate teams; achieving operational
excellence and continuous improvement; and maintaining a strong balance sheet.
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Fiscal 2022 Highlights
•Robust global demand, coupled with increased market volatility, resulted in
higher commodity prices and significantly improved earnings.
•Higher refining margins drove significantly improved earnings in our Energy
segment that resulted from supply and demand factors, including trade flow
disruptions caused by the Russian invasion of Ukraine and higher global demand
for energy products as consumption outpaced supply.
•Equity method investments performed well, with our CF Nitrogen investment being
the largest contributor due to improved earnings as a result of market
conditions driven by strong global demand for urea and UAN and decreased global
supply.
•Our global grain and processing and wholesale agronomy businesses in our Ag
segment benefited from strong global demand and increased margins.
Fiscal 2023 Outlook
Our segments operate in cyclical environments in which market conditions can change rapidly with significant positive or negative impacts on our results. We anticipate that various macroeconomic factors, including the ongoing war betweenRussia andUkraine , rising interest rates, and inflationary pressures increasing costs of labor, freight and materials, will continue to drive uncertainty and instability in global energy and agricultural commodity markets, as well as global financial markets, which could have a significant impact on each of our segments during fiscal 2023. In addition to these broad macroeconomic factors, the cost of renewable energy credits remains higher than historical levels, which could continue to negatively impact our profitability, and regional factors, such as unpredictable weather conditions, including those due to climate change, could impact demand for agricultural inputs and outputs, as well as our ability to supply those inputs and outputs. Although challenges remain, the imbalance between global supply and strong global demand for agricultural commodities is currently expected to result in continued market volatility and favorable pricing in fiscal 2023. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts in fiscal 2023. Refer to Item 1A of this Annual Report on Form 10-K for additional consideration these risks may have on our business operations and financial performance. In addition to navigating market conditions that impact our businesses, we will continue to take actions in an effort to execute on our enterprise priorities throughout fiscal 2023, including empowering and supporting our people, advancing our operating model by transforming how we work and adopting new technologies, and strategically investing in our infrastructure to meet the evolving needs of our owners and customers, enhance value for the cooperative system and propel sustainable growth. 26
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Table of Contents Operating Metrics Energy
Our Energy segment operations primarily include our refineries in
Years Ended August 31,
2022 2021
Refinery throughput volumes (Barrels per day)
Heavy, high-sulfur crude oil 103,525 96,175
All other crude oil 73,171 64,277
Other feedstocks and blendstocks 14,179 14,839
Total refinery throughput volumes 190,875 175,291
Refined fuel yields
Gasolines 89,084 86,860
Distillates 82,291 68,720
We are subject to the Renewable Fuel Standard that requires refiners to blend
renewable fuels (e.g., ethanol and biodiesel) into their finished transportation
fuels or purchase renewable energy credits, known as renewable identification
numbers ("RINs"), in lieu of blending. The EPA generally establishes new annual
renewable fuel percentage standards for each compliance year in the preceding
year. In June 2022 , the EPA issued a final renewable volume obligation ("RVO")
for calendar years 2020 through 2022. The RVO for calendar year 2020 was lower
than previously issued, and the RVO for calendar year 2021 was lower than
anticipated as a result of lower demand for refined fuels that occurred during
calendar year 2021 due to the COVID-19 pandemic. We generate RINs through our
blending activities, but we cannot generate enough RINs to meet the needs of our
refining capacity and RINs must be purchased on the open market. The price of
RINs can be volatile, with prices for D6 ethanol RINs and D4 ethanol RINs rising
by 15% and 21%, respectively, during fiscal 2022 compared to the prior year,
which negatively impacted our earnings. Estimates of our RIN expense are
calculated using an average RIN price each month.
In addition to our internal operational reliability, the profitability of our
Energy segment is largely driven by crack spreads (i.e., the price differential
between refined products and inputs such as crude oil) and Western Canadian
Select ("WCS") crude oil discounts (i.e., the price discount for WCS crude oil
relative to West Texas Intermediate ("WTI") crude oil), which are driven by the
supply and demand of refined products. Crack spreads and WCS crude oil discounts
both increased in fiscal 2022, compared to the prior year, contributing to
improved IBIT for the Energy segment. The table below provides information about
average market reference prices and differentials that impacted our Energy
segment:
Years Ended August 31,
2022 2021
Market indicators
WTI crude oil (dollars per barrel) $ 91.84 $ 56.62
WTI - WCS crude oil discount (dollars per barrel) $ 14.93 $ 11.52
Group 3 2:1:1 crack spread (dollars per barrel)* $ 30.67 $ 14.95
Group 3 5:3:2 crack spread (dollars per barrel)* $ 29.02 $ 14.86
D6 ethanol RIN (dollars per RIN) $ 1.2859 $ 1.1221
D4 ethanol RIN (dollars per RIN) $ 1.5560
*Group 3 refers to the oil refining and distribution system serving the Midwest
markets from the
27-------------------------------------------------------------------------------- Table of Contents Ag Our Ag segment operations work together to facilitate production, purchase, sale and eventual use of grain and other agricultural commodities withinthe United States and internationally. Profitability in our Ag segment is largely driven by throughput and production volumes, as well as commodity price spreads; however, revenues and cost of goods sold ("COGS") are largely affected by market-driven commodity prices that are outside our control. The table below provides information about average market prices for agricultural commodities and our sales/throughput volumes that impacted our Ag segment for the years endedAugust 31, 2022 and 2021: Years Ended August 31, Market Source* 2022 2021 Commodity prices Corn (dollars per bushel) Chicago Board of Trade$ 6.45 $ 5.45 Soybeans (dollars per bushel) Chicago Board of Trade$ 14.65 $ 13.37 Wheat (dollars per bushel) Chicago Board of Trade$ 8.63 $ 6.52 Urea (dollars per ton) Green Markets NOLA$ 644.93 $ 330.00 Urea ammonium nitrate (dollars per ton) Green Markets NOLA$ 521.28 $ 216.00 Ethanol (dollars per gallon) Chicago Platts$ 2.62 $ 1.86
Volumes
Grain and oilseed (thousands of bushels) 2,247,254 2,765,808
North American grain and oilseed port throughput (thousands of bushels)
674,350 867,880
Wholesale crop nutrients (thousands of tons) 6,589 8,088
Ethanol (thousands of gallons) 915,087 890,462
*Market source information represents the average month-end price during the period.
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Consolidated Statements of Operations
Years Ended August 31,
2022 2021
Dollars % of Revenues* Dollars % of Revenues*
(In thousands) (In thousands)
Revenues $ 47,791,666 100.0 % $ 38,448,033 100.0 %
Cost of goods sold 45,664,745 95.5 37,496,634 97.5
Gross profit 2,126,921 4.5 951,399 2.5
Marketing, general and administrative expenses 997,835 2.1 745,602 1.9
Operating earnings 1,129,086 2.4 205,797 0.5
Interest expense 114,156 0.2 104,565 0.3
Other income (23,760) - (59,559) (0.2)
Equity income from investments (771,327) (1.6) (354,529) (0.9)
Income before income taxes 1,810,017 3.8 515,320 1.3
Income tax expense (benefit) 132,116 0.3 (38,249) (0.1)
Net income 1,677,901 3.5 553,569 1.4
Net loss attributable to noncontrolling
interests (861) - (383) -
Net income attributable to CHS Inc. $ 1,678,762 3.5 % $ 553,952 1.4 %
*Amounts less than 0.1% are shown as zero percent. Percentage subtotals may differ due to rounding.
The charts below detail revenues, net of intersegment revenues, and IBIT by
reportable segment for fiscal 2022. Our Nitrogen Production reportable segment
represents an equity method investment that records earnings and allocated
expenses, but not revenues.
[[Image Removed: chscp-20220831_g3.jpg]]
[[Image Removed: chscp-20220831_g4.jpg]]
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Income (Loss) Before Income Taxes by Segment
Energy
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Income (loss) before income taxes
The following waterfall analysis and commentary presents the changes in our
Energy segment IBIT for the year ended
[[Image Removed: chscp-20220831_g5.jpg]]*See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The change in Energy segment IBIT for fiscal 2022 reflects the following: •Higher crack spreads and increased WCS crude oil discounts reflect improved market conditions in our refined fuels business and contributed to a$1.0 billion increase of IBIT. •Increased refinery production volumes also contributed to increased IBIT of approximately$81.0 million as a result of the increased sales mix of higher-margin produced refined fuels, compared to the lower-margin purchased refined fuels. •Increased margins due to higher crack spreads and WCS crude oil discounts were partially offset by hedging-related losses of$128.0 million and other increased costs for refined fuels, including higher RIN and natural gas prices due to market conditions that contributed to decreased earnings of$74.0 million and$26.0 million , respectively. Additionally, the$35.3 million benefit associated with the liquidation of historical last-in, first out ("LIFO") layers for certain refined fuels inventories in the prior year did not reoccur in fiscal 2022. •Lower propane margins resulting from hedging-related losses and reversals of prior unrealized gains of$55.4 million during fiscal 2022 also partially offset the improved earnings in our refined fuels business. 30
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Ag
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Income before income taxes $ 657,586 $ 298,096 $ 359,490 120.6 %
The following waterfall analysis and commentary presents the changes in our Ag
segment IBIT for the year ended
[[Image Removed: chscp-20220831_g6.jpg]]*See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations.
The change in Ag segment IBIT for fiscal 2022 reflects the following: •Increased margins across all our Ag segment product categories, including: •$145.1 million increase for grain and oilseed that resulted primarily from strong global demand and mark-to-market changes associated with our commodity derivatives, including unrealized gains; •$119.6 million increase for wholesale agronomy products, which resulted from strong global market demand and global supply disruptions; •$105.6 million increase for oilseed processing as a result of strong meal and oil demand; and •$103.9 million increase for feed and farm supplies due to strong demand and global supply disruptions. •Decreased volumes due to supply chain constraints and less favorable weather conditions during the planting and application season during fiscal 2022 resulted in a$106.3 million decrease for feed and farm supplies, which was partially offset by the net impact of other volume changes in other Ag segment product categories. All Other Segments Years Ended August 31, Change 2022 2021 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT*$ 477,985 $ 121,035 $ 356,950 294.9 % Corporate and Other IBIT$ 57,895 $ 106,785 $ (48,890) (45.8) %
*See Note 6, Investments, of the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.
Our Nitrogen Production segment IBIT increased as a result of higher equity income attributed to increased sale prices of urea and UAN due to strong global demand and decreased global supply, which was partially offset by higher natural gas costs. Corporate and Other IBIT decreased due to a combination of factors, including decreased equity method income from our investment inVentura Foods , as a result of less favorable market conditions for edible oils and investment gains during the prior year that did not reoccur during the current year. 31 -------------------------------------------------------------------------------- Table of Contents Revenues by Segment Energy Years Ended August 31, Change 2022 2021 Dollars Percent (Dollars in thousands) Revenues$ 10,294,774 $ 6,375,261 $ 3,919,513 61.5 %
The following waterfall analysis and commentary presents the changes in our
Energy segment revenues for the year ended
[[Image Removed: chscp-20220831_g7.jpg]]
The change in Energy segment revenues for fiscal 2022 reflects the following:
•Increased selling prices for refined fuels due to global market conditions
contributed to $3.5 billion greater revenues.
•Increased selling prices for propane as a result of global market conditions
during fiscal 2022 also positively impacted revenues by $370.7 million .
•Lower volumes of propane resulted from lower demand driven by warmer weather
conditions and less crop-drying activity, which contributed to decreased
revenues of $27.3 million .
•Lower volumes of refined fuels resulted from lower demand due to high gasoline
prices and contributed to decreased revenues of $19.6 million .
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Ag
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Revenues $ 37,460,211 $ 32,035,342 $ 5,424,869 16.9 %
The following waterfall analysis and commentary presents the changes in our Ag
segment revenues for the year ended
[[Image Removed: chscp-20220831_g8.jpg]]
The change in Ag segment revenues for fiscal 2022 reflects the following:
•Higher pricing attributed to market-driven price increases across all of our Ag
segment product categories, including:
•$6.4 billion increase in revenues for grain and oilseed driven by increased
global demand;
•$1.5 billion increase for feed and farm supplies due to strong demand and
constrained supply;
•$1.5 billion increase for wholesale agronomy products resulting from strong
global market demand and global supply disruptions;
•$721.1 million increase for renewable fuels resulting from demand driven higher
prices; and
•$541.0 million increase for oilseed processing due to strong meal and oil
demand.
•Lower volumes of grain and oilseed contributed to a $4.2 billion decrease in
revenues. Decreased volumes resulted from a combination of factors, including
the prior year experiencing elevated volumes following the Phase One trade
agreement with China , which have since plateaued; a business model change at our
TEMCO equity method investment during the second quarter of fiscal 2021 that
resulted in reduced revenues and COGS during fiscal 2022 on certain transactions
associated with TEMCO; lower crop yields due to drought conditions experienced
in portions of our North American trade territory; and the impact of Hurricane
Ida on our grain export terminal in Myrtle Grove, Louisiana , during the first
quarter of fiscal 2022.
•The remaining volume decrease was experienced across most of our other Ag
segment product categories, including an $843.1 million decrease for feed and
farm supplies due to supply chain constraints and less favorable weather
conditions during the spring planting and application season compared to the
prior year.
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All Other Segments*
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Corporate and Other revenues $ 36,681 37,430 $ (749) (2.0) %
*Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
There were no significant changes to revenues for Corporate and Other during fiscal 2022 compared to the prior year.
Cost of Goods Sold by Segment
Energy
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 9,358,627 $ 6,183,864 $ 3,174,763 51.3 %
The following waterfall analysis and commentary presents the changes in our
Energy segment COGS for the year ended August 31, 2022 , compared to the prior
year:
[[Image Removed: chscp-20220831_g9.jpg]]
The change in Energy segment COGS for fiscal 2022 reflects the following:
•Increased costs for refined fuels resulting from global market conditions
contributed to a $2.7 billion increase in COGS.
•Higher costs for propane as a result of global market conditions, including the
impact of hedging-related losses and reversals of prior unrealized gains,
resulted in a $434.8 million increase in COGS.
•Lower volumes of propane resulted from lower demand driven by warmer weather
conditions and less crop-drying activity, which contributed to decreased COGS of
$26.2 million .
•Lower volumes of refined fuels resulted from lower demand due to high gasoline
prices and contributed to decreased COGS of $19.3 million .
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Ag
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 36,308,514 $ 31,322,491 $ 4,986,023 15.9 %
The following waterfall analysis and commentary presents the changes in our Ag
segment COGS for the year ended
[[Image Removed: chscp-20220831_g10.jpg]]
The change in Ag segment COGS for fiscal 2022 reflects the following:
•Higher costs attributed to market-driven price increases across all our Ag
segment product categories, including:
•$6.3 billion increase for grain and oilseed driven by increased global demand;
•$1.4 billion increase for feed and farm supplies due to strong demand and
constrained supply;
•$1.3 billion increase for wholesale agronomy products resulting from strong
global market demand and global supply disruptions;
•$666.0 million increase for renewable fuels resulting from high demand driving
higher prices; and
•$435.5 million increase for oilseed processing due to strong meal and oil
demand.
•Lower volumes of grain and oilseed contributed to a $4.2 billion decrease in
COGS. The decreased volumes resulted from a combination of factors, including
the prior year experiencing elevated volumes following the Phase One trade
agreement with China , which has since plateaued; a business model change at our
TEMCO equity method investment during the second quarter of fiscal 2021 that
resulted in reduced revenues and COGS during fiscal 2022 on certain transactions
associated with TEMCO; lower crop yields due to drought conditions experienced
in portions of our North American trade territory; and the impact of Hurricane
Ida on our grain export terminal in Myrtle Grove, Louisiana , during the first
quarter of fiscal 2022.
•The remaining volume decrease was experienced across most of our other Ag
segment product categories, including a $736.8 million decrease for feed and
farm supplies due to supply chain constraints and less favorable weather
conditions during the spring planting and application season compared to the
prior year.
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All Other Segments
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Nitrogen Production COGS $ 1,669 $ 1,650 $ 19 1.2%
Corporate and Other COGS $ (4,065) $ (11,370) $ 7,305 64.2%
There were no significant changes to COGS for our Nitrogen Production segment or Corporate and Other during fiscal 2022 compared to the prior year.
Marketing, General and Administrative Expenses
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Marketing, general and administrative expenses $ 997,835 $ 745,602 $ 252,233 33.8 %
Marketing, general and administrative expenses increased during fiscal 2022
primarily due to higher performance-based incentive compensation accruals driven
by improved financial results in comparison to the prior year and, to a lesser
extent, increased external consulting expenses for projects such as our
enterprise resource planning system implementation and strategic adjustments to
our operating model.
Interest Expense
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Interest expense $ 114,156 $ 104,565 $ 9,591 9.2 %
Interest expense increased during fiscal 2022 as a result of higher interest
rates compared to the prior year, particularly during the second half of fiscal
2022 as the U.S. Federal Reserve and other foreign equivalents raised interest
rates. The increase was partially offset by decreased average outstanding debt
balances compared to the prior year.
Other Income
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Other income $ 23,760 $ 59,559 $ (35,799) (60.1) %
Other income decreased during fiscal 2022, primarily due to investment gains
during the prior year that did not reoccur during fiscal 2022, impairment of
certain held-for-sale assets and fewer gains on the sale of businesses during
fiscal 2022.
Equity Income from Investments
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Equity income from investments*
*See Note 6, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.
Equity income from investments increased during fiscal 2022 compared to the
prior year, primarily due to increased income associated with our equity method
investment in CF Nitrogen. CF Nitrogen experienced increased sale prices of urea
and UAN due to strong global demand and decreased global supply.
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Income Tax Expense (Benefit)
Years Ended August 31, Change
2022 2021 Dollars Percent
(Dollars in thousands)
Income tax expense (benefit) $ 132,116 $ (38,249) $ 170,365 445.4 %
Increased income tax expense primarily resulted from increased nonpatronage
earnings and other nondeductible items during fiscal 2022. Federal and state
statutory rates applied to nonpatronage business activity were 24.4% and 24.5%
for the years ended August 31, 2022 and 2021, respectively. Income taxes and
effective tax rates vary each year based upon profitability and nonpatronage
business activity, which resulted in effective tax rates of 7.3% and (7.4)% for
the years ended August 31, 2022 and 2021, respectively.
Comparison of Results of Operations for the Years Ended
For a discussion of results of operations for fiscal 2021 compared to fiscal 2020, please refer to Part II, Item 7 , Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedAugust 31, 2021 , filed with theSEC onNovember 4, 2021 . Combining the Foods segment in our Corporate and Other category during fiscal 2022 did not have a material impact on our comparison of results of operations for the years endedAugust 31, 2022 and 2021, as relevant year-over-year changes for the Foods segment were discussed within the Corporate and Other category.
Liquidity and Capital Resources
In assessing our financial condition, we consider factors such as working
capital, internal benchmarking related to our applicable covenants and other
financial information. The following financial information is used when
assessing our liquidity and capital resources to meet our capital allocation
priorities, which include maintaining the safety and compliance of our
operations, paying interest on debt and preferred stock dividends, returning
cash to our member-owners in the form of cash patronage and equity redemptions
and taking advantage of strategic opportunities that benefit our member-owners:
August 31,
2022 2021
(Dollars in thousands)
Cash and cash equivalents $ 793,957 $ 413,159
Notes payable 606,719 1,740,859
Long-term debt including current maturities 1,958,814 1,618,361
Total equities 9,461,266 9,017,326
Working capital 2,425,878 1,672,938
Current ratio* 1.3 1.3
*Current ratio is defined as current assets divided by current liabilities.
Summary of Our Major Sources of Cash and Cash Equivalents
We fund our current operations primarily through a combination of cash flows
from operations supplemented with short-term borrowings through our committed
and uncommitted revolving credit facilities, including our securitization
facility with certain unaffiliated financial institutions ("Securitization
Facility") and our repurchase facility relating thereto ("Repurchase Facility").
We fund certain of our long-term capital needs, primarily those related to
acquisitions of property, plant and equipment, with cash flows from operations
and by issuing long-term debt. See Note 9, Notes Payable and Long-Term Debt, of
the notes to the consolidated financial statements that are included in this
Annual Report on Form 10-K for additional information on our short-term
borrowings and long-term debt, including tables with summarized long-term debt
outstanding. We will continue to consider opportunities to further diversify and
enhance our sources and amounts of liquidity.
On August 30, 2022 , the Securitization Facility and Repurchase Facility were
amended to extend their respective maturity dates to August 29, 2023 , and
increase the maximum committed availability under the Securitization Facility to
$850.0 million from $700.0 million .
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On February 19, 2021 , we amended our 10-year term loan facility to convert the
entire $366.0 million aggregate principle amount outstanding thereunder into a
revolving loan, which could be paid down and readvanced in an amount up to the
referenced $366.0 million until February 19, 2022 . On February 19, 2022 , the
total advanced loan balance of $366.0 million reverted to a non-revolving term
loan that is payable on September 4, 2025 .
Summary of Our Major Uses of Cash and Cash Equivalents
Annually, our Board of Directors approves our capital expenditure budget. Our fiscal 2023 capital expenditure priorities include maintaining our assets through maintenance; complying with environmental, health and safety requirements; enhancing information technology capabilities; improving productivity; and growth. Our refining business requires continued investment in our refining process to maintain its safety, operational reliability and profitability. In addition, our Board of Directors annually approves our cash patronage and equity redemptions to be paid in fiscal 2023, based on fiscal 2022 financial performance. The following is a summary of our primary cash requirements for fiscal 2023: •Capital expenditures. We expect total capital expenditures for fiscal 2023 to be approximately$887.2 million , compared to capital expenditures of$354.4 million in fiscal 2022. Increased capital expenditures for fiscal 2023 are for investments in our infrastructure to meet the evolving needs of our owners and customers, enhance value for the cooperative system and propel sustainable growth. Excluded from the capital expenditures for fiscal 2023 is approximately$236.0 million for major maintenance at ourLaurel andMcPherson refineries. •Preferred stock dividends. We had approximately$2.3 billion of preferred stock outstanding as ofAugust 31, 2022 . We expect to pay dividends on our preferred stock of approximately$168.7 million during fiscal 2023. •Patronage. Our Board of Directors authorized approximately$500.0 million of our fiscal 2022 patronage-sourced earnings to be paid to our member-owners during fiscal 2023. •Equity redemptions. Our Board of Directors has authorized equity redemptions of up to$500.0 million to be distributed in fiscal 2023 in the form of redemptions of qualified and nonqualified equity owned by individual producer-members and association members. The Board of Directors will continue to periodically evaluate the level of equity redemption activity throughout fiscal 2023 with respect to the amounts it has authorized for redemption during the fiscal year. We believe cash generated by operating and investing activities, along with available borrowing capacity under our credit facilities, will be sufficient to support our operations for the foreseeable future. Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all our debt covenants and restrictions as ofAugust 31, 2022 . Based on our current 2023 projections, we expect continued covenant compliance.
Working Capital
We measure working capital as current assets less current liabilities and believe this information is meaningful to investors as a measure of operational efficiency and short-term financial health. Working capital is not defined underU.S. GAAP and may not be computed the same as similarly titled measures used by other companies. Working capital as ofAugust 31, 2022 and 2021, is as follows: 2022 2021 Change (Dollars in thousands) Current assets$ 9,377,847 $ 7,998,951 $ 1,378,896 Less current liabilities 6,951,969 6,326,013 625,956 Working capital$ 2,425,878 $ 1,672,938 $ 752,940 As ofAugust 31, 2022 , working capital increased by$752.9 million compared withAugust 31, 2021 . Current asset balance changes increased working capital by$1.4 billion , primarily due to increases in receivables, which were driven by higher commodity prices. Current liabilities balance changes decreased working capital by$626.0 million , primarily due to an increase in our dividends and equities payable for our cash patronage and equity redemptions to be paid to owners in fiscal 2023. We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks. We believe our current cash balances and available capacity on our committed and uncommitted lines of credit will provide adequate liquidity to meet our working capital needs. 38 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations Our estimated future obligations as ofAugust 31, 2022 , include both current and long-term obligations. During fiscal 2023, we have a current obligation to repay$283.1 million of long-term debt, as well as$78.6 million of interest related to long-term debt. Beyond fiscal 2023, our long-term debt obligation is$1.6 billion and interest payments related to long-term debt of$378.9 million . For finance leases, we have a current and long-term obligation of$8.6 million and$48.5 million , respectively. For operating leases, we have a current and long-term obligation of$57.9 million and$227.2 million , respectively. See Note 9, Notes Payable and Long-Term Debt, and Note 19, Leases, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information on our long-term debt and leases, respectively. We enter into purchase obligations that are legally binding and into enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased and fixed or estimated prices to be paid at the time of settlement. Our current and long-term obligation for such arrangements is$9.1 billion and$1.1 billion , respectively. Cash Flows Years Ended August 31, 2022 2021 Change (Dollars in thousands) Net cash provided by operating activities$ 1,946,518 $ 757,811 $ 1,188,707 Net cash used in investing activities (457,084) (101,672) (355,412) Net cash used in financing activities (1,113,688) (326,585) (787,103) Effect of exchange rate changes on cash and cash equivalents (14,756) (4,063) (10,693) Net increase in cash and cash equivalents and restricted cash$ 360,990 $ 325,491 $ 35,499 Cash flows from operating activities can fluctuate significantly from period to period as a result of various factors, including seasonality and timing differences associated with purchases, sales, taxes and other business decisions. The$1.2 billion increase in cash provided by operating activities in fiscal 2022 is primarily the result of higher net income during fiscal 2022 compared to fiscal 2021, including a$424.8 million increase in cash distributions from our equity investment in CF Nitrogen during 2022 compared to the prior year. The$355.4 million increase in cash used in investing activities in fiscal 2022 reflects increases in ourCHS Capital notes receivables primarily due to increases in funding for producer borrowers from increased marketing of programs and higher commodity prices. The$787.1 million increase in cash used in financing activities in fiscal 2022 primarily reflects decreased net cash inflows associated with our notes payable during fiscal 2022. The increase is also partially due to higher amounts paid for cash patronage and equity redemptions in fiscal 2022 compared to the prior fiscal year.
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity withU.S. GAAP. Preparation of these consolidated financial statements requires use of estimates, as well as management's judgments and assumptions regarding matters that are subjective, uncertain or involve a high degree of complexity, all of which affect the results of operations and financial condition for the periods presented. We believe the following accounting policies are critical to our consolidated financial statements and may involve a higher degree of estimates, judgments and complexity.
Inventory Valuation and Reserves
Grain, processed grain, oilseed, processed oilseed and other minimally
processed soy-based inventories are stated at net realizable value. All other
inventories are stated at the lower of cost or net realizable value. The costs
of certain energy inventories (wholesale refined products, crude oil and
asphalt) are determined on the LIFO method; all other inventories of nongrain
products purchased for resale are valued on the first-in, first-out ("FIFO") and
average cost methods. Estimates are used in determining the net realizable
values of grain and oilseed and processed grain and oilseed inventories. These
estimates include using inputs that are generally based on exchange-traded
prices and/or recent market bids and offers, including location-specific
adjustments. If estimates regarding the valuation of inventories are less
favorable than management's assumptions, write-downs of inventories may be
required.
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Derivative Financial Instruments
We enter into exchange-traded commodity futures and options contracts to hedge
our exposure to price fluctuations on energy, grain and oilseed transactions to
the extent considered practicable for minimizing risk. Futures and options
contracts used for hedging are purchased and sold through regulated commodity
exchanges. We also use over-the-counter instruments to hedge our exposure on
fixed-price contracts. Fluctuations in inventory valuations, however, may not be
completely hedged due in part to the absence of satisfactory hedging facilities
for certain commodities and geographical areas and in part to our assessment of
our exposure from expected price fluctuations. We also manage our risks by
entering into fixed-price purchase contracts with preapproved producers and
establishing appropriate limits for individual suppliers. Fixed-price sales
contracts are entered into with customers of acceptable creditworthiness, as
internally evaluated. The fair values of futures and options contracts are
determined primarily from quotes listed on regulated commodity exchanges.
Fixed-price purchase and sales contracts are with various counterparties, and
the fair values of such contracts are determined from the market price of the
underlying product. We are exposed to loss in the event of nonperformance by the
counterparties to the contracts and, therefore, contract values are reviewed and
adjusted to reflect potential nonperformance. Risk of nonperformance by
counterparties includes the inability to perform because of a counterparty's
financial condition and a risk that the counterparty will refuse to perform on a
contract during periods of price fluctuations where contract prices are
significantly different from the current market prices.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits costs and obligations depend on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates and other factors. In accordance withU.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore generally affect recognized expenses and the recorded obligations in future periods. While our management believes the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses.
Deferred Tax Assets and Uncertain Tax Positions
We assess whether a valuation allowance is necessary to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. While we have considered future taxable income, as well as other factors, in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to income in the period such determination was made. We are also significantly impacted by the utilization of tax credits, some of which were passed to us from theMcPherson refinery , related to refinery upgrades that enable us to produce ultra-low-sulfur fuels. Our tax credit carryforwards are available to offset future federal and state tax liabilities with the tax credits becoming unavailable to us if not used by their expiration date. Our net operating loss carryforwards for tax purposes are available to offset future taxable income. If our loss carryforwards are not used, they will expire. Tax benefits related to uncertain tax positions are recognized in our financial statements if it is more likely than not that the position would be sustained upon examination by a tax authority that has full knowledge of all relevant information. The benefits are measured using a cumulative probability approach. Under this approach, we record in our financial statements the greatest amount of tax benefits that have a more than 50% probability of being realized upon final settlement with the tax authorities. In determining these tax benefits, we assign probabilities to a range of outcomes that we feel we could ultimately settle on with the tax authorities using all relevant facts and information available at the reporting date. Due to the complexity of these uncertainties, the ultimate resolution may result in a benefit that is materially different than our current estimate.
Long-Lived Assets
Property, plant and equipment is depreciated or amortized over the expected useful lives of individual or groups of assets based on the straight-line method. Economic circumstances or other factors may cause management's estimates of expected useful lives to differ from actual useful lives. All long-lived assets, including property, plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment in accordance withU.S. GAAP, at least annually for goodwill, and whenever events or changes in circumstances indicate the carrying amount of a long-lived asset or asset group may not be recoverable. For goodwill, our annual impairment testing occurs in our fourth quarter. An impaired asset is written down to its estimated fair value based on the best information available. Fair value is generally measured by discounting estimated future 40 -------------------------------------------------------------------------------- Table of Contents cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and our estimates may differ from actual results. We have asset retirement obligations with respect to certain of our refineries and other assets due to various legal obligations to clean and/or dispose of the component parts at the time they are retired. In most cases, these assets can be used for extended and indeterminate periods of time, as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain refineries and related assets and to continue making improvements to those assets based on technological advances. As a result, we believe our refineries and related assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire a refinery and related assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery or other asset, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that future cost. We have other assets that we may be obligated to dismantle at the end of corresponding lease terms subject to the lessor's discretion for which we have recorded asset retirement obligations. Based on our estimates of the timing, cost and probability of removal, these obligations are not material.
Recent Accounting Pronouncements
No recent accounting pronouncements are expected to have a material impact on our consolidated financial statements.
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