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 on 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 2021 First Quarter Highlights •Fiscal 2021 Trends Update •Operating Metrics •Results of Operations •Liquidity and Capital Resources •Off-Balance Sheet Financing Arrangements •Contractual Obligations •Critical Accounting Policies •Recent Accounting Pronouncements Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year endedAugust 31, 2020 (including the information presented therein under Risk Factors), as well as the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q. OverviewCHS 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 acrossthe 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 ofThe 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 grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties; also serves as a wholesaler and retailer of agronomy products. •Nitrogen Production. Consists solely of our equity method investment inCF Industries Nitrogen, LLC ("CF Nitrogen"), and produces and distributes nitrogen fertilizer.
In addition, our financing and hedging businesses, along with our nonconsolidated wheat milling and food production and distribution joint ventures, have been aggregated within Corporate and Other.
The condensed 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, along with 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. Management also focuses 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,
23--------------------------------------------------------------------------------
Table of Contents
respectively. Additionally, our agronomy business generally experiences higher
volumes during the spring planting season. Our global grain marketing operations
are subject to fluctuations in volume and income based on producer harvests,
world grain prices, demand and global trade volumes. Our Energy segment
generally experiences higher volumes 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 during the winter heating and fall crop-drying seasons. The graphs below
depict the seasonality inherent in our businesses.
[[Image Removed: chscp-20201130_g1.jpg]]
[[Image Removed: chscp-20201130_g2.jpg]]
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, grains, 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 network,
outbreaks of disease, government regulations and policies, global trade disputes
and general political/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, expands
market access to add value for our owners, and transforms and evolves our core
businesses by capitalizing on changing market dynamics. To execute on 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-
24--------------------------------------------------------------------------------
Table of Contents
performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet.
Fiscal 2021 First Quarter Highlights
•Improved weather conditions during the fall harvest season compared to the prior year drove increased volumes and margins across much of our Ag segment during the first quarter of fiscal 2021. •Improved trade relations betweenthe United States and foreign trade partners led to increased grain and oilseed volumes and margins. •Exceptionally low crack spreads and other unfavorable market conditions in our refined fuels business, driven primarily by the COVID-19 pandemic, resulted in volume and price declines that significantly reduced earnings compared to the prior year. •A significant portion of our global employees continue with remote working arrangements. In addition to remote working arrangements, we have also increased hygiene and infection-control processes at all of our facilities and developed risk mitigation and exposure policies applicable to our enterprise. The costs of these activities were not material during the first quarter of fiscal 2021 and are not expected to be material for the remainder of fiscal 2021. In addition, our operations were deemed to be essential infrastructure industries by federal and state governments, which allowed us to continue operating all of our facilities and operations.
Fiscal 2021 Trends Update
Our Energy and Ag segments operate in cyclical environments in which unforeseen market conditions can have a significant positive or negative impact. As with virtually all other companies inthe United States , we are dealing with the effects of COVID-19. Most of our operations are considered to be essential; however, periods of depressed demand and pricing could result in decreased profitability and the need to assess for potential impairments. Refer to Item 1A of our Annual Report on Form 10-K for the year endedAugust 31, 2020 , for additional considerations of the risks COVID-19 may continue to have on our business, liquidity, capital resources and financial results.
The energy industry experienced significant volume and margin reductions primarily as a result of the COVID-19 pandemic during the first quarter of fiscal 2021 that significantly reduced our profitability. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts; however, we expect uncertainty and volatility to drive unfavorable market conditions in the energy industry that will negatively impact our profitability throughout the remainder of fiscal 2021.
Although challenges remain, theU.S. agricultural industry has experienced increased demand for grain and oilseed commodities following the Phase One trade agreement withChina , which has resulted in increased volumes and improved commodity prices. Additionally, more favorable weather conditions during the first quarter of fiscal 2021 compared to the prior year provided an opportunity for increased volumes and improved earnings across much of our Ag segment during the fall harvest. Unforeseen global market conditions can positively or negatively impact agricultural commodity prices and volumes sold. We are unable to predict these conditions or the severity that such conditions could have on our pricing and volumes. In addition to global supply and demand impacts, regional factors such as unpredictable weather conditions could continue to impact our operations. As a result, while we expect revenues, margins and cash flows from core operations in our Ag segment to stabilize through the remainder of fiscal 2021, unforeseen global market conditions with negative impacts could put pressure on associated asset valuations. In addition to market conditions that impact our businesses, we will continue to take actions to protect our financial health while continuing to deliver on our enterprise resource planning system implementation and advance toward our targeted operating model, which actions include implementing plans to substantially reduce budgeted costs and working on cash flow improvements with the objective of generating substantial additional operating cash flows. 25
--------------------------------------------------------------------------------
Table of Contents Operating Metrics Energy
Our Energy segment operations primarily include our
Three Months Ended
November 30,
2020 2019
Refinery throughput volumes (Barrels per day)
Heavy, high-sulfur crude oil 92,594 84,957
All other crude oil 60,082 78,819
Other feedstocks and blendstocks 15,815 17,285
Total refinery throughput volumes 168,491 181,061
Refined fuel yields
Gasolines 84,263 92,282
Distillates 65,853 72,929
We are subject to the Renewable Fuels Standard, which requires refiners to
blend renewable fuels (e.g., ethanol, biodiesel) into their finished
transportation fuels or purchase renewable energy credits, known as Renewable
Identification Numbers ("RINs"), in lieu of blending. The U.S. Environmental
Protection Agency generally establishes new annual renewable fuel percentage
standards for each compliance year in the preceding year. 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 and can impact profitability.
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 differentials (i.e., the price differential between
West Texas Intermediate ("WTI") crude oil and WCS crude oil), which are driven
by the supply and demand of refined product markets. Crack spreads and the WCS
crude oil differential decreased significantly during the three months ended
November 30, 2020 , compared to the same period during the prior year,
contributing to a significant decline in IBIT for the Energy segment. The table
below provides information about average market reference prices and
differentials that impact our Energy segment.
Three Months Ended
November 30,
2020 2019
Market indicators
WTI crude oil (dollars per barrel) $ 40.18
WTI - WCS crude oil differential (dollars per barrel)
Group 3 2:1:1 crack spread (dollars per barrel)*
Group 3 5:3:2 crack spread (dollars per barrel)*
D6 ethanol RIN (dollars per RIN) $ 0.5485
D4 ethanol RIN (dollars per RIN) $ 0.8105
*Group 3 refers to the oil refining and distribution system serving Midwest
markets from the
26--------------------------------------------------------------------------------
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 , as well as 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 three months endedNovember 30, 2020 and 2019. Three Months Ended November 30, Market Source* 2020 2019 Commodity prices Corn (dollars per bushel) Chicago Board of Trade$ 4.20 $ 3.83 Soybeans (dollars per bushel) Chicago Board of Trade$ 11.69 $ 9.00 Wheat (dollars per bushel) Chicago Board of Trade$ 5.80 $ 5.17 Urea (dollars per ton) Green Markets NOLA$ 225.00 $ 225.00
Urea Ammonium Nitrate (dollars per ton) Green Markets NOLA
$ 119.32 $ 151.00 Ethanol (dollars per gallon) Chicago Platts$ 1.33 $ 1.60
Volumes
Grain and oilseed (thousands of bushels) 746,584 619,539
North American grain and oilseed port throughput (thousands of bushels)
219,707 136,856
Crop nutrients (thousands of tons) 1,875 1,851
Ethanol (thousands of gallons) 220,771 222,276
*Market source information represents the average month-end price during the period.
27
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Three Months Ended
Three Months Ended
November 30,
2020 % of Revenues 2019 % of Revenues
(Dollars in thousands)
Revenues $ 8,715,643 100.0 % $ 7,621,485 100.0 %
Cost of goods sold 8,537,539 98.0 7,295,942 95.7
Gross profit 178,104 2.0 325,543 4.3
Marketing, general and administrative expenses 170,661 2.0 168,331 2.2
Operating earnings 7,443 0.1 157,212 2.1
Interest expense 25,050 0.3 34,971 0.5
Other income (12,624) (0.1) (13,498) (0.2)
Equity income from investments (50,023) (0.6) (49,662) (0.7)
Income before income taxes 45,040 0.5 185,401 2.4
Income tax (benefit) expense (24,329) (0.3) 6,664 0.1
Net income 69,369 0.8 178,737 2.3
Net (loss) income attributable to
noncontrolling interests (302) - 855 -
Net income attributable to CHS Inc. $ 69,671 0.8 % $ 177,882 2.3 %
The charts below detail revenues, net of intersegment revenues, and IBIT by
reportable segment for the three months ended November 30, 2020 . Our Nitrogen
Production reportable segment represents an equity method investment that
records earnings and allocated expenses, but not revenues.
[[Image Removed: chscp-20201130_g3.jpg]]
[[Image Removed: chscp-20201130_g4.jpg]]
28--------------------------------------------------------------------------------
Table of Contents
Income Before Income Taxes by Segment
Energy
Three Months Ended
November 30, Change
2020 2019 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 three months endedNovember 30, 2020 , compared to the same period during the prior year. [[Image Removed: chscp-20201130_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 reflects the following:
•Significantly less advantageous market conditions in our refined fuels business
compared to the same period of the prior year resulted in lower margins and
volumes. These market conditions were driven by the negative demand shock
associated with COVID-19 that resulted in a combination of decreased crack
spreads, increased RIN prices and decreased WCS crude oil differentials
experienced on heavy Canadian crude oil which is processed by our refineries.
•Decreased propane margins due to the reversal of hedging gains recognized
during the prior year and reduced propane demand, which resulted from warmer and
dryer fall weather during the first quarter of fiscal 2021 compared to the same
period during the prior year, which drove propane margins and volumes lower.
29--------------------------------------------------------------------------------
Table of Contents
Ag
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Income (loss) before income taxes
The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the three months endedNovember 30, 2020 , compared to the same period during the prior year. [[Image Removed: chscp-20201130_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 reflects the following: •Favorable weather conditions during the fall harvest season compared to the prior year contributed to increased volumes and margins across much of our Ag segment. •Improved relations betweenthe United States and foreign trade partners drove increased volumes and margins for grain and oilseed commodities. All Other Segments Three Months Ended November 30, Change 2020 2019 Dollars Percent (Dollars in thousands)
Nitrogen Production IBIT*
Corporate and Other IBIT
*See Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
Our Nitrogen Production segment IBIT decreased as a result of lower equity
method income attributed to reduced sale prices of urea and urea ammonium
nitrate, which are produced and sold by CF Nitrogen. Corporate and Other IBIT
increased primarily as a result of increased earnings in our hedging business
due to higher trading volumes compared to the same period of the prior year.
30--------------------------------------------------------------------------------
Table of Contents
Revenues by Segment
Energy
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Revenues $ 1,257,847 $ 1,895,423 $ (637,576) (33.6) %
The following waterfall analysis and commentary presents the changes in our
Energy segment revenues for the three months ended November 30, 2020 , compared
to the same period during the prior year.
[[Image Removed: chscp-20201130_g7.jpg]]
The change in Energy segment revenues reflects the following:
•Decreased selling prices and volumes for refined fuels as a result of global
market conditions, including the continued impact of the demand shocks occurring
during the COVID-19 pandemic, as well as product mix, contributed to $489.2
million and $77.5 million decreases in revenues, respectively.
•Decreased volumes of propane driven by lower demand as a result of warmer and
dryer weather conditions during the fall contributed to a $60.6 million decrease
in revenues.
31--------------------------------------------------------------------------------
Table of Contents
Ag
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Revenues $ 7,445,402 $ 5,711,855 $ 1,733,547 30.3 %
The following waterfall analysis and commentary presents the changes in our Ag
segment revenues for the three months ended November 30, 2020 , compared to the
same period during the prior year.
[[Image Removed: chscp-20201130_g8.jpg]]
The change in Ag segment revenues reflects the following:
•Volume increases across most of the Ag segment resulted primarily from improved
trade relations between the United States and foreign trade partners. Warmer and
dryer weather conditions for the fall harvest compared to the same period of the
prior year also contributed to volume increases. Stronger grain and oilseed
movement contributed to a $976.1 million increase in revenues with the remaining
increase being composed primarily of improved sales volumes of processing and
food ingredients, agronomy products and feed and farm supplies used for the fall
harvest.
•Higher pricing for grain and oilseed was driven by increased global demand and
contributed to a $759.5 million increase in revenues. The price increase
attributed to grain and oilseed was partially offset by price decreases across
the remainder of the Ag segment, which were the result of global market
conditions and product mix.
All Other Segments
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Corporate and Other revenues*
*Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
Corporate and Other revenues decreased during the three months endedNovember 30, 2020 , compared to the same period during the prior year as a result of lower revenues in our financing business due to market-driven interest rate reductions. 32
--------------------------------------------------------------------------------
Table of Contents
Cost of Goods Sold by Segment
Energy
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 1,281,042 $ 1,686,162 $ (405,120) (24.0) %
The following waterfall analysis and commentary presents the changes in our
Energy segment COGS for the three months ended November 30, 2020 , compared to
the same period during the prior year.
[[Image Removed: chscp-20201130_g9.jpg]]
The change in Energy segment COGS reflects the following:
•Decreased costs and volumes for refined fuels as a result of global market
conditions, including the continued impact of the demand shocks occurring during
the COVID-19 pandemic, as well as product mix, contributed to $306.6 million and
$70.4 million decreases in COGS, respectively.
•Decreased volumes of propane contributed to a $45.8 million decrease in COGS,
which were driven by lower demand that resulted from warmer and dryer weather
conditions during the fall. The decreased propane volumes were partially offset
by increased costs for propane driven by hedging losses and global market
conditions, which contributed to a $30.9 million increase in COGS.
33--------------------------------------------------------------------------------
Table of Contents
Ag
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Cost of goods sold $ 7,260,342 $ 5,610,200 $ 1,650,142 29.4 %
The following waterfall analysis and commentary presents the changes in our Ag
segment COGS for the three months ended November 30, 2020 , compared to the same
period during the prior year.
[[Image Removed: chscp-20201130_g10.jpg]]
The change in Ag segment COGS reflects the following:
•Volume increases across most of the Ag segment resulted primarily from improved
trade relations between the United States and foreign trade partners. Warmer and
dryer weather conditions for the fall harvest compared to the same period of the
prior year also contributed to volume increases. Stronger grain and oilseed
movement contributed to a $960.3 million increase in COGS with the remaining
increase being composed primarily of improved sales volumes of processing and
food ingredients with COVID-19 restrictions being relaxed and increased agronomy
products and feed and farm supplies used for the fall harvest.
•Higher pricing for grain and oilseed resulted from increased global demand and
contributed to a $745.3 million increase in COGS. The price increase attributed
to grain and oilseed was partially offset by price decreases across the
remainder of the Ag segment, which were driven by global market conditions and
product mix.
All Other Segments
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Nitrogen Production COGS
Corporate and Other COGS
There were no significant changes to COGS in our Nitrogen Production segment or Corporate and Other during the three months endedNovember 30, 2020 , compared to the same period during the prior year. 34
--------------------------------------------------------------------------------
Table of Contents
Marketing, General and Administrative Expenses
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Marketing, general and administrative expenses
$ 168,331 $ 2,330 1.4 % Marketing, general and administrative expenses increased during the three months endedNovember 30, 2020 , compared to the three months endedNovember 30, 2019 , due to an$11.7 million increase in reserve and impairment charges, net of recoveries. This increase was partially offset by various cost-reduction initiatives launched during the current year. Interest Expense Three Months Ended November 30, Change 2020 2019 Dollars Percent (Dollars in thousands) Interest expense$ 25,050 $ 34,971 $ (9,921) (28.4) % Interest expense decreased during the three months endedNovember 30, 2020 , as a result of lower interest rates and decreased average outstanding debt balances compared to the same period of the prior year. Other Income Three Months Ended November 30, Change 2020 2019 Dollars Percent (Dollars in thousands) Other income$ 12,624 $ 13,498 $ (874) (6.5) %
Other income decreased during the three months ended
Equity Income from Investments
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Equity income from investments* $ 50,023 $ 49,662 $ 361 0.7 %
*See Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information.
We record equity income or loss for investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Condensed Consolidated Statements of Operations. Equity income from investments increased during the three months endedNovember 30, 2020 , compared to the same period during the prior year, primarily due to increased equity income associated with our equity method investment inTEMCO, LLC , which experienced a significant increase in volumes and profitability with increased trade flows toChina . The increased equity income was partially offset by lower equity income from other equity investments, including CF Nitrogen, which decreased due to lower urea and urea ammonium nitrate prices. 35
--------------------------------------------------------------------------------
Table of Contents
Income Tax (Benefit) Expense
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Income tax (benefit) expense
Increased income tax benefit during the three months endedNovember 30, 2020 , primarily reflects tax benefits related to changes in the mix of full-year earnings projected across business units and equity management assumptions, as well as intercompany transfer of assets anticipated from tax planning. Effective tax rates for the three months endedNovember 30, 2020 and 2019, were (54.0)% and 3.6%, respectively. Federal and state statutory rates applied to nonpatronage business activity were 24.9% and 24.7% for the three months endedNovember 30, 2020 and 2019, respectively. Income taxes and effective tax rate vary each year based on profitability and nonpatronage business activity during each of the comparable years.
Liquidity and Capital Resources
Summary
In assessing our financial condition, we consider factors such as working capital and internal benchmarking related to our applicable covenants and other financial criteria. We fund our operations primarily through a combination of cash flows from operations supplemented with borrowings under our revolving credit facility. We fund our capital expenditures and growth primarily through cash, operating cash flow and long-term debt financing. OnNovember 30, 2020 , we had working capital, defined as current assets less current liabilities, of$1.7 billion , and a current ratio, defined as current assets divided by current liabilities, of 1.3 compared to working capital of$1.3 billion and a current ratio of 1.3 onAugust 31, 2020 . OnNovember 30, 2019 , we had working capital of$992.5 million and a current ratio of 1.2 compared to working capital of$1.1 billion and a current ratio of 1.2 onAugust 31, 2019 . Working capital and the current ratio may not be computed the same as similarly titled measures used by other companies. We believe this information is meaningful to investors as a measure of operational efficiency and short-term financial health. As ofNovember 30, 2020 , we had cash and cash equivalents of$143.5 million , total equities of$8.8 billion , long-term debt (including current maturities) of$2.1 billion and notes payable of$2.0 billion . Our capital allocation priorities 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 owners. We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity. 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 and we expect to remain in compliance with our loan covenants.
As we continue to navigate the impact of COVID-19 on our business and operations, we have strengthened our liquidity through a variety of means, including curtailing certain spending and reprioritizing capital expenditures. We are actively managing our short-term and long-term liquidity.
Fiscal 2021 and 2020 Activity
OnAugust 14, 2020 , we entered into a Note Purchase Agreement to borrow$375.0 million of debt in the form of notes. The notes under this Note Purchase Agreement are structured in four series with maturities ranging from 7 to 15 years and interest accruing at rates ranging from 3.24% to 3.73%, subject to certain adjustments depending on our ratio of consolidated funded debt to consolidated cash flow. The funding of these notes took place onNovember 2, 2020 . This funding has and will be used to pay fiscal 2021 debt maturities, as well as manage liquidity. We have a receivables and loans securitization facility ("Securitization Facility") with certain unaffiliated financial institutions ("Purchasers"). Under the Securitization Facility, we and certain of our subsidiaries ("Originators") sell trade accounts and notes receivable ("Receivables") toCofina Funding, LLC ("Cofina"), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn transfers the Receivables to the Purchasers and this arrangement is accounted for as a secured borrowing. We use the proceeds from the sale of Receivables under the Securitization Facility for general corporate purposes and settlements are made on a monthly basis. The amount available under the Securitization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business. As ofNovember 30, 2020 , and 36
--------------------------------------------------------------------------------
Table of Contents
We also have a repurchase facility ("Repurchase Facility") related to the
Securitization Facility. Under the Repurchase Facility, we can borrow up to
$150.0 million , collateralized by a subordinated note issued by Cofina in favor
of the Originators and representing a portion of the outstanding balance of the
Receivables sold by the Originators to Cofina under the Securitization Facility.
As of November 30, 2020 , and August 31, 2020 , the outstanding balance under the
Repurchase Facility was $150.0 million .
On September 24, 2020 , the Securitization Facility and Repurchase Facility
were amended, increasing the maximum availability under the Securitization
Facility to $600.0 million from $500.0 million and extending their respective
termination dates to July 30, 2021 .
Cash Flows
The following table presents summarized cash flow data for the three months
ended
Three Months Ended
November 30, Change
2020 2019 Dollars Percent
(Dollars in thousands)
Net cash (used in) provided by operating
activities $ (673,453) $ 160,701 $ (834,154) (519.1) %
Net cash used in investing activities (114,311) (114,949) 638 0.6 %
Net cash provided by (used in) financing
activities 808,891 (71,882) 880,773 1,225.3 %
Effect of exchange rate changes on cash and cash
equivalents 2,324 (1,153) 3,477 301.6 %
Net increase (decrease) in cash and cash
equivalents and restricted cash $ 23,451 $ (27,283) $ 50,734 186.0 %
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 $834.2 million decrease in cash provided by operating activities
reflects decreased net income during the first quarter of fiscal 2021 compared
to the same period of the prior fiscal year and working capital increases,
primarily associated with increased receivables and inventories.
The
The$880.8 million increase in cash provided by financing activities primarily reflects increased net cash inflows associated with our notes payable and long-term debt facilities, including the$375.0 million Note Purchase Agreement funding during the first quarter of fiscal 2021.
Future Uses of Cash
We expect to utilize cash and cash equivalents, cash generated by operating activities and cash raised through the Note Purchase Agreement to fund capital expenditures, major maintenance, debt and interest payments, preferred stock dividends, patronage and equity redemptions. The following is a summary of our primary cash requirements for fiscal 2021: •Capital expenditures. We expect total capital expenditures for fiscal 2021 to be approximately$501.4 million , compared to capital expenditures of$418.4 million in fiscal 2020. During the three months endedNovember 30, 2020 , we acquired property, plant and equipment of$85.7 million . •Debt and interest. We expect to repay approximately$189.3 million of long-term debt and finance lease obligations and incur interest payments related to long-term debt of approximately$70.7 million during fiscal 2021. During the three months endedNovember 30, 2020 , we repaid$20.0 million of scheduled long-term debt maturities. •Preferred stock dividends. We had approximately$2.3 billion of preferred stock outstanding atNovember 30, 2020 . We expect to pay dividends on our preferred stock of approximately$168.7 million during fiscal 2021. •Patronage. Our Board of Directors authorized approximately$30.0 million of our fiscal 2020 patronage sourced earnings to be paid to our member-owners during fiscal 2021. •Equity redemptions. Our Board of Directors has authorized equity redemptions of$38.0 million to be distributed in fiscal 2021 in the form of redemptions of qualified and nonqualified equity owned by individual producer members 37
--------------------------------------------------------------------------------
Table of Contents
and association members. During the three months ended
Future Sources of Cash
We fund our current operations primarily through a combination of cash flows from operations and committed and uncommitted revolving credit facilities, including our Securitization Facility and Repurchase Facility. We believe these sources will provide adequate liquidity to meet our working capital needs. 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 and term loans. OnAugust 14, 2020 , we entered into a Note Purchase Agreement to borrow$375.0 million of long-term debt in the form of notes that was funded onNovember 2, 2020 . This funding has and will be used to pay fiscal 2021 debt maturities, as well as manage liquidity. In addition, our wholly-owned subsidiary,CHS Capital , makes loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities and has financing sources as detailed below in "CHS Capital Financing."
Working Capital Financing
We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks. We believe our current cash balances and available capacity on our committed lines of credit will provide adequate liquidity to meet our working capital needs. The following table summarizes our primary lines of credit as ofNovember 30, 2020 : Primary Revolving Borrowings Credit Facilities Maturities Total Capacity Outstanding Interest Rates (Fiscal Year) (Dollars in thousands) Committed five-year unsecured LIBOR or base rate + 0.00% to facility 2024$ 2,750,000 $ 527,000 1.55% Uncommitted bilateral LIBOR or base rate + facilities 2021 380,000 300,000 applicable margin Our primary line of credit is a five-year unsecured revolving credit facility with a syndicate of domestic and international banks. The credit facility provides a committed amount of$2.75 billion that expires onJuly 16, 2024 . We also maintain certain uncommitted bilateral facilities to support our working capital needs. In addition to our facilities above, our wholly-owned subsidiaries CHS Europe S.a.r.l. and CHS Agronegocio Industria e Comercio Ltda had uncommitted lines of credit with$316.6 million outstanding as ofNovember 30, 2020 . In addition, our other international subsidiaries had lines of credit outstanding of$93.5 million as ofNovember 30, 2020 .
Long-term Debt Financing
The following table presents summarized long-term debt data (including current
maturities) as of
November 30, August 31,
2020 2020
(Dollars in thousands)
Private placement debt $ 1,717,133 $ 1,363,725
Bank financing 366,000 366,000
Finance lease obligations 28,872 31,460
Other notes and contract payable 34,354 34,709
Deferred financing costs (4,623) (4,771)
$ 2,141,736 $ 1,791,123
38--------------------------------------------------------------------------------
Table of Contents
CHS Capital Financing
For a description of the Securitization Facility and the Repurchase Facility, see above in "Fiscal 2021 and 2020 Activity."
CHS Capital sells loan commitments it has originated toCompeer Financial, PCA , d/b/a ProPartners Financial on a recourse basis. Total outstanding commitments under the program were$150.0 million as ofNovember 30, 2020 , of which$113.4 million was borrowed with an interest rate of 1.44%.CHS Capital borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and bear interest at variable rates ranging from 0.35% to 1.4% as ofNovember 30, 2020 , and are due upon demand. Borrowings under these notes totaled$81.9 million as ofNovember 30, 2020 .
Covenants
Our long-term debt is mostly unsecured; however, restrictive covenants under various debt agreements require maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants and restrictions as ofNovember 30, 2020 . Based on our current fiscal 2021 projections, we expect continued covenant compliance. All outstanding private placement notes conform to financial covenants applicable to those of our amended and restated five-year unsecured revolving credit facility. The notes provide that if our ratio of consolidated funded debt to consolidated cash flows is greater than 3.0 to 1.0, the interest rate on outstanding notes will be increased between 0.25% and 1.00%, depending on the related note series, the actual ratio and/or whether the notes have an investment grade rating from a nationally recognized statistical rating organization, until the ratio becomes 3.0 to 1.0, or less. During the three months endedNovember 30, 2020 and 2019, our ratio of consolidated funded debt to consolidated cash flows remained below 3.0 to 1.0.
Patronage and Equity Redemptions
In accordance with our bylaws and by action of our Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year and are based on amounts using financial statement earnings. Total patronage distributions related to the year endedAugust 31, 2020 , which will be distributed in fiscal 2021, are estimated to be$242.0 million , with the qualified cash portion estimated to be$30.0 million and nonqualified equity distributions estimated to be$212.0 million . In accordance with authorization from our Board of Directors, we expect total cash redemptions related to the year endedAugust 31, 2020 , which will be distributed in fiscal 2021, to be approximately$38.0 million and to include redemptions of qualified and nonqualified equity owned by individual producer members and association members. During the three months endedNovember 30, 2020 ,$7.7 million of that amount was redeemed in cash, compared to$5.4 million redeemed in cash during the three months endedNovember 30, 2019 . 39
--------------------------------------------------------------------------------
Table of Contents
Preferred Stock
Dividends paid on our preferred stock during the three months endedNovember 30, 2020 and 2019, were$42.2 million . The following is a summary of our outstanding preferred stock as ofNovember 30, 2020 , all shares of which are listed on the Global Select Market ofThe Nasdaq Stock Market LLC : Net Proceeds Dividend Rate Dividend Payment Nasdaq Symbol Issuance Date Shares Outstanding Redemption Value (a) (b) (c) Frequency Redeemable Beginning (d) (Dollars in millions) 8% Cumulative Redeemable CHSCP (e) 12,272,003 $ 306.8$ 311.2 8.00 % Quarterly7/18/2023 ClassB Cumulative Redeemable, Series 1 CHSCO (f) 21,459,066 $ 536.5$ 569.3 7.875 % Quarterly9/26/2023 Class B Reset Rate Cumulative Redeemable, Series 2 CHSCN 3/11/2014 16,800,000 $ 420.0 $
406.2 7.10 % Quarterly 3/31/2024 Class B Reset Rate Cumulative Redeemable, Series 3 CHSCM9/15/2014 19,700,000 $ 492.5$ 476.7 6.75 % Quarterly
ClassB Cumulative Redeemable, Series 4 CHSCL1/21/2015 20,700,000 $ 517.5$ 501.0 7.50 % Quarterly1/21/2025 (a) Includes patron equities redeemed with preferred stock. (b) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2, accumulates dividends at a rate of 7.10% per year untilMarch 31, 2024 , and then at a rate equal to the three-month LIBOR plus 4.298%, not to exceed 8.00% per annum, subsequent toMarch 31, 2024 . (c) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3, accumulates dividends at a rate of 6.75% per year untilSeptember 30, 2024 , and then at a rate equal to the three-month LIBOR plus 4.155%, not to exceed 8.00% per annum, subsequent toSeptember 30, 2024 . (d) Preferred stock is redeemable for cash at our option, in whole or in part, at a per-share price equal to the per-share liquidation preference of$25.00 per share, plus all dividends accumulated and unpaid on that share to and including the date of redemption, beginning on the dates set forth in this column. (e) The 8% Cumulative Redeemable Preferred Stock was issued at various times from 2002 through 2010. (f) Shares of Class B Cumulative Redeemable Preferred Stock, Series 1, were issued onSeptember 26, 2013 ;August 25, 2014 ;March 31, 2016 ; andMarch 30, 2017 .
Off-Balance Sheet Financing Arrangements
Guarantees
We are a guarantor for lines of credit and performance obligations of related companies. As ofNovember 30, 2020 , our bank covenants allowed maximum guarantees of$1.0 billion , of which$140.4 million were outstanding. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide guarantees were current as ofNovember 30, 2020 .
Debt
We have no material off-balance sheet debt.
Loan Participations
We engaged in off-balance sheet arrangements through certain loan participation agreements. Refer to further details about these arrangements in Note 3, Receivables, of the notes to the consolidated financial statements in our Annual Report on Form 10-K for the year endedAugust 31, 2020 . 40
--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations
Our contractual obligations presented in 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, 2020 , have not materially changed during the three months endedNovember 30, 2020 .
Critical Accounting Policies
Other than as described within the Significant Accounting Policies section of Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our critical accounting policies as presented in 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, 2020 , have not materially changed during the three months endedNovember 30, 2020 .
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements that apply to us.
© Edgar Online, source
