UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☑|| ||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
| || ||For the fiscal year ended||August 31, 2020|
|☐|| ||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
| || ||For the transition period from to |
Commission file number: 001-36079
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of|
incorporation or organization)
|5500 Cenex Drive|
|Inver Grove Heights,||Minnesota||55077|
| (Address of principal executive offices, including zip code)|
| (Registrant’s telephone number, including area code)|
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|8% Cumulative Redeemable Preferred Stock||CHSCP||The Nasdaq Stock Market LLC|
|Class B Cumulative Redeemable Preferred Stock, Series 1||CHSCO||The Nasdaq Stock Market LLC|
|Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2||CHSCN||The Nasdaq Stock Market LLC|
|Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3||CHSCM||The Nasdaq Stock Market LLC|
|Class B Cumulative Redeemable Preferred Stock, Series 4||CHSCL||The Nasdaq Stock Market LLC|
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Yes ☑ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|Large accelerated filer|
|Smaller reporting company|
|Emerging growth company|
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☑
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter:
The Registrant has no voting or non-voting common equity (the Registrant is a member cooperative).
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
The Registrant has no common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
ITEM 1. BUSINESS
CHS Inc. (referred to herein as "CHS," "we," "us" or "our") is the nation’s leading integrated agricultural cooperative, providing grain, foods and energy resources to businesses and consumers on a global basis. As a cooperative, we are owned by farmers and ranchers and their member cooperatives (referred to herein as "members") across the United States. We also have preferred shareholders that own shares of our five series of preferred stock, which are each listed and traded on the Global Select Market of The Nasdaq Stock Market LLC ("The Nasdaq"). We buy commodities from and provide products and services to individual agricultural producers, local cooperatives and other companies (including our members and other nonmember customers), both domestically and internationally. We provide a wide variety of products and services, ranging from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products to agricultural outputs that include grains and oilseeds, processed grains and oilseeds, renewable fuels and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those equity investments and joint ventures is included as a component of our net income using the equity method of accounting. For the year ended August 31, 2020, our total revenues were $28.4 billion and net income attributable to CHS Inc. was $422.4 million.
We have aligned our segments based on an assessment of how our businesses operate and the products and services they sell. Our Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. Our Ag segment derives its revenues through origination and marketing of grain, including service activities conducted at export terminals; through wholesale agronomy sales of crop nutrient and crop protection products; from sales of soybean meal, soybean refined oil and soyflour products; through the production and marketing of renewable fuels; and through retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies. Our Ag segment also records equity income from our grain export joint venture and other investments. Our Nitrogen Production segment consists solely of our equity method investment in CF Industries Nitrogen, LLC ("CF Nitrogen"). Our other business operations, primarily our financing and hedging businesses, are included in Corporate and Other because of the nature of their products and services, as well as the relative amount of revenues from those businesses. Prior to its sale on May 4, 2018, our insurance business was also included in Corporate and Other. In addition, our nonconsolidated wheat milling and food production and distribution joint ventures are included in Corporate and Other.
Our earnings from cooperative business are allocated to members (and to a limited extent to nonmembers with which we have agreed to do business on a patronage basis) based on the volume of business they do with us. We allocate these earnings to our patrons in the form of patronage refunds (which are also called patronage dividends), which may be in cash, patrons’ equities (in the form of capital equity certificates) or both. Patrons' equities may be redeemed over time solely at the discretion of our Board of Directors. Earnings derived from nonmembers, which are not treated as patronage, are taxed at federal and state statutory corporate rates and are retained by us as unallocated capital reserves. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and if we qualify for patronage refunds from them.
Our origins date back to the early 1930s with the founding of our predecessor companies, Cenex, Inc. and Harvest States Cooperatives. CHS Inc. emerged as the result of the merger of those two entities in 1998 and is headquartered in Inver Grove Heights, Minnesota.
Our internet address is www.chsinc.com. The information contained on our website is not part of, and is not incorporated in, this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.
We are the nation's largest cooperative energy company based on revenues and identifiable assets, with operations that include petroleum refining and pipelines; supply, marketing and distribution of refined fuels (gasoline, diesel fuel and other energy products); blending, sale and distribution of lubricants; and wholesale supply of propane and other natural gas liquids. Our Energy segment processes crude oil into refined petroleum products at our refineries in Laurel, Montana, and McPherson, Kansas, and sells those products under the Cenex® brand to member cooperatives and other independent retailers through a network of nearly 1,500 sites, the majority of which are convenience stores marketing Cenex branded fuels and owned by our member cooperatives. For fiscal 2020, our Energy revenues, after elimination of intersegment revenues, were $5.4 billion and were primarily from gasoline, diesel fuel and propane.
Laurel refinery. Our Laurel, Montana, refinery processes medium- and high-sulfur crude oil into refined petroleum products that primarily include gasoline, diesel fuel, asphalt and petroleum coke. Our Laurel refinery sources approximately 95% of its crude oil supply from Canada, with the remaining balance obtained from domestic sources, and we have access to Canadian and northwest Montana crude oil through our wholly-owned Front Range Pipeline, LLC, and other common carrier pipelines. Our Laurel refinery also has access to Wyoming crude oil via common carrier pipelines from the south.
Our Laurel refinery processes approximately 55,500 barrels of crude oil per day to produce refined products that consist of approximately 42% gasoline, 40% diesel fuel and other distillates, 10% asphalt, 7% petroleum coke and 1% other products. Refined fuels produced at our Laurel refinery are available via rail cars and via the Yellowstone Pipeline to western Montana terminals and to Spokane, Washington; south via common carrier pipelines to Wyoming terminals and Denver, Colorado; and east via our wholly-owned Cenex Pipeline, LLC, to Glendive, Montana, and Minot, Prosper and Fargo, North Dakota.
McPherson refinery. Our McPherson, Kansas, refinery processes approximately 64% low- and medium-sulfur crude oil and approximately 36% heavy-sulfur crude oil into gasoline, diesel fuel and other distillates, propane and other products. The refinery sources its crude oil through its own pipelines, as well as common carrier pipelines. Low- and medium-sulfur crude oil is sourced from Kansas, Colorado, North Dakota, Oklahoma and Texas, and heavy-sulfur crude oil is sourced from Canada and Wyoming.
Our McPherson refinery processes approximately 110,000 barrels of crude oil per day to produce refined products that consist of approximately 53% gasoline, 41% diesel fuel and other distillates, 2% propane and 4% other products. These products are loaded into trucks at the McPherson refinery or shipped via common carrier pipelines to other markets.
Other energy operations. We operate six propane terminals, four asphalt terminals, seven refined product terminals and three lubricants blending and packaging facilities. We also own and lease a fleet of liquid and pressure trailers and tractors, which transport refined fuels, propane, anhydrous ammonia and other products.
Products and Services
Our Energy segment produces and sells (primarily wholesale) gasoline, diesel fuel, propane, asphalt, lubricants and other related products, and also provides transportation services. In addition to selling products refined at our Laurel and McPherson refineries, we purchase refined petroleum products from third parties. For fiscal 2020, we obtained approximately 76% of the refined petroleum products we sold from our Laurel and McPherson refineries and approximately 24% from third parties.
Sales and Marketing; Customers
We market approximately 80% of our refined fuel products to members, with the balance sold to nonmembers. Sales are made wholesale to member cooperatives and through a network of independent retailers that operate convenience stores under the Cenex brand. We sold approximately 1.4 billion gallons of gasoline and approximately 1.7 billion gallons of diesel fuel in fiscal 2020. We also blend, package and wholesale auto and farm machinery lubricants to both members and nonmembers. We are one of the nation's largest propane wholesalers based on revenues. Most of the propane sold in rural areas is for heating and agricultural usage. Annual sales volumes of propane vary greatly depending on weather patterns and crop conditions.
The petroleum business is highly cyclical. Demand for crude oil and energy products is driven by the condition of local and worldwide economies, local and regional weather patterns and taxation relative to other energy sources, which can significantly affect the price of refined fuel products. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products in the spring, summer and early fall when gasoline and diesel fuel usage by our agricultural customers is highest and is subject to domestic supply and demand forces. Other energy products, such as propane, generally experience higher volumes and profitability during the winter heating and crop-drying seasons. More fuel-efficient equipment, reduced crop tillage, depressed prices for crops, weather conditions and government programs that encourage idle acres may all reduce demand for our energy products.
Regulation. Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, have a significant impact on our Energy segment. Our Energy segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the U.S. Environmental Protection Agency ("EPA"), the Department of Transportation ("DOT"), the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration, the Federal Energy Regulatory Commission and similar government agencies. These laws, regulations and rules govern, among other things, discharge of materials into the environment, including air and water; reporting storage of hazardous wastes and other hazardous materials; transportation, handling and disposal of wastes and other materials; labeling of pesticides and similar substances; and investigation and remediation of releases of hazardous materials. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. Our hedging transactions and activities are subject to the rules and regulations of the exchanges we use and governing bodies, such as the Chicago Mercantile Exchange ("CME"), the New York Mercantile Exchange ("NYMEX") and the U.S. Commodity Futures Trading Commission ("CFTC").
Competition. The petroleum refining and wholesale fuels business is very competitive. Among our competitors are some of the world’s largest integrated petroleum companies, which have their own crude oil supplies and distribution and marketing systems. We also compete with smaller domestic refiners and marketers in the midwestern and northwestern United States, with foreign refiners who import products into the United States and with producers and marketers in other industries supplying other forms of energy and fuels to consumers. Given the commodity nature of the end products, profitability in the industry depends largely on margins, as well as operating efficiency, product mix and costs of product distribution and transportation. The retail gasoline market is highly competitive, with competitors that are much larger than us and that have greater brand recognition and distribution outlets throughout the country and the world than we do. We are also experiencing increased competition from regional and unbranded retailers. Our owned and nonowned retail outlets are located primarily in the northwestern, midwestern and southern United States.
We market refined fuel products in five principal geographic areas. The first area includes the Midwest and Northern Plains. Competition at the wholesale level in this area includes major oil companies, as well as independent refiners and wholesale brokers/suppliers. This area has a robust spot market and is influenced by the large refinery center along the Gulf Coast.
To the east of the Midwest and Northern Plains is another unique marketing area. This area centers near Chicago, Illinois, and includes eastern Wisconsin, Illinois and Indiana. In this area, we principally compete with the major oil companies, as well as independent refiners and wholesale brokers/suppliers.
Another market area includes Arkansas, Missouri and the northern part of Texas. Competition in this area includes the major oil companies and independent refiners. This area is principally supplied from the Gulf Coast refinery center and is also driven by a strong spot market that reacts quickly to changes in the international and national supply balance.
Another geographic area includes Montana, western North Dakota, Wyoming, Utah, Idaho, Colorado and western South Dakota. Competition at the wholesale level in this area includes the major oil companies and independent refiners.
The last area includes much of Washington and Oregon. We compete with the major oil companies in this area. This area is known for volatile prices and an active spot market.
Our Ag segment includes our global grain marketing, country operations, wholesale agronomy, processing and food ingredients and renewable fuels businesses. These businesses work together to facilitate the production, purchase, sale and eventual use of grain and other agricultural products within the United States, as well as internationally. In fiscal 2020, revenues in our Ag segment were $22.9 billion after elimination of intersegment revenues, consisting principally of grain sales.
Global grain marketing. We are the nation’s largest cooperative marketer of grain and oilseed based on grain sales. Our global grain marketing operations purchase grain directly from agricultural producers and elevator operators primarily in the midwestern and western United States and indirectly through our country operations business. The purchased grain is typically contracted for sale for future delivery at a specified location, and we are responsible for handling the grain and either arranging for or facilitating its transportation to that location. We own and operate export terminals, river terminals and elevators throughout the United States to handle and transport grain and grain products. We also maintain locations in Europe, the Middle East, the Pacific Rim and South America for the marketing, merchandising and/or sourcing of grains and crop nutrients. We primarily conduct our global grain marketing operations directly, but do conduct some of our operations through joint ventures, including TEMCO, LLC, a 50% owned joint venture with Cargill, Incorporated ("Cargill"), focused on exports, primarily to Asia.
Country operations. Our country operations business operates 487 agri-operations locations through 42 business units dispersed throughout the midwestern and western United States. Most of these locations purchase grain from farmers and sell agronomy, energy, feed and seed products to those same producers and others, although not all locations provide every product and service. We also manufacture animal feed through eight owned plants and four limited liability companies.
Wholesale agronomy. Our wholesale agronomy business includes our wholesale crop nutrients and wholesale crop protection businesses. Our wholesale crop nutrients business delivers products directly to our customers and our country operations business from the manufacturer or through our 17 warehouse terminals and other nonowned storage facilities located throughout the United States. To supplement what is purchased domestically, our Galveston, Texas, deep-water port and terminal receives fertilizer by vessel from origins such as Asia and the Caribbean Basin where significant volumes of urea are produced. The fertilizer is then shipped by rail to destinations within crop-producing regions of the United States. Our wholesale crop protection business operates out of our network of 29 warehouses from which we deliver products directly to our member cooperatives and independent retailers. We also operate a bulk chemical rail terminal in Brooten, Minnesota, where we handle and store bulk crop protection products for some of the crop protection industry’s largest chemical manufacturers. This facility has approximately 6 million gallons of chemical storage capacity.
Processing and food ingredients. Our processing and food ingredients operations are conducted at facilities that can crush approximately 115 million bushels of oilseeds on an annual basis, producing approximately 2.6 million short tons of meal/flour and 1.6 billion pounds of edible oil annually. We purchase our oilseeds from members, other CHS businesses and third parties that have tightly integrated connections with our global grain marketing operations and country operations business.
Renewable fuels. Our renewable fuels business produces 257 million gallons of fuel-grade ethanol, 60 million pounds of inedible corn oil and 636 thousand tons of dried distillers grains with solubles ("DDGS") annually. Renewable fuels produced by our production plants are marketed by our global grain marketing business, along with more than 450 million gallons of ethanol and 3 million tons of DDGS annually under marketing agreements with ethanol production plants.
Products and Services
Our Ag segment provides local cooperatives and farmers with the inputs and services they need to produce grain and raise livestock. These include seed, crop nutrients, crop protection products, animal feed, animal health products, refined fuels and propane. We also buy and merchandise grain in both domestic and international markets. With a portion of the grain we purchase, we produce renewable fuels, including ethanol and DDGS. We also produce refined oils, meal and soyflour at our processing facilities.
Sales and Marketing; Customers
Our Ag segment provides products and services to a wide range of customers, primarily in the United States. These customers include member and nonmember producers, local cooperatives, elevators, grain dealers, grain processors and crop nutrient retailers. We sell our edible oils and soyflour to food companies. The meal we produce is sold to integrated livestock producers and feed mills. The ethanol and DDGS we produce are sold throughout the United States and to various international customers.
Many of the business activities in our Ag segment are highly seasonal and, consequently, the operating results for our Ag segment will typically vary throughout the year. For example, our country operations business generally experiences higher volumes and income during the fall harvest and spring planting seasons and our agronomy business generally experiences higher volumes and income during the spring planting season. In addition, our Ag segment operations may be adversely affected by relative levels of supply and demand, both domestic and international, commodity price levels and transportation costs and conditions. Supply is affected by weather conditions, plant disease, insect damage, acreage planted and government regulations and policies. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, population growth, per capita consumption of some products and renewable fuels production levels.
Regulation. Our Ag operations are subject to laws and related regulations and rules designed to protect the environment that is administered by the EPA, the DOT and similar government agencies. These laws, regulations and rules govern, among other things, discharge of materials into the environment, including air and water; reporting storage of hazardous wastes and other hazardous materials; transportation, handling and disposal of wastes and other materials; labeling of pesticides and similar substances; and investigation and remediation of releases of hazardous materials. In addition, environmental laws impose a liability on owners and operators for investigation and remediation of contaminated property and on a party who sends hazardous materials to those contaminated properties for treatment, storage, disposal or recycling. In some instances, that liability exists regardless of fault. Our global grain marketing operations, country operations business, processing and food ingredient operations and renewable fuel operations are also subject to laws and related regulations and rules administered by the U.S. Department of Agriculture, the U.S. Food and Drug Administration and other federal, state, local and foreign governmental agencies that govern processing, packaging, storage, distribution, advertising, labeling, quality and safety of feed and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. The hedging transactions and activities of our global grain marketing, country operations, processing and food ingredient and renewable fuels businesses are subject to the rules and regulations of the exchanges we use and governing bodies, such as the CME, the Chicago Board of Trade ("CBOT"), the Minneapolis Grain Exchange ("MGEX") and the CFTC.
Competition. In our Ag segment, we have significant competition in the businesses in which we operate based principally on price, services, quality, patronage and alternative products. Our businesses depend on relationships with local cooperatives and private retailers, proximity to customers and producers, competitive pricing and safety of food, feed and grain products. We compete with other large distributors of agricultural products, as well as other regional or local distributors, local cooperatives, retailers and manufacturers.
Our Nitrogen Production segment consists solely of our approximate 10% membership interest (based on product tons) in CF Nitrogen, our strategic venture with CF Industries Holdings, Inc. ("CF Industries"). In connection with our investment in CF Nitrogen, we entered into a supply agreement with CF Nitrogen that entitles us to purchase up to 1.1 million tons of granular urea and 580,000 tons of urea ammonium nitrate ("UAN") annually for ratable delivery through fiscal 2096. We account for our CF Nitrogen investment using the hypothetical liquidation at book value method and on August 31, 2020, our investment was approximately $2.7 billion. 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.
Our investment in CF Nitrogen positions us and our members for long-term dependable fertilizer supply, supply chain efficiency and production economics. In addition, the ability to source product from CF Nitrogen production facilities under our supply agreement benefits our members and customers through strategically positioned access to essential fertilizer products.
CF Nitrogen has four production facilities located in Donaldsonville, Louisiana; Port Neal, Iowa; Yazoo City, Mississippi; and Woodward, Oklahoma. Natural gas is the principal raw material and primary fuel source used in the ammonia production process. CF Nitrogen has access to competitively priced natural gas through a reliable network of pipelines connected to major natural gas trading hubs near its production facilities.
Products and Services
CF Nitrogen produces nitrogen-based products, including methanol, UAN, urea and related products.
Sales and Marketing; Customers
CF Nitrogen has three customers, including CHS and two consolidated subsidiaries of CF Industries.
Regulation. CF Nitrogen is subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA and similar government agencies. These laws, regulations and rules govern, among other things, discharge of materials into the environment, including air and water; reporting storage of hazardous wastes and other hazardous materials; handling and disposal of wastes and other materials; and investigation and remediation of releases of hazardous materials. In addition, environmental laws impose a liability on owners and operators for investigation and remediation of contaminated property and on a party that sends hazardous materials to those contaminated properties for treatment, storage, disposal or recycling. In some instances, that liability exists regardless of fault.
Competition. CF Nitrogen competes primarily on delivered price and, to a lesser extent, on customer service and product quality. CF Nitrogen competes domestically with a variety of large companies in the fertilizer industry. There is also significant competition from products sourced from other regions of the world.
CORPORATE AND OTHER
CHS Capital. Our wholly-owned financing subsidiary, CHS Capital, LLC ("CHS Capital"), provides local cooperatives with a variety of loans that meet commercial agriculture needs. These loans include operating, term, revolving and other short- and long-term options. CHS Capital also provides loans to individual producers for crop inputs, feed and hedging-related margin calls. Producer operating loans are also offered in strategic geographic regions.
CHS Hedging. Our wholly-owned commodity brokerage subsidiary, CHS Hedging, LLC ("CHS Hedging"), is a registered, CFTC-regulated futures commission merchant ("FCM") and a clearing member of the CBOT, CME, NYMEX and MGEX. CHS Hedging provides consulting services and commodity risk management services primarily in the grains, oilseeds, fertilizer, livestock, dairy and energy markets. CHS Hedging is also the FCM for the majority of our commodity futures trading.
Wheat milling. Ardent Mills, LLC ("Ardent Mills"), the largest flour miller in the United States, is a joint venture with CHS, Cargill and Conagra Brands, Inc. ("Conagra"). In connection with the Ardent Mills joint venture, CHS, Cargill and Conagra have various ancillary and noncompete agreements including, among other things, an agreement for us to supply Ardent Mills with certain wheat and durum products. We hold a 12% interest in Ardent Mills and account for our investment as an equity method investment due to our ability to exercise significant influence through our ability to appoint a member of the Board of Shareholders and Board of Managers of Ardent Mills. On August 31, 2020, our investment in Ardent Mills was $208.9 million. 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.
Foods. Ventura Foods, LLC ("Ventura Foods"), is a joint venture between CHS and Wilsey Foods, Inc., a majority-owned subsidiary of MBK USA Holdings, Inc., with each company owning 50% interests. Ventura Foods produces vegetable oil-based products, such as packaged frying oils, margarines, mayonnaises, sauces, salad dressings and other food products, and currently has 16 manufacturing and distribution locations across the United States and Canada. Ventura Foods sources its raw materials, which consist primarily of soybean oil, canola oil, palm/coconut oil, peanut oil and other ingredients and supplies, from various domestic and overseas suppliers, including our oilseed processing operations. We account for our investment in Ventura Foods using the equity method of accounting and, on August 31, 2020, our investment was $381.4 million. 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.
On August 31, 2020, we had 10,493 full-time, part-time, temporary and seasonal employees. Of that total, 2,439 were employed in our Energy segment, 7,211 were employed in our Ag segment and 843 were employed in Corporate and Other. In addition to those individuals directly employed by us, many individuals work for our joint ventures, including employees of CF Nitrogen in our Nitrogen Production segment and Ventura Foods and Ardent Mills in our Corporate and Other category, and are not included in these totals.
As of August 31, 2020, we had 12 collective bargaining agreements with unions covering approximately 8% of our employees in the United States, which expire on various dates through May 31, 2024.
CHS AUTHORIZED CAPITAL
We are an agricultural membership cooperative organized under Minnesota cooperative law to do business with member and nonmember patrons.
ITEM 1A. RISK FACTORS
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains and our other publicly available documents may contain, and our officers, directors and other representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our businesses, financial condition and results of operations, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements are discussed or identified in our public filings made with the U.S. Securities and Exchange Commission, including in this "Risk Factors" discussion. Any forward-looking statements made by us in this Annual Report on Form 10-K are based only on information currently available to us and speak only as of the date on which the statement is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by applicable law.
Reference to this ("Cautionary Statement") in the context of a forward-looking statement shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those indicated in the forward-looking statement.
The following risk factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any particular forward-looking statement. The following risk factors should not be construed as exhaustive.
Risks Related to Operating Our Business
Our revenues, results of operations and cash flows could be materially and adversely affected by changes in commodity prices.
Our revenues, results of operations and cash flows are affected by market prices for commodities such as crude oil, natural gas, ethanol, fertilizer, grain, oilseed, flour, and crude and refined vegetable oils. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, plant disease, insect damage, drought, availability and adequacy of supply, availability of a reliable rail and river transportation network, outbreaks of disease, government regulation and policies, global trade disputes, and general political and economic conditions. We are also exposed to fluctuating
commodity prices as the result of our inventories of commodities, typically grain, fertilizer and petroleum products, and purchase and sale contracts at fixed or partially fixed prices. At any time, our inventory levels and unfulfilled fixed or partially fixed price contract obligations may be substantial. We have processes in place to monitor exposures to these risks and engage in strategies, such as hedging, to manage these risks. If these controls and strategies are not successful in mitigating our exposure to these fluctuations, we could be materially and adversely affected. Changes in market prices for commodities that 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.
For example, in our energy operations, profitability depends largely on the margin between the cost of crude oil that we refine and the selling prices that we obtain for our refined products. The prices for crude oil and for gasoline, diesel fuel and other refined petroleum products fluctuate widely. Factors influencing these prices, many of which are beyond our control, include:
•levels of worldwide and domestic supplies;
•capacities of domestic and foreign refineries;
•ability of members of the Organization of Petroleum Exporting Countries and other countries that are significant producers of oil to agree to and maintain oil price and production controls, and the price and level of imports;
•disruption in supply;
•political instability or conflict in oil-producing regions;
•level of demand from consumers, agricultural producers and other customers;
•price and availability of alternative fuels;
•availability of pipeline capacity; and
•domestic and foreign governmental regulations and taxes.
Many of these factors resulted in significant volatility in crude oil, refined petroleum products and natural gas supplies and prices during the period of the COVID-19 pandemic prior to August 31, 2020. Additional volatility is expected to occur during the remainder of the pandemic and that volatility may be significant. The long-term effects of this volatility and other conditions on the prices of crude oil, refined petroleum products and natural gas are uncertain and ever-changing. Increases in crude oil prices without a corresponding increase in the prices of our refined petroleum products, and decreases in crude oil prices with larger corresponding decreases in the prices of our refined petroleum products, would reduce our net income. Accordingly, we expect our margins and the profitability of our energy business to fluctuate, possibly significantly, over time.
We are subject to political, economic, legal and other risks of doing business globally.
We are a global business and are exposed to risks associated with having global operations. These risks include, but are not limited to, risks relating to terrorism, war, civil unrest, changes in a country's or region's social, economic or political conditions, changes in local labor conditions and regulations, changes in safety and environmental regulations, changes in regulatory or legal environments, restrictions on currency exchange activities, currency exchange fluctuations, price controls on commodities, taxes, doing business in countries or regions with inadequate infrastructure and logistics challenges. In particular, some countries where we operate lack well-developed legal systems or have not adopted clear legal and regulatory frameworks. This lack of legal certainty exposes our operations to increased risks, including increased difficulty in enforcing our agreements in those jurisdictions and increased risk of adverse actions by local government authorities, such as unilateral or forced renegotiation, modification or nullification of existing agreements or expropriations.
Our business and operations and demand for our products are highly dependent on certain global and regional factors that are outside our control and that could adversely impact our business.
The level of demand for our products is affected by global and regional demographics and macroeconomic conditions, including population growth rates and changes in standards of living. A significant downturn in global economic growth or recessionary conditions in major geographic regions, including what have been experienced as a result of the COVID-19
pandemic, may lead to a reduced demand for our products and services, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. Weak global economic conditions and adverse conditions in financial and capital markets may adversely impact the financial condition and liquidity of some of our customers, suppliers and other counterparties, which could have a material adverse effect on our customers' ability to pay for our products and on our business, financial condition, liquidity, results of operations and prospects.
Additionally, planted acreage and consequently the volume of fertilizer and crop protection products applied, is partially dependent on government programs, grain prices and the perception held by producers of demand for production, all of which are outside our control. Moreover, our business and operations may be affected by weather conditions, including those due to climate change, that are outside our control. For example:
•Weather conditions during the spring planting season and early summer crop nutrient and crop protection application season affect agronomy product volumes and profitability.
•Adverse weather conditions, such as heavy snow or rainfall and any flooding as a result thereof, may cause transportation delays and increased transportation costs, or damage physical assets, especially facilities in low-lying areas near coasts and river banks or situated in hurricane-prone and rain-susceptible regions.
•Changes in weather patterns may shift periods of demand for products or regions in which our products are produced or distributed, which could require us to evolve our procurement and distribution processes.
•Significant changes in water levels (up or down, as a result of flooding, drought or otherwise) may cause changes in agricultural activity, which could require changes to our operating and distribution activities, as well as significant capital improvements to our facilities.
•Climate change may cause changes in weather patterns and conditions, including changes in rainfall and storm patterns and intensities, water shortages, changes in sea levels and changes in temperature levels, all of which could adversely impact our costs and business operations, the location, cost and competitiveness of commodity agricultural production, related storage and processing facilities, or demand for agricultural commodities. These effects could significantly reduce demand for the products we sell to or buy from agricultural producers and local cooperatives, and therefore could adversely impact our results of operations, liquidity or capital resources.
•We may experience increased insurance premiums and deductibles, or decreases in available coverage, for our assets in areas subject to adverse weather conditions.
Emerging sustainability and other environmental priorities outside our control could also affect agricultural practices and future demand for agronomy products applied to crops and the volume of any such application. Accordingly, factors outside our control could materially and adversely affect our revenues, results of operations and cash flows.
Our business and operations have been and may continue to be adversely affected by the ongoing COVID-19 outbreak or other similar outbreaks.
Outbreaks of contagious diseases, including the ongoing COVID-19 outbreak and pandemic, and other adverse public health developments in countries and states where we operate, have had and are expected to continue to have an adverse effect on our business, financial condition and results of operations. These effects include a potential negative impact on the availability of our key personnel; temporary closures of our facilities or facilities of our members, business partners, customers, suppliers, third-party service providers or other vendors; and interruption of domestic and global supply chains, distribution channels, liquidity and capital or financial markets. In particular, we are actively monitoring COVID-19 impacts on our supply chain and distribution channels. Restrictions on or disruptions of transportation, port closures or increased border controls or closures, or other impacts on domestic and global supply chains or distribution channels, could increase our costs for raw materials and commodity costs, increase demand for raw materials and commodities from competing purchasers, limit our ability to meet customer demand or otherwise have a material adverse effect on our business, financial condition, results of operation or cash flows. In addition, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees, including requiring administrative and other groups of our employees to work remotely, suspending nonessential travel and restricting attendance at industry events and in-person work-related meetings, which could negatively affect our business. Some of these precautionary measures, and similar precautionary measures that we may take in the future, may result in additional costs. Further, COVID-19 has resulted in a widespread health crisis that has affected and is expected to continue to adversely affect the economies and financial markets of many countries and most areas of the United States, which may affect our ability to obtain additional financing for our businesses and demand
for our products and services, such as the declines in demand experienced during the third and fourth quarters of our fiscal year 2020 by our refined fuels, renewable fuels, and processing and food ingredients businesses and Ventura Foods. The declines in demand experienced by our refined fuels, renewable fuels, and processing and food ingredients businesses and Ventura Foods have and may continue to have an adverse effect on our business and our financial results. The impact of the COVID-19 pandemic may also exacerbate the other risks discussed in this Item 1A, any of which could have a material effect on us. The extent to which COVID-19 will impact our business and our financial results in the future will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing spread of the virus, the severity of the disease, the duration of the outbreak, the extent of any reoccurrence of the coronavirus or any evolutions or mutations thereof, the development of vaccines or therapeutic treatments that can restore consumer and business economic confidence, and the type and duration of actions that may be taken by various governmental authorities in response to the outbreak and the impact on the U.S. and the global economy, including whether the agricultural industry continues to be designated an essential infrastructure industry and may continue to operate if future lockdowns occur. As a result, at the time of this filing, it is not possible to predict the overall future impact of COVID-19 on our business, liquidity, capital resources and financial results.
We participate in highly competitive business markets and we may not be able to continue to compete successfully, which could have a material adverse effect on us.
We operate in several highly competitive business segments and our competitors may succeed in developing new or enhanced products that are better than ours, may be more successful in marketing and selling their products than we are, or may have more effective supply chain capability than we have. Competitive factors include price, service level, proximity to markets, access to transportation, product quality, marketing and risk management. In our business segments, we compete with certain companies that are larger and better known than we are and that have greater marketing, financial, personnel and other resources than we do. As a result, we may not be able to continue to compete successfully, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
Our revenues, margins, results of operations and cash flows could be materially and adversely affected if our members were to do business with others rather than with us.
We do not have an exclusive relationship with our members and our members are not obligated to supply us with their products or purchase products from us. Our members often have a variety of distribution outlets and product sources available to them. If our members were to sell their products to other purchasers or purchase products from other sellers, our revenues and margins would decline and our results of operations and cash flows could be materially and adversely affected.
If our customers choose alternatives to our refined petroleum products, our revenues, results of operations and cash flows could be materially and adversely affected.
Numerous alternative energy sources currently under development could serve as alternatives to our gasoline, diesel fuel and other refined petroleum products. If any of these alternative products become more economically viable or preferable to our customers for environmental or other reasons, demand for our energy products would decline. Declining demand for our energy products, particularly diesel fuel sold for farming applications, could materially and adversely affect our revenues, results of operations and cash flows.
Consolidation among the producers of products we purchase and customers for products we sell could materially and adversely affect our revenues, results of operations and cash flows.
Consolidation has occurred among the individual producers and manufacturers of products we sell and purchase, including crude oil, fertilizer and grain, and it is highly likely that this consolidation will continue in the future. Consolidation could allow producers to negotiate pricing, supply availability and other contract terms that are less favorable to us. In addition, consolidation also may increase the likelihood that consumers or end users of these products enter into supply relationships with a smaller number of producers, resulting in potentially higher prices for the products we purchase.
Consolidation has also occurred among local cooperatives that are the primary wholesale customers of our products, which has resulted in a smaller wholesale and retail customer base for our products and has intensified the competition for these customers. It is highly likely that this consolidation will continue in the future. Ongoing consolidation among distributors and brokers of food products and food retailers has altered the buying patterns of these businesses, as they have increasingly elected to work with product suppliers who can meet their needs nationwide rather than just regionally or locally. If these cooperatives, distributors, brokers and retailers elect not to purchase our products, our revenues, results of operations and cash flows could be materially and adversely affected.
In addition, in the seed, fertilizer and crop protection markets, consolidation at both the producer and wholesale customer level has increased the potential for direct sales from the respective input manufacturer to cooperative customers and/or individual agricultural producers, which would remove us from the supply chain and could have a material and adverse effect on our revenues, results of operations and cash flows.
We are exposed to risk of nonperformance and nonpayment by counterparties.
We are exposed to risk of nonperformance and nonpayment by counterparties, whether pursuant to contracts or otherwise. Risk of nonperformance and nonpayment by counterparties includes inability or refusal of a counterparty to pay us, inability or refusal to perform because of a counterparty's financial condition and liquidity or for any other reason, and risk that the counterparty will refuse to perform a contract during a period of price fluctuations where contract prices are significantly different than current market prices. In the event we experience significant nonperformance or nonpayment by counterparties, our financial condition, results of operations and cash flows could be materially and adversely affected. For example, we store inventory in third-party warehouses, and the operators of these warehouses may not adequately store or secure our inventory, or they may improperly sell that inventory to someone else, which could expose us to a loss of the value of that inventory. In the event we experience any such nonperformance by a third-party warehouse operator, our financial condition, results of operations and cash flows could be materially and adversely affected.
Our business, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money.
We extend credit to, make loans to and engage in other financing arrangements with individual producers, local cooperatives and other third parties around the world. We incur credit risk and the risk of losses if our borrowers and others to which we extend credit do not repay their loans or perform their obligations to pay us the money they owe. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or for other reasons. If these counterparties do not pay us back, such that we experience significant defaults on their payment obligations to us, our financial condition, results of operations or cash flows could be materially and adversely affected.
We are also subject to the risk that our rights against borrowers and other third parties that owe us money may not be enforceable in all circumstances. For example, a borrower or third party may declare bankruptcy. In addition, due to implications of the overall agricultural sector's extended period of depressed commodity prices and margins, the COVID-19 pandemic and changing weather conditions, including those due to climate change, among other factors, the credit quality of borrowers and other third parties whose obligations we hold could deteriorate, including a deterioration in the value of collateral posted by those parties to secure their obligations to us pursuant to purchase contracts, loan agreements or other contracts. If that deterioration occurs, the material adverse effects of third parties not performing their repayment obligations may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount owed to us. For example, certain loans and other financing arrangements we undertake with agricultural producers are typically secured by the counterparty's crops that are planted in the current year. There is a risk that the value of the crop will not be sufficient to satisfy the counterparty’s repayment obligations under the financing arrangement as a result of weather, crop growing conditions, other factors that influence the price, supply and demand for agricultural commodities or for other reasons.
In addition, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. Termination of contracts and foreclosure on collateral may subject us to claims for improper exercise of our rights. Default rates, downgrades and disputes with counterparties as to the valuation of collateral increase significantly in times of market stress and illiquidity.
In respect to our lending activity, we evaluate collectability of both commercial and producer loans on a specific identification basis, based on the amount and quality of the collateral obtained, and record specific loan loss reserves when appropriate. Consistent with accounting principles generally accepted in the United States ("U.S. GAAP"), a general reserve is also maintained based on historical loss experience and various qualitative factors. For other forms of credit, we establish reserves as appropriate and consistent with U.S. GAAP. The reserves represent our best estimate based on current facts and circumstances. Future developments or changes in assumptions may cause us to record adjustments to the reserves that could materially and adversely affect our results of operations.
Our risk management strategies may not be effective.
Our business is affected by fluctuations in commodity prices, transportation costs, energy prices, foreign currency exchange rates and interest rates. We monitor position limits, account receivables and other exposures and engage in other strategies and controls to manage these risks. Our monitoring efforts may not be effective at detecting a significant risk
exposure and our controls and strategies may not be effective in adequately managing against the occurrence of a significant loss relating to a risk exposure. If our controls and strategies are not successful in mitigating or preventing our financial exposure to losses due to the fluctuations or failures mentioned above, it could significantly and adversely affect our operating results.
Actual or perceived quality, safety or health risks associated with our products could subject us to significant liability and damage our business and reputation.
If any of our food or animal feed products were to become adulterated or misbranded, we would need to recall those items and could experience product liability claims if either consumers' or customers' livestock were injured or were claimed to be injured as a result. A widespread product recall or a significant product liability judgment could cause our products to be unavailable for a period of time or could cause a loss of consumer or customer confidence in our products. Even if a product liability claim were unsuccessful or were not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our business and reputation with existing and potential consumers and customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. In addition, general public perceptions regarding the quality, safety or health risks associated with particular food or animal feed products, such as concerns regarding genetically modified crops, could reduce demand and prices for some of the products associated with our businesses. To the extent that consumer preferences evolve away from products that our members or we produce for health or other reasons, such as the growing demand for organic food products, and we are unable to develop or procure products that satisfy new consumer preferences, there will be a decreased demand for our products, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
Our operations are subject to business interruptions and casualty losses; we do not insure against all potential losses and could be seriously harmed by unanticipated liabilities.
Our operations are subject to business interruptions due to unanticipated events such as explosions, fires, pipeline interruptions, transportation delays, equipment failures, crude oil or refined product spills, adverse weather conditions and labor disputes. For example:
•Our oil refineries and other facilities are potential targets for terrorist attacks that could halt or discontinue production.
•Our inability to negotiate acceptable contracts with unionized workers in our operations could result in strikes or work stoppages.
•Our corporate headquarters, the facilities we own or the significant inventories we carry could be damaged or destroyed by catastrophic events, adverse weather conditions or contamination.
•Someone may accidentally or intentionally introduce a computer virus to our information technology systems or breach our computer systems or other cyber resources.
•An occurrence of a pandemic or epidemic disease, such as the COVID-19 pandemic, affecting a substantial part of our workforce or our customers could cause an interruption in our business operations.
The effects of any of these events could be significant. We maintain insurance coverage against many, but not all, potential losses or liabilities arising from these operating hazards, but uninsured losses or losses above our coverage limits are possible. Uninsured losses and liabilities arising from operating hazards could have a material adverse effect on us. In addition, if we experience insurable events, our insurance premiums could increase or insurance relating thereto may become unavailable to us.
We are subject to workforce factors that could adversely affect our business and financial condition.
Like most companies in the agricultural industry, we are continuously challenged to hire, develop and retain a sufficient number of employees to operate our businesses throughout our operating geographies. We may have difficulty recruiting and retaining new employees with adequate qualifications and experience. The challenge of hiring new employees is exacerbated by the rural nature of our business, which provides for a smaller pool of skilled employee candidates. To hire new employees, we may be forced to pay higher wages or offer other benefits that might impact our cost of labor. Furthermore, when we do hire new employees, we may be unable to successfully transfer our other employees' institutional knowledge and
skills to them. These or other employee workforce factors could negatively impact our business, financial condition or results of operations.
Technological improvements could decrease the demand for our agronomy and energy products.
Technological advances in agriculture could decrease the demand for crop nutrients, energy and other crop input products and services we provide. Genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could affect the demand for our crop nutrients and crop protection products. Demand for fuel that we sell could decline as technology allows for more efficient usage of equipment. Declining demand for our products could materially and adversely affect our revenues, results of operations and cash flows.
We utilize information technology systems to support our business. The ongoing multiyear implementation of an enterprisewide resource planning system, reliance upon multiple legacy business systems, security breaches or other disruptions to our information technology systems or assets could interfere with our operations, compromise security of our customers' or suppliers' information and expose us to liability that could adversely impact our business and reputation.
Our operations rely on certain key information technology ("IT") systems, many of which are legacy in nature or may depend on third-party services to provide critical connections of data, information and services for internal and external users.
Over the past several years, we have been implementing a new enterprise resource planning system ("ERP"), and we expect this ERP implementation to continue for the next several years. This ERP implementation has and will continue to require significant capital and human resources to deploy. Changes we have experienced in the implementation timeline and the scope of the implementation likely have impacted the capital and operating expense amounts required to complete the implementation and there can be no assurance that the actual costs for completing the ERP implementation will not exceed our current estimates or that the ERP will not take longer to implement than we currently expect. In addition, potential flaws in implementing the ERP or in the failure of any portion/module of the ERP to meet our needs or provide appropriate controls may pose risks to our ability to operate successfully and efficiently and with an effective system of internal controls.
There may be other challenges and risks to both our aging and current IT systems over time due to any number of causes, such as catastrophic events, availability of resources, power outages, security breaches or cyber-based attacks, as we upgrade and standardize our ERP system on a worldwide basis. These challenges and risks could result in legal claims or proceedings, liability or penalties, disruption in operations, loss of valuable data, increased costs and damage to our reputation, all of which could adversely affect our business. Our ongoing IT investments include those relating to cybersecurity, including technology, hired expertise and cybersecurity risk mitigation actions. However, in connection with the COVID-19 pandemic, a number of our employees have transitioned to working remotely. As a result, more of our employees are working from locations where our cybersecurity programs may be less effective and robust. In addition, we have experienced an increase in the number of attempts by external parties to access our networks and our data without authorization, and these attempts have become increasingly sophisticated. We have experienced insignificant data security incidents in the past and any security incident or breach that may occur could adversely impact our business and reputation.
We are also subject to laws and regulations in the United States and other jurisdictions regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer and security of personal data. These laws and regulations pose increasingly complex compliance challenges and will require us to incur costs to achieve and maintain compliance; some of those costs may be significant. Any violation of such laws and regulations, including as a result of a security or privacy breach, could subject us to legal claims, regulatory penalties and damage to our reputation.
Increasing scrutiny and changing expectations from stakeholders with respect to our environmental, social and governance practices may expose us to new or additional risks.
Companies across all industries are facing increasing scrutiny from stakeholders related to their environmental, social and governance ("ESG") practices. Investor advocacy groups, certain institutional investors, lenders, investment funds and other influential investors are also increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. Regardless of the industry, investors' and other stakeholders' increased focus and activism related to ESG and similar matters may hinder access to capital or financing, as investors or lenders may determine to reallocate capital or not commit capital as a result of their assessment of a company's ESG practices. If we do not adapt or comply with investor, lender or stakeholder ESG expectations and standards, which are evolving, or if we are perceived to have not responded appropriately to the growing focus on ESG issues, regardless of whether there is a legal
requirement to do so, we may suffer from reputational damage and our business or financial condition could be materially and adversely affected.
Acquisitions, strategic alliances, joint ventures, divestitures and other nonordinary course-of-business events resulting from portfolio management actions and other evolving business strategies could affect future results.
We monitor our business portfolio and organizational structure and have made and may continue to make acquisitions, strategic alliances, joint ventures, divestitures and changes to our organizational structure. With respect to acquisitions, future results will be affected by our ability to identify suitable acquisition candidates, to adequately finance any acquisitions and to integrate acquired businesses quickly and obtain the anticipated financial returns, including synergies. Our ability to successfully complete a divestiture will depend on, among other things, our ability to identify buyers that are prepared to acquire such assets or businesses on acceptable terms and to adjust and optimize our retained businesses following the divestiture. Additionally, we may fail to consummate proposed acquisitions, divestitures, joint ventures or strategic alliances after incurring expenses and devoting substantial resources, including management time, to such transactions.
Several parts of our business, including in particular our nitrogen production business, our foods business and portions of our global grain marketing and wheat milling operations, are operated through joint ventures with third parties where we do not have majority control of the venture. By operating a business through a joint venture, we have less control over business decisions than we have in our subsidiaries and limited liability companies in which we have a controlling interest. In particular, we generally cannot act on major business initiatives in our joint ventures without the consent of the other party or parties in those ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that co-venturers might experience business or financial stresses that impact their ability to effectively operate the joint venture, or might become bankrupt or fail to fund their share of the business, in which case the joint venture may be unable to access needed growth capital without funding from us and/or any other remaining co-venturers. Co-venturers may have economic, tax or other business interests or goals that are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Our co-venturers may take actions that are not within our control, which may expose our investments in joint ventures to the risk of lower values or returns. Joint venture investments may also lead to impasses. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our day-to-day business. In addition, we may in certain circumstances be liable for the actions of our co-venturers. Each of these matters could have a material adverse effect on us.
We made certain assumptions and projections regarding the future of the markets served by our joint venture investments, which included projected raw materiality availability and pricing, production costs, market pricing and demand for the joint venture's products. These assumptions were an integral part of the economics used to evaluate these joint venture investment opportunities prior to consummation. To the extent that actual market performance varies from our models, our ability to achieve projected returns on our joint venture investments may be impacted in a materially adverse manner. For example, assumptions we made in connection with our investment in CF Nitrogen may not align with future demand for nitrogen-based products or the cost or availability of natural gas, the primary feedstock utilized for CF Nitrogen's nitrogen-based products.
Risks Related to Laws and Regulations
Government policies, mandates, regulations and trade agreements could adversely affect our operations and profitability.
Our business is subject to numerous government policies, mandates and regulations that could have an adverse effect on our operations or profitability. For example, government policies, mandates and regulations related to genetically modified organisms, traceability standards, product safety and labeling, and renewable and low-carbon fuels could have an adverse effect on our operations or profitability by, among other things, influencing planting of certain crops, location and size of crop production, trade of processed and unprocessed commodity products, volumes and types of imports and exports, availability and competitiveness of feedstocks as raw materials, and viability and volume of certain of our products. In our Energy segment, government policies, mandates and regulations designed to stop or impede the development or production of oil, such as those limiting or banning use of hydraulic fracturing, drilling or oilsands production, could adversely affect our operations and profitability.
In addition, changes in international trade agreements and trade disputes can adversely affect commodity trade flows by limiting or disrupting trade between countries or regions. In many countries around the world, historical free trade relationships are being challenged. For example, the U.S. government has imposed tariffs on certain products imported into the
United States, which has resulted in reciprocal tariffs from other countries, including countries where we operate and/or into which we import products, such as imports of U.S. soybeans into China. In addition, the U.S. government has indicated its intent to renegotiate or potentially terminate certain existing international trade agreements and it is unclear what changes, if any, will be made to international trade agreements that are relevant to our business activities. These actions have created uncertainty between the United States and other nations, including countries where we operate, and have led to significant volatility in commodity prices, disruptions in historical trade flows and shifts in planting patterns in the United States and South America, all of which have resulted in reduced volumes of grain exports overall and have presented challenges and uncertainties for our business. Changes in trade policy, withdrawals from or material modifications to relevant international trade agreements and continued uncertainty could depress economic activity and restrict our access to suppliers and customers and we cannot predict the effects of future trade policies, disputes or agreements on our business. Tariffs and trade restrictions that are implemented on products that we buy and/or sell could increase the cost of those products or adversely affect the availability of market access. These cost increases and market changes could adversely affect demand for our products and reduce margins, which could have a material adverse effect on our business and our earnings. In addition, the U.S. government can prevent or restrict us from doing business in or with other countries. These restrictions and those of other governments could limit our ability to gain access to business opportunities in various countries.
Changes in federal income tax laws or in our tax status could increase our tax liability and reduce our net income significantly.
Current federal income tax laws, regulations and interpretations regarding the taxation of cooperatives allow us to exclude income generated through business with or for a member (patronage-sourced income) from our taxable income to the extent it is distributed back to our members. If any changes are made to such federal income tax laws, regulations or interpretations, or if in the future we were not eligible to be taxed as a cooperative, our tax liability would significantly increase and our net income would significantly decrease.
We incur significant costs in complying with applicable laws and regulations. Any failure to comply with these laws and regulations, or make capital or other investments necessary to comply with these laws and regulations, could expose us to unanticipated expenditures and liabilities.
We are subject to numerous federal, state and local provisions regulating our business and operations. We incur and expect to incur significant capital and operating expenses to comply with these laws and regulations. We may be unable to pass on those expenses to customers without experiencing volume and margin losses. For example, the compliance burden and impact on our operations and profitability as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and related regulations continue to evolve, as federal agencies have implemented and continue to implement its many provisions through regulation. These efforts to change the regulation of financial markets subject users of derivatives, such as CHS, to extensive oversight and regulation by the CFTC. Such initiatives have imposed and may continue to impose additional costs on us, including operating and compliance costs, and the cost of fines or penalties in the event we do not comply, and could materially affect the availability, as well as the cost and terms, of certain transactions. Certain federal regulations, studies and reports addressing Dodd-Frank, including the regulation of swaps and derivatives, are still being implemented and others are being finalized. We will continue to monitor these developments. Any of these matters could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.
We establish reserves for the future cost of known compliance obligations, such as remediation of identified environmental issues. However, these reserves may prove inadequate to meet our actual liability. Moreover, amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of currently unknown compliance issues may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. Furthermore, our failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, civil remedies, including fines and injunctions, criminal fines and penalties, and recalls of our products. For example, we regularly maintain hedges to manage the price risks associated with our commercial operations. These transactions typically take place on exchanges such as the CME. Our hedging transactions and activities are subject to the rules and regulations of the exchanges we use and governing bodies, including the CME, the NYMEX, the CBOT, the MGEX and the CFTC. All exchanges have broad powers to review required records, to investigate and enforce compliance and to punish noncompliance by entities subject to their jurisdiction. Failure to comply with such rules and regulations could lead to restrictions on our trading activities or subject us to enforcement action by the CFTC or a disciplinary action by the exchanges, which could lead to substantial fines or penalties or limitations on our related operations. In addition, any investigation or proceeding by an exchange or the CFTC, whether successful or unsuccessful, could result in substantial costs, diversion of resources, including management time, and potential harm to our reputation, all of which could have a material adverse effect on our business financial condition, liquidity, results of operations and prospects.
The consequences of any U.S. Securities and Exchange Commission ("SEC") or other governmental authority's investigation with respect to certain rail freight contracts purchased in connection with our North American grain marketing operations could have a material adverse effect on our business.
In connection with the preparation of our Annual Report on Form 10-K for the year ended August 31, 2018, our management noted potentially excessive valuations in net derivative asset valuations relating to certain rail freight contracts purchased in connection with our North American grain marketing operations. Following the identification of these potentially excessive valuations, we engaged external counsel, which engaged forensic accountants to work with our management under the oversight of the Audit Committee of our Board of Directors to conduct an investigation. The investigation concluded there were misstatements in the consolidated financial statements included in certain of our filings with the SEC that were due to intentional misconduct by a former employee in our rail freight trading operations, and due to rail freight contracts and certain nonrail freight contracts not meeting technical accounting requirements to qualify as derivative financial instruments. The misconduct consisted of the former employee manipulating the mark-to-market valuation of railcars that were the subject of rail freight purchase contracts and manipulating the quantity of railcars included in the monthly mark-to-market valuation. In addition, the investigation revealed intentional misstatements that were made by the former employee to our external auditor in connection with its audit of our consolidated financial statements for the year ended August 31, 2017. During the course of, and as a result of, the investigation, we terminated the employee. The Audit Committee of our Board of Directors and our legal counsel reported the findings of the investigation to our Board of Directors and to our independent registered public accounting firm and have discussed evidence uncovered and conclusions reached in the investigation with the staff of the Division of Enforcement of the SEC. We are cooperating, and will continue to fully cooperate with, the staff of the Division of Enforcement of the SEC in any ongoing review of these matters. We are unable at this time to predict when the SEC Division of Enforcement's review of these matters will be completed or what regulatory or other outcomes may result. If the SEC or any other governmental authority determines that violations of certain laws or regulations occurred, we could be exposed to a broad range of civil and criminal sanctions. Although we are currently unable to predict what actions the SEC or any other governmental authority might take, or what the likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, such actions, fines and/or penalties could be material, resulting in a material adverse effect on our business, prospects, reputation, financial condition, results of operations or cash flows. Even if an inquiry or investigation does not result in an adverse determination, our business, prospects, reputation, financial condition, results of operations or cash flows could be adversely impacted. In addition, the expenses incurred in connection with the ongoing or any other review by the SEC or any other governmental authority, and the diversion of the attention of our management that could occur as a result thereof, could adversely affect our business, financial condition, results of operations or cash flows.
We are subject to extensive anti-corruption, anti-bribery, anti-kickback and trade laws and regulations, and any noncompliance with those laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
We operate on a global basis and are subject to anti-corruption, anti-bribery and anti-kickback laws and regulations, including the Foreign Corrupt Practices Act of 1977, as amended ("FCPA"). The FCPA and other similar anti-corruption, anti-bribery and anti-kickback laws and regulations in other jurisdictions generally prohibit companies and their intermediaries or agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining business. We operate and sell our products in many parts of the world that have experienced governmental corruption to some degree and in certain circumstances strict compliance with anti-corruption, anti-bribery and anti-kickback laws and regulations may conflict with local customs and practices. In addition, in certain countries, we engage third-party agents or intermediaries to act on our behalf and/or conduct all or a portion of our operations through joint venture partners, including in those countries with a high risk for corruption. If any of these third parties violate applicable anti-corruption, anti-bribery or anti-kickback laws or regulations, we may be liable for those violations. We have policies in place prohibiting employees from making or authorizing improper payments; we train our employees regarding compliance with anti-corruption, anti-bribery and anti-kickback laws and regulations; and we utilize procedures to identify and mitigate risks of such misconduct by our employees, third-party agents, intermediaries and joint venture partners. However, we cannot provide assurances that our employees, third-party agents, intermediaries or joint venture partners will comply with those policies, laws and regulations. If we are found liable for violations of the FCPA or other similar anti-corruption, anti-bribery or anti-kickback laws or regulations, either due to our own acts or out of inadvertence or due to the acts or inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could have a material adverse effect on our business, financial condition and results of operations.
In the fourth quarter of fiscal 2018, we contacted the U.S. Department of Justice ("DOJ") and SEC to voluntarily self-disclose potential violations of the FCPA in connection with a small number of reimbursements made to Mexican customs agents in the 2014-2015 time period for payments customs agents made to Mexican customs officials in connection with inspections of grain crossing the U.S.-Mexican border by railcar. In connection with their review of this matter, we have cooperated with the DOJ's and SEC's evaluation of other areas of potential interest relating to the FCPA. On February 25, 2020,
we received a letter from the DOJ stating that it had closed its inquiry into each of these matters without taking any action against us and acknowledging its appreciation of our cooperation. We are still fully cooperating with the SEC's ongoing evaluation of these FCPA-related matters. At this time, the SEC has not taken a position on these FCPA-related matters and we are unable to predict when the SEC's review of these matters will be completed or what regulatory or other outcomes may result.
Due to the international scope of our operations, we are also subject to a complex system of import- and export-related laws and regulations, including U.S. regulations issued by Customs and Border Protection, the Bureau of Industry and Security, the Office of Antiboycott Compliance, the Directorate of Defense Trade Controls and the Office of Foreign Assets Control, as well as the counterparts of these agencies in other countries. Any alleged or actual violation of these laws or regulations by us or our employees may subject us to government scrutiny, investigation and civil and criminal penalties, and may limit our import and export abilities. Furthermore, embargoes and sanctions imposed by the United States and other governments restricting or prohibiting sales to specific persons or countries or based on product classification may expose us to potential criminal or civil sanctions. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the way existing laws and regulations might be administered or interpreted.
Environmental and energy laws and regulations may result in increased operating costs and capital expenditures and may have a material and adverse effect on us.
New and current environmental and energy laws and regulations, including regulations relating to alternative energy sources and the risk of global climate change, new interpretations of existing environmental and energy laws and regulations, increased governmental enforcement of environmental and energy laws and regulations or other developments in these areas could require us to make additional unforeseen expenditures on technologies and/or other assets to continue our operations or unforeseen changes to our operations, either of which could adversely affect us. For example, it is possible that some form of regulation will be forthcoming at the federal or state level in the United States with respect to emissions of greenhouse gases ("GHGs"), such as carbon dioxide, methane and nitrous oxide. New federal legislation or regulatory programs that restrict emissions of GHGs or comparable new state legislation or programs or customer requirements in areas where we or our customers conduct business could adversely affect our operations and the demand for our energy products, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. In addition, new legislation, regulatory programs, or customer or other stakeholder expectations could require substantial expenditures for installation and operation of systems and equipment or for substantial modifications to existing equipment.
Also, pursuant to the Energy Independence and Security Act of 2007, the EPA has promulgated the Renewable Fuel Standard ("RFS"), which requires refiners to blend renewable fuels, such as ethanol and biodiesel, with their petroleum 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. We generate RINs in our marketing operations under the RFS; however, it may not be enough to meet the needs of our refining capacity and, if so, RINs must be purchased on the open market. In recent years, the price of RINs has been extremely volatile. As a result, the purchase of RINs could have a negative impact on our future refined fuels margins, the impact of which we are unable to estimate.
Environmental liabilities could have a material adverse effect on us.
Many of our current and former facilities have been in operation for many years and over that time we and other operators of those facilities have generated, used, stored and disposed of substances or wastes that are or might be considered hazardous under applicable or future enacted environmental laws, including liquid fertilizers, chemicals and fuels stored in underground and aboveground tanks. Any past or future actions in violation of applicable environmental laws could subject us to administrative penalties, fines, injunctions or other costs, such as capital expenditures. In addition, an owner or operator of contaminated property, and a party who sends hazardous materials to such site for treatment, storage, disposal or recycling can be liable for the cost of investigation and remediation under environmental laws. In some instances, such liability exists regardless of fault. Moreover, future or unknown past releases of hazardous substances could subject us to private lawsuits claiming damages, including for bodily injury or property damage, and to adverse publicity, which could have a material adverse effect on us. Liabilities, including legal costs, related to remediation of contaminated properties are not recognized by us until the related costs are considered probable and can be reasonably estimated.
Risks Related to our Financial Position and Financing Our Business
Our financial results are susceptible to seasonality.
Many of our business activities are highly seasonal and operating results vary throughout the year. Our revenue is generally lowest during the second and fourth fiscal quarters and highest during the first and third fiscal quarters. For example, in our Ag segment, our country operations business generally experiences higher volumes and income during the spring planting season and during the fall harvest season and our agronomy business generally experiences higher volumes and income during the spring planting season. Our global grain marketing operations are also subject to fluctuations in volume and income based on producer harvests, world grain prices and demand, and international trade relationships. Our Energy segment generally experiences higher volumes and income in certain operating areas, such as refined products, in the spring, summer and early fall when gasoline and diesel fuel use by our customers and members is highest and is subject to global supply and demand forces. Other energy products, such as propane, generally experience higher volumes and income during the winter heating and crop-drying seasons. The COVID-19 pandemic may impact seasonal trends that typically characterize our revenue and operating results.
If any of our long-lived assets become impaired, we could be required to record a significant impairment charge, which would negatively impact our results of operations.
All our long-lived assets, including property, plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment in accordance with U.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 example, the COVID-19 pandemic and other factors resulted in substantial reductions in demand and sharp price declines in certain industries in which we operate during the third quarter of fiscal 2020, particularly with respect to the production of renewable fuels and other energy products. Accordingly, based on these deteriorated macroeconomic and industry conditions, we considered the impacts on each of our businesses and determined that we needed to perform interim impairment assessments of goodwill and asset groups during the third quarter of fiscal 2020 for a reporting unit within our Ag segment that operates in the renewable fuels industry. Although no impairment was recorded as a result of the impairment assessment during the third quarter of fiscal 2020, or as a result of our annual goodwill impairment tests as of July 31, 2020, we are continuing to monitor our results and projected cash flows to assess whether any impairment may be necessary in the future. Any such future impairment, or any other future impairment of our long-lived assets, could require us to record a significant impairment charge, which would negatively impact our results of operations.
Our business is capital-intensive and we rely on cash generated from our operations and external financing to fund our strategies and ongoing capital needs.
We require significant capital, including access to credit markets from time to time, to operate our businesses and fund our strategies. Our working capital requirements are directly affected by the price of commodities, which may fluctuate significantly and quickly. We also require substantial capital to maintain and upgrade our extensive network of facilities to keep pace with competitive developments, technological advances, regulatory changes and changing safety standards. In addition, the expansion of our business and pursuit of acquisitions or other business opportunities has required, and may in the future require, significant amounts of capital. If we are unable to generate sufficient cash flow or maintain access to adequate external financing, including as a result of significant disruptions in the global credit markets, it could restrict our current operations and our growth opportunities, which could adversely affect our operating results and restrict our ability to repay our existing debts.
Our cooperative structure limits our ability to access equity capital.
As a cooperative, we may not sell common stock in our company. In addition, existing laws and our articles of incorporation and bylaws limit dividends on any preferred stock we may issue to 8% per annum. These limitations may restrict our ability to raise equity capital and may adversely affect our ability to compete with enterprises that do not face similar restrictions.
Changes in the method of determining the London Interbank Offered Rate ("LIBOR") or the replacement of LIBOR with an alternative reference rate may adversely affect interest rates under our credit facilities and dividend rates with respect to our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock.
LIBOR is the basic rate of interest widely used as a global reference for setting interest rates on loans. Some of our credit facilities, including our five-year revolving credit facility and our 10-year term loan facility, use LIBOR as the reference rate. In addition, the terms of our Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 ("Class B Series 2
Preferred Stock"), and our Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 ("Class B Series 3 Preferred Stock"), provide that, beginning on March 24, 2024, in the case of our Class B Series 2 Preferred Stock, or on September 30, 2024, in the case of our Class B Series 3 Preferred Stock ("Initial Reset Date"), dividends on such preferred stock will accumulate at a rate equal to three-month LIBOR plus an applicable spread, not to exceed 8% per annum.
In 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time, if new methods of calculating LIBOR will be established such that it continues to exist after 2021 or whether different reference rates used to price indebtedness will develop or become widely accepted. It is impossible to predict the effect these developments, any discontinuance, modification or other reforms to LIBOR or the establishment or acceptance of alternative reference rates may have on LIBOR, other benchmark rates or floating rate debt instruments. Although certain of our credit facilities, including our five-year revolving credit facility and our 10-year term loan facility, contain LIBOR alternative provisions, use of alternative reference rates, new methods of calculating LIBOR or other reforms could cause the interest rates on our borrowings to be materially different than expected, which could have an adverse effect on our financial position, results of operations and liquidity and cause us to attempt to renegotiate such credit facilities. Similarly, although the rate at which dividends accumulate on our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock may not exceed 8% per annum, there is uncertainty regarding the calculation of such rate following the applicable Initial Reset Date in the event that LIBOR ceases to exist, and the use of alternative reference rates, new methods of calculating LIBOR or other reforms could cause the dividends we pay on our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock following the applicable Initial Reset Date to be materially different than expected, which could have an adverse effect on our financial position, results of operations and liquidity and cause us to attempt to amend the terms of our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock, including by seeking shareholder approval of any such amendment. In addition, the overall financial market may be disrupted as a result of the phaseout or replacement of LIBOR. Disruption in the financial market could have an adverse effect on our financial position, results of operations and liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the date hereof, there were no unresolved comments from the SEC staff regarding our periodic or current reports.
ITEM 2. PROPERTIES
We own or lease energy, agronomy, grain-handling and processing facilities and other real estate throughout the United States and internationally. Below is a summary of these locations by segment and related business. All facilities are owned except where indicated as leased.
|Refineries||Laurel, Montana, and McPherson, Kansas|
|Propane terminals||11 locations in Iowa, Maine, Minnesota, Missouri, North Dakota, Washington and Wisconsin; the locations in Glenwood, Minnesota, Hannaford, North Dakota, and Nooksack and Yakima, Washington, are owned by CHS; the location in Rockville, Minnesota, is 50% owned by CHS; all other locations are either fully or partially leased|
|Transportation terminals/repair facilities||12 locations in Iowa, Kansas, Minnesota, Montana, North Dakota, South Dakota, Washington and Wisconsin|
|Petroleum and asphalt terminals/storage facilities||11 locations in Montana, North Dakota and Wisconsin|
Cenex Pipeline, LLC
|Laurel, Montana, to Fargo, North Dakota|
Front Range Pipeline, LLC
|Canadian border to Laurel, Montana|
Jayhawk Pipeline, LLC
|Throughout Kansas, with branches in Nebraska, Oklahoma and Texas|
|McPherson, Kansas, to Conway, Kansas|
Kaw Pipe Line Company
|Locations throughout Kansas|
|Osage Pipe Line Company, LLC||Oklahoma to Kansas (50% owned by CHS)|
|Convenience stores/gas stations||36 locations in Minnesota, Montana, North Dakota, South Dakota and Wyoming, six of which are leased |
|Lubricant plants/warehouses||Inver Grove Heights, Minnesota; Kenton, Ohio; and Amarillo, Texas; the location in Inver Grove Heights is leased|
|Global Grain Marketing|
|Grain terminals||18 locations in Illinois, Iowa, Louisiana, Minnesota, Wisconsin, Argentina, Brazil, Hungary, Romania and Ukraine|
|Grain marketing offices||35 locations in Iowa, Minnesota, Nebraska, Argentina, Brazil, Bulgaria, China, Hungary, Italy, Jordan, Mexico, Paraguay, Romania, Serbia, Singapore, South Korea, Spain, Switzerland, Taiwan, Ukraine and Uruguay; all locations are leased other than the offices in Davenport, Iowa, and Winona, Minnesota, which we own|
|Agri-operations facilities||Approximately 487 community locations (some of the facilities are on leased land) located in Colorado, Idaho, Illinois, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Washington and Wisconsin|
|Feed manufacturing facilities||8 locations in Montana, North Dakota, Oregon and South Dakota|
|Deep-water port||Galveston, Texas|
|Terminals||17 locations in Arkansas, Idaho, Illinois, Iowa, Kentucky, Louisiana, Minnesota, Mississippi, South Dakota, Tennessee and Texas; facilities in Little Rock, Arkansas; Owensboro, Kentucky; and Galveston, Texas, are on leased land|
|Bulk chemical rail terminal facility||Brooten, Minnesota|
|Distribution warehouses||29 locations in Arkansas, Idaho, Illinois, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Oklahoma, South Dakota, Texas, Washington and Wisconsin; all facilities are leased except those in Willmar, Minnesota (two locations); Fargo and Minot, North Dakota; and Black River Falls, Wisconsin|
|Processing and Food Ingredients|
|Oilseed facilities||Fairmont, Hallock and Mankato, Minnesota|
|Sunflower processing plants||Fargo and Grandin, North Dakota|
|Storage and warehouse facilities||Hazel, Minnesota; Joliette, North Dakota; and a leased facility in Winkler, Canada|
|Ethanol plants||Annawan and Rochelle, Illinois|
|Corporate and Other|
|Corporate headquarters||We lease a 24-acre campus in Inver Grove Heights, Minnesota, consisting of one building with approximately 320,000 square feet of office space and own an additional nine acres of land adjacent to the leased property on which we have two smaller buildings with approximately 13,400 and 9,000 square feet of space|
|Office facilities||Leased facilities in Eagan and St. Paul, Minnesota; Kansas City, Missouri; Huron, South Dakota; and Washington, District of Columbia|
|Agricultural land and related improvements||We own approximately 179 acres of agricultural land and related improvements in central Michigan|
ITEM 3. LEGAL PROCEEDINGS
We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, our management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As a cooperative, we do not have common stock that is traded or otherwise. We have not sold any equity securities during the three years ended August 31, 2020, that were not registered under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical consolidated financial information for each of the five periods indicated. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K and with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Our consolidated financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP. The selected income statement data for the years ended August 31, 2020, 2019, 2018, 2017 and 2016, and balance sheet data as of August 31, 2020, 2019, 2018 and 2017, are derived from our audited consolidated financial statements and related notes. The selected balance sheet data as of August 31, 2016, is derived from unaudited consolidated financial information not included in this Annual Report on Form 10-K. Balance sheet data as of August 31, 2016, was restated in our Annual Report on Form 10-K for the year ended August 31, 2018, to correct certain amounts that had been previously misstated.
|Selected Consolidated Financial Data|
|Income Statement Data |
(years ended August 31):
|(Dollars in thousands)|
|Revenues||$||28,406,365 ||$||31,900,453 ||$||32,683,347 ||$||32,037,426 ||$||30,355,260 |
|Cost of goods sold||27,424,558 ||30,516,120 ||31,591,227 ||31,143,549 ||29,383,459 |
|Gross profit||981,807 ||1,384,333 ||1,092,120 ||893,877 ||971,801 |
|Operating earnings (loss)||277,265 ||659,602 ||452,364 ||(173,878)||299,234 |
|Income (loss) before income taxes||386,878 ||815,601 ||671,230 ||(110,166)||402,125 |
|Net income||423,609 ||828,057 ||775,306 ||70,958 ||383,026 |
|Net income (loss) attributable to noncontrolling interests||1,170 ||(1,823)||(601)||(634)||(223)|
|Net income attributable to CHS Inc. ||422,439 ||829,880 ||775,907 ||71,592 ||383,249 |
|Balance Sheet Data (as of August 31):|| || || |
|Working capital||$||1,346,506 ||$||1,078,888 ||$||759,034 ||$||148,565 ||$||338,446 |
|Net property, plant and equipment||4,957,938 ||5,088,708 ||5,141,719 ||5,356,434 ||5,488,323 |
|Total assets||15,993,947 ||16,447,494 ||16,381,178 ||15,818,922 ||17,149,639 |
|Long-term debt, including current maturities||1,791,123 ||1,789,111 ||1,930,255 ||2,179,793 ||2,297,205 |
|Total equities||8,819,173 ||8,617,530 ||8,165,028 ||7,705,640 ||7,759,157 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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:
•Fiscal 2020 Highlights
•Fiscal 2021 Outlook
•Results of Operations
•Liquidity and Capital Resources
•Off-Balance Sheet Financing Arrangements
•Critical Accounting Policies and Estimates
•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.
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 ("The Nasdaq"). 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 in CF 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 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 income 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 income 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 and profitability 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 profitability during the winter heating and fall crop-drying seasons. The graphs below depict the seasonality inherent in our businesses.
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/policies, global trade disputes and general political/economic conditions.
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-performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet.
Fiscal 2020 Highlights
•Improved weather conditions during the spring planting season compared to the prior year drove increased earnings across much of our Ag segment during the second half of fiscal 2020.
•Strong supply chain performance in our propane business driven by efficiently sourcing propane for our customers during a period of significant propane demand for crop drying and home heating positively contributed to our results, particularly in the first half of fiscal 2020.
•Less advantageous market conditions in our refined fuels business, driven primarily by the COVID-19 pandemic and other factors, resulted in volume and price declines that significantly reduced earnings compared to the prior year.
•Poor weather conditions during fiscal 2019 negatively impacted our Ag segment's operations during the first half of fiscal 2020, including lower crop yields and poor grain quality following a late harvest, as well as lower crop nutrient sales that traditionally occur during the fall.
•As more fully described in Item 9A, Controls and Procedures, of this Annual Report on Form 10-K, we continued dedicating significant internal and external resources, as well as management and Board focus, on improving our internal control environment resulting in remediation of the last remaining material weaknesses identified in our fiscal 2018 Annual Report on Form 10-K.
•We responded to the COVID-19 pandemic by implementing remote working arrangements for approximately half our global employees, increasing hygiene and infection control processes at all our facilities, increasing use of personal protective equipment and developing risk mitigation and exposure policies applicable to our enterprise. The costs of these activities have not been and are not expected to be material in future periods. In addition, our operations were deemed to be essential infrastructure industries by federal and state governments, which allowed us to continue operating all our facilities and operations.
Fiscal 2021 Outlook
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 in the United States, we are dealing with the effects of COVID-19. In fiscal 2021, we will focus on navigating COVID-19 to ensure the well-being of our people and business, including a detailed plan to return safely from remote work. Most of our operations are considered to be essential; however, periods of depressed demand and pricing within the U.S. ethanol production, refined fuels or other industries in which we operate could result in decreased profitability and the need to assess certain assets for potential impairments.
The energy industry experienced significant volume and price swings as a result of the COVID-19 pandemic in fiscal 2020 that will likely continue to negatively impact profitability in fiscal 2021. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts; however, we expect the uncertain and volatile market conditions in the energy industry to continue into fiscal 2021, which will continue to put pressure on associated asset valuations.
The agricultural industry continues to operate in a challenging environment that has been characterized by generally lower margins, reduced liquidity and increased leverage that have resulted from a period of reduced commodity prices. More favorable weather conditions during the fiscal 2020 spring planting season and the beginning of the fiscal 2021 harvest season compared to the prior year could provide an opportunity for increased volumes and improved earnings across much of our Ag segment during fiscal 2021. However, trade relations between the United States and foreign trade partners, particularly those that purchase large quantities of agricultural commodities, while improving, are still not normalized, which could continue to result in unpredictable impacts to agricultural commodity prices and volumes sold as we move into fiscal 2021. We are unable to predict how long the current environment will last or how severe the effects will ultimately be on our pricing and volumes. In addition to global supply and demand impacts, regional factors such as unpredictable weather conditions could impact our operations. Although we expect improved revenues, margins and cash flows from core operations in our Ag segment, additional or continued challenges experienced in the agricultural market are expected to continue to put pressure on associated asset valuations during fiscal 2021.
In addition to market conditions that impact our businesses, we continue to identify opportunities to sustainably reduce costs and improve cash management strategies to protect our financial health while continuing to deliver on our enterprise resource planning ("ERP") system implementation and advance toward our targeted operating model. Implementation of our ERP system is expected to occur in phases over the next several years and will require continued significant capital investment.
Our Energy segment operations primarily include our Laurel, Montana, and McPherson, Kansas, refineries, which process crude oil to produce refined products, including gasoline, distillates and other products. The following table provides information about our consolidated refinery operations.
|Years Ended August 31,|
|Refinery throughput volumes||(Barrels per day)|
|Heavy, high-sulfur crude oil||92,298 ||92,047 |
|All other crude oil||70,255 ||58,366 |
|Other feedstocks and blendstocks||13,179 ||10,724 |
|Total refinery throughput volumes||175,732 ||161,137 |
|Refined fuel yields|
|Gasolines||86,615 ||76,563 |
|Distillates||71,410 ||66,661 |
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 WCS crude oil differentials decreased significantly during fiscal 2020 compared to the prior fiscal year. The table below provides information about average market reference prices and differentials that impact our Energy segment.
|Years Ended August 31,|
|WTI crude oil (dollars per barrel)||$||44.45 ||$||58.59 |
|WTI - WCS crude oil differential (dollars per barrel)||$||14.31 ||$||20.23 |
|Group 3 2:1:1 crack spread (dollars per barrel)*||$||12.36 ||$||18.74 |
|Group 3 5:3:2 crack spread (dollars per barrel)*||$||11.60 ||$||17.67 |
|D6 ethanol RIN (dollars per RIN)||$||0.2903 ||$||0.1713 |
|D4 ethanol RIN (dollars per RIN)||$||0.5344 ||$||0.4273 |
*Group 3 refers to the oil refining and distribution system serving the Midwest markets from the Gulf Coast through the Plains states.
Our Ag segment operations work together to facilitate the production, purchase, sale and eventual use of grain and other agricultural commodities within the 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 years ended August 31, 2020 and 2019.
|Years Ended August 31,|
|Corn (dollars per bushel)||Chicago Board of Trade||$3.55||$3.76|
|Soybeans (dollars per bushel)||Chicago Board of Trade||$8.92||$8.75|
|Wheat (dollars per bushel)||Chicago Board of Trade||$5.32||$5.47|
|Urea (dollars per ton)||Green Markets NOLA||$226.00||$265.00|
|Urea Ammonium Nitrate ("UAN") (dollars per ton)||Green Markets NOLA||$137.60||$182.72|
|Ethanol (dollars per gallon)||Chicago Platts||$1.30||$1.34|
|Grain and oilseed (thousands of bushels)||2,531,023 ||2,636,084 |
|North American grain and oilseed port throughput (thousands of bushels)||564,563 ||581,175 |
|Wholesale crop nutrients (thousands of tons)||7,561 ||6,931 |
|Ethanol (thousands of gallons)||846,159 ||935,115 |
*Market source information represents the average month-end price during the period.
Results of Operations
Consolidated Statements of Operations
|Years Ended August 31,|
|Dollars||% of Revenues*||Dollars||% of Revenues*|
|(In thousands)||(In thousands)|
|Revenues||$||28,406,365 ||100.0 ||%||$||31,900,453 ||100.0 ||%|
|Cost of goods sold||27,424,558 ||96.5 ||30,516,120 ||95.7 |
|Gross profit||981,807 ||3.5 ||1,384,333 ||4.3 |
|Marketing, general and administrative expenses||704,542 ||2.5 ||724,731 ||2.3 |
|Operating earnings||277,265 ||1.0 ||659,602 ||2.1 |
|Gain on disposal of business||(1,450)||— ||(3,886)||— |
|Interest expense||116,977 ||0.4 ||167,065 ||0.5 |
|Equity income from investments||(186,715)||(0.7)||(236,755)||(0.7)|
|Income before income taxes||386,878 ||1.4 ||815,601 ||2.6 |
|Income tax benefit||(36,731)||(0.1)||(12,456)||— |
|Net income||423,609 ||1.5 ||828,057 ||2.6 |
|Net income (loss) attributable to noncontrolling interests||1,170 ||— ||(1,823)||— |
|Net income attributable to CHS Inc. ||$||422,439 ||1.5 ||%||$||829,880 ||2.6 ||%|
*Amounts less than 0.1% are shown as zero percent. Percentage subtotals may differ due to rounding.
The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for fiscal 2020. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.
Income Before Income Taxes by Segment
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Income before income taxes||$||225,317 ||$||618,188 ||$||(392,871)||(63.6)||%|
The following waterfall analysis and commentary presents changes in our Energy segment IBIT for the year ended August 31, 2020, compared to the prior year.
*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 2020 reflects the following:
•Significantly less advantageous market conditions in our refined fuels business compared to the prior year drove 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 WCS crude oil differentials experienced on heavy Canadian crude oil, which is processed by our refineries, and decreased crack spreads.
•An $80.8 million gain recognized that was associated with certain federal excise tax credits as a reduction of COGS during fiscal 2019 that did not reoccur during fiscal 2020.
•The decreased IBIT due to lower margins and volumes in our refined fuels business was partially offset by increased propane volumes and improved propane margins due to unrealized hedging gains, increased fixed-price contracts and significant demand for crop drying and home heating, particularly during the first quarter of fiscal 2020.
•A lower of cost or market charge of $42.0 million was recorded in COGS to reduce the carrying value of our energy inventories to their market value as of May 31, 2020. Based upon market prices observed as of August 31, 2020, the lower of cost or market reserve was decreased by approximately $34.0 million as prices improved while inventories were sold.
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Income before income taxes||$||53,724 ||$||43,016 ||$||10,708 ||24.9 ||%|
The following waterfall analysis and commentary presents changes in our Ag segment IBIT for the year ended August 31, 2020, compared to the prior year.
*See commentary related to these changes in the marketing, general and administrative expenses, (gain) loss on disposal of business, interest expense, other income and equity income from investments sections of this Results of Operations.
The change in Ag segment IBIT for fiscal 2020 reflects the following:
•Improved margins across certain Ag segment businesses, including feed and farm supplies, grain and oilseed and renewable fuels resulted from a combination of optimism for improved trade relations between the United States and foreign trade partners and favorable weather conditions for spring planting during the year ended August 31, 2020. These improved margins were partially offset by reduced margins related to agronomy products due to oversupply in the market and processing and food ingredients, which experienced decreased margins as a result of the COVID-19 pandemic.
•Decreased volumes across much of the Ag segment were due to the impacts of poor weather conditions in fiscal 2019 that led to a smaller harvest in fiscal 2020, impacts of the COVID-19 pandemic on our processing and food ingredients business and global trade tensions between the United States and foreign trading partners, particularly during the first half of fiscal 2020. These volume decreases were partially offset by increased volumes associated with agronomy products that were primarily attributable to our acquisition of the remaining 75% ownership interest in West Central Distribution, LLC ("WCD"), that we did not previously own on March 1, 2019, the results of which were not included in the entire comparable period of the prior year.
All Other Segments
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Nitrogen Production IBIT*||$||51,837 ||$||72,870 ||$||(21,033)||(28.9)||%|
|Corporate and Other IBIT||$||56,000 ||$||81,527 ||$||(25,527)||(31.3)||%|
*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.
Our Nitrogen Production segment IBIT decreased as a result of lower equity method income attributed to reduced sale prices of urea and UAN, which are produced and sold by CF Nitrogen. Corporate and Other IBIT decreased primarily as a result of lower earnings from our investment in Ventura Foods, LLC ("Ventura Foods"), which experienced a significant reduction in demand due to COVID-19, and decreased income from our financing business due to lower interest rates during the year ended August 31, 2020, compared to the year ended August 31, 2019.
Revenues by Segment
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Revenues||$||5,431,134 ||$||7,119,076 ||$||(1,687,942)||(23.7)||%|
The following waterfall analysis and commentary presents changes in our Energy segment revenues for the year ended August 31, 2020, compared to the prior year.
The change in Energy segment revenues for fiscal 2020 reflects the following:
•Decreased selling prices for refined fuels and propane were driven by global market conditions, including the impact of the demand shocks occurring during the COVID-19 pandemic, as well as product mix, which contributed to $1.3 billion and $135.5 million decreases in revenues, respectively.
•A 4% decrease of refined fuels volumes contributed to a $235.7 million decrease in revenues, which was partially offset by a 3% increase of propane volumes that contributed to a $22.6 million increase in revenues. Decreased volumes of refined fuels were attributable primarily to lower demand resulting from demand shock in the transportation sector that followed the COVID-19 pandemic and during the fall 2019 harvest as a result of poor weather conditions and a smaller crop across much of the agricultural region of the United States in which we operate. Increased volumes of propane resulted from significant propane demand for crop drying and home heating, particularly during the first half of fiscal 2020.
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Revenues||$||22,926,099 ||$||24,720,072 ||$||(1,793,973)||(7.3)||%|
The following waterfall analysis and commentary presents changes in our Ag segment revenues for the year ended August 31, 2020, compared to the prior year.
The change in Ag segment revenues for fiscal 2020 reflects the following:
•Lower grain and oilseed and feed and farm supply volumes contributed to $671.6 million and $629.3 million decreases in revenues, respectively. These decreases resulted from poor spring weather conditions during fiscal 2019 that led to lower crop yields and fewer acres harvested during fall of fiscal 2020 and the impact of global trade tensions between the United States and foreign trading partners, particularly during the first half of fiscal 2020.
•Lower renewable fuels and processing and food ingredients volumes contributed to $119.5 million and $117.3 million decreases in revenues, respectively. These decreases resulted from reduced demand for renewable fuels and processing and food ingredient products as a result of the COVID-19 pandemic.
•The volume decreases were partially offset by increased volumes associated with agronomy products due to heightened spring 2020 demand and the increase in revenues that resulted from the March 1, 2019, acquisition of the remaining 75% ownership interest in WCD that we did not previously own, the results of which were not included in the entire comparable period of the prior year.
•Decreased pricing driven by global market conditions and product mix contributed to $584.7 million and $578.6 million decreases in revenues for agronomy and grain and oilseed, respectively. However, these price decreases were partially offset by market-driven price increases for other products, including feed and farm supplies, that increased revenues by $433.7 million.
All Other Segments*
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Corporate and Other revenues||$||49,132 ||$||61,305 ||$||(12,173)||(19.9)||%|
*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 year ended August 31, 2020, compared to the year ended August 31, 2019, primarily due to lower revenues in our financing business due to market-driven interest rate reductions.
Cost of Goods Sold by Segment
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Cost of goods sold||$||5,002,597 ||$||6,303,323 ||$||(1,300,726)||(20.6)||%|
The following waterfall analysis and commentary presents changes in our Energy segment COGS for the year ended August 31, 2020, compared to the prior year.
The change in Energy segment COGS for fiscal 2020 reflects the following:
•Decreased costs and a 4% volume decrease for refined fuels driven by global market conditions, including the demand shock in the transportation sector that followed the COVID-19 pandemic and product mix, which contributed to decreases in COGS of $914.6 million and $207.6 million, respectively.
•Decreased costs for propane driven by global market conditions and unrealized hedging gains contributed to a $249.8 million decrease in COGS. The decreased costs were partially offset by a 3% volume increase that contributed to a $21.6 million increase in COGS, which was driven by significant propane demand for crop drying and home heating during the first half of fiscal 2020 during a period of poor weather conditions.
•The cost decrease was partially offset by the recognition of an $80.8 million gain associated with certain federal excise tax credits as a reduction of COGS during the second quarter of fiscal 2019 that did not reoccur during fiscal 2020.
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Cost of goods sold||$||22,424,661 ||$||24,215,749 ||$||(1,791,088)||(7.4)||%|
The following waterfall analysis and commentary presents changes in our Ag segment COGS for the year ended August 31, 2020, compared to the prior year.
The change in Ag segment COGS for fiscal 2020 reflects the following:
•Lower grain and oilseed and feed and farm supply volumes contributed to $669.3 million and $570.8 million decreases in COGS, respectively. These decreases resulted from poor spring weather conditions during fiscal 2019 that led to lower crop yields and fewer acres harvested during fall of fiscal 2020 and the impact of global trade tensions between the United States and foreign trading partners, particularly during the first half of fiscal 2020.
•Lower renewable fuels and processing and food ingredients volumes contributed to $119.5 million and $110.2 million decreases in COGS, respectively. These decreases resulted from reduced demand for renewable fuels and processing and food ingredient products as a result of the COVID-19 pandemic.
•The volume decreases were partially offset by increased volumes associated with agronomy products due to heightened spring 2020 demand and the increase in revenues that resulted from the March 1, 2019, acquisition of the remaining 75% ownership interest in WCD that we did not previously own, the results of which were not included in the entire comparable period of the prior year.
•Lower pricing driven by global market conditions and product mix contributed to $627.0 million and $533.1 million decreases in COGS for grain and oilseed and agronomy, respectively. However, these price decreases were partially offset by market-driven price increases for other products, including feed and farm supplies that increased COGS by $357.4 million.
All Other Segments
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Nitrogen Production COGS||$||2,397 ||$||2,879 ||$||(482)||(16.7)%|
|Corporate and Other COGS||$||(5,097)||$||(5,831)||$||734 ||12.6%|
There were no significant changes to COGS for our Nitrogen Production segment or Corporate and Other during fiscal 2020.
Marketing, General and Administrative Expenses
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Marketing, general and administrative expenses||$||704,542 ||$||724,731 ||$||(20,189)||(2.8)||%|
The decrease in marketing, general and administrative expenses for fiscal 2020 was primarily due to the impact of loan loss reserves and impairments recorded during fiscal 2019 that did not reoccur and decreased incentive-based compensation during fiscal 2020. The decrease was partially offset by decreased recoveries of amounts reserved and impaired, increased maintenance expenses associated with our information technology platforms and increased payroll expenses due to the employees who joined CHS following our acquisition of the remaining 75% ownership interest in WCD, which were not included in the entire comparable period of the prior year.
Gain on Disposal of Business
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Gain on disposal of business||$||1,450 ||$||3,886 ||$||(2,436)||(62.7)||%|
Gain on disposal of business did not change significantly during fiscal 2020.
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Interest expense||$||116,977 ||$||167,065 ||$||(50,088)||(30.0)||%|
Interest expense decreased during fiscal 2020 as a result of lower interest rates and decreased average outstanding debt balances compared to the prior year.
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Other income||$||38,425 ||$||82,423 ||$||(43,998)||(53.4)||%|
Other income decreased primarily as a result of nonoperating gains recognized during fiscal 2019 that did not reoccur during fiscal 2020, including a $19.1 million gain recognized in connection with the acquisition of the remaining 75% ownership in WCD. Additionally, decreased interest income resulting from lower interest rates adversely impacted other income.
Equity Income from Investments
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Equity income from investments*||$||186,715 ||$||236,755 ||$||(50,040)||(21.1)||%|
*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.
The decreased equity income from investments for fiscal 2020 was primarily due to lower equity income recognized from our equity method investments in CF Nitrogen and Ventura Foods, which decreased by $32.4 million and $17.6 million, respectively. The decreases were driven by reduced urea and UAN pricing for CF Nitrogen and the significantly reduced demand in the foodservice industry during the COVID-19 pandemic experienced by Ventura Foods.
Income Tax Benefit
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Income tax benefit||$||36,731 ||$||12,456 ||$||24,275 ||194.9 ||%|
Increased income tax benefit during fiscal 2020 primarily reflects a tax benefit related to the settlement of a U.S. federal audit resulting in additional tax credit carryovers, as well as equity management assumptions used in fiscal 2020 and the associated impact on income taxes. Federal and state statutory rates applied to nonpatronage business activity were 24.9% and 24.7% for the years ended August 31, 2020 and 2019, respectively. Income taxes and effective tax rates vary each year based upon profitability and nonpatronage business activity, which resulted in effective tax rates of (9.5)% and (1.5)% for the years ended August 31, 2020 and 2019, respectively.
Comparison of Results of Operations for the Years Ended August 31, 2019 and 2018
For a discussion of results of operations for fiscal 2019 compared to fiscal 2018, 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 ended August 31, 2019, filed with the SEC on November 6, 2019.
Liquidity and Capital Resources
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 short-term borrowings through our revolving credit facilities. We fund our capital expenditures and growth primarily through cash, operating cash flow and long-term debt financing.
On August 31, 2020 and 2019, we had working capital, defined as current assets less current liabilities, of $1.3 billion and $1.1 billion, respectively. The increase in working capital was driven primarily by reductions in our notes payable and accounts payable. Our current ratio, defined as current assets divided by current liabilities, was 1.3 and 1.2 as of August 31, 2020 and 2019, respectively. 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 of August 31, 2020, we had cash and cash equivalents of $140.9 million, total equities of $8.8 billion, long-term debt (including current maturities) of $1.8 billion and notes payable of $1.6 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 needs.
Fiscal 2020 and 2019 Activity
On August 14, 2020, we entered into the 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 and whether the notes have an investment grade rating from a nationally recognized statistical rating organization. The funding of these notes took place on November 2, 2020, and will be used to refinance upcoming debt maturities in fiscal 2021 and add 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") to Cofina 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 of August 31, 2020, total availability under the Securitization Facility was $423.0 million, all of which had been utilized.
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 August 31, 2020 and 2019, the outstanding balance under the Repurchase Facility was $150.0 million.
On June 26, 2020, we amended our existing Securitization Facility and Repurchase Facility. As a result of the amendment, the maximum availability of the Securitization Facility was decreased from $700.0 million to $500.0 million. On September 24, 2020, the Securitization Facility and Repurchase Facility were further 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.
During fiscal 2019, we completed the acquisition of the remaining 75% ownership interest in WCD that we did not previously own by paying $106.7 million; net cash flows were reduced by $8.0 million of cash acquired. WCD is now included in our Ag segment and deepens our presence in the agronomy products market. See Note 20, Acquisitions, of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.
We also completed planned major maintenance activities during fiscal 2020 and 2019, which contributed to cash outflows of $14.5 million and $232.1 million for the years ended August 31, 2020 and 2019, respectively.
|Years Ended August 31,||Change|
| ||(Dollars in thousands)|
|Net cash provided by operating activities||$||1,087,229 ||$||1,139,931 ||$||(52,702)||(4.6)||%|
|Net cash used in investing activities||(243,705)||(661,283)||417,578 ||63.1 ||%|
|Net cash used in financing activities||(931,148)||(725,646)||(205,502)||(28.3)||%|
|Effect of exchange rate changes on cash and cash equivalents||4,942 ||2,733 ||2,209 ||80.8 ||%|
|Net decrease in cash and cash equivalents and restricted cash||$||(82,682)||$||(244,265)||$||161,583 ||66.2 ||%|
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 $52.7 million decrease in cash provided by operating activities reflects decreased net income during fiscal 2020 compared to the prior fiscal year, which was partially offset by working capital decreases, primarily associated with decreased receivables.
The $417.6 million decrease in cash used in investing activities primarily reflects increased collections of $130.5 million, decreased expenditures for major maintenance, CHS Capital, LLC ("CHS Capital") notes receivable and acquisition of the remaining 75% ownership interest in WCD in fiscal 2019, which did not reoccur in fiscal 2020.
The $205.5 million increase in cash used in financing activities primarily reflects increased net cash outflows associated with our notes payable and long-term debt facilities, an increase in cash patronage paid and an increase in equity redemption payments.
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 $486.8 million, compared to capital expenditures of $418.4 million in fiscal 2020. Excluded from the capital expenditures for fiscal 2021 is approximately $56.0 million for major maintenance at our Laurel refinery.
•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 $74.6 million during fiscal 2021.
•Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding as of August 31, 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 $33.0 million to be distributed in fiscal 2021 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 2021 in respect to the amounts it has authorized for redemption during the fiscal year.
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. On August 14, 2020, we entered into the Note Purchase Agreement to borrow $375.0 million of long-term debt in the form of notes that was funded on November 2, 2020. This funding will be used to refinance maturing long-term debt as well as add liquidity. In addition, our wholly-owned subsidiary, CHS Capital, makes loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities and has financing sources as detailed below in "CHS Capital Financing."
Working Capital Financing
We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks. We believe our current cash balances and available capacity on our committed lines of credit will provide adequate liquidity to meet our working capital needs. The following table summarizes our primary lines of credit as of August 31, 2020 and 2019:
|Primary Revolving Credit Facilities||Fiscal Year|
|Total Capacity||Borrowings Outstanding||Interest Rates|
|(Dollars in thousands)|
|Committed five-year unsecured facility||2024||$||2,750,000 ||$||345,000 ||$||335,000 ||LIBOR or base rate +0.00% to 1.55%|
|Uncommitted bilateral facilities*||2021||300,000 ||— ||430,000 ||LIBOR or base rate + applicable margin|
*Total capacity for the uncommitted bilateral facilities was $630.0 million at August 31, 2019. As of August 31, 2020, the uncommitted bilateral facilities do not include $300.0 million of capacity with a banking partner for which we are currently in the process of terminating the related agreement.
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 on July 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 $318.4 million outstanding as of August 31, 2020. In addition, our other international subsidiaries had lines of credit outstanding of $69.7 million as of August 31, 2020.
Long-Term Debt Financing
Long-term debt including current maturities was $1.8 billion as of August 31, 2020 and 2019. During the year ended August 31, 2020, we repaid approximately $25.4 million of long-term debt consisting of scheduled debt maturities and optional prepayments. On August 14, 2020, we entered into the Note Purchase Agreement to borrow $375.0 million of long-term debt in the form of notes that was funded on November 2, 2020. 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, including tables with summarized long-term debt outstanding.
CHS Capital Financing
For a description of the Securitization Facility and the Repurchase Facility, see above in "Fiscal 2020 and 2019 Activity."
CHS Capital sells loan commitments it has originated to Compeer Financial, PCA, d/b/a ProPartners Financial on a recourse basis. Total outstanding commitments under the program were $150.0 million as of August 31, 2020, of which $133.3 million was borrowed with an interest rate of 1.45%.
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 1.40% as of August 31, 2020, and are due upon demand. Borrowings under these notes totaled $134.9 million as of August 31, 2020.
On September 30, 2019, CHS Capital entered into a credit agreement with a revolving note. Under this agreement, CHS Capital had available capacity of $100.0 million of which no amount was outstanding as of August 31, 2020. This agreement matured subsequent to August 31, 2020, and was not renewed.
Our long-term debt is mostly unsecured; however, restrictive covenants under various debt agreements require the maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants and restrictions as of August 31, 2020. Based on our current 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 flow 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 both fiscal 2020 and 2019, our ratio of consolidated funded debt to consolidated cash flow 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. The cash portion of the qualified patronage distribution, if any, is determined annually by our Board of Directors, with the balance issued in the form of qualified and/or nonqualified capital equity certificates. Total patronage distributions for fiscal 2020 are estimated to be $242.0 million, with the qualified cash portion estimated to be $30.0 million and nonqualified equity distributions of $212.0 million. No portion of annual net earnings for fiscal 2020 will be issued in the form of qualified capital equity certificates.
The following table presents estimated patronage distributions for the year ending August 31, 2021, and actual patronage distributions for the years ended August 31, 2020, 2019 and 2018:
| ||(Dollars in millions)|
|Patronage distributed in cash||$||30.0 ||$||90.1 ||$||75.8 ||$||— |
|Patronage distributed in equity||212.0 ||474.4 ||353.0 ||128.8 |
|Total patronage distributed||$||242.0 ||$||564.5 ||$||428.8 ||$||128.8 |
Our Board of Directors has authorized equity redemptions of $33.0 million to be distributed in fiscal 2021 in the form of redemptions of qualified and nonqualified equity owned by individual producer members and association members. These redemptions are classified as a current liability on the August 31, 2020, Consolidated Balance Sheet. The Board of Directors will continue to periodically evaluate the level of equity redemption activity throughout fiscal 2021 in respect to the amounts it has authorized for redemption during the fiscal year.
See Note 12, Equities, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for a summary of our outstanding preferred stock as of August 31, 2020, each series of which is listed and traded on the Global Select Market of The Nasdaq Stock Market LLC.
Off-Balance Sheet Financing Arrangements
We are a guarantor for lines of credit and performance obligations of related, nonconsolidated companies. Our bank covenants allow maximum guarantees of $1.0 billion, of which $127.9 million were outstanding on August 31, 2020. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out cash related to them and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide guarantees were current as of August 31, 2020.
There is no material off-balance sheet debt.
We engage in off-balance sheet arrangements through certain loan participation agreements. Refer to further details about these arrangements in Note 3, Receivables, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K.
We had certain contractual obligations as of August 31, 2020, which require the following payments to be made:
| ||Payments Due by Period|
|1 - 3|
|3 - 5|
| ||(Dollars in thousands)|
Long-term debt obligations (1)
|$||1,750,947 ||$||181,628 ||$||313,656 ||$||697,560 ||$||558,103 |
Interest payments (2)
|498,157 ||74,573 ||134,426 ||108,726 ||180,432 |
Finance lease obligations (3)
|35,337 ||8,845 ||13,070 ||5,489 ||7,933 |
|Operating lease obligations||305,828 ||64,379 ||90,667 ||55,229 ||95,553 |
Purchase obligations (4)
|6,555,832 ||5,587,252 ||440,551 ||217,226 ||310,803 |
Other liabilities (5)
|449,206 ||— ||32,082 ||14,846 ||402,278 |
|Total obligations||$||9,595,307 ||$||5,916,677 ||$||1,024,452 ||$||1,099,076 ||$||1,555,102 |
(1) Excludes fair value adjustments to the long-term debt reported on our Consolidated Balance Sheet as of August 31, 2020, resulting from fair value interest rate swaps and related hedge accounting.
(2) Based on interest rates and long-term debt balances as of August 31, 2020.
(3) Future minimum lease payments under finance leases include amounts related to bargain purchase options and residual value guarantees, which represent economic obligations as opposed to contractual payment obligations.
(4) Purchase obligations are legally binding and enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities; fixed, minimum or variable price provisions; and approximate time of the transactions. In the ordinary course of business, we enter into a significant number of forward purchase commitments for agricultural and energy commodities and related freight. The purchase obligation amounts shown above include both short- and long-term obligations and are based on a) fixed or minimum quantities to be purchased and b) fixed or estimated prices to be paid at the time of settlement. Current estimates are based on
assumptions about future market conditions that will exist at the time of settlement. Consequently, actual amounts paid under these contracts may differ due to the variable pricing provisions. Market risk related to the variability of our forward purchase commitments is economically hedged by offsetting forward sale contracts that are not included in the amounts above.
(5) Other liabilities include the long-term portion of deferred compensation, deferred tax liabilities and contractual redemptions. Of the total other liabilities and deferred tax liabilities of $652.9 million on our Consolidated Balance Sheet as of August 31, 2020, the timing of the payments of $394.6 million of such liabilities cannot be determined and $203.7 million relate to long-term operating lease liabilities.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States ("U.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 and processed oilseed 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 last-in, first-out ("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 grains and oilseeds inventories. These estimates include measurement of grain in bins and other storage facilities, which uses formulas in addition to actual measurements taken to arrive at appropriate quantities. Other determinations made by management include quality of inventory and estimates for freight. Grain shrink reserves and other reserves that account for spoilage also affect inventory valuations. If estimates regarding the valuation of inventories, or the adequacy of reserves, are less favorable than management’s assumptions, then additional reserves or write-downs of inventories may be required.
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 than 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 with U.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 the McPherson 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, these loss carryforwards 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.
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 with U.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 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 lessor 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
See Note 1, Organization, Basis of Presentation and Significant Accounting Policies, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for information concerning new accounting standards and the impact of implementation of those standards on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
When we enter into a commodity purchase or sales commitment, we incur risks related to price changes and performance including delivery, quality, quantity and shipment period. In the event that market prices decrease, we are exposed to risk of loss for the market value of inventory and purchase contracts with fixed or partially fixed prices. Conversely, we are exposed to risk of loss on our fixed or partially fixed price sales contracts in the event that market prices increase.
Our use of hedging reduces exposure to price volatility by protecting against adverse short-term price movements, but also limits the benefits of favorable short-term price movements. To reduce the price risk associated with fixed price commitments, we generally enter into commodity derivative contracts, to the extent practical, to achieve a net commodity position within the formal position limits we have established and deemed prudent for each commodity. These contracts are primarily transacted through our FCM on regulated commodity futures exchanges, but may include over-the-counter derivative instruments when deemed appropriate. These contracts are recorded at fair values based on quotes listed on regulated commodity exchanges or the market prices of the underlying products listed on the exchanges, except that certain contracts that are accounted for as normal purchase and normal sales transactions. For commodities where there is no liquid derivative contract, risk is managed through the use of forward sales contracts, other pricing arrangements and, to some extent, futures contracts in highly correlated commodities. These contracts are economic hedges of price risk, but are not designated as hedging instruments for accounting purposes. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations.
When a futures position is established, initial margin must be deposited with the applicable exchange or broker. The amount of margin required varies by commodity and is set by the applicable exchange at its sole discretion. If the market price relative to a short futures position increases, an additional margin deposit would be required. Similarly, a margin deposit would be required if the market price relative to a long futures position decreases. Conversely, if the market price increases relative to a long futures position or decreases relative to a short futures position, margin deposits may be returned by the applicable exchange or broker.
Our policy is to manage our commodity price risk exposure according to internal policies and in alignment with our tolerance for risk. It is our policy that our profitability should come from operations, primarily derived from margins on products sold and grain merchandised, not from hedging transactions. At any one time, inventory and purchase contracts for delivery to us may be substantial. We have risk management policies and procedures that include established net physical position limits. These limits are defined for each commodity and business unit, and business units may include both trader and management limits as appropriate. The limits policy is overseen at a high level by our corporate compliance team, with day-to-day monitoring procedures being implemented within each individual business unit to ensure any limits overage is explained and exposures reduced, or a temporary limit increase is established if needed. The position limits are reviewed at least annually with our senior leadership and Board of Directors. We monitor current market conditions and may expand or reduce our net position limits or procedures in response to changes in those conditions.
The use of hedging instruments does not protect against nonperformance by counterparties to cash contracts. We evaluate counterparty exposure by reviewing contracts and adjusting the values to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty's financial condition and the risk that the counterparty will refuse to perform on a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. We manage these risks by entering into fixed price purchase and sales contracts with preapproved producers and by establishing appropriate limits for individual suppliers. Fixed price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. Regarding our use of derivatives, we transact in exchange traded instruments or enter into over-the-counter derivatives that primarily clear through our FCM, which limits our counterparty exposure relative to hedging activities. Historically, we have not experienced significant events of nonperformance on open contracts. Accordingly, we only adjust the estimated fair values of specifically identified contracts for nonperformance. Although we have established policies and procedures, we make no assurances that historical nonperformance experience will carry forward to future periods.
A 10% adverse change in market prices would not materially affect our results of operations, since we use commodity futures and forward contracts of economic hedges of price risk and since our operations have effective economic hedging requirements as a general practice. Factors that could impact the effectiveness of our hedging activities include the accuracy of our forecasts, the volatility of the commodity markets and the availability of hedging instruments. The utilization of derivatives and hedging activities is described more fully in Note 15, Derivative Financial Instruments and Hedging Activities, and Note 16, Fair Value Measurements, of the notes to our consolidated financial statements included in this Annual Report on Form 10-K.
Interest Rate Risk
Debt used to finance inventories and receivables is represented by short-term notes payable, so our blended interest rate for all such notes approximates current market rates. The table below provides information about our outstanding debt that is sensitive to changes in interest rates. The table presents scheduled contractual principal payments and related weighted average interest rates for the fiscal years presented.
|Expected Maturity Date||Total||Fair Value|
| ||(Dollars in thousands)|
|Liabilities:|| || || || || || || || |
|Variable rate miscellaneous |
short-term notes payable
|$||763,215 ||$||— ||$||— ||$||— ||$||— ||$||— ||$||763,215 ||$||(763,215)|
|Average interest rate||2.0 ||%||— ||— ||— ||— ||— ||2.0 ||%||— |
|Variable rate CHS Capital short-term notes payable||$||812,276 ||$||— ||$||— ||$||— ||$||— ||$||— ||$||812,276 ||$||(812,276)|
|Average interest rate||1.3 ||%||— ||— ||— ||— ||— ||1.3 ||%||— |
|Fixed rate long-term debt||$||181,628 ||$||30,828 ||$||282,828 ||$||780 ||$||330,780 ||$||558,103 ||$||1,384,947 ||$||(1,497,526)|
|Average interest rate||4.5 ||%||3.2 ||%||3.2 ||%||4.5 ||%||3.2 ||%||4.9 ||%||3.9 ||%||— |
|Variable rate long-term debt||$||— ||$||— ||$||— ||$||— ||$||366,000 ||$||— ||$||366,000 ||$||(384,364)|
Average interest rate (a)
|— ||— ||— ||— ||range||— ||range||— |
(a) Borrowings under the agreement bear interest at a base rate (or LIBOR) plus an applicable margin, or at a fixed rate of interest determined and quoted by the administrative agent under the agreement in its sole and absolute discretion from time to time. The applicable margin is based on our leverage ratio and ranges between 1.50% and 2.00% for LIBOR-based loans and between 0.50% and 1.00% for base rate loans.
Foreign Currency Risk
We were exposed to risk regarding foreign currency fluctuations during fiscal 2020 and in prior years even though a substantial amount of our international sales were denominated in U.S. dollars. In addition to specific transactional exposure, foreign currency fluctuations can impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. From time to time, we enter into foreign currency hedge contracts to minimize the impact of currency fluctuations on our transactional exposures. The notional amounts of our foreign exchange derivative contracts were $1.2 billion and $894.7 million as of August 31, 2020 and 2019, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 15(a)(1) of this Annual Report on Form 10-K are set forth beginning on page F-1. Financial statement schedules are included in Schedule II in Item 15(a)(2) of this Annual Report on Form 10-K. Supplementary financial information required by Item 302 of Regulation S-K promulgated by the SEC for each quarter during the years ended August 31, 2020 and 2019, is presented below.
|Three Months Ended|
(Dollars in thousands)
|Revenues||$||6,945,623 ||$||7,241,031 ||$||6,598,226 ||$||7,621,485 |
|Gross profit||122,850 ||218,359 ||315,055 ||325,543 |
|Income before income taxes||3,204 ||70,449 ||127,824 ||185,401 |
|Net income||21,677 ||97,501 ||125,694 ||178,737 |
|Net income attributable to CHS Inc. ||21,462 ||97,648 ||125,447 |