CHS INC

Previous wording

•Financial performance was solid across our segments, although down from the record second quarter of fiscal 2023.

Current wording

•Financial performance remained solid across our segments, although down from historically strong results in fiscal 2023.

Previous wording

•Our Energy segment margins declined from the highs in the prior year due to changing market conditions including the impact of a historically warm winter.

Current wording

•Our Energy segment margins declined from the prior year due to changing market conditions including the impact of less favorable refining margins.

Previous wording

Our segments operate in cyclical environments in which market conditions can change rapidly with significant positive or negative impacts on our results. We anticipate that various macroeconomic factors will continue to drive uncertainty and instability in global energy and agricultural commodity markets, as well as global financial markets, which could have a significant impact on each of our segments during the remainder of fiscal 2024. These factors include the ongoing war between Russia and Ukraine and any escalation of conflict in the Middle East; shifts in global trade flows for commodities; a higher interest rate environment; and inflationary pressures increasing costs of labor, freight and materials. In addition to these broad macroeconomic factors, other factors could impact the demand and pricing for agricultural inputs and outputs, as well as our ability to supply those inputs and outputs while remaining profitable. These include the cost of renewable energy credits, the prices of which remains volatile and could continue to negatively impact our profitability, and regional factors, such as unpredictable weather conditions, including those due to climate change. We currently expect the imbalance between global supply and strong global demand for energy and agricultural commodities to continue to moderate through the remainder of fiscal 2024. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts to us in fiscal 2024. Refer to Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2023 for additional impacts that these and other risks may have on our business operations and financial performance.

Current wording

Our segments operate in cyclical environments in which market conditions can change rapidly with significant positive or negative impacts on our results. We anticipate that various macroeconomic factors will continue to drive uncertainty and instability in global energy and agricultural commodity markets, as well as global financial markets, which could have a significant impact on each of our segments during the remainder of fiscal 2024. These factors include the ongoing war between Russia and Ukraine and any escalation of conflict in the Middle East; shifts in global trade flows for commodities; a higher interest rate environment; and inflationary pressures increasing costs of labor, freight and materials. In addition to these broad macroeconomic factors, other factors could impact the demand and pricing for agricultural inputs and outputs, as well as our ability to supply those inputs and outputs while remaining profitable. These include the cost of renewable energy credits, the prices of which have experienced volatility in recent years and could positively or negatively impact our profitability, and regional factors, such as unpredictable weather conditions, including those due to climate change. We have experienced reduced profitability through the first nine months of fiscal year 2024 in both our Energy and Ag segments due to declining margins. In our Energy segment, margins have been adversely impacted by increased industry capacity utilization rates bringing additional refined fuel supply to the market, driving decreased refining margins. In our Ag segment, margins have eroded due to waning demand for U.S. grain and oilseed as global trade flows continue to shift away from the U.S. and to other markets around the world. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts to us; however, we currently expect the moderation of margins for energy and agricultural commodities to persist during the remainder of fiscal 2024 and into fiscal 2025, which could negatively impact our profitability. Refer to Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2023, for additional impacts these and other risks may have on our business operations and financial performance.

Previous wording

We are subject to the Renewable Fuel Standard that requires refiners to blend renewable fuels (e.g., ethanol and biodiesel) into their finished transportation fuels or purchase renewable energy credits, known as renewable identification numbers ("RINs"), in lieu of blending. The U.S. Environmental Protection Agency ("EPA") generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. In June 2023, the EPA issued a final renewable volume obligation ("RVO") for calendar years 2020 through 2025. We generate RINs through our blending activities, but we cannot generate enough RINs to meet the needs of our refining capacity; therefore, RINs must be purchased on the open market. The price of RINs can be volatile, with prices for D6 ethanol RINs and D4 biodiesel RINs decreasing by 59% and 60%, respectively, during the three months ended February 29, 2024, compared to the same period during the prior year, which positively impacted our earnings. Estimates of our RIN expenses are calculated using an average RIN price each month.

Current wording

We are subject to the Renewable Fuel Standard that requires refiners to blend renewable fuels (e.g., ethanol and biodiesel) into their finished transportation fuels or purchase renewable energy credits, known as renewable identification numbers ("RINs"), in lieu of blending. The U.S. Environmental Protection Agency ("EPA") generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. In June 2023, the EPA issued a final renewable volume obligation ("RVO") for calendar years 2020 through 2025. We generate RINs through our blending activities, but we cannot generate enough RINs to meet the needs of our refining capacity; therefore, RINs must be purchased on the open market. The price of RINs can be volatile, with prices for D6 ethanol RINs and D4 biodiesel RINs decreasing by 67% and 68%, respectively, during the three months ended May 31, 2024, compared to the same period during the prior year, which positively impacted our earnings. Estimates of our RIN expenses are calculated using an average RIN price each month.

Previous wording

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 crude oil inputs) and Western Canadian Select ("WCS") crude oil discounts (i.e., the price discount for WCS crude oil relative to West Texas Intermediate ("WTI") crude oil), which are driven by supply and demand of refined products. Crack spreads and WCS crude oil discounts both decreased during the three and six months ended February 29, 2024, compared to the same period during the prior year, contributing to lower IBIT for the Energy segment. The table below provides information about average market reference prices and differentials that impacted our Energy segment:

Current wording

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 crude oil inputs) and Western Canadian Select ("WCS") crude oil discounts (i.e., the price discount for WCS crude oil relative to West Texas Intermediate ("WTI") crude oil), which are driven by supply and demand of refined products. Crack spreads and WCS crude oil discounts both decreased during the three and nine months ended May 31, 2024, compared to the same period during the prior year, contributing to lower IBIT for the Energy segment. The table below provides information about average market reference prices and differentials that impacted our Energy segment:

Previous wording

•Lower crack spreads and decreased WCS crude oil discounts resulted from less favorable global market conditions compared to the same period during the prior year, which contributed to a $235.8 million decrease of IBIT.

Current wording

•Lower crack spreads and decreased WCS crude oil discounts resulted from less favorable global market conditions compared to the same period during the prior year, which contributed to a $152.7 million decrease of IBIT.

Previous wording

•The overall decreased IBIT was partially offset by decreased costs for RINs in our refined fuels business, which contributed to reduced costs of $66.8 million.

Current wording

•The IBIT decrease was partially offset by lower costs for RINs in our refined fuels business, which contributed to lower costs of $65.6 million.

Previous wording

Our Nitrogen Production segment IBIT decreased from the prior year due to lower equity income attributed to decreased selling prices of urea and UAN, which was partially offset by decreased natural gas costs, all due to global supply and demand factors. Corporate and Other IBIT decreased primarily due to lower equity income from Ventura Foods, LLC ("Ventura Foods"), which experienced less favorable market conditions for edible oils during the second quarter of fiscal 2024 compared to the same period during the prior year.

Current wording

Our Nitrogen Production segment IBIT decreased slightly from the prior year due to lower equity income attributed to decreased selling prices of urea and UAN, which was mostly offset by decreased natural gas costs, all due to global supply and demand factors. Corporate and Other IBIT decreased primarily due to lower equity income from Ventura Foods, LLC ("Ventura Foods"), which experienced less favorable market conditions for oil-based food products during the third quarter of fiscal 2024 compared to the same period during the prior year.

Previous wording

•Decreased selling prices resulting from global market conditions contributed to $279.6 million and $66.7 million decreases in revenues for refined fuels and propane, respectively.

Current wording

•Decreased selling prices resulting from global market conditions contributed to $102.0 million and $13.4 million decreases in revenues for refined fuels and propane, respectively.

Previous wording

•Lower propane and refined fuels volumes contributed to $52.1 million and $48.4 million decreases in revenues, respectively, primarily driven by lower demand due to warm winter weather conditions across much of our trade territory.

Current wording

•Lower refined fuels and propane volumes contributed to $44.8 million and $29.2 million decreases in revenues, respectively, primarily driven by lower demand as a result of unfavorable weather conditions across much of our trade territory.

Previous wording

•Decreased selling prices across most of our Ag segment product categories during the second quarter of fiscal 2024, including:

Current wording

•Decreased selling prices across most of our Ag segment product categories due to global market conditions during the third quarter of fiscal 2024, including:

Previous wording

•Lower volumes of propane and refined fuels resulting from decreased demand associated with the warm winter weather conditions across much of our trade territory and global market conditions contributed to decreased COGS of $29.3 million and $20.9 million, respectively.

Current wording

•Lower refined fuels and propane volumes contributed to decreased COGS of $38.8 million and $31.0 million, respectively, primarily driven by lower demand as a result of unfavorable weather conditions across much of our trade territory.

Previous wording

•Lower costs across most of our Ag segment product categories during the second quarter of fiscal 2024, including:

Current wording

•Lower costs across most of our Ag segment product categories during the third quarter of fiscal 2024, including:

Previous wording

◦$2.0 billion decrease for grain and oilseed primarily driven by lower pricing due to global market conditions;

Current wording

◦$1.3 billion decrease for grain and oilseed primarily driven by lower pricing due to global market conditions;

Previous wording

◦$170.0 million decrease for renewable fuels resulting from lower ethanol prices due to decreased demand.

Current wording

◦$95.2 million decrease for renewable fuels resulting from lower input costs.

Previous wording

Equity income from investments decreased during the six months ended February 29, 2024, compared to the same period during the prior year, primarily due to lower income associated with our equity method investments in CF Nitrogen as a result of lower prices of urea and UAN due to global supply and demand factors and Ventura Foods due to less favorable market conditions for edible oils during the first half of fiscal 2024 compared to the same period during the prior year.

Current wording

Equity income from investments decreased during the three months ended May 31, 2024, compared to the same period during the prior year, primarily due to lower income associated with our equity method investment in Ventura Foods due to less favorable market conditions for oil-based food products during the third quarter of fiscal 2024.

Previous wording

Decreased income tax expense during the three months ended February 29, 2024, resulted primarily from lower nonpatronage earnings during the period. Effective tax rates for the three months ended February 29, 2024, and February 28, 2023, were 8.3% and 6.7%, respectively. Federal and state statutory rates of 24.5% and 24.4% were applied to nonpatronage business activity for the three months ended February 29, 2024, and February 28, 2023, respectively. Income taxes and effective tax rates vary each year based on profitability, income tax credits, nonpatronage business activity and current equity management assumptions.

Current wording

Income tax expense increased during the three months ended May 31, 2024, which resulted primarily from a lower Domestic Production Activities Deduction ("DPAD") compared to the same period of the prior year. Effective tax rates for the three months ended May 31, 2024 and 2023, were 4.1% and 1.9%, respectively. Federal and state statutory rates of 24.5% and 24.7% were applied to nonpatronage business activity for the three months ended May 31, 2024 and 2023, respectively. Income taxes and effective tax rates vary each year based on profitability, income tax credits, nonpatronage business activity and current equity management assumptions.

Previous wording

The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for the six months ended February 29, 2024. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues.

Current wording

The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for the nine months ended May 31, 2024. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues.

Previous wording

•Lower crack spreads and decreased WCS crude oil discounts resulted from global market conditions, which contributed to a $427.6 million decrease of IBIT.

Current wording

•Lower crack spreads and decreased WCS crude oil discounts resulted from global market conditions, which contributed to a $573.9 million decrease of IBIT.

Previous wording

•The overall decreased IBIT was partially offset by decreased costs for RINs in our refined fuels business, which contributed to a $114.4 million cost reduction.

Current wording

•The IBIT decrease was partially offset by lower costs for RINs in our refined fuels business, which contributed to a $180.0 million cost reduction.

Previous wording

Our Nitrogen Production segment IBIT decreased from the prior year due to lower equity income attributed to decreased selling prices of urea and UAN, which was partially offset by decreased natural gas costs, all due to global supply and demand factors. Corporate and other IBIT remained flat as lower equity income from Ventura Foods due to less favorable market conditions for edible oils during the first half of fiscal 2024 compared to the same period during the prior year was mostly offset by increased interest income resulting from higher interest rates and a larger cash balance.

Current wording

Our Nitrogen Production segment IBIT decreased from the prior year due to lower equity income attributed to decreased selling prices of urea and UAN, which was partially offset by decreased natural gas costs, all due to global supply and demand factors. Corporate and other IBIT decreased primarily due to lower equity income from Ventura Foods, which experienced less favorable market conditions for oil-based food products during the nine months ended May 31, 2024, compared to the same period during the prior year.

Previous wording

•Decreased selling prices resulting from global market conditions contributed to $577.5 million and $117.7 million decreases in revenues for refined fuels and propane, respectively.

Current wording

•Decreased selling prices resulting from global market conditions contributed to $677.6 million and $128.5 million decreases in revenues for refined fuels and propane, respectively.

Previous wording

•Lower propane and refined fuels volumes contributed to $34.9 million and $24.8 million decreases in revenues, respectively, primarily driven by lower demand associated with the warm winter weather conditions across much of our trade territory.

Current wording

•Lower refined fuels and propane volumes contributed to $95.0 million and $83.8 million decreases in revenues, respectively, primarily driven by lower demand as a result of unfavorable weather conditions across much of our trade territory.

Previous wording

•Decreased selling prices across most of our Ag segment product categories during the first half of fiscal 2024, including:

Current wording

•Decreased selling prices across most of our Ag segment product categories due to global market conditions during the first nine months of fiscal 2024, including:

Previous wording

•Increased volumes for grain and oilseed contributed to a $1.5 billion increase in revenues, primarily due to stronger global demand for grain and oilseed as prices have declined.

Current wording

•Increased volumes for grain and oilseed contributed to a $1.4 billion increase in revenues, primarily due to stronger global demand for grain and oilseed as prices declined.

Previous wording

Corporate and Other revenues increased during the three months ended February 29, 2024, compared to the same period during the prior year, primarily due to increased interest income as a result of a larger average notes receivable balance and higher interest rates.

Current wording

Corporate and Other revenues increased during the nine months ended May 31, 2024, compared to the same period during the prior year, primarily due to increased interest income as a result of a larger average notes receivable balance and higher interest rates.

Previous wording

•Global market conditions, including reduced RIN costs, contributed to decreased costs for refined fuels and propane that drove $230.4 million and $132.5 million decreases in COGS, respectively.

Current wording

•Global market conditions, including reduced RIN costs, contributed to decreased costs for refined fuels and propane that drove $238.3 million and $148.5 million decreases in COGS, respectively.

Previous wording

•Lower costs across most of our Ag segment product categories during the first half of fiscal 2024, including:

Current wording

•Lower costs across most of our Ag segment product categories during the first nine months of fiscal 2024, including:

Previous wording

◦$3.3 billion decrease for grain and oilseed primarily driven by lower pricing due to global market conditions;

Current wording

◦$4.5 billion decrease for grain and oilseed primarily driven by lower pricing due to global market conditions;

Previous wording

◦$202.2 million decrease for renewable fuels primarily resulting from lower input costs; and

Current wording

◦$298.3 million decrease for renewable fuels primarily resulting from lower input costs; and

Previous wording

•Increased volumes for grain and oilseed contributed to a $1.4 billion increase in COGS, primarily due to stronger global demand for grain and oilseed as prices have declined.

Current wording

•Increased volumes for grain and oilseed contributed to a $1.3 billion increase in COGS, primarily due to stronger global demand for grain and oilseed as prices declined.

Previous wording

There were no significant changes on a dollar basis to COGS in our Nitrogen Production segment or Corporate and Other during the six months ended February 29, 2024, compared to the same period during the prior year.

Current wording

There were no significant changes on a dollar basis to COGS in our Nitrogen Production segment or Corporate and Other during the nine months ended May 31, 2024, compared to the same period during the prior year.

Previous wording

Interest expense decreased during the six months ended February 29, 2024, as a result of decreased notes payable balances, which was partially offset by higher interest rates compared to the same period in the prior year.

Current wording

Interest expense decreased during the nine months ended May 31, 2024, as a result of decreased notes payable balances, which was partially offset by higher interest rates compared to the same period in the prior year.

Previous wording

Other income increased during the three months ended February 29, 2024, primarily as a result of increased interest income due to a larger average cash balance and higher interest rates.

Current wording

Other income increased during the nine months ended May 31, 2024, primarily as a result of increased interest income due to a larger average cash balance and higher interest rates.

Previous wording

Equity income from investments decreased during the three months ended February 29, 2024, compared to the same period during the prior year, primarily due to lower income associated with our equity method investments in CF Nitrogen as a result of lower prices of urea and UAN due to global supply and demand factors and Ventura Foods due to less favorable market conditions for edible oils during the second quarter of fiscal 2024 compared to the same period during the prior year.

Current wording

Equity income from investments decreased during the nine months ended May 31, 2024, compared to the same period during the prior year, primarily due to lower income associated with our equity method investments in CF Nitrogen as a result of lower prices of urea and UAN due to global supply and demand factors and in Ventura Foods due to less favorable market conditions for oil-based food products during the nine months ended May 31, 2024.

Previous wording

Decreased income tax expense during the six months ended February 29, 2024, resulted primarily from the recognition of research and development tax credits as well as lower nonpatronage income during the period. Effective tax rates for the six months ended February 29, 2024, and February 28, 2023, were 1.3% and 4.9%, respectively. Federal and state statutory rates of 24.5% and 24.4% were applied to nonpatronage business activity for the six months ended February 29, 2024, and February 28, 2023, respectively. Income taxes and effective tax rates vary each year based on profitability, income tax credits, nonpatronage business activity and current equity management assumptions.

Current wording

Decreased income tax expense during the nine months ended May 31, 2024, resulted primarily from the recognition of research and development tax credits as well as lower nonpatronage income during the period. Effective tax rates for the nine months ended May 31, 2024 and 2023, were 2.1% and 3.9%, respectively. Federal and state statutory rates of 24.5% and 24.7% were applied to nonpatronage business activity for the nine months ended May 31, 2024 and 2023, respectively. Income taxes and effective tax rates vary each year based on profitability, income tax credits, nonpatronage business activity and current equity management assumptions.

Previous wording

We fund our current operations primarily through our cash flows from operations and with short-term borrowings through our committed and uncommitted revolving credit facilities, including our securitization facility with certain unaffiliated financial institutions and our repurchase facility. We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment, with cash flows from operations and by issuing long-term debt. See Note 6, Notes Payable and Long-Term Debt, of the notes to the unaudited condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information on our short-term borrowings and long-term debt. We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity.

Current wording

We fund our current operations primarily through our cash flows from operations and with short-term borrowings through our committed and uncommitted revolving credit facilities, including our securitization facility with certain unaffiliated financial institutions and our repurchase facility. We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment, with cash flows from operations and by issuing long-term debt. On April 18, 2024, we entered into a Note Purchase Agreement to borrow $700.0 million of debt in the form of notes; the funding of these notes will take place on July 16, 2024. See Note 6, Notes Payable and Long-Term Debt, of the notes to the unaudited condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information on our short-term borrowings and long-term debt. We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity.

Previous wording

•Capital expenditures. We expect total capital expenditures for fiscal 2024 to be approximately $953.0 million compared to capital expenditures of $564.5 million in fiscal 2023. Increased capital expenditures for fiscal 2024 are for investments in our infrastructure to meet the evolving needs of our owners and customers, enhance value for the cooperative system and propel sustainable growth. During the six months ended February 29, 2024, we acquired $346.1 million of property, plant and equipment.

Current wording

•Capital expenditures. We expect total capital expenditures for fiscal 2024 to be approximately $825.0 million compared to capital expenditures of $564.5 million in fiscal 2023. Increased capital expenditures for fiscal 2024 are for investments in our infrastructure to meet the evolving needs of our owners and customers, enhance value for the cooperative system and propel sustainable growth. During the nine months ended May 31, 2024, we acquired $541.4 million of property, plant and equipment.

Previous wording

•Major maintenance. We expect total major maintenance for fiscal 2024 to be approximately $20.0 million compared to major maintenance of $217.4 million in fiscal 2023. Decreased major maintenance for fiscal 2024 is due to significantly reduced turnaround activities at our refineries compared to the turnaround at our Laurel refinery during fiscal 2023. During the six months ended February 29, 2024, we paid $10.7 million in major maintenance.

Current wording

•Major maintenance. We expect total major maintenance for fiscal 2024 to be approximately $22.0 million compared to major maintenance of $217.4 million in fiscal 2023. Decreased major maintenance for fiscal 2024 is due to significantly reduced turnaround activities at our refineries compared to the turnaround at our Laurel refinery during fiscal 2023. During the nine months ended May 31, 2024, we paid $14.8 million in major maintenance.

Previous wording

•Debt and interest. We expect to repay approximately $9.6 million of long-term debt and finance lease obligations and incur interest payments related to long-term debt of approximately $88.3 million during fiscal 2024. During the six months ended February 29, 2024, we repaid $4.5 million of scheduled long-term debt maturities and finance lease obligations.

Current wording

•Debt and interest. We expect to repay approximately $9.6 million of long-term debt and finance lease obligations and incur interest payments related to long-term debt of approximately $88.3 million during fiscal 2024. During the nine months ended May 31, 2024, we repaid $6.5 million of scheduled long-term debt maturities and finance lease obligations.