General
The following discussions of financial condition and results of operations
should be read in conjunction with the unaudited interim financial statements
and notes to such statements and the cautionary statement regarding
forward-looking statements found at the beginning of Part I, Item 1, of this
Quarterly Report on Form 10-Q, as well as our consolidated financial statements
and notes thereto for the year ended August 31, 2012, included in our Annual
Report on Form 10-K, filed with the Securities and Exchange Commission. This
discussion contains forward-looking statements based on current expectations,
assumptions, estimates and projections of management. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, as more fully described in the cautionary statement
and elsewhere in this Quarterly Report on Form 10-Q.
CHS Inc. (CHS, we or us) is a diversified company, which provides grain, foods
and energy resources to businesses and consumers on a global basis. As a
cooperative, we are owned by farmers, ranchers and their member cooperatives
across the United States. We also have preferred stockholders that own shares of
our 8% Cumulative Redeemable Preferred Stock.
We provide a full range of production agricultural inputs such as refined fuels,
propane, farm supplies, animal nutrition and agronomy products, as well as
services, which include hedging, financing and insurance services. We own and
operate petroleum refineries and pipelines and market and distribute refined
fuels and other energy products under the Cenex® brand through a network of
member cooperatives and independents. We purchase grains and oilseeds directly
and indirectly from agricultural producers primarily in the midwestern and
western United States. These grains and oilseeds are either sold to domestic and
international customers or further processed into a variety of grain-based food
products.
Our consolidated financial statements include the accounts of CHS and all of our
wholly-owned and majority-owned subsidiaries and limited liability companies,
including National Cooperative Refinery Association (NCRA) in our Energy
segment. The effects of all significant intercompany transactions have been
eliminated.
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We have aligned our segments based on an assessment of how our businesses
operate and the products and services they sell.
Our Energy segment produces and provides primarily for the wholesale
distribution of petroleum products and transportation of those products. Our Ag
segment purchases and further processes or resells grains and oilseeds
originated by our country operations business, by our member cooperatives and by
third parties, and also serves as wholesaler and retailer of crop inputs.
Corporate and Other primarily represents our non-consolidated wheat milling and
packaged food joint ventures, as well as our business solutions operations,
which consist of commodities hedging, insurance and financial services related
to crop production.
Corporate administrative expenses are allocated to each business segment, and
Corporate and Other, based on direct usage for services that can be tracked,
such as information technology and legal, and other factors or considerations
relevant to the costs incurred.
Many of our business activities are highly seasonal and operating results vary
throughout the year. Our income is generally lowest during the second fiscal
quarter and highest during the third fiscal quarter. For example, in our Ag
segment, our crop nutrients and country operations businesses generally
experience higher volumes and income during the spring planting season and in
the fall, which corresponds to harvest. Our grain marketing operations are also
subject to fluctuations in volume and earnings based on producer harvests, world
grain prices and demand. Our Energy segment generally experiences higher volumes
and profitability in certain operating areas, such as refined products, in the
summer and early fall when gasoline and diesel fuel usage is highest and is
subject to global supply and demand forces. Other energy products, such as
propane, may experience higher volumes and profitability during the winter
heating and crop drying seasons.
Our revenues, assets and cash flows can be significantly affected by global
market prices for commodities such as petroleum products, natural gas, grains,
oilseeds, crop nutrients and flour. 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. Commodity prices are
affected by a wide range of factors beyond our control, including the weather,
crop damage due to disease or insects, drought, the availability and adequacy of
supply, government regulations and policies, world events, and general political
and economic conditions.
While our revenues and operating results are derived from businesses and
operations which are wholly-owned and majority-owned, a portion of our business
operations are conducted through companies in which we hold ownership interests
of 50% or less and do not control the operations. We account for these
investments primarily using the equity method of accounting, wherein we record
our proportionate share of income or loss reported by the entity as equity
income from investments, without consolidating the revenues and expenses of the
entity in our Consolidated Statements of Operations. In our Ag segment, this
principally includes our 50% ownership in TEMCO. In Corporate and Other, these
investments principally include our 50% ownership in Ventura Foods and our 24%
ownership in Horizon Milling and Horizon Milling G.P.
Results of Operations
Comparison of the three months ended November, 2012 and 2011
General. We recorded income before income taxes of $381.9 million during the
three months ended November 30, 2012 compared to $530.8 million during the three
months ended November 30, 2011, a decrease of $148.9 million (28%). Operating
results reflected decreased pretax earnings in our Energy segment and our Ag
segment, partially offset by increased pretax earnings in Corporate and Other.
Our Energy segment generated income before income taxes of $253.0 million for
the three months ended November 30, 2012 compared to $397.3 million in the three
months ended November 30, 2011, representing a decrease of $144.3 million (36%).
During the three months ended November 30, 2012, we had a net loss on the
mark-to-market for our refinery margin hedges of $42.3 million compared to a net
gain of $113.0 million during the same period of the previous year. Without this
impact, margins in our refined fuels would have improved. Earnings in our
propane, transportation and renewable fuels marketing businesses improved, while
our lubricants business experienced decreased earnings during the three months
ended November 30, 2012, when compared to the same three-month period of the
previous year.
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Our Ag segment generated income before income taxes of $112.4 million for the
three months ended November 30, 2012 compared to $121.4 million in the three
months ended November 30, 2011, a decrease in earnings of $9.0 million (7%).
Earnings from our wholesale crop nutrients business decreased $5.4 million for
the three months ended November 30, 2012 compared with the three months ended
November 30, 2011, primarily due to decreased margins. Our country operations
earnings increased $4.3 million during the three months ended November 30, 2012,
compared to the same three-month period of the previous year, primarily as a
result of increased retail merchandise volumes and grain volumes. Our grain
marketing earnings decreased by $14.8 million during the three months ended
November 30, 2012 compared with the three months ended November 30, 2011,
primarily as a result of decreased margins. Our processing and food ingredients
businesses experienced an increase in earnings of $5.6 million for the three
months ended November 30, 2012 compared to the same period of the previous year,
primarily related to increased margins from our soybean crushing and refining
businesses.
Corporate and Other generated income before income taxes of $16.5 million during
the three months ended November 30, 2012 compared to $12.2 million during the
three months ended November 30, 2011, an increase in earnings of $4.3 million
(36%). Business solutions earnings increased $1.3 million during the three
months ended November 30, 2012 compared with the three months ended November 30,
2011, which reflected increased loan volumes in our financial services business,
partially offset by decreased volumes in our hedging activities. Our share of
earnings from Ventura Foods, our packaged foods joint venture, net of allocated
expenses, increased by $3.0 million during the three months ended November 30,
2012, compared to the same period of the previous year, primarily from improved
margins. Our share of earnings from our wheat milling joint ventures, net of
allocated expenses, remained relatively flat for the three months ended
November 30, 2012 compared to the same period of the previous year.
Net Income attributable to CHS Inc. Consolidated net income attributable to CHS
Inc. for the three months ended November 30, 2012 was $343.7 million compared to
$416.2 million for the three months ended November 30, 2011, which represents a
$72.5 million (17%) decrease.
Revenues. Consolidated revenues were $11.7 billion for the three months ended
November 30, 2012 compared to $9.7 billion for the three months ended
November 30, 2011, which represents a $2.0 billion (20%) increase.
Our Energy segment revenues, after elimination of intersegment revenues, of $3.2
billion decreased by $76.2 million (2%) during the three months ended
November 30, 2012 compared to the three months ended November 30, 2011. During
the three months ended November 30, 2012 and 2011, our Energy segment recorded
revenues from sales to our Ag segment of $133.6 million and $130.1 million,
respectively, which are eliminated as part of the consolidation process. The net
decrease of $76.2 million is comprised of a net decrease of $40.3 million
related to lower prices and $35.9 million related to lower sales volumes.
Refined fuels revenues increased $12.7 million (1%), of which $12.9 million was
related to a net average selling price increase, partially offset by $0.1
million related to lower volumes, compared to the same period of the previous
year. The sales price of refined fuels increased $0.02 per gallon, while volumes
remained relatively flat. Propane revenues decreased $67.8 million (27%), which
included $77.9 million related to a decrease in the net average selling price,
partially offset by $10.1 million from a 4% increase in volumes, when compared
to the same period of the previous year. The average selling price of propane
decreased $0.46 per gallon (30%), when compared to the same period of the
previous year. Renewable fuels marketing revenues decreased $27.2 million (7%),
primarily from a decrease in the average selling price of $0.34 per gallon
(12%), partially offset by a 6% increase in volumes, when compared with the same
period of the previous year.
Our Ag segment revenues, after elimination of intersegment revenues, of $8.5
billion increased $2.1 billion (32%) during the three months ended November 30,
2012 compared to the three months ended November 30, 2011.
Grain revenues in our Ag segment totaled $6.5 billion and $4.7 billion during
the three months ended November 30, 2012 and 2011, respectively. Of the grain
revenues increase of $1.8 billion (38%), $1.2 billion is due to increased
average grain selling prices and $557.6 million is due to a 12% net increase in
volumes, during the three months ended November 30, 2012 compared to the same
period of the previous year. The average sales price of all grain and oilseed
commodities sold reflected an increase of $2.09 per bushel (23%) over the three
months ended November 30, 2011. Corn and soybeans had increased volumes, while
wheat had decreased volumes compared to the three months ended November 30,
2011.
Our processing and food ingredients revenues in our Ag segment of $480.6 million
increased $131.8 million (38%) during the three months ended November 30, 2012
compared to the three months ended November 30, 2011. The net increase in
revenues is comprised of $73.9 million from an increase in the average selling
price of our oilseed products and a net increase of $58.0 million related to
increased volumes, including volumes from recent acquisitions, as compared to
the three months ended November 30, 2011. Typically, changes in average selling
prices of oilseed products are primarily driven by the average market prices of
soybeans.
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Wholesale crop nutrient revenues in our Ag segment totaled $756.4 million and
$662.7 million during the three months ended November 30, 2012 and 2011,
respectively. Of the wholesale crop nutrient revenues increase of $93.8 million
(14%), $0.5 million was related to increased average fertilizer selling prices
and $93.2 million was due to increased volumes during the three months ended
November 30, 2012 compared to the same period of the previous year. The average
sales price of all fertilizers sold was relatively flat, which reflected an
increase of $0.37 per ton compared to the same period of the previous year. Our
wholesale crop nutrient volumes increased 16% during the three months ended
November 30, 2012 compared with the three months ended November 30, 2011.
Our Ag segment other product revenues, primarily feed and farm supplies, of
$747.6 million increased by $78.3 million (12%) during the three months ended
November 30, 2012 compared to the three months ended November 30, 2011,
primarily the result of increased revenues in our country operations sales of
retail crop nutrients, feed, crop protection and energy products, which includes
additional volumes from acquisitions. Other revenues within our Ag segment of
$59.2 million during the three months ended November 30, 2012 remained
relatively flat compared to the same period of the previous year.
Total revenues also include other revenues generated primarily within our Ag
segment and Corporate and Other. Our Ag segment's country operations elevators
and agri-service centers derive other revenues from activities related to
production agriculture, which include grain storage, grain cleaning, fertilizer
spreading, crop protection spraying and other services of this nature, and our
grain marketing operations receive other revenues at our export terminals from
activities related to loading vessels. Corporate and Other derives revenues
primarily from our financing, hedging and insurance operations.
Cost of Goods Sold. Consolidated cost of goods sold was $11.2 billion for the
three months ended November 30, 2012 compared to $9.1 billion for the three
months ended November 30, 2011, which represents a $2.1 billion (23%) increase.
Our Energy segment cost of goods sold, after elimination of intersegment costs,
of $2.9 billion increased by $22.2 million (1%) during the three months ended
November 30, 2012 compared to the three months ended November 30, 2011. The
increase in cost of goods sold is primarily due to an increase in the cost of
goods sold for refined fuels products. Specifically, refined fuels cost of goods
sold increased $93.8 million (5%), which reflects an increase in the average
cost of refined fuels of $0.07 per gallon (2%) compared to the three months
ended November 30, 2011, while volumes remained relatively flat. On average, we
process approximately 55,000 barrels of crude oil per day at our Laurel, Montana
refinery and 85,000 barrels of crude oil per day at NCRA's McPherson, Kansas
refinery. The aggregate average per unit cost of crude oil purchased for the two
refineries increased 6% compared to the three months ended November 30, 2011,
which is reflected in the $0.07 per gallon increase in average cost of refined
fuels. The increase in refined fuels cost of goods sold included a net loss on
the mark-to-market of our refinery margin hedges of $42.3 million, compared to a
net gain of $113.0 million in the same period of the previous fiscal year, and
an increase in the contingent crack spread liability related to our purchase of
the noncontrolling interests of NCRA of $43.1 million. The cost of propane
decreased $69.1 million, which was reflected by an average cost decrease of
$0.46 per gallon (31%), partially offset by a 4% increase in volumes, when
compared to the three months ended November 30, 2011. Renewable fuels marketing
costs decreased $29.9 million (8%), primarily from a decrease in the average
cost of $0.36 per gallon (13%), partially offset by a 6% increase in volumes,
when compared with the same period of the previous year.
Our Ag segment cost of goods sold, after elimination of intersegment costs, of
$8.3 billion increased $2.0 billion (33%) during the three months ended
November 30, 2012 compared to the three months ended November 30, 2011. Grain
cost of goods sold in our Ag segment totaled $6.3 billion and $4.6 billion
during the three months ended November 30, 2012 and 2011, respectively. The cost
of grains and oilseed procured through our Ag segment increased $1.7 billion
(37%) compared to the three months ended November 30, 2011. This is primarily
the result of a $1.98 (22%) increase in the average cost per bushel, and a 12%
net increase in bushels sold, as compared to the same period of the previous
year. The average month-end market price per bushel of soybeans, corn and spring
wheat increased compared to the same period of the previous year.
Our processing and food ingredients cost of goods sold in our Ag segment of
$466.1 million increased $122.0 million (35%) during the three months ended
November 30, 2012 compared to the three months ended November 30, 2011, which
was primarily due to increases in the cost of soybeans purchased and higher
volumes of oilseed refined products sold, which includes volumes from recent
acquisitions.
Wholesale crop nutrients cost of goods sold in our Ag segment totaled $726.3
million and $631.4 million during the three months ended November 30, 2012 and
2011 respectively. The net increase of $95.0 million (15%) is comprised of a net
increase in tons sold of 16%, partially offset by a decrease in the average cost
per ton of fertilizer of $5 (1%), primarily relating to lower of cost or market
adjustments, when compared to the same period of the previous year.
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Our Ag segment other product cost of goods sold, primarily feed and farm
supplies, increased $65.2 million (12%) during the three months ended
November 30, 2012 compared to the three months ended November 30, 2011,
primarily the result of increased revenues in our country operations sales of
retail crop nutrients, feed, crop protection and energy products, and includes
additional volumes from acquisitions.
Marketing, General and Administrative. Marketing, general and administrative
expenses of $124.5 million for the three months ended November 30, 2012
increased by $12.0 million (11%) compared to the three months ended November 30,
2011. This net increase is primarily due to the expansion of foreign operations
and acquisitions in our Ag segment.
Interest, net. Net interest of $67.2 million for the three months ended
November 30, 2012 increased $46.4 million compared to the three months ended
November 30, 2011. Interest expense for the three months ended November 30, 2012
and 2011 was $71.1 million and $23.3 million, respectively. The increase in
interest expense of $47.8 million is primarily due to interest accretion of $1.6
million related to the purchase of the NCRA noncontrolling interests and $45.0
million of patronage earned by the noncontrolling interests of NCRA. The
increase in interest expense was also partially due to increased short-term
borrowings during the three months ended November 30, 2012 compared to the same
period of the previous year. The average level of short-term borrowings
increased $64.5 million during the year ended November 30, 2012 compared to the
same period of the previous year, of which $43.7 million related to CHS Capital
activity. For the three months ended November 30, 2012 and 2011, we capitalized
interest of $2.9 million and $1.8 million, respectively, primarily related to
construction projects at both refineries in our Energy segment. Interest income
was $1.0 million and $0.7 million for the three months ended November 30, 2012
and 2011, respectively.
Equity Income from Investments. Equity income from investments of $28.1 million
for the three months ended November 30, 2012 increased $3.9 million (16%)
compared to the three months ended November 30, 2011. We record equity income or
loss primarily from the investments in which we have an ownership interest of
50% or less and have significant influence, but not control, for our
proportionate share of income or loss reported by the entity, without
consolidating the revenues and expenses of the entity in our Consolidated
Statements of Operations. The net increase in equity income from investments was
attributable to increased earnings from investments in our Ag segment and
Corporate and Other of $0.8 million and $3.2 million, respectively, while
earnings from investments in our Energy segment remained relatively flat when
compared to the same period of the previous year.
Our Ag segment generated increased equity investment earnings of $0.8 million.
Our country operations business reported an aggregate increase in equity
investment earnings of $2.4 million from several small equity investments.
We had a net decrease of $1.5 million from our share of equity investment
earnings in our grain marketing joint ventures during the three months ended
November 30, 2012 compared to the same period of the previous year.
Corporate and Other generated increased equity investment earnings of $3.2
million, primarily from Ventura Foods, our vegetable oil-based products and
packaged foods joint venture, which increased $2.8 million compared to the three
months ended November 30, 2011, as well as our wheat milling joint venture
earnings, which also increased by $0.3 million compared to the three months
ended November 30, 2011.
Income Taxes. Income tax expense of $36.0 million for the three months ended
November 30, 2012, compared with $42.0 million for the three months ended
November 30, 2011, resulting in effective tax rates of 9.4% and 7.9%,
respectively. The federal and state statutory rate applied to nonpatronage
business activity was 38.1% and 38.9% for the three months ended November 30,
2012 and 2011, respectively. The income taxes and effective tax rate vary each
year based upon profitability and nonpatronage business activity during each of
the comparable years.
Noncontrolling interests. Net income from noncontrolling interests of $2.2
million for the three months ended November 30, 2012 decreased by $70.5 million
(97%) compared to the three months ended November 30, 2011. Beginning in the
second quarter of fiscal 2012, earnings from NCRA are no longer attributable to
the noncontrolling interests, and patronage earned by the noncontrolling
interests of NCRA after November 29, 2011 are included as interest, net in our
Consolidated Statements of Operations.
Liquidity and Capital Resources
On November 30, 2012, we had working capital, defined as current assets less
current liabilities, of $2,961.0 million and a current ratio, defined as current
assets divided by current liabilities, of 1.4 to 1.0 compared to working capital
of $2,848.5 million and a current ratio of 1.4 to 1.0 on August 31, 2012. On
November 30, 2011, we had working capital of $2,881.7 million and a current
ratio of 1.5 to 1.0, compared to working capital of $2,776.5 million and a
current ratio of 1.5 to 1.0 on August 31, 2011.
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On November 30, 2012, August 31, 2012 and November 30, 2011, we had two primary
committed lines of credit. We had a three-year revolving facility and a
five-year revolving facility, each with committed amounts of $1.25 billion, for
a total of $2.5 billion, which had no amounts outstanding as of November 30,
2012, August 31, 2012 and November 30, 2011. The major financial covenants for
both revolving facilities require us to maintain a minimum consolidated net
worth, adjusted as defined in the credit agreements, of $2.5 billion and a
consolidated funded debt to consolidated cash flow ratio of no greater than 3.00
to 1.00. The term consolidated cash flow is principally our earnings before
interest, taxes, depreciation and amortization (EBITDA) with adjustments as
defined in the credit agreements. A third financial ratio does not allow our
adjusted consolidated funded debt to adjusted consolidated equity to exceed 0.80
to 1.00 at any time. As of November 30, 2012, we were in compliance with all
covenants. Our credit facilities are established with a syndication of domestic
and international banks, and our inventories and receivables financed with them
are highly liquid. With our current cash balances and our available capacity on
our committed lines of credit, we believe that we have adequate liquidity to
cover any increase in net operating assets and liabilities and expected
maintenance capital expenditures.
In addition, our wholly-owned subsidiary, CHS Capital, makes seasonal and term
loans to member cooperatives, businesses and individual producers of
agricultural products included in our cash flows from investing activities, and
has its own financing explained in further detail below under "Cash Flows from
Financing Activities."
Cash Flows from Operations
Cash flows from operations are generally affected by commodity prices and the
seasonality of our businesses. These commodity prices are affected by a wide
range of factors beyond our control, including weather, crop conditions,
drought, the availability and the adequacy of supply and transportation,
government regulations and policies, world events, and general political and
economic conditions. These factors are described in the cautionary statements
and may affect net operating assets and liabilities, and liquidity.
Our cash flows provided by operating activities were $1,086.4 million and
$1,157.5 million for the three months ended November 30, 2012 and November 30,
2011, respectively. Cash flows were similar when comparing the two periods
primarily from significant increases in cash inflows for net changes in
operating assets and liabilities during the three months ended November 30, 2012
and 2011. Commodity prices decreased during the three months ended November 30,
2012 and 2011, and resulted in decreased working capital needs compared to
August 31, 2012 and 2011, respectively.
Our operating activities provided net cash of $1,086.4 million during the three
months ended November 30, 2012. Net income including noncontrolling interests of
$345.9 million, net non-cash expenses and cash distributions from equity
investments of $110.0 million and a decrease in net operating assets and
liabilities of $630.5 million provided the net cash from operating activities.
The primary components of net non-cash expenses and cash distributions from
equity investments included depreciation and amortization, including
amortization of major repair costs, of $64.9 million and the loss on the crack
spread contingent liability of $43.1 million. The decrease in net operating
assets and liabilities was caused primarily by a decrease in commodity prices
resulting in a decrease in margin deposits and an increase in accounts payable,
partially offset by a decrease in customer margin deposits and an increase in
inventory quantities on November 30, 2012, when compared to August 31, 2012. On
November 30, 2012, the per bushel market prices of two of our primary grain
commodities, corn and soybeans, decreased by $0.50 (6%) and $3.26 (18%),
respectively; while the per bushel market price of our third primary commodity,
spring wheat, was relatively flat when compared to the spot prices on August 31,
2012. In general, crude oil market prices decreased $8 per barrel (8%) on
November 30, 2012 when compared to August 31, 2012. On November 30, 2012,
fertilizer commodity prices affecting our wholesale crop nutrients and country
operations retail businesses reflected decreases between 1% and 11%, depending
on the specific products, with the exception of ammonia prices which increased
5% compared to prices on August 31, 2012. An increase in grain inventory
quantities in our Ag segment of 30.5 million bushels (21%) partially offset the
decreases in net operating assets and liabilities when comparing inventories at
November 30, 2012 to August 31, 2012.
Our operating activities provided net cash of $1,157.5 million during the three
months ended November 30, 2011. Net income including noncontrolling interests of
$488.9 million, net non-cash expenses and cash distributions from equity
investments of $76.4 million and a decrease in net operating assets and
liabilities of $592.1 million provided the net cash from operating activities.
The primary components of adjustments to reconcile net income to net cash
provided by operating activities included depreciation and amortization, and
amortization of deferred major repair costs, of $59.5 million, and redemptions
from equity investments, net of income from those investments, of $16.8 million.
The decrease in net operating assets and liabilities was caused primarily by a
decrease in commodity prices resulting in a decrease in margin deposits,
partially offset by a decrease in customer margin deposits and an increase in
inventory quantities on November 30, 2011, when
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compared to August 31, 2011. On November 30, 2011, the per bushel market prices
of our three primary grain commodities decreased as follows: corn $1.56 (21%),
soybeans $3.18 (22%) and spring wheat $1.31 (14%) when compared to market prices
on August 31, 2011. In general, crude oil market prices increased $12 (13%) per
barrel on November 30, 2011 compared to August 31, 2011. On November 30, 2011,
fertilizer commodity prices affecting our wholesale crop nutrients and country
operations retail businesses generally remained flat or decreased up to 5%,
depending on the specific products, compared to prices on August 31, 2011. An
increase in grain inventory quantities in our Ag Business segment of 17.6
million bushels (14%) partially offset the decreases in net operating assets and
liabilities when comparing inventories at November 30, 2011 to August 31, 2011.
We expect our net operating assets and liabilities to increase through our
second quarter of fiscal 2013, resulting in increased cash needs. Our second
quarter has typically been the period of our highest short-term borrowings. We
expect to increase crop nutrient and crop protection product inventories and
prepayments to suppliers of these products in our wholesale crop nutrients and
country operations businesses during our second quarter of fiscal 2013. At the
same time, we expect this increase in net operating assets and liabilities to be
partially offset by the collection of prepayments from our customers for these
products. Prepayments are frequently used for agronomy products to assure supply
and at times to guarantee prices. In addition, during our second fiscal quarter
of 2013, we will make payments on deferred payment contracts for those producers
that sold grain to us during prior quarters and requested payment after the end
of the calendar year. We believe that we have adequate capacity through our
current cash balances and committed credit facilities to meet any likely
increase in net operating assets and liabilities.
Cash Flows from Investing Activities
For the three months ended November 30, 2012 and 2011, the net cash flows used
in our investing activities totaled, $230.8 million and $116.6 million,
respectively.
The acquisition of property, plant and equipment comprised the primary use of
cash totaling $138.1 million and $98.9 million for the three months ended
November 30, 2012 and 2011, respectively.
Expenditures for major repairs related to our refinery turnarounds were $3.9
million and $16.6 million during the three months ended November 30, 2012 and
2011, respectively. Refineries have planned major maintenance to overhaul,
repair, inspect and replace process materials and equipment which typically
occur for a five-to-six week period every 2-4 years. Our Laurel, Montana
refinery completed a turnaround during the three months ended November 30, 2011
and has a scheduled turnaround for maintenance for the spring of 2013. We
estimate total expenditures related to this turnaround to be approximately $50.0
million.
For the year ending August 31, 2013, we expect total expenditures for the
acquisition of property, plant and equipment and major repairs at our refineries
to be approximately $750.0 million. Included in our expected capital
expenditures for fiscal 2013, is $164.0 million for a project to replace a coker
at one of our refineries with an expected total cost of $555.0 million and
expected completion in fiscal 2015. We incurred $60.4 million of costs related
to the coker project in fiscal 2012 and $28.5 million in the first quarter of
fiscal 2013.
Cash acquisitions of businesses, net of cash acquired, totaled $8.1 million and
$32.3 million during the three months ended November 30, 2012 and 2011,
respectively. During the three months ended November 30, 2011, we acquired a
crushing facility in Creston, Iowa, which is included in our Ag segment.
Investments made in joint ventures and other investments during the three months
ended November 30, 2012 and 2011, totaled $7.7 million and $3.2 million,
respectively.
Changes in notes receivable during the three months ended November 30, 2012
resulted in a net decrease in cash flows of $74.2 million compared to a net
increase of $31.5 million during the three months ended November 30, 2011. The
primary cause of the decrease in cash flows during fiscal 2013 was an increase
in CHS Capital notes receivable on November 30, 2012 compared to August 31, 2012
of $53.4 million. During fiscal 2012, the primary cause of the increase in cash
flows was a decrease in CHS Capital notes receivable on November 30, 2011
compared to August 31, 2011 of $68.0 million.
Cash Flows from Financing Activities
For the three months ended November 30, 2012 and 2011, the net cash flows used
in our financing activities totaled $10.1 million and $178.3 million,
respectively.
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Working Capital Financing:
We finance our working capital needs through short-term lines of credit with a
syndication of domestic and international banks. On November 30, 2012 and 2011,
we had two primary committed lines of credit. We had a three-year revolving
facility and a five-year revolving facility, each with committed amounts of
$1.25 billion, for a total of $2.5 billion. In addition to our primary revolving
lines of credit, we have a committed revolving credit facility dedicated to
NCRA, with a syndication of banks in the amount of $15.0 million. In December
2011, the line of credit dedicated to NCRA was renewed and expires in December
2014. We also have a three-year, $40.0 million committed revolving facility,
with the right to increase the capacity to $120.0 million that expires in
November 2013. Our wholly-owned subsidiaries, CHS Europe S.A. and CHS
Agronegocio Industria e Comercio Ltda., have uncommitted lines of credit which
are collateralized by $208.1 million of inventories and receivables at November
30, 2012. In addition, other international subsidiaries have lines of credit
totaling $45.4 million outstanding at November 30, 2012, of which $18.0 million
is collateralized. On November 30, 2012, August 31, 2012 and November 30, 2011,
we had total short-term indebtedness outstanding on these various facilities and
other miscellaneous short-term notes payable totaling $275.0, $269.8 million and
$124.5 million.
We have two commercial paper programs totaling up to $125.0 million, with two
banks participating in our revolving credit facilities. Terms of our credit
facilities allow a maximum usage of $200.0 million to pay principal under any
commercial paper facility. On November 30, 2012, August 31, 2012 and November
30, 2011, we had no commercial paper outstanding.
CHS Capital Financing:
Cofina Funding, LLC (Cofina Funding), a wholly-owned subsidiary of CHS Capital,
has commitments totaling $300.0 million as of November 30, 2012, under note
purchase agreements with various purchasers, through the issuance of short-term
notes payable. CHS Capital sells eligible commercial loans receivable it has
originated to Cofina Funding, which are then pledged as collateral under the
note purchase agreements. The notes payable issued by Cofina Funding bear
interest at variable rates based on commercial paper with a weighted average
rate of 1.21% as of November 30, 2012. Borrowings by Cofina Funding utilizing
the issuance of commercial paper under the note purchase agreements totaled
$121.5 million as of November 30, 2012.
CHS Capital has available credit under master participation agreements with
numerous counterparties. Borrowings under these agreements are accounted for as
secured borrowings and bear interest at variable rates ranging from 2.03% to
2.96% as of November 30, 2012. As of November 30, 2012, the total funding
commitment under these agreements was $257.4 million, of which $100.4 million
was borrowed.
CHS Capital sells loan commitments it has originated to ProPartners Financial
(ProPartners) on a recourse basis. The total capacity for commitments under the
ProPartners program is $300.0 million. The total outstanding commitments under
the program totaled $224.7 million as of November 30, 2012, of which $128.7
million was borrowed under these commitments with an interest rate of 1.67%.
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 0.80% to 1.10% as of November 30, 2012, and are due
upon demand. Borrowings under these notes totaled $251.3 million as of November
30, 2012.
Long-term Debt Financing:
We typically finance our long-term capital needs, primarily for the acquisition
of property, plant and equipment, with long-term agreements with various
insurance companies and banks.
On November 30, 2012, we had total long-term debt outstanding of $1,393.9
million, of which $150.0 million was bank financing, $1,183.6 million was
private placement debt and $60.3 million was other notes and contracts payable.
The aggregate amount of long-term debt payable presented in the Management's
Discussion and Analysis in our Annual Report on Form 10-K for the year ended
August 31, 2012, has not changed significantly during the three months ended
November 30, 2012. On August 31, 2012 and November 30, 2011, we had total
long-term debt outstanding of $1,440.4 million and $1,475.7 million,
respectively. Our long-term debt is unsecured except for other notes and
contracts in the amount of $26.2 million; however, restrictive covenants under
various agreements have requirements for maintenance of minimum consolidated net
worth and other financial ratios. We were in compliance with all debt covenants
and restrictions as of November 30, 2012.
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We did not have any new long-term borrowings during the three months ended
November 30, 2012 and 2011. During the three months ended November 30, 2012 and
2011, we repaid long-term debt of $46.5 million and $39.2 million,
respectively.
Other Financing:
During the three months ended November 30, 2012, pursuant to our agreement to
acquire the remaining shares of NCRA, we made the first payments for the
mandatorily redeemable noncontrolling interests to Growmark and MFA in the
amounts of $48.0 million and $18.0 million, respectively; increasing our
ownership to 79.2%.
Changes in checks and drafts outstanding resulted in an increase in cash flows
of $36.5 million during the three months ended November 30, 2012, and a decrease
in cash flows of $41.6 million during the three months ended November 30, 2011.
In accordance with the bylaws and by action of the Board of Directors, annual
net earnings from patronage sources are distributed to consenting patrons
following the close of each fiscal year. Patronage refunds are calculated based
on amounts using financial statement earnings. The cash portion of the patronage
distribution is determined annually by the Board of Directors, with the balance
issued in the form of capital equity certificates. Consenting patrons have
agreed to take both the cash and capital equity certificate portion allocated to
them from our previous fiscal year's income into their taxable income, and as a
result, we are allowed a deduction from our taxable income for both the cash
distribution and the allocated capital equity certificates, as long as the cash
distribution is at least 20% of the total patronage distribution. Distributable
patronage earnings from the fiscal year ended August 31, 2012, are expected to
be distributed during the three months ended February 28,
2013. The cash portion of this distribution, deemed by the Board of Directors to
be 35% for individual members and 40% for nonindividual members, is expected to
be approximately $378.7 million and is classified as a current liability on our
November 30, 2012 and August 31, 2012 Consolidated Balance Sheets in dividends
and equities payable.
Redemptions of capital equity certificates approved by the Board of Directors
are divided into two pools, one for non-individuals (primarily member
cooperatives) who may participate in an annual retirement program for equities
held by them and another for individuals who are eligible for equity redemptions
at age 70 or upon death. In accordance with authorization from the Board of
Directors, we expect total redemptions related to the year ended August 31,
2012, that will be distributed in fiscal 2013, to be approximately $196.0
million, of which $2.4 million was redeemed in cash during the three months
ended November 30, 2012, compared to $2.4 million distributed in cash during the
three months ended November 30, 2011.
Our 8% Cumulative Redeemable Preferred Stock (Preferred Stock) is listed on the
NASDAQ Stock Market LLC under the symbol CHSCP. On November 30, 2012, we had
12,272,003 shares of Preferred Stock outstanding with a total redemption value
of approximately $306.8 million, excluding accumulated dividends. Our Preferred
Stock accumulates dividends at a rate of 8% per year, which are payable
quarterly. Dividends paid on our Preferred Stock during the three months ended
November 30, 2012 and 2011, were $6.1 million and $6.1 million, respectively.
Our Preferred Stock is redeemable at our option. At this time, we have no
current plan or intent to redeem any Preferred Stock.
Off Balance Sheet Financing Arrangements
Lease Commitments:
Our lease commitments presented in Management's Discussion and Analysis in our
Annual Report on Form 10-K for the year ended August 31, 2012, have not
materially changed during the three months ended November 30, 2012.
Guarantees:
We are a guarantor for lines of credit and performance obligations of related
companies. As of November 30, 2012, our bank covenants allowed maximum
guarantees of $500.0 million, of which $71.3 million was outstanding. We have
collateral for a portion of these contingent obligations. We have not recorded a
liability related to the contingent obligations as we do not expect to pay out
any cash related to them, and the fair values are considered immaterial. The
underlying loans to the counterparties for which we provide guarantees are
current as of November 30, 2012.
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Debt:
There is no material off balance sheet debt.
Contractual Obligations
Our contractual obligations presented in Management's Discussion and Analysis in
our Annual Report on Form 10-K for the year ended August 31, 2012, have not
materially changed during the three months ended November 30, 2012.
Critical Accounting Policies
Our critical accounting policies presented in Management's Discussion and
Analysis in our Annual Report on Form 10-K for the year ended August 31, 2012,
have not materially changed during the three months ended November 30, 2012.
Effect of Inflation and Foreign Currency Transactions
We believe that inflation and foreign currency fluctuations have not had a
significant effect on our operations since we conduct a significant portion of
our business in U.S. dollars.
Recent Accounting Pronouncements
In September 2011, the FASB issued ASU No. 2011-08, "Intangibles - Goodwill and
Other (Topic 350) - Testing Goodwill for Impairment." ASU No. 2011-08 allows
entities to use a qualitative approach to test goodwill for impairment. It
permits an entity to first perform a qualitative assessment to determine whether
it is more likely than not that the fair value of a reporting unit is less than
its carrying value. If it is concluded that this is the case, it is necessary to
perform the currently prescribed two-step goodwill impairment test. Otherwise,
the two-step goodwill impairment test is not required. This guidance became
effective for us during the three months ended November 30, 2012. The adoption
of this guidance did not have a material impact on our consolidated financial
statements.
In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting
Assets and Liabilities." ASU No. 2011-11 creates new disclosure requirements
about the nature of an entity's rights of setoff and related arrangements
associated with its financial instruments and derivative instruments. The
disclosure requirements in this update are effective for annual reporting
periods, and interim periods within those years, beginning on or after January
1, 2013. We are currently evaluating the impact that the adoption will have on
our consolidated financial statements in fiscal 2014.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
SECURITIES LITIGATION REFORM ACT
Any statements contained in this report regarding the outlook for our businesses
and their respective markets, such as projections of future performance,
statements of our plans and objectives, forecasts of market trends and other
matters, are forward-looking statements based on our assumptions and beliefs.
Such statements may be identified by such words or phrases as "will likely
result," "are expected to," "will continue," "outlook," "will benefit," "is
anticipated," "estimate," "project," "management believes" or similar
expressions. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
discussed in such statements and no assurance can be given that the results in
any forward-looking statement will be achieved. For these statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. Any forward-looking
statement speaks only as of the date on which it is made, and we disclaim any
obligation to subsequently revise any forward-looking statement to reflect
events or circumstances after such date or to reflect the occurrence of
anticipated or unanticipated events.
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Certain factors could cause our future results to differ materially from those
expressed or implied in any forward-looking statements contained in this report.
These factors include the factors discussed in Item 1A of our Annual Report on
Form 10-K for the fiscal year ended August 31, 2012 under the caption "Risk
Factors," the factors discussed below and any other cautionary statements,
written or oral, which may be made or referred to in connection with any such
forward-looking statements. Since it is not possible to foresee all such
factors, these factors should not be considered as complete or exhaustive.
• Our revenues and operating results could be adversely affected by
changes in commodity prices.
• Our operating results could be adversely affected if our members were
to do business with others rather than with us.
• We participate in highly competitive business markets in which we may
not be able to continue to compete successfully.
• Changes in federal income tax laws or in our tax status could increase
our tax liability and reduce our net income.
• We incur significant costs in complying with applicable laws and
regulations. Any failure to make the capital investments necessary to
comply with these laws and regulations could expose us to financial
liability.
• Changing environmental and energy laws and regulation, including those
related to climate change and Green House Gas ("GHG") emissions, may
result in increased operating costs and capital expenditures and may
have an adverse effect on our business operations.
• Government policies and regulation affecting the agricultural sector
and related industries could adversely affect our operations and
profitability.
• Environmental liabilities could adversely affect our results and
financial condition.
• Actual or perceived quality, safety or health risks associated with
our products could subject us to liability and damage our business and
reputation.
• Our operations are subject to business interruptions and casualty
losses; we do not insure against all potential losses and could be
seriously harmed by unexpected liabilities.
• Our cooperative structure limits our ability to access equity capital.
• Consolidation among the producers of products we purchase and
customers for products we sell could adversely affect our revenues and
operating results.
• If our customers choose alternatives to our refined petroleum products
our revenues and profits may decline.
• Operating results from our agronomy business could be volatile and are
dependent upon certain factors outside of our control.
• Technological improvements in agriculture could decrease the demand
for our agronomy and energy products.
• We operate some of our business through joint ventures in which our
rights to control business decisions are limited.
