CHS INC 10-K

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 our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections: • Overview • Business Strategy • Fiscal 2021 Highlights • Fiscal 2022 Outlook • Operating Metrics • Results of Operations • Liquidity and Capital Resources • Critical Accounting Policies • Recent Accounting Pronouncements Our MD&A should be read in conjunction with the accompanying audited financial statements and notes to those financial statements and the Cautionary Statement regarding forward-looking statements found in Part I, Item 1A of this Annual Report on Form 10-K. Overview CHS Inc. is a diversified company that provides grain, food, agronomy and energy resources to businesses and consumers on a global scale. As a cooperative, we are owned by farmers, ranchers and member cooperatives across the United States. We also have preferred shareholders that own our five series of preferred stock, all of which are listed and traded on the Global Select Market of The Nasdaq Stock Market LLC. We operate in the following four 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. Produces and distributes nitrogen fertilizer. Consists of our equity method investment in CF Industries Nitrogen, LLC ("CF Nitrogen"), and allocated expenses. • Foods . Produces edible oils used in food preparation and packaged food products. Consists of our equity method investment in Ventura Foods, LLC ("Ventura Foods"), and allocated expenses. In addition, our financing and hedging businesses, along with our nonconsolidated wheat milling joint venture, 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 reportable segment, and Corporate and Other, based on direct use of services, such as information technology and legal, and other factors or considerations relevant to the costs incurred. Management's Focus . When evaluating our operating performance, management focuses on gross profit and income before income taxes ("IBIT"). As a company that operates heavily in global commodities, there is significant unpredictability and volatility in pricing, costs and global trade volumes. Consequently, we focus on managing the margin we can earn and the resulting IBIT. Management also focuses on ensuring balance sheet strength through appropriate management of financial liquidity, leverage, capital allocation and cash flow optimization. Seasonality . Many of our business activities are highly seasonal and our operating results vary throughout the year. Our revenues generally trend lower during the second and fourth fiscal quarters and higher during the first and third fiscal quarters; however, our IBIT does not necessarily follow the same trend due to weather and other events that can impact profitability. For example, in our Ag segment, our country operations business generally experiences higher volumes and revenues during the fall harvest and spring planting seasons, which generally correspond to our first and third fiscal quarters, respectively. Additionally, our agronomy business generally experiences higher volumes and revenues during the spring 25 Table of Contents planting season. Our global grain and processing operations are subject to fluctuations in volume and revenues based on producer harvests, world grain prices, demand and international trade relationships. Our Energy segment generally experiences higher volumes and revenues in certain operating areas, such as refined products, in the spring, summer and early fall when gasoline and diesel fuel use by agricultural producers is highest and is subject to global supply and demand forces. Other energy products, such as propane, generally experience higher volumes and revenues during the winter heating and fall crop-drying seasons. The graphs below depict the seasonality inherent in our businesses. * The COVID-19 pandemic started during the second quarter of fiscal 2020. Pricing and Volumes . Our revenues, assets and cash flows can be significantly affected by global market prices and sales volumes of commodities such as petroleum products, natural gas, 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 networks, outbreaks of disease, government regulations and policies, global trade disputes and general political and/or economic conditions. Business Strategy Our business strategies focus on an enterprisewide effort to create an experience that empowers customers to make CHS their first choice, expand market access to add value for our owners, and transform and evolve our core businesses by capitalizing on changing market dynamics. To execute 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- 26 Table of Contents performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet. Fiscal 2021 Highlights • Strong global demand drove commodity prices higher, and a full year of improved trade relations between the United States and foreign trade partners led to continued higher volumes for grain and oilseed, which significantly improved earnings in our Ag segment compared to the prior year. • Unfavorable market conditions in our refined fuels business, driven primarily by exceptionally high costs for renewable energy credits and less favorable pricing on heavy Canadian crude oil processed by our refineries, resulted in lower earnings in our Energy segment. • Lower earnings in our Energy segment were partially offset by improved crack spreads that drove increased margins in our refined fuels business as demand shocks associated with the COVID-19 pandemic began to subside. • Equity earnings from investments, particularly from CF Nitrogen and Ventura Foods, were a significant source of earnings during fiscal 2021. • Although a significant portion of our global employees continued with remote working arrangements throughout fiscal 2021, we began planning for our employees to return to our offices in either full or hybrid capacities when it is appropriate taking into account COVID-19 restrictions and precautions. The costs of these activities were not material during fiscal 2021. Fiscal 2022 Outlook Our Energy and Ag segments operate in cyclical environments in which unforeseen market conditions can have significant positive or negative impacts. For example, we expect there to be continued uncertainty during fiscal 2022 that could have significant positive or negative impacts on our results as we continue to navigate the lingering effects of the COVID-19 pandemic. Most of our operations are considered to be essential; however, periods of depressed demand and margins could result in decreased profitability and the need to assess for potential impairments. Easing of measures taken to mitigate the spread of COVID-19, the rollout of vaccines and other efforts to respond to the pandemic in the United States and globally could also impact the profitability of our businesses. Refer to Item 1A of this Annual Report on Form 10-K for additional considerations of risks the COVID-19 pandemic may continue to have on our business, liquidity, capital resources and financial results. Although improving from the lows experienced during the prior fiscal year, the energy industry continues to experience volume and margin reductions compared to historical levels. These reductions are primarily the result of the COVID-19 pandemic, which began in our second quarter of fiscal 2020 and significantly reduced our profitability. In addition, the cost of renewable energy credits remains significantly higher than historical levels, which we expect will negatively impact our profitability during fiscal 2022. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts; however, we expect continued uncertainty and volatility in the energy industry that could negatively impact our profitability during fiscal 2022. The U.S. agricultural industry experienced increased demand for grain and oilseed commodities during fiscal 2021 following the Phase One trade agreement with China, which resulted in increased volumes and improved commodity prices; however, unforeseen global market conditions can positively or negatively impact agricultural commodity prices and volumes sold. We are unable to predict these conditions or the severity of the impact such conditions could have on our pricing and volumes. In addition to global supply and demand impacts, regional factors such as unpredictable weather conditions, including those due to climate change, could impact our operations. For example, unfavorable weather events and conditions experienced in fiscal 2021, including the impacts of Hurricane Ida on our grain export terminal in Myrtle Grove, Louisiana, and drought conditions experienced in portions of our trade territory, are expected to negatively impact our revenues, margins and cash flows from core operations during fiscal 2022. As with others in our industry, we are seeing significantly higher freight costs that are the result of logistical challenges in the shipping industry, and we expect these challenges to continue into fiscal 2022. Additionally, unforeseen global market conditions with negative impacts remain a risk that could put pressure on asset valuations in our Ag segment. In addition to market conditions that impact our businesses, we will continue to take actions to protect our financial health during fiscal 2022, while continuing to deliver on our enterprise resource planning system implementation and advance our operating model. 27 Table of Contents Operating Metrics Energy 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, 2021 2020 Refinery throughput volumes (Barrels per day) Heavy, high-sulfur crude oil 96,175 92,298 All other crude oil 64,277 70,255 Other feedstocks and blendstocks 14,839 13,179 Total refinery throughput volumes 175,291 175,732 Refined fuel yields Gasolines 86,860 86,615 Distillates 68,720 71,410 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 ("EPA") generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year, although standards have not yet been established for calendar year 2021. We generate RINs through our blending activities, but we cannot generate enough RINs to meet the needs of our refining capacity and RINs must be purchased on the open market. The price of RINs can be volatile, with prices for D6 ethanol RINs and D4 ethanol RINs rising by 287% and 141%, respectively, during fiscal 2021 compared to the prior year, which negatively impacted our profitability during fiscal 2021. Estimates of our RIN obligations and expenses are based on the number of RINs we expect will be required by the EPA and are calculated using an average RIN price each month. Absent the annual renewable fuel percentage standard for calendar year 2021, we have assumed the annual renewable fuel percentage standard will be consistent with calendar year 2020. 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 increased during fiscal 2021, compared to the prior year, contributing to improved IBIT for the Energy segment. However, WCS crude oil differentials decreased during fiscal 2021, which partially offset the positive impact of improved crack spreads. The table below provides information about average market reference prices and differentials that impact our Energy segment: Years Ended August 31, 2021 2020 Market indicators WTI crude oil (dollars per barrel) $ 56.62 $ 44.45 WTI - WCS crude oil differential (dollars per barrel) $ 11.52 $ 14.31 Group 3 2:1:1 crack spread (dollars per barrel)* $ 14.95 $ 12.36 Group 3 5:3:2 crack spread (dollars per barrel)* $ 14.86 $ 11.60 D6 ethanol RIN (dollars per RIN) $ 1.1221 $ 0.2903 D4 ethanol RIN (dollars per RIN) $ 1.2856 $ 0.5344 *Group 3 refers to the oil refining and distribution system serving the Midwest markets from the Gulf Coast through the Plains states. 28 Table of Contents Ag Our Ag segment operations work together to facilitate production, purchase, sale and eventual use of grain and other agricultural commodities within the United States and internationally. Profitability in our Ag segment is largely driven by throughput and production volumes, as well as commodity price spreads; however, revenues and cost of goods sold ("COGS") are largely affected by market-driven commodity prices that are outside our control. The table below provides information about average market prices for agricultural commodities and our sales/throughput volumes that impacted our Ag segment for the years ended August 31, 2021 and 2020: Years Ended August 31, Market Source* 2021 2020 Commodity prices Corn (dollars per bushel) Chicago Board of Trade $5.45 $3.55 Soybeans (dollars per bushel) Chicago Board of Trade $13.37 $8.92 Wheat (dollars per bushel) Chicago Board of Trade $6.52 $5.32 Urea (dollars per ton) Green Markets NOLA $330.00 $226.00 Urea Ammonium Nitrate ("UAN") (dollars per ton) Green Markets NOLA $216.00 $137.60 Ethanol (dollars per gallon) Chicago Platts $1.86 $1.30 Volumes Grain and oilseed (thousands of bushels) 2,765,808 2,531,023 North American grain and oilseed port throughput (thousands of bushels) 867,880 564,563 Wholesale crop nutrients (thousands of tons) 8,088 7,561 Ethanol (thousands of gallons) 890,462 846,159 *Market source information represents the average month-end price during the period. 29 Table of Contents Results of Operations Consolidated Statements of Operations Years Ended August 31, 2021 2020 Dollars % of Revenues* Dollars % of Revenues* (In thousands) (In thousands) Revenues $ 38,448,033 100.0 % $ 28,406,365 100.0 % Cost of goods sold 37,496,634 97.5 27,424,558 96.5 Gross profit 951,399 2.5 981,807 3.5 Marketing, general and administrative expenses 745,602 1.9 704,542 2.5 Operating earnings 205,797 0.5 277,265 1.0 Interest expense 104,565 0.3 116,977 0.4 Other income (59,559) (0.2) (39,875) (0.1) Equity income from investments (354,529) (0.9) (186,715) (0.7) Income before income taxes 515,320 1.3 386,878 1.4 Income tax benefit (38,249) (0.1) (36,731) (0.1) Net income 553,569 1.4 423,609 1.5 Net (loss) income attributable to noncontrolling interests (383) — 1,170 — Net income attributable to CHS Inc. $ 553,952 1.4 % $ 422,439 1.5 % *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 2021. Our Nitrogen Production and Foods reportable segments represent equity method investments that record earnings and allocated expenses, but not revenues. 30 Table of Contents Income (Loss) Before Income Taxes by Segment Energy Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) (Loss) income before income taxes $ (10,596) $ 225,317 $ (235,913) (104.7) % The following waterfall analysis and commentary presents changes in our Energy segment IBIT for the year ended August 31, 2021, 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 2021 reflects the following: • Significantly higher RIN prices in our refined fuels business negatively impacted margins by approximately $236.0 million and decreased WCS crude oil differentials experienced on heavy Canadian crude oil processed by our refineries reduced margins by approximately $77.1 million. • Reduced margins in our refined fuels business were partially offset by improved crack spreads and the liquidation of historical last-in, first-out ("LIFO") layers for certain refined fuels inventories that resulted in improved margins of approximately $153.7 million and $35.3 million, respectively. • Lower propane margins primarily due to global market conditions and the reversal of hedging gains recognized during the prior year resulted in a margin decrease of approximately $56.1 million. • Reduced propane volumes resulting from warmer and drier weather conditions during fiscal 2021 contributed to a $15.8 million decrease of IBIT, which was partially offset by increased refined fuels volumes as the demand shocks experienced during the COVID-19 pandemic continued to subside. 31 Table of Contents Ag Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Income before income taxes $ 298,096 $ 53,724 $ 244,372 454.9 % The following waterfall analysis and commentary presents changes in our Ag segment IBIT for the year ended August 31, 2021, 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 Ag segment IBIT for fiscal 2021 reflects the following: • Favorable weather conditions for the fall harvest and spring planting seasons, a full year of improved trade relations between the United States and foreign trade partners and favorable market conditions for our processing business during fiscal 2021 compared to the prior year contributed to increased volumes and margins across most of our Ag segment. The improved margins were partially offset by lower grain and oilseed margins, including the impact of mark-to-market losses that are expected to reverse over time. • We experienced increased equity income from our investment in TEMCO, LLC ("TEMCO"), and gains on the sale of businesses during fiscal 2021 that did not occur during fiscal 2020. All Other Segments Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT* $ 121,035 $ 51,837 $ 69,198 133.5 % Foods IBIT* $ 67,902 $ 24,179 $ 43,723 180.8 % Corporate and Other IBIT $ 38,883 $ 31,821 $ 7,062 22.2 % *See Note 6, Investments, of the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional information. Our Nitrogen Production segment experienced increased IBIT due to increased equity method income attributed to higher sale prices of urea and UAN, which were partially offset by increased natural gas costs. Our Foods segment experienced increased IBIT as a result of favorable market conditions for edible oils and a recovery of sales volumes in fiscal 2021, compared with the early stages of the COVID-19 pandemic in fiscal 2020. Corporate and Other IBIT increased primarily due to increased income from our equity method investment in Ardent Mills, LLC, as a result of strong sales volumes and improved commodity margins in fiscal 2021, compared with the early stages of the COVID-19 pandemic in fiscal 2020. 32 Table of Contents Revenues by Segment Energy Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Revenues $ 6,375,261 $ 5,431,134 $ 944,127 17.4 % The following waterfall analysis and commentary presents changes in our Energy segment revenues for the year ended August 31, 2021, compared to the prior year: The change in Energy segment revenues for fiscal 2021 reflects the following: • Increased selling prices for refined fuels and propane as a result of improved global market conditions, including improved demand following the initial demand shocks in fiscal 2020 associated with the COVID-19 pandemic resulted in increased revenues of $793.4 million and $183.6 million, respectively. • Decreased volumes of propane resulting from lower demand due to warmer and drier weather conditions during fiscal 2021 contributed to decreased revenues of $90.1 million. Decreased propane volumes were partially offset by increased volumes of refined fuels as the demand shocks experienced during the COVID-19 pandemic continued to subside. 33 Table of Contents Ag Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Revenues $ 32,035,342 $ 22,926,099 $ 9,109,243 39.7 % The following waterfall analysis and commentary presents changes in our Ag segment revenues for the year ended August 31, 2021, compared to the prior year: The change in Ag segment revenues for fiscal 2021 reflects the following: • A full year of improved trade relations between the United States and foreign trade partners and more favorable weather conditions compared to the prior year resulted in increased volumes. Stronger grain and oilseed shipments contributed to a $1.9 billion increase in revenues with the remaining increase being composed primarily of improved sales volumes of feed and farm supplies and agronomy products. • Due to a planned business model change at our TEMCO equity method investment to increase its operational efficiency, we experienced reduced revenues and COGS on certain transactions associated with TEMCO, which partially offset strong volume revenue growth in grain and oilseed during fiscal 2021. • Higher pricing for grain and oilseed was driven by increased global demand, which contributed to a $5.3 billion increase in revenues. The remaining increase was attributed to a combination of price increases and product mix across our other businesses, including agronomy and processing, as well as partially offsetting price decreases for feed and farm supplies. All Other Segments* Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Corporate and Other revenues $ 37,430 49,132 $ (11,702) (23.8) % *Our Nitrogen Production and Foods reportable segments represent equity method investments that record earnings and allocated expenses, but not revenues. Corporate and Other revenues decreased during the year ended August 31, 2021, compared to the year ended August 31, 2020, mostly as a result of lower revenues in our financing business due to market-driven interest rate reductions. 34 Table of Contents Cost of Goods Sold by Segment Energy Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Cost of goods sold $ 6,183,864 $ 5,002,597 $ 1,181,267 23.6 % The following waterfall analysis and commentary presents changes in our Energy segment COGS for the year ended August 31, 2021, compared to the prior year: The change in Energy segment COGS for fiscal 2021 reflects the following: • Increased refined fuel prices resulted from global market conditions and contributed to a $961.2 million increase of COGS, which includes the impact of significantly higher costs for RINs of approximately $236.0 million. • Global market conditions and the reversal of hedging gains recognized during the prior year contributed to a $239.7 million increase of COGS for propane. • Decreased volumes of propane resulting from lower demand due to warmer and drier weather conditions during fiscal 2021 contributed to lower COGS of $74.2 million. Decreased propane volumes were partially offset by increased volumes of refined fuels as the demand shocks experienced during the COVID-19 pandemic continued to subside. 35 Table of Contents Ag Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Cost of goods sold $ 31,322,491 $ 22,424,661 $ 8,897,830 39.7 % The following waterfall analysis and commentary presents changes in our Ag segment COGS for the year ended August 31, 2021, compared to the prior year: The change in Ag segment COGS for fiscal 2021 reflects the following: • A full year of improved trade relations between the United States and foreign trade partners and favorable weather conditions compared to the prior year drove volumes higher. Stronger grain and oilseed shipments and mark-to-market losses that we expect to reverse over time contributed to a $1.9 billion increase of COGS with the remaining increase being composed primarily of improved volumes of feed and farm supplies and agronomy products. • Due to a planned business model change at our TEMCO equity method investment to increase its operational efficiency, we experienced reduced revenues and COGS on certain transactions associated with TEMCO, which partially offset strong volume growth in grain and oilseed during fiscal 2021. • Higher prices for grain and oilseed resulted from increased global demand and contributed to a $5.3 billion increase of COGS. The remaining price increase was driven by a combination of global market conditions and product mix, which increased costs for renewable fuels, agronomy products, and processing, and a partially offsetting price decrease for feed and farm supplies. All Other Segments* Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Nitrogen Production COGS $ 1,650 $ 2,397 $ (747) (31.2)% Corporate and Other COGS $ (11,370) $ (5,097) $ (6,273) (123.1)% *Our Foods reportable segment represents an equity method investment that did not record any COGS during fiscal 2021 or fiscal 2020. There were no significant changes to COGS for our Nitrogen Production segment or Corporate and Other during fiscal 2021 compared to the prior year. 36 Table of Contents Marketing, General and Administrative Expenses Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Marketing, general and administrative expenses $ 745,602 $ 704,542 $ 41,060 5.8 % The increase in marketing, general and administrative expenses for fiscal 2021 compared to the prior year reflects higher performance-based incentive compensation expenses associated with improved annual results in comparison to the prior year, which was partially offset by lower expenses due to focused cost reduction initiatives realized during fiscal 2021. Interest Expense Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Interest expense $ 104,565 $ 116,977 $ (12,412) (10.6) % Interest expense decreased during fiscal 2021 as a result of lower interest rates compared to the prior year. Other Income Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Other income $ 59,559 $ 39,875 $ 19,684 49.4 % Other income increased during fiscal 2021 primarily due to increased gains on the sale of businesses and investment gains compared to the prior year. Equity Income from Investments Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Equity income from investments* $ 354,529 $ 186,715 $ 167,814 89.9 % *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. We record equity income or loss for investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. Equity income from investments increased during fiscal 2021 compared to the prior year, primarily due to increased income associated with our equity method investments in CF Nitrogen, Ventura Foods and TEMCO. CF Nitrogen experienced increased sale prices of urea and UAN; Ventura Foods experienced favorable market conditions for edible oils and a recovery of sales volumes in fiscal 2021, compared with the early stages of the COVID-19 pandemic in fiscal 2020; and TEMCO experienced a significant increase in volumes and profitability with increased trade flows to China. Additionally, TEMCO changed its business model during fiscal 2021, which has improved its operating efficiency and contributed to increased profitability. Income Tax Benefit Years Ended August 31, Change 2021 2020 Dollars Percent (Dollars in thousands) Income tax benefit $ 38,249 $ 36,731 $ 1,518 4.1 % Increased income tax benefit during fiscal 2021 primarily resulted from a benefit associated with tax planning for certain assets. The increased income tax benefit was partially offset by a benefit earned during fiscal 2020 related to the settlement of a U.S. federal audit resulting in additional tax credit carryovers that did not reoccur during fiscal 2021. Federal and state statutory rates applied to nonpatronage business activity were 24.5% and 24.9% for the years ended August 31, 2021 37 Table of Contents and 2020, respectively. Income taxes and effective tax rates vary each year based upon profitability and nonpatronage business activity, which resulted in negative effective tax rates of (7.4)% and (9.5)% for the years ended August 31, 2021 and 2020, respectively. Comparison of Results of Operations for the Years Ended August 31, 2020 and 2019 For a discussion of results of operations for fiscal 2020 compared to fiscal 2019, 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, 2020, filed with the SEC on November 5, 2020. The addition of the Foods segment in fiscal 2021, which was previously included in our Corporate and Other category, did not have a material impact to our comparison of results of operations for the years ended August 31, 2020 and 2019, as the year-over-year changes for the Foods segment were previously discussed within the Corporate and Other category. Liquidity and Capital Resources In assessing our financial condition, we consider factors such as working capital, internal benchmarking related to our applicable covenants, and other financial information. The following financial information is used when assessing our liquidity and capital resources to meet our capital allocation priorities, which include maintaining the safety and compliance of our operations, paying interest on debt and preferred stock dividends, returning cash to our member-owners in the form of cash patronage and equity redemptions and taking advantage of strategic opportunities that benefit our owners: August 31, 2021 August 31, 2020 (Dollars in thousands) Cash and cash equivalents $ 413,159 $ 140,874 Notes payable 1,740,859 1,575,491 Long-term debt including current maturities 1,618,361 1,791,123 Total equities 9,017,326 8,819,173 Working capital 1,672,938 1,346,506 Current ratio* 1.3 1.3 *Current ratio is defined as current assets divided by current liabilities. Summary of Our Major Sources of Cash and Cash Equivalents We fund our current operations primarily through a combination of cash flows from operations supplemented with short-term borrowings through our committed and uncommitted revolving credit facilities, including our securitization facility with certain unaffiliated financial institutions ("Securitization Facility") and our repurchase facility relating thereto ("Repurchase Facility"). We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment, with cash flows from operations and by issuing long-term debt. See Note 9, Notes Payable and Long-Term Debt , of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information on our short-term borrowings and long-term debt, including tables with summarized long-term debt outstanding. We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity. On February 19, 2021, we amended our 10-year term loan facility to convert the entire $366.0 million aggregate principle amount outstanding thereunder into a revolving loan, which can be paid down and readvanced in an amount up to the referenced $366.0 million until February 19, 2022. On February 19, 2022, the total funded loan balance outstanding reverts to a nonrevolving term loan that is payable on September 4, 2025. On August 14, 2020, we entered into a Note Purchase Agreement to borrow $375.0 million of debt in the form of notes. The notes under this Note Purchase Agreement are structured in four series with maturities ranging from seven 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. This funding was used to pay debt maturities and manage liquidity. On September 24, 2020, the Securitization Facility and Repurchase Facility were amended, increasing the maximum availability under the Securitization Facility to $600.0 million from $500.0 million and extending termination dates to July 30, 2021, and September 24, 2021, respectively. On July 30, 2021, the Securitization Facility was further amended to extend its 38 Table of Contents termination date to August 31, 2021. Subsequently on August 31, 2021, the Securitization Facility and Repurchase Facility were again amended, increasing the maximum committed availability under the Securitization Facility to $700.0 million from $600.0 million, adding a $250.0 million uncommitted portion to the Securitization Facility and extending their respective maturity dates to August 30, 2022. Summary of Our Major Uses of Cash and Cash Equivalents Annually, our Board of Directors approves our capital expenditure budget. Our fiscal 2022 capital expenditure priorities include maintaining our assets through maintenance; compliance with environmental, health and safety requirements; information technology; productivity; and growth. Our refining business requires continued investment in our refining process to maintain its operational reliability, profitability and safety. In addition, our Board of Directors annually approves our cash patronage and equity redemptions to be paid in fiscal 2022, based on fiscal 2021 financial performance. The following is a summary of our primary cash requirements for fiscal 2022: • Capital expenditures. We expect total capital expenditures for fiscal 2022 to be approximately $414.0 million, compared to capital expenditures of $317.8 million in fiscal 2021. Excluded from the capital expenditures for fiscal 2022 is approximately $53.7 million for major maintenance at our Laurel refinery. • Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding as of August 31, 2021. We expect to pay dividends on our preferred stock of approximately $168.7 million during fiscal 2022. • Patronage . Our Board of Directors authorized approximately $50.0 million of our fiscal 2021 patronage-sourced earnings to be paid to our member-owners during fiscal 2022. • Equity redemptions . Our Board of Directors has authorized equity redemptions of $ 100.0 million to be distributed in fiscal 2022 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 2022 with respect to the amounts it has authorized for redemption during the fiscal year. We believe cash generated by operating and investing activities, along with available borrowing capacity under our credit facilities, will be sufficient to support our operations for the foreseeable future. Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all our debt covenants and restrictions as of August 31, 2021. Based on our current 2022 projections, we expect continued covenant compliance. Working Capital We measure working capital as current assets less current liabilities and believe this information is meaningful to investors as a measure of operational efficiency and short-term financial health. Working capital is not defined under U.S. generally accepted accounting principles ("U.S. GAAP") and may not be computed the same as similarly titled measures used by other companies. Working capital as of August 31, 2021 and 2020, is as follows: 2021 2020 Change (Dollars in thousands) Current assets $ 7,998,951 $ 6,266,547 $ 1,732,404 Less current liabilities 6,326,013 4,920,041 1,405,972 Working capital $ 1,672,938 $ 1,346,506 $ 326,432 As of August 31, 2021, working capital increased by $326.4 million compared with August 31, 2020. Current asset balance changes increased working capital by $1.7 billion, primarily driven by increases in receivables and inventories. Current liabilities balance changes decreased working capital by $1.4 billion, primarily due to increases in accounts payable and notes payable. We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks. We believe our current cash balances and available capacity on our committed and uncommitted lines of credit will provide adequate liquidity to meet our working capital needs. 39 Table of Contents Contractual Obligations Our estimated future obligations as of August 31, 2021, include both current and long-term obligations. During fiscal 2022, we have a current obligation to repay $31.1 million of long-term debt, as well as $68.2 million of interest related to long-term debt. Beyond fiscal 2022, our long-term debt obligation is $1.6 billion and interest payments related to long-term debt of $423.0 million. For finance leases, we have a current and long-term obligation of $8.5 million and $35.9 million, respectively. For operating leases, we have a current and long-term obligation of $66.1 million and $237.8 million, respectively. See Note 9, Notes Payable and Long-Term Debt, and Note 19 , Leases , of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information on our long-term debt and leases, respectively. We enter into purchase obligations that are legally binding and into enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased and fixed or estimated prices to be paid at the time of settlement. Our current and long-term obligation for such arrangements is $8.6 billion and $946.9 million, respectively. Cash Flows Years Ended August 31, 2021 2020 Change (Dollars in thousands) Net cash provided by operating activities $ 757,811 $ 1,087,229 $ (329,418) Net cash used in investing activities ( 101,672 ) ( 243,705 ) 142,033 Net cash used in financing activities ( 326,585 ) ( 931,148 ) 604,563 Effect of exchange rate changes on cash and cash equivalents ( 4,063 ) 4,942 (9,005) Net increase (decrease) in cash and cash equivalents and restricted cash $ 325,491 $ (82,682) $ 408,173 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 $329.4 million decrease in cash provided by operating activities in fiscal 2021 is primarily the result of a higher proportion of income generated by equity method investments, which do not result in an increase in cash until dividends are distributed to us. The decrease is also driven by working capital increases, primarily associated with increased receivables and inventories. The $142.0 million decrease in cash used in investing activities in fiscal 2021 primarily reflects decreased expenditures for property, plant and equipment net of the proceeds from the sales of certain locations in our Ag segment. The $604.6 million decrease in cash used in financing activities in fiscal 2021 primarily reflects increased net cash inflows associated with our notes payable and long-term debt facilities, including the $375.0 million Note Purchase Agreement funding during the first quarter of fiscal 2021. The decrease is also partially due to lower amounts paid for cash patronage and equity redemptions in fiscal 2021 compared to the prior fiscal year. Critical Accounting Policies Our consolidated financial statements are prepared in conformity with 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, processed oilseed and other minimally processed soy-based inventories are stated at net realizable value. All other inventories are stated at the lower of cost or net realizable value. The costs of certain energy inventories (wholesale refined products, crude oil and asphalt) are determined on the LIFO method; all other inventories of nongrain products purchased for resale are valued on the first-in, first-out ("FIFO") and average cost methods. Estimates are used in determining the net realizable values of grain and oilseed and processed grain and oilseed inventories. These estimates include using inputs that are generally based on exchange traded prices and/or recent market bids and offers, including location-specific adjustments. If estimates regarding the valuation of inventories are less favorable than management's assumptions, write-downs of inventories may be required. 40 Table of Contents Derivative Financial Instruments We enter into exchange-traded commodity futures and options contracts to hedge our exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk. Futures and options contracts used for hedging are purchased and sold through regulated commodity exchanges. We also use over-the-counter instruments to hedge our exposure on fixed-price contracts. Fluctuations in inventory valuations, however, may not be completely hedged due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and in part to our assessment of our exposure from expected price fluctuations. We also manage our risks by entering into fixed-price purchase contracts with preapproved producers and establishing appropriate limits for individual suppliers. Fixed-price sales contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The fair values of futures and options contracts are determined primarily from quotes listed on regulated commodity exchanges. Fixed-price purchase and sales contracts are with various counterparties, and the fair values of such contracts are determined from the market price of the underlying product. We are exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty's financial condition and a risk that the counterparty will refuse to perform on a contract during periods of price fluctuations where contract prices are significantly different from the current market prices. Pension and Other Postretirement Benefits Pension and other postretirement benefits costs and obligations depend on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates and other factors. In accordance 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, they will expire. Tax benefits related to uncertain tax positions are recognized in our financial statements if it is more likely than not that the position would be sustained upon examination by a tax authority that has full knowledge of all relevant information. The benefits are measured using a cumulative probability approach. Under this approach, we record in our financial statements the greatest amount of tax benefits that have a more than 50% probability of being realized upon final settlement with the tax authorities. In determining these tax benefits, we assign probabilities to a range of outcomes that we feel we could ultimately settle on with the tax authorities using all relevant facts and information available at the reporting date. Due to the complexity of these uncertainties, the ultimate resolution may result in a benefit that is materially different than our current estimate. Long-Lived Assets Property, plant and equipment is depreciated or amortized over the expected useful lives of individual or groups of assets based on the straight-line method. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual useful lives. All long-lived assets, including property, plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment in accordance 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 41 Table of Contents cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and our estimates may differ from actual results. We have asset retirement obligations with respect to certain of our refineries and other assets due to various legal obligations to clean and/or dispose of the component parts at the time they are retired. In most cases, these assets can be used for extended and indeterminate periods of time, as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain refineries and related assets and to continue making improvements to those assets based on technological advances. As a result, we believe our refineries and related assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire a refinery and related assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery or other asset, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that future cost. We have other assets that we may be obligated to dismantle at the end of corresponding lease terms subject to the lessor's discretion for which we have recorded asset retirement obligations. Based on our estimates of the timing, cost and probability of removal, these obligations are not material. Recent Accounting Pronouncements 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.