CHS INC 10-Q

ITEM 2. 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 2022 Second Quarter Highlights • Fiscal 2022 Trends Update • Operating Metrics • Results of Operations • Liquidity and Capital Resources • Critical Accounting Policies • Recent Accounting Pronouncements Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2021 (including the information presented therein under Risk Factors), as well as the condensed consolidated financial statements and the related notes included in Item 1 of Part I and the risk factors included in Item 1A of Part II of this Quarterly Report on Form 10-Q. 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 who own our five series of preferred stock, all of which are listed and traded on the Global Select Market of The Nasdaq Stock Market LLC. We operate in the following three reportable segments: • Energy . Produces and provides primarily for the wholesale distribution and transportation of petroleum products. • Ag . Purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as a wholesaler and retailer of agronomy products. • Nitrogen Production . Produces and distributes nitrogen fertilizer. It consists of our equity method investment in CF Industries Nitrogen, LLC ("CF Nitrogen"), and allocated expenses. In addition, our financing and hedging businesses, along with our nonconsolidated food production and distribution and wheat milling joint ventures, have been aggregated within Corporate and Other. The condensed consolidated financial statements include the accounts of CHS and all subsidiaries and limited liability companies in which we have a controlling interest. The effects of all significant intercompany transactions have been eliminated. Corporate administrative expenses and interest are allocated to each reporting segment 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 23 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, wars and civil unrest, 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 these strategies, we are focused on implementing agile, efficient and 24 Table of Contents sustainable new technology platforms; building robust and efficient supply chains; hiring, developing and retaining high-performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet. Fiscal 2022 Second Quarter Highlights • Robust global demand, coupled with increased market volatility, resulted in higher commodity prices and improved earnings. • Our processing and wholesale agronomy products drove significantly improved earnings in our Ag segment. • Equity method investments continue to perform well and represent a significant portion of our earnings with our CF Nitrogen investment being the largest contributor. The CF Nitrogen investment improved earnings are a result of market conditions driven by strong global demand for urea and urea ammonium nitrate ("UAN"). • Refining margins were higher in our Energy segment due to improved crack spreads resulting from higher demand in the energy industry as volumes increased to more normal levels and more favorable pricing for Canadian crude oil, which is processed by our refineries. Fiscal 2022 Trends Update Our Energy and Ag segments operate in cyclical environments in which unforeseen market conditions can have significant positive or negative impacts. For example, we have experienced and anticipate continued effects of inflation on costs such as labor, freight and materials. Additionally, the Russian invasion of Ukraine in February 2022 has resulted in significant uncertainty and instability in global commodities markets, including agricultural commodities and crude oil. Ukraine is a key international grain originating country in which we operate. Our operations in Ukraine have been dramatically disrupted because of the conflict and some of our Ukrainian employees have been forced to relocate to other countries and within Ukraine, with many unable to perform all or some work duties. The ongoing conflict could cause harm to our employees and otherwise impair their ability to work for extended periods of time, as well as disrupt telecommunications systems, banks and other critical infrastructure necessary to conduct business in Ukraine. Although we do not have significant fixed assets or infrastructure in Ukraine, we continue to have grain inventory in various facilities in Ukraine. As a result of the conflict and related export bans that were put in place by the Ukrainian government in March 2022, our ability to access grain inventories in Ukraine has been limited and could result in an impairment of all or a portion of those grain inventories, which amounted to approximately $30.0 million as of February 28, 2022. Refer to Item 1A of Part II of this Quarterly Report on Form 10-Q for additional considerations of the risks this conflict may continue to have on our business operations and financial performance. 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. Most of the measures taken to mitigate the spread of COVID-19 have been eased; however, additional variants, the effectiveness of vaccines and other efforts to respond to the pandemic in the United States and globally could continue to impact the profitability of our businesses. Refer to Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2021, for additional considerations of risks the COVID-19 pandemic may continue to have on our business, liquidity, capital resources and financial results. The energy industry continues to experience improved crack spreads and maintain higher volumes compared to the lows experienced during the early stages of the COVID-19 pandemic, which began in the second quarter of fiscal 2020 and significantly reduced our profitability in fiscal 2021. At the same time, the cost of renewable energy credits remains significantly higher than historical levels, which continued to negatively impact our profitability during the second quarter of fiscal 2022. Russia's invasion of Ukraine has also resulted in significant volatility in crude oil prices as sanctions have limited crude oil supply in global markets. We are unable to predict how long the current environment will last or the severity of the financial and operational impacts; however, we expect uncertainty and volatility to continue in the energy industry for the remainder of fiscal 2022, which could significantly impact our earnings. Although challenges remain, the U.S. agricultural industry has experienced continued, strong demand for grain and oilseed commodities, which has resulted in improved commodity prices. In addition, due to decreased global supply and strong global demand for fertilizer and related products, the current improved profitability will likely continue in our Ag and Nitrogen Production segments until supply becomes more balanced with the current strong demand. 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 effects of Hurricane Ida on our grain export terminal in Myrtle Grove, Louisiana, and drought conditions experienced in portions of our trade territory have negatively impacted our revenues, margins and cash flows from core operations during fiscal 2022. As with 25 Table of Contents others in our industry, we are seeing significantly higher freight costs that are the result of inflation and logistical challenges in the shipping industry, and we expect these challenges to continue for the remainder of 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 navigating market conditions that impact our businesses, we will continue to take actions in an effort to protect our financial health during fiscal 2022, while continuing to deliver on our enterprise resource planning system implementation and advancing our operating model. Operating Metrics Energy Our Energy segment operations primarily include our refineries in Laurel, Montana, and McPherson, Kansas, which process crude oil to produce refined products, including gasoline, distillates and other products. The following table provides information about our consolidated refinery operations: Three Months Ended February 28, Six Months Ended February 28, 2022 2021 2022 2021 Refinery throughput volumes (Barrels per day) Heavy, high-sulfur crude oil 103,233 96,847 102,784 94,709 All other crude oil 73,845 56,302 72,076 58,202 Other feedstocks and blendstocks 12,255 11,744 15,314 13,791 Total refinery throughput volumes 189,333 164,893 190,174 166,702 Refined fuel yields Gasolines 88,764 77,479 90,837 80,890 Distillates 83,166 68,916 81,033 67,376 We are subject to the Renewable Fuel Standard, which requires refiners to blend renewable fuels (e.g., ethanol and biodiesel) into their finished transportation fuels or purchase renewable energy credits, known as renewable identification numbers ("RINs"), in lieu of blending. The U.S. Environmental Protection Agency ("EPA") generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. In December 2021, the EPA issued a proposal for the renewable volume obligation ("RVO") for calendar years 2020 through 2022. As proposed, the RVO for calendar year 2020 is lower than previously issued, and calendar year 2021 is lower than anticipated as a result of lower demand for refined fuels due to the COVID-19 pandemic. 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 25% and 39%, respectively, during the second quarter of fiscal 2022 compared to the same period of the prior year, which negatively impacted our profitability during the second quarter of fiscal 2022. Estimates of our RIN expense are based on the proposed RVO and are calculated using an average RIN price each month. 26 Table of Contents 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 products. Crack spreads and WCS crude oil differentials both increased during the three and six months ended February 28, 2022 and 2021, compared to the same period during the prior year, contributing to improved IBIT for the Energy segment. The table below provides information about average market reference prices and differentials that impact our Energy segment: Three Months Ended February 28, Six Months Ended February 28, 2022 2021 2022 2021 Market indicators WTI crude oil (dollars per barrel) $ 82.10 $ 52.74 $ 79.62 $ 46.46 WTI - WCS crude oil differential (dollars per barrel) $ 16.17 $ 11.91 $ 14.56 $ 10.85 Group 3 2:1:1 crack spread (dollars per barrel)* $ 17.88 $ 12.55 $ 17.96 $ 10.10 Group 3 5:3:2 crack spread (dollars per barrel)* $ 17.24 $ 12.08 $ 17.40 $ 9.73 D6 ethanol RIN (dollars per RIN) $ 1.0968 $ 0.8745 $ 1.1404 $ 0.7115 D4 ethanol RIN (dollars per RIN) $ 1.4405 $ 1.0385 $ 1.4541 $ 0.9245 *Group 3 refers to the oil refining and distribution system serving Midwest markets from the Gulf Coast through the Plains states. 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 three and six months ended February 28, 2022 and 2021: Three Months Ended February 28, Six Months Ended February 28, Market Source* 2022 2021 2022 2021 Commodity prices Corn (dollars per bushel) Chicago Board of Trade $ 6.39 $ 5.29 $ 5.98 $ 4.64 Soybeans (dollars per bushel) Chicago Board of Trade $ 14.88 $ 13.63 $ 13.62 $ 12.23 Wheat (dollars per bushel) Chicago Board of Trade $ 8.20 $ 6.21 $ 7.89 $ 5.82 Urea (dollars per ton) Green Markets NOLA $ 644.00 $ 293.00 $ 657.00 $ 259.00 Urea ammonium nitrate (dollars per ton) Green Markets NOLA $ 547.52 $ 154.88 $ 500.16 $ 137.10 Ethanol (dollars per gallon) Chicago Platts $ 2.43 $ 1.54 $ 2.62 $ 1.50 Volumes Grain and oilseed (thousands of bushels) 534,955 665,030 1,099,067 1,411,613 North American grain and oilseed port throughput (thousands of bushels) 186,935 218,616 359,922 438,322 Wholesale crop nutrients (thousands of tons) 1,375 1,534 3,199 3,409 Ethanol (thousands of gallons) 228,355 218,147 452,601 438,918 *Market source information represents the average month-end price during the period. 27 Table of Contents Results of Operations Three months ended February 28, 2022 and 2021 Three Months Ended February 28, 2022 % of Revenues* 2021 % of Revenues* (Dollars in thousands) Revenues $ 10,332,588 100.0 % $ 8,320,159 100.0 % Cost of goods sold 10,063,590 97.4 8,218,439 98.8 Gross profit 268,998 2.6 101,720 1.2 Marketing, general and administrative expenses 244,325 2.4 161,510 1.9 Operating earnings (loss) 24,673 0.2 (59,790) (0.7) Interest expense 25,174 0.2 28,855 0.3 Other income (1,405) — (17,846) (0.2) Equity income from investments (229,923) (2.2) (64,109) (0.8) Income (loss) before income taxes 230,827 2.2 (6,690) (0.1) Income tax expense 11,931 0.1 31,668 0.4 Net income (loss) 218,896 2.1 (38,358) (0.5) Net loss attributable to noncontrolling interests (104) — (129) — Net income (loss) attributable to CHS Inc. $ 219,000 2.1 % $ (38,229) (0.5) % *Amounts less than 0.1% are shown as zero percent. Percentage totals may differ due to rounding. The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for the three months ended February 28, 2022. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. 28 Table of Contents Income (Loss) Before Income Taxes by Segment Energy Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Income (loss) before income taxes $ 10,832 $ (54,690) $ 65,522 119.8 % The following waterfall analysis and commentary presents the changes in our Energy segment IBIT for the three months ended February 28, 2022, compared to the same period during 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 reflects the following: • Higher crack spreads and increased WCS crude oil differentials reflect improved market conditions in our refined fuels business and contributed to a $94.4 million increase of IBIT. • Improved margins in our refined fuels business were partially offset by higher RIN prices due to market conditions. • Lower propane margins resulting from unrealized hedging-related losses during the second quarter of fiscal 2022 also partially offset the improved earnings in our refined fuels business. 29 Table of Contents Ag Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Income before income taxes $ 55,181 $ 14,044 $ 41,137 292.9 % The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the three months ended February 28, 2022, compared to the same period during 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 reflects the following: • Increased margins across most of our Ag segment product categories during the second quarter of fiscal 2022, including: ◦ $51.0 million increase for oilseed processing as a result of strong meal and oil demand; ◦ $44.6 million increase for feed and farm supplies due to favorable pricing resulting from strong demand and constrained supply; and ◦ $39.5 million increase for wholesale agronomy products, which resulted from strong global market demand and global supply disruptions. • Decreased volumes due to supply chain constraints, less crop-drying activity and timing differences associated with earlier spring demand during the prior year resulted in a $53.5 million decrease for feed and farm supplies. All Other Segments Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT* $ 154,257 $ 11,165 $ 143,092 1,281.6 % Corporate and Other IBIT $ 10,557 $ 22,791 $ (12,234) (53.7) % *For additional information, see Note 5, Investments, of the notes to the unaudited condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q. Our Nitrogen Production segment IBIT increased as a result of higher equity income attributed to increased sale prices of urea and UAN, which was partially offset by increased natural gas costs. Corporate and Other IBIT decreased primarily due to higher performance-based incentive compensation accruals associated with improved financial results compared to the prior year. 30 Table of Contents Revenues by Segment Energy Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Revenues $ 2,027,999 $ 1,372,158 $ 655,841 47.8 % The following waterfall analysis and commentary presents the changes in our Energy segment revenues for the three months ended February 28, 2022, compared to the same period during the prior year: The change in Energy segment revenues reflects the following: • Increased selling prices for refined fuels contributed to a $517.0 million increase in revenues and resulted from global market conditions. • Increased selling prices for propane as a result of global market conditions during the second quarter of fiscal 2022 positively impacted revenue by $136.4 million. • Lower propane volumes contributed to a $33.7 million decrease in revenues driven by lower demand as a result of warmer winter weather conditions during most of the second quarter of fiscal 2022 compared to the same period of the prior year, which was partially offset by increased volumes of refined fuels. 31 Table of Contents Ag Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Revenues $ 8,295,931 $ 6,938,212 $ 1,357,719 19.6 % The following waterfall analysis and commentary presents the changes in our Ag segment revenues for the three months ended February 28, 2022, compared to the same period during the prior year: The change in Ag segment revenues reflects the following: • Higher pricing attributed to market-driven price increases across all of our Ag segment product categories during the second quarter of fiscal 2022, including: ◦ $1.3 billion increase for grain and oilseed driven by increased global demand; ◦ $688.7 million increase for wholesale agronomy products resulting from strong global market demand and global supply disruptions; ◦ $338.7 million increase for renewable fuels resulting from high demand; ◦ $251.8 million increase for feed and farm supplies due to strong demand and constrained supply; and ◦ $224.4 million increase for oilseed processing due to strong meal and oil demand. • Decreased volumes of grain and oilseed contributed to a $1.1 billion decrease in revenues. The decreased volumes resulted from a combination of factors, including the comparable period of the prior year experiencing elevated volumes following the Phase One trade agreement with China, which have since plateaued, and lower crop yields due to drought conditions experienced in portions of our trade territory in North America. • The remaining volume decrease related to lower volumes across most of our other Ag segment product categories, including a $175.8 million decrease for feed and farm supplies due to supply chain constraints, less crop-drying activity and timing differences associated with earlier spring demand during the prior year. All Other Segments Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Corporate and Other revenues* $ 8,658 $ 9,789 $ (1,131) (11.6) % *Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. There were no significant changes to revenues in Corporate and Other during the three months ended February 28, 2022, compared to the same period during the prior year. 32 Table of Contents Cost of Goods Sold by Segment Energy Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Cost of goods sold $ 1,952,852 $ 1,380,045 $ 572,807 41.5 % The following waterfall analysis and commentary presents the changes in our Energy segment COGS for the three months ended February 28, 2022, compared to the same period during the prior year: The change in Energy segment COGS reflects the following: • Increased costs for refined fuels contributed to $430.2 million increase of COGS driven by global market conditions. • Increased costs for propane as a result of global market conditions and unrealized hedging-related losses resulted in a $140.4 million increase of COGS. • Lower volumes of propane contributed to a $32.4 million decrease of COGS driven by lower demand as a result of warmer winter weather conditions during most of the second quarter of fiscal 2022 compared to the same period of the prior year, which was partially offset by increased volumes of refined fuels. 33 Table of Contents Ag Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Cost of goods sold $ 8,111,480 $ 6,841,093 $ 1,270,387 18.6 % The following waterfall analysis and commentary presents the changes in our Ag segment COGS for the three months ended February 28, 2022, compared to the same period during the prior year: The change in Ag segment COGS reflects the following: • Higher costs attributed to market-driven price increases across all of our Ag segment product categories during the second quarter of fiscal 2022, including: ◦ $1.3 billion increase for grain and oilseed driven by increased global demand; ◦ $649.2 million increase for wholesale agronomy products resulting from strong global market demand and global supply disruptions; ◦ $305.3 million increase for renewable fuels resulting from high demand driving higher prices; ◦ $207.2 million increase for feed and farm supplies due to strong demand and constrained supply; and ◦ $173.4 million increase for oilseed processing due to strong meal and oil demand. • Decreased volumes of grain and oilseed contributed to a $1.1 billion decrease in COGS. The decreased volumes resulted from a combination of factors, including the comparable period of the prior year experiencing elevated volumes following the Phase One trade agreement with China, which have since plateaued, and lower crop yields due to drought conditions experienced in portions of our trade territory in North America. • The remaining volume decrease related to lower volumes across most of our other Ag segment product categories, including a $122.3 million decrease for feed and farm supplies due to supply chain constraints, less crop-drying activity and timing differences associated with earlier spring demand during the prior year. All Other Segments Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Nitrogen Production COGS $ 414 $ 422 $ (8) (1.9)% Corporate and Other COGS $ (1,156) $ (3,121) $ 1,965 63.0% There were no significant changes to COGS in our Nitrogen Production segment or Corporate and Other during the three months ended February 28, 2022, compared to the same period during the prior year. 34 Table of Contents Marketing, General and Administrative Expenses Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Marketing, general and administrative expenses $ 244,325 $ 161,510 $ 82,815 51.3 % Marketing, general and administrative expenses increased during the three months ended February 28, 2022, primarily due to higher performance-based incentive compensation accruals driven by improved financial results in comparison to the prior year, as well as increased external consulting expenses for projects such as our enterprise resource planning system implementation and advancing our operating model. Interest Expense Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Interest expense $ 25,174 $ 28,855 $ (3,681) (12.8) % Interest expense decreased during the three months ended February 28, 2022, as a result of lower notes payable and long-term debt balances compared to the same period of the prior year. Other Income Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Other income $ 1,405 $ 17,846 $ (16,441) (92.1) % Other income decreased during the three months ended February 28, 2022, primarily due to an investment gain during the second quarter of the prior year that did not reoccur during the current year. Equity Income from Investments Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Equity income from investments* $ 229,923 $ 64,109 $ 165,814 258.6 % *For additional information, see Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q. Equity income from investments increased during the three months ended February 28, 2022, compared to the same period during the prior year, primarily due to increased income associated with our equity method investment in CF Nitrogen. CF Nitrogen experienced increased sale prices of urea and UAN due to strong global demand and decreased global supply. Income Tax Expense Three Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Income tax expense $ 11,931 $ 31,668 $ (19,737) 62.3 % Decreased income tax expense during the three months ended February 28, 2022, primarily resulted from a significant change in the mix of full-year earnings projected across business units during the second quarter of the prior year that did not reoccur during the current year. Effective tax rates for the three months ended February 28, 2022 and 2021, were 5.2% and (473.4)%, respectively. Federal and state statutory rates applied to nonpatronage business activity were 24.4% and 24.9% for the three months ended February 28, 2022 and 2021, respectively. Income taxes and effective tax rates vary each year based on profitability and nonpatronage business activity. 35 Table of Contents Six months ended February 28, 2022 and 2021 Six Months Ended February 28, 2022 % of Revenues* 2021 % of Revenues* (Dollars in thousands) Revenues $ 21,213,345 100.0 % $ 17,035,802 100.0 % Cost of goods sold 20,424,439 96.3 16,755,978 98.4 Gross profit 788,906 3.7 279,824 1.6 Marketing, general and administrative expenses 449,259 2.1 332,171 1.9 Operating earnings (loss) 339,647 1.6 (52,347) (0.3) Interest expense 48,606 0.2 53,905 0.3 Other income (25,181) (0.1) (30,470) (0.2) Equity income from investments (381,268) (1.8) (114,132) (0.7) Income before income taxes 697,490 3.3 38,350 0.2 Income tax expense 26,651 0.1 7,339 — Net income 670,839 3.2 31,011 0.2 Net loss attributable to noncontrolling interests (122) — (431) — Net income attributable to CHS Inc. $ 670,961 3.2 % $ 31,442 0.2 % *Amounts less than 0.1% are shown as zero percent. Percentage totals may differ due to rounding. The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for the six months ended February 28, 2022. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. 36 Table of Contents Income (Loss) Before Income Taxes by Segment Energy Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Income (loss) before income taxes $ 80,021 $ (121,867) $ 201,888 165.7 % The following waterfall analysis and commentary presents the changes in our Energy segment IBIT for the six months ended February 28, 2022, compared to the same period during 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 reflects the following: • Higher crack spreads and increased WCS crude oil differentials reflect improved market conditions in our refined fuels business and contributed to a $282.2 million increase of IBIT. • Improved margins in our refined fuels business were partially offset by higher RIN prices due to market conditions. • Lower propane margins resulting from unrealized hedging-related losses during fiscal 2022 also partially offset the improved earnings in our refined fuels business. 37 Table of Contents Ag Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Income before income taxes $ 341,606 $ 97,053 $ 244,553 252.0 % The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the six months ended February 28, 2022, compared to the same period during 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 reflects the following: • Increased margins across all our Ag segment product categories, including: ◦ $119.3 million increase for wholesale agronomy products, which resulted from strong global market demand and global supply disruptions; ◦ $83.8 million increase for oilseed processing as a result of strong meal and oil demand; ◦ $60.7 million increase for feed and farm supplies due to strong demand and global supply disruptions; and ◦ $53.1 million increase for grain and oilseed that resulted primarily from mark-to-market changes associated with our commodity derivatives, including the reversal of unrealized losses. • Decreased volumes due to supply chain constraints, less crop-drying activity and timing differences associated with earlier spring demand during the prior year resulted in a $57.8 million decrease for feed and farm supplies. • The remaining volume decrease related primarily to grain and oilseed, which resulted from a combination of factors, including the comparable period of the prior year experiencing elevated volumes following the Phase One trade agreement with China, which have since plateaued; lower crop yields due to drought conditions experienced in portions of our trade territory; and the impact of Hurricane Ida on our grain export terminal in Myrtle Grove, Louisiana, during the first quarter of fiscal 2022. 38 Table of Contents All Other Segments Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT* $ 250,840 $ 15,635 $ 235,205 1,504.3 % Corporate and Other IBIT $ 25,023 $ 47,529 $ (22,506) (47.4) % *For additional information, see Note 5, Investments, of the notes to the unaudited condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q. Our Nitrogen Production segment IBIT increased as a result of higher equity income attributed to increased sale prices of urea and UAN, which was partially offset by increased natural gas costs. Corporate and Other IBIT decreased primarily due to higher performance-based incentive compensation accruals associated with improved results in comparison to the prior year. Revenues by Segment Energy Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Revenues $ 4,331,986 $ 2,630,005 $ 1,701,981 64.7 % The following waterfall analysis and commentary presents the changes in our Energy segment revenues for the six months ended February 28, 2022, compared to the same period during the prior year: The change in Energy segment revenues reflects the following: • Increased selling prices and volumes for refined fuels contributed to $1.4 billion and $58.8 million increases in revenues, respectively. Increased refined fuels selling prices resulted from global market conditions and increased volumes resulted from a return to more normal levels compared to the lower volumes experienced during the COVID-19 pandemic. • Increased selling prices for propane as a result of global market conditions during the first half of fiscal 2022 positively impacted revenue by $271.6 million. • Increased revenues were partially offset by lower volumes of propane driven by lower demand as a result of warmer and drier weather conditions during the first half of fiscal 2022 compared to the same period of the prior year. 39 Table of Contents Ag Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Revenues $ 16,865,190 $ 14,383,614 $ 2,481,576 17.3 % The following waterfall analysis and commentary presents the changes in our Ag segment revenues for the six months ended February 28, 2022, compared to the same period during the prior year: The change in Ag segment revenues reflects the following: • Higher pricing attributed to market-driven price increases across all of our Ag segment product categories, including: ◦ $2.4 billion increase in revenues for grain and oilseed driven by increased global demand; ◦ $1.3 billion increase for wholesale agronomy products resulting from strong global market demand and global supply disruptions; ◦ $626.5 million increase for feed and farm supplies due to strong demand and constrained supply; ◦ $537.7 million increase for renewable fuels resulting from high demand driving higher prices; and ◦ $295.1 million increase for oilseed processing due to strong meal and oil demand. • Lower volumes of grain and oilseed contributed to a $2.5 billion decrease in revenues. The decreased volumes resulted from a combination of factors, including the comparable period of the prior year experiencing elevated volumes following the Phase One trade agreement with China, which have since plateaued; a business model change at our TEMCO, LLC ("TEMCO"), equity method investment during the second quarter of fiscal 2021 that resulted in reduced revenues and COGS during the current period on certain transactions associated with TEMCO; lower crop yields due to drought conditions experienced in portions of our North American trade territory; and the impact of Hurricane Ida on our grain export terminal in Myrtle Grove, Louisiana, during the first quarter of fiscal 2022. • The remaining volume decrease was experienced across most of our other Ag segment product categories, including a $326.6 million decrease for feed and farm supplies due to supply chain constraints, less crop-drying activity and timing differences associated with earlier spring demand during the prior year. All Other Segments Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Corporate and Other revenues* $ 16,169 $ 22,183 $ (6,014) (27.1) % *Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. Corporate and Other revenues decreased during the six months ended February 28, 2022, compared to the same period during the prior year primarily as a result of decreased revenues in our hedging business due to lower commissions from hedging activities. 40 Table of Contents Cost of Goods Sold by Segment Energy Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Cost of goods sold $ 4,132,477 $ 2,661,087 $ 1,471,390 55.3 % The following waterfall analysis and commentary presents the changes in our Energy segment COGS for the six months ended February 28, 2022, compared to the same period during the prior year: The change in Energy segment COGS reflects the following: • Increased costs and volumes for refined fuels contributed to $1.1 billion and $60.9 million increases of COGS, respectively. Increased refined fuels costs resulted from global market conditions and increased volumes resulted from a return to more normal levels compared to the lower volumes experienced during the COVID-19 pandemic. • Higher costs for propane as a result of global market conditions and unrealized hedging-related losses resulted in a $292.9 million increase of COGS. • Increased COGS was partially offset by lower volumes of propane driven by lower demand as a result of warmer and drier weather conditions during most of the first half of fiscal 2022 compared to the same period of the prior year. 41 Table of Contents Ag Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Cost of goods sold $ 16,295,473 $ 14,101,435 $ 2,194,038 15.6 % The following waterfall analysis and commentary presents the changes in our Ag segment COGS for the six months ended February 28, 2022, compared to the same period during the prior year: The change in Ag segment COGS reflects the following: • Higher costs attributed to market-driven price increases across all of our Ag segment product categories, including: ◦ $2.4 billion increase for grain and oilseed driven by increased global demand; ◦ $1.2 billion increase for wholesale agronomy products resulting from strong global market demand and global supply disruptions; ◦ $565.7 million increase for feed and farm supplies due to strong demand and constrained supply; ◦ $499.3 million increase for renewable fuels resulting from high demand driving higher prices; and ◦ $211.3 million increase for oilseed processing due to strong meal and oil demand. • Lower volumes of grain and oilseed contributed to a $2.4 billion decrease in COGS. The decreased volumes resulted from a combination of factors, including the comparable period of the prior year experiencing elevated volumes following the Phase One trade agreement with China, which has since plateaued; a business model change at our TEMCO equity method investment during the second quarter of fiscal 2021 that resulted in reduced revenues and COGS during the current period on certain transactions associated with TEMCO; lower crop yields due to drought conditions experienced in portions of our North American trade territory; and the impact of Hurricane Ida on our grain export terminal in Myrtle Grove, Louisiana, during the first quarter of fiscal 2022. • The remaining volume decrease was experienced across most of our other Ag segment product categories, including a $268.9 million decrease for feed and farm supplies due to supply chain constraints, less crop-drying activity and timing differences associated with earlier spring demand during the prior year. All Other Segments Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Nitrogen Production COGS $ 828 $ 843 $ (15) (1.8)% Corporate and Other COGS $ (4,339) $ (7,387) $ 3,048 41.3% There were no significant changes to COGS in our Nitrogen Production segment or Corporate and Other during the six months ended February 28, 2022, compared to the same period during the prior year. 42 Table of Contents Marketing, General and Administrative Expenses Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Marketing, general and administrative expenses $ 449,259 $ 332,171 $ 117,088 35.2 % Marketing, general and administrative expenses increased during the six months ended February 28, 2022, primarily due to higher performance-based incentive compensation accruals driven by improved financial results in comparison to the prior year, as well as increased external consulting expenses for projects such as our enterprise resource planning system implementation and advancing our operating model. Interest Expense Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Interest expense $ 48,606 $ 53,905 $ (5,299) (9.8) % Interest expense decreased during the six months ended February 28, 2022, as a result of lower notes payable and long-term debt balances compared to the same period of the prior year. Other Income Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Other income $ 25,181 $ 30,470 $ (5,289) (17.4) % Other income decreased during the six months ended February 28, 2022, primarily due to an investment gain during the second quarter of the prior year that did not reoccur during the current year. The decrease was partially offset by a gain on the sale of a business in our Ag segment during the first quarter of fiscal 2022 that did not occur during the same period of the prior year. Equity Income from Investments Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Equity income from investments* $ 381,268 $ 114,132 $ 267,136 234.1 % *For additional information, see Note 5, Investments, of the notes to the condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q. Equity income from investments increased during the six months ended February 28, 2022, compared to the same period during the prior year, primarily due to increased income associated with our equity method investment in CF Nitrogen. CF Nitrogen experienced increased sale prices of urea and UAN due to strong global demand and decreased global supply. Income Tax Expense Six Months Ended February 28, Change 2022 2021 Dollars Percent (Dollars in thousands) Income tax expense $ 26,651 $ 7,339 $ 19,312 (263.1) % Increased income tax expense during the six months ended February 28, 2022, primarily resulted from increased earnings during the first six months of fiscal 2022. Effective tax rates for the six months ended February 28, 2022 and 2021, were 3.8% and 19.1%, respectively. Federal and state statutory rates applied to nonpatronage business activity were 24.4% and 24.9% for the six months ended February 28, 2022 and 2021, respectively. Income taxes and effective tax rates vary each year based on profitability and nonpatronage business activity. 43 Table of Contents 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 them: February 28, 2022 August 31, 2021 (Dollars in thousands) Cash and cash equivalents $ 211,936 $ 413,159 Notes payable 2,688,004 1,740,859 Long-term debt including current maturities 1,964,727 1,618,361 Total equities 9,368,444 9,017,326 Working capital 2,416,695 1,672,938 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 6, Notes Payable and Long-Term Debt , of the notes to the unaudited condensed consolidated financial statements that are included in this Quarterly Report on Form 10-Q for additional information on our short-term borrowings and long-term debt. We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity. Summary of Our Major Uses of Cash and Cash Equivalents 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 $561 .4 mi llion compared to capital expenditures of $317.8 million in fiscal 2021. During the six months ended February 28, 2022, we acquired $130.9 million of property, plant and equipment. • Debt and interest . We expect to repay approximately $38.5 million of long-term debt and finance lease obligations and incur interest payments related to long-term debt of approximately $71.5 million during fiscal 2022. During the six months ended February 28, 2022, we repaid $30.5 million of scheduled long-term debt maturities. • Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding as of February 28, 2022. We expect to pay dividends on our preferred stock of approximately $168.7 million during fiscal 2022. Dividends paid on our preferred stock during the six months ended February 28, 2022, were $84.3 million. • 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. During the six months ended February 28, 2022, we distributed $30.0 million of cash patronage related to the year ended August 31, 2021, with the remaining $20.0 million expected to be distributed in the third quarter of fiscal year 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. During the six months ended February 28, 2022, we redeemed $17.5 million of member equity. 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 February 28, 2022. Based on our current fiscal 2022 projections, we expect continued covenant compliance. 44 Table of Contents 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 February 28, 2022, and August 31, 2021, was as follows: February 28, 2022 August 31, 2021 Change (Dollars in thousands) Current assets $ 11,227,062 $ 7,998,951 $ 3,228,111 Less current liabilities 8,810,367 6,326,013 2,484,354 Working capital $ 2,416,695 $ 1,672,938 $ 743,757 As of February 28, 2022, working capital increased by $743.8 million compared with August 31, 2021. Current asset balance changes increased working capital by $3.2 billion, primarily driven by increases in inventories, receivables and supplier advances, which were driven by higher commodity prices and seasonality in our business. Current liability balance changes decreased working capital by $2.5 billion, primarily due to increases in notes payable, customer advances and accounts payable, which were also driven by higher commodity prices and seasonality in our business. 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. Contractual Obligations For information regarding our estimated contractual obligations, see the MD&A discussion included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended August 31, 2021. Cash Flows The following table presents summarized cash flow data for the six months ended February 28, 2022 and 2021: Six Months Ended February 28, 2022 2021 Change (Dollars in thousands) Net cash used in operating activities $ (1,303,541) $ (1,134,545) $ (168,996) Net cash used in investing activities (156,140) (69,618) (86,522) Net cash provided by financing activities 1,191,666 1,319,720 (128,054) Effect of exchange rate changes on cash and cash equivalents (3,717) 1,026 (4,743) (Decrease) increase in cash and cash equivalents and restricted cash $ (271,732) $ 116,583 $ (388,315) 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 $169.0 million increase in cash used in operating activities reflects working capital increases, primarily associated with increased inventories and receivables, partially offset by increased net income during the first half of fiscal 2022 compared to the same period of the prior year. The $86.5 million increase in cash used in investing activities primarily reflects timing differences associated with borrowings and payments for CHS Capital notes receivable balances during the first half of fiscal 2022 compared to the same period during fiscal 2021. The $128.1 million decrease in cash provided by financing activities primarily reflects decreased net cash inflows associated with our notes payable and long-term debt facilities as the funding of a $375.0 million Note Purchase Agreement occurred during the first half of fiscal 2021. 45 Table of Contents Preferred Stock The following is a summary of our outstanding preferred stock as of February 28, 2022, all shares of which are listed on the Global Select Market of The Nasdaq Stock Market LLC: Nasdaq Symbol Issuance Date Shares Outstanding Redemption Value Net Proceeds (a) Dividend Rate (b) (c) Dividend Payment Frequency Redeemable Beginning (d) (Dollars in millions) 8% Cumulative Redeemable CHSCP (e) 12,272,003 $ 306.8 $ 311.2 8.00 % Quarterly 7/18/2023 Class B Cumulative Redeemable, Series 1 CHSCO (f) 21,459,066 $ 536.5 $ 569.3 7.875 % Quarterly 9/26/2023 Class B Reset Rate Cumulative Redeemable, Series 2 CHSCN 3/11/2014 16,800,000 $ 420.0 $ 406.2 7.10 % Quarterly 3/31/2024 Class B Reset Rate Cumulative Redeemable, Series 3 CHSCM 9/15/2014 19,700,000 $ 492.5 $ 476.7 6.75 % Quarterly 9/30/2024 Class B Cumulative Redeemable, Series 4 CHSCL 1/21/2015 20,700,000 $ 517.5 $ 501.0 7.50 % Quarterly 1/21/2025 (a) Includes patron equities redeemed with preferred stock. (b) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2, accumulates dividends at a rate of 7.10% per year until March 31, 2024, and then at a rate equal to the three-month LIBOR plus 4.298%, not to exceed 8.00% per annum, subsequent to March 31, 2024. (c) Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3, accumulates dividends at a rate of 6.75% per year until September 30, 2024, and then at a rate equal to the three-month LIBOR plus 4.155%, not to exceed 8.00% per annum, subsequent to September 30, 2024. (d) Preferred stock is redeemable for cash at our option, in whole or in part, at a per-share price equal to the per-share liquidation preference of $25.00 per share, plus all dividends accumulated and unpaid on that share to and including the date of redemption, beginning on the dates set forth in this column. (e) The 8% Cumulative Redeemable Preferred Stock was issued at various times from 2002 through 2010. (f) Shares of Class B Cumulative Redeemable Preferred Stock, Series 1, were issued on September 26, 2013; August 25, 2014; March 31, 2016; and March 30, 2017. Critical Accounting Policies Other than as described within the Significant Accounting Policies section of Note 1, Basis of Presentation and Significant Accounting Policies, to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our critical accounting policies as presented in MD&A in our Annual Report on Form 10-K for the year ended August 31, 2021, have not materially changed during the six months ended February 28, 2022. Recent Accounting Pronouncements See Note 1, Basis of Presentation and Significant Accounting Policies , to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements that apply to us. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We did not experience material changes in market risk exposures for the period ended February 28, 2022 , that would affect the quantitative and qualitative disclosures presented in our Annual Report on Form 10-K for the year ended August 31, 2021.