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 condensed consolidated 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 2023 Third Quarter Highlights • Fiscal 2023 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, 2022 (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 of this Quarterly Report on Form 10-Q. Overview CHS Inc. ("CHS") 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 grain and oilseed originated by our country operations and global grain and processing businesses, by our member cooperatives and by third parties. It also includes our renewable fuels business and 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 our Corporate and Other category. 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 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. We also focus 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 fiscal quarter and increase in the third quarter; 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 planting season. Our global grain and processing 22 Table of Contents operations are subject to fluctuations in volumes 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: 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, grain, 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, disease outbreaks, government regulations and policies, global trade disputes, wars and civil unrest, and general political and/or economic conditions. 23 Table of Contents 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 sustainable technology platforms; building robust and efficient supply chains; hiring, developing and retaining high-performing, diverse and passionate teams; achieving operational excellence and continuously improving; and maintaining a strong balance sheet. Fiscal 2023 Third Quarter Highlights • Robust global demand and market volatility continued to result in commodity prices that are elevated from historical averages. • Strong meal and oil demand resulted in improved oilseed crush margins that contributed to higher earnings in our oilseed processing business, which was partially offset by decreased prices for agronomy products in our Ag segment. • Our Energy segment continued to deliver strong earnings as a result of favorable market conditions in our refined fuels business, including sustained high global demand for energy products, as consumption outpaced supply. • Equity method investments continued to perform well, with our CF Nitrogen and Ventura Foods investments being the largest contributors. • We completed planned major maintenance to overhaul, repair, inspect and replace process materials and equipment (referred to in the industry as "turnaround") at our Laurel, Montana, refinery during April and May 2023. Fiscal 2023 Trends Update Our segments operate in cyclical environments in which market conditions can change rapidly with significant positive or negative impacts on our results. We anticipate that various macroeconomic factors, including the ongoing war between Russia and Ukraine; rising interest rates; bank failures and potential bank failures; and inflationary pressures increasing costs of labor, freight and materials; will continue to drive uncertainty and instability in global energy and agricultural commodity markets, as well as in global financial markets. This uncertainty and instability could have a significant impact on each of our segments through the remainder of fiscal 2023. In addition to these broad macroeconomic factors, other factors could impact demand for agricultural inputs and outputs, as well as our ability to supply those inputs and outputs. These include the cost of renewable energy credits, which remains higher than historical levels and could continue to negatively impact our profitability, and regional factors, such as unpredictable weather conditions, including those due to climate change. We currently expect the imbalance between global supply and strong global demand for agricultural commodities to continue to moderate through the remainder of fiscal 2023. We are unable to predict how long the current environment and market conditions will last or the extent of the financial and operational impacts to us in fiscal 2023. Refer to Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2022, and Item 1A of our Quarterly Report on Form 10-Q for the quarter ended February 28, 2023, for additional impacts that these and other risks may have on our business operations and financial performance. In addition to navigating market conditions that impact our businesses, we will continue to execute our enterprise priorities for fiscal 2023, including empowering and supporting our people, advancing our operating model by transforming how we work and adopting new technologies, and strategically investing in our infrastructure to meet the evolving needs of our owners and customers, enhancing value for the cooperative system and propelling sustainable growth. 24 Table of Contents 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. To ensure the reliability of our refineries, we perform major maintenance activities every two to five years, which require a temporary shutdown of operations. These planned shutdowns allow us to extend the life, increase the capacity and improve the safety and efficiency of our refinery processing assets. They also minimize unplanned business interruptions and are essential to the long-term reliability and profitability of our Energy segment. During periods of maintenance, utilization rates, throughput volumes and refined fuel yields are lower, and we may purchase refined petroleum products from third parties to meet the needs of our customers. These third-party purchases may result in lower margins than for products produced by our refineries, which reduces our profitability. The following table provides information about our consolidated refinery operations: Three Months Ended May 31, Nine Months Ended May 31, 2023 2022 2023 2022 Refinery throughput volumes* (Barrels per day) Heavy, high-sulfur crude oil 80,994 106,658 90,878 104,090 All other crude oil 71,037 72,915 70,704 72,359 Other feedstocks and blendstocks 14,543 11,436 11,594 14,007 Total refinery throughput volumes 166,574 191,009 173,176 190,456 Refined fuel yields* Gasolines 79,690 87,174 78,805 89,602 Distillates 69,460 85,078 75,640 82,396 *Lower refinery throughput volumes and refined fuel yields experienced during the three and nine months ended May 31, 2023, are primarily due to a planned shutdown to perform major maintenance at our Laurel, Montana, refinery. 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 June 2023, the EPA issued its final renewable volume obligation ("RVO") for calendar years 2023 through 2025. 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, which can impact our profitability. The prices for D6 ethanol RINs and D4 biodiesel RINs increased by 16% and decreased by 5%, respectively, during the third quarter of fiscal 2023 compared to the same period in the prior year. Estimates of our RIN expenses are calculated using an average RIN price each month. 25 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 discounts (i.e., the price discount for WCS crude oil relative to West Texas Intermediate ("WTI") crude oil), which are driven by the supply and demand for refined products. Crack spreads and WCS crude oil discounts both increased during the nine months ended May 31, 2023, compared to the same period during the prior year, which contributed to improved IBIT for the Energy segment during the period. Although the WCS crude oil discount increased during the three months ended May 31, 2023, and resulted in improved IBIT for the Energy segment during the quarter, crack spreads decreased in the third quarter of fiscal 2023 relative to the same period during the prior year. The table below provides information about average market reference prices and discounts that impacted our Energy segment during the three and nine months ended May 31, 2023 and 2022: Three Months Ended May 31, Nine Months Ended May 31, 2023 2022 2023 2022 Market indicators WTI crude oil (dollars per barrel) $ 74.81 $ 106.39 $ 79.05 $ 88.54 WTI - WCS crude oil discount (dollars per barrel) $ 17.24 $ 12.98 $ 22.48 $ 14.03 Group 3 2:1:1 crack spread (dollars per barrel)* $ 32.74 $ 38.86 $ 35.99 $ 24.93 Group 3 5:3:2 crack spread (dollars per barrel)* $ 32.12 $ 36.30 $ 33.54 $ 23.70 D6 ethanol RIN (dollars per RIN) $ 1.5263 $ 1.3176 $ 1.6063 $ 1.1995 D4 biodiesel RIN (dollars per RIN) $ 1.5593 $ 1.6443 $ 1.6903 $ 1.5175 *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 nine months ended May 31, 2023 and 2022: Three Months Ended May 31, Nine Months Ended May 31, Market Source* 2023 2022 2023 2022 Commodity prices Corn (dollars per bushel) Chicago Board of Trade $ 6.30 $ 7.74 $ 6.57 $ 6.34 Soybeans (dollars per bushel) Chicago Board of Trade $ 14.17 $ 16.70 $ 14.49 $ 14.18 Wheat (dollars per bushel) Chicago Board of Trade $ 6.35 $ 10.46 $ 7.47 $ 8.74 Urea (dollars per ton) Green Markets NOLA $ 351.04 $ 745.00 $ 448.50 $ 688.00 Urea ammonium nitrate (dollars per ton) Green Markets NOLA $ 268.92 $ 615.04 $ 396.93 $ 539.52 Ethanol (dollars per gallon) Chicago Platts $ 2.37 $ 2.62 $ 2.35 $ 2.62 Volumes Grain and oilseed (thousands of bushels) 544,908 575,827 1,629,545 1,674,894 North American grain and oilseed port throughput (thousands of bushels) 135,329 176,773 471,920 536,695 Wholesale crop nutrients (thousands of tons) 2,113 1,750 5,098 4,949 Ethanol (thousands of gallons) 236,035 234,679 717,438 687,280 *Market source information represents the average month-end price during the period. 26 Table of Contents Results of Operations Three Months Ended May 31, 2023 and 2022 Three Months Ended May 31, 2023 % of Revenues* 2022 % of Revenues* (Dollars in thousands) Revenues $ 12,026,051 100.0 % $ 13,137,724 100.0 % Cost of goods sold 11,351,711 94.4 12,493,467 95.1 Gross profit 674,340 5.6 644,257 4.9 Marketing, general and administrative expenses 273,238 2.3 243,136 1.9 Operating earnings 401,102 3.3 401,121 3.1 Interest expense 36,949 0.3 32,099 0.2 Other income (31,027) (0.3) (6,636) (0.1) Equity income from investments (162,940) (1.4) (263,079) (2.0) Income before income taxes 558,120 4.6 638,737 4.9 Income tax expense 10,777 0.1 62,492 0.5 Net income 547,343 4.6 576,245 4.4 Net loss attributable to noncontrolling interests (156) — (329) — Net income attributable to CHS Inc. $ 547,499 4.6 % $ 576,574 4.4 % *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 May 31, 2023. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. 27 Table of Contents Income Before Income Taxes by Segment Energy Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Income before income taxes $ 198,995 $ 163,241 $ 35,754 21.9 % The following waterfall analysis and commentary presents the changes in our Energy segment IBIT for the three months ended May 31, 2023, 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: • Increased margins resulting from hedging-related gains due to global market conditions and increased WCS crude oil discounts in our refined fuels business contributed to $101.0 million and $33.2 million increases of IBIT, respectively. • Increased margins were partially offset by decreased refined fuels production volumes due to planned major maintenance at our Laurel, Montana, refinery, which reduced the sales mix of higher-margin produced refined fuels compared to the prior period and contributed to a $74.0 million decrease of IBIT, as well as lower crack spreads that contributed to a $54.3 million decrease of IBIT. 28 Table of Contents Ag Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Income before income taxes $ 233,515 $ 273,688 $ (40,173) (14.7 %) The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the three months ended May 31, 2023, 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: • Decreased margins for wholesale and retail agronomy products resulted from market-driven price decreases and contributed to a $99.9 million decrease of IBIT. • The margin decrease in Ag segment IBIT was partially offset by increased margins in our grain and oilseed and oilseed processing product categories due to strong meal and oil demand resulting in improved crush margins. • Higher volumes of wholesale and retail agronomy products contributed to a $31.1 million increase of IBIT due to increased demand during the third quarter of fiscal 2023 as prices declined due to global market conditions. All Other Segments Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT* $ 56,263 $ 178,212 $ (121,949) (68.4 %) Corporate and Other IBIT $ 69,347 $ 23,596 $ 45,751 193.9 % *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 decreased from the prior year due to lower equity income attributed to decreased selling prices of urea and UAN due to global supply and demand factors. Corporate and Other IBIT increased primarily due to increased equity income from our Ventura Foods, LLC ("Ventura Foods"), investment as a result of more favorable market conditions for edible oils experienced during the third quarter of fiscal 2023 compared to the same period in the prior year, as well as increased interest income due to higher interest rates. 29 Table of Contents Revenues by Segment Energy Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Revenues $ 2,264,087 $ 2,775,942 $ (511,855) (18.4 %) The following waterfall analysis and commentary presents the changes in our Energy segment revenues for the three months ended May 31, 2023, compared to the same period during the prior year: The change in Energy segment revenues reflects the following: • Decreased selling prices resulting from global market conditions contributed to $545.5 million and $62.9 million decreases of revenues for refined fuels and propane, respectively. • Higher refined fuels volumes contributed to a $91.5 million increase in revenues driven by higher demand. 30 Table of Contents Ag Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Revenues $ 9,743,976 $ 10,352,369 $ (608,393) (5.9 %) The following waterfall analysis and commentary presents the changes in our Ag segment revenues for the three months ended May 31, 2023, compared to the same period during the prior year: The change in Ag segment revenues reflects the following: • Decreased selling prices across many of our Ag segment product categories during the third quarter of fiscal 2023, included: ◦ $654.0 million decrease for wholesale and retail agronomy products driven by lower urea and UAN prices; ◦ $64.1 million decrease for renewable fuels resulting from lower ethanol prices due to decreased demand; and ◦ $36.7 million decrease for oilseed processing due to global market conditions. • Increased volumes of wholesale and retail agronomy products contributed to a $374.6 million increase in revenues, which experienced increased demand during the third quarter of fiscal 2023 as prices declined due to global market conditions. • The overall volume increase was mostly offset by decreased volumes within our grain and oilseed product category due to a combination of factors, including drought conditions in parts of our trade territory and lower global demand for U.S. grain. All Other Segments Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Corporate and Other revenues* $ 17,988 $ 9,413 $ 8,575 91.1 % *Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. Corporate and Other revenues increased during the three months ended May 31, 2023, compared to the same period during the prior year, primarily as a result of increased interest income due to higher interest rates. 31 Table of Contents Cost of Goods Sold by Segment Energy Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Cost of goods sold $ 1,989,646 $ 2,533,135 $ (543,489) (21.5 %) The following waterfall analysis and commentary presents the changes in our Energy segment COGS for the three months ended May 31, 2023, compared to the same period during the prior year: The change in Energy segment COGS reflects the following: • Global market conditions contributed to decreased costs for refined fuels and propane that drove $583.7 million and $52.3 million decreases in COGS, respectively. • Higher volumes of refined fuels resulting from higher demand contributed to increased COGS of $83.2 million. 32 Table of Contents Ag Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Cost of goods sold $ 9,365,319 $ 9,960,631 $ (595,312) (6.0 %) The following waterfall analysis and commentary presents the changes in our Ag segment COGS for the three months ended May 31, 2023, compared to the same period during the prior year: The change in Ag segment COGS reflects the following: • Lower costs across many of our Ag segment product categories during the third quarter of fiscal 2023, included: ◦ $554.1 million decrease for wholesale and retail agronomy products driven by lower urea and UAN prices; ◦ $65.4 million decrease for oilseed processing due to lower commodity prices; and ◦ $53.5 million decrease for renewable fuels resulting from lower input costs. • Increased volumes of wholesale and retail agronomy products contributed to a $343.5 million increase in COGS, which experienced increased demand during the third quarter of fiscal 2023 as prices declined due to global market conditions. • The overall volume increase was mostly offset by volume decreases within our grain and oilseed product category primarily due to drought conditions in parts of our trade territory and lower global demand for U.S. grain. All Other Segments Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Nitrogen Production COGS $ 424 $ 428 $ (4) (0.9 %) Corporate and Other COGS $ (3,678) $ (727) $ (2,951) (405.9 %) There were no significant changes to COGS in our Nitrogen Production segment or Corporate and Other during the three months ended May 31, 2023, compared to the same period during the prior year. 33 Table of Contents Marketing, General and Administrative Expenses Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Marketing, general and administrative expenses $ 273,238 $ 243,136 $ 30,102 12.4 % Marketing, general and administrative expenses increased during the three months ended May 31, 2023, primarily due to higher salary and benefit expenses, as well as costs related to certain legal matters. Interest Expense Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Interest expense $ 36,949 $ 32,099 $ 4,850 15.1 % Interest expense increased during the three months ended May 31, 2023, as a result of higher interest rates compared to the same period in the prior year, which was partially offset by decreased notes payable balances. Other Income Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Other income $ 31,027 $ 6,636 $ 24,391 367.6 % Other income increased during the three months ended May 31, 2023, as a result of increased interest income due to higher interest rates and a larger cash balance earning interest. Equity Income from Investments Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Equity income from investments* $ 162,940 $ 263,079 $ (100,139) (38.1 %) *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 decreased during the three months ended May 31, 2023, compared to the same period during the prior year, primarily due to lower income associated with our equity method investment in CF Nitrogen, partially offset by higher income associated with our equity method investment in Ventura Foods. Equity income decreased for CF Nitrogen as a result of lower prices of urea and UAN due to global supply and demand factors and increased for Ventura Foods as a result of more favorable market conditions for edible oils. Income Tax Expense Three Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Income tax expense $ 10,777 $ 62,492 $ (51,715) (82.8 %) Decreased income tax expense during the three months ended May 31, 2023, resulted from decreased nonpatronage earnings and additional Domestic Production Activities Deduction ("DPAD") benefit during the period. Effective tax rates for the three months ended May 31, 2023 and 2022, were 1.9% and 9.8%, respectively. Federal and state statutory rates of 24.7% and 24.4% were applied to nonpatronage business activity for the three months ended May 31, 2023 and 2022, respectively. Income taxes and effective tax rates vary each year based on profitability, nonpatronage business activity and current equity management assumptions. 34 Table of Contents Results of Operations Nine Months Ended May 31, 2023 and 2022 Nine Months Ended May 31, 2023 % of Revenues* 2022 % of Revenues* (Dollars in thousands) Revenues $ 36,098,738 100.0 % $ 34,351,069 100.0 % Cost of goods sold 34,160,996 94.6 32,917,906 95.8 Gross profit 1,937,742 5.4 1,433,163 4.2 Marketing, general and administrative expenses 749,829 2.1 692,395 2.0 Operating earnings 1,187,913 3.3 740,768 2.2 Interest expense 106,166 0.3 80,705 0.2 Other income (83,629) (0.2) (31,817) (0.1) Equity income from investments (523,236) (1.4) (644,347) (1.9) Income before income taxes 1,688,612 4.7 1,336,227 3.9 Income tax expense 66,305 0.2 89,143 0.3 Net income 1,622,307 4.5 1,247,084 3.6 Net loss attributable to noncontrolling interests (111) — (451) — Net income attributable to CHS Inc. $ 1,622,418 4.5 % $ 1,247,535 3.6 % *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 nine months ended May 31, 2023. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. 35 Table of Contents Income Before Income Taxes by Segment Energy Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Income before income taxes $ 860,411 $ 243,262 $ 617,149 253.7 % The following waterfall analysis and commentary presents the changes in our Energy segment IBIT for the nine months ended May 31, 2023, 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 discounts resulted from higher global demand and improved market conditions in our refined fuels business, which contributed to a $742.3 million increase of IBIT. • Higher margins for refined fuels and propane attributable to hedging-related impacts due to global market conditions affecting the price of these products contributed to $108.0 million and $19.6 million increases of IBIT, respectively. • The increased IBIT was partially offset by the impact of decreased refined fuels production volumes due to planned and unplanned major maintenance at our Laurel and McPherson refineries that reduced the sales mix of higher-margin produced refined fuels compared to the prior year and contributed to a $170.0 million decrease of IBIT. • Increased costs in our refined fuels business also partially offset the increased IBIT, the most significant of which included $59.0 million related to higher RIN prices due to market conditions and $33.0 million of higher repair and maintenance expenses in the current year. 36 Table of Contents Ag Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Income before income taxes $ 439,248 $ 615,294 $ (176,046) (28.6 %) The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the nine months ended May 31, 2023, 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: • Decreased margins of $238.7 million were realized primarily for wholesale and retail agronomy products, which experienced market-driven price decreases during the period. • Decreased margins of $47.6 million for renewable fuels resulted from decreased ethanol prices. • Overall decreased Ag margins were partially offset by increased margins of $63.5 million and $40.8 million in our oilseed processing and grain and oilseed product categories due to strong meal and oil crush margins and favorable global market conditions, respectively. All Other Segments Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT* $ 234,869 $ 429,052 $ (194,183) (45.3 %) Corporate and Other IBIT $ 154,084 $ 48,619 $ 105,465 216.9 % *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 decreased from the prior year as a result of lower equity income attributed to decreased selling prices of urea and UAN due to global supply and demand factors. Corporate and Other IBIT increased primarily due to increased equity income from our Ventura Foods investment as a result of more favorable market conditions for edible oils experienced during the first nine months of fiscal 2023 compared to the same period in the prior year, as well as increased interest income due to higher interest rates. 37 Table of Contents Revenues by Segment Energy Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Revenues $ 7,552,294 $ 7,107,928 $ 444,366 6.3 % The following waterfall analysis and commentary presents the changes in our Energy segment revenues for the nine months ended May 31, 2023, compared to the same period during the prior year: The change in Energy segment revenues reflects the following: • Global market conditions contributed to increased selling prices for refined fuels that contributed to a $390.2 million increase in revenues, which was partially offset by lower selling prices for propane, which resulted in a $135.0 million decrease in revenues. • Higher refined fuels volumes driven by higher demand contributed to a $151.6 million increase in revenues. 38 Table of Contents Ag Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Revenues $ 28,497,690 $ 27,217,559 $ 1,280,131 4.7 % The following waterfall analysis and commentary presents the changes in our Ag segment revenues for the nine months ended May 31, 2023, compared to the same period during the prior year: The change in Ag segment revenues reflects the following: • Higher revenues were primarily attributed to market-driven price increases for grain and oilseed, which resulted from increased global demand during the first nine months of fiscal 2023 and contributed to a $2.5 billion increase of revenues. • The overall increase of revenues was partially offset by a $1.1 billion decrease in revenues for wholesale and retail agronomy products driven by lower urea and UAN prices. • Volumes decreased within our grain and oilseed product category due to a combination of factors, including lower crop yields resulting from drought conditions experienced in portions of our trade territory in North America, and contributed to a $464.0 million decrease in revenues. • The overall volume decrease was partially offset by volume increases in most of our product categories, including a $119.9 million increase in revenues for oilseed processing driven by strong meal and oil demand, a $79.8 million increase in revenues for renewable fuels due to higher demand and a $47.5 million increase in revenues for retail and wholesale agronomy products, which experienced increased demand during the third quarter of fiscal 2023 as prices declined due to global market conditions. All Other Segments Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Corporate and Other revenues* $ 48,754 $ 25,582 $ 23,172 90.6 % *Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses but not revenues. Corporate and Other revenues increased during the nine months ended May 31, 2023, compared to the same period during the prior year, primarily as a result of increased interest income due to higher interest rates. 39 Table of Contents Cost of Goods Sold by Segment Energy Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Cost of goods sold $ 6,475,627 $ 6,665,612 $ (189,985) (2.9 %) The following waterfall analysis and commentary presents the changes in our Energy segment COGS for the nine months ended May 31, 2023, compared to the same period during the prior year: The change in Energy segment COGS reflects the following: • Global market conditions, including hedging-related impacts for refined fuels and propane, contributed to $215.2 million and $154.2 million decreases in COGS, respectively. • Higher volumes of refined fuels due to higher demand contributed to increased COGS of $141.3 million. 40 Table of Contents Ag Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Cost of goods sold $ 27,689,354 $ 26,256,104 $ 1,433,250 5.5 % The following waterfall analysis and commentary presents the changes in our Ag segment COGS for the nine months ended May 31, 2023, compared to the same period during the prior year: The change in Ag segment COGS reflects the following: • Higher costs were primarily attributed to market-driven price increases for grain and oilseed, which resulted from increased global demand during the first nine months of fiscal 2023 and contributed to a $2.5 billion increase of COGS. • The overall increase of costs was partially offset by a $819.2 million decrease for wholesale and retail agronomy products driven by lower urea and UAN prices. • Volumes decreased within our grain and oilseed product category due to a combination of factors, including lower crop yields resulting from drought conditions experienced in portions of our trade territory in North America and contributed to a $458.3 million decrease in COGS. • The overall volume decrease was partially offset by volume increases in most of our product categories, including a $105.6 million increase in COGS for oilseed processing driven by strong meal and oil demand, a $77.1 million increase in COGS for renewable fuels due to higher demand and a $49.6 million increase in COGS for retail and wholesale agronomy products, which experienced increased demand during the third quarter of fiscal 2023 as prices declined due to global market conditions. All Other Segments Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Nitrogen Production COGS $ 1,276 $ 1,256 $ 20 1.6 % Corporate and Other COGS $ (5,261) $ (5,066) $ (195) (3.8 %) There were no significant changes to COGS in our Nitrogen Production segment or Corporate and Other during the nine months ended May 31, 2023, compared to the same period during the prior year. 41 Table of Contents Marketing, General and Administrative Expenses Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Marketing, general and administrative expenses $ 749,829 $ 692,395 $ 57,434 8.3 % Marketing, general and administrative expenses increased during the nine months ended May 31, 2023, primarily due to higher salary and benefit expenses, as well as costs related to certain legal matters and higher repair and maintenance expenses for our facilities and information technology platforms. Interest Expense Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Interest expense $ 106,166 $ 80,705 $ 25,461 31.5 % Interest expense increased during the nine months ended May 31, 2023, as a result of higher interest rates compared to the same period in the prior year, which was partially offset by decreased notes payable balances. Other Income Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Other income $ 83,629 $ 31,817 $ 51,812 162.8 % Other income increased during the nine months ended May 31, 2023, primarily as a result of increased interest income due to higher interest rates and a larger cash balance earning interest. Equity Income from Investments Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Equity income from investments* $ 523,236 $ 644,347 $ (121,111) (18.8 %) *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 decreased during the nine months ended May 31, 2023, compared to the same period during the prior year, primarily due to lower income associated with our equity method investment in CF Nitrogen, which was partially offset by higher income associated with our equity method investment in Ventura Foods. Equity income decreased for CF Nitrogen as a result of lower prices of urea and UAN due to global supply and demand factors and increased for Ventura Foods as a result of more favorable market conditions for edible oils. Income Tax Expense Nine Months Ended May 31, Change 2023 2022 Dollars Percent (Dollars in thousands) Income tax expense $ 66,305 $ 89,143 $ (22,838) (25.6 %) Decreased income tax expense during the nine months ended May 31, 2023, resulted from decreased nonpatronage earnings and additional DPAD benefit during the period. Effective tax rates for the nine months ended May 31, 2023 and 2022, were 3.9% and 6.7%, respectively. Federal and state statutory rates of 24.7% and 24.4% were applied to nonpatronage business activity for the nine months ended May 31, 2023 and 2022, respectively. Income taxes and effective tax rates vary each year based on profitability, nonpatronage business activity and current equity management assumptions. 42 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 our member-owners: May 31, 2023 August 31, 2022 (Dollars in thousands) Cash and cash equivalents $ 997,323 $ 793,957 Notes payable 605,955 606,719 Long-term debt including current maturities 1,952,256 1,958,814 Total equities 10,083,378 9,461,266 Working capital 2,765,321 2,425,878 Current ratio* 1.4 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 our cash flows from operations and with short-term borrowings through our committed and uncommitted revolving credit facilities, including our securitization facility with certain unaffiliated financial institutions and our repurchase facilities relating thereto. On April 21, 2023, we amended and restated our five-year unsecured revolving credit facility, which provides a committed amount of $2.8 billion. That facility now expires on April 21, 2028. We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment, with cash flows from operations and by issuing long-term debt. On January 24, 2023, we entered into a Note Purchase Agreement to borrow $150.0 million of debt in the form of a note. The note matures on January 24, 2030, and interest accrues at a rate of 5.68%, subject to certain adjustments depending on our ratio of consolidated funded debt to consolidated cash flow, and the proceeds were used to retire maturing 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 2023: • Capital expenditures. We expect total capital expenditures for fiscal 2023 to be approximately $730.2 million compared to capital expenditures of $354.4 million in fiscal 2022. Increased capital expenditures for fiscal 2023 are for investments in our infrastructure to meet the evolving needs of our owners and customers, enhance value for the cooperative system and propel sustainable growth. During the nine months ended May 31, 2023, we acquired $374.2 million of property, plant and equipment. • Major maintenance. We expect total major maintenance for fiscal 2023 to be approximately $238.3 million compared to major maintenance of $24.8 million in fiscal 2022. Increased major maintenance for fiscal 2023 is for a turnaround at our Laurel refinery. During the nine months ended May 31, 2023, we paid $184.4 million in major maintenance. • Debt and interest . We expect to repay approximately $291.7 million of long-term debt and finance lease obligations and incur interest payments related to long-term debt of approximately $87.5 million during fiscal 2023. During the nine months ended May 31, 2023, we repaid $159.4 million of scheduled long-term debt maturities and finance lease obligations. • Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding as of May 31, 2023. We expect to pay dividends on our preferred stock of approximately $168.7 million during fiscal 2023. Dividends paid on our preferred stock during the nine months ended May 31, 2023, were $126.5 million. • Patronage . Our Board of Directors has authorized approximately $500.0 million of our fiscal 2022 patronage-sourced earnings to be paid to our member-owners during fiscal 2023. During the nine months ended May 31, 2023, we distributed $502.9 million of cash patronage related to the year ended August 31, 2022. • Equity redemptions . Our Board of Directors has authorized equity redemptions of up to $500.0 million to be distributed in fiscal 2023 in the form of redemptions of qualified and nonqualified equity owned by individual 43 Table of Contents producer-members and association members. During the nine months ended May 31, 2023, we redeemed $480.4 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 short- and long-term operations. 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 debt covenants and restrictions as of May 31, 2023. Based on our current fiscal 2023 projections, we expect continued covenant compliance. Working Capital We measure working capital as current assets less current liabilities as each amount appears on our condensed consolidated balance sheets. We 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 May 31, 2023, and August 31, 2022, was as follows: May 31, 2023 August 31, 2022 Change (Dollars in thousands) Current assets $ 9,386,291 $ 9,377,847 $ 8,444 Less current liabilities 6,620,970 6,951,969 (330,999) Working capital $ 2,765,321 $ 2,425,878 $ 339,443 As of May 31, 2023, working capital increased by $339.4 million compared with August 31, 2022. Current asset balance changes increased working capital by $8.4 million, primarily driven by increases in receivables and cash and cash equivalents, which were driven by seasonality in our business. Current liability balance changes increased working capital by $331.0 million, primarily due to a decrease in the current portion of long-term debt following its maturity during fiscal 2023 and a decrease in customer advances, which was driven by 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, 2022. No material changes occurred during the nine months ended May 31, 2023. Cash Flows The following table presents summarized cash flow data for the nine months ended May 31, 2023 and 2022: Nine Months Ended May 31, 2023 2022 Change (Dollars in thousands) Net cash provided by (used in) operating activities $ 1,969,725 $ (7,138) $ 1,976,863 Net cash used in investing activities (651,088) (339,888) (311,200) Net cash (used in) provided by financing activities (1,147,164) 355,946 (1,503,110) Effect of exchange rate changes on cash and cash equivalents (16) (11,311) 11,295 Increase (decrease) in cash and cash equivalents and restricted cash $ 171,457 $ (2,391) $ 173,848 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 $2.0 billion decrease in cash used in operating activities primarily reflects decreases in inventories and receivables, which resulted from a combination of reduced prices and volumes, as well as increased net income during the first nine months of fiscal 2023 compared to the same period during fiscal 2022. 44 Table of Contents The $311.2 million increase of cash used in investing activities reflects larger expenditures for property, plant and equipment and major maintenance during the first nine months of fiscal 2023, compared to the same period during fiscal 2022. The $1.5 billion decrease in cash provided by financing activities primarily reflects decreased net cash inflows associated with our notes payable due to lower short-term funding needs resulting from strong cash earnings and increased cash outflows for patronage paid and equity redemptions during the first nine months of fiscal 2023 compared to the same period during fiscal 2022. Preferred Stock The following is a summary of our outstanding preferred stock as of May 31, 2023, 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 benchmark interest rate 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 benchmark interest rate plus 4.155%, not to exceed 8.00% per annum, subsequent to September 30, 2024. (d) All series of preferred stock are 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 Our critical accounting policies as presented in the MD&A in our Annual Report on Form 10-K for the year ended August 31, 2022, have not materially changed during the nine months ended May 31, 2023. Recent Accounting Pronouncements No recent accounting pronouncements are expected to have a material impact on our condensed consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We did not experience material changes in market risk exposures for the period ended May 31, 2023 , that would affect the quantitative and qualitative disclosures presented in our Annual Report on Form 10-K for the year ended August 31, 2022. 45 Table of Contents