What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-11-08 compared with 2022-11-02 · 98 added, 106 removed, 319 unchanged (39% of the section changed)

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Produces and provides primarily for the wholesale distribution and transportation of petroleum products.

Purchases and further processes or resells grain and oilseed originated by our country operations and global grain businesses, by our member cooperatives and by third parties.

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.

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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 consolidated financial statements include the accounts of CHS and all subsidiaries and limited liability companies in which we have a controlling interest.

The consolidated financial statements include the accounts of CHS and all subsidiaries and limited liability companies in which we have control.

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.

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 .

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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.

Our revenues and IBIT generally trend lower during the second fiscal quarter and increase in the third fiscal quarter.

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 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.

Our global grain and processing operations are subject to fluctuations in volumes and revenues based on producer harvests, world grain prices, global 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 .

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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 new technology platforms;

To execute these strategies, we are focused on implementing agile, efficient and sustainable technology platforms;

building robust and efficient supply chains;

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Fiscal 2023 Highlights

• Robust global demand, coupled with increased market volatility, resulted in higher commodity prices and significantly improved earnings.

• Higher refining margins drove significantly improved earnings in our Energy segment that resulted from supply and demand factors, including trade flow disruptions caused by the Russian invasion of Ukraine and higher global demand for energy products as consumption outpaced supply.

• Equity method investments performed well, with our CF Nitrogen investment being the largest contributor due to improved earnings as a result of market conditions driven by strong global demand for urea and UAN and decreased global supply.

• Our global grain and processing and wholesale agronomy businesses in our Ag segment benefited from strong global demand and increased margins.

• Robust global demand and market volatility continued to result in higher commodity prices that are elevated from historical averages.

• Our Energy segment delivered 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.

• In our Ag segment, strong meal and oil demand resulted in improved crush margins that contributed to higher earnings in our oilseed processing business, which was partially offset by decreased prices for agronomy products.

• Equity method investments performed well, with our CF Nitrogen and Ventura Foods investments being the largest contributors.

Fiscal 2024 Outlook

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, 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 global financial markets, which could have a significant impact on each of our segments during fiscal 2023.

In addition to these broad macroeconomic factors, the cost of renewable energy credits remains higher than historical levels, which could continue to negatively impact our profitability, and regional factors, such as unpredictable weather conditions, including those due to climate change, could impact demand for agricultural inputs and outputs, as well as our ability to supply those inputs and outputs.

Although challenges remain, the imbalance between global supply and strong global demand for agricultural commodities is currently expected to result in continued market volatility and favorable pricing in fiscal 2023.

We anticipate that various macroeconomic factors will continue to drive uncertainty and instability in global energy and agricultural commodity markets, as well as global financial markets, which could have a significant impact on each of our segments during fiscal 2024.

These factors include the ongoing war between Russia and Ukraine and escalation of conflict in the Middle East, shifts in global trade flows for commodities, a higher interest rate environment, and inflationary pressures increasing costs of labor, freight and materials.

In addition to these broad macroeconomic factors, other factors could impact the demand and pricing for agricultural inputs and outputs, as well as our ability to supply those inputs and outputs while remaining profitable.

These include the cost of renewable energy credits, the prices of which remains volatile and could continue to negatively impact our profitability, and regional factors, such as unpredictable weather conditions, including those due to climate change.

We currently expect the imbalance between global supply and strong global demand for energy and agricultural commodities to continue to moderate in fiscal 2024.

We are unable to predict how long the current environment will last or the severity of the financial and operational impacts in fiscal 2024.

Refer to Item 1A of this Annual Report on Form 10-K for additional consideration these risks may have on our business operations and financial performance.

In addition to navigating market conditions that impact our businesses, we will continue to take actions in an effort to execute on our enterprise priorities throughout 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, enhance value for the cooperative system and propel sustainable growth.

We will continue to execute our enterprise priorities for fiscal 2024, including empowering and investing in our people, accelerating our operating model to better serve owners and customers, leveraging our financial strength to navigate dynamic and changing market conditions, and elevating sustainable growth through empowered teams, an integrated operating model and a solid financial foundation.

Operating Metrics

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:

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Distillates 76,613 82,291

*Lower refinery throughput volumes and refined fuel yields experienced during fiscal 2023 are primarily due to a planned shutdown to perform major

maintenance at our Laurel, Montana, refinery during the third quarter of fiscal 2023.

We are subject to the Renewable Fuel Standard that requires refiners to blend renewable fuels (e.g., ethanol and biodiesel) into their finished transportation fuels or purchase renewable energy credits, known as renewable identification numbers ("RINs"), in lieu of blending.

The EPA generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year.

Environmental Protection Agency ("EPA") generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year.

In June 2023, the EPA issued a final renewable volume obligation ("RVO") for calendar years 2020 through 2025.

The RVO for calendar year 2020 was lower than previously issued, and the RVO for calendar year 2021 was lower than anticipated as a result of lower demand for refined fuels that occurred during calendar year 2021 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.

We generate RINs through our blending activities, but we cannot generate enough RINs to meet the needs of our refining capacity;

therefore, RINs must be purchased on the open market.

The price of RINs can be volatile, with prices for D6 ethanol RINs and D4 ethanol RINs rising by 22% and 5%, respectively, during fiscal 2023 compared to the prior year, which negatively impacted our earnings.

Estimates of our RIN expense are calculated using an average RIN price each month.

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 of refined products.

Estimates of our RIN expenses are calculated using an average RIN price each month.

Crack spreads and WCS crude oil discounts both increased in fiscal 2023, compared to the prior year, contributing to improved IBIT for the Energy segment.

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*Group 3 refers to the oil refining and distribution system serving the Midwest markets from the Gulf Coast through the Plains states.

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.

Our Ag segment operations work together to facilitate the 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.

however, revenues and cost of goods sold ("COGS") are largely affected by market-driven commodity prices outside our control.

The table below provides information about average market prices for agricultural commodities and our sales/throughput volumes that impacted our Ag segment for the years ended August 31, 2023 and 2022:

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Income before income taxes 2,007,779 4.4 1,810,017 3.8

Income tax expense (benefit) 132,116 0.3 (38,249) (0.1)

Income tax expense 107,655 0.2 132,116 0.3

Net income 1,900,124 4.2 1,677,901 3.5

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Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.

Income (Loss) Before Income Taxes by Segment

Income Before Income Taxes by Segment

Years Ended August 31, Change

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(Dollars in thousands)

Income (loss) before income taxes $ 616,551 $ (10,596) $ 627,147 5,918.7 %

Income before income taxes $ 1,075,443 $ 616,551 $ 458,892 74.4 %

The following waterfall analysis and commentary presents the changes in our Energy segment IBIT for the year ended August 31, 2023, compared to the prior year:

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The change in Energy segment IBIT for fiscal 2023 reflects the following:

• Higher crack spreads and increased WCS crude oil discounts reflect improved market conditions in our refined fuels business and contributed to a $1.0 billion increase of IBIT.

• Increased refinery production volumes also contributed to increased IBIT of approximately $81.0 million as a result of the increased sales mix of higher-margin produced refined fuels, compared to the lower-margin purchased refined fuels.

• Increased margins due to higher crack spreads and WCS crude oil discounts were partially offset by hedging-related losses of $128.0 million and other increased costs for refined fuels, including higher RIN and natural gas prices due to market conditions that contributed to decreased earnings of $74.0 million and $26.0 million, respectively.

Additionally, the $35.3 million benefit associated with the liquidation of historical last-in, first out ("LIFO") layers for certain refined fuels inventories in the prior year did not reoccur in fiscal 2022.

• Lower propane margins resulting from hedging-related losses and reversals of prior unrealized gains of $55.4 million during fiscal 2022 also partially offset the improved earnings in our refined fuels business.

• Higher crack spreads and increased WCS crude oil discounts reflect higher global demand and improved market conditions in our refined fuels business and contributed to a $533.2 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 $135.0 million and $68.2 million of increased IBIT, respectively.

• Increased IBIT was partially offset by the impact of decreased refined fuels production volumes primarily due to planned major maintenance at our Laurel refinery that reduced the sales mix of higher-margin produced refined fuels products relative to lower-margin purchased refined fuels products and contributed to a $127.0 million decrease of IBIT.

• Increased costs in our refined fuels business also partially offset increased IBIT, the most significant of which included $84.0 million related to higher market-driven RIN prices and $77.0 million of higher refinery expenses, the largest of which was repairs and maintenance, in the current year.

Years Ended August 31, Change

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The change in Ag segment IBIT for fiscal 2023 reflects the following:

• Increased margins across all our Ag segment product categories, including:

◦ $145.1 million increase for grain and oilseed that resulted primarily from strong global demand and mark-to-market changes associated with our commodity derivatives, including unrealized gains;

◦ $119.6 million increase for wholesale agronomy products, which resulted from strong global market demand and global supply disruptions;

◦ $105.6 million increase for oilseed processing as a result of strong meal and oil demand;

◦ $103.9 million increase for feed and farm supplies due to strong demand and global supply disruptions.

• Decreased volumes due to supply chain constraints and less favorable weather conditions during the planting and application season during fiscal 2022 resulted in a $106.3 million decrease for feed and farm supplies, which was partially offset by the net impact of other volume changes in other Ag segment product categories.

• Decreased margins across most of our Ag segment product categories during the year, including:

◦ $232.6 million decrease for wholesale and retail agronomy products, which experienced market-driven price decreases throughout fiscal 2023 compared to historically high prices in the prior year;

◦ $51.5 million decrease for renewable fuels due to lower ethanol prices;

◦ $46.2 million decrease for grain and oilseed as a result of the timing of the impact of mark-to-market adjustments associated with our commodity derivatives.

• The margin decrease in our Ag segment was partially offset by $90.2 million of increased margins in our oilseed processing products due to strong meal and oil demand.

All Other Segments

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*See Note 6, Investments, of the notes to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

Our Nitrogen Production segment IBIT increased as a result of higher equity income attributed to increased sale prices of urea and UAN due to strong global demand and decreased global supply, which was partially offset by higher natural gas costs.

Corporate and Other IBIT decreased due to a combination of factors, including decreased equity method income from our investment in Ventura Foods, as a result of less favorable market conditions for edible oils and investment gains during the prior year that did not reoccur during the current year.

Our Nitrogen Production segment IBIT decreased from the prior year as a result of lower equity income attributed to significantly decreased selling prices of urea and UAN due to global supply and demand factors.

Corporate and Other IBIT increased primarily due to a $144.3 million increase of equity income from our Ventura Foods investment as a result of more favorable market conditions for edible oils experienced during the current year compared to the prior year and a gain associated with the sale of certain assets.

The remaining increase was mostly due to a larger cash balance earning a higher interest rate compared to the prior year.

Revenues by Segment

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The change in Energy segment revenues for fiscal 2023 reflects the following:

• Increased selling prices for refined fuels due to global market conditions contributed to $3.5 billion greater revenues.

• Increased selling prices for propane as a result of global market conditions during fiscal 2022 also positively impacted revenues by $370.7 million.

• Lower volumes of propane resulted from lower demand driven by warmer weather conditions and less crop-drying activity, which contributed to decreased revenues of $27.3 million.

• Lower volumes of refined fuels resulted from lower demand due to high gasoline prices and contributed to decreased revenues of $19.6 million.

• Decreased selling prices resulting from global market conditions contributed to $222.0 million and $185.6 million

decreases in revenues for refined fuels and propane, respectively.

• Higher refined fuels volumes driven by strong demand contributed to increased revenues of $215.4 million.

Years Ended August 31, Change

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The change in Ag segment revenues for fiscal 2023 reflects the following:

• Higher pricing attributed to market-driven price increases across all of our Ag segment product categories, including:

◦ $6.4 billion increase in revenues for grain and oilseed driven by increased global demand;

◦ $1.5 billion increase for feed and farm supplies due to strong demand and constrained supply;

◦ $1.5 billion increase for wholesale agronomy products resulting from strong global market demand and global supply disruptions;

◦ $721.1 million increase for renewable fuels resulting from demand driven higher prices;

◦ $541.0 million increase for oilseed processing due to strong meal and oil demand.

• Lower volumes of grain and oilseed contributed to a $4.2 billion decrease in revenues.

Decreased volumes resulted from a combination of factors, including 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 equity method investment during the second quarter of fiscal 2021 that resulted in reduced revenues and COGS during fiscal 2022 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 an $843.1 million decrease for feed and farm supplies due to supply chain constraints and less favorable weather conditions during the spring planting and application season compared to the prior year.

• Volumes decreased within our grain and oilseed products primarily as a result of lower global demand for U.S.

grain, which contributed to a $1.5 billion decrease in revenues.

• Wholesale and retail agronomy products experienced market-driven price decreases throughout fiscal 2023, resulting in decreased revenues of $844.6 million.

• Lower prices for renewable fuels due to global market conditions contributed to decreased revenues of $292.8 million.

• Higher pricing for grain and oilseed and oilseed processing products partially offset overall Ag segment price decreases, contributing $332.5 million and $80.0 million increases in revenues due to favorable global market conditions and strong meal and oil demand, respectively.

All Other Segments*

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*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 for Corporate and Other during fiscal 2022 compared to the prior year.

Corporate and Other revenues increased during fiscal 2023 compared to the prior year primarily as a result of increased interest income in our financing business due to higher interest rates and a larger notes receivable balance.

Cost of Goods Sold by Segment

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The change in Energy segment COGS for fiscal 2023 reflects the following:

• Increased costs for refined fuels resulting from global market conditions contributed to a $2.7 billion increase in COGS.

• Higher costs for propane as a result of global market conditions, including the impact of hedging-related losses and reversals of prior unrealized gains, resulted in a $434.8 million increase in COGS.

• Lower volumes of propane resulted from lower demand driven by warmer weather conditions and less crop-drying activity, which contributed to decreased COGS of $26.2 million.

• Lower volumes of refined fuels resulted from lower demand due to high gasoline prices and contributed to decreased COGS of $19.3 million.

• Global market conditions contributed to decreased costs for refined fuels and propane that drove $584.3 million and

$254.2 million decreases in COGS, respectively.

• Higher volumes of refined fuels resulting from higher demand partially offset the overall COGS decrease and contributed to increased COGS of $193.5 million.

Years Ended August 31, Change

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The change in Ag segment COGS for fiscal 2023 reflects the following:

• Higher costs attributed to market-driven price increases across all our Ag segment product categories, including:

◦ $6.3 billion increase for grain and oilseed driven by increased global demand;

◦ $1.4 billion increase for feed and farm supplies due to strong demand and constrained supply;

◦ $1.3 billion increase for wholesale agronomy products resulting from strong global market demand and global supply disruptions;

◦ $666.0 million increase for renewable fuels resulting from high demand driving higher prices;

◦ $435.5 million increase for oilseed processing due to strong meal and oil demand.

• Lower volumes of grain and oilseed contributed to a $4.2 billion decrease in COGS.

The decreased volumes resulted from a combination of factors, including the prior year experiencing elevated volumes following the Phase One trade agreement with China, which has since plateaued;

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 $736.8 million decrease for feed and farm supplies due to supply chain constraints and less favorable weather conditions during the spring planting and application season compared to the prior year.

• Volumes decreased within our grain and oilseed products primarily as a result of lower global demand for U.S.

grain, which contributed to a $1.5 billion decrease in COGS.

• Wholesale and retail agronomy products experienced market-driven cost decreases throughout fiscal 2023, resulting in decreased COGS of $612.0 million.

• Lower costs for renewable fuels resulted from decreased corn input costs, which contributed to decreased COGS of $241.3 million.

• Higher costs for grain and oilseed products due to global market conditions partially offset the overall Ag segment COGS decrease, contributing to a $378.7 million increase in COGS.

All Other Segments

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Marketing, general and administrative expenses $ 1,032,765 $ 997,835 $ 34,930 3.5 %

Marketing, general and administrative expenses increased during fiscal 2022 primarily due to higher performance-based incentive compensation accruals driven by improved financial results in comparison to the prior year and, to a lesser extent, increased external consulting expenses for projects such as our enterprise resource planning system implementation and strategic adjustments to our operating model.

Marketing, general and administrative expenses increased during fiscal 2023 primarily due to increased compensation expenses and, to a lesser degree, higher consulting expenses primarily associated with our enterprise resource planning system implementation and other technologies to advance our operating model.

Interest Expense

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Interest expense $ 137,442 $ 114,156 $ 23,286 20.4 %

Interest expense increased during fiscal 2022 as a result of higher interest rates compared to the prior year, particularly during the second half of fiscal 2022 as the U.S.

Federal Reserve and other foreign equivalents raised interest rates.

The increase was partially offset by decreased average outstanding debt balances compared to the prior year.

Interest expense increased during fiscal 2023 as a result of higher interest rates compared to the prior year, which was partially offset by decreased notes payable balances compared to the prior year.

Years Ended August 31, Change

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Other income $ 112,131 $ 23,760 $ 88,371 371.9 %

Other income decreased during fiscal 2022, primarily due to investment gains during the prior year that did not reoccur during fiscal 2022, impairment of certain held-for-sale assets and fewer gains on the sale of businesses during fiscal 2022.

Other income increased during fiscal 2023 primarily a result of increased interest income due to higher interest rates and a larger cash balance earning interest compared to the prior year.

Equity Income from Investments

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*See Note 6, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.

Equity income from investments increased during fiscal 2022 compared to 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 (Benefit)

Equity income from investments decreased during fiscal 2023 compared to 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 investment in Ventura Foods.

Equity income decreased for CF Nitrogen as a result of lower selling prices for urea and UAN due to global supply and demand factors.

Equity income increased for Ventura Foods as a result of more favorable market conditions for edible oils and a gain associated with the sale of certain assets.

Income Tax Expense

Years Ended August 31, Change

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(Dollars in thousands)

Income tax expense (benefit) $ 132,116 $ (38,249) $ 170,365 445.4 %

Increased income tax expense primarily resulted from increased nonpatronage earnings and other nondeductible items during fiscal 2022.

Federal and state statutory rates applied to nonpatronage business activity were 24.4% and 24.5% for the years ended August 31, 2022 and 2021, respectively.

Income taxes and effective tax rates vary each year based upon profitability and nonpatronage business activity, which resulted in effective tax rates of 7.3% and (7.4)% for the years ended August 31, 2022 and 2021, respectively.

Income tax expense $ 107,655 $ 132,116 $ (24,461) (18.5) %

Decreased income tax expense resulted from additional Domestic Production Activities Deduction ("DPAD") benefit during fiscal 2023 and fewer nondeductible items compared to fiscal 2022.

Effective tax rates for the years ended August 31, 2023 and 2022, were 5.4% and 7.3%, respectively.

Federal and state statutory rates of 24.5% and 24.4% were applied to nonpatronage business activity for the years ended August 31, 2023 and 2022, respectively.

Income taxes and effective tax rates vary each year based upon profitability and nonpatronage business activity.

Comparison of Results of Operations for the Years Ended August 31, 2022 and 2021

For a discussion of results of operations for fiscal 2022 compared to fiscal 2021, please refer to Part II, Item 7 , Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended August 31, 2022, filed with the SEC on November 2, 2022.

Combining the Foods segment in our Corporate and Other category during fiscal 2022 did not have a material impact on our comparison of results of operations for the years ended August 31, 2022 and 2021, as relevant year-over-year changes for the Foods segment were discussed within the Corporate and Other category.

Liquidity and Capital Resources

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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 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 ("Securitization Facility").

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 9, Notes Payable and Long-Term Debt , of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information on our short-term borrowings and long-term debt, including tables with summarized long-term debt outstanding.

We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity.

On August 30, 2022, the Securitization Facility and Repurchase Facility were amended to extend their respective maturity dates to August 29, 2023, and increase the maximum committed availability under the Securitization Facility to $ 850.0 million from $ 700.0 million.

On February 19, 2021, we amended our 10-year term loan facility to convert the entire $366.0 million aggregate principle amount outstanding thereunder into a revolving loan, which could be paid down and readvanced in an amount up to the referenced $366.0 million until February 19, 2022.

On February 19, 2022, the total advanced loan balance of $366.0 million reverted to a non-revolving term loan that is payable on September 4, 2025.

Summary of Our Major Uses of Cash and Cash Equivalents

Annually, our Board of Directors approves our capital expenditure budget.

Our fiscal 2023 capital expenditure priorities include maintaining our assets through maintenance;

Our fiscal 2024 capital expenditure priorities include maintaining our assets through repairs and maintenance;

complying with environmental, health and safety requirements;

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Increased capital expenditures for fiscal 2024 are for investments in our infrastructure to meet the evolving needs of our owners and customers, enhance value for the cooperative system and propel sustainable growth.

Excluded from the capital expenditures for fiscal 2023 is approximately $236.0 million for major maintenance at our Laurel and McPherson refineries.

• Major maintenance .

We expect total major maintenance for fiscal 2024 to be approximately $31.0 million, compared to major maintenance of $217.4 million in fiscal 2023.

Decreased major maintenance for fiscal 2024 is due to significantly reduced turnaround activities at our refineries compared to the turnaround at our Laurel refinery during fiscal 2023.

• Preferred stock dividends.

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The Board of Directors will continue to periodically evaluate the level of equity redemption activity throughout fiscal 2024 with respect to the amounts it has authorized for redemption during the fiscal year.

We believe cash generated by operating and investing activities, along with available borrowing capacity under our credit facilities, will be sufficient to support our operations for the foreseeable future.

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-term 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.

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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.

We measure working capital as current assets less current liabilities as each amount appears on our 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.

GAAP and may not be computed the same as similarly titled measures used by other companies.

Working capital as of August 31, 2022 and 2021, is as follows:

Working capital as of August 31, 2023 and 2022, was as follows:

2023 2022 Change

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As of August 31, 2023, working capital increased by $803.6 million compared with August 31, 2022.

Current asset balance changes increased working capital by $1.4 billion, primarily due to increases in receivables, which were driven by higher commodity prices.

Current liabilities balance changes decreased working capital by $626.0 million, primarily due to an increase in our dividends and equities payable for our cash patronage and equity redemptions to be paid to owners in fiscal 2023.

Current asset balance changes decreased working capital by $249.2 million, primarily due to decreases in receivables and inventories, which were driven by lower commodity prices and volumes.

Current liabilities balance changes increased working capital by $1.1 billion, primarily due to a decrease in the current portion of long-term debt due to lower scheduled debt maturities in fiscal 2024, as well as decreases in customer advance payments and accounts payable due to lower commodity prices and volumes.

We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks.

8 unchanged sentences

We enter into purchase obligations that are legally binding and into enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities to be purchased and fixed or estimated prices to be paid at the time of settlement.

Our current and long-term obligation for such arrangements is $9.1 billion and $1.1 billion, respectively.

Our current and long-term obligation for such arrangements is $6.9 billion and $847.7 million, respectively.

Years Ended August 31,

7 unchanged sentences

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 $1.2 billion increase in cash provided by operating activities in fiscal 2022 is primarily the result of higher net income during fiscal 2022 compared to fiscal 2021, including a $424.8 million increase in cash distributions from our equity investment in CF Nitrogen during 2022 compared to the prior year.

The $355.4 million increase in cash used in investing activities in fiscal 2022 reflects increases in our CHS Capital notes receivables primarily due to increases in funding for producer borrowers from increased marketing of programs and higher commodity prices.

The $787.1 million increase in cash used in financing activities in fiscal 2022 primarily reflects decreased net cash inflows associated with our notes payable during fiscal 2022.

The increase is also partially due to higher amounts paid for cash patronage and equity redemptions in fiscal 2022 compared to the prior fiscal year.

The $1.3 billion increase in cash provided by operating activities in fiscal 2023 primarily reflects decreases in receivables and inventories, which resulted from a combination of reduced prices and volumes, as well as increased net income during fiscal 2023 compared to fiscal 2022.

The $493.1 million increase in cash used in investing activities in fiscal 2023 reflects larger expenditures for property, plant and equipment and major maintenance during fiscal 2023 compared to fiscal 2022.

The $281.8 million increase in cash used in financing activities in fiscal 2023 primarily reflects increased cash outflows for patronage paid and equity redemptions during fiscal 2023 compared to fiscal 2022.

Critical Accounting Policies

5 unchanged sentences

All other inventories are stated at the lower of cost or net realizable value.

The costs of certain energy inventories (wholesale refined products, crude oil and asphalt) are determined on the LIFO method;

The costs of certain energy inventories (wholesale refined products, crude oil and asphalt) are determined on the last-in, first-out ("LIFO") method;

all other inventories of nongrain products purchased for resale are valued on the first-in, first-out ("FIFO") and average cost methods.

22 unchanged sentences

While we have considered future taxable income, as well as other factors, in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to income in the period such determination was made.

We are also significantly impacted by the utilization of tax credits, some of which were passed to us from the McPherson refinery, related to refinery upgrades that enable us to produce ultra-low-sulfur fuels.

We are also significantly impacted by utilization of tax credits, some of which were passed to us from the McPherson refinery, related to refinery upgrades that enable us to produce ultra-low-sulfur fuels.

Our tax credit carryforwards are available to offset future federal and state tax liabilities with the tax credits becoming unavailable to us if not used by their expiration date.

1 unchanged sentence

If our loss carryforwards are not used, they will expire.

Tax benefits related to uncertain tax positions are recognized in our financial statements if it is more likely than not that the position would be sustained upon examination by a tax authority that has full knowledge of all relevant information.

Tax benefits related to uncertain tax positions are recognized in our financial statements if it is more likely than not the position would be sustained upon examination by a tax authority that has full knowledge of all relevant information.

The benefits are measured using a cumulative probability approach.

21 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis