CHS INC 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management regarding our financial condition and results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections: • Overview • Business Strategy • Fiscal 2024 Highlights • Fiscal 2025 Outlook • Operating Metrics • Results of Operations • Liquidity and Capital Resources • Critical Accounting Policies • Recent Accounting Pronouncements Our MD&A should be read in conjunction with the accompanying audited financial statements and notes to those financial statements and the Cautionary Statement regarding forward-looking statements found in Part I, Item 1A of this Annual Report on Form 10-K. Overview CHS Inc. is a diversified company that provides grain, food, agronomy and energy resources to businesses and consumers on a global scale. As a cooperative, we are owned by farmers, ranchers and member cooperatives across the United States. We also have preferred shareholders 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 wholesale distribution and transportation of petroleum products. • Ag. Purchases and further processes or resells grain and oilseed originated by our ag retail 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 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 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 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 and IBIT generally trend lower during the second fiscal quarter and increase in the third fiscal quarter. For example, in our Ag segment, our ag retail 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, global demand and international trade relationships. Our Energy segment generally experiences higher volumes and revenues in 26 Table of Contents 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. 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 continuous improvement; and maintaining a strong balance sheet. 27 Table of Contents Fiscal 2024 Highlights • Financial performance remained solid across our segments, although down from historically strong results in the prior year. • Our Energy segment results declined from the prior year due to evolving market conditions, including the impact of less favorable refining margins. • In our Ag segment, earnings declined compared to the prior year as a result of softening oilseed crush margins and global market conditions that drove down margins for U.S. grain and oilseed exports. • Equity method investments continued to perform well, with our CF Nitrogen investment being the largest contributor. Fiscal 2025 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 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 2025. These factors include, among others, the ongoing war between Russia and Ukraine and further escalation of conflict in the Middle East, shifts in global trade flows for commodities, including global competitiveness giving rise to a weak export market for U.S. sourced agricultural products, potential changes in U.S. trade policy following the U.S. general election in November, a changing interest rate environment, and continued pricing pressures impacting costs of labor, freight and materials. These factors, or any form of them, could cause significant margin pressure and lower profitability. In addition to these broad macroeconomic factors, other factors could impact demand and pricing for agricultural inputs and outputs, as well as our ability to supply those inputs and outputs while remaining profitable. These include regional factors, such as unpredictable weather conditions, including those due to climate change. We currently expect global supply and demand factors impacting energy and agricultural commodities to be less favorable for us in fiscal 2025. Further, in light of increasing uncertainty in the markets we serve, we are unable to predict how long the current environment will last or the significance of the financial and operational impacts to us; however, we currently expect the trend of reduced margins for energy and agricultural commodities to persist in fiscal 2025. 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. We will continue to execute our enterprise priorities for fiscal 2025, including pursuing growth through strategic investments and cooperative connections and leveraging our financial strength and resilience as we navigate less favorable market conditions for energy and agricultural commodities. 28 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 gasolines, 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: Years Ended August 31, 2024 2023 Refinery throughput volumes* (Barrels per day) Heavy, high-sulfur crude oil 108,713 94,692 All other crude oil 69,137 70,397 Other feedstocks and blendstocks 11,574 11,804 Total refinery throughput volumes 189,424 176,893 Refined fuel yields Gasolines 85,210 81,006 Distillates 84,739 76,613 *Lower refinery throughput volumes and refined fuel yields experienced during fiscal 2023 were primarily due to a planned shutdown to perform major maintenance at our Laurel, Montana, refinery. 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 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 a final renewable volume obligation ("RVO") for calendar years 2020 through 2025. 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 biodiesel RINs decreasing by 57% and 58%, respectively, during fiscal 2024 compared to the prior year, which positively impacted our earnings. Estimates of our RIN expenses 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 crude oil inputs) 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 supply and demand of refined products. Crack spreads and WCS crude oil discounts both decreased in fiscal 2024 , compared to the prior year, contributing to decreased IBIT for the Energy segment. The table below provides information about average market reference prices and differentials that impacted our Energy segment: Years Ended August 31, 2024 2023 Market indicators* WTI crude oil (dollars per barrel) $ 79.41 $ 78.25 WTI - WCS crude oil discount (dollars per barrel) $ 17.24 $ 19.94 Group 3 2:1:1 crack spread (dollars per barrel) $ 21.97 $ 36.17 Group 3 5:3:2 crack spread (dollars per barrel) $ 20.60 $ 34.25 D6 ethanol RIN (dollars per RIN) $ 0.6801 $ 1.5725 D4 biodiesel RIN (dollars per RIN) $ 0.6829 $ 1.6380 *Market source information represents the average month-end price during the period. Group 3 refers to the oil refining and distribution system serving the Midwest markets from the Gulf Coast through the Plains states. 29 Table of Contents Ag 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 outside our control. The table below provides information about average market prices for agricultural commodities, as well as sales and throughput volumes that impacted our Ag segment for the years ended August 31, 2024 and 2023: Years Ended August 31, Market Source* 2024 2023 Commodity prices Corn (dollars per bushel) Chicago Board of Trade $ 4.37 $ 6.19 Soybeans (dollars per bushel) Chicago Board of Trade $ 11.88 $ 14.50 Wheat (dollars per bushel) Chicago Board of Trade $ 5.76 $ 7.17 Urea (dollars per ton) Green Markets NOLA $ 332.46 $ 420.06 Urea ammonium nitrate (dollars per ton) Green Markets NOLA $ 238.84 $ 349.87 Ethanol (dollars per gallon) Chicago Platts $ 1.83 $ 2.36 Volumes Grain and oilseed (thousands of bushels) 2,382,219 2,108,183 North American grain and oilseed port throughput (thousands of bushels) 664,025 557,414 Wholesale crop nutrients (thousands of tons) 7,245 6,628 Ethanol (thousands of gallons) 711,451 968,516 *Market source information represents the average week-end or month-end price during the period. 30 Table of Contents Results of Operations Consolidated Statements of Operations Years Ended August 31, 2024 2023 Dollars % of Revenues* Dollars % of Revenues* (In thousands) (In thousands) Revenues $ 39,261,229 100.0 % $ 45,590,004 100.0 % Cost of goods sold 37,509,902 95.5 43,213,739 94.8 Gross profit 1,751,327 4.5 2,376,265 5.2 Marketing, general and administrative expenses 1,166,969 3.0 1,032,765 2.3 Operating earnings 584,358 1.5 1,343,500 2.9 Interest expense 104,064 0.3 137,442 0.3 Other income ( 137,630 ) (0.4) ( 112,131 ) (0.2) Equity income from investments ( 479,863 ) (1.2) ( 689,590 ) (1.5) Income before income taxes 1,097,787 2.8 2,007,779 4.4 Income tax (benefit) expense ( 4,872 ) — 107,655 0.2 Net income 1,102,659 2.8 1,900,124 4.2 Net loss attributable to noncontrolling interests 340 — ( 314 ) — Net income attributable to CHS Inc. $ 1,102,319 2.8 % $ 1,900,438 4.2 % *Amounts less than 0.1% are shown as zero percent. Percentage subtotals may differ due to rounding. The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for fiscal 2024 . Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues. 31 Table of Contents Income Before Income Taxes by Segment Energy Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Income before income taxes $ 429,053 $ 1,075,443 $ (646,390) (60.1) % The following waterfall analysis and commentary presents the changes in our Energy segment IBIT for the year ended August 31, 2024, compared to the prior year: *See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations. The change in Energy segment IBIT for fiscal 2024 reflects the following: • Lower crack spreads and decreased WCS crude oil discounts resulted from global market conditions, which contributed to an $803.8 million decrease of IBIT. • Increased repairs and maintenance expense primarily due to unplanned maintenance at our Laurel, Montana, and McPherson, Kansas refineries contributed to $44.2 million of decreased IBIT. • Lower margins from premiums on seasonal refined fuels products contributed $28.0 million of decreased IBIT. • The overall IBIT decrease was partially offset by lower costs for RINs in our refined fuels business, which contributed to a $247.2 million cost reduction. 32 Table of Contents Ag Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Income before income taxes $ 342,677 $ 411,808 $ (69,131) (16.8) % The following waterfall analysis and commentary presents the changes in our Ag segment IBIT for the year ended August 31, 2024, compared to the prior year: *See commentary related to these changes in the marketing, general and administrative expenses, interest expense, other income and equity income from investments sections of this Results of Operations. The change in Ag segment IBIT for fiscal 2024 reflects the following: • Decreased margins of $120.2 million for oilseed processing due to a higher supply of canola and soybean meal and oil across global markets, resulting in lower crush margins and decreased margins of $34.1 million for grain and oilseed due to competitive global grain markets that compressed margins, compared to the prior year. • The margin decrease was partially offset by increased margins for wholesale and retail agronomy products driven by improved market conditions, which contributed to a $61.3 million increase of IBIT. • Higher volumes of wholesale and retail agronomy products contributed to a $27.2 million increase of IBIT due to increased demand as prices declined due to global market conditions. • Higher volumes for grain and oilseed and oilseed processing products collectively contributed to $52.2 million of increased IBIT as a result of favorable weather conditions and logistical and operational efficiencies at the oilseed crush plants. All Other Segments Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Nitrogen Production IBIT* $ 151,235 $ 260,760 $ (109,525) (42.0) % Corporate and Other IBIT $ 174,822 $ 259,768 $ (84,946) (32.7) % *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 decreased from the prior year as a result of lower equity income attributed to decreased selling prices of urea and UAN, which was partially offset by decreased natural gas costs, all due to global supply and demand factors. Corporate and Other IBIT decreased primarily due to lower equity income from our Ventura Foods investment as a result of less favorable market conditions for oil-based food products experienced during the current year compared to the prior year and a gain associated with the sale of certain assets in the prior year that did not recur in the current year. 33 Table of Contents Revenues by Segment Energy Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Revenues $ 8,766,495 $ 10,096,913 $ (1,330,418) (13.2) % The following waterfall analysis and commentary presents the changes in our Energy segment revenues for the year ended August 31, 2024, compared to the prior year: The change in Energy segment revenues for fiscal 2024 reflects the following: • Decreased selling prices resulting from global market conditions contributed to $1.0 billion and $121.3 million decreases in revenues for refined fuels and propane, respectively. • Lower propane and refined fuels volumes contributed to $93.9 million and $64.0 million decreases in revenues, respectively, primarily driven by lower demand as a result of unfavorable weather conditions across much of our trade territory. 34 Table of Contents Ag Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Revenues $ 30,416,859 $ 35,425,204 $ (5,008,345) (14.1) % The following waterfall analysis and commentary presents the changes in our Ag segment revenues for the year ended August 31, 2024, compared to the prior year: The change in Ag segment revenues for fiscal 2024 reflects the following: • Decreased selling prices across all of our Ag segment product categories due to global market conditions during fiscal 2024, including: ◦ $6.0 billion decrease for grain and oilseed; ◦ $1.2 billion decrease for wholesale and retail agronomy products; ◦ $484.1 million decrease for oilseed processing; and ◦ $331.6 million decrease for renewable fuels. • Increased volumes for grain and oilseed contributed to a $3.1 billion increase in revenues, primarily due to more favorable weather conditions in fiscal 2024. All Other Segments* Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Corporate and Other revenues $ 77,875 $ 67,887 $ 9,988 14.7 % *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 fiscal 2024 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 average notes receivable balance. 35 Table of Contents Cost of Goods Sold by Segment Energy Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Cost of goods sold $ 8,041,588 $ 8,718,224 $ (676,636) (7.8) % The following waterfall analysis and commentary presents the changes in our Energy segment COGS for the year ended August 31, 2024, compared to the prior year: The change in Energy segment COGS for fiscal 2024 reflects the following: • Global market conditions, including reduced RIN costs, contributed to decreased costs for refined fuels and propane that drove $368.1 million and $124.7 million decreases in COGS, respectively. • Lower propane and refined fuels volumes contributed to $90.5 million and $54.7 million decreases in COGS, respectively, primarily driven by lower demand as a result of unfavorable weather conditions across much of our trade territory. 36 Table of Contents Ag Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Cost of goods sold $ 29,478,231 $ 34,501,163 $ (5,022,932) (14.6) % The following waterfall analysis and commentary presents the changes in our Ag segment COGS for the year ended August 31, 2024, compared to the prior year: The change in Ag segment COGS for fiscal 2024 reflects the following: • Lower costs across all of our Ag segment product categories due to global market conditions during fiscal 2024, including: ◦ $5.9 billion decrease for grain and oilseed; ◦ $1.3 billion decrease for wholesale and retail agronomy products; ◦ $376.1 million decrease for renewable fuels; and ◦ $363.8 million decrease for oilseed processing. • Increased volumes for grain and oilseed contributed to a $3.1 billion increase in COGS, primarily due to more favorable weather conditions in fiscal 2024. All Other Segments Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Nitrogen Production COGS $ 138 $ 1,693 $ (1,555) (91.8)% Corporate and Other COGS $ (10,055) $ (7,341) $ (2,714) (37.0)% There were no significant changes on a dollar basis to COGS for our Nitrogen Production segment or Corporate and Other during fiscal 2024 compared to the prior year. 37 Table of Contents Marketing, General and Administrative Expenses Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Marketing, general and administrative expenses $ 1,166,969 $ 1,032,765 $ 134,204 13.0 % Marketing, general and administrative expenses increased during fiscal 2024 primarily due to higher compensation and benefit expenses, as well as higher consulting expenses primarily associated with our enterprise resource planning system implementation and other technologies to advance our operating model. Interest Expense Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Interest expense $ 104,064 $ 137,442 $ (33,378) (24.3) % Interest expense decreased during fiscal 2024 as a result of decreased notes payable balances compared to the prior year, which was partially offset by higher interest rates compared to the prior year. Other Income Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Other income $ 137,630 $ 112,131 $ 25,499 22.7 % Other income increased during fiscal 2024 primarily as a result of increased interest income due to a larger average cash balance and higher interest rates. Equity Income from Investments Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Equity income from investments* $ 479,863 $ 689,590 $ (209,727) (30.4) % *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 decreased during fiscal 2024 compared to the prior year, primarily due to lower income associated with our equity method investments in CF Nitrogen and 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 decreased for Ventura Foods as a result of less favorable market conditions for oil-based food products and a gain associated with the sale of certain assets in the prior year that did not reoccur in the current year. Income Tax (Benefit) Expense Years Ended August 31, Change 2024 2023 Dollars Percent (Dollars in thousands) Income tax (benefit) expense $ (4,872) $ 107,655 $ (112,527) (104.5) % Lower income tax expense during fiscal 2024 resulted primarily from lower nonpatronage income compared to fiscal 2023, recognition of research and development tax credits during fiscal 2024 and increased Domestic Production Activities Deduction ("DPAD") benefit. Effective tax rates for the years ended August 31, 2024 and 2023, were (0.4)% and 5.4%, respectively. Federal and state statutory rate of 24.5% was applied to nonpatronage business activity for the years ended August 31, 2024 and 2023. Income taxes and effective tax rates vary each year based upon profitability and nonpatronage business activity. 38 Table of Contents Comparison of Results of Operations for the Years Ended August 31, 2023 and 2022 For a discussion of results of operations for fiscal 2023 compared to fiscal 2022, 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, 2023, filed with the SEC on November 8, 2023. 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: August 31, 2024 2023 (Dollars in thousands) Cash and cash equivalents $ 794,865 $ 1,765,286 Notes payable 306,831 547,923 Long-term debt including current maturities 2,161,460 1,827,658 Total equities 10,761,924 10,452,389 Working capital 3,307,969 3,229,455 Current ratio* 1.6 1.5 *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 ("Securitization Facility"). We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment, with cash flows from operations and by issuing long-term debt. On April 18, 2024, we entered into a Note Purchase Agreement to borrow $700.0 million of debt in the form of notes; the funding of these notes took place on July 16, 2024. On October 29, 2024, we amended our 10-year term loan facility reducing the size to $300.0 million and adding a converting revolver feature. 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. Summary of Our Major Uses of Cash and Cash Equivalents Annually, our Board of Directors approves our capital expenditure budget. Our fiscal 2025 capital expenditure priorities include maintaining our assets through repairs and maintenance; complying with environmental, health and safety requirements; enhancing information technology capabilities; improving productivity; and growth. Our refining business requires continued investment in our refining process to maintain its safety, operational reliability and profitability. In addition, our Board of Directors approved our cash patronage and equity redemptions to be paid in fiscal 2025, based on fiscal 2024 financial performance. The following is a summary of our primary expected cash requirements for fiscal 2025: • Capital expenditures. We expect total capital expenditures for fiscal 2025 to be approximately $837.3 million, compared to capital expenditures of $808.8 million in fiscal 2024 , as we continue to invest in capital expenditures projects to meet the evolving needs of our owners and customers, enhance value for the cooperative system and unlock growth during fiscal 2025. In addition, we expect over $200.0 million of incremental expenditures for potential business acquisitions during fiscal 2025. • Major maintenance . We expect total major maintenance for fiscal 2025 to be approximately $256.9 million, compared to major maintenance of $22.7 million in fiscal 2024. Increased major maintenance expectation for fiscal 2025 is due to a scheduled turnaround at our McPherson refinery during fiscal 2025 compared to minimal turnaround activities at our refineries during fiscal 2024. • Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding as of August 31, 2024. We expect to pay dividends on our preferred stock of approximately $168.7 million during fiscal 2025. 39 Table of Contents • Patronage . Our Board of Directors authorized approximately $300.0 million of our fiscal 2024 patronage-sourced earnings to be paid to our member-owners during fiscal 2025. • Equity redemptions . Our Board of Directors authorized approximately $300.0 million of equity redemptions to be distributed in fiscal 2025 in the form of redemptions of qualified and nonqualified equity owned by individual producer-members and association members. The Board of Directors will continue to periodically evaluate the level of equity redemption activity throughout fiscal 2025 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 short-term (the next 12 months) and long-term operations (beyond the next 12 months). Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all our debt covenants and restrictions as of August 31, 2024. Based on our current 2025 projections, we expect continued covenant compliance. Working Capital 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, 2024 and 2023, was as follows: 2024 2023 Change (Dollars in thousands) Current assets $ 8,708,783 $ 9,128,649 $ (419,866) Less current liabilities (5,400,814) (5,899,194) 498,380 Working capital $ 3,307,969 $ 3,229,455 $ 78,514 As of August 31, 2024, working capital increased by $78.5 million compared with August 31, 2023. Current asset balance changes decreased working capital by $419.9 million, primarily driven by a decrease in our cash balance due to a decline in cash provided by operations from year end 2023, which was partially offset by increases in receivables. Current liabilities balance changes increased working capital by $498.4 million, primarily due to a decrease in accounts and notes payable, which were driven by changes in working capital needs and lower commodity prices. 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 Our estimated future contractual obligations as of August 31, 2024, include both current and long-term obligations. During fiscal 2025, we have a current obligation to repay $330.6 million of long-term debt, as well as $101.7 million of interest related to long-term debt. Beyond fiscal 2025, our long-term debt obligation is $1.8 billion and interest payments related to long-term debt of $747.4 million. For finance leases, we have a current and long-term obligation of $9.0 million and $49.3 million, respectively. For operating leases, we have a current and long-term obligation of $71.3 million and $176.0 million, respectively. See Note 9, Notes Payable and Long-Term Debt, and Note 19 , Leases , of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information on our long-term debt and leases, respectively. We enter into purchase obligations that are legally binding and enter 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 $4.8 billion and $569.8 million, respectively. 40 Table of Contents Cash Flows Years Ended August 31, 2024 2023 Change (Dollars in thousands) Net cash provided by operating activities $ 1,272,880 $ 3,284,182 $ (2,011,302) Net cash used in investing activities ( 1,431,588 ) ( 950,191 ) (481,397) Net cash used in financing activities ( 814,253 ) ( 1,395,468 ) 581,215 Effect of exchange rate changes on cash and cash equivalents 2,236 2,590 (354) Net (decrease) increase in cash and cash equivalents and restricted cash $ (970,725) $ 941,113 $ (1,911,838) 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 provided by operating activities in fiscal 2024 primarily reflects decreased net income, as well as decreased cash provided by receivables and inventories during fiscal 2024. The $481.4 million increase in cash used in investing activities in fiscal 2024 reflects increased investments and higher expenditures for property, plant and equipment during fiscal 2024 compared to fiscal 2023. The $581.2 million decrease in cash used in financing activities in fiscal 2024 primarily reflects increased net proceeds from long-term debt and decreased cash outflows for patronage paid and equity redemptions during fiscal 2024 compared to fiscal 2023. Critical Accounting Policies Our consolidated financial statements are prepared in conformity with U.S. GAAP. Preparation of these consolidated financial statements requires use of estimates, as well as management's judgments and assumptions regarding matters that are subjective, uncertain or involve a high degree of complexity, all of which affect the results of operations and financial condition for the periods presented. We believe the following accounting policies are critical to our consolidated financial statements and may involve a higher degree of estimates, judgments and complexity. Inventory Valuation and Reserves Grain, processed grain, oilseed, processed oilseed and other minimally processed soy-based inventories are stated at net realizable value. All other inventories are stated at the lower of cost or net realizable value. The costs of certain energy inventories (wholesale refined products, crude oil and asphalt) are determined on the 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. Estimates are used in determining the net realizable values of grain and oilseed and processed grain and oilseed inventories. These estimates include using inputs that are generally based on exchange-traded prices and/or recent market bids and offers, including location-specific adjustments. If estimates regarding the valuation of inventories are less favorable than management's assumptions, write-downs of inventories may be required. Derivative Financial Instruments We enter into exchange-traded commodity futures and options contracts to hedge our exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk. Futures and options contracts used for hedging are purchased and sold through regulated commodity exchanges. We also use over-the-counter instruments to hedge our exposure on fixed-price contracts. Fluctuations in inventory valuations, however, may not be completely hedged due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and in part to our assessment of our exposure from expected price fluctuations. We also manage our risks by entering into fixed-price purchase contracts with preapproved producers and establishing appropriate limits for individual suppliers. Fixed-price sales contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The fair values of futures and options contracts are determined primarily from quotes listed on regulated commodity exchanges. Fixed-price purchase and sales contracts are with various counterparties, and the fair values of such contracts are determined from the market price of the underlying product. We are exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty's financial condition and a risk that the counterparty will refuse to 41 Table of Contents perform on a contract during periods of price fluctuations where contract prices are significantly different from the current market prices. Pension and Other Postretirement Benefits Pension and other postretirement benefits costs and obligations depend on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates and other factors. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore generally affect recognized expenses and the recorded obligations in future periods. While our management believes the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses. Deferred Tax Assets and Uncertain Tax Positions We assess whether a valuation allowance is necessary to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. While we have considered future taxable income, as well as other factors, in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to income in the period such determination was made. We are also significantly impacted by utilization of tax credits, some of which were passed to us from the McPherson refinery, related to refinery upgrades that enable us to produce ultra-low-sulfur fuels. Our tax credit carryforwards are available to offset future federal and state tax liabilities with the tax credits becoming unavailable to us if not used by their expiration date. Our net operating loss carryforwards for tax purposes are available to offset future taxable income. If our loss carryforwards are not used, they will expire. Tax benefits related to uncertain tax positions are recognized in our financial statements if it is more likely than not the position would be sustained upon examination by a tax authority that has full knowledge of all relevant information. The benefits are measured using a cumulative probability approach. Under this approach, we record in our financial statements the greatest amount of tax benefits that have a more than 50% probability of being realized upon final settlement with the tax authorities. In determining these tax benefits, we assign probabilities to a range of outcomes that we feel we could ultimately settle on with the tax authorities using all relevant facts and information available at the reporting date. Due to the complexity of these uncertainties, the ultimate resolution may result in a benefit that is materially different than our current estimate. Long-Lived Assets Property, plant and equipment is depreciated or amortized over the expected useful lives of individual or groups of assets based on the straight-line method. Economic circumstances or other factors may cause management's estimates of expected useful lives to differ from actual useful lives. All long-lived assets, including property, plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment in accordance with U.S. GAAP, at least annually for goodwill, and whenever events or changes in circumstances indicate the carrying amount of a long-lived asset or asset group may not be recoverable. For goodwill, our annual impairment testing occurs in our fourth quarter. An impaired asset is written down to its estimated fair value based on the best information available. Fair value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and our estimates may differ from actual results. We have asset retirement obligations with respect to certain of our refineries and other assets due to various legal obligations to clean and/or dispose of the component parts at the time they are retired. In most cases, these assets can be used for extended and indeterminate periods of time, as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain refineries and related assets and to continue making improvements to those assets based on technological advances. As a result, we believe our refineries and related assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire a refinery and related assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery or other asset, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that future cost. We have other assets that we may be obligated to dismantle at the end of corresponding lease terms subject to the lessor's discretion for which we have recorded asset retirement obligations. Based on our estimates of the timing, cost and probability of removal, these obligations are not material. 42 Table of Contents Recent Accounting Pronouncements See Note 1, Organization, Basis of Presentation and Significant Accounting Policies , of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for information concerning new accounting standards and the impact of implementation of those standards on our financial statements.