Company Quick10K Filing
Quick10K
CHS
10-K 2019-08-31 Annual: 2019-08-31
10-Q 2019-05-31 Quarter: 2019-05-31
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-K 2018-08-31 Annual: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-Q 2017-11-30 Quarter: 2017-11-30
10-K 2017-08-31 Annual: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-K 2016-08-31 Annual: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-K 2015-08-31 Annual: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-Q 2015-02-28 Quarter: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-K 2014-08-31 Annual: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-11-05 Other Events
8-K 2019-09-04 Other Events
8-K 2019-07-26 Officers, Other Events, Exhibits
8-K 2019-07-16 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-06-05 Other Events
8-K 2019-05-22 Regulation FD, Exhibits
8-K 2019-01-08 Other Events
8-K 2018-12-07 Officers, Regulation FD, Exhibits
8-K 2018-11-30 Earnings, Exhibits
8-K 2018-11-06 Other Events
8-K 2018-10-22 Amendment, Regulation FD, Exhibits
8-K 2018-09-05 Other Events
8-K 2018-08-30 Enter Agreement, Off-BS Arrangement
8-K 2018-06-28 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-14 Officers
8-K 2018-06-05 Other Events
8-K 2018-05-17 Regulation FD, Exhibits
8-K 2018-03-15 Officers, Exhibits
MO Altria Group 82,788
CALM Cal-Maine Foods 1,926
BV Brightview Holdings 1,900
FDP Fresh Del Monte Produce 1,291
UVV Universal 1,255
ANDE Andersons 743
LMNR Limoneira 345
LND Brasilagro - Brazilian Agricultural Real Estate 199
SEED Origin Agritech 18
PYX Playtex Products 0
CHSCP 2019-08-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Note 1 Organization, Basis of Presentation and Significant Accounting Policies
Note 2 Revenues
Note 3 Receivables
Note 4 Inventories
Note 5 Investments
Note 6 Property, Plant and Equipment
Note 7 Other Assets
Note 8 Notes Payable and Long-Term Debt
Note 9 Income Taxes
Note 10 Equities
Note 11 Benefit Plans
Note 12 Segment Reporting
Note 13 Derivative Financial Instruments and Hedging Activities
Note 14 Fair Value Measurements
Note 15 Commitments and Contingencies
Note 16 Supplemental Cash Flow and Other Information
Note 17 Related Party Transactions
Note 18 Acquisitions
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EX-10.3A ex-103achsannualvariablepa.htm
EX-10.4B ex-104bchsltiplan2019x2021.htm
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CHS Earnings 2019-08-31

CHSCP 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 chscp10k83119.htm 10-K Document

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended
August 31, 2019
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to          .

Commission file number: 001-36079
CHS Inc.
(Exact name of Registrant as specified in its charter)
Minnesota
 (State or other jurisdiction of
incorporation or organization)
 
41-0251095
 (I.R.S. Employer
Identification Number)
5500 Cenex Drive
 
 
Inver Grove Heights, Minnesota 55077
 (Address of principal executive offices,
including zip code)
 
(651) 355-6000
 (Registrant’s telephone number,
including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
8% Cumulative Redeemable Preferred Stock
CHSCP
The Nasdaq Stock Market LLC
Class B Cumulative Redeemable Preferred Stock, Series 1
CHSCO
The Nasdaq Stock Market LLC
Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2
CHSCN
The Nasdaq Stock Market LLC
Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3
CHSCM
The Nasdaq Stock Market LLC
Class B Cumulative Redeemable Preferred Stock, Series 4
CHSCL
The Nasdaq Stock Market LLC


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o NO þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
YES þ NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES o NO þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter:

The Registrant has no voting or non-voting common equity (the Registrant is a member cooperative).

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date:

The Registrant has no common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None.
 



INDEX
 
 
Page
No.
 
 
 
 
 
 
 
 
 



PART I

ITEM 1.    BUSINESS

THE COMPANY

CHS Inc. (referred to herein as "CHS," "we," "us" or "our") is the nation’s leading integrated agricultural cooperative, providing grain, foods and energy resources to businesses and consumers on a global basis. As a cooperative, we are owned by farmers and ranchers and their member cooperatives (referred to herein as "members") across the United States. We also have preferred shareholders that own shares of our five series of preferred stock, which are each listed and traded on the Nasdaq Global Select Market. We buy commodities from and provide products and services to individual agricultural producers, local cooperatives and other companies (including our members and other non-member customers), both domestically and internationally. We provide a wide variety of products and services, ranging from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products to agricultural outputs that include grains and oilseeds, grain and oilseed processing, renewable fuels and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those equity investments and joint ventures is included as a component of our net income using the equity method of accounting. For the year ended August 31, 2019, our total revenues were $31.9 billion and net income attributable to CHS Inc. was $829.9 million.

We have aligned our segments based on an assessment of how our businesses operate and the products and services they sell. Our Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. Our Ag segment derives its revenues through origination and marketing of grain, including service activities conducted at export terminals; through wholesale agronomy sales of crop nutrient and crop protection products; from sales of soybean meal, soybean refined oil and soyflour products; through the production and marketing of renewable fuels; and through retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies. Our Ag segment also records equity income from our grain export joint venture and other investments. Our Nitrogen Production segment consists solely of our equity method investment in CF Industries Nitrogen, LLC ("CF Nitrogen"). Our other business operations, primarily our financing and hedging businesses, are included in Corporate and Other because of the nature of their products and services, as well as the relative amount of revenues for those businesses. Prior to its sale on May 4, 2018, our insurance business was also included in Corporate and Other. In addition, our non-consolidated wheat milling and food production and distribution joint ventures are included in Corporate and Other.

Our earnings from cooperative business are allocated to members (and to a limited extent to non-members with which we have agreed to do business on a patronage basis) based on the volume of business they do with us. We allocate these earnings to our patrons in the form of patronage refunds (which are also called patronage dividends), which may be in cash, patrons’ equities (in the form of capital equity certificates) or both. Patrons' equities may be redeemed over time solely at the discretion of our Board of Directors. Earnings derived from non-members, which are not treated as patronage, are taxed at federal and state statutory corporate rates and are retained by us as unallocated capital reserves. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and if we qualify for patronage refunds from them.

Our origins date back to the early 1930s with the founding of our predecessor companies, Cenex, Inc. and Harvest States Cooperatives. CHS Inc. emerged as the result of the merger of those two entities in 1998, and is headquartered in Inver Grove Heights, Minnesota.

Our internet address is www.chsinc.com. The information contained on our website is not part of, and is not incorporated in, this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.


1


ENERGY
Overview

We are the nation's largest cooperative energy company based on revenues and identifiable assets, with operations that include petroleum refining and pipelines; supply, marketing and distribution of refined fuels (gasoline, diesel fuel and other energy products); blending, sale and distribution of lubricants; and wholesale supply of propane and other natural gas liquids. Our Energy segment processes crude oil into refined petroleum products at our refineries in Laurel, Montana and McPherson, Kansas and sells those products under the Cenex® brand to member cooperatives and other independent retailers through a network of nearly 1,500 sites, the majority of which are convenience stores marketing Cenex branded fuels and owned by our member cooperatives. For fiscal 2019, our Energy revenues, after elimination of intersegment revenues, were $7.1 billion and were primarily from gasoline and diesel fuel.

Operations

Laurel refinery. Our Laurel, Montana, refinery processes medium- and high-sulfur crude oil into refined petroleum products that primarily include gasoline, diesel fuel, petroleum coke and asphalt. Our Laurel refinery sources approximately 93% of its crude oil supply from Canada, with the remaining balance obtained from domestic sources, and we have access to Canadian and northwest Montana crude oil through our wholly-owned Front Range Pipeline, LLC and other common carrier pipelines. Our Laurel refinery also has access to Wyoming crude oil via common carrier pipelines from the south.

Our Laurel refinery processes approximately 61,000 barrels of crude oil per day to produce refined products that consist of approximately 43% gasoline, 41% diesel fuel and other distillates, 8% asphalt, 7% petroleum coke and 1% other products. Refined fuels produced at our Laurel refinery are available via rail cars and via the Yellowstone Pipeline to western Montana terminals and to Spokane, Washington; south via common carrier pipelines to Wyoming terminals and Denver, Colorado; and east via our wholly-owned Cenex Pipeline, LLC, to Glendive, Montana, and Minot, Prosper and Fargo, North Dakota.

McPherson refinery. Our McPherson, Kansas, refinery processes approximately 61% low- and medium-sulfur crude oil and approximately 39% heavy-sulfur crude oil into gasoline, diesel fuel and other distillates, propane and other products. The refinery sources its crude oil through its own pipelines, as well as common carrier pipelines. Low- and medium-sulfur crude oil is sourced from Kansas, Colorado, North Dakota, Oklahoma and Texas, and heavy-sulfur crude oil is sourced from Canada and Wyoming.

Our McPherson refinery processes approximately 110,000 barrels of crude oil per day to produce refined products that consist of approximately 52% gasoline, 42% diesel fuel and other distillates, 2% propane and 4% other products. These products are loaded into trucks at the McPherson refinery or shipped via common carrier pipelines to other markets.

Other energy operations. We operate six propane terminals, four asphalt terminals, seven refined product terminals and three lubricants blending and packaging facilities. We also own and lease a fleet of liquid and pressure trailers and tractors, which transport refined fuels, propane, anhydrous ammonia and other products.

Products and Services

Our Energy segment produces and sells (primarily wholesale) gasoline, diesel fuel, propane, asphalt, lubricants and other related products, and also provides transportation services. In addition to selling products refined at our Laurel and McPherson refineries, we purchase refined petroleum products from third parties. For fiscal 2019, we obtained approximately 70% of the refined petroleum products we sold from our Laurel and McPherson refineries and approximately 30% from third parties.

Sales and Marketing; Customers

We market approximately 80% of our refined fuel products to members, with the balance sold to non-members. Sales are made wholesale to member cooperatives and through a network of independent retailers that operate convenience stores under the Cenex brand. We sold approximately 1.5 billion gallons of gasoline and approximately 1.7 billion gallons of diesel fuel in fiscal 2019. We also blend, package and wholesale auto and farm machinery lubricants to both members and non-members. We are one of the nation’s largest propane wholesalers based on revenues. Most of the propane sold in rural areas is for heating and agricultural usage. Annual sales volumes of propane vary greatly depending on weather patterns and crop conditions.


2


Industry; Competition

The petroleum business is highly cyclical. Demand for crude oil and energy products is driven by the condition of local and worldwide economies, local and regional weather patterns and taxation relative to other energy sources, which can significantly affect the price of refined fuel products. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the spring, summer and early fall when gasoline and diesel fuel usage by our agricultural customers is highest and is subject to domestic supply and demand forces. Other energy products, such as propane, generally experience higher volumes and profitability during the winter heating and crop-drying seasons. More fuel-efficient equipment, reduced crop tillage, depressed prices for crops, weather conditions and government programs that encourage idle acres may all reduce demand for our energy products.

Regulation. Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, have a significant impact on our Energy segment. Our Energy segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the U.S. Environmental Protection Agency ("EPA"), the Department of Transportation ("DOT"), the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration, the Federal Energy Regulatory Commission and similar government agencies. These laws, regulations and rules govern, among other things, discharge of materials into the environment, including air and water; reporting storage of hazardous wastes and other hazardous materials; transportation, handling and disposal of wastes and other materials; labeling of pesticides and similar substances; and investigation and remediation of releases of hazardous materials. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. Our hedging transactions and activities are subject to the rules and regulations of the exchanges we use and governing bodies, such as the Chicago Mercantile Exchange ("CME"), the New York Mercantile Exchange ("NYMEX") and the U.S. Commodity Futures Trading Commission ("CFTC").

Competition. The petroleum refining and wholesale fuels business is very competitive. Among our competitors are some of the world’s largest integrated petroleum companies, which have their own crude oil supplies, distribution and marketing systems. We also compete with smaller domestic refiners and marketers in the midwestern and northwestern United States, with foreign refiners who import products into the United States and with producers and marketers in other industries supplying other forms of energy and fuels to consumers. Given the commodity nature of the end products, profitability in the industry depends largely on margins, as well as operating efficiency, product mix and costs of product distribution and transportation. The retail gasoline market is highly competitive, with competitors that are much larger than us and that have greater brand recognition and distribution outlets throughout the country and the world than we do. We are also experiencing increased competition from regional and unbranded retailers. Our owned and non-owned retail outlets are located primarily in the northwestern, midwestern and southern United States.

We market refined fuel products in five principal geographic areas. The first area includes the Midwest and Northern Plains. Competition at the wholesale level in this area includes major oil companies, as well as independent refiners and wholesale brokers/suppliers. This area has a robust spot market and is influenced by the large refinery center along the Gulf Coast.

To the east of the Midwest and Northern Plains is another unique marketing area. This area centers near Chicago, Illinois, and includes eastern Wisconsin, Illinois and Indiana. In this area, we principally compete with the major oil companies, as well as independent refiners and wholesale brokers/suppliers.

Another market area includes Arkansas, Missouri and the northern part of Texas. Competition in this area includes the major oil companies and independent refiners. This area is principally supplied from the Gulf Coast refinery center and is also driven by a strong spot market that reacts quickly to changes in the international and national supply balance.

Another geographic area includes Montana, western North Dakota, Wyoming, Utah, Idaho, Colorado and western South Dakota. Competition at the wholesale level in this area includes the major oil companies and independent refiners.

The last area includes much of Washington and Oregon. We compete with the major oil companies in this area. This area is known for volatile prices and an active spot market.


3


AG
Overview

Our Ag segment includes our global grain marketing, country operations, wholesale agronomy, processing and food ingredients and renewable fuels businesses. These businesses work together to facilitate the production, purchase, sale and eventual use of grain and other agricultural products within the United States, as well as internationally. In fiscal 2019, revenues in our Ag segment were $24.7 billion after elimination of intersegment revenues, consisting principally of grain sales.

Operations

Global grain marketing. We are the nation’s largest cooperative marketer of grain and oilseed based on grain sales. Our global grain marketing operations purchase grain directly from agricultural producers and elevator operators primarily in the midwestern and western United States and indirectly through our country operations business. The purchased grain is typically contracted for sale for future delivery at a specified location, and we are responsible for handling the grain and either arranging for or facilitation of its transportation to that location. We own and operate export terminals, river terminals and elevators throughout the United States to handle and transport grain and grain products. We also maintain locations in Europe, the Middle East, the Pacific Rim and South America for the marketing, merchandising and/or sourcing of grains and crop nutrients. We primarily conduct our global grain marketing operations directly, but do conduct some of our operations through joint ventures, including TEMCO, LLC, a 50% owned joint venture with Cargill, Incorporated ("Cargill"), focused on exports, primarily to Asia.

Country operations. Our country operations business operates 470 agri-operations locations through 43 business units dispersed throughout the midwestern and western United States. Most of these locations purchase grain from farmers and sell agronomy, energy, feed and seed products to those same producers and others, although not all locations provide every product and service. We also manufacture animal feed through eight owned plants and three limited liability companies.

Wholesale agronomy. Our wholesale agronomy business includes our wholesale crop nutrients and wholesale crop protection businesses. Our wholesale crop nutrients business delivers products directly to our customers and our country operations business from the manufacturer or through our 18 inland and river warehouse terminals and other non-owned storage facilities located throughout the United States. To supplement what is purchased domestically, our Galveston, Texas, deep-water port and terminal receives fertilizer by vessel from origins such as Asia and the Caribbean Basin where significant volumes of urea are produced. The fertilizer is then shipped by rail to destinations within crop-producing regions of the United States. Our wholesale crop protection business operates out of our network of 32 warehouses from which we deliver products directly to our member cooperatives and independent retailers. We also operate a bulk chemical rail terminal in Brooten, Minnesota, where we handle and store bulk crop protection products for some of the crop protection industry’s largest chemical manufacturers. This facility has approximately 6 million gallons of chemical storage capacity.

Processing and food ingredients. Our processing and food ingredients operations are conducted at facilities that can crush approximately 128 million bushels of oilseeds on an annual basis, producing approximately 2.8 million short tons of meal/flour and 1.5 billion pounds of edible oil annually. We purchase our oilseeds from members, other CHS businesses and third parties that have tightly integrated connections with our global grain marketing operations and country operations business. 

Renewable fuels. Our renewable fuels business produces 266 million gallons of fuel grade ethanol and 662 thousand tons of dried distillers grains with solubles ("DDGS") annually. Renewable fuels produced by our production plants are marketed by our global grain marketing business, along with more than 520 million gallons of ethanol and 4.5 million tons of DDGS annually under marketing agreements with ethanol production plants.

Products and Services

Our Ag segment provides local cooperatives and farmers with the inputs and services they need to produce grain and raise livestock. These include seed, crop nutrients, crop protection products, animal feed, animal health products, refined fuels and propane. We also buy and merchandise grain in both domestic and international markets. With a portion of the grain we purchase we produce renewable fuels, including ethanol and DDGS. We also produce refined oils, meal and soyflour at our processing facilities.


4


Sales and Marketing; Customers

Our Ag segment provides products and services to a wide range of customers, primarily in the United States. These customers include member and non-member producers, local cooperatives, elevators, grain dealers, grain processors and crop nutrient retailers. We sell our edible oils and soyflour to food companies. The meal we produce is sold to integrated livestock producers and feed mills. The ethanol and DDGS we produce are sold throughout the United States and to various international locations.

Industry; Competition

Many of the business activities in our Ag segment are highly seasonal and, consequently, the operating results for our Ag segment will typically vary throughout the year. For example, our country operations business generally experiences higher volumes and income during the fall harvest and spring planting seasons and our agronomy business generally experiences higher volumes and income during the spring planting season. In addition, our Ag segment operations may be adversely affected by relative levels of supply and demand, both domestic and international, commodity price levels and transportation costs and conditions. Supply is affected by weather conditions, plant disease, insect damage, acreage planted and government regulations and policies. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, population growth, per capita consumption of some products and renewable fuels production levels.

Regulation. Our Ag operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA, the DOT and similar government agencies. These laws, regulations and rules govern, among other things, discharge of materials into the environment, including air and water; reporting storage of hazardous wastes and other hazardous materials; transportation, handling and disposal of wastes and other materials; labeling of pesticides and similar substances; and investigation and remediation of releases of hazardous materials. In addition, environmental laws impose a liability on owners and operators for investigation and remediation of contaminated property and on a party who sends hazardous materials to those contaminated properties for treatment, storage, disposal or recycling. In some instances, that liability exists regardless of fault. Our global grain marketing operations, country operations business, processing and food ingredient operations and renewable fuel operations are also subject to laws and related regulations and rules administered by the U.S. Department of Agriculture ("USDA"), the U.S. Food and Drug Administration ("FDA") and other federal, state, local and foreign governmental agencies that govern processing, packaging, storage, distribution, advertising, labeling, quality and safety of feed and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. The hedging transactions and activities of our global grain marketing, country operations, processing and food ingredient and renewable fuels businesses are subject to the rules and regulations of the exchanges we use and governing bodies, such as the CME, the Chicago Board of Trade ("CBOT"), the Minneapolis Grain Exchange ("MGEX") and the CFTC.

Competition. In our Ag segment, we have significant competition in the businesses in which we operate based principally on price, services, quality, patronage and alternative products. Our businesses depend on relationships with local cooperatives and private retailers, proximity to customers and producers, and competitive pricing. We compete with other large distributors of agricultural products, as well as other regional or local distributors, local cooperatives, retailers and manufacturers.

NITROGEN PRODUCTION
Overview
    
Our Nitrogen Production segment consists solely of our approximate 10% membership interest (based on product tons) in CF Nitrogen, our strategic venture with CF Industries Holdings, Inc. ("CF Industries"). In February 2016, in connection with our investment in CF Nitrogen, we entered into an 80-year supply agreement with CF Nitrogen that entitles us to purchase up to 1.1 million tons of granular urea and 580,000 tons of urea ammonium nitrate ("UAN") annually for ratable delivery. We account for our CF Nitrogen investment using the hypothetical liquidation at book value method and on August 31, 2019, our investment was approximately $2.7 billion.

Our investment in CF Nitrogen positions us and our members for long-term dependable fertilizer supply, supply chain efficiency and production economics. In addition, the ability to source product from CF Nitrogen production facilities under our supply agreement benefits our members and customers through strategically positioned access to essential fertilizer products.


5


Operations

CF Nitrogen has four production facilities located in Donaldsonville, Louisiana, Port Neal, Iowa, Yazoo City, Mississippi, and Woodward, Oklahoma. Natural gas is the principal raw material and primary fuel source used in the ammonia production process. CF Nitrogen has access to competitively priced natural gas through a reliable network of pipelines connected to major natural gas trading hubs near its production facilities.

Products and Services

CF Nitrogen produces nitrogen-based products, including methanol, UAN and urea and related products.

Sales and Marketing; Customers

CF Nitrogen has three customers, including CHS and two consolidated subsidiaries of CF Industries.

Industry; Competition

Regulation. CF Nitrogen is subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA and similar government agencies. These laws, regulations and rules govern, among other things, discharge of materials into the environment, including air and water; reporting storage of hazardous wastes and other hazardous materials; handling and disposal of wastes and other materials; and investigation and remediation of releases of hazardous materials. In addition, environmental laws impose a liability on owners and operators for investigation and remediation of contaminated property and on a party who sends hazardous materials to those contaminated properties for treatment, storage, disposal or recycling. In some instances, that liability exists regardless of fault.

Competition. CF Nitrogen competes primarily on delivered price and, to a lesser extent, on customer service and product quality. CF Nitrogen competes domestically with a variety of large companies in the fertilizer industry. There is also significant competition from products sourced from other regions of the world.

CORPORATE AND OTHER

CHS Capital. Our wholly-owned financing subsidiary, CHS Capital, LLC ("CHS Capital"), provides cooperative associations with a variety of loans that meet commercial agriculture needs. These loans include operating, term, revolving and other short- and long-term options. CHS Capital also provides loans to individual producers for crop inputs, feed and hedging-related margin calls. Producer operating loans are also offered in strategic geographic regions.

CHS Hedging. Our wholly-owned commodity brokerage subsidiary, CHS Hedging, LLC ("CHS Hedging"), is a registered futures commission merchant and a clearing member of the CBOT, the CME and the MGEX. CHS Hedging provides consulting services and commodity risk management services primarily in the grains, oilseeds, fertilizer, livestock, dairy and energy markets.

Wheat milling. Ardent Mills, LLC ("Ardent Mills"), the largest flour miller in the United States, was formed as a joint venture with CHS, Cargill and ConAgra Foods, Inc., which combined the North American flour milling operations of its three parent companies, including assets from our existing joint venture milling operations Horizon Milling, LLC, Horizon Milling, ULC, and CHS-owned mills. In connection with the formation of Ardent Mills, the joint venture parties entered into various ancillary and non-compete agreements including, among other things, an agreement for us to supply Ardent Mills with certain wheat and durum products. We hold a 12% interest in Ardent Mills and account for our investment as an equity method investment due to our ability to exercise significant influence through our ability to appoint a member of the Board of Shareholders and Board of Managers. On August 31, 2019, our investment in Ardent Mills was $209.0 million.

Foods. Ventura Foods, LLC ("Ventura Foods") is a joint venture between CHS and Wilsey Foods, Inc., a majority-owned subsidiary of MBK USA Holdings, Inc., with each parent company owning a 50% interest. Ventura Foods produces vegetable oil-based products, such as packaged frying oils, margarine, mayonnaise, salad dressings and other food products, and currently has 16 manufacturing and distribution locations across the United States and Canada. Ventura Foods sources its raw materials, which consist primarily of soybean oil, canola oil, palm/coconut oil, peanut oil and other ingredients and supplies, from various domestic and overseas suppliers, including our oilseed processing operations. We account for our investment in Ventura Foods using the equity method of accounting and, on August 31, 2019, our investment was $374.5 million.


6


EMPLOYEES

On August 31, 2019, we had 10,703 full-time, part-time, temporary and seasonal employees. Of that total, 2,522 were employed in our Energy segment, 7,418 were employed in our Ag segment and 763 were employed in Corporate and Other. In addition to those individuals directly employed by us, many individuals work for joint ventures in which we have a 50% or less ownership interest, including employees of CF Nitrogen and Ventura Foods in our Nitrogen Production segment and Corporate and Other categories, respectively, and are not included in these totals.

Labor Relations
As of August 31, 2019, we had 12 collective bargaining agreements with unions covering approximately 8% of our employees in the United States. These collective bargaining agreements expire on various dates through November 1, 2023, except for one collective bargaining agreement covering 24 pipeline employees, which renews automatically every September 1, unless 60 days’ notice of termination is given.

CHS AUTHORIZED CAPITAL

We are an agricultural membership cooperative organized under Minnesota cooperative law to do business with member and non-member patrons.

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ITEM 1A.    RISK FACTORS

CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K contains and our other publicly available documents may contain, and our officers, directors and other representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our businesses, financial condition and results of operations, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements are discussed or identified in our public filings made with the U.S. Securities and Exchange Commission, including in this "Risk Factors" discussion. Any forward-looking statements made by us in this Annual Report on Form 10-K are based only on information currently available to us and speak only as of the date on which the statement is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by applicable law.

Reference to this Cautionary Statement in the context of a forward-looking statement shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those indicated in the forward-looking statement.

The following risk factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any particular forward-looking statement. The following risk factors should not be construed as exhaustive.

Our revenues, results of operations and cash flows could be materially and adversely affected by changes in commodity prices.

Our revenues, results of operations and cash flows are affected by market prices for commodities such as crude oil, natural gas, ethanol, fertilizer, grain, oilseed, flour, and crude and refined vegetable oils. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, plant disease, insect damage, drought, availability and adequacy of supply, government regulation and policies, and general political and economic conditions. We are also exposed to fluctuating commodity prices as the result of our inventories of commodities, typically grain, fertilizer and petroleum products, and purchase and sale contracts at fixed or partially fixed prices. At any time, our inventory levels and unfulfilled fixed or partially fixed price contract obligations may be substantial. We have processes in place to monitor exposures to these risks and engage in strategies, such as hedging, to manage these risks. If these controls and strategies are not successful in mitigating our exposure to these fluctuations, we could be materially and adversely affected. Changes in market prices for commodities that 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.

For example, in our energy operations, profitability depends largely on the margin between the cost of crude oil that we refine and the selling prices that we obtain for our refined products. The prices for crude oil and for gasoline, diesel fuel and other refined petroleum products fluctuate widely. Factors influencing these prices, many of which are beyond our control, include:

levels of worldwide and domestic supplies;

capacities of domestic and foreign refineries;

ability of members of the Organization of Petroleum Exporting Countries ("OPEC") to agree to and maintain oil price and production controls, and price and level of imports;


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disruption in supply;

political instability or conflict in oil-producing regions;

level of demand from consumers, agricultural producers and other customers;

price and availability of alternative fuels;

availability of pipeline capacity; and

domestic and foreign governmental regulations and taxes.

The long-term effects of these and other conditions on the prices of crude oil and refined petroleum products are uncertain and ever-changing. Increases in crude oil prices without a corresponding increase in the prices of our refined petroleum products, and decreases in crude oil prices with larger corresponding decreases in the prices of our refined petroleum products, would reduce our net income. Accordingly, we expect our margins and the profitability of our energy business to fluctuate, possibly significantly, over time.

Government policies, mandates, regulations and trade agreements could adversely affect our operations and profitability. 

Our business is subject to numerous government policies, mandates and regulations that could have an adverse effect on our operations or profitability. For example, government policies, mandates and regulations related to genetically modified organisms, traceability standards, product safety and labeling and renewable and low carbon fuels could have an adverse effect on our operations or profitability by, among other things, influencing planting of certain crops, location and size of crop production, trade of processed and unprocessed commodity products, volumes and types of imports and exports, the availability and competitiveness of feedstocks as raw materials and viability and volume of certain of our products. In our Energy segment, government policies, mandates and regulations designed to stop or impede the development or production of oil, such as those limiting or banning use of hydraulic fracturing, drilling or oilsands production, could adversely affect our operations and profitability.

In addition, changes in international trade agreements and trade disputes can adversely affect commodity trade flows by limiting or disrupting trade between countries or regions. In many countries around the world, historical free trade relationships are being challenged. For example, the U.S. government has imposed tariffs on certain products imported into the United States, which has resulted in reciprocal tariffs from other countries, including countries where we operate and/or into which we import products, such as imports of U.S. soybeans into China. In addition, the U.S. government has indicated its intent to renegotiate or potentially terminate certain existing international trade agreements and it is unclear what changes, if any, will be made to international trade agreements that are relevant to our business activities. These actions have created uncertainty between the United States and other nations, including countries where we operate, and have led to significant volatility in commodity prices, disruptions in historical trade flows and shifts in planting patterns in the United States and South America, all of which have resulted in reduced volumes of grain exports overall and have presented challenges and uncertainties for our business. Changes in trade policy, withdrawals from or material modifications to relevant international trade agreements and continued uncertainty could depress economic activity and restrict our access to suppliers and customers. Tariffs and trade restrictions that are implemented on products that we buy and/or sell could increase the cost of those products or adversely affect the availability of market access. These cost increases and market changes could adversely affect demand for our products and reduce margins, which could have a material adverse effect on our business and our earnings. In addition, the U.S. government can prevent or restrict us from doing business in or with other countries. These restrictions and those of other governments could limit our ability to gain access to business opportunities in various countries.
 
We are subject to political, economic, legal and other risks of doing business globally. 

We are a global business and are exposed to risks associated with having global operations. These risks include, but are not limited to, risks relating to terrorism, war, civil unrest, changes in a country's or region's social, economic or political conditions, changes in local labor conditions and regulations, changes in safety and environmental regulations, changes in regulatory or legal environments, restrictions on currency exchange activities, currency exchange fluctuations, price controls on commodities, taxes and doing business in countries or regions with inadequate infrastructure and logistics challenges. In particular, some countries where we operate lack well-developed legal systems or have not adopted clear legal and regulatory frameworks. This lack of legal certainty exposes our operations to increased risks, including increased difficulty in enforcing

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our agreements in those jurisdictions and increased risk of adverse actions by local government authorities, such as unilateral or forced renegotiation, modification or nullification of existing agreements or expropriations.

Our business and operations and demand for our products are highly dependent on certain global and regional factors that are outside our control and that could adversely impact our business.

The level of demand for our products is affected by global and regional demographics and macroeconomic conditions, including population growth rates and changes in standards of living. A significant downturn in global economic growth or recessionary conditions in major geographic regions may lead to a reduced demand for agricultural commodities, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. Weak global economic conditions and adverse conditions in financial and capital markets may adversely impact the financial condition and liquidity of some of our customers, suppliers and other counterparties, which could have a material adverse effect on our customers' ability to pay for our products and on our business, financial condition, liquidity, results of operations and prospects.

Additionally, planted acreage and consequently the volume of fertilizer and crop protection products applied, is partially dependent on government programs, grain prices and the perception held by producers of demand for production, all of which are outside our control. Moreover, our business and operations may be affected by weather conditions that are outside our control. For example:

Weather conditions during the spring planting season and early summer crop nutrient and crop protection application season affect agronomy product volumes and profitability.

Adverse weather conditions, such as heavy snow or rainfall and any flooding as a result thereof, may cause transportation delays and increased transportation costs, or damage physical assets, especially facilities in low-lying areas near coasts and river banks or situated in hurricane-prone and rain-susceptible regions.

Changes in weather patterns may shift periods of demand for products or even regions in which our products are produced or distributed, which could require us to evolve our procurement and distribution processes.

Significant changes in water levels (up or down, as a result of flooding, drought or otherwise) may cause changes in agricultural activity, which could require changes to our operating and distribution activities, as well as significant capital improvements to our facilities.

We may experience increased insurance premiums and deductibles, or decreases in available coverage, for our assets in areas subject to adverse weather conditions.

Emerging sustainability and other environmental priorities outside our control could also affect agricultural practices and future demand for agronomy products applied to crops and the volume of any such application. Accordingly, factors outside our control could materially and adversely affect our revenues, results of operations and cash flows.

Our revenues, margins, results of operations and cash flows could be materially and adversely affected if our members were to do business with others rather than with us.

We do not have an exclusive relationship with our members and our members are not obligated to supply us with their products or purchase products from us. Our members often have a variety of distribution outlets and product sources available to them. If our members were to sell their products to other purchasers or purchase products from other sellers, our revenues and margins would decline and our results of operations and cash flows could be materially and adversely affected.

We are exposed to risk of nonperformance and nonpayment by counterparties.

We are exposed to risk of nonperformance and nonpayment by counterparties, whether pursuant to contracts or otherwise. Risk of nonperformance and nonpayment by counterparties includes inability or refusal of a counterparty to pay us, inability or refusal to perform because of a counterparty's financial condition and liquidity or for any other reason, and risk that the counterparty will refuse to perform a contract during a period of price fluctuations where contract prices are significantly different than current market prices. In the event we experience significant nonperformance or nonpayment by counterparties, our financial condition, results of operations and cash flows could be materially and adversely affected. For example, we store inventory in third-party warehouses, and the operators of these warehouses may not adequately store or secure our inventory, or they may improperly sell that inventory to someone else, which could expose us to a loss of the value of that inventory. In the

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event we experience any such nonperformance by a third-party warehouse operator, our financial condition, results of operations and cash flows could be materially and adversely affected.

We participate in highly competitive business markets and we may not be able to continue to compete successfully, which could have a material adverse effect on us.

We operate in several highly competitive business segments and our competitors may succeed in developing new or enhanced products that are better than ours, may be more successful in marketing and selling their products than we are, or may have more effective supply chain capability than we have. Competitive factors include price, service level, proximity to markets, access to transportation, product quality and marketing. In our business segments, we compete with certain companies that are larger and better known than we are and that have greater marketing, financial, personnel and other resources than we do. As a result, we may not be able to continue to compete successfully, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Our business, profitability and liquidity may be adversely affected by the deterioration in the credit quality of, or defaults by, third parties who owe us money.

We extend credit to, make loans to and engage in other financing arrangements with individual producers, local cooperatives and other third parties around the world. We incur credit risk and the risk of losses if our borrowers and others to which we extend credit do not repay their loans or perform their obligations to pay us the money they owe. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or for other reasons. If these counterparties do not pay us back, such that we experience significant defaults on their payment obligations to us, our financial condition, results of operations or cash flows could be materially and adversely affected.

We are also subject to the risk that our rights against borrowers and other third parties that owe us money may not be enforceable in all circumstances. For example, a borrower or third party may declare bankruptcy. In addition, due to implications of the overall agricultural sector's extended period of depressed commodity prices and margins and weather-related impacts on production in 2019, among other factors, the credit quality of borrowers and other third parties whose obligations we hold could deteriorate, including a deterioration in the value of collateral posted by those parties to secure their obligations to us pursuant to purchase contracts, loan agreements or other contracts. If that deterioration occurs, the material adverse effects of third parties not performing their repayment obligations may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount owed to us. For example, certain loans and other financing arrangements we undertake with agricultural producers are typically secured by the counterparty's crops that are planted in the current year. There is a risk that the value of the crop will not be sufficient to satisfy the counterparty’s repayment obligations under the financing arrangement as a result of weather, crop growing conditions, other factors that influence the price, supply and demand for agricultural commodities or for other reasons.

In addition, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. Termination of contracts and foreclosure on collateral may subject us to claims for improper exercise of our rights. Default rates, downgrades and disputes with counterparties as to the valuation of collateral increase significantly in times of market stress and illiquidity.

In respect to our lending activity, we evaluate collectability of both commercial and producer loans on a specific identification basis, based on the amount and quality of the collateral obtained, and record specific loan loss reserves when appropriate. Consistent with accounting principles generally accepted in the United States ("U.S. GAAP"), a general reserve is also maintained based on historical loss experience and various qualitative factors. For other forms of credit, we establish reserves as appropriate and consistent with U.S. GAAP. The reserves represent our best estimate based on current facts and circumstances. Future developments or changes in assumptions may cause us to record adjustments to the reserves that could materially and adversely affect our results of operations.

Changes in federal income tax laws or in our tax status could increase our tax liability and reduce our net income significantly.

Current federal income tax laws, regulations and interpretations regarding the taxation of cooperatives allow us to exclude income generated through business with or for a member (patronage income) from our taxable income. If any changes are made to such federal income tax laws, regulations or interpretations, or if in the future we were not eligible to be taxed as a cooperative, our tax liability would significantly increase and our net income would significantly decrease.


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We incur significant costs in complying with applicable laws and regulations. Any failure to comply with these laws and regulations, or make capital or other investments necessary to comply with these laws and regulations, could expose us to unanticipated expenditures and liabilities.

We are subject to numerous federal, state and local provisions regulating our business and operations. We incur and expect to incur significant capital and operating expenses to comply with these laws and regulations. We may be unable to pass on those expenses to customers without experiencing volume and margin losses. For example, the compliance burden and impact on our operations and profitability as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and related regulations continue to evolve, as federal agencies have implemented and continue to implement its many provisions through regulation. These efforts to change the regulation of financial markets subject users of derivatives, such as CHS, to extensive oversight and regulation by the CFTC. Such initiatives have imposed and may continue to impose additional costs on us, including operating and compliance costs, and the cost of fines or penalties in the event we do not comply, and could materially affect the availability, as well as the cost and terms, of certain transactions. Certain federal regulations, studies and reports addressing Dodd-Frank, including the regulation of swaps and derivatives, are still being implemented and others are being finalized. We will continue to monitor these developments. Any of these matters could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

We establish reserves for the future cost of known compliance obligations, such as remediation of identified environmental issues. However, these reserves may prove inadequate to meet our actual liability. Moreover, amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of currently unknown compliance issues may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. Furthermore, our failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, civil remedies, including fines and injunctions, criminal fines and penalties, and recalls of our products. For example, we regularly maintain hedges to manage the price risks associated with our commercial operations. These transactions typically take place on exchanges such as the CME. Our hedging transactions and activities are subject to the rules and regulations of the exchanges we use and governing bodies, including the CME, the NYMEX, the CBOT, the MGEX and the CFTC. All exchanges have broad powers to review required records, to investigate and enforce compliance and to punish noncompliance by entities subject to their jurisdiction. Failure to comply with such rules and regulations could lead to restrictions on our trading activities or subject us to enforcement action by the CFTC or a disciplinary action by the exchanges, which could lead to substantial fines or penalties or limitations on our related operations. In addition, any investigation or proceeding by an exchange or the CFTC, whether successful or unsuccessful, could result in substantial costs, diversion of resources, including management time, and potential harm to our reputation, all of which could have a material adverse effect on our business financial condition, liquidity, results of operations and prospects.

The consequences of any U.S. Securities and Exchange Commission ("SEC") or other governmental authority's investigation with respect to certain rail freight contracts purchased in connection with our North American grain marketing operations could have a material adverse effect on our business.

In connection with the preparation of our Annual Report on Form 10-K for the year ended August 31, 2018, our management noted potentially excessive valuations in net derivative asset valuations relating to certain rail freight contracts purchased in connection with our North American grain marketing operations. Following the identification of these potentially excessive valuations, we engaged external counsel, which engaged forensic accountants to work with our management under the oversight of the Audit Committee of our Board of Directors to conduct an investigation. The investigation concluded there were misstatements in the consolidated financial statements included in certain of our filings with the SEC that were due to intentional misconduct by a former employee in our rail freight trading operations, and due to rail freight contracts and certain non-rail freight contracts not meeting technical accounting requirements to qualify as derivative financial instruments. The misconduct consisted of the former employee manipulating the mark-to-market valuation of railcars that were the subject of rail freight purchase contracts and manipulating the quantity of railcars included in the monthly mark-to-market valuation. In addition, the investigation revealed intentional misstatements that were made by the former employee to our external auditor in connection with its audit of our consolidated financial statements for the year ended August 31, 2017. During the course of, and as a result of, the investigation, we terminated the employee. The Audit Committee of our Board of Directors and our legal counsel reported the findings of the investigation to our Board of Directors and to our independent registered public accounting firm and have discussed evidence uncovered and conclusions reached in the investigation with the staff of the Division of Enforcement of the SEC. Although we are not aware that any formal investigation or inquiry has been commenced, we are cooperating, and will continue to fully cooperate with, the staff of the Division of Enforcement of the SEC in any ongoing review of these matters. We are unable at this time to predict when the SEC Division of Enforcement's review of these matters will be completed or what regulatory or other outcomes may result. If the SEC or any other governmental authority determines that violations of certain laws or regulations occurred, we could be exposed to a broad range of civil and criminal sanctions. Although we are currently unable to predict what actions the SEC or any other governmental authority might take, or what the

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likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, such actions, fines and/or penalties could be material, resulting in a material adverse effect on our business, prospects, reputation, financial condition, results of operations or cash flows. Even if an inquiry or investigation does not result in an adverse determination, our business, prospects, reputation, financial condition, results of operations or cash flows could be adversely impacted. In addition, the expenses incurred in connection with the ongoing review or any investigation by the SEC or any other governmental authority, and the diversion of the attention of our management that could occur as a result thereof, could adversely affect our business, financial condition, results of operations or cash flows.

We are subject to the Foreign Corrupt Practices Act of 1977 and other similar anti-corruption, anti-bribery and anti-kickback laws and regulations, and any noncompliance with those laws and regulations by us or others acting on our behalf could have a material adverse effect on our business, financial condition and results of operations.

We operate on a global basis and are subject to anti-corruption, anti-bribery and anti-kickback laws and regulations, including the Foreign Corrupt Practices Act of 1977 as amended ("FCPA"). The FCPA and other similar anti-corruption, anti-bribery and anti-kickback laws and regulations in other jurisdictions generally prohibit companies and their intermediaries or agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining business. We operate and sell our products in many parts of the world that have experienced governmental corruption to some degree and in certain circumstances strict compliance with anti-corruption, anti-bribery and anti-kickback laws and regulations may conflict with local customs and practices. In addition, in certain countries, we engage third-party agents or intermediaries to act on our behalf and/or conduct all or a portion of our operations through joint venture partners, including in those countries with a high risk for corruption. If any of these third parties violate applicable anti-corruption, anti-bribery or anti-kickback laws or regulations, we may be liable for those violations. We have policies in place prohibiting employees from making or authorizing improper payments, we train our employees regarding compliance with anti-corruption, anti-bribery and anti-kickback laws and regulations, and we utilize procedures to identify and mitigate risks of such misconduct by our employees, third-party agents, intermediaries and joint venture partners. However, we cannot provide assurances that our employees, third-party agents, intermediaries or joint venture partners will comply with those policies, laws and regulations. If we are found liable for violations of the FCPA or other similar anti-corruption, anti-bribery or anti-kickback laws or regulations, either due to our own acts or out of inadvertence or due to the acts or inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could have a material adverse effect on our business, financial condition and results of operations.

In the fourth quarter of fiscal 2018, we contacted the U.S. Department of Justice and SEC to voluntarily self-disclose potential violations of the FCPA in connection with a small number of reimbursements made to Mexican customs agents in the 2014-2015 time period for payments customs agents made to Mexican customs officials in connection with inspections of grain crossing the U.S.-Mexican border by railcar. We are fully cooperating with the government, with the assistance of legal counsel, which includes investigating other areas of potential interest to the government. We are unable at this time to predict when our or the government agencies' review of these matters will be completed or what regulatory or other outcomes may result.

Environmental and energy laws and regulations may result in increased operating costs and capital expenditures and may have a material and adverse effect on us.

New and current environmental and energy laws and regulations, including regulations relating to alternative energy sources and the risk of global climate change, new interpretations of existing environmental and energy laws and regulations, increased governmental enforcement of environmental and energy laws and regulations or other developments in these areas could require us to make additional unforeseen expenditures or unforeseen changes to our operations, either of which could adversely affect us. For example, it is possible that some form of regulation will be forthcoming at the federal or state level in the United States with respect to emissions of greenhouse gases ("GHGs"), such as carbon dioxide, methane and nitrous oxides. New federal legislation or regulatory programs that restrict emissions of GHGs or comparable new state legislation or programs or customer requirements in areas where we or our customers conduct business could adversely affect our operations and the demand for our energy products, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. In addition, new legislation or regulatory programs could require substantial expenditures for installation and operation of systems and equipment or for substantial modifications to existing equipment.

Also, pursuant to the Energy Independence and Security Act of 2007, the EPA has promulgated the Renewable Fuel Standard ("RFS"), which requires refiners to blend renewable fuels, such as ethanol and biodiesel, with their petroleum fuels or to 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. We generate RINs in our marketing operations under the RFS; however, it may not be enough to meet the needs of our refining

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capacity and, if so, RINs must be purchased on the open market. In recent years, the price of RINs has been extremely volatile. As a result, the purchase of RINs could have a negative impact on our future refined fuels margins, the impact of which we are unable to estimate.

During fiscal 2019, the EPA granted our Laurel, Montana, refinery an extension of the small refinery exemption under the RFS as provided for under the Clean Air Act for 2018 ("small refinery exemption"). This action provided our Laurel refinery an exemption from its renewable fuel volume obligations under the RFS program for compliance year 2018. In granting this exemption, the EPA considered a number of factors and concluded the Laurel refinery qualified for the exemption as prescribed under the standard. As with other competitors who received the exemption in the same geographic area as our Laurel refinery, the small refinery exemption lowers our cost to operate and has a positive impact on our earnings. Since the small refinery exemption is granted on a year-to-year basis, we are unable to predict whether we will receive this exemption in the future.

Environmental liabilities could have a material adverse effect on us.

Many of our current and former facilities have been in operation for many years and over that time we and other operators of those facilities have generated, used, stored and disposed of substances or wastes that are or might be considered hazardous under applicable or future enacted environmental laws, including liquid fertilizers, chemicals and fuels stored in underground and above-ground tanks. Any past or future actions in violation of applicable environmental laws could subject us to administrative penalties, fines, injunctions or other costs, such as capital expenditures. In addition, an owner or operator of contaminated property, and a party who sends hazardous materials to such site for treatment, storage, disposal or recycling can be liable for the cost of investigation and remediation under environmental laws. In some instances, such liability exists regardless of fault. Moreover, future or unknown past releases of hazardous substances could subject us to private lawsuits claiming damages, including for bodily injury or property damage, and to adverse publicity, which could have a material adverse effect on us. Liabilities, including legal costs, related to remediation of contaminated properties are not recognized by us until the related costs are considered probable and can be reasonably estimated.

Actual or perceived quality, safety or health risks associated with our products could subject us to significant liability and damage our business and reputation.

If any of our food or animal feed products were to become adulterated or misbranded, we would need to recall those items and could experience product liability claims if either consumers or customers' livestock were injured or were claimed to be injured as a result. A widespread product recall or a significant product liability judgment could cause our products to be unavailable for a period of time or could cause a loss of consumer or customer confidence in our products. Even if a product liability claim were unsuccessful or were not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our business and reputation with existing and potential consumers and customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. In addition, general public perceptions regarding the quality, safety or health risks associated with particular food or animal feed products, such as concerns regarding genetically modified crops, could reduce demand and prices for some of the products associated with our businesses. To the extent that consumer preferences evolve away from products that our members or we produce for health or other reasons, such as the growing demand for organic food products, and we are unable to develop or procure products that satisfy new consumer preferences, there will be a decreased demand for our products, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

We have identified material weaknesses in our internal control over financial reporting. If these material weaknesses persist or if we fail to establish and maintain effective internal controls over financial reporting, our ability to accurately report our results could be adversely affected.

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. We have concluded that material weaknesses in our internal control over financial reporting exist and those material weaknesses are discussed further in Item 9A, Controls and Procedures, of this Annual Report on Form 10-K. The existence of one or more material weaknesses precludes a conclusion by management that a corporation's internal control over financial reporting is effective.
    
In response to the identified material weaknesses, our management, with the oversight of the Audit Committee of our Board of Directors, has dedicated significant resources, including involvement of outside advisors, and has undertaken significant efforts to improve our internal control over financial reporting and to remediate the material weaknesses identified. Although certain remedial actions have been completed, others are still in process, and we continue to actively plan for and

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implement additional control procedures. If we fail to remediate the identified material weaknesses or fail to otherwise maintain effective control over financial reporting in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis. Our management and Board of Directors continue to devote significant time and attention to remediating and overseeing the remediation of the identified material weaknesses and improving our internal control over financial reporting, and we expect to continue to incur costs associated with remediating such material weaknesses and implementing appropriate processes, including fees for additional audit, legal and consulting services, which could negatively affect our financial condition and operating results.

Our financial results are susceptible to seasonality.

Many of our business activities are highly seasonal and operating results vary throughout the year. Our revenue and income are generally lowest during the second and fourth fiscal quarters and highest during the first and third fiscal quarters. For example, in our Ag segment, our country operations business generally experiences higher volumes and income during the spring planting season and during the fall harvest season and our agronomy business generally experiences higher volumes and income during the spring planting season. Our global grain marketing operations are also subject to fluctuations in volume and income based on producer harvests, world grain prices and demand, and international trade relationships. Our Energy segment generally experiences higher volumes and income in certain operating areas, such as refined products, in the spring, summer and early fall when gasoline and diesel fuel usage by our customers and members is highest and is subject to global supply and demand forces. Other energy products, such as propane, generally experience higher volumes and income during the winter heating and crop-drying seasons.

Our operations are subject to business interruptions and casualty losses; we do not insure against all potential losses and could be seriously harmed by unanticipated liabilities.

Our operations are subject to business interruptions due to unanticipated events such as explosions, fires, pipeline interruptions, transportation delays, equipment failures, crude oil or refined product spills, adverse weather conditions and labor disputes. For example:

Our oil refineries and other facilities are potential targets for terrorist attacks that could halt or discontinue production.

Our inability to negotiate acceptable contracts with unionized workers in our operations could result in strikes or work stoppages.

Our corporate headquarters, the facilities we own or the significant inventories we carry could be damaged or destroyed by catastrophic events, adverse weather conditions or contamination.

Someone may accidentally or intentionally introduce a computer virus to our information technology systems or breach our computer systems or other cyber resources.

An occurrence of a pandemic or epidemic disease affecting a substantial part of our workforce or our customers could cause an interruption in our business operations.

The effects of any of these events could be significant. We maintain insurance coverage against many, but not all, potential losses or liabilities arising from these operating hazards, but uninsured losses or losses above our coverage limits are possible. Uninsured losses and liabilities arising from operating hazards could have a material adverse effect on us.

Our risk management strategies may not be effective.

Our business is affected by fluctuations in commodity prices, transportation costs, energy prices, foreign currency exchange rates and interest rates. We monitor position limits, account receivables and other exposures and engage in other strategies and controls to manage these risks. Our monitoring efforts may not be effective at detecting a significant risk exposure and our controls and strategies may not be effective in adequately managing against the occurrence of a significant loss relating to a risk exposure. If our controls and strategies are not successful in mitigating or preventing our financial exposure to losses due to the fluctuations or failures mentioned above, it could significantly and adversely affect our operating results.


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We are subject to workforce factors that could adversely affect our business and financial condition.

Like most companies in the agricultural industry, we are continuously challenged to hire, develop and retain a sufficient number of employees to operate our businesses throughout our operating geographies. We may have difficulty recruiting and retaining new employees with adequate qualifications and experience. The challenge of hiring new employees is exacerbated by the rural nature of our business, which provides for a smaller pool of skilled employee candidates. To hire new employees, we may be forced to pay higher wages or offer other benefits that might impact our cost of labor. Furthermore, when we do hire new employees, we may be unable to successfully transfer our other employees' institutional knowledge and skills to them. These or other employee workforce factors could negatively impact our business, financial condition or results of operations.

Our business is capital-intensive and we rely on cash generated from our operations and external financing to fund our strategies and ongoing capital needs.

We require significant capital, including access to credit markets from time to time, to operate our business and fund our strategies. Our working capital requirements are directly affected by the price of commodities, which may fluctuate significantly and quickly. We also require substantial capital to maintain and upgrade our extensive network of facilities to keep pace with competitive developments, technological advances, regulations and changing safety standards. In addition, the expansion of our business and pursuit of acquisitions or other business opportunities has required, and may in the future require, significant amounts of capital. If we are unable to generate sufficient cash flow or maintain access to adequate external financing, including as a result of significant disruptions in the global credit markets, it could restrict our current operations and our growth opportunities, which could adversely affect our operating results and restrict our ability to repay our existing debts.

Our cooperative structure limits our ability to access equity capital.

As a cooperative, we may not sell common stock in our company. In addition, existing laws and our articles of incorporation and bylaws limit dividends on any preferred stock we may issue to 8% per annum. These limitations may restrict our ability to raise equity capital and may adversely affect our ability to compete with enterprises that do not face similar restrictions.

Changes in the method of determining the London Interbank Offered Rate ("LIBOR") or the replacement of LIBOR with an alternative reference rate may adversely affect interest rates under our credit facilities and dividend rates with respect to our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock.

LIBOR is the basic rate of interest widely used as a global reference for setting interest rates on loans. Some of our credit facilities, including our five-year revolving credit facility and our 10-year term loan facility, use LIBOR as the reference rate. In addition, the terms of our Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 ("Class B Series 2 Preferred Stock") and our Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 ("Class B Series 3 Preferred Stock") provide that, beginning on March 24, 2024, in the case of our Class B Series 2 Preferred Stock, or on September 30, 2024, in the case of our Class B Series 3 Preferred Stock ("Initial Reset Date"), dividends on such preferred stock will accumulate at a rate equal to three-month LIBOR plus an applicable spread, not to exceed 8% per annum.

In 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time, if new methods of calculating LIBOR will be established such that it continues to exist after 2021 or whether different reference rates used to price indebtedness will develop. It is impossible to predict the effect these developments, any discontinuance, modification or other reforms to LIBOR or the establishment of alternative reference rates may have on LIBOR, other benchmark rates or floating rate debt instruments. Although certain of our credit facilities, including our five-year revolving credit facility and our 10-year term loan facility, contain LIBOR alternative provisions, use of alternative reference rates, new methods of calculating LIBOR or other reforms could cause the interest rates on our borrowings to be materially different than expected, which could have an adverse effect on our financial position, results of operations and liquidity and cause us to attempt to renegotiate such credit facilities. Similarly, although the rate at which dividends accumulate on our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock may not exceed 8% per annum, there is uncertainty regarding the calculation of such rate following the applicable Initial Reset Date in the event that LIBOR ceases to exist, and the use of alternative reference rates, new methods of calculating LIBOR or other reforms could cause the dividends we pay on our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock following the applicable Initial Reset Date to be materially different than expected, which could have an adverse effect on our financial position, results of operations and liquidity and cause us to attempt to amend the terms of our Class B Series 2 Preferred Stock and Class B Series 3 Preferred Stock, including by seeking shareholder approval of any such

16


amendment. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial market could have an adverse effect on our financial position, results of operations and liquidity.

Consolidation among the producers of products we purchase and customers for products we sell could materially and adversely affect our revenues, results of operations and cash flows.

Consolidation has occurred among the individual producers of products we sell and purchase, including crude oil, fertilizer and grain, and it is highly likely to continue in the future. Consolidation could allow producers to negotiate pricing, supply availability and other contract terms that are less favorable to us. Consolidation also may increase the likelihood that consumers of these products enter into supply relationships with a smaller number of producers, resulting in potentially higher prices for the products we purchase.

Consolidation has also occurred among cooperative associations that are the primary wholesale customers of our products, which has resulted in a smaller wholesale and retail customer base for our products and has intensified the competition for these customers. This consolidation is likely to continue in the future. Ongoing consolidation among distributors and brokers of food products and food retailers has altered the buying patterns of these businesses, as they have increasingly elected to work with product suppliers who can meet their needs nationwide rather than just regionally or locally. If these cooperatives, distributors, brokers and retailers elect not to purchase our products, our revenues, results of operations and cash flows could be materially and adversely affected.

In addition, in the seed, fertilizer and crop protection markets, consolidation at both the producer and wholesale customer level has increased the potential for direct sales from the respective input manufacturer to the cooperative customers and/or the individual agricultural producer, which would remove us from the supply chain and could have a material and adverse effect on our revenues, results of operations and cash flows.

If our customers choose alternatives to our refined petroleum products, our revenues, results of operations and cash flows could be materially and adversely affected.

Numerous alternative energy sources currently under development could serve as alternatives to our gasoline, diesel fuel and other refined petroleum products. If any of these alternative products become more economically viable or preferable to our customers for environmental or other reasons, demand for our energy products would decline. Declining demand for our energy products, particularly diesel fuel sold for farming applications, could materially and adversely affect our revenues, results of operations and cash flows.

Technological improvements could decrease the demand for our agronomy and energy products.

Technological advances in agriculture could decrease the demand for crop nutrients, energy and other crop input products and services we provide. Genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could affect the demand for our crop nutrients and crop protection products. Demand for fuel that we sell could decline as technology allows for more efficient usage of equipment. Declining demand for our products could materially and adversely affect our revenues, results of operations and cash flows.

Acquisitions, strategic alliances, joint ventures, divestitures and other non-ordinary course-of business events resulting from portfolio management actions and other evolving business strategies could affect future results.

We monitor our business portfolio and organizational structure and have made and may continue to make acquisitions, strategic alliances, joint ventures, divestitures and changes to our organizational structure. With respect to acquisitions, future results will be affected by our ability to identify suitable acquisition candidates, to adequately finance any acquisitions and to integrate acquired businesses quickly and obtain the anticipated financial returns, including synergies. Our ability to successfully complete a divestiture will depend on, among other things, our ability to identify buyers that are prepared to acquire such assets or businesses on acceptable terms and to adjust and optimize our retained businesses following the divestiture. Additionally, we may fail to consummate proposed acquisitions, divestitures, joint ventures or strategic alliances after incurring expenses and devoting substantial resources, including management time, to such transactions.

Several parts of our business, including in particular our nitrogen production business, our foods business and portions of our global grain marketing and wheat milling operations, are operated through joint ventures with third parties where we do not have majority control of the venture. By operating a business through a joint venture, we have less control over business decisions than we have in our subsidiaries and limited liability companies in which we have a controlling interest. In particular, we generally cannot act on major business initiatives in our joint ventures without the consent of the other party or parties in

17


those ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that co-venturers might become bankrupt or fail to fund their share of required capital contributions, in which case the joint venture may be unable to access needed growth capital (if the co-venturer is solely responsible for capital contributions) or we and any other remaining co-venturers would generally be liable for the joint venture’s liabilities. Co-venturers may have economic, tax or other business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Our co-venturers may take actions that are not within our control, which may expose our investments in joint ventures to the risk of lower values or returns. Joint venture investments may also lead to impasses. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our day-to-day business. In addition, we may in certain circumstances be liable for the actions of our co-venturers. Each of these matters could have a material adverse effect on us.

We made certain assumptions and projections regarding the future of the markets served by our joint venture investments, which included projected market pricing and demand for their products. These assumptions were an integral part of the economics used to evaluate these joint venture investment opportunities prior to consummation. To the extent that actual market performance varies from our models, our ability to achieve projected returns on our joint venture investments may be impacted in a materially adverse manner.
    
We utilize information technology systems to support our business. The ongoing multiyear implementation of an enterprise-wide resource planning system, reliance upon multiple legacy business systems, security breaches or other disruptions to our information technology systems or assets could interfere with our operations, compromise security of our customers' or suppliers' information and expose us to liability that could adversely impact our business and reputation.

Our operations rely on certain key information technology ("IT") systems, many of which are legacy in nature or may depend on third-party services to provide critical connections of data, information and services for internal and external users. Over the next several years, we expect to continue implementing a new enterprise resource planning system ("ERP"), which has and will continue to require significant capital and human resources to deploy. There can be no assurance that the actual costs for the ERP will not exceed our current estimates or that the ERP will not take longer to implement than we currently expect. In addition, potential flaws in implementing the ERP or in the failure of any portion/module of the ERP to meet our needs or provide appropriate controls may pose risks to our ability to operate successfully and efficiently and with an effective system of internal controls. There may be other challenges and risks to both our aging and current IT systems over time due to any number of causes, such as catastrophic events, availability of resources, power outages, security breaches or cyber-based attacks, as we upgrade and standardize our ERP system on a worldwide basis. These challenges and risks could result in legal claims or proceedings, liability or penalties, disruption in operations, loss of valuable data, increased costs and damage to our reputation, all of which could adversely affect our business. Our ongoing IT investments include those relating to cybersecurity, including technology, hired expertise and cybersecurity risk mitigation actions. However, an incident or breach may occur and subject us to an adverse impact on our business and reputation. Further, we are subject to laws and regulations in the United States and other jurisdictions regarding privacy, data protection and data security, including those related to the collection, storage, handling, use, disclosure, transfer and security of personal data. These laws and regulations pose increasingly complex compliance challenges and may require us to incur significant additional compliance costs. Any violation of such laws and regulations, including as a result of a security or privacy breach, could subject us to legal claims, regulatory penalties and damage to our reputation.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

As of the date hereof, there were no unresolved comments from the SEC staff regarding our periodic or current reports.


18


ITEM 2.    PROPERTIES

We own or lease energy, agronomy, grain-handling and processing facilities and other real estate throughout the United States and internationally. Below is a summary of these locations by segment and related business. All facilities are owned except where indicated as leased.
Description
Location(s)
Energy
 
Refineries
Laurel, Montana, and McPherson, Kansas
Propane terminals
Biddeford, Maine; Glenwood and Rockville, Minnesota (Rockville is 50% owned by CHS); Hannaford, North Dakota; Ross, North Dakota; and Hixton, Wisconsin
Transportation terminals/repair facilities
12 locations in Iowa, Kansas, Minnesota, Montana, North Dakota, South Dakota, Washington and Wisconsin
Petroleum and asphalt terminals/storage facilities
11 locations in Montana, North Dakota and Wisconsin
Pipelines:
 
Cenex Pipeline, LLC
Laurel, Montana, to Fargo, North Dakota
Front Range Pipeline, LLC
Canadian border to Laurel, Montana
Jayhawk Pipeline, LLC
Throughout Kansas, with branches in Nebraska, Oklahoma and Texas
Conway Pipeline
McPherson, Kansas, to Conway, Kansas
Kaw Pipe Line Company
Locations throughout Kansas
Osage Pipe Line Company, LLC (50% owned by CHS McPherson Refinery Inc. ("CHS McPherson"))
Oklahoma to Kansas
Convenience stores/gas stations
36 locations in Minnesota, Montana, North Dakota, South Dakota and Wyoming, six of which are leased
Lubricant plants/warehouses
Inver Grove Heights, Minnesota; Kenton, Ohio; and Amarillo, Texas; the location in Inver Grove Heights is leased
Ag
 
Global Grain Marketing
 
Grain terminals
18 locations in Illinois, Iowa, Louisiana, Minnesota, Wisconsin, Argentina, Brazil, Hungary, Romania and Ukraine
Fertilizer terminal
Argentina
Grain marketing offices
34 locations in Iowa, Minnesota, Nebraska, Argentina, Brazil, Bulgaria, Canada, China, Hungary, Jordan, Paraguay, Romania, Serbia, Singapore, South Korea, Spain, Switzerland, Taiwan, Ukraine and Uruguay; all locations are leased other than the offices in Davenport, Iowa, and Winona, Minnesota, which we own
Country Operations
 
Agri-operations facilities
Approximately 470 community locations (of which some of the facilities are on leased land) located in Colorado, Idaho, Illinois, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Washington and Wisconsin
Feed manufacturing facilities
8 locations in Montana, North Dakota, Oregon and South Dakota
Wholesale Agronomy
 
Deep water port
Galveston, Texas
Terminals
18 locations in Arkansas, Idaho, Illinois, Iowa, Kentucky, Louisiana, Minnesota, Mississippi, South Dakota, Tennessee and Texas; facilities in Little Rock, Arkansas; Owensboro, Kentucky; and Galveston, Texas, are on leased land
Bulk chemical rail terminal facility
Brooten, Minnesota

19


Distribution warehouses
32 locations in Arkansas, Iowa, Idaho, Illinois, Kansas, Michigan, Minnesota, Missouri, Montana, North Dakota, Nebraska, Oklahoma, South Dakota, Texas, Washington and Wisconsin; all facilities are leased except those in Willmar, Minnesota (two locations); Fargo and Minot, North Dakota; and Black River Falls, Wisconsin
Processing and Food Ingredients
 
Oilseed facilities
Hallock, Fairmont and Mankato, Minnesota
Sunflower processing plants
Grandin and Fargo, North Dakota
Storage and warehouse facilities
Hazel, Minnesota; Joliette, North Dakota; and a leased facility in Winkler, Canada
Renewable Fuels
 
Ethanol plants
Rochelle and Annawan, Illinois
Corporate and Other
 
Corporate headquarters
We lease a 24-acre campus in Inver Grove Heights, Minnesota, consisting of one building with approximately 320,000 square feet of office space and own an additional nine acres of land adjacent to the leased property on which we have two smaller buildings with approximately 13,400 and 9,000 square feet of space
Office facilities
Leased facilities in Eagan and St. Paul, Minnesota; Kansas City, Missouri; Huron, South Dakota; and Washington, D.C.
Agricultural land and related improvements
We own approximately 3,500 acres of agricultural land and related improvements in central Michigan

ITEM 3.    LEGAL PROCEEDINGS

We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, our management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As a cooperative, we do not have common stock that is traded or otherwise. We have not sold any equity securities during the three years ended August 31, 2019, that were not registered under the Securities Act of 1933.



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ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial information for each of the five periods indicated. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K and with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Our consolidated financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP. The selected income statement data for the years ended August 31, 2019, 2018, 2017 and 2016, and balance sheet data as of August 31, 2019, 2018 and 2017, are derived from our audited consolidated financial statements and related notes. The selected income statement data for the year ended August 31, 2015, and balance sheet data as of August 31, 2016 and 2015, are derived from unaudited consolidated financial information not included in this Annual Report on Form 10-K. Certain prior period amounts have been revised as follows:

Income statement data for the year ended August 31, 2015, and balance sheet data as of August 31, 2016, and 2015, were restated in our Annual Report on Form 10-K for the year ended August 31, 2018, to correct certain amounts that had been previously misstated.
For all periods presented, income statement information has been revised to reflect the impact of adopting Accounting Standards Update ("ASU") No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Postretirement Benefit Cost during fiscal 2019. As a result of the adoption of this ASU, the non-service cost components of net periodic benefit costs have been reclassified from cost of goods sold ("COGS") and marketing, general and administrative expenses to outside of operating income within other (income) loss.
 
Selected Consolidated Financial Data
 
2019
 
2018
 
2017
 
2016
 
2015
Income Statement Data (for the years ended August 31):
(Dollars in thousands)
Revenues
$
31,900,453

 
$
32,683,347

 
$
32,037,426

 
$
30,355,260

 
$
34,517,452

Cost of goods sold
30,516,120

 
31,591,227

 
31,143,549

 
29,383,459

 
33,099,074

Gross profit
1,384,333

 
1,092,120

 
893,877

 
971,801

 
1,418,378

Marketing, general and administrative expenses
737,636

 
677,465

 
611,076

 
597,531

 
640,306

Reserve and impairment charges (recoveries), net
(12,905
)
 
(37,709
)
 
456,679

 
75,036

 
158,771

Operating earnings (loss)
659,602

 
452,364

 
(173,878
)
 
299,234

 
619,301

(Gain) loss on disposal of business
(3,886
)
 
(131,816
)
 
2,190

 

 

Interest expense
167,065

 
149,202

 
171,239

 
113,704

 
70,659

Other (income) loss
(82,423
)
 
(82,737
)
 
(99,803
)
 
(40,818
)
 
(43,868
)
Equity (income) loss from investments
(236,755
)
 
(153,515
)
 
(137,338
)
 
(175,777
)
 
(107,850
)
Income (loss) before income taxes
815,601

 
671,230

 
(110,166
)
 
402,125

 
700,360

Income tax expense (benefit)
(12,456
)
 
(104,076
)
 
(181,124
)
 
19,099

 
(4,900
)
Net income (loss)
828,057

 
775,306

 
70,958

 
383,026

 
705,260

Net income (loss) attributable to noncontrolling interests
(1,823
)
 
(601
)
 
(634
)
 
(223
)
 
(816
)
Net income (loss) attributable to CHS Inc. 
$
829,880

 
$
775,907

 
$
71,592

 
$
383,249

 
$
706,076

Balance Sheet Data (as of August 31):
 

 
 

 
 

 
 

 
 
Working capital
$
1,078,888

 
$
759,034

 
$
148,565

 
$
338,446

 
$
2,650,637

Net property, plant and equipment
5,088,708

 
5,141,719

 
5,356,434

 
5,488,323

 
5,192,927

Total assets
16,447,494

 
16,381,178

 
15,818,922

 
17,149,639

 
15,101,216

Long-term debt, including current maturities
1,789,111

 
1,930,255

 
2,179,793

 
2,297,205

 
1,478,930

Total equities
8,617,530

 
8,165,028

 
7,705,640

 
7,759,157

 
7,551,439


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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 management on 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 2019 Highlights
Fiscal 2020 Priorities
Fiscal 2020 Outlook
Results of Operations
Liquidity and Capital Resources
Off-Balance Sheet Financing Arrangements
Contractual Obligations
Critical Accounting Estimates
Effect of Inflation and Foreign Currency Transactions
Recent Accounting Pronouncements    

Our MD&A should be read in conjunction with the accompanying audited financial statements and notes to those financial statements and the Cautionary Statement regarding forward-looking statements found in Part I, Item 1A of this Annual Report on Form 10-K.

Overview

CHS Inc. is a diversified company that provides grain, food, agronomy and energy resources to businesses and consumers on a global scale. As a cooperative, we are owned by farmers, ranchers and member cooperatives across the United States. We also have preferred shareholders that own our five series of preferred stock, all of which are listed and traded on the Nasdaq Global Select Market. We operate in the following three reportable segments:

Energy. Produces and provides primarily for the wholesale distribution and transportation of petroleum products.
Ag. Purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties; also serves as a wholesaler and retailer of agronomy products.
Nitrogen Production. Consists solely of our equity method investment in CF Nitrogen and produces and distributes nitrogen fertilizer, a commodity chemical.

In addition, our financing and hedging businesses, along with our non-consolidated wheat milling and food production and distribution joint ventures, have been aggregated within Corporate and Other. Prior to its sale on May 4, 2018, our insurance operations were also included within Corporate and Other.
    
The consolidated financial statements include the accounts of CHS and all subsidiaries and limited liability companies in which we have a controlling interest. The effects of all significant intercompany transactions have been eliminated.

Corporate administrative expenses and interest are allocated to each reporting segment, along with Corporate and Other, based on direct usage for 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 (loss) 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 resulting income before income taxes. Management also focuses on ensuring the strength of the balance sheet 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 income generally trend lower during the second and fourth fiscal quarters and higher during the first and third fiscal quarters; however, weather or other events may impact this trend, particularly for IBIT. For example, in our Ag segment, our country operations business generally experiences higher volumes and income during the fall harvest and spring

22


planting seasons, which generally correspond to our first and third fiscal quarters, respectively. Additionally, our agronomy business generally experiences higher volumes and income during the spring planting season. Our global grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices, demand and global trade volumes. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the spring, summer and early fall when gasoline and diesel fuel usage by our agricultural producers is highest and is subject to global supply and demand forces. Other energy products, such as propane, generally experience higher volumes and profitability during the winter heating and fall crop-drying seasons. The graphs below depict the seasonality inherent in our business, particularly revenue trends that are not impacted as significantly by other events.
revenuecharta03.jpg
ibitcharta03.jpg
* Income (loss) before income taxes experienced deviations from historical trends during fiscal 2017 through fiscal 2019 as a result of material charges incurred, gains on sales of non-core assets and a combination of factors described in the Fiscal 2019 Highlights and the Results of Operations sections below.

Pricing and Volumes. Our revenues, assets and cash flows can be significantly affected by global market prices and sales volumes of commodities such as petroleum products, natural gas, grains, oilseed products and agronomy products. Changes in market prices for commodities we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Similarly, increased or decreased sales volumes without a corresponding change in the purchase and selling prices of those products can affect revenues and operating earnings. Commodity prices and sales volumes are affected by a wide range of factors beyond our control, including weather, crop damage due to plant disease or insects, drought, availability/adequacy of supply of the related commodity, availability of a reliable rail and river transportation network, government regulations/policies, world events, global trade disputes and general political/economic conditions.

Business Strategy

Our business strategies focus on an enterprise-wide effort to create an experience that empowers customers to make CHS their first choice, expands market access to add value for our owners, and transforms and evolves our core businesses by

23


capitalizing on changing market dynamics. To execute upon these strategies, we are focused on the implementation and use of agile, efficient and sustainable new technology platforms; building robust and efficient supply chains; hiring, developing and retaining high-performing, diverse and passionate teams; achieving operational excellence and continuous improvement; and maintaining a strong balance sheet.

Fiscal 2019 Highlights

Margins were higher in our Energy segment compared to the prior year's results due to favorable pricing of heavy Canadian crude oil, which is processed by our refineries, experienced primarily during the first half of fiscal 2019.
We continued to experience significant pressure on grain volume and margins due to slow movement of grain that has resulted from unresolved trade issues between the United States and its trading partners.
Poor weather conditions, including heavy snow during the spring and significant rainfall during the summer of 2019 negatively impacted our Ag segment operations. Severe flooding resulting from the heavy snow and rainfall contributed to railroad delays and prevented or delayed planting, which resulted in increased costs, reduced volumes and fewer planted acres. Further, navigable waterways experienced high, swift water conditions that impeded barge traffic, severely affecting our ability to economically supply fertilizer and grains to their associated buyers.
Through various efforts and mechanisms, we recovered a net $12.9 million of previously recorded reserve and impairment charges. This consisted of recoveries of approximately $109.4 million in fiscal 2019, partially offset by additional reserves and impairment charges of $96.5 million as more fully described in Results of Operations.
Manufacturing changes within our Energy business have allowed us to benefit from certain federal excise tax credits. Following the resolution of the underlying gain contingencies associated with tax credits during fiscal 2019, a gain of $80.8 million was recognized as a reduction of COGS in our Consolidated Statements of Operations. We are uncertain whether similar gains may reoccur in the future.
On March 1, 2019, we completed the acquisition of the remaining 75% ownership interest in West Central Distribution, LLC ("WCD"), a full-service wholesale distributor of agronomy products that was not previously owned by us.
Earnings from our equity method investments in CF Nitrogen and Ventura Foods remained strong compared to the prior year.
As more fully described in Item 9A, Controls and Procedures, of this Annual Report on Form 10-K, we continued dedicating significant internal and external resources, as well as management and Board focus on improving our internal control environment resulting in remediation of three material weaknesses identified in our fiscal 2018 Annual Report on Form 10-K.

Fiscal 2020 Priorities

Identify and execute on opportunities to deliver sustainable cost savings across the enterprise.
Successfully achieve milestones for implementation of our new ERP system to drive efficiency and growth.
Manage and leverage information to enable business growth and drive competitive advantage through data-driven decisions and insight.
Continue to strengthen and improve our internal control environment with an emphasis on operational excellence and continuous improvement.

Fiscal 2020 Outlook

Our Energy and Ag segments operate in cyclical environments. The energy industry experienced favorable market conditions during the first half of fiscal 2019 that led to higher margins and improved earnings in fiscal 2019; however, the favorable conditions returned to lower, more normalized levels during the second half of fiscal 2019. Although unforeseen market conditions could positively or negatively impact the energy industry, we expect the normalized market conditions experienced by our Energy segment during the second half of fiscal 2019 to remain throughout fiscal 2020. The agricultural industry continues to operate in a challenging environment characterized by lower margins, reduced liquidity and increased leverage that have resulted from reduced commodity prices. In addition, trade relations between the United States and foreign trade partners, particularly those that purchase large quantities of agricultural commodities, are strained, resulting in unpredictable impacts to commodity prices and volumes sold within the agricultural industry. We are unable to predict how long the current environment will last or how severe the effects will ultimately be. In addition to global supply and demand impacts, regional factors, including unpredictable weather conditions, could continue to impact our operations. As a result, we expect revenues, margins and cash flows from our core operations in our Ag segment to continue to be under pressure during fiscal 2020, which will put pressure on the associated asset valuations.


24


Results of Operations

Consolidated Statements of Operations
 
For the Years Ended August 31,
 
2019
 
2018
 
Dollars
 
% of Revenues*
 
Dollars
 
% of Revenues*
 
(In thousands)
 
 
 
(In thousands)
 
 
Revenues
$
31,900,453

 
100.0
 %
 
$
32,683,347

 
100.0
 %
Cost of goods sold
30,516,120

 
95.7

 
31,591,227

 
96.7

Gross profit
1,384,333

 
4.3

 
1,092,120

 
3.3

Marketing, general and administrative expenses
737,636

 
2.3

 
677,465

 
2.1

Reserve and impairment charges (recoveries), net
(12,905
)
 

 
(37,709
)
 
(0.1
)
Operating earnings (loss)
659,602

 
2.1

 
452,364

 
1.4

(Gain) loss on disposal of business
(3,886
)
 

 
(131,816
)
 
(0.4
)
Interest expense
167,065

 
0.5

 
149,202

 
0.5

Other (income) loss
(82,423
)
 
(0.3
)
 
(82,737
)
 
(0.3
)
Equity (income) loss from investments
(236,755
)
 
(0.7
)
 
(153,515
)
 
(0.5
)
Income (loss) before income taxes
815,601

 
2.6

 
671,230

 
2.1

Income tax expense (benefit)
(12,456
)
 

 
(104,076
)
 
(0.3
)
Net income (loss)
828,057

 
2.6

 
775,306

 
2.4

Net income (loss) attributable to noncontrolling interests
(1,823
)
 

 
(601
)
 

Net income (loss) attributable to CHS Inc. 
$
829,880

 
2.6
 %
 
$
775,907

 
2.4
 %
*Amounts less than 0.1% are shown as zero percent.

The charts below detail revenues, net of intersegment revenues, and IBIT by reportable segment for fiscal 2019. Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenue.
segmentrevenuecharta03.jpg
segmentibita03.jpg

25


Energy Segment Operating Metrics

Our Energy segment operations primarily include our Laurel, Montana, and McPherson, Kansas, refineries, which process crude oil to produce refined products, including gasoline, distillates and other products. The following tables provide information about our consolidated refinery operations.
 
For the Years Ended August 31,
 
2019
 
2018
Refinery throughput volumes
(Barrels per day)
Heavy, high-sulfur crude oil
92,047

 
84,339

All other crude oil
58,366

 
66,785

Other feedstocks and blendstocks
10,724

 
17,713

Total refinery throughput volumes
161,137

 
168,837

Refined fuel yields
 
 
 
Gasolines
76,563

 
86,115

Distillates
66,661

 
65,060


We are subject to the Renewable Fuels Standard ("RFS"), which requires refiners to blend renewable fuels (e.g., ethanol, biodiesel) into their finished transportation fuels or purchase renewable energy credits, known as Renewable Identification Numbers ("RINs"), in lieu of blending. The U.S. Environmental Protection Agency generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. We generate RINs under the RFS in our renewable fuels operations and through our blending activities at our terminals, but we cannot generate enough RINs to meet the needs of our refining capacity and RINs must be purchased on the open market. The price of RINs can be volatile and can impact profitability.

In addition to our internal operational reliability, the profitability of our Energy segment is largely driven by crack spreads (i.e., the price differential between refined products and inputs such as crude oil) and Western Canadian Select ("WCS") crude oil differentials (i.e., the price differential between West Texas Intermediate ("WTI") crude oil and WCS crude oil), which are driven by the supply and demand of refined product markets. Crack spreads remained relatively stable during fiscal 2019 compared to the prior fiscal year; however, WCS crude oil differentials improved during fiscal 2019 compared to the prior fiscal year, specifically during the first half of fiscal 2019. The table below provides information about the average market reference prices and differentials that impact our Energy segment.    
 
For the Years Ended August 31,
 
2019
 
2018
Market indicators
 
 
 
WTI crude oil (dollars per barrel)
$58.59
 
$62.23
WTI - WCS crude oil differential (dollars per barrel)
$20.23
 
$17.92
Group 3 2:1:1 crack spread (dollars per barrel)*
$18.74
 
$19.08
Group 3 5:3:2 crack spread (dollars per barrel)*
$17.67
 
$18.46
D6 ethanol RIN (dollars per RIN)
$0.1713
 
$0.5280
D4 ethanol RIN (dollars per RIN)
$0.4273
 
$0.7221
*Group 3 refers to the oil refining and distribution system serving the Midwest markets from the Gulf Coast through the Plains states.













26


Income (Loss) Before Income Taxes by Segment

Energy
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Income (loss) before income taxes
$
618,188

 
$
452,108

 
$
166,080

 
36.7
%

The following table and commentary present the primary reasons for changes in IBIT for our Energy segment for the year ended August 31, 2019, compared to the prior year:
 
 
2019 vs. 2018
 
 
(Dollars in thousands)
Volume
 
$
(10,369
)
Price
 
298,979

Transportation, retail and other
 
(30,976
)
Non-gross profit related activity+
 
(91,554
)
Total change in Energy IBIT
 
$
166,080

+See commentary related to these changes in the marketing, general and administrative expenses, reserve and impairment charges (recoveries), net, (gain) loss on disposal of business, interest expense, other income (loss) and equity (income) loss from investments sections of this Results of Operations.

The $166.1 million increase in Energy segment IBIT for fiscal 2019 reflects the following:
Improved market conditions in our refined fuels business, primarily driven by favorable pricing on heavy Canadian crude oil, which is processed by our refineries. Favorable crude oil pricing, as well as hedging gains and decreased renewable energy credit costs during fiscal 2019, contributed to a $215.7 million IBIT increase.
Manufacturing changes within our Energy business have allowed us to benefit from certain federal excise tax credits. Following resolution of the underlying gain contingencies associated with the tax credits during fiscal 2019, a gain of $80.8 million was recognized as a reduction of COGS in our Consolidated Statements of Operations.
The increased IBIT resulting from improved market conditions in our refined fuels business was partially offset by the turnaround at our McPherson refinery during April and May 2019. The decreased IBIT related to the McPherson refinery turnaround was partially offset by increased IBIT at our Laurel refinery following a turnaround during May 2018 that did not reoccur during fiscal 2019.
Increases to IBIT were also partially offset by gains totaling $65.9 million recorded in other income in connection with the sale of certain assets during fiscal 2018, including the sale of 34 Zip Trip stores located in the Pacific Northwest and sale of the Council Bluffs pipeline and refined fuels terminal in Council Bluffs, Iowa, that did not reoccur during fiscal 2019.

Ag
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Income (loss) before income taxes
$
43,016

 
$
74,258

 
$
(31,242
)
 
(42.1
)%

The following table and commentary present the primary reasons for changes in IBIT for our Ag segment for the year ended August 31, 2019, compared to the prior year:
 
 
2019 vs. 2018
 
 
(Dollars in thousands)
Volume
 
$
59,344

Price
 
(31,648
)
Non-gross profit related activity+
 
(58,938
)
Total change in Ag IBIT
 
$
(31,242
)
+See commentary related to these changes in the marketing, general and administrative expenses, reserve and impairment charges (recoveries), net, (gain) loss on disposal of business, interest expense, other income (loss) and equity (income) loss from investments sections of this Results of Operations.


27


The $31.2 million decrease in Ag segment IBIT for fiscal 2019 reflects the following:
A combination of higher non-gross-profit-related expenses contributed to a $58.9 million IBIT decrease, primarily related to increased reserve and impairment charges in connection with certain loan loss reserves associated with the challenging agricultural environment in our country operations business, including the impact of an out-of-period adjustment recorded during the period increasing reserve and impairment charges (recoveries), net by $25.5 million. Decreased interest income and increased interest expense also contributed to the IBIT decrease; however, the impacts of these changes were mostly offset by a $19.1 million gain recognized in connection with our acquisition of the remaining 75% ownership interest in WCD that we did not previously own during fiscal 2019.
Poor weather conditions, including heavy snow during the spring and heavy rainfall during the summer of 2019 in the agricultural regions of the United States and continuing global trade tensions between the United States and foreign trading partners resulted in generally decreased margins and decreased or flat volumes across most of our Ag segment during fiscal 2019.
The decreased IBIT across much of the Ag segment was partially offset by increased rebates and increased volumes associated with certain agronomy products, which was attributable to a $12.9 million increase of IBIT that resulted from the March 1, 2019, acquisition of the remaining 75% ownership interest in WCD that we did not previously own, the results of which were not included in the comparable period of the prior fiscal year.

All Other Segments
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Nitrogen Production IBIT*
$
72,870

 
$
38,838

 
$
34,032

 
87.6
 %
Corporate and Other IBIT
$
81,527

 
$
106,026

 
$
(24,499
)
 
(23.1
)%
*See Note 5, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.

Our Nitrogen Production segment IBIT increased as a result of significantly higher equity method income throughout fiscal 2019 attributed to increased sale prices of urea and UAN, which are produced and sold by CF Nitrogen. Corporate and Other IBIT decreased primarily as a result of a $58.2 million gain in Corporate and Other associated with the sale of CHS Insurance during fiscal 2018 that did not reoccur during fiscal 2019. That gain was partially offset by higher earnings from our investment in Ventura Foods and from our financing business.

Revenues by Segment

Energy
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Revenues
$
7,119,076

 
$
7,589,119

 
$
(470,043
)
 
(6.2
)%

The following table and commentary present the primary reasons for changes in revenues, net of intersegment revenues, for our Energy segment for the year ended August 31, 2019, compared to the prior year:
 
 
2019 vs. 2018
 
 
(Dollars in thousands)
Volume
 
$
(25,223
)
Price
 
(317,622
)
Transportation, retail and other
 
(127,198
)
Total change in Energy revenues
 
$
(470,043
)

28


The $470.0 million decrease in Energy segment revenues for fiscal 2019 reflects the following:
The net impact of price and volume changes associated with other energy products, including decreased refined fuels and propane selling prices, contributed to revenue decreases of $180.7 million and $142.5 million, respectively. Decreased volumes of refined fuels and lubricants also contributed to $64.7 million and $19.2 million revenue decreases, respectively. The decreased volumes were attributed primarily to poor weather conditions that prevented and delayed spring planting of crops across much of the agricultural region of the United States, lowering demand for our diesel fuel products. These decreases were partially offset by increased propane volumes that contributed to a $58.7 million increase of revenues.
Transportation, retail and other revenues decreased as a result of the sale of 34 Zip Trip stores located in the Pacific Northwest during the third quarter of fiscal 2018. Revenues for these stores were included in our Energy segment results of operations during most of fiscal 2018, but were not present in fiscal 2019.
Transportation, retail and other revenues also decreased as a result of the impact of applying new revenue recognition guidance under Accounting Standards Codification ("ASC") Topic 606 during fiscal 2019 compared to previous guidance during the prior fiscal year, which resulted in a $52.1 million decrease of revenues due to certain contracts being recognized on a net basis rather than a gross basis.

Ag
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Revenues
$
24,720,072

 
$
25,037,481

 
$
(317,409
)
 
(1.3
)%

The following table and commentary present the primary reasons for changes in revenues, net of intersegment revenues, for our Ag segment for the year ended August 31, 2019, compared to the prior year:
 
 
2019 vs. 2018
 
 
(Dollars in thousands)
Volume
 
$
(29,341
)
Price
 
(288,068
)
Total change in Ag revenues
 
$
(317,409
)

The $317.4 million decrease in Ag segment revenues for fiscal 2019 reflects the following:
Decreased volumes associated with grain and oilseed contributed to a $600.9 million decrease of revenues. The decreased volumes resulted primarily from continuing global trade tensions between the United States and foreign trading partners.
Decreased prices associated with grain and oilseed, feed and farm supplies, renewable fuels and processing and food ingredients all contributed to decreased revenues, the largest of which were attributable to decreased renewable fuel and grain and oilseed prices, which decreased revenues by $261.9 million and $134.9 million, respectively. Although ethanol demand has remained relatively stable in North America, margins and underlying prices remained under pressure for most of fiscal 2019 as ethanol production and inventory supplies remained at high levels. The decreased prices also resulted from the poor weather conditions during the spring of 2019 in the agricultural region of the United States that prevented and delayed planting of crops (impacting the mix and timing of products sold) and continuing global trade tensions between the United States and foreign trading partners.
The decreased revenues across much of the Ag segment were partially offset by increased pricing and volumes associated with certain agronomy products, including increased pricing of crop nutrient products due to global supply and demand and a $456.2 million increase of revenues that resulted from the March 1, 2019, acquisition of the remaining 75% ownership interest in WCD that we did not previously own and the results of which were not included in the prior fiscal year.

All Other Segments*
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Corporate and Other revenues
$
61,305

 
$
56,747

 
$
4,558

 
8.0
%
*Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues.

29


There were no significant changes in Corporate and Other revenues during fiscal 2019; however, the increase resulted from higher revenues associated with our financing and hedging businesses, which was partially offset by a decrease of insurance revenues due to the sale of CHS Insurance during the third quarter of fiscal 2018.

Cost of Goods Sold by Segment

Energy
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Cost of goods sold
$
6,303,323

 
$
7,031,000

 
$
(727,677
)
 
(10.3
)%

The following table and commentary present the primary reasons for changes in COGS for our Energy segment, net of intercompany COGS, for the year ended August 31, 2019, compared to the prior year:
 
 
2019 vs. 2018
 
 
(Dollars in thousands)
Volume
 
$
(14,855
)
Price
 
(616,600
)
Transportation, retail and other
 
(96,222
)
Total change in Energy COGS
 
$
(727,677
)

The $727.7 million decrease in Energy segment COGS for fiscal 2019 reflects the following:
Decreased refined fuels costs and volumes contributed to $396.4 million and $59.8 million decreases of COGS, respectively. Decreased costs for refined fuels was driven primarily by favorable pricing on heavy Canadian crude oil, which is processed by our refineries, as well as decreased renewable energy credit costs. The decreased volumes were attributed primarily to poor weather conditions that prevented and delayed spring planting of crops across much of the agricultural region of the United States, lowering demand for our diesel fuel products.
Decreased propane costs contributed to a $147.7 million decrease of COGS; however, the decrease was partially offset by an 8% increase in propane volumes, which contributed to a $60.2 million increase of COGS.
A gain of $80.8 million recognized as a reduction of COGS in our Consolidated Statements of Operations during fiscal 2019, which resulted from manufacturing changes in our Energy business that allowed us to benefit from certain federal excise tax credits.
Transportation, retail and other COGS decreased primarily as a result of the sale of 34 Zip Trip stores located in the Pacific Northwest that were sold during the third quarter of fiscal 2018. Costs associated with these stores were included in our Energy segment results of operations during most of fiscal 2018, but were not present in fiscal 2019.
Other COGS also decreased as a result of the impact of applying new revenue recognition guidance under ASC Topic 606 during fiscal 2019 compared to previous guidance during the comparable period of the prior fiscal year, which resulted in a $52.1 million decrease of COGS due to certain contracts being recognized on a net basis rather than a gross basis.

Ag
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Cost of goods sold
$
24,215,749

 
$
24,560,854

 
$
(345,105
)
 
(1.4
)%

The following table and commentary present the primary reasons for changes in COGS for our Ag segment, net of intercompany COGS, for the year ended August 31, 2019, compared to the prior year:
 
 
2019 vs. 2018
 
 
(Dollars in thousands)
Volume
 
$
(89,447
)
Price
 
(255,658
)
Total change in Ag COGS
 
$
(345,105
)

30


The $345.1 million decrease in Ag segment COGS for fiscal 2019 reflects the following:
Decreased volumes associated with grain and oilseed contributed to a $595.8 million decrease of COGS. The decreased volumes resulted primarily from continuing global trade tensions between the United States and foreign trading partners.
Decreased costs associated with grain and oilseed, feed and farm supplies, renewable fuels and processing and food ingredients contributed to decreased COGS, the largest of which were attributable to decreased renewable fuel and feed and farm supply costs, which decreased COGS by $223.5 million and $182.5 million, respectively. Although ethanol demand has remained relatively stable in North America, margins remained under pressure for most of fiscal 2019 as ethanol production and inventory supplies remained at high levels. The decreased costs also resulted from the poor weather conditions, including heavy snow and rainfall, during the spring of 2019 in the agricultural region of the United States that prevented and delayed planting of crops (impacting the mix and timing of products sold) and continuing global trade tensions between the United States and foreign trading partners.
The decreased COGS across much of the Ag segment was partially offset by increased volumes and costs associated with certain agronomy products and processing and food ingredients, most of which was attributable to an increase of COGS that resulted from our acquisition of the remaining 75% ownership interest in WCD that we did not previously own on March 1, 2019, the results of which were not included in the comparable period of the prior fiscal year.

All Other Segments
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Nitrogen Production COGS
$
2,879

 
$
1,340

 
$
1,539

 
NM*
Corporate and Other COGS
$
(5,831
)
 
$
(3,307
)
 
$
(2,524
)
 
NM*
*NM - not meaningful

There were no significant changes to COGS for our Nitrogen Production segment or Corporate and Other during fiscal 2019.

Marketing, General and Administrative Expenses
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Marketing, general and administrative expenses
$
737,636

 
$
677,465

 
$
60,171

 
8.9
%

The $60.2 million increase in marketing, general and administrative expenses for fiscal 2019 relates primarily to increased annual incentive compensation resulting from improved earnings during fiscal 2019, increased consulting and outside service fees associated with ongoing internal controls strengthening efforts in response to prior material weakness determinations and increased repairs and maintenance expense at our facilities.

Reserve and Impairment Charges (Recoveries), Net
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Reserve and impairment charges (recoveries), net
$
(12,905
)
 
$
(37,709
)
 
$
24,804

 
65.8
%

The $24.8 million decrease in recoveries of reserve and impairment charges relates primarily to the impact of reserve and impairment charges recorded during fiscal 2019 that offset recoveries. Recoveries of amounts reserved and impaired during previous years totaled approximately $109.4 million during fiscal 2019; however, these recoveries were offset by approximately $96.5 million of reserve and impairment charges recorded during fiscal 2019 that resulted from the challenging agricultural environment that continues to negatively impact our Ag segment. The reserve and impairment charges recorded during fiscal 2019 relate primarily to increased loan loss reserves of $48.4 million in our country operations business, including the impact of a $25.5 million out-of-period adjustment, as well as a $27.4 million impairment of goodwill associated with a reporting unit in our Ag segment and the impairment of other long-lived assets.


31


Gain (Loss) on Disposal of Business
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Gain (loss) on disposal of business
$
3,886

 
$
131,816

 
$
(127,930
)
 
NM*
*NM - not meaningful

The decrease in gain (loss) on disposal of business is primarily attributable to gains recognized on the sale of certain assets during fiscal 2018 that did not reoccur during fiscal 2019, including a $65.9 million gain in our Energy segment associated with the sale of 34 Zip Trip stores located in the Pacific Northwest and sale of the Council Bluffs pipeline and refined fuels terminal in Council Bluffs, Iowa, and a $58.2 million gain in Corporate and Other associated with the sale of CHS Insurance.

Interest Expense
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Interest expense
$
167,065

 
$
149,202

 
$
17,863

 
12.0
%

The $17.9 million increase in interest expense for fiscal 2019 was due to higher outstanding debt balances associated with our unsecured revolving credit facility and higher interest rates during fiscal 2019.

Other Income (Loss)
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Other income (loss)
$
82,423

 
$
82,737

 
$
(314
)
 
(0.4
)%

There were no significant changes to other income (loss) during fiscal 2019.

Equity Income (Loss) from Investments
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Equity income (loss) from investments*
$
236,755

 
$
153,515

 
$
83,240

 
54.2
%
*See Note 5, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.
    
The $83.2 million increase of equity income (loss) from investments for fiscal 2019 was primarily due to higher equity income recognized from our equity method investments in CF Nitrogen and Ventura Foods, which increased by $53.5 million and $26.8 million, respectively. The increases were driven by improved urea and UAN pricing for CF Nitrogen and improved product margins and volumes for Ventura Foods.

Income Tax Benefit (Expense)
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Income tax benefit (expense)
$
12,456

 
$
104,076

 
$
(91,620
)
 
(88.0
)%

The decrease in income tax benefit was primarily due to incremental tax benefits recognized during fiscal 2018 that did not reoccur during fiscal 2019, including revaluation of our net deferred tax liability resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017, and the intercompany transfer of a business on December 1, 2017. The federal and state

32


statutory rate applied to nonpatronage business activity was 24.7% and 29.3% for the years ended August 31, 2019 and 2018, 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, 2018 and 2017

For a discussion of results of operations for fiscal 2018 compared to fiscal 2017, 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, 2018, filed with the SEC on December 3, 2018.

Liquidity and Capital Resources

Summary

In assessing our financial condition, we consider factors such as working capital and internal benchmarking related to our applicable covenants and other financial criteria. We fund our operations primarily through a combination of cash flows from operations supplemented with borrowings under our revolving credit facilities. We fund our capital expenditures and growth primarily through cash, operating cash flow and long-term debt financing.

On August 31, 2019 and 2018, we had working capital, defined as current assets less current liabilities, of $1.1 billion and $759.0 million, respectively. The increase in working capital was driven primarily by reductions in our notes payable and debt and increases in our accounts receivable and inventory that resulted from our acquisition of the remaining 75% ownership interest in WCD that we did not previously own. Our current ratio, defined as current assets divided by current liabilities, was 1.2 and 1.1 as of August 31, 2019 and 2018, respectively. Working capital and the current ratio may not be computed the same as similarly titled measures used by other companies. We believe this information is meaningful to investors as a measure of operational efficiency and short-term financial health.
As of August 31, 2019, we had cash and cash equivalents of $211.2 million, total equities of $8.6 billion, long-term debt (including current maturities) of $1.8 billion and notes payable of $2.2 billion. Our capital allocation priorities include paying interest on debt and preferred stock dividends, returning cash to our member-owners in the form of cash patronage and equity redemptions, maintaining the safety and compliance of our operations, and taking advantage of strategic opportunities that benefit our owners. We will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity. 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 and we expect to remain in compliance with our loan covenants.

Fiscal 2019 and 2018 Activity

During fiscal 2019, we completed the acquisition of the remaining 75% ownership interest in WCD that we did not previously own by paying $106.7 million, of which net cash flows were reduced by $8.0 million of cash acquired. WCD is now included in our Ag segment and deepens our presence in the agronomy products market. See Note 18, Acquisitions, of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for additional information.

Also during fiscal 2019, our McPherson refinery finished its planned major maintenance. Total cash spend associated with the project was $223.4 million for the year ended August 31, 2019.

On June 27, 2019, we extended our existing receivables and loans securitization facility ("Securitization Facility") with certain unaffiliated financial institutions ("Purchasers"). Under the Securitization Facility, we and certain of our subsidiaries ("Originators") sell trade accounts and notes receivable ("Receivables") to Cofina Funding, LLC ("Cofina"), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn transfers the Receivables to the Purchasers, which is accounted for as a secured borrowing. During the period from July 2017 through a previous amendment of the Securitization Facility in June 2018, CHS accounted for Receivables sold under the Securitization Facility as a sale of financial assets pursuant to ASC 860, Transfers and Servicing, and the Receivables sold were derecognized from our Consolidated Balance Sheets. We use the proceeds from the sale of Receivables under the Securitization Facility for general corporate purposes and settlements are made on a monthly basis. The Securitization Facility is scheduled to terminate on June 26, 2020, but may be extended.

The amount available under the Securitization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of $700.0 million. As of August 31,

33


2019 and 2018, the total availability under the Securitization Facility was $632.0 million and $645.0 million, respectively, all of which had been utilized.

On September 4, 2018, we entered into a repurchase facility (the "Repurchase Facility") related to the Securitization Facility. Under the Repurchase Facility, we are able to borrow up to $150.0 million, collateralized by a subordinated note issued by Cofina in favor of the Originators and representing a portion of the outstanding balance of the Receivables sold by the Originators to Cofina under the Securitization Facility. As of August 31, 2019, the outstanding balance under the Repurchase Facility was $150.0 million.

Cash Flows
 
For the Years Ended August 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percent
 
(Dollars in thousands)
 
 
 
 
Net cash provided by (used in) operating activities
$
1,139,931

 
$
1,074,497

 
$
65,434

 
6.1
 %
Net cash provided by (used in) investing activities
(661,283
)
 
(79,524
)
 
(581,759
)
 
(731.6
)%
Net cash provided by (used in) financing activities
(725,646
)
 
(732,170
)
 
6,524

 
0.9
 %
Effect of exchange rate changes on cash and cash equivalents
2,733

 
8,864

 
(6,131
)
 
(69.2
)%
Net increase (decrease) in cash and cash equivalents
$
(244,265
)
 
$
271,667

 
$
(515,932
)
 
(189.9
)%

The $65.4 million increase in cash provided by operating activities primarily reflects increased net income during fiscal 2019 compared to the prior fiscal year. A combination of factors contributed to various other offsetting changes within operating cash flow activities, including decreased revenues that resulted from global trade tensions between the United States and its foreign trading partners, as well as poor weather conditions during the spring of 2019 in the agricultural region of the United States that prevented and delayed planting of crops.

The $581.8 million increase in cash used in investing activities for fiscal 2019 primarily reflects the following:
Cash outflows of approximately $223.4 million for planned major maintenance at our McPherson refinery during fiscal 2019.
Proceeds of $230.0 million from the sale of certain North American businesses/assets during fiscal 2018 that did not reoccur during fiscal 2019.
In March 2019, we acquired the remaining 75% ownership interest in WCD that we did not previously own for $106.7 million, of which net cash flows were reduced by $8.0 million of cash acquired.
Increased acquisitions of property, plant and equipment for selective growth capital investments.
The increased uses of cash referenced above were partially offset by certain other investing activities, including increased payments from customer financing and decreased investments redeemed.

Cash used in financing activities decreased by $6.5 million for fiscal 2019, primarily due to the following:
Decreased net cash outflows associated with our notes payable and long-term borrowings.
The decrease was partially offset by payment of cash patronage of $75.8 million during fiscal 2019 and increased equity redemption payments of $76.7 million.

Future Uses of Cash

We expect to utilize cash and cash equivalents, along with cash generated by operating activities, to fund capital expenditures, major repairs, debt and interest payments, preferred stock dividends, patronage and equity redemptions. The following is a summary of our primary cash requirements for fiscal 2020:

Capital expenditures. We expect total capital expenditures for fiscal 2020 to be approximately $524.8 million, compared to capital expenditures of $443.2 million in fiscal 2019. Included in that amount for fiscal 2020 is approximately $105.0 million for the acquisition of property, plant and equipment at our Laurel and McPherson refineries.
Debt and interest. We expect to repay approximately $39.2 million of long-term debt and capital lease obligations and incur interest payments related to long-term debt of approximately $76.2 million during fiscal 2020.
Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding as of August 31, 2019. We expect to pay dividends on our preferred stock of approximately $168.7 million during fiscal 2020.

34


Patronage. Our Board of Directors authorized approximately $90.0 million of our fiscal 2019 patronage sourced earnings to be paid to our member owners during fiscal 2020.
Equity redemptions. Our Board of Directors authorized and we expect total redemptions of approximately $90.0 million to be distributed in fiscal 2020 and in the form of redemptions of qualified and non-qualified equity owned by individual producer members and association members.

Future Sources of Cash
    
We fund our current operations primarily through a combination of cash flows from operations and committed and uncommitted revolving credit facilities, including our Securitization Facility and Repurchase Facility. We believe these sources will provide adequate liquidity to meet our working capital needs. 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 privately placed long-term debt and term loans. In addition, our wholly-owned subsidiary, CHS Capital, makes loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities and has financing sources as detailed below in CHS Capital Financing.

Working Capital Financing

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 lines of credit will provide adequate liquidity to meet our working capital needs. The following table summarizes our primary lines of credit as of August 31, 2019 and 2018:
Primary Revolving Credit Facilities
 
Maturity
 
Total Capacity
 
Borrowings Outstanding
 
Interest Rates
 
 
 
 
2019
 
2019
 
2018
 
 
 
 
 
 
(Dollars in thousands)
 
 
Committed five-year unsecured facility
 
2024
 
$
2,750,000

 
$
335,000

 
$

 
LIBOR or base rate +0.00% to 1.45%
Uncommitted bilateral facilities
 
2020
 
630,000

 
430,000

 
515,000

 
LIBOR or base rate +0.00% to 1.20%

On July 16, 2019, we amended and restated our primary line of credit, which is a five-year, unsecured revolving credit facility with a syndicate of domestic and international banks. The credit facility provides a committed amount of $2.75 billion that expires on July 16, 2024.
    
In addition to our primary revolving lines of credit, we have a three-year $315.0 million committed revolving pre-export credit facility for CHS Agronegocio Industria e Comercio Ltda ("CHS Agronegocio"), our wholly-owned subsidiary, to provide financing for its working capital needs arising from its purchases and sales of grains, fertilizers and other agricultural products and that expires in April 2020. As of August 31, 2019, no amounts were outstanding under the facility.

In addition to our uncommitted bilateral facilities above, our wholly-owned subsidiaries, CHS Europe S.a.r.l and CHS Agronegocio, had uncommitted lines of credit with $342.7 million outstanding, as of August 31, 2019. In addition, our other international subsidiaries had total lines of credit outstanding of $155.8 million as of August 31, 2019, of which $13.8 million was collateralized.

35



Long-term Debt Financing

The following table presents summarized long-term debt including current maturities, for the years ended August 31, 2019 and 2018.
 
For the Years Ended August 31,
 
2019
 
2018
 
(Dollars in thousands)
Private placement debt
$
1,379,840

 
$
1,510,547

Bank financing
366,000

 
366,000

Capital lease obligations
28,239

 
25,280

Other notes and contract payable
18,601

 
32,607

Deferred financing costs
(3,569
)
 
(4,179
)
 
$
1,789,111

 
$
1,930,255

    
Long-term debt outstanding as of August 31, 2019, has aggregate maturities, excluding fair value adjustments and capital leases, as follows:
 
(Dollars in thousands)
2020
$
32,812

2021
180,663

2022
66

2023
282,066

2024
2,620

Thereafter
1,256,525

 
$
1,754,752

    
See Note 8, 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.

CHS Capital Financing

For a description of the Securitization Facility and the Repurchase Facility, see above in Fiscal 2019 and 2018 activity.

CHS Capital has available credit under a master participation agreement with one counterparty. Borrowings under this agreement are accounted for as secured borrowings and bear interest at 4.19% as of August 31, 2019. As of August 31, 2019, the total funding commitment under this agreement was $5.0 million, of which $2.3 million was borrowed.

CHS Capital sells loan commitments it has originated to ProPartners Financial on a recourse basis. Total outstanding commitments under the program were $65.8 million as of August 31, 2019, of which $42.3 million was borrowed with an interest rate of 3.36%.

CHS Capital borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and bear interest at variable rates ranging from 0.35% to 1.40% as of August 31, 2019, and are due upon demand. Borrowings under these notes totaled $63.8 million as of August 31, 2019.

Covenants    

Our long-term debt is mostly unsecured; however, restrictive covenants under various debt agreements require the maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants and restrictions as of August 31, 2019. Based on our current 2020 projections, we expect continued covenant compliance.

All outstanding private placement notes conform to financial covenants applicable to those of our amended and restated five-year, unsecured, revolving credit facility. The notes provide that if our ratio of consolidated funded debt to

36


consolidated cash flow is greater than 3.0 to 1.0, the interest rate on all outstanding notes will be increased by 0.25% until the ratio becomes 3.0 or less. During both fiscal 2019 and 2018, our ratio of funded debt to consolidated cash flow remained below 3.0 to 1.0.

Patronage and Equity Redemptions

In accordance with our bylaws and by action of our Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year and are based on amounts using financial statement earnings. The cash portion of the qualified patronage distribution, if any, is determined annually by our Board of Directors, with the balance issued in the form of qualified and/or non-qualified capital equity certificates. Total patronage distributions for fiscal 2019 are estimated to be $562.4 million, with the qualified cash portion estimated to be $90.0 million and non-qualified equity distributions of $472.4 million. No portion of annual net earnings for fiscal 2019 will be issued in the form of qualified capital equity certificates. Patronage distributions for fiscal 2018 were $428.8 million, with a $75.8 million cash portion. Actual patronage distributions and cash portion for fiscal 2017 and 2016 were $128.8 million (with no cash portion) and $257.5 million ($103.9 million in cash), respectively.

The following table presents estimated patronage data for the year ending August 31, 2020, and actual patronage data for the years ended August 31, 2019, 2018 and 2017:
 
2020
 
2019
 
2018
 
2017
 
(Dollars in millions)
Patronage distributed in cash
$
90.0

 
$
75.8

 
$

 
$
103.9

Patronage distributed in equity
472.4

 
353.0

 
128.8

 
153.6

Total patronage distributed
$
562.4

 
$
428.8

 
$
128.8

 
$
257.5

    
In accordance with authorization from our Board of Directors, we expect total redemptions related to the year ended August 31, 2019, and distributed in fiscal 2020 to be approximately $90.0 million. These redemptions are classified as a current liability on the August 31, 2019, Consolidated Balance Sheet.

Other Financing

See Note 10, Equities, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for a summary of our outstanding preferred stock as of August 31, 2019, each series of which is listed and traded on the Global Select Market of Nasdaq.

Off-Balance Sheet Financing Arrangements

Guarantees

We are a guarantor for lines of credit and performance obligations of related, non-consolidated companies. Our bank covenants allow maximum guarantees of $1.0 billion, of which $196.0 million were outstanding on August 31, 2019. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out cash related to them and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide guarantees were current as of August 31, 2019.

Operating Leases
    
Future minimum lease payments required under noncancelable operating leases as of August 31, 2019, were $342.0 million.

Debt

There is no material off-balance sheet debt.





37


Loan Participations

We engage in off-balance sheet arrangements through certain loan participation agreements. Refer to further details about these arrangements in Note 3, Receivables, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K.

Contractual Obligations

We had certain contractual obligations as of August 31, 2019, which require the following payments to be made:
 
Payments Due by Period
 
Total
 
Less than
1 Year
 
1 - 3
Years
 
3 - 5
Years
 
More than
5 Years
 
(Dollars in thousands)
Long-term debt obligations (1)
$
1,754,752

 
$
32,812

 
$
180,729

 
$
284,686

 
$
1,256,525

Interest payments (2)
575,305

 
76,217

 
142,227

 
122,001

 
234,860

Capital lease obligations (3)
31,684

 
6,761

 
11,220

 
7,186

 
6,517

Operating lease obligations
341,988

 
87,168

 
101,046

 
61,121

 
92,653

Purchase obligations (4)
7,094,073

 
5,696,389

 
719,274

 
256,480

 
421,930

Other liabilities (5)
496,356

 

 
35,355

 
17,143

 
443,858

Total obligations
$
10,294,158

 
$
5,899,347

 
$
1,189,851

 
$
748,617

 
$
2,456,343

(1) Excludes fair value adjustments to the long-term debt reported on our Consolidated Balance Sheet as of August 31, 2019, resulting from fair value interest rate swaps and related hedge accounting.

(2) Based on interest rates and long-term debt balances as of August 31, 2019.

(3) Future minimum lease payments under capital leases include amounts related to bargain purchase options and residual value guarantees, which represent economic obligations as opposed to contractual payment obligations.

(4) Purchase obligations are legally binding and enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities; fixed, minimum or variable price provisions; and approximate time of the transactions. In the ordinary course of business, we enter into a significant number of forward purchase commitments for agricultural and energy commodities and related freight. The purchase obligation amounts shown above include both short- and long-term obligations and are based on a) fixed or minimum quantities to be purchased and b) fixed or estimated prices to be paid at the time of settlement. Current estimates are based on assumptions about future market conditions that will exist at the time of settlement. Consequently, actual amounts paid under these contracts may differ due to the variable pricing provisions. Market risk related to the variability of our forward purchase commitments is economically hedged by offsetting forward sale contracts that are not included in the amounts above.

(5) Other liabilities include the long-term portion of deferred compensation, deferred tax liabilities and contractual redemptions. Of the total other liabilities and deferred tax liabilities of $496.4 million on our Consolidated Balance Sheet as of August 31, 2019, the timing of the payments of $431.8 million of such liabilities cannot be determined.

Critical Accounting Estimates

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 significant accounting policies may involve a higher degree of estimates, judgments and complexity.

Inventory Valuation and Reserves

Grain, processed grain, oilseed and processed oilseed 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 non-grain 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 grains and oilseeds inventories. These estimates include measurement of grain in bins and other storage facilities, which uses formulas in addition to actual measurements taken to arrive at appropriate quantities. Other determinations made by management include quality of inventory and estimates for

38


freight. Grain shrink reserves and other reserves that account for spoilage also affect inventory valuations. If estimates regarding the valuation of inventories, or the adequacy of reserves, are less favorable than management’s assumptions, then additional reserves or 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 perform on a contract during periods of price fluctuations where contract prices are significantly different than the current market prices.

Pension and Other Postretirement Benefits

Pension and other postretirement benefits costs and obligations depend on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates and other factors. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expenses and the recorded obligations in future periods. While our management believes the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses.

Deferred Tax Assets and Uncertain Tax Positions

We assess whether a valuation allowance is necessary to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. While we have considered future taxable income, as well as other factors, in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to income in the period such determination was made. We are also significantly impacted by the utilization of tax credits, some of which were passed to us from the McPherson refinery, related to refinery upgrades that enable us to produce ultra-low-sulfur fuels. Our tax credit carryforwards are available to offset future federal and state tax liabilities with the tax credits becoming unavailable to us if not used by their expiration date. Our net operating loss carryforwards for tax purposes are available to offset future taxable income. If our loss carryforwards are not used, these loss carryforwards will expire.

Tax benefits related to uncertain tax positions are recognized in our financial statements if it is more likely than not that the position would be sustained upon examination by a tax authority that has full knowledge of all relevant information. The benefits are measured using a cumulative probability approach. Under this approach, we record in our financial statements the greatest amount of tax benefits that have a more than 50% probability of being realized upon final settlement with the tax authorities. In determining these tax benefits, we assign probabilities to a range of outcomes that we feel we could ultimately settle on with the tax authorities using all relevant facts and information available at the reporting date. Due to the complexity of these uncertainties, the ultimate resolution may result in a benefit that is materially different than our current estimate.

Long-Lived Assets

Property, plant and equipment is depreciated or amortized over the expected useful lives of individual or groups of assets based on the straight-line method. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

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

39


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.

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 lessor 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.

Effect of Inflation and Foreign Currency Transactions

We believe inflation and foreign currency fluctuations have not had a significant effect on our operations during the three years ended August 31, 2019, since we conduct a significant portion of our business in U.S. dollars.

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 the implementation of those standards on our financial statements.


40


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY PRICE RISK

When we enter into a commodity purchase or sales commitment, we incur risks related to price changes and performance including delivery, quality, quantity and shipment period. In the event that market prices decrease, we are exposed to risk of loss for the market value of inventory and purchase contracts with fixed or partially fixed prices. Conversely, we are exposed to risk of loss on our fixed or partially fixed price sales contracts in the event that market prices increase.

Our use of hedging reduces exposure to price volatility by protecting against adverse short-term price movements, but also limits the benefits of favorable short-term price movements. To reduce the price risk associated with fixed price commitments, we generally enter into commodity derivative contracts, to the extent practical, to achieve a net commodity position within the formal position limits we have established and deemed prudent for each commodity. These contracts are primarily transacted on regulated commodity futures exchanges, but may include over-the-counter derivative instruments when deemed appropriate. For commodities where there is no liquid derivative contract, risk is managed through the use of forward sales contracts, other pricing arrangements and, to some extent, futures contracts in highly correlated commodities. These contracts are economic hedges of price risk, but are not designated as hedging instruments for accounting purposes. The contracts are recorded on our Consolidated Balance Sheets at fair values based on quotes listed on regulated commodity exchanges or the market prices of the underlying products listed on the exchanges, except that fertilizer and propane contracts are accounted for as normal purchase and normal sales transactions. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations.
When a futures position is established, initial margin must be deposited with the applicable exchange or broker. The amount of margin required varies by commodity and is set by the applicable exchange at its sole discretion. If the market price relative to a short futures position increases, an additional margin deposit would be required. Similarly, a margin deposit would be required if the market price relative to a long futures position decreases. Conversely, if the market price increases relative to a long futures position or decreases relative to a short futures position, margin deposits may be returned by the applicable exchange or broker.
Our policy is to manage our commodity price risk exposure according to internal polices and in alignment with our tolerance for risk. It is our policy that our profitability should come from operations, primarily derived from margins on products sold and grain merchandised, not from hedging transactions. At any one time, inventory and purchase contracts for delivery to us may be substantial. We have risk management policies and procedures that include established net physical position limits. These limits are defined for each commodity and business unit, and may include both trader and management limits as appropriate. The limits policy is overseen at a high level by our corporate compliance team, with day-to-day monitoring procedures being implemented within each individual business unit to ensure any limits overage is explained and exposures reduced, or a temporary limit increase is established if needed. The position limits are reviewed at least annually with our senior leadership and Board of Directors. We monitor current market conditions and may expand or reduce our net position limits or procedures in response to changes in those conditions.
The use of hedging instruments does not protect against nonperformance by counterparties to cash contracts. We evaluate counterparty exposure by reviewing contracts and adjusting the values to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty's financial condition and the risk that the counterparty will refuse to perform on a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. We manage these risks by entering into fixed price purchase and sales contracts with preapproved producers and by establishing appropriate limits for individual suppliers. Fixed price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. Regarding our use of derivatives, we primarily transact in exchange traded instruments or enter into over-the-counter derivatives that clear through a designated clearing organization, which limits our counterparty exposure relative to hedging activities. Historically, we have not experienced significant events of nonperformance on open contracts. Accordingly, we only adjust the estimated fair values of specifically identified contracts for nonperformance. Although we have established policies and procedures, we make no assurances that historical nonperformance experience will carry forward to future periods.
A 10% adverse change in market prices would not materially affect our results of operations, since we use commodity futures and forward contracts as economic hedges of price risk and since our operations have effective economic hedging requirements as a general business practice.


41


INTEREST RATE RISK

Debt used to finance inventories and receivables is represented by short-term notes payable, so our blended interest rate for all such notes approximates current market rates. We have outstanding interest rate swaps with an aggregate notional amount of $365.0 million designated as fair value hedges of portions of our fixed-rate debt. Our objective is to offset changes in the fair value of the debt associated with the risk of variability in the three-month U.S. dollar LIBOR interest rate, in essence converting the fixed-rate debt to variable-rate debt. Offsetting changes in the fair values of both the swap instruments and hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. During fiscal 2019, we recorded offsetting fair value adjustments of $21.2 million, with no ineffectiveness recorded in earnings.

The table below provides information about our outstanding debt and derivative financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents scheduled contractual principal payments and related weighted average interest rates for the fiscal years presented. For interest rate swaps, the table presents notional amounts for payments to be exchanged by expected contractual maturity dates for the fiscal years presented and interest rates noted in the table.
Expected Maturity Date
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
 
Total
 
Fair Value
Asset (Liability)
 
(Dollars in thousands)
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Variable rate miscellaneous
short-term notes payable
$
1,330,550

 
$

 
$

 
$

 
$

 
$

 
$
1,330,550

 
$
(1,330,550
)
Average interest rate
3.4
%
 

 

 

 

 

 
3.4
%
 

Variable rate CHS Capital short-term notes payable
$
825,558

 
$

 
$

 
$

 
$

 
$

 
$
825,558

 
$
(825,558
)
Average interest rate
2.9
%
 

 

 

 

 

 
2.9
%
 

Fixed rate long-term debt
$
32,812

 
$
180,663

 
$
66

 
$
282,066

 
$
2,620

 
$
890,525

 
$
1,388,752

 
$
(1,505,213
)
Average interest rate
4.4
%
 
4.5
%
 
5.1
%
 
4.5
%
 
5.1
%
 
4.6
%
 
4.4
%
 

Variable rate long-term debt
$

 
$

 
$

 
$

 
$

 
$
366,000

 
$
366,000

 
$
(372,489
)
Average interest rate (a)

 

 

 

 

 
range

 
range

 

Interest Rate Derivatives:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fixed to variable long-term debt interest rate swaps
$

 
$
160,000

 
$

 
$
130,000

 
$

 
$
75,000

 
$
365,000

 
$
9,841

Average pay rate (b)

 
range

 

 
range

 

 
range

 
range

 

Average receive rate (c)

 
range

 

 
range

 

 
range

 
range

 

(a) Borrowings under the agreement bear interest at a base rate (or LIBOR) plus an applicable margin, or at a fixed rate of interest determined and quoted by the administrative agent under the agreement in its sole and absolute discretion from time to time. The applicable margin is based on our leverage ratio and ranges between 1.50% and 2.00% for LIBOR-based loans and between 0.50% and 1.00% for base rate loans.

(b) Five swaps with notional amounts of $365.0 million with fixed rates from 4.52% to 4.67%.

(c) Average three-month U.S. dollar LIBOR plus spreads ranging from 2.009% to 2.74%.

FOREIGN CURRENCY RISK

We were exposed to risk regarding foreign currency fluctuations during fiscal 2019 and in prior years even though a substantial amount of our international sales were denominated in U.S. dollars. In addition to specific transactional exposure, foreign currency fluctuations can impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. From time to time, we enter into foreign currency hedge contracts to minimize the impact of currency fluctuations on our transactional exposures. The notional amounts of our foreign exchange derivative contracts were $894.7 million and $988.8 million as of August 31, 2019 and 2018, respectively.


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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements listed in Item 15(a)(1) of this Annual Report on Form 10-K are set forth beginning on page F-1. Financial statement schedules are included in Schedule II in Item 15(a)(2) of this Annual Report on Form 10-K. Supplementary financial information required by Item 302 of Regulation S-K promulgated by the SEC for each quarter during the years ended August 31, 2019 and 2018, is presented below.
 
For the Three Months Ended
 
August 31,
2019
 
May 31,
2019
 
February 28,
2019
 
November 30,
2018
 
(Unaudited)
(Dollars in thousands)
Revenues
$
8,434,684

 
$
8,497,941

 
$
6,483,539

 
$
8,484,289

Gross profit
262,508

 
223,771