CHSCP

CHS Inc. 10-Q Summary: Period Ended February 28, 2009

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for CHS Inc., a diversified cooperative providing grain, foods, and energy resources. The report covers the three and six-month periods ended February 28, 2009. CHS operates through three primary segments: Energy, Ag Business, and Processing, along with Corporate and Other. The company is owned by farmers, ranchers, and member cooperatives.

Key Financial Metrics

Note: Debt figures include Notes Payable ($273M), Current Portion of Long-Term Debt ($93M), and Long-Term Debt ($1.06B).

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 25% ($1.7 billion) for the three months and 4% ($506 million) for the six months compared to the prior year. This was primarily driven by significant declines in commodity prices for refined fuels, grains, and crop nutrients.
• Profitability Drop: Net income fell 51% for the quarter and 53% for the six-month period. Income before taxes dropped from $197.4 million to $96.3 million (quarter) and from $535.2 million to $252.4 million (six months).
• Segment Performance:
  • Energy: Earnings increased due to higher margins on refined fuels despite lower prices.
  • Ag Business: Earnings decreased 89% (quarter) and 90% (six months) due to lower crop nutrient margins and a $56.8 million lower-of-cost-or-market inventory adjustment.
  • Processing: Earnings decreased significantly, turning into a net loss for the six-month period, largely due to a $70.7 million impairment charge on the VeraSun investment.
• Investment Impairments: A $70.7 million impairment loss was recorded on the VeraSun Energy Corporation investment due to its Chapter 11 bankruptcy filing and stock price decline. This was partially offset by a $15.7 million gain on the sale of NYMEX Holdings stock.
• Cash Flow Improvement: Operating cash flow turned positive at $934.2 million for the six months, compared to a use of $432.7 million in the prior year, driven by reduced working capital needs from lower commodity prices.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued price volatility in grain and energy markets but within a narrower band. Crude oil prices are expected to remain relatively low.
• Capital Expenditures: The company expects to spend approximately $503.9 million on property, plant, and equipment for the fiscal year ending August 31, 2009. This includes approximately $73 million for benzene removal at refineries to comply with EPA regulations.
• Liquidity: CHS maintains a $1.3 billion five-year revolving credit facility and a $300 million 364-day revolver, both with no outstanding balances as of February 28, 2009. Management believes liquidity is adequate to cover operating needs and capital expenditures.
• Risks: Key risks include adverse changes in commodity prices, environmental liabilities (including EPA settlements and potential penalties), and the cooperative structure limiting access to equity capital. The company also faces risks related to joint ventures where it does not have controlling interest.

Investor Verification Checklist

• VeraSun Impairment: Verify the remaining carrying value of the VeraSun investment and the potential for further write-downs given the bankruptcy proceedings.
• Inventory Valuation: Review the remaining $18.1 million of lower-of-cost-or-market adjustments in crop nutrients and the impact of continued fertilizer price declines.
• Commodity Hedging: Assess the exposure to commodity price volatility given the significant drop in grain and energy prices and the company's hedging strategies.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly regarding working capital levels, given the fluctuation in asset values.
• Capital Expenditures: Monitor the progress and cost of the EPA-mandated benzene removal projects at the Laurel and NCRA refineries.