CHSCP

CHS Inc. 10-Q Summary: Period Ended February 28, 2011

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for CHS Inc., a diversified cooperative providing grain, foods, and energy resources. The report covers the three and six months ended February 28, 2011. CHS operates through three primary segments: Energy (petroleum refining and distribution), Ag Business (grain, oilseeds, and crop inputs), and Corporate and Other (joint ventures and financial services). The company is owned by farmers, ranchers, and member cooperatives.

Key Financial Metrics

Note: Debt figures include Notes Payable ($1,640.7M), Current Portion of Long-term Debt ($109.0M), and Long-term Debt ($931.0M) as of Feb 28, 2011.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 31% year-over-year for both the three-month and six-month periods, driven by higher commodity prices (grains, oilseeds, refined fuels) and increased volumes in the Ag Business segment.
• Profitability Surge: Net income attributable to CHS Inc. rose 135% for the quarter and 96% for the six-month period compared to the prior year. This was fueled by improved margins in the Energy segment (refined fuels) and Ag Business segment (crop nutrients, country operations).
• Segment Performance:
  • Energy: Income before taxes increased 554% for the quarter, primarily due to improved margins at the Laurel, Montana and NCRA refineries.
  • Ag Business: Income before taxes increased 39% for the quarter, driven by higher grain volumes, improved retail margins, and better crop nutrient margins.
• Cash Flow: Operating cash flow turned negative, using $957.2 million for the six months ended Feb 28, 2011, compared to $232.5 million used in the prior year. This increase in cash usage was due to significant working capital requirements to build inventories and hedge positions amidst rising commodity prices.

Guidance, Outlook, and Risks

• Capital Expenditures: The company expects total expenditures for property, plant, and equipment and major refinery repairs to be approximately $639.1 million for the fiscal year ending August 31, 2011. This includes EPA-mandated benzene reduction projects.
• Recent Transactions:
  • Signed an agreement to sell its 45% interest in Multigrain, S.A. for $225.0 million, expecting a significant gain in the third quarter of fiscal 2011.
  • Dissolved the United Harvest joint venture; CHS now operates the Kalama, Washington export facility directly, with construction upgrades expected to impact earnings negatively for 18-24 months.
  • Acquired Agri Point Ltd. for $62.4 million to expand global grain origination in Eastern Europe.
• Risks and Contingencies:
  • Commodity Price Volatility: Revenues and earnings are highly sensitive to global market prices for petroleum, grains, and fertilizers.
  • Seasonality: Income is historically lowest in the second fiscal quarter and highest in the third.
  • External Events: The company noted the Japan earthquake had little impact to date but remains wary of logistical disruptions.

Investor Verification Checklist

• Working Capital Needs: Verify the sustainability of the $957 million operating cash outflow driven by inventory buildup and rising commodity prices.
• Refinery Margins: Assess the durability of the improved margins in the Energy segment, which drove a significant portion of the earnings increase.
• Debt Covenants: Confirm compliance with financial covenants, specifically the minimum consolidated net worth of $2.5 billion and debt-to-cash flow ratios, given the increased short-term borrowings.
• Joint Venture Gains: Monitor the timing and realization of the expected gain from the Multigrain, S.A. sale in the upcoming quarter.
• Capital Projects: Track the completion of EPA benzene reduction projects and the impact of the United Harvest dissolution on export volumes.