CHSCP

CHS Inc. 10-K Summary: Fiscal Year Ended August 31, 2009

Business Context and Reporting Period

Company: CHS Inc. (CHS)
Reporting Period: Fiscal year ended August 31, 2009
Structure: Agricultural membership cooperative owned by farmers, ranchers, and member cooperatives. CHS also has preferred stockholders (8% Cumulative Redeemable Preferred Stock, symbol CHSCP).
Operations: Integrated agricultural company operating in three primary segments: Energy (refining, wholesaling, retailing petroleum), Ag Business (grain marketing, agronomy, country operations), and Processing (soybean crushing, oil refining, food products). Operations are global, with significant international sales in Asia, North America, and South America.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 20% ($6.5 billion) primarily due to lower commodity prices for refined fuels, grain, and crop nutrients. Energy segment revenues fell 34%, and Ag Business revenues fell 13%.
• Profitability Drop: Net income decreased 53% ($421.6 million). The Ag Business segment saw an 87% drop in income before taxes, largely due to the absence of a $91.7 million gain from the sale of CF Industries stock in 2008 and significant losses in the wholesale crop nutrients business due to falling fertilizer prices.
• Investment Losses: The company recorded a $74.3 million loss on its investment in VeraSun Energy Corporation (formerly US BioEnergy) following the company's bankruptcy. This was partially offset by a $15.7 million gain on the sale of NYMEX Holdings stock.
• Segment Performance:
  • Energy: Income before taxes increased 20% to $359.6 million, driven by higher refining margins at the Laurel, Montana refinery following a coker project completion.
  • Ag Business: Income before taxes plummeted to $73.1 million from $568.3 million. Wholesale crop nutrient earnings were $235.8 million lower due to inventory write-downs ($92 million) and reduced volumes.
  • Processing: Turned a profit of $4.1 million compared to a $5.8 million loss in 2008, despite the VeraSun write-off, due to improved margins at Ventura Foods.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued price volatility in commodities but within a narrower band. Capital expenditures for fiscal 2010 are expected to be approximately $490.8 million.
• Regulatory Compliance: Significant capital expenditures are required to comply with EPA regulations reducing benzene levels in gasoline by January 1, 2011. Total anticipated cost is $134 million, with $33 million spent through August 2009.
• Key Risks:
  • Commodity Price Volatility: Revenues and earnings are highly sensitive to market prices for crude oil, grain, and fertilizer. Falling prices without corresponding cost reductions can severely impact margins.
  • Counterparty Risk: Exposure to non-performance by counterparties in fixed-price contracts, particularly during periods of price fluctuation.
  • Environmental Liabilities: Potential costs for remediation of contaminated properties and compliance with evolving environmental laws.
  • Cooperative Structure: Limits ability to access equity capital as the company cannot sell common stock.
• Unusual Items: Patronage losses of approximately $60 million from the wholesale crop nutrients business in fiscal 2009 will be offset against fiscal 2008 patronage through the cancellation of capital equity certificates.

Investor Verification Checklist

• Commodity Price Exposure: Verify current market prices for crude oil, corn, soybeans, and fertilizer relative to the company's hedging positions and inventory valuations.
• VeraSun Investment Status: Confirm the final write-off status of the VeraSun investment and any remaining contingent liabilities.
• Capital Expenditure Schedule: Review the timeline and funding sources for the $134 million EPA benzene compliance project and the $490.8 million fiscal 2010 CAPEX plan.
• Patronage Distribution: Verify the final calculation of fiscal 2009 patronage refunds (estimated at $426.5 million) and the cash portion (35%) to be distributed in fiscal 2010.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically minimum working capital levels, given the reduction in net income.