NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation and Significant Accounting Policies
Basis of Presentation
These unaudited condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full fiscal year because of the seasonal nature of our businesses, among other things. Our unaudited condensed consolidated financial statements and notes are presented as permitted by the requirements for Quarterly Reports on Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2021, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC").
Significant Accounting Policies
No significant accounting policies were updated or changed since our Annual Report on Form 10-K for the year ended August 31, 2021.
Recent Accounting Pronouncements
No recent accounting pronouncements are expected to have a material impact on our condensed consolidated financial statements.
Note 2 Revenues
The following table presents revenues recognized under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC Topic 606"), disaggregated by reportable segment, as well as the amount of revenues recognized under ASC Topic 815, Derivatives and Hedging ("ASC Topic 815"), and other applicable accounting guidance for the three and nine months ended May 31, 2022 and 2021. Other applicable accounting guidance primarily includes revenues recognized under ASC Topic 470, Debt, and ASC Topic 842, Leases, that fall outside the scope of ASC Topic 606.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ASC Topic 606 | | ASC Topic 815 | | Other Guidance | | Total Revenues |
Three Months Ended May 31, 2022 | | (Dollars in thousands) |
Energy | | $ | 2,529,311 | | | $ | 246,631 | | | $ | — | | | $ | 2,775,942 | |
Ag | | 3,460,390 | | | 6,883,785 | | | 8,194 | | | 10,352,369 | |
Corporate and Other | | 4,205 | | | — | | | 5,208 | | | 9,413 | |
Total revenues | | $ | 5,993,906 | | | $ | 7,130,416 | | | $ | 13,402 | | | $ | 13,137,724 | |
| | | | | | | | |
Three Months Ended May 31, 2021 | | | | | | | | |
Energy | | $ | 1,533,643 | | | $ | 171,155 | | | $ | — | | | $ | 1,704,798 | |
Ag | | 2,810,389 | | | 6,389,677 | | | 16,138 | | | 9,216,204 | |
Corporate and Other | | 3,929 | | | — | | | 5,045 | | | 8,974 | |
Total revenues | | $ | 4,347,961 | | | $ | 6,560,832 | | | $ | 21,183 | | | $ | 10,929,976 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ASC Topic 606 | | ASC Topic 815 | | Other Guidance | | Total Revenues |
Nine Months Ended May 31, 2022 | | (Dollars in thousands) |
Energy | | $ | 6,426,092 | | | $ | 681,836 | | | $ | — | | | $ | 7,107,928 | |
Ag | | 8,056,676 | | | 19,139,417 | | | 21,466 | | | 27,217,559 | |
Corporate and Other | | 11,785 | | | — | | | 13,797 | | | 25,582 | |
Total revenues | | $ | 14,494,553 | | | $ | 19,821,253 | | | $ | 35,263 | | | $ | 34,351,069 | |
| | | | | | | | |
Nine Months Ended May 31, 2021 | | | | | | | | |
Energy | | $ | 3,841,678 | | | $ | 493,125 | | | $ | — | | | $ | 4,334,803 | |
Ag | | 5,324,396 | | | 18,232,235 | | | 43,187 | | | 23,599,818 | |
Corporate and Other | | 14,925 | | | — | | | 16,232 | | | 31,157 | |
Total revenues | | $ | 9,180,999 | | | $ | 18,725,360 | | | $ | 59,419 | | | $ | 27,965,778 | |
Less than 1% of revenues accounted for under ASC Topic 606 included within the tables above are recorded over time and relate primarily to service contracts.
Contract Assets and Contract Liabilities
Contract assets relate to unbilled amounts arising from goods that have already been transferred to customers where the right to payment is not conditional on the passage of time. This results in the recognition of an asset, as the amount of revenue recognized at a certain point in time exceeds the amount billed to customers. Contract assets are recorded in receivables within our Condensed Consolidated Balance Sheets and were $17.1 million and $29.0 million as of May 31, 2022, and August 31, 2021, respectively.
Contract liabilities relate to advance payments from customers for goods and services that we have yet to provide. Contract liabilities of $544.8 million and $213.9 million as of May 31, 2022, and August 31, 2021, respectively, are recorded within other current liabilities on our Condensed Consolidated Balance Sheets. For the three months ended May 31, 2022 and 2021, we recognized revenues of $48.1 million and $34.2 million related to contract liabilities, respectively. For the nine months ended May 31, 2022 and 2021, we recognized revenues of $213.9 million and $126.2 million related to contract liabilities, respectively. These amounts were included in the other current liabilities balance at the beginning of the respective period.
Note 3 Receivables
| | | | | | | | | | | |
| May 31, 2022 | | August 31, 2021 |
| (Dollars in thousands) |
Trade accounts receivable | $ | 3,164,995 | | | $ | 2,047,198 | |
CHS Capital short-term notes receivable | 652,041 | | | 505,778 | |
Other | 404,352 | | | 451,630 | |
Gross receivables | 4,221,388 | | | 3,004,606 | |
Less: allowances and reserves | 128,266 | | | 143,722 | |
Total receivables | $ | 4,093,122 | | | $ | 2,860,884 | |
Receivables are composed of trade accounts receivable, short-term notes receivable in our wholly-owned subsidiary, CHS Capital, LLC ("CHS Capital"), and other receivables, less an allowance for expected credit losses. The allowance for expected credit losses is based on our best estimate of expected credit losses in existing receivable balances and is determined using historical write-off experience, adjusted for various industry and regional data and current expectations of future credit losses.
Notes receivable from commercial borrowers are collateralized by various combinations of mortgages, personal property, accounts and notes receivable, inventories and assignments of certain regional cooperatives' capital stock. These loans are primarily originated in the states of Minnesota and North Dakota. CHS Capital also has loans receivable from producer
borrowers that are collateralized by various combinations of growing crops, livestock, inventories, accounts receivable, personal property and supplemental mortgages and are originated in the same states as the commercial notes.
In addition to the short-term balances included in the table above, CHS Capital had long-term notes receivable, with durations of generally not more than 10 years, totaling $50.3 million and $55.4 million as of May 31, 2022, and August 31, 2021, respectively. Long-term notes receivable are included in other assets on our Condensed Consolidated Balance Sheets. As of May 31, 2022, and August 31, 2021, commercial notes represented 49% and 28%, respectively, and producer notes represented 51% and 72%, respectively, of total CHS Capital notes receivable.
CHS Capital has commitments to extend credit to customers if there are no violations of contractually established conditions. As of May 31, 2022, CHS Capital customers had additional available credit of $645.9 million. No significant troubled debt restructuring activity occurred and no third-party customer or borrower accounted for more than 10% of the total receivables balance as of May 31, 2022, or August 31, 2021.
Note 4 Inventories
| | | | | | | | | | | |
| May 31, 2022 | | August 31, 2021 |
| (Dollars in thousands) |
Grain and oilseed | $ | 2,044,585 | | | $ | 1,435,544 | |
Energy | 577,360 | | | 762,317 | |
Agronomy | 1,439,716 | | | 958,548 | |
Processed grain and oilseed | 140,752 | | | 140,975 | |
Other | 249,282 | | | 37,291 | |
Total inventories | $ | 4,451,695 | | | $ | 3,334,675 | |
As of May 31, 2022, and August 31, 2021, we valued approximately 14% and 13%, respectively, of inventories, primarily crude oil and refined fuels within our Energy segment, using the lower of cost, determined on the last in, first out ("LIFO") method, or net realizable value. If the first in, first out ("FIFO") method of accounting had been used, inventories would have been higher than the reported amount by $895.7 million and $359.2 million as of May 31, 2022, and August 31, 2021, respectively. Actual valuation of inventory under the LIFO method can be made only at the end of each year based on inventory levels and costs at that time. Interim LIFO calculations are based on management's estimates of expected year-end inventory levels and values and are subject to final year-end LIFO inventory valuation.
Note 5 Investments
| | | | | | | | | | | |
| May 31, 2022 | | August 31, 2021 |
| (Dollars in thousands) |
Equity method investments: | | | |
CF Industries Nitrogen, LLC | $ | 2,916,993 | | | $ | 2,667,164 | |
Ventura Foods, LLC | 414,929 | | | 388,612 | |
Ardent Mills, LLC | 237,971 | | | 220,132 | |
TEMCO, LLC | 57,295 | | | 31,464 | |
Other equity method investments | 264,555 | | | 232,923 | |
Other investments | 131,352 | | | 128,816 | |
Total investments | $ | 4,023,095 | | | $ | 3,669,111 | |
Joint ventures and other investments, in which we have significant ownership and influence, but not control, are accounted for in our condensed consolidated financial statements using the equity method of accounting. Our significant equity method investments consist of CF Industries Nitrogen, LLC ("CF Nitrogen"), Ventura Foods, LLC ("Ventura Foods"), Ardent Mills, LLC ("Ardent Mills"), and TEMCO, LLC ("TEMCO"), which are summarized below. In addition to the recognition of our share of income from equity method investments, our equity method investments are evaluated for indicators of other-than-temporary impairment on an ongoing basis in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Other investments consist primarily of investments in cooperatives without readily determinable fair values and are generally recorded at cost, unless an impairment or other observable market price change occurs, requiring an adjustment. We have approximately $788.7 million of cumulative undistributed earnings from our equity method investees included in the investments balance as of May 31, 2022.
CF Nitrogen
We have a $2.9 billion investment in CF Nitrogen, a strategic venture with CF Industries Holdings, Inc. ("CF Industries"). The investment consists of an approximate 10% membership interest (based on product tons) in CF Nitrogen. We account for this investment using the hypothetical liquidation at book value method, recognizing our share of the earnings and losses of CF Nitrogen as equity income from investments in our Nitrogen Production segment based on our contractual claims on the entity's net assets pursuant to the liquidation provisions of the CF Nitrogen Limited Liability Company Agreement, adjusted for semiannual cash distributions.
The following table provides summarized unaudited financial information for our equity method investment in CF Nitrogen for the nine months ended May 31, 2022 and 2021:
| | | | | | | | | | | |
| Nine Months Ended May 31, |
| 2022 | | 2021 |
| (Dollars in thousands) |
Net sales | $ | 4,972,383 | | | $ | 2,116,040 | |
Gross profit | 2,682,653 | | | 565,067 | |
Net earnings | 2,641,425 | | | 524,071 | |
Earnings attributable to CHS Inc. | 497,289 | | | 118,477 | |
Ventura Foods, Ardent Mills and TEMCO
We have a 50% interest in Ventura Foods, a joint venture with Mitsui & Co., that produces and distributes primarily edible oil-based products. We also have a 12% interest in Ardent Mills, which is a joint venture with Cargill, Incorporated ("Cargill"), and Conagra Brands, Inc., and is the largest flour miller in the United States. Additionally, we have a 50% interest in TEMCO, which is a joint venture with Cargill focused on export elevation, primarily to Asia. We account for Ventura Foods, Ardent Mills and TEMCO as equity method investments. Our shares of the results of Ventura Foods and Ardent Mills are included in Corporate and Other and our share of the results of TEMCO is included in our Ag segment.
The following table provides aggregate summarized unaudited financial information for our equity method investments in Ventura Foods, Ardent Mills and TEMCO for the nine months ended May 31, 2022 and 2021:
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| Nine Months Ended May 31, |
| 2022 | | 2021 |
| (Dollars in thousands) |
Net sales | $ | 7,124,636 | | | $ | 7,471,759 | |
Gross profit | 850,417 | | | 741,461 | |
Net earnings | 439,502 | | | 363,988 | |
Earnings attributable to CHS Inc. | 105,869 | | | 116,436 | |
Our investments in other equity method investees are not significant in relation to our condensed consolidated financial statements, either individually or in aggregate.
Note 6 Notes Payable and Long-Term Debt
Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants as of May 31, 2022. The table below summarizes our notes payable as of May 31, 2022, and August 31, 2021:
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| May 31, 2022 | | August 31, 2021 |
| (Dollars in thousands) |
Notes payable | $ | 966,258 | | | $ | 864,147 | |
CHS Capital notes payable | 1,062,601 | | | 876,712 | |
Total notes payable | $ | 2,028,859 | | | $ | 1,740,859 | |
As of May 31, 2022, our primary line of credit was 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. There were no borrowings outstanding on this facility as of May 31, 2022, and August 31, 2021.
We have a 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, and this arrangement is accounted for as a secured financing. 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 amount available under the Securitization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business. The Securitization Facility consists of a committed portion with a maximum availability of $700.0 million and an uncommitted portion with a maximum availability of $250.0 million. As of May 31, 2022, total availability under the Securitization Facility was $950.0 million, all of which had been utilized.
We also have a repurchase facility ("Repurchase Facility") related to the Securitization Facility. Under the Repurchase Facility, we can obtain repurchase agreement financing in an amount up to $150.0 million for subordinated notes 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 May 31, 2022, and August 31, 2021, the outstanding balance under the Repurchase Facility was $150.0 million.
On February 19, 2021, we amended our 10-year term loan facility to convert the entire $366.0 million aggregate principle amount outstanding thereunder into a revolving loan, which could be paid down and readvanced in an amount up to the referenced $366.0 million until February 19, 2022. On February 19, 2022, the total advanced loan balance of $366.0 million reverted to a nonrevolving term loan that is payable on September 4, 2025.
The following table presents summarized long-term debt (including current portion) as of May 31, 2022, and August 31, 2021:
| | | | | | | | | | | |
| May 31, 2022 | | August 31, 2021 |
| (Dollars in thousands) |
Private placement debt | $ | 1,550,229 | | | $ | 1,552,974 | |
Term loan | 366,000 | | | — | |
Finance lease obligations | 46,684 | | | 36,034 | |
Other notes and contracts payable | 2,845 | | | 33,443 | |
Deferred financing costs | (3,671) | | | (4,090) | |
Total long-term debt | 1,962,087 | | | 1,618,361 | |
Less current portion | 161,308 | | | 38,450 | |
Long-term portion | $ | 1,800,779 | | | $ | 1,579,911 | |
Interest expense for the three months ended May 31, 2022 and 2021, was $32.1 million and $29.0 million, respectively, net of capitalized interest of $0.9 million and $3.9 million, respectively. Interest expense for the nine months ended May 31, 2022 and 2021, was $80.7 million and $82.9 million, respectively, net of capitalized interest of $4.7 million and $6.0 million, respectively.
Note 7 Income Taxes
Our effective tax rate for the three months ended May 31, 2022, was 9.8% compared to (6.8)% for the three months ended May 31, 2021. Our effective tax rate for the nine months ended May 31, 2022, was 6.7%, compared to (3.4)% for the nine months ended May 31, 2021. Our income tax expense reflects the mix of full-year earnings projected across business units and current equity management assumptions. Income taxes and effective tax rates vary each year based on profitability and nonpatronage business activity during the year.
Our uncertain tax positions are affected by the tax years that are under audit or remain subject to examination by the relevant taxing authorities. Reserves are recorded against unrecognized tax benefits when we believe certain fully supportable tax return positions are likely to be challenged, and we may not prevail. If we were to prevail on all positions taken in relation to uncertain tax positions, $114.6 million and $114.3 million of the unrecognized tax benefits would ultimately benefit our effective tax rate as of May 31, 2022, and August 31, 2021, respectively. It is reasonably possible that the total amount of unrecognized tax benefits could significantly change in the next 12 months.
Note 8 Equities
Changes in Equities
Changes in equities for the nine months ended May 31, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Certificates | | | | Accumulated Other Comprehensive Loss | | | | | | |
| Capital Equity Certificates | | Nonpatronage Equity Certificates | | Nonqualified Equity Certificates | | Preferred Stock | | | Capital Reserves | | Noncontrolling Interests | | Total Equities |
| (Dollars in thousands) |
Balances, August 31, 2021 | $ | 3,583,911 | | | $ | 28,431 | | | $ | 1,634,896 | | | $ | 2,264,038 | | | $ | (216,391) | | | $ | 1,713,976 | | | $ | 8,465 | | | $ | 9,017,326 | |
Reversal of prior year redemption estimates | 12,221 | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,221 | |
| | | | | | | | | | | | | | | |
Redemptions of equities | (9,824) | | | (318) | | | (2,079) | | | — | | | — | | | — | | | — | | | (12,221) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | (84,334) | | | — | | | (84,334) | |
Other, net | (1,023) | | | 17 | | | (64) | | | — | | | — | | | 1,393 | | | (841) | | | (518) | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 451,961 | | | (18) | | | 451,943 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (15,418) | | | — | | | — | | | (15,418) | |
Estimated 2022 cash patronage refunds | — | | | — | | | — | | | — | | | — | | | (39,691) | | | — | | | (39,691) | |
Estimated 2022 equity redemptions | (79,382) | | | — | | | — | | | — | | | — | | | — | | | — | | | (79,382) | |
Balances, November 30, 2021 | 3,505,903 | | | 28,130 | | | 1,632,753 | | | 2,264,038 | | | (231,809) | | | 2,043,305 | | | 7,606 | | | 9,249,926 | |
Reversal of prior year patronage and redemption estimates | 5,264 | | | — | | | (230,290) | | | — | | | — | | | 260,120 | | | — | | | 35,094 | |
Distribution of 2021 patronage refunds | — | | | — | | | 231,371 | | | — | | | — | | | (261,414) | | | — | | | (30,043) | |
Redemptions of equities | (4,228) | | | (20) | | | (1,016) | | | — | | | — | | | — | | | — | | | (5,264) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | (42,167) | | | — | | | (42,167) | |
Other, net | (5) | | | — | | | — | | | — | | | — | | | 50 | | | (599) | | | (554) | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 219,000 | | | (104) | | | 218,896 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 9,954 | | | — | | | — | | | 9,954 | |
Estimated 2022 cash patronage refunds | — | | | — | | | — | | | — | | | — | | | (22,466) | | | — | | | (22,466) | |
Estimated 2022 equity redemptions | (44,932) | | | — | | | — | | | — | | | — | | | — | | | — | | | (44,932) | |
Balances, February 28, 2022 | 3,462,002 | | | 28,110 | | | 1,632,818 | | | 2,264,038 | | | (221,855) | | | 2,196,428 | | | 6,903 | | | 9,368,444 | |
Reversal of prior year patronage and redemption estimates | 81,731 | | | — | | | — | | | — | | | — | | | 20,170 | | | — | | | 101,901 | |
Distribution of 2021 patronage refunds | — | | | — | | | 4,205 | | | — | | | — | | | (25,188) | | | — | | | (20,983) | |
Redemptions of equities | (78,616) | | | (90) | | | (3,038) | | | — | | | — | | | — | | | — | | | (81,744) | |
| | | | | | | | | | | | | | | |
Other, net | (2,228) | | | (1) | | | (6,809) | | | — | | | — | | | 1,105 | | | (295) | | | (8,228) | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 576,574 | | | (329) | | | 576,245 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (18,221) | | | — | | | — | | | (18,221) | |
Estimated 2022 cash patronage refunds | — | | | — | | | — | | | — | | | — | | | (58,745) | | | — | | | (58,745) | |
Estimated 2022 equity redemptions | (117,491) | | | — | | | — | | | — | | | — | | | — | | | — | | | (117,491) | |
Balances, May 31, 2022 | $ | 3,345,398 | | | $ | 28,019 | | | $ | 1,627,176 | | | $ | 2,264,038 | | | $ | (240,076) | | | $ | 2,710,344 | | | $ | 6,279 | | | $ | 9,741,178 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Certificates | | | | Accumulated Other Comprehensive Loss | | | | | | |
| Capital Equity Certificates | | Nonpatronage Equity Certificates | | Nonqualified Equity Certificates | | Preferred Stock | | | Capital Reserves | | Noncontrolling Interests | | Total Equities |
| (Dollars in thousands) |
Balances, August 31, 2020 | $ | 3,724,187 | | | $ | 28,727 | | | $ | 1,408,696 | | | $ | 2,264,038 | | | $ | (233,924) | | | $ | 1,618,147 | | | $ | 9,302 | | | $ | 8,819,173 | |
Reversal of prior year redemption estimates | 7,726 | | | — | | | — | | | — | | | — | | | — | | | — | | | 7,726 | |
| | | | | | | | | | | | | | | |
Redemptions of equities | (6,539) | | | (31) | | | (1,156) | | | — | | | — | | | — | | | — | | | (7,726) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | (84,334) | | | — | | | (84,334) | |
Other, net | (654) | | | (47) | | | (197) | | | — | | | — | | | (7,798) | | | 35 | | | (8,661) | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 69,671 | | | (302) | | | 69,369 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 8,917 | | | — | | | — | | | 8,917 | |
Estimated 2021 cash patronage refunds | — | | | — | | | — | | | — | | | — | | | (9,304) | | | — | | | (9,304) | |
Estimated 2021 equity redemptions | (9,304) | | | — | | | — | | | — | | | — | | | — | | | — | | | (9,304) | |
Balances, November 30, 2020 | 3,715,416 | | | 28,649 | | | 1,407,343 | | | 2,264,038 | | | (225,007) | | | 1,586,382 | | | 9,035 | | | 8,785,856 | |
Reversal of prior year patronage and redemption estimates | 4,760 | | | — | | | (211,970) | | | — | | | — | | | 233,345 | | | — | | | 26,135 | |
Distribution of 2020 patronage refunds | — | | | — | | | 214,720 | | | — | | | — | | | (236,136) | | | — | | | (21,416) | |
Redemptions of equities | (4,177) | | | (35) | | | (548) | | | — | | | — | | | — | | | — | | | (4,760) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | (42,167) | | | — | | | (42,167) | |
Other, net | (26) | | | — | | | (15) | | | — | | | — | | | 1,068 | | | (361) | | | 666 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (38,229) | | | (129) | | | (38,358) | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 2,549 | | | — | | | — | | | 2,549 | |
Estimated 2021 cash patronage refunds | — | | | — | | | — | | | — | | | — | | | 5,639 | | | — | | | 5,639 | |
Estimated 2021 equity redemptions | 5,639 | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,639 | |
Balances, February 28, 2021 | 3,721,612 | | | 28,614 | | | 1,409,530 | | | 2,264,038 | | | (222,458) | | | 1,509,902 | | | 8,545 | | | 8,719,783 | |
Reversal of prior year redemption estimates | 15,514 | | | — | | | 5,000 | | | — | | | — | | | 8,625 | | | — | | | 29,139 | |
Distribution of 2020 patronage refunds | — | | | — | | | 7 | | | — | | | — | | | (8,632) | | | — | | | (8,625) | |
Redemptions of equities | (19,275) | | | (35) | | | (6,013) | | | — | | | — | | | — | | | — | | | (25,323) | |
| | | | | | | | | | | | | | | |
Other, net | (298) | | | 43 | | | 58 | | | — | | | — | | | (1,726) | | | (61) | | | (1,984) | |
Net income | — | | | — | | | — | | | — | | | — | | | 273,591 | | | 81 | | | 273,672 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 7,115 | | | — | | | — | | | 7,115 | |
Estimated 2021 cash patronage refunds | — | | | — | | | — | | | — | | | — | | | (21,292) | | | — | | | (21,292) | |
Estimated 2021 equity redemptions | (21,292) | | | — | | | — | | | — | | | — | | | — | | | — | | | (21,292) | |
Balances, May 31, 2021 | $ | 3,696,261 | | | $ | 28,622 | | | $ | 1,408,582 | | | $ | 2,264,038 | | | $ | (215,343) | | | $ | 1,760,468 | | | $ | 8,565 | | | $ | 8,951,193 | |
Preferred Stock Dividends
The following is a summary of dividends declared per share by series of preferred stock for the nine months ended May 31, 2022 and 2021. Due to the timing of dividend declarations during the fiscal year, no declarations were made during the three months ended May 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Nine Months Ended May 31, |
| Nasdaq symbol | | | | | | 2022 | | 2021 |
Series of preferred stock: | | | | | | | (Dollars per share) |
8% Cumulative Redeemable | CHSCP | | | | | | $ | 1.50 | | | $ | 1.50 | |
Class B Cumulative Redeemable, Series 1 | CHSCO | | | | | | $ | 1.48 | | | $ | 1.48 | |
Class B Reset Rate Cumulative Redeemable, Series 2 | CHSCN | | | | | | $ | 1.33 | | | $ | 1.33 | |
Class B Reset Rate Cumulative Redeemable, Series 3 | CHSCM | | | | | | $ | 1.27 | | | $ | 1.27 | |
Class B Cumulative Redeemable, Series 4 | CHSCL | | | | | | $ | 1.41 | | | $ | 1.41 | |
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ended May 31, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension and Other Postretirement Benefits | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total |
| (Dollars in thousands) |
Balance as of August 31, 2021, net of tax | $ | (141,385) | | | $ | 4,824 | | | $ | (79,830) | | | $ | (216,391) | |
Other comprehensive income (loss), before tax: | | | | | | | |
Amounts before reclassifications | (83) | | | 870 | | | (9,983) | | | (9,196) | |
Amounts reclassified | 5,064 | | | (12,954) | | | — | | | (7,890) | |
Total other comprehensive income (loss), before tax | 4,981 | | | (12,084) | | | (9,983) | | | (17,086) | |
Tax effect | (1,213) | | | 2,943 | | | (62) | | | 1,668 | |
Other comprehensive income (loss), net of tax | 3,768 | | | (9,141) | | | (10,045) | | | (15,418) | |
| | | | | | | |
Balance as of November 30, 2021, net of tax | (137,617) | | | (4,317) | | | (89,875) | | | (231,809) | |
Other comprehensive income (loss), before tax: | | | | | | | |
Amounts before reclassifications | — | | | 3,974 | | | 5,807 | | | 9,781 | |
Amounts reclassified | 6,056 | | | (4,705) | | | — | | | 1,351 | |
Total other comprehensive income (loss), before tax | 6,056 | | | (731) | | | 5,807 | | | 11,132 | |
Tax effect | (1,475) | | | 178 | | | 119 | | | (1,178) | |
Other comprehensive income (loss), net of tax | 4,581 | | | (553) | | | 5,926 | | | 9,954 | |
Balance as of February 28, 2022, net of tax | (133,036) | | | (4,870) | | | (83,949) | | | (221,855) | |
Other comprehensive income (loss), before tax: | | | | | | | |
Amounts before reclassifications | 369 | | | (39,169) | | | 2,497 | | | (36,303) | |
Amounts reclassified | 5,560 | | | 5,782 | | | — | | | 11,342 | |
Total other comprehensive income (loss), before tax | 5,929 | | | (33,387) | | | 2,497 | | | (24,961) | |
Tax effect | (1,444) | | | 8,130 | | | 54 | | | 6,740 | |
Other comprehensive income (loss), net of tax | 4,485 | | | (25,257) | | | 2,551 | | | (18,221) | |
Balance as of May 31, 2022, net of tax | $ | (128,551) | | | $ | (30,127) | | | $ | (81,398) | | | $ | (240,076) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension and Other Postretirement Benefits | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total |
| (Dollars in thousands) |
Balance as of August 31, 2020, net of tax | $ | (159,680) | | | $ | 10,886 | | | $ | (85,130) | | | $ | (233,924) | |
Other comprehensive income (loss), before tax: | | | | | | | |
Amounts before reclassifications | (125) | | | 14,506 | | | 3,629 | | | 18,010 | |
Amounts reclassified | 4,977 | | | (12,284) | | | — | | | (7,307) | |
Total other comprehensive income, before tax | 4,852 | | | 2,222 | | | 3,629 | | | 10,703 | |
Tax effect | (1,207) | | | (553) | | | (26) | | | (1,786) | |
Other comprehensive income, net of tax | 3,645 | | | 1,669 | | | 3,603 | | | 8,917 | |
Balance as of November 30, 2020, net of tax | (156,035) | | | 12,555 | | | (81,527) | | | (225,007) | |
Other comprehensive income (loss), before tax: | | | | | | | |
Amounts before reclassifications | — | | | 2,929 | | | (587) | | | 2,342 | |
Amounts reclassified | 5,151 | | | (3,673) | | | — | | | 1,478 | |
Total other comprehensive income (loss), before tax | 5,151 | | | (744) | | | (587) | | | 3,820 | |
Tax effect | (1,282) | | | 185 | | | (174) | | | (1,271) | |
Other comprehensive income (loss), net of tax | 3,869 | | | (559) | | | (761) | | | 2,549 | |
Balance as of February 28, 2021, net of tax | (152,166) | | | 11,996 | | | (82,288) | | | (222,458) | |
Other comprehensive income (loss), before tax: | | | | | | | |
Amounts before reclassifications | 112 | | | (4,725) | | | 8,398 | | | 3,785 | |
Amounts reclassified | 5,064 | | | (1,919) | | | — | | | 3,145 | |
Total other comprehensive income (loss), before tax | 5,176 | | | (6,644) | | | 8,398 | | | 6,930 | |
Tax effect | (1,288) | | | 1,653 | | | (180) | | | 185 | |
Other comprehensive income (loss), net of tax | 3,888 | | | (4,991) | | | 8,218 | | | 7,115 | |
Balance as of May 31, 2021, net of tax | $ | (148,278) | | | $ | 7,005 | | | $ | (74,070) | | | $ | (215,343) | |
Amounts reclassified from accumulated other comprehensive income (loss) were related to pension and other postretirement benefits, cash flow hedges and foreign currency translation adjustments. Pension and other postretirement reclassifications include amortization of net actuarial loss, prior service credit and transition amounts and are recorded as cost of goods sold and marketing, general and administrative expenses (see Note 9, Benefit Plans, for further information). Gains or losses associated with cash flow hedges are recorded as cost of goods sold (see Note 11, Derivative Financial Instruments and Hedging Activities, for further information). Gains or losses on foreign currency translation reclassifications related to sales of businesses are recorded as other income.
Note 9 Benefit Plans
We have various pension and other defined benefit and defined contribution plans, in which substantially all employees may participate. We also have nonqualified supplemental executive and Board of Directors retirement plans.
Components of net periodic benefit costs for the three and nine months ended May 31, 2022 and 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended May 31, |
| Qualified Pension Benefits | | Nonqualified Pension Benefits | | Other Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Components of net periodic benefit costs: | (Dollars in thousands) |
Service cost | $ | 11,569 | | | $ | 11,307 | | | $ | 232 | | | $ | 108 | | | $ | 249 | | | $ | 297 | |
Interest cost | 4,292 | | | 4,141 | | | 70 | | | 68 | | | 126 | | | 123 | |
Expected return on assets | (10,990) | | | (10,910) | | | — | | | — | | | — | | | — | |
Prior service cost (credit) amortization | 44 | | | 45 | | | (29) | | | (28) | | | (111) | | | (111) | |
Actuarial loss (gain) amortization | 5,852 | | | 5,447 | | | 120 | | | 53 | | | (315) | | | (341) | |
| | | | | | | | | | | |
Net periodic benefit cost (benefit) | $ | 10,767 | | | $ | 10,030 | | | $ | 393 | | | $ | 201 | | | $ | (51) | | | $ | (32) | |
| | | | | | | | | | | |
| Nine Months Ended May 31, |
| Qualified Pension Benefits | | Nonqualified Pension Benefits | | Other Benefits |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Components of net periodic benefit costs: | (Dollars in thousands) |
Service cost | $ | 34,706 | | | $ | 33,921 | | | $ | 695 | | | $ | 325 | | | $ | 747 | | | $ | 890 | |
Interest cost | 12,875 | | | 12,422 | | | 211 | | | 205 | | | 377 | | | 369 | |
Expected return on assets | (32,969) | | | (32,731) | | | — | | | — | | | — | | | — | |
Prior service cost (credit) amortization | 131 | | | 134 | | | (86) | | | (85) | | | (334) | | | (334) | |
Actuarial loss (gain) amortization | 17,555 | | | 16,342 | | | 359 | | | 159 | | | (944) | | | (1,024) | |
| | | | | | | | | | | |
Net periodic benefit cost (benefit) | $ | 32,298 | | | $ | 30,088 | | | $ | 1,179 | | | $ | 604 | | | $ | (154) | | | $ | (99) | |
The service cost component of defined benefit net periodic benefit cost is recorded in cost of goods sold and marketing, general and administrative expenses. The other components of net periodic benefit cost are recorded in other income.
Employer Contributions
Any contributions made during fiscal 2022 will depend primarily on market returns on the pension plan assets and minimum funding level requirements. No contributions were made to the pension plans during the nine months ended May 31, 2022, and we do not currently anticipate being required to make contributions for our pension plans in fiscal 2022.
Note 10 Segment Reporting
We are an integrated agricultural cooperative, providing grain, foods and energy resources to businesses and consumers on a global basis. We provide a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products, to agricultural outputs that include grain and oilseed, processed grain and oilseed, renewable fuels and food products. We define our operating segments in accordance with ASC Topic 280, Segment Reporting, to reflect the manner in which our chief operating decision maker, our Chief Executive Officer, evaluates performance and allocates resources in managing the business. We have aggregated those operating segments into three reportable segments: Energy, Ag and Nitrogen Production.
Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag segment purchases and further processes or resells grain and oilseed originated by our country operations business, by our member cooperatives and by third parties; serves as a wholesaler and retailer of crop inputs; and produces and markets ethanol. Our Nitrogen Production segment consists of our equity method investment in CF Nitrogen and allocated expenses. Our supply agreement with CF Nitrogen entitles us to purchase up to a specified quantity of granular urea and urea ammonium nitrate ("UAN") annually from CF Nitrogen. Corporate and Other represents our financing and hedging businesses, which primarily consist of a U.S. Commodity Futures Trading Commission-regulated futures commission merchant ("FCM") for commodities hedging and financial services related to crop production. Our nonconsolidated investments in Ventura Foods and Ardent Mills are also included in our Corporate and Other category.
Corporate administrative expenses and interest are allocated to each reportable segment and Corporate and Other, based on direct use of services, such as information technology and legal, and other factors or considerations relevant to the costs incurred.
Many of our business activities are highly seasonal and our operating results vary throughout the year. Our revenues generally trend lower during the second and fourth fiscal quarters and higher during the first and third fiscal quarters; however, our income before income taxes does not necessarily follow the same trend, due to weather and other events that can impact profitability. For example, in our Ag segment, our country operations business generally experiences higher volumes and revenues during the fall harvest and spring planting seasons, which generally correspond to our first and third fiscal quarters, respectively. Additionally, our agronomy business generally experiences higher volumes and revenues during the spring planting season. Our global grain and processing operations are subject to fluctuations in volume and revenues based on producer harvests, world grain prices, demand and international trade relationships. Our Energy segment generally experiences higher volumes and revenues in certain operating areas, such as refined products, in the spring, summer and early fall when gasoline and diesel fuel use by agricultural producers is highest and is subject to global supply and demand forces. Other energy products, such as propane, generally experience higher volumes and revenues during the winter heating and fall crop-drying seasons.
Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grain, oilseed, crop nutrients and flour. 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. Commodity prices are affected by a wide range of factors beyond our control, including weather, crop damage due to plant disease or insects, drought, availability and adequacy of supply, availability of reliable rail and river transportation networks, outbreaks of disease, government regulations and policies, global trade disputes, wars and civil unrest, and general political and economic conditions.
While our revenues and operating results are derived primarily from businesses and operations that are wholly-owned or subsidiaries and limited liability companies in which we have a controlling interest, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less or do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments without consolidating the revenues and expenses of the entity in our Condensed Consolidated Statements of Operations. In our Ag segment, this includes our 50% interest in TEMCO. In our Nitrogen Production segment, this consists of our approximate 10% membership interest (based on product tons) in CF Nitrogen. In Corporate and Other, this principally includes our 50% ownership in Ventura Foods and our 12% ownership in Ardent Mills. See Note 5, Investments, for more information on these entities.
Reconciling amounts represent the elimination of revenues between segments. Such transactions are executed at market prices to more accurately evaluate the profitability of individual business segments.
Segment information for the three and nine months ended May 31, 2022 and 2021, is presented in the tables below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy | | Ag | | Nitrogen Production | | Corporate and Other | | Reconciling Amounts | | Total |
Three Months Ended May 31, 2022 | (Dollars in thousands) |
Revenues, including intersegment revenues | $ | 2,943,305 | | | $ | 10,359,992 | | | $ | — | | | $ | 11,215 | | | $ | (176,788) | | | $ | 13,137,724 | |
Intersegment revenues | (167,363) | | | (7,623) | | | — | | | (1,802) | | | 176,788 | | | — | |
Revenues, net of intersegment revenues | $ | 2,775,942 | | | $ | 10,352,369 | | | $ | — | | | $ | 9,413 | | | $ | — | | | $ | 13,137,724 | |
Operating earnings (loss) | 164,016 | | | 256,817 | | | (14,480) | | | (5,232) | | | — | | | 401,121 | |
Interest expense | 2,182 | | | 18,581 | | | 12,263 | | | (257) | | | (670) | | | 32,099 | |
Other income | (485) | | | (10,221) | | | (258) | | | 3,658 | | | 670 | | | (6,636) | |
Equity income from investments | (922) | | | (25,231) | | | (204,697) | | | (32,229) | | | — | | | (263,079) | |
Income before income taxes | $ | 163,241 | | | $ | 273,688 | | | $ | 178,212 | | | $ | 23,596 | | | $ | — | | | $ | 638,737 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy | | Ag | | Nitrogen Production | | Corporate and Other | | Reconciling Amounts | | Total |
Three Months Ended May 31, 2021 | (Dollars in thousands) |
Revenues, including intersegment revenues | $ | 1,815,077 | | | $ | 9,222,597 | | | $ | — | | | $ | 10,842 | | | $ | (118,540) | | | $ | 10,929,976 | |
Intersegment revenues | (110,279) | | | (6,393) | | | — | | | (1,868) | | | 118,540 | | | — | |
Revenues, net of intersegment revenues | $ | 1,704,798 | | | $ | 9,216,204 | | | $ | — | | | $ | 8,974 | | | $ | — | | | $ | 10,929,976 | |
Operating earnings (loss) | 2,955 | | | 134,606 | | | (8,799) | | | (837) | | | — | | | 127,925 | |
Interest expense | (333) | | | 17,661 | | | 10,318 | | | 390 | | | 956 | | | 28,992 | |
Other income | (636) | | | (6,331) | | | (308) | | | (2,517) | | | (956) | | | (10,748) | |
Equity income from investments | (1,035) | | | (16,855) | | | (65,444) | | | (63,188) | | | — | | | (146,522) | |
Income before income taxes | $ | 4,959 | | | $ | 140,131 | | | $ | 46,635 | | | $ | 64,478 | | | $ | — | | | $ | 256,203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy | | Ag | | Nitrogen Production | | Corporate and Other | | Reconciling Amounts | | Total |
Nine Months Ended May 31, 2022 | (Dollars in thousands) |
Revenues, including intersegment revenues | $ | 7,574,881 | | | $ | 27,239,897 | | | $ | — | | | $ | 32,060 | | | $ | (495,769) | | | $ | 34,351,069 | |
Intersegment revenues | (466,953) | | | (22,338) | | | — | | | (6,478) | | | 495,769 | | | — | |
Revenues, net of intersegment revenues | $ | 7,107,928 | | | $ | 27,217,559 | | | $ | — | | | $ | 25,582 | | | $ | — | | | $ | 34,351,069 | |
Operating earnings (loss) | 243,009 | | | 560,200 | | | (35,525) | | | (26,916) | | | — | | | 740,768 | |
Interest expense | 4,568 | | | 45,466 | | | 34,770 | | | (3,073) | | | (1,026) | | | 80,705 | |
Other income | (1,217) | | | (37,320) | | | (2,058) | | | 7,752 | | | 1,026 | | | (31,817) | |
Equity income from investments | (3,604) | | | (63,240) | | | (497,289) | | | (80,214) | | | — | | | (644,347) | |
Income before income taxes | $ | 243,262 | | | $ | 615,294 | | | $ | 429,052 | | | $ | 48,619 | | | $ | — | | | $ | 1,336,227 | |
Total assets as of May 31, 2022 | $ | 4,357,274 | | | $ | 9,556,610 | | | $ | 2,930,538 | | | $ | 3,864,621 | | | $ | — | | | $ | 20,709,043 | |
| | | | | | | | | | | |
| Energy | | Ag | | Nitrogen Production | | Corporate and Other | | Reconciling Amounts | | Total |
Nine Months Ended May 31, 2021 | (Dollars in thousands) |
Revenues, including intersegment revenues | $ | 4,643,387 | | | $ | 23,615,087 | | | $ | — | | | $ | 38,370 | | | $ | (331,066) | | | $ | 27,965,778 | |
Intersegment revenues | (308,584) | | | (15,269) | | | — | | | (7,213) | | | 331,066 | | | — | |
Revenues, net of intersegment revenues | $ | 4,334,803 | | | $ | 23,599,818 | | | $ | — | | | $ | 31,157 | | | $ | — | | | $ | 27,965,778 | |
Operating earnings (loss) | (120,879) | | | 212,223 | | | (24,661) | | | 8,894 | | | — | | | 75,577 | |
Interest expense | 492 | | | 48,796 | | | 33,721 | | | 1,536 | | | (1,648) | | | 82,897 | |
Other income | (2,108) | | | (29,784) | | | (2,175) | | | (8,800) | | | 1,648 | | | (41,219) | |
Equity income from investments | (2,355) | | | (43,974) | | | (118,477) | | | (95,848) | | | — | | | (260,654) | |
Income (loss) before income taxes | $ | (116,908) | | | $ | 237,185 | | | $ | 62,270 | | | $ | 112,006 | | | $ | — | | | $ | 294,553 | |
Note 11 Derivative Financial Instruments and Hedging Activities
We enter into various derivative instruments to manage our exposure to movements primarily associated with agricultural and energy commodity prices and, to a lesser degree, foreign currency exchange rates and interest rates. Except for certain cash-settled swaps related to future crude oil purchases and refined product sales, which are accounted for as cash flow hedges, our derivative instruments represent economic hedges of price risk for which hedge accounting under ASC Topic 815 is not applied. Rather, the derivative instruments are recorded on our Condensed Consolidated Balance Sheets at fair value with changes in fair value being recorded directly to earnings, primarily within cost of goods sold in our Condensed Consolidated Statements of Operations. See Note 12, Fair Value Measurements, for additional information. The majority of our exchange-traded agricultural commodity futures are settled daily through CHS Hedging, LLC, our wholly-owned FCM.
Derivatives Not Designated as Hedging Instruments
Although we have certain netting arrangements for our exchange-traded futures and options contracts and certain over-the-counter ("OTC") contracts, we have elected to report our derivative instruments on a gross basis on our Condensed Consolidated Balance Sheets under ASC Topic 210-20, Balance Sheet-Offsetting. The following tables present the gross fair values of derivative assets, derivative liabilities and margin deposits (cash collateral) recorded on our Condensed Consolidated Balance Sheets, along with related amounts permitted to be offset in accordance with U.S. GAAP: | | | | | | | | | | | | | | | | | | | | | | | |
| May 31, 2022 |
| | | Amounts Not Offset on Condensed Consolidated Balance Sheet but Eligible for Offsetting | | |
| Gross Amount Recognized | | Cash Collateral | | Derivative Instruments | | Net Amount |
| (Dollars in thousands) |
Derivative Assets | | | | | | | |
Commodity derivatives | $ | 762,167 | | | $ | — | | | $ | 21,015 | | | $ | 741,152 | |
Foreign exchange derivatives | 114,804 | | | — | | | 15,410 | | | 99,394 | |
Embedded derivative asset | 13,545 | | | — | | | — | | | 13,545 | |
Total | $ | 890,516 | | | $ | — | | | $ | 36,425 | | | $ | 854,091 | |
Derivative Liabilities | | | | | | | |
Commodity derivatives | $ | 609,663 | | | $ | 239 | | | $ | 22,590 | | | $ | 586,834 | |
Foreign exchange derivatives | 15,454 | | | — | | | 15,410 | | | 44 | |
| | | | | | | |
Total | $ | 625,117 | | | $ | 239 | | | $ | 38,000 | | | $ | 586,878 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| August 31, 2021 |
| | | Amounts Not Offset on Condensed Consolidated Balance Sheet but Eligible for Offsetting | | |
| Gross Amount Recognized | | Cash Collateral | | Derivative Instruments | | Net Amount |
| (Dollars in thousands) |
Derivative Assets | | | | | | | |
Commodity derivatives | $ | 532,832 | | | $ | — | | | $ | 4,174 | | | $ | 528,658 | |
Foreign exchange derivatives | 19,429 | | | — | | | 5,582 | | | 13,847 | |
Embedded derivative asset | 16,488 | | | — | | | — | | | 16,488 | |
Total | $ | 568,749 | | | $ | — | | | $ | 9,756 | | | $ | 558,993 | |
Derivative Liabilities | | | | | | | |
Commodity derivatives | $ | 444,861 | | | $ | 2,485 | | | $ | 4,174 | | | $ | 438,202 | |
Foreign exchange derivatives | 8,506 | | | — | | | 5,582 | | | 2,924 | |
Total | $ | 453,367 | | | $ | 2,485 | | | $ | 9,756 | | | $ | 441,126 | |
Derivative assets and liabilities with maturities of 12 months or less are recorded in other current assets and other current liabilities, respectively, on our Condensed Consolidated Balance Sheets. Derivative assets and liabilities with maturities greater than 12 months are recorded in other assets and other liabilities, respectively, on our Condensed Consolidated Balance Sheets. The amount of long-term derivative assets recorded on our Condensed Consolidated Balance Sheets as of May 31, 2022, and August 31, 2021, was $29.3 million and $21.6 million, respectively. The amount of long-term derivative liabilities recorded on our Condensed Consolidated Balance Sheets as of May 31, 2022, and August 31, 2021, was $3.6 million and $4.8 million, respectively.
The majority of our derivative instruments have not been designated as hedging instruments. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended May 31, | | Nine Months Ended May 31, |
| Location of Gain (Loss) | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (Dollars in thousands) |
Commodity derivatives | Cost of goods sold | | $ | (324,965) | | | $ | (552,985) | | | $ | (905,400) | | | $ | (945,631) | |
Foreign exchange derivatives | Cost of goods sold | | 18,147 | | | 35,567 | | | 58,438 | | | 27,327 | |
Foreign exchange derivatives | Marketing, general and administrative expenses | | 1,097 | | | 838 | | | 1,600 | | | 1,011 | |
Embedded derivative | Other income | | 258 | | | 308 | | | 2,057 | | | 2,174 | |
Total | | $ | (305,463) | | | $ | (516,272) | | | $ | (843,305) | | | $ | (915,119) | |
Commodity Contracts
As of May 31, 2022, and August 31, 2021, we had outstanding commodity futures and options contracts that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity contracts:
| | | | | | | | | | | | | | | | | | | | | | | |
| May 31, 2022 | | August 31, 2021 |
| Long | | Short | | Long | | Short |
| (Units in thousands) |
Grain and oilseed (bushels) | 754,573 | | | 1,279,773 | | | 666,726 | | 851,582 |
Energy products (barrels) | 13,138 | | | 8,778 | | | 9,881 | | 7,656 |
Processed grain and oilseed (tons) | 1,050 | | | 4,475 | | | 559 | | 3,418 |
Crop nutrients (tons) | 74 | | | 3 | | | 66 | | 12 |
Ocean freight (metric tons) | 45 | | | — | | | 210 | | — |
| | | | | | | |
Foreign Exchange Contracts
We conduct a substantial portion of our business in U.S. dollars, but we are exposed to risks relating to foreign currency fluctuations, primarily due to global grain marketing transactions in South America, the Asia Pacific region and Europe, and purchases of products from Canada. We use foreign currency derivative instruments to mitigate the impact of exchange rate fluctuations. Although we have some risk exposure related to foreign currency transactions, a larger impact with exchange rate fluctuations is 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. The notional amount of our foreign exchange derivative contracts was $1.9 billion and $1.2 billion as of May 31, 2022, and August 31, 2021, respectively.
Embedded Derivative Asset
Under the terms of our strategic investment in CF Nitrogen, if the credit rating of CF Industries is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a nonrefundable annual payment of $5.0 million from CF Industries. These payments will continue on an annual basis until the date that the credit rating of CF Industries is upgraded to above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier.
Since the credit rating of CF Industries was reduced below the specified levels during fiscal 2017, we have received an annual payment of $5.0 million from CF Industries. Gains totaling $2.1 million and $2.2 million were recognized in other income in our Condensed Consolidated Statements of Operations for the nine months ended May 31, 2022 and 2021, respectively. The fair value of the embedded derivative asset recorded on our Condensed Consolidated Balance Sheets as of May 31, 2022, was equal to $13.5 million. The current and long-term portions of the embedded derivative asset are included in other current assets and other assets on our Condensed Consolidated Balance Sheets, respectively. See Note 12, Fair Value Measurements, for additional information regarding valuation of the embedded derivative asset.
Derivatives Designated as Cash Flow Hedging Strategies
Certain pay-fixed, receive-variable, cash-settled swaps are designated as cash flow hedges of future crude oil purchases in our Energy segment. We also designate certain pay-variable, receive-fixed, cash-settled swaps as cash flow hedges of future refined energy product sales. These hedging instruments and the related hedged items are exposed to significant market price risk and potential volatility. As part of our risk management strategy, we look to hedge a portion of our expected future crude oil needs and the resulting refined product output based on prevailing futures prices, management's expectations about future commodity price changes and our risk appetite. We may also elect to dedesignate certain derivative instruments previously designated as cash flow hedges as part of our risk management strategy. Amounts recorded in other comprehensive income for these dedesignated derivative instruments remain in other comprehensive income and are recognized in earnings in the period in which the underlying transactions affect earnings. As of May 31, 2022, and August 31, 2021, the aggregate notional amounts of cash flow hedges were 6.1 million and 2.7 million barrels, respectively.
The following table presents the fair value of our commodity derivative instruments designated as cash flow hedges and the line items on our Condensed Consolidated Balance Sheets in which they are recorded:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets | | | | Derivative Liabilities |
Balance Sheet Location | | May 31, 2022 | | August 31, 2021 | | Balance Sheet Location | | May 31, 2022 | | August 31, 2021 |
| | (Dollars in thousands) | | | | (Dollars in thousands) |
Other current assets | | $ | 19,596 | | | $ | 11,874 | | | Other current liabilities | | $ | 54,150 | | | $ | 1,001 | |
The following table presents the pretax losses recorded in other comprehensive income relating to cash flow hedges for the three and nine months ended May 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (Dollars in thousands) |
Commodity derivatives | | $ | (36,688) | | | $ | (7,590) | | | $ | (51,961) | | | $ | (7,700) | |
The following table presents the pretax (losses) gains relating to our existing cash flow hedges that were reclassified from accumulated other comprehensive loss into our Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended May 31, | | Nine Months Ended May 31, |
| Location of Gain | | 2022 | | 2021 | | 2022 | | 2021 |
| | | (Dollars in thousands) |
Commodity derivatives | Cost of goods sold | | $ | (5,482) | | | $ | 2,329 | | | $ | 12,777 | | | $ | 19,084 | |
Note 12 Fair Value Measurements
ASC Topic 820, Fair Value Measurement, defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
We determine fair values of derivative instruments and certain other assets based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. ASC Topic 820 describes three levels within its hierarchy that may be used to measure fair value. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs are unobservable inputs that are supported by little or no market activity for the assets or liabilities. Categorization within the valuation hierarchy is based on the lowest level of input significant to the fair value measurement.
Recurring fair value measurements as of May 31, 2022, and August 31, 2021, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| May 31, 2022 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (Dollars in thousands) |
Assets | | | | | | | |
Commodity derivatives | $ | 1,790 | | | $ | 779,973 | | | $ | — | | | $ | 781,763 | |
Foreign exchange derivatives | — | | | 114,804 | | | — | | | 114,804 | |
| | | | | | | |
Deferred compensation assets | 47,435 | | | — | | | — | | | 47,435 | |
| | | | | | | |
Embedded derivative asset | — | | | 13,545 | | | — | | | 13,545 | |
Segregated investments and marketable securities | 319,551 | | | — | | | — | | | 319,551 | |
Other assets | 5,965 | | | — | | | — | | | 5,965 | |
Total | $ | 374,741 | | | $ | 908,322 | | | $ | — | | | $ | 1,283,063 | |
Liabilities | | | | | | | |
Commodity derivatives | $ | 3,678 | | | $ | 660,134 | | | $ | — | | | $ | 663,812 | |
Foreign exchange derivatives | — | | | 15,454 | | | — | | | 15,454 | |
| | | | | | | |
Total | $ | 3,678 | | | $ | 675,588 | | | $ | — | | | $ | 679,266 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| August 31, 2021 |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| (Dollars in thousands) |
Assets | | | | | | | |
Commodity derivatives | $ | 2,453 | | | $ | 542,253 | | | $ | — | | | $ | 544,706 | |
Foreign exchange derivatives | — | | | 19,429 | | | — | | | 19,429 | |
| | | | | | | |
Deferred compensation assets | 51,940 | | | — | | | — | | | 51,940 | |
| | | | | | | |
Embedded derivative asset | — | | | 16,488 | | | — | | | 16,488 | |
Segregated investments and marketable securities | 99,837 | | | — | | | — | | | 99,837 | |
Other assets | 6,052 | | | — | | | — | | | 6,052 | |
Total | $ | 160,282 | | | $ | 578,170 | | | $ | — | | | $ | 738,452 | |
Liabilities | | | | | | | |
Commodity derivatives | $ | 1,615 | | | $ | 444,247 | | | $ | — | | | $ | 445,862 | |
Foreign exchange derivatives | — | | | 8,506 | | | — | | | 8,506 | |
| | | | | | | |
Total | $ | 1,615 | | | $ | 452,753 | | | $ | — | | | $ | 454,368 | |
Commodity and foreign exchange derivatives. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. Our forward commodity purchase and sales contracts with fixed-price components, select ocean freight contracts and other OTC derivatives are determined using inputs that are generally based on exchange-traded prices and/or recent market bids and offers, including location-specific adjustments, and are classified within Level 2. Location-specific inputs are driven by local market supply and demand and are generally based on broker or dealer quotations or market transactions in either listed or OTC markets. Changes in the fair values of these contracts are recognized in our Condensed Consolidated Statements of Operations as a component of cost of goods sold.
Deferred compensation and other assets. Our deferred compensation investments consist primarily of rabbi trust assets that are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1. Changes in the fair values of these other assets are primarily recognized in our Condensed Consolidated Statements of Operations as a component of marketing, general and administrative expenses.
Embedded derivative asset. The embedded derivative asset relates to contingent payments inherent to our investment in CF Nitrogen. The inputs used in the fair value measurement include the probability of future upgrades and downgrades of the credit rating of CF Industries based on historical credit rating movements of other public companies and the discount rates applied to potential annual payments based on applicable historical and current yield coupon rates. Based on these observable inputs, our fair value measurement is classified within Level 2. See Note 11, Derivative Financial Instruments and Hedging Activities, for additional information.
Segregated investments and marketable securities. Our segregated investments and marketable securities are comprised of investments in various government agencies and U.S. Treasury securities, which are valued using quoted market prices and classified within Level 1.
Note 13 Commitments and Contingencies
Environmental
We are required to comply with various environmental laws and regulations incidental to our normal business operations. To meet our compliance requirements, we establish reserves for future costs of remediation associated with identified issues that are both probable and can be reasonably estimated. Estimates of environmental costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regulations and are included in cost of goods sold and marketing, general and administrative expenses in our Condensed Consolidated Statements of Operations. Recoveries, if any, are recorded in the period in which recovery is received. Liabilities are monitored and adjusted as new facts or changes in law or technology occur. The resolution of any such matters may affect consolidated net income for any fiscal period; however, we currently believe any resulting liabilities, individually or in aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
Other Litigation and Claims
We are involved as a defendant in various lawsuits, claims and disputes, in the normal course of our business. The resolution of any such matters may affect net income for any fiscal period; however, we currently believe any resulting liabilities, individually or in aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
Guarantees
We are a guarantor for lines of credit and performance obligations of related, nonconsolidated companies. Our bank covenants allow maximum guarantees of $1.0 billion, of which $213.0 million were outstanding on May 31, 2022. 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 any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide these guarantees were current as of May 31, 2022.
Note 14 Other Current Assets and Liabilities
Other current assets and liabilities as of May 31, 2022, and August 31, 2021, are as follows: | | | | | | | | | | | |
| May 31, 2022 | | August 31, 2021 |
Other current assets | (Dollars in thousands) |
Derivative assets (Note 11) | $ | 880,836 | | | $ | 559,056 | |
Margin and related deposits | 425,943 | | | 336,397 | |
Supplier advance payments | 386,174 | | | 194,706 | |
Restricted cash | 170,837 | | | 129,325 | |
Other | 197,685 | | | 170,749 | |
Total other current assets | $ | 2,061,475 | | | $ | 1,390,233 | |
Other current liabilities | | | |
Customer margin deposits and credit balances | $ | 383,743 | | | $ | 269,114 | |
Customer advance payments | 771,540 | | | 439,293 | |
Derivative liabilities (Note 11) | 675,708 | | | 449,522 | |
Dividends and equity payable | 363,491 | | | 150,000 | |
Total other current liabilities | $ | 2,194,482 | | | $ | 1,307,929 | |