CHS 2014 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ...energy, grains and foods system innovatively linking producers to consumers. OUR MISSION To grow company profitability and stakeholder value. OUR VALUES At CHS, our values include a tradition of partnership and shared success. We build lasting and mutually rewarding customer relationships. We manage...

  • Page 3
    CONTENTS Leadership Letter Operations Report Financial Highlights Financial Report Board of Directors Executive Team Acknowledgements 2 6 26 28 66 69 70 The Erickson-McGrath family looks to CHS and Five Star Cooperative to drive the momentum that keeps the fifthgeneration Clear Lake, Iowa, farm ...

  • Page 4
    ... acquisitions, expansions and upgrades in our global energy, grains, fertilizer, food and food ingredients platforms. This includes the announcement just after the close of fiscal 2014 of what is by far the largest investment in CHS history: building a $3 billion nitrogen fertilizer plant at...

  • Page 5
    ..., Board of Directors CARL CASALE President and Chief Executive Officer Will CHS keep moving forward even as global economic clouds roll in to end one of the sunniest periods in agriculture history? We're confident the investments underway, opportunities we've identified and our financial strength...

  • Page 6
    DELIVERING THE ENERGY PROPANE SALES* "In farming, if you're not growing, you're standing still, and if you're standing still, you're slipping back. You'll look back in a year or two and say, 'We did the right thing,' by keeping up with equipment, keeping up with the community, being part of it." - ...

  • Page 7
    $24.9M IN PROPANE SUPPLY INVESTMENTS 2014 "Momentum is about keeping things rolling in the right direction, continuing to grow and finding new, innovative ways to produce as cost-effectively as possible," says Paul Kilian, a Prosser, Wash., producer. CHS 2014 5

  • Page 8
    ...CHS wholesale propane customers increase propane storage capacity through its purchase plan. CHS continues to invest in its petroleum refineries and related storage and distribution system. A new hydrogen plant and crude unit modifications will boost diesel production at the Laurel, Mont., refinery...

  • Page 9
    ... new vigor to this business. The new CHS Lubricants Technical Conference and an online training program educated energy specialists and sales teams about lubricant essentials. Cenex® retail brand and premium fuels growth continue to drive system momentum as CHS remains a rural energy leader. CHS...

  • Page 10
    ...® BRANDED RETAIL SITES ADDED "Moving forward, momentum will mean being able to adapt when it's time to go hard, like this year when our corn planting window was four days. In this world, you need a lot of support to keep your momentum going." - Steve McGrath, producer Clear Lake, Iowa 63 2014 50...

  • Page 11
    REFINED FUELS SALES GALLONS 3B 2014 2.6B GALLONS 2013 2012 2010 2011 Ongoing investments in the CHS energy system from refined fuels to propane to renewable fuels continue to add value in farm fields, homes and commercial businesses across rural America. CHS 2014 9

  • Page 12
    ...® Supports Communities 10K+ $280K since 2012 to winners PEOPLE HONORED IN FREE FUEL ENERGY INVESTMENTS Refinery coker (Laurel, Mont.) New refined fuels pipeline connection (Council Bluffs, Iowa) Refinery mild hydrocracker (Laurel, Mont.) New propane terminal (Glenwood, Minn.) New propane...

  • Page 13
    ... service. Renewable Fuels Marketing increased volume by 52 percent in 2014 with expanded domestic and global territory, enhanced customer service offerings and superior transportation options. CHS supports cellulosic ethanol production by U.S. companies and is exploring related lignin markets. A new...

  • Page 14
    DRIVING AG BUSINESS COUNTRIES WITH CHS LOCATIONS "Momentum is the drive inside to be successful, to achieve your goals and to find ways to do that while caring for others and our land. There's only so much land, and we want to take care of it." 25 2014 8 2010 - Janet Chambers, producer, Ionia, ...

  • Page 15
    ... FERTILIZER VOLUME IN GALLONS (CHS Crop Nutrients and Country Operations) 4M 2.5M 0.5M 2013 INCREASE 400% 2014 2015 (projected) Agronomist Heidi Morris of Bleyhl Farm Service, left, delivers agronomic advice that helps ensure best results for fruit grower Martin Pedroza, Grandview, Wash. CHS...

  • Page 16
    ... margins and revenues in a year with continued weather challenges and rapidly declining commodity prices, CHS expanded its ag businesses to add long-term value. Owners benefited from established customer relationships, backed by supply chain logistics and risk management that boost grain export...

  • Page 17
    ... corn. In South America, CHS is partial owner of an export terminal being built at Necochea, Argentina. It will provide access to the growing customer base in China and other markets in the Asia-Pacific region when it is operational in early calendar 2015. A new joint venture sunflower processing...

  • Page 18
    DRIVING AG BUSINESS CHS GLOBAL GRAIN ORIGINATION "Momentum is making sure we're caught up with speed and efficiency for growers, because farms keep getting bigger. We need to make sure our momentum is keeping up with them." NORTH AMERICA SOUTH AMERICA EUROPE - Rich Halsne, agronomist Five Star ...

  • Page 19
    ...EUROPE AFRICA SOUTH AMERICA NORTH AMERICA ASIA (includes Canada, Mexico, Central America, Caribbean) Hilger, Mont., grain and livestock producers Megan and Ryan Green count on CHS Central Montana for Payback® feed, agronomic advice and agronomy products. "As a producer, you don't have time to...

  • Page 20
    ... and other soy-based food ingredients continues to offer significant opportunity for growth. Doing business in more than 500 communities in the United States and Canada, CHS Country Operations had a record-breaking year for profitability. Excellent margins in grains, crop Proprietary liquid starter...

  • Page 21
    ... Operations added Canadian assets in April, acquiring 16 retail agronomy locations in Alberta and Saskatchewan from Crop Production Services (Canada), a subsidiary of Agrium, Inc. The new sites market crop nutrients warehoused at the Shelby, Mont., fertilizer plant. CHS Lake Region is building...

  • Page 22
    ..., general manager CHS Central Montana CHS CAPITAL COMMERCIAL LENDING (fiscal 2010-2014) 8 4 12 12 3 3 7 SHUTTLE FACILITIES NON-SHUTTLE EXPANSIONS FERTILIZER HUB PLANTS NON-HUB FERTILIZER PLANTS PROPANE ACQUISITIONS/ EXPANSIONS NEW FEED PLANTS/ UPGRADES RETAIL STORE PROJECTS 20 CHS 2014

  • Page 23
    ... NEW ACCOUNTS 2014 +$5M IN HEDGE LINE COMMITMENTS 2014 +20 CHS CAPITAL NEW PRODUCER LOANS 2014 Dairy farmer and Bleyhl Farm Service director Bill Scheenstra, who farms with his wife, Susan, near Sunnyside, Wash., says, "If you're not moving forward, you're moving backward. Buildings and equipment...

  • Page 24
    ...for member cooperatives and CHS Country Operations locations, including an advance payment bond program that protects producers from risk related to prepaid inputs and a property insurance program to protect co-op growth. New opportunities were realized through wholesale surety partnerships offered...

  • Page 25
    ... system combined to create new complexities in recruitment and retention of cooperative CEOs and managers. To build proficiency by cooperative managers and directors, provide access to industry experts and facilitate networking, Aligned Solutions held a record number of board retreats in 2014...

  • Page 26
    ...and supply planning and customer service functions also were refined, and the new Staying Sharp employee continuing education program was introduced to help the Ventura Foods team maintain its edge in a competitive market. The creation of Ardent Mills, the premier flour-milling joint venture between...

  • Page 27
    ... and wheat 2. Cooperative supplies propane to dry corn 3. Farmer sells corn to the co-op 4. CHS Capital, CHS Hedging and CHS Insurance provide financing and risk management services to farmers and cooperatives 5. Co-op sells corn to the ethanol plant 6. Ethanol plant produces ethanol, DDGS and corn...

  • Page 28
    ...$2.1 BILLION TOTAL CASH RETURN* $ in millions OWNER RETURN ON CHS EQUITY percent *Includes preferred stock and dividends 36.9 2011 40.6 2012 44.5 2013 42.7 2014 502.2 2010 961.4 2011 25.3 2010 1,260.6 2012 992.4 2013 1,081.4 2014 REVENUES $ in billions CHS NET INCOME $ in millions 26...

  • Page 29
    ...commodity prices, which affected borrowing and hedging activity. Earnings contributions to CHS for fiscal 2014 reached high marks for the company's 50 percent ownership of Ventura Foods, LLC, a vegetable-oil-based food manufacturing business, and its 12 percent share of Ardent Mills, a wheat milling...

  • Page 30
    ...Customer margin deposits and credit balances Customer advance payments Checks and drafts outstanding Accounts payable Derivative liabilities Accrued expenses Dividends and equities payable Total current liabilities Long-term debt Mandatorily redeemable noncontrolling interests Long-term deferred tax...

  • Page 31
    ... FINANCIAL STATEMENTS 5NOV201416072906 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Operating earnings (Gain) loss on investments Interest, net Equity (income) loss from investments Income before income taxes...

  • Page 32
    ... 2013 patronage refunds Redemptions of equities Equities issued Capital equity certificates exchanged for preferred stock Preferred stock dividends Distributions to noncontrolling interests Other, net Net income Other comprehensive income (loss), net of tax Estimated 2014 patronage refunds Estimated...

  • Page 33
    CONSOLIDATED FINANCIAL STATEMENTS PREFERRED STOCK ACCUMULATED OTHER COMPREHENSIVE LOSS CAPITAL RESERVES NONCONTROLLING INTERESTS TOTAL EQUITIES $ 319,368 $ (174,876) $ 1,075,474 674,678 (676,250) $ 349,...) (130,149) $ 1,190,177 $ (156,757) $ 1,598,660 $ 18,336 $ 6,466,844 CHS 2014 31

  • Page 34
    ... net cash provided by (used in) operating activities: Depreciation and amortization Amortization of deferred major repair costs (Income) loss from equity investments Distributions from equity investments Noncash patronage dividends received (Gain) loss on sale of property, plant and equipment (Gain...

  • Page 35
    ... Reset Rate Cumulative Redeemable Preferred Stock, Series 3 (Class B Series 3 Preferred Stock), which is listed on the NASDAQ under the symbol CHSCM. We buy commodities from and provide products and services to patrons (including member and other nonmember customers), both domestic and international...

  • Page 36
    ...we have significant ownership and influence, but not control, are accounted for in our consolidated financial statements using the equity method of accounting. Investments in other cooperatives are stated at cost, plus patronage dividends received in the form of capital stock and other 34 CHS 2014

  • Page 37
    ... outflows as operating activities. Revenue Recognition We provide a wide variety of products and services, from production agricultural inputs such as fuels, farm supplies and crop nutrients, to agricultural outputs that include grain and oilseed, processed grains and oilseeds and food products. We...

  • Page 38
    ... date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, ''Revenue from Contracts with Customers.'' ASU No. 2014...

  • Page 39
    ... combinations of mortgages, personal property, accounts and notes receivable, inventories and assignments of certain regional cooperative's capital stock. These loans are primarily originated in the states of Minnesota, Wisconsin and North Dakota. CHS Capital also has loans receivable from producer...

  • Page 40
    ...(Cargill) and were accounted for as equity method investments included in Corporate and Other. In our third quarter of fiscal 2014, we formed Ardent Mills LLC (Ardent Mills), a joint venture with Cargill and ConAgra Foods, Inc., which combines the North American flour milling operations of the three...

  • Page 41
    ...) Goodwill Customer lists, less accumulated amortization of $26,114 and $20,063, respectively Trademarks and other intangible assets, less accumulated amortization of $29,587 and $25,982, respectively Notes receivable Long-term receivable Prepaid pension and other benefits Capitalized major...

  • Page 42
    ...to pay principal under any commercial paper facility. On August 31, 2014 we had no commercial paper outstanding. Miscellaneous short-term notes payable totaled $0.3 million as of August 31, 2014. (b) Cofina Funding, LLC (Cofina Funding), a wholly-owned subsidiary of CHS Capital, has available credit...

  • Page 43
    ..., Derivative Financial Instruments and Hedging Activities for more information. (b) Other notes and contracts payable of $14.3 million were collateralized on August 31, 2014. As of August 31, 2014, the carrying value of our longterm debt approximated its fair value, based on quoted market prices of...

  • Page 44
    ....4 million and $88.1 million as of August 31, 2014, and 2013, respectively. During the year ended August 31, 2014, the valuation allowance for NCRA decreased by $8.0 million due to a change in the amount of state tax credits that are estimated to be utilized. NCRA's valuation allowance is necessary...

  • Page 45
    ... federal income tax rate State and local income taxes, net of federal income tax benefit Patronage earnings Domestic production activities deduction Export activities at rates other than the U.S. statutory rate Valuation allowance Tax credits Non-controlling interests Other Effective tax rate 35...

  • Page 46
    ...Stock accumulates dividends at a rate of 8% per year, which are payable quarterly. During the year ended August 31, 2013, we amended the terms of our 8% Preferred Stock to provide that it may not be redeemed at our option until July 18, 2023. On August 31, 2014, we had 18,071,363 shares of our Class...

  • Page 47
    ... loss, prior service credit and transition amounts as disclosed in Note 10, Benefit Plans. In February 2014, interest rate swaps, which were previously accounted for as cash flow hedges, were terminated as the issuance of the underlying debt was no longer probable. As a result, a $13.5 million...

  • Page 48
    ...employees may participate. We also have non-qualified supplemental executive and Board retirement plans. Financial information on changes in benefit obligation, plan assets funded and balance sheets status as of August 31, 2014 and 2013 is as follows: QUALIFIED PENSION BENEFITS... service cost (credit)...

  • Page 49
    ...capita cost of covered health care benefits was assumed for the year ended August 31, 2014. The rate was assumed to decrease gradually to 4.8% by 2026 and remain at that level thereafter. We provide defined life insurance and health care benefits for certain retired employees and Board of Directors...

  • Page 50
    ... international securities, short and long-term securities, growth and value equities, large and small cap stocks, as well as active and passive management styles. The committees believe that with prudent risk tolerance and asset diversification, the plans should be able to meet pension obligations...

  • Page 51
    ... STATEMENTS Our pension plans' fair value measurements at August 31, 2014 and 2013 are as follows: 2014 (DOLLARS IN THOUSANDS) LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Cash and cash equivalents Equities: Mutual funds Fixed income securities: Mutual funds Partnership and joint venture interests Other Total...

  • Page 52
    ... at the reporting date. The following tables set forth a summary of changes in the fair value of the plan's Level 3 assets for the years ended August 31, 2014 and 2013: 2014 (DOLLARS IN THOUSANDS) PARTNERSHIP AND JOINT REAL MUTUAL FUNDS VENTURE INTERESTS ESTATE FUNDS HEDGE FUNDS TOTAL Balances...

  • Page 53
    ... as part of the actuarial valuation of the plan and may change as a result of plan experience. In addition to the contributions to the Co-op Plan listed above, total contributions to individually insignificant multi-employer pension plans were immaterial in fiscal 2014, 2013 and 2012. CHS 2014 51

  • Page 54
    ... as a wholesaler and retailer of crop inputs. Corporate and Other primarily represents our non-consolidated wheat milling and packaged food joint ventures, as well as our business solutions operations, which consists of commodities hedging, insurance and financial services related to crop production...

  • Page 55
    ...31, 2014, 2013 and 2012 is as follows: (DOLLARS IN THOUSANDS) ENERGY AG CORPORATE RECONCILING AND OTHER AMOUNTS TOTAL For the year ended August 31, 2014: Revenues Cost of goods sold Gross profit Marketing, general and administrative Operating earnings (Gain) loss on investments Interest, net Equity...

  • Page 56
    ... in our Ag segment. The following table represents our product sales, based on the geographic locations in which the sales originated, for the years ended August 31, 2014, 2013 and 2012: (DOLLARS IN MILLIONS) 2014 2013 2012 North America South America Europe, the Middle East and Africa...

  • Page 57
    ... of loss on fixed or partially fixed price sales contracts in the event market prices increase. Our commodity contracts primarily relate to grain, oilseed, energy (crude, refined products and propane) and fertilizer commodities. Our freight contracts primarily relate to rail, barge and ocean freight...

  • Page 58
    ...and also a review by senior management if operating areas are outside of position limits. A similar process is used in energy and wholesale crop nutrients operations. Position limits are reviewed, at least annually, with management and the Board of Directors. We monitor current market conditions and...

  • Page 59
    ...hedge accounting and as a result, changes in fair value are recorded in earnings within interest, net in our Consolidated Statements of Operations. Long-term debt used to finance non-current assets carries various fixed interest rates and is payable at various dates to minimize the effects of market...

  • Page 60
    ... inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. These assets and liabilities include marketable inventories, interest rate swaps, forward commodity and freight purchase and sales contracts, flat price or basis...

  • Page 61
    ... and 2013 are as follows: 2014 QUOTED PRICES IN SIGNIFICANT ACTIVE MARKETS FOR SIGNIFICANT OTHER UNOBSERVABLE IDENTICAL ASSETS OBSERVABLE INPUTS INPUTS (LEVEL 1) (LEVEL 2) (LEVEL 3) (DOLLARS IN THOUSANDS) TOTAL Assets: Readily marketable inventories Commodity and freight derivatives Interest rate...

  • Page 62
    ... minimum contractual threshold that would require settlement with the counterparties quarterly adjusted volatility estimates derived from daily historical market data yield curves for U.S. Treasury securities the range in the number of years remaining related to each contingent payment 60 CHS 2014

  • Page 63
    ... produced at our Ashdod, Israel facility following one customer's report to us of a positive test result for salmonella in product purchased from us. We notified applicable food safety regulators, including the Israel Ministry of Health and the U.S. Food and Drug Administration, of both the positive...

  • Page 64
    ... to transfer funds in the future for fixed or minimum amounts or quantities of goods or services at fixed or minimum prices. Our long-term unconditional purchase obligations primarily relate to pipeline and grain handling take-or-pay and through-put agreements. Minimum future payments required under...

  • Page 65
    ... Income taxes Other significant noncash investing and financing transactions: Capital equity certificates redeemed with preferred stock Capital equity certificates issued in exchange for Ag acquisitions Accrual of dividends and equities payable Assets contributed to Ardent Mills joint venture 200...

  • Page 66
    ... grain origination opportunities and increase renewable fuels capacity. Additionally, we acquired the fertilizer business and assets of Terral RiverService, a transportation service company specializing in the bulk storage and handling of dry and liquid materials along the Mississippi River system...

  • Page 67
    ... our Ag segment. Report of independent registered public accounting firm To the Board of Directors and Members and Patrons of CHS Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of changes in equities...

  • Page 68
    ... chair, Executive Committee; former secretary-treasurer _Represents CHS on the Quentin Burdick Center for Cooperatives; member, Rugby Farmers Union Elevator; former member, Harvest States Wheat Milling Defined Member Board, North Central Experiment Station Board of Visitors, North Dakota Farm and...

  • Page 69
    ..., Minn.; elected 2013 _Member, Capital and CHS Foundation Finance and Investment committees; former member and chairman, CHS Annual Meeting Resolutions Committee _Chairman, River Region Co-op; former chairman, Southern Minnesota Co-op Directors' Association; former secretary, Minnesota State Co-op...

  • Page 70
    ..., Government Relations and Capital committees; former assistant secretary-treasurer _Former board member, American Coalition for Ethanol; former board member and chairman, Full Circle Ag and Northern Electric Cooperative _B.S., agriculture, South Dakota State University _Partner in family farming...

  • Page 71
    ..._Leads CHS energy operations, including refineries, pipelines and terminals; refined fuels, propane, lubricants; processing and food ingredients _Chairman, National Cooperative Refinery Association board Chairman, Ventura Foods, LLC _B.S., economics, University of North Dakota; M.B.A., University of...

  • Page 72
    ... Rocque Fairbanks, Geraldine, Mont. Photography David Lundquist Printing GLS Companies, Brooklyn Park, Minn. Design Colle+McVoy, Minneapolis, Minn. Washington: Greg Robertson, Heidi Morris, Don Waddle, Mike Zavola and the Bleyhl Farm Service team; Archie den Hoed and Martin Pedroza, Grandview, Wash...

  • Page 73
    5500 Cenex Drive Inver Grove Heights, MN 55077 651-355-6000 chsinc.com NASDAQ: CHSCP, CHSCO, CHSCN, CHSCM