Energy segment fuels CHS earnings

by Eric Schroeder
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ST. PAUL, MINN. — Strong performance within the company’s energy segment propelled second-quarter net income at CHS Inc. to $275,086,000, up sharply from $78,470,000 in the same period a year ago.
Revenues also were higher, increasing 12% to $9,882,378,000 from $8,843,812,000.

The company’s Ag Business segment, which consists of CHS’s agronomy, grain marketing and retail operations, posted operating earnings of $66,379,000 in the second quarter of fiscal 2013, up 43% from $46,386,000 in the same period a year ago. Sales in the segment totaled $7,150,228,000, up 19% from $6,008,402,000 a year ago.

“Our grain marketing earnings decreased by $14.3 million during the three months ended Feb. 28, 2013, compared with the three months ended Feb. 29, 2012, primarily as a result of decreased volumes and margins,” CHS said in an April 3 filing with the Securities and Exchange Commission. “Our processing and food ingredients businesses experienced an increase in earnings of $8.6 million for the three months ended Feb. 28, 2013, compared to the same period of the previous year, primarily due to $5.5 million in acquisition costs related to our acquisition of Solbar during the three months ended Feb. 29, 2012, in addition to increased margins from our soybean crushing and refining businesses.”

The company’s share of earnings from its 50% ownership of Ventura Foods, L.L.C., a vegetable oil-based food manufacturing business, remained relatively flat during the second quarter, while those from its 24% share of Horizon Milling, L.L.C. increased $2.3 million, primarily due to improved margins. On March 4, CHS entered into a definitive agreement with Cargill and ConAgra Foods, Inc. to form Ardent Mills, a joint venture combining the North American flour milling operations of the three parent companies, with CHS holding a 12% interest. The transaction is expected to close in fiscal 2014.

Energy earnings in the second quarter of fiscal 2013 rose sharply to $268,752,000 from $58,851,000, while sales fell 4% to $2,815,736,000 from $2,918,852,000. CHS said that during the three months ended Feb. 28, 2013, the company suffered a net loss on the mark-to-market for its refinery margin hedges of $15.4 million compared with a net loss of $46.7 million during the same period of the previous year.

“Earnings in our transportation business improved, while our propane, renewable fuels marketing and lubricants businesses experienced decreased earnings during the three months ended Feb. 28, 2013, when compared to the same three-month period of the previous year,” CHS said. “We are subject to the renewable fuel standard (R.F.S.), which requires refiners to blend renewable fuels (e.g., ethanol, biodiesel) into their finished transportation fuels or purchase renewable energy credits, called RINs, in lieu of blending.

“The E.P.A. generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. We generate RINs in our marketing operations under the R.F.S., however it is not enough to meet the needs of our refining capacity and RINs must be purchased on the open market. Recently the price of RINs has been extremely volatile with prices increasing. As a result, the purchase of RINs could have a negative impact on our future refined fuels margins, the impact of which we are not able to estimate at this time.”

Net income at CHS in the six months ended Feb. 28 was a record $618,793,000, which compared with $494,678,000 in the same period a year ago. Revenues for the first half of fiscal 2013 totaled $21,592,316,000, up 16% from $18,577,971,000.

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