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As filed with the Securities and Exchange Commission on February 14, 2008
Registration No. 333-148091
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Amendment No. 1
to
Form S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
CHS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
     
Minnesota   41-0251095
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
5150
(Primary Standard Industrial Classification Code Number)
 
     
5500 Cenex DriveInver Grove Heights, Minnesota 55077(651) 355-6000(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
  David KastelicSenior Vice President and General CounselCHS Inc.5500 Cenex DriveInver Grove Heights, Minnesota 55077(651) 355-3712Fax (651) 355-4554
    (Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
 
David P. Swanson
Michael W. Clausman
Dorsey & Whitney LLP
50 South Sixth Street
Minneapolis, Minnesota 55402
(612) 340-2600
Fax (612) 340-8738
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o     Accelerated filer  o     Non-accelerated filer  þ   Smaller reporting company o
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
      Aggregate Offering
    Registration Fee
Title of Each Class of Securities to be Registered     Price     (1)
8% Cumulative Redeemable Preferred Stock
    $46,363,888     $1,430.29
             
 
(1) Of this amount, the Registrant previously paid $1,398.66 as a registration fee with this Registration Statement on Form S-1, Registration Number 333-148091, filed on December 14, 2007.
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a) of the Securities Act, may determine.
 


 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION DATED FEBRUARY 14, 2008
 
PROSPECTUS
1,807,559  Shares
 
(CHS LOGO)
 
CHS Inc.
 
8%  Cumulative Redeemable Preferred Stock
 
We are issuing 1,807,559 shares of our 8% Cumulative Redeemable Preferred Stock to redeem $46,363,888 of our “patrons’ equities.” The shares will be issued to redeem our outstanding patrons’ equities on a pro rata basis. Subject to the exceptions described below in “Plan of Distribution,” shares of preferred stock issued in redemption of the patrons’ equities will be issued only to non-individual active members who have conducted business with us during the past five years and whose pro rata share of the redemption amount is equal to or greater than $500. For each member eligible to receive such preferred stock, shares will be issued only in a number that does not exceed 18,100 shares of preferred stock (which equals one-quarter of one percent (0.25%) of our total shares of preferred stock outstanding as of the end of the 2007 calendar year). See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of patrons’ equities and our annual pro rata redemptions of patrons’ equities. The amount of patrons’ equities that will be redeemed with each share of preferred stock issued will be 25.65, which is the greater of $25.28 (equal to the $25.00 liquidation preference per share of preferred stock plus $0.28 of accumulated dividends from and including January 1, 2008 to and including February 19, 2008) or the closing price for one share of the preferred stock on February 11, 2008. There will not be any cash proceeds from the issuance of the preferred stock. However, by issuing shares of preferred stock in redemption of patrons’ equities, we will make the cash that we would otherwise have used to redeem those patrons’ equities available for working capital purposes.
 
Holders of the preferred stock are entitled to receive cash dividends at the rate of $2.00 per share per year. Dividends are payable quarterly in arrears when, as and if declared on March 31, June 30, September 30 and December 31 of each year (each, a “payment date”), except that if a payment date is a Saturday, Sunday or legal holiday, the dividend is paid without interest on the next day that is not a Saturday, Sunday or legal holiday. Dividends payable on the preferred stock are cumulative. The preferred stock is subject to redemption and has the preferences described in this prospectus. The preferred stock is not convertible into any of our other securities and is non-voting except in certain limited circumstances.
 
The preferred stock is traded on The NASDAQ Global Select Market under the trading symbol “CHSCP.” On February 11, 2008, the closing price of the preferred stock was $25.65 per share.
 
Ownership of our preferred stock involves risks.  See “Risk Factors” beginning on page 9.
 
We expect to issue the preferred stock on or about February 19, 2008.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
CHS Inc.
 
5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-6000
 
The date of this prospectus is February   , 2008.


 

 
TABLE OF CONTENTS
 
         
    Page
 
IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
       
PROSPECTUS SUMMARY
    1  
RISK FACTORS
    9  
USE OF PROCEEDS
    14  
BUSINESS
    15  
ENERGY
    16  
AG BUSINESS
    20  
PROCESSING
    25  
CORPORATE AND OTHER
    28  
PRICE RISK AND HEDGING
    29  
EMPLOYEES
    29  
LEGAL PROCEEDINGS
    30  
PROPERTIES
    30  
MEMBERSHIP IN CHS AND AUTHORIZED CAPITAL
    33  
SELECTED CONSOLIDATED FINANCIAL DATA
    36  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    40  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    71  
MANAGEMENT
    72  
DESCRIPTION OF THE PREFERRED STOCK
    72  
COMPARISON OF RIGHTS OF HOLDERS OF PATRONS’ EQUITIES AND RIGHTS OF HOLDERS OF PREFERRED STOCK
    77  
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
    78  
PLAN OF DISTRIBUTION
    81  
LEGAL MATTERS
    82  
EXPERTS
    82  
WHERE YOU CAN FIND MORE INFORMATION
    82  
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
    83  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC
    F-i  
 
IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
 
You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized any other person to provide you with different or additional information. This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates. We are not making an offer of these securities in any state where the offer is not permitted. The information in this prospectus is current as of the date on the front of this prospectus.
 
References in this prospectus, and the documents incorporated by reference in this prospectus, to “CHS,” “CHS Cooperatives,” “Cenex Harvest States Cooperatives,” the “Company,” “we,” “our” and “us” refer to CHS Inc., a Minnesota cooperative corporation, and its subsidiaries. We maintain a web site at http://www.chsinc.com. Information contained in our website does not constitute part of this prospectus.
 
All references to “preferred stock” in this prospectus are to our 8% Cumulative Redeemable Preferred Stock unless the context requires otherwise.


 

 
PROSPECTUS SUMMARY
 
The following summary highlights information we present in greater detail elsewhere in this prospectus and in the information incorporated by reference in it. This summary may not contain all of the information that is important to you and you should carefully consider all of the information contained or incorporated by reference in this prospectus. This prospectus contains forward-looking statements that are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. These factors include those listed under “Risk Factors” and elsewhere in this prospectus.
 
CHS Inc.
 
CHS Inc. (referred to herein as “CHS,” “we” or “us”) is one of the nation’s leading integrated agricultural companies. As a cooperative, we are owned by farmers and ranchers and their member cooperatives (referred to herein as “members”) from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock, which is listed on the NASDAQ Global Select Market under the symbol CHSCP. On November 30, 2007, we had 7,240,221 shares of preferred stock outstanding. We buy commodities from and provide products and services to patrons (including our members and other non-member customers), both domestic and international. 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 grains and oilseeds, grain and oilseed processing and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those entities is included as a component in our net income under the equity method of accounting. For the fiscal year ended August 31, 2007, our total revenues were $17.2 billion and net income was $756.7 million.
 
We operate three business segments: Energy, Ag Business and Processing. Together, our three business segments create vertical integration to link producers with consumers. Our Energy segment derives its revenues through refining, wholesaling, marketing and retailing of petroleum products. Our Ag Business segment derives its revenues through the origination and marketing of grain, including service activities conducted at export terminals, through the retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies, and records equity income from investments in our agronomy joint ventures, grain export joint ventures and other investments. As of September 2007, our Ag Business segment revenues also include sales of crop nutrient products due to the acquisition of that business from our Agriliance LLC joint venture. Our Processing segment derives its revenues from the sales of soybean meal and soybean refined oil, and records equity income from wheat milling joint ventures, a vegetable oil-based food manufacturing and distribution joint venture, and an ethanol manufacturing company. We include other business operations in Corporate and Other because of the nature of their products and services, as well as the relative revenue size of those businesses. These businesses primarily include our insurance, hedging and other service activities related to crop production.
 
In May 2005, we sold the majority of our Mexican foods business for proceeds of $38.3 million resulting in a loss on disposition of $6.2 million. During the year ended August 31, 2006, we sold all of the remaining assets for proceeds of $4.2 million and a gain of $1.6 million.
 
Membership in CHS is restricted to certain producers of agricultural products and to associations of producers of agricultural products that are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended. Our Board of Directors may establish other qualifications for membership, as it may from time to time deem advisable.
 
Our earnings from cooperative business are allocated to members (and to a limited extent to non-members with which we have agreed to do business on a patronage basis) based on the volume of business they do with us. We allocate these earnings to our patrons in the form of patronage refunds (which are also called patronage dividends) in cash and patron’s equities, which may be redeemed over time. Earnings derived from non-members, which are not allocated patronage, are taxed at federal and state statutory corporate rates and are retained by us as unallocated capital reserve. We also receive patronage refunds from the cooperatives in


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which we are a member, if those cooperatives have earnings to distribute and if we qualify for patronage refunds from them.
 
Our origins date back to the early 1930s with the founding of the predecessor companies of Cenex, Inc. and Harvest States Cooperatives. CHS Inc. emerged as the result of the merger of those two entities in 1998, and is headquartered in Inver Grove Heights, Minnesota.
 
Energy
 
We are the nation’s largest cooperative energy company based on revenues and identifiable assets, with operations that include petroleum refining and pipelines; the supply, marketing (including ethanol and biodiesel) and distribution of refined fuels (gasoline, diesel and other energy products); the blending, sale and distribution of lubricants; and the wholesale supply of propane. Our Energy segment processes crude oil into refined petroleum products at refineries in Laurel, Montana (wholly-owned) and McPherson, Kansas (an entity in which we have an approximate 74.5% ownership interest) and sells those products under the Cenex® brand to member cooperatives and others through a network of approximately 1,600 independent retail sites, including approximately 850 that operate Cenex/Ampride convenience stores.
 
Ag Business
 
Agronomy.  Through our fiscal year ended August 31, 2007, we conducted our wholesale and some of our retail agronomy operations through our 50% ownership interest in Agriliance LLC (Agriliance), in which Land O’Lakes, Inc. (Land O’Lakes) holds the other 50% ownership interest. Prior to September 2007, Agriliance was one of North America’s largest wholesale distributors of crop nutrients, crop protection products and other agronomy products based upon annual sales. Our 50% ownership interest in Agriliance is treated as an equity method investment, and therefore, Agriliance’s revenues and expenses are not reflected in our operating results. At November 30, 2007, our equity investment in Agriliance was $145.6 million.
 
In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail business. We currently are exploring, with Land O’Lakes, the repositioning options for the remaining portions of the Agriliance retail distribution business. During the three months ended November 30, 2007, we contributed $230.0 million to Agriliance to support their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets.
 
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, we were each entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O’Lakes owed us $133.5 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance’s debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made a true-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during our current fiscal year.
 
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Preliminary values assigned to the net assets as of September 1, 2007 totaled $268.7 million.
 
In August 2005, we sold 81% of our 20% ownership interest in CF Industries, Inc., a crop nutrients manufacturer and distributor, in an initial public offering (IPO). After the IPO, our ownership interest was reduced to approximately 3.9% in the post-IPO company named CF Industries Holdings, Inc. (CF). During our fiscal year ended August 31, 2007, we sold 540,000 shares of our CF stock for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million. During the first quarter of fiscal 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million.


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There is significant seasonality in the sale of agronomy products and services, with peak activity coinciding with the planting and input seasons.
 
Country Operations.  Our country operations business purchases a variety of grains from our producer members and other third parties, and provides cooperative members and producers with access to a full range of products and services including farm supplies and programs for crop and livestock production. Country operations operates at 335 locations, which includes 3 sunflower plants, dispersed throughout Minnesota, North Dakota, South Dakota, Montana, Nebraska, Kansas, Oklahoma, Colorado, Idaho, Washington and Oregon. Most of these locations purchase grain from farmers and sell agronomy products, energy products and feed to those same producers and others, although not all locations provide every product and service.
 
Grain Marketing.  We are the nation’s largest cooperative marketer of grain and oilseed based on grain storage capacity and grain sales, handling about 1.5 billion bushels annually. During fiscal 2007, we purchased approximately 60% of our total grain volumes from individual and cooperative association members and our country operations business, with the balance purchased from third parties. We arrange for the transportation of the grains either directly to customers or to our owned or leased grain terminals and elevators awaiting delivery to domestic and foreign purchasers. We primarily conduct our grain marketing operations directly, but do conduct some of our business through joint ventures.
 
Processing
 
Our Processing segment converts raw agricultural commodities into ingredients for finished food products or into finished consumer food products. We have focused on areas that allow us to utilize the products supplied by our member producers. These areas are oilseed processing and our joint ventures in wheat milling, foods and renewable fuels.
 
The Issuance
 
We are issuing 1,807,559 shares of our 8% Cumulative Redeemable Preferred Stock to redeem $46,363,888 of our “patrons’ equities.” The shares will be issued to redeem our outstanding patrons’ equities on a pro rata basis. Subject to the exceptions described below in “Plan of Distribution,” shares of preferred stock issued in redemption of the patrons’ equities will be issued only to non-individual active members who have conducted business with us during the past five years and whose pro rata share of the redemption amount is equal to or greater than $500. For each member eligible to receive such preferred stock, shares will be issued only in a number that does not exceed 18,100 shares of preferred stock (which equals one-quarter of one percent (0.25%) of our total shares of preferred stock outstanding as of December 31, 2007). See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of patrons’ equities and our annual pro rata redemptions of patrons’ equities. The amount of patrons’ equities that will be redeemed with each share of preferred stock issued will be $25.65, which is the greater of $25.28 (equal to the $25.00 liquidation preference per share of preferred stock plus $0.28 of accumulated dividends from and including January 1, 2008 to and including February 19, 2008) or the closing price for one share of the preferred stock on The NASDAQ Global Select Market on February 11, 2008. There will not be any cash proceeds from the issuance of the preferred stock. However, by issuing shares of preferred stock in redemption of patrons’ equities, we will make the cash that we would otherwise have used to redeem those patrons’ equities available for working capital purposes.


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Terms of the Preferred Stock
 
Dividends Holders of the preferred stock (which include both members and non-member third parties) are entitled to receive cash dividends at the rate of $2.00 per share per year when, as and if declared by our board of directors. Dividends are cumulative and are payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year (each, a “payment date”), except that if a payment date is a Saturday, Sunday or legal holiday, the dividend is paid without interest on the next day that is not a Saturday, Sunday or legal holiday.
 
Liquidation Rights In the event of our liquidation, holders of the preferred stock are entitled to receive $25.00 per share plus all dividends accumulated and unpaid on the shares to and including the date of liquidation, subject, however, to the rights of any of our securities that rank senior or on parity with the preferred stock.
 
Rank As to payment of dividends and as to distributions of assets upon the liquidation, dissolution or winding up of CHS, whether voluntary or involuntary, the preferred stock ranks prior to:
 
• any patronage refund;
 
• any other class or series of our capital stock designated by our board of directors as junior to the preferred stock; and
 
• our common stock, if any.
 
Shares of any class or series of our capital stock that are not junior to the preferred stock, rank equally with the preferred stock as to the payment of dividends and the distribution of assets.
 
Redemption at our Option We have not redeemed any of our preferred stock. From and after February 1, 2008, we may, at our option, at any time, redeem the preferred stock, in whole or from time to time in part, for cash at a price of $25.00 per share plus all dividends accumulated and unpaid on that share to and including the date of redemption. We have no current plan or intention to redeem the preferred stock.
 
Redemption at the Holder’s Option In the event of a change in control initiated by our board of directors, holders of the preferred stock will have the right, for a period of 90 days from the date of the change in control, to require us to repurchase their shares of preferred stock at a price of $25.00 per share plus all dividends accumulated and unpaid on that share to and including the date of redemption. “Change in control” is defined in “Description of the Preferred Stock-Redemption at the Holder’s Option.”
 
No Exchange or Conversion Rights, No Sinking Fund
The preferred stock is not exchangeable for or convertible into any other shares of our capital stock or any other securities or property. The preferred stock is not subject to the operation of any purchase, retirement or sinking fund.


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Voting Rights Holders of the preferred stock do not have voting rights, except as required by applicable law; provided, that the affirmative vote of two-thirds of the outstanding preferred stock will be required to approve:
 
• any amendment to our articles of incorporation or the resolutions establishing the terms of the preferred stock if the amendment adversely affects the rights or preferences of the preferred stock; or
 
• the creation of any class or series of equity securities having rights senior to the preferred stock as to the payment of dividends or distribution of assets upon the liquidation, dissolution or winding up of CHS.
 
No Preemptive Rights Holders of the preferred stock have no preemptive right to acquire shares of any class or series of our capital stock.
 
Trading The preferred stock is listed on The NASDAQ Global Select Market under the symbol “CHSCP.”
 
Comparison of Rights Holders of the preferred stock have different rights from those of holders of patrons’ equities. See “Comparison of Rights of Holders of Patrons’ Equities and Rights of Holders of Preferred Stock.”
 
Risk Factors Ownership of our preferred stock involves risks. See “Risk Factors” beginning on page 9.


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Summary Selected Consolidated Financial Data
 
The selected consolidated financial data below has been derived from our consolidated financial statements for the periods indicated below. The selected consolidated financial data for August 31, 2007, 2006 and 2005 and for the three months ended November 30, 2007 and 2006 should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this filing. In May 2005, we sold the majority of our Mexican foods business and have recorded the Mexican foods business as discontinued operations. In the opinion of our management, the unaudited historical financial data were prepared on the same basis as the audited historical financial data and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of this information. Results of operations for the three-month periods are not necessarily indicative of results of operations that may be expected for the full fiscal year.
 
Summary Consolidated Financial Data
 
                                                         
    Three Months Ended
       
    November 30     Years Ended August 31  
    2007     2006(1)     2007(1)     2006(1)     2005(1)     2004(1)     2003(1)  
    (unaudited)     (unaudited)                                
    (Dollars in thousands)  
 
Income Statement Data:
                                                       
Revenues
  $ 6,525,386     $ 3,751,070     $ 17,215,992     $ 14,383,835     $ 11,926,962     $ 10,969,081     $ 9,314,116  
Cost of goods sold
    6,210,749       3,528,636       16,129,233       13,540,285       11,438,473       10,525,746       8,985,066  
                                                         
Gross profit
    314,637       222,434       1,086,759       843,550       488,489       443,335       329,050  
Marketing, general and administrative
    66,459       52,102       245,357       231,238       199,354       202,455       175,662  
                                                         
Operating earnings
    248,178       170,332       841,402       612,312       289,135       240,880       153,388  
Gain on investments
    (94,948 )     (5,348 )     (20,616 )             (13,013 )     (14,666 )        
Gain on legal settlements
                                            (692 )     (10,867 )
Interest, net
    13,537       7,688       31,098       41,305       41,509       42,758       40,516  
Equity income from investments
    (31,190 )     (4,531 )     (109,685 )     (84,188 )     (95,742 )     (79,022 )     (47,299 )
Minority interests
    22,979       18,912       143,214       91,079       49,825       34,184       22,099  
                                                         
Income from continuing operations before income taxes
    337,800       153,611       797,391       564,116       306,556       258,318       148,939  
Income taxes
    36,900       17,232       40,668       59,350       34,153       30,108       17,530  
                                                         
Income from continuing operations
    300,900       136,379       756,723       504,766       272,403       228,210       131,409  
(Income) loss on discontinued operations, net of taxes
                            (625 )     16,810       5,909       5,232  
                                                         
Net income
  $ 300,900     $ 136,379     $ 756,723     $ 505,391     $ 255,593     $ 222,301     $ 126,177  
                                                         
Balance Sheet Data (at end of period):
                                                       
Working capital
  $ 1,265,415     $ 843,240     $ 821,878     $ 848,344     $ 766,807     $ 500,315     $ 469,758  
Net property, plant and equipment
    1,836,372       1,525,028       1,728,171       1,476,239       1,359,535       1,249,655       1,122,982  
Total assets
    8,438,759       5,550,481       6,754,373       4,994,166       4,748,654       4,047,710       3,821,386  
Long-term debt, including current maturities
    1,071,514       727,199       688,321       744,745       773,074       683,818       663,173  
Total equities
    2,602,172       2,162,248       2,475,455       2,053,466       1,778,879       1,643,491       1,496,147  
Ratio of earnings to fixed charges and preferred dividends(2)
    11.5x       9.8x       10.1x       8.2x       4.7x       4.5x       3.3x  
 
 
 
(1) Adjusted to reflect adoption of Financial Accounting Standards Board (FASB) Staff Position No. AUG AIR-1; see “Change in Accounting Principle — Turnarounds.”
 
(2) For purposes of computing the ratio of earnings to fixed charges and preferred dividends, earnings consist of income from continuing operations before income taxes on consolidated operations, distributed income


6


 

from equity investees and fixed charges. Fixed charges consist of interest expense and one-third of rental expense, considered representative of that portion of rental expense estimated to be attributable to interest.
 
Change in Accounting Principle — Turnarounds
 
During the first fiscal quarter of 2008, we changed our accounting method for the costs of turnarounds from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to FASB Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The comparative financial statements for the three months ended November 30, 2006 and the years ended August 31, 2007, 2006, 2005, 2004 and 2003 have been adjusted to apply the new method retrospectively. These deferred costs are included in our Consolidated Balance Sheets in other assets. The amortization expenses are included in cost of goods sold in our Consolidated Statements of Operations. The following consolidated financial statement line items included in the Summary Selected Consolidated Financial Data were affected by this change in accounting principle.
 
                                                 
    As of and For the Three Months Ended
    As of and For The Year Ended
 
    November 30, 2006     August 31, 2007  
    As
    FSP AUG
          As
    FSP AUG
       
    Previously
    AIR-1
    As
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted     Reported     Adjustment     Adjusted  
 
Consolidated Balance Sheets
                                               
Other current assets
  $ 600,990     $ (7,649 )   $ 593,341                          
Other assets
    237,553       46,636       284,189     $ 147,965     $ 60,787     $ 208,752  
Accrued expenses
    410,433       (22,698 )     387,735       439,084       (6,244 )     432,840  
Other liabilities
    355,452       18,957       374,409       359,198       18,010       377,208  
Minority interests in subsidiaries
    156,870       6,556       163,426       190,830       6,556       197,386  
Equities
    2,126,076       36,172       2,162,248       2,432,990       42,465       2,475,455  
Consolidated Statements of Operations
                                               
Cost of goods sold
  $ 3,528,794     $ (158 )   $ 3,528,636     $ 16,139,691     $ (10,458 )   $ 16,129,233  
Income before income taxes
    153,453       158       153,611       786,933       10,458       797,391  
Income taxes
    17,171       61       17,232       36,600       4,068       40,668  
Net income
    136,282       97       136,379       750,333       6,390       756,723  
 


7


 

                                                 
    As of and For The Year Ended
    As of and For The Year Ended
 
    August 31, 2006     August 31, 2005  
    As
    FSP AUG
          As
    FSP AUG
       
    Previously
    AIR-1
    As
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted     Reported     Adjustment     Adjusted  
 
Consolidated Balance Sheets
                                               
Other assets
  $ 223,474     $ 51,583     $ 275,057     $ 229,940     $ 21,717     $ 251,657  
Accrued expenses
    347,078       (19,390 )     327,688       397,044       (8,104 )     388,940  
Other liabilities
    310,157       28,342       338,499       229,322       5,316       234,638  
Minority interests in subsidiaries
    141,375       6,556       147,931       144,195       3,523       147,718  
Equities
    2,017,391       36,075       2,053,466       1,757,897       20,982       1,778,879  
Consolidated Statements of Operations
                                               
Cost of goods sold
  $ 13,570,507     $ (30,222 )   $ 13,540,285     $ 11,449,858     $ (11,385 )   $ 11,438,473  
Minority interests
    85,974       5,105       91,079       47,736       2,089       49,825  
Income from continuing operations before income taxes
    538,999       25,117       564,116       297,260       9,296       306,556  
Income taxes
    49,327       10,023       59,350       30,434       3,719       34,153  
Net income
    490,297       15,094       505,391       250,016       5,577       255,593  
 
                                                 
    As of and For The Year Ended
    As of and For The Year Ended
 
    August 31, 2004     August 31, 2003  
    As
    FSP AUG
          As
    FSP AUG
       
    Previously
    AIR-1
    As
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted     Reported     Adjustment     Adjusted  
 
Consolidated Balance Sheets
                                               
Other assets
  $ 237,117     $ 16,418     $ 253,535     $ 239,520     $ 13,418     $ 252,938  
Accrued expenses
    305,650       (6,875 )     298,775       254,415       (11,020 )     243,395  
Other liabilities
    148,526       5,606       154,132       111,555       7,930       119,485  
Minority interests in subsidiaries
    130,715       2,282       132,997       112,645       2,072       114,717  
Equities
    1,628,086       15,405       1,643,491       1,481,711       14,436       1,496,147  
Consolidated Statements of Operations
                                               
Cost of goods sold
  $ 10,527,715     $ (1,969 )   $ 10,525,746     $ 8,989,050     $ (3,984 )   $ 8,985,066  
Minority interests
    33,830       354       34,184       21,950       149       22,099  
Income from continuing operations before income taxes
    256,703       1,615       258,318       145,104       3,835       148,939  
Income taxes
    29,462       646       30,108       16,031       1,499       17,530  
Net income
    221,332       969       222,301       123,841       2,336       126,177  

8


 

 
RISK FACTORS
 
You should be aware that ownership of our preferred stock involves risks. In consultation with your own financial and legal advisers, you should carefully consider the following discussion of risks that we believe to be significant, together with the other information contained or incorporated by reference in this prospectus, including the section entitled “Special Note Regarding Forward-Looking Statements” and our consolidated financial statements and the notes to them. The value of any preferred stock that you own may decline and you could lose the entire value of your preferred stock.
 
Risks Related to our Operations
 
Our revenues and operating results could be adversely affected by changes in commodity prices.
 
Our revenues, earnings and cash flows are affected by market prices for commodities such as crude oil, natural gas, grain, oilseeds, flour, and crude and refined vegetable oil. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, disease, insect damage, drought, the availability and adequacy of supply, government regulation and policies, and general political and economic conditions. We are also exposed to fluctuating commodity prices as the result of our inventories of commodities, typically grain and petroleum products, and purchase and sale contracts at fixed or partially fixed prices. At any time, our inventory levels and unfulfilled fixed or partially fixed price contract obligations may be substantial. Increases in market prices for commodities that we purchase without a corresponding increase in the prices of our products or our sales volume or a decrease in our other operating expenses could reduce our revenues and net income.
 
In our energy operations, profitability depends largely on the margin between the cost of crude oil that we refine and the selling prices that we obtain for our refined products. Although the prices for crude oil reached historical highs during 2007, the prices for both crude oil and for gasoline, diesel fuel and other refined petroleum products fluctuate widely. Factors influencing these prices, many of which are beyond our control, include:
 
  •  levels of worldwide and domestic supplies;
 
  •  capacities of domestic and foreign refineries;
 
  •  the ability of the members of OPEC to agree to and maintain oil price and production controls, and the price and level of foreign imports;
 
  •  disruption in supply;
 
  •  political instability or armed conflict in oil-producing regions; the level of consumer demand;
 
  •  the price and availability of alternative fuels;
 
  •  the availability of pipeline capacity; and
 
  •  domestic and foreign governmental regulations and taxes.
 
The long-term effects of these and other conditions on the prices of crude oil and refined petroleum products are uncertain and ever-changing. Increases in crude oil prices without a corresponding increase in the prices of our refined petroleum products could reduce our net income. Accordingly, we expect our margins on and the profitability of our energy business to fluctuate, possibly significantly, over time.
 
Our operating results could be adversely affected if our members were to do business with others rather than with us.
 
  We do not have an exclusive relationship with our members and our members are not obligated to supply us with their products or purchase products from us. Our members often have a variety of distribution outlets and product sources available to them. If our members were to sell their products to other purchasers or purchase products from other sellers, our revenues would decline and our results of operations could be adversely affected.


9


 

We participate in highly competitive business markets in which we may not be able to continue to compete successfully.
 
  We operate in several highly competitive business segments and our competitors may succeed in developing new or enhanced products that are better than ours, and may be more successful in marketing and selling their products than we are with ours. Competitive factors include price, service level, proximity to markets, product quality and marketing. In some of our business segments, such as Energy, we compete with companies that are larger, better known and have greater marketing, financial, personnel and other resources. As a result, we may not be able to continue to compete successfully with our competitors.
 
Changes in federal income tax laws or in our tax status could increase our tax liability and reduce our net income.
 
  Current federal income tax laws, regulations and interpretations regarding the taxation of cooperatives, which allow us to exclude income generated through business with or for a member (patronage income) from our taxable income, could be changed. If this occurred, or if in the future we were not eligible to be taxed as a cooperative, our tax liability would significantly increase and our net income significantly decrease.
 
We incur significant costs in complying with applicable laws and regulations. Any failure to make the capital investments necessary to comply with these laws and regulations could expose us to financial liability.
 
  We are subject to numerous federal, state and local provisions regulating our business and operations and we incur and expect to incur significant capital and operating expenses to comply with these laws and regulations. We may be unable to pass on those expenses to customers without experiencing volume and margin losses. For example, capital expenditures for upgrading our refineries, largely to comply with regulations requiring the reduction of sulfur levels in refined petroleum products, were completed in fiscal year 2006. We incurred capital expenditures from fiscal years 2003 through 2006 related to these upgrades of $88.1 million for our Laurel, Montana refinery and $328.7 million for the National Cooperative Refinery Association’s (NCRA) McPherson, Kansas refinery.
 
We establish reserves for the future cost of known compliance obligations, such as remediation of identified environmental issues. However, these reserves may prove inadequate to meet our actual liability. Moreover, amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of currently unknown compliance issues may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. Furthermore, our failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, civil remedies including fines and injunctions, and recalls of our products.
 
Environmental liabilities could adversely affect our results and financial condition.
 
  Many of our current and former facilities have been in operation for many years and, over that time, we and other operators of those facilities have generated, used, stored and disposed of substances or wastes that are or might be considered hazardous under applicable environmental laws, including chemicals and fuels stored in underground and above-ground tanks. Any past or future actions in violation of applicable environmental laws could subject us to administrative penalties, fines and injunctions. Moreover, future or unknown past releases of hazardous substances could subject us to private lawsuits claiming damages and to adverse publicity. Liabilities, including legal costs, related to remediation of contaminated properties are not recognized until the related costs are considered probable and can be reasonably estimated.
 
Actual or perceived quality, safety or health risks associated with our products could subject us to liability and damage our business and reputation.
 
  If any of our food or feed products became adulterated or misbranded, we would need to recall those items and could experience product liability claims if consumers were injured as a result. A widespread product recall or a significant product liability judgment could cause our products to be unavailable for a period of time or a loss of consumer confidence in our products. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused


10


 

illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. In addition, general public perceptions regarding the quality, safety or health risks associated with particular food or feed products, such as concerns regarding genetically modified crops, could reduce demand and prices for some of the products associated with our businesses. To the extent that consumer preferences evolve away from products that our members or we produce for health or other reasons, such as the growing demand for organic food products, and we are unable to develop products that satisfy new consumer preferences, there will be a decreased demand for our products.
 
Our operations are subject to business interruptions and casualty losses; we do not insure against all potential losses and could be seriously harmed by unexpected liabilities.
 
  Our operations are subject to business interruptions due to unanticipated events such as explosions, fires, pipeline interruptions, transportation delays, equipment failures, crude oil or refined product spills, inclement weather and labor disputes. For example:
 
  •  our oil refineries and other facilities are potential targets for terrorist attacks that could halt or discontinue production;
 
  •  our inability to negotiate acceptable contracts with unionized workers in our operations could result in strikes or work stoppages;
 
  •  the significant inventories that we carry or the facilities we own could be damaged or destroyed by catastrophic events, extreme weather conditions or contamination; and
 
  •  an occurrence of a pandemic flu or other disease affecting a substantial part of our workforce or our customers could cause an interruption in our business operations, the affects of which could be significant.
 
We maintain insurance coverages against many, but not all potential losses or liabilities arising from these operating hazards, but uninsured losses or losses above our coverage limits are possible. Uninsured losses and liabilities arising from operating hazards could have a material adverse effect on our financial position or results of operations.
 
Our cooperative structure limits our ability to access equity capital.
 
  As a cooperative, we may not sell common equity in our company. In addition, existing laws and our articles of incorporation and bylaws contain limitations on dividends of 8% of any preferred stock that we may issue. These limitations restrict our ability to raise equity capital and may adversely affect our ability to compete with enterprises that do not face similar restrictions.
 
Consolidation among the producers of products we purchase and customers for products we sell could adversely affect our revenues and operating results.
 
  Consolidation has occurred among the producers of products we purchase, including crude oil and grain, and it is likely to continue in the future. Consolidation could increase the price of these products and allow suppliers to negotiate pricing and other contract terms that are less favorable to us. Consolidation also may increase the competition among consumers of these products to enter into supply relationships with a smaller number of producers resulting in potentially higher prices for the products we purchase.
 
Consolidation among purchasers of our products and in wholesale and retail distribution channels has resulted in a smaller customer base for our products and intensified the competition for these customers. For example, ongoing consolidation among distributors and brokers of food products and food retailers has altered the buying patterns of these businesses, as they have increasingly elected to work with product suppliers who can meet their needs nationwide rather than just regionally or locally. If these distributors, brokers and retailers elect not to purchase our products, our sales volumes, revenues and profitability could be significantly reduced.


11


 

If our customers choose alternatives to our refined petroleum products, our revenues and profits may decline.
 
  Numerous alternative energy sources currently under development could serve as alternatives to our gasoline, diesel fuel and other refined petroleum products. If any of these alternative products become more economically viable or preferable to our products for environmental or other reasons, demand for our energy products would decline. Demand for our gasoline, diesel fuel and other refined petroleum products also could be adversely affected by increased fuel efficiencies.
 
Operating results from our agronomy business could be volatile and are dependent upon certain factors outside of our control.
 
  Planted acreage, and consequently the volume of fertilizer and crop protection products applied, is partially dependent upon government programs and the perception held by the producer of demand for production. Weather conditions during the spring planting season and early summer spraying season also affect agronomy product volumes and profitability.
 
Technological improvements in agriculture could decrease the demand for our agronomy and energy products.
 
  Technological advances in agriculture could decrease the demand for crop nutrients, energy and other crop input products and services that we provide. Genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could affect the demand for our crop nutrients and crop protection products. Demand for fuel that we sell could decline as technology allows for more efficient usage of equipment.
 
We operate some of our business through joint ventures in which our rights to control business decisions are limited.
 
  Several parts of our business, including in particular, our agronomy operations and portions of our grain marketing, wheat milling, foods and renewable fuels operations, are operated through joint ventures with third parties. By operating a business through a joint venture, we have less control over business decisions than we have in our wholly-owned or majority-owned businesses. In particular, we generally cannot act on major business initiatives in our joint ventures without the consent of the other party or parties in those ventures.
 
Risks Related to the Preferred Stock
 
The preferred stock may not continue to qualify for listing on the Nasdaq Global Select Market.
 
  Although the preferred stock is listed on The NASDAQ Global Select Market, it may not continue to qualify for listing. For example, we may be unable to satisfy the requirements regarding “independent” directors as now or subsequently in effect. If our preferred stock were delisted, the liquidity of the market for the preferred stock could be reduced, possibly significantly.
 
The trading market for the preferred stock may not be maintained, which may limit your ability to resell your shares.
 
  The trading market for the preferred stock may not be maintained or provide any significant liquidity. If you decide to sell your preferred stock there may be either no or only a limited number of potential buyers. This, in turn, may affect the price you receive for your preferred stock or your ability to sell your preferred stock at all.
 
If you are able to resell your preferred stock, many factors may affect the price you receive, which may be lower than you believe to be appropriate.
 
  As with other publicly traded securities, many factors could affect the market price of our preferred stock. In addition to those factors relating to CHS and the preferred stock described elsewhere in this “Risk Factors” section and elsewhere in this prospectus, the market price of our preferred stock could be affected by


12


 

conditions in and perceptions of agricultural and energy markets and companies and also by broader, general market, political and economic conditions.
 
Furthermore, U.S. stock markets have experienced price and volume volatility that has affected many companies’ stock prices, often for reasons unrelated to the operating performance of those companies. Fluctuations such as these also may affect the market price of our preferred stock. As a result of these factors, you may only be able to sell your preferred stock at prices below those you believe to be appropriate. The trading price for the preferred stock may at any time be less than its issue price pursuant to this prospectus or its liquidation value.
 
Issuances of substantial amounts of preferred stock could adversely affect the market price of our preferred stock.
 
  From time to time in the future, we expect to again issue shares of preferred stock to our members in redemption of a portion of their patrons’ equities or other equity securities and may do so as frequently as annually. We expect these shares to be freely tradeable upon issuance to our members, and some or all members who receive preferred stock may seek to sell their shares in the public market. Furthermore, from time to time we may sell additional shares of preferred stock to the public. Future issuances or sales of our preferred stock or the availability of our preferred stock for sale may adversely affect the market price for our preferred stock or our ability to raise capital by offering equity securities.
 
The terms of the preferred stock are fixed and changes in market conditions, including market interest rates, may decrease the market price for the preferred stock.
 
  The terms of the preferred stock, such as the 8% dividend rate, the amount of the liquidation preference and the redemption terms, are fixed and will not change, even if market conditions with respect to these terms fluctuate. This may mean that you could obtain a higher return from an investment in other securities. It also means that an increase in market interest rates is likely to decrease the market price for the preferred stock.
 
You will have limited voting rights.
 
  As a holder of the preferred stock, you will be entitled to vote only on actions that would amend, alter or repeal our articles of incorporation or the resolutions establishing the preferred stock if the amendment, alteration or repeal would adversely affect the rights or preferences of the preferred stock or that would create a series of senior equity securities. You will not have the right to vote on actions customarily subject to shareholder vote or approval, including the election of directors, the approval of significant transactions, and other amendments to our articles of incorporation that would not adversely affect the rights and preferences of the preferred stock.
 
Payment of dividends on the preferred stock is not guaranteed.
 
  Although dividends on the preferred stock accumulate, our board of directors must approve the actual payment of those dividends. Our board of directors can elect at any time or from time to time, and for an indefinite duration, not to pay the accumulated dividends. Our board of directors could do so for any reason, including the following:
 
  •  unanticipated cash requirements;
 
  •  the need to make payments on our indebtedness;
 
  •  concluding that the payment of dividends would cause us to breach the terms of any agreement, such as financial ratio covenants; or
 
  •  determining that the payment of dividends would violate applicable law regarding unlawful distributions to shareholders.


13


 

We can redeem the preferred stock at our discretion, which redemption may be at a price less than its market price and may limit the trading price for the preferred stock.
 
  We have the option of redeeming your shares at any time on or after February 1, 2008 for $25.00 per share plus any accumulated and unpaid dividends. If we redeem your shares, the redemption price may be less than the price you might receive if you were to sell your shares in the open market. In addition, the fact that the shares are redeemable may limit the price at which they trade.
 
The amount of your liquidation preference or redemption payment is fixed and you will have no right to receive any greater payment regardless of the circumstances.
 
  The payment due upon a liquidation or redemption is fixed at $25.00 per share plus accumulated and unpaid dividends. If we have value remaining after payment of this amount, you will have no right to participate in that value. If the market price for our preferred stock is greater than the redemption price, you will have no right to receive the market price from us upon liquidation or redemption.
 
Your liquidation rights will be subordinate to those of holders of our indebtedness and of any senior equity securities we have issued or may issue in the future and may be subject to the equal rights of other equity securities.
 
  There are no restrictions in the terms of the preferred stock on our ability to incur indebtedness. We can also, with the consent of holders of two-thirds of the outstanding preferred stock, issue preferred equity securities that are senior with respect to liquidation payments to the preferred stock. If we were to liquidate our business, we would be required to repay all of our outstanding indebtedness and to satisfy the liquidation preferences of any senior equity securities that we may issue in the future before we could make any distributions to holders of our preferred stock. We could have insufficient cash available to do so, in which case you would not receive any payment on the amounts due you. Moreover, there are no restrictions on our ability to issue preferred equity securities that rank on a parity with the preferred stock as to liquidation preferences and any amounts remaining after the payment of senior securities would be split equally among all holders of those securities, which might result in your receiving less than the full amount due you.
 
USE OF PROCEEDS
 
The shares of preferred stock that are being issued pursuant to this prospectus and the registration statement of which it is a part are being issued to redeem $46,363,888 of our “patrons’ equities.” The shares will be issued to redeem our outstanding patrons’ equities on a pro rata basis. Subject to the exceptions described below in “Plan of Distribution,” shares of preferred stock issued in redemption of the patrons’ equities will be issued only to non-individual active members who have conducted business with us during the past five years and whose pro rata share of the redemption amount is equal to or greater than $500. For each member eligible to receive such preferred stock, shares will be issued only in a number that does not exceed 18,100 shares of preferred stock (which equals one-quarter of one percent (0.25%) of our total shares of preferred stock outstanding as of December 31, 2007). See “Membership and Authorized Capital — Patrons’ Equities” for a discussion of patrons’ equities and our redemption of them. There will not be any cash proceeds from the issuance of preferred stock. However, by issuing shares of preferred stock in redemption of patrons’ equities we will make the cash that we would otherwise have used to redeem those patrons’ equities available for working capital purposes.


14


 

 
BUSINESS
 
We are one of the nation’s leading integrated agricultural companies. As a cooperative, we are owned by farmers and ranchers and their member cooperatives (referred to herein as “members”) from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders (both members and non-member third parties) that own shares of our 8% Cumulative Redeemable Preferred Stock, which is listed on the NASDAQ Global Select Market under the symbol CHSCP. On November 30, 2007, we had 7,240,221 shares of preferred stock outstanding. We buy commodities from and provide products and services to patrons (including our members and other non-member customers), both domestic and international. 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 grains and oilseeds, grain and oilseed processing and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those entities is included as a component in our net income under the equity method of accounting. For the fiscal year ended August 31, 2007, our total revenues were $17.2 billion and net income was $756.7 million.
 
We operate three business segments: Energy, Ag Business and Processing. Together, our three business segments create vertical integration to link producers with consumers. Our Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. Our Ag Business segment derives its revenues through the origination and marketing of grain, including service activities conducted at export terminals, through the retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies, and records equity income from investments in our agronomy joint ventures, grain export joint ventures and other investments. As of September 2007, our Ag Business segment revenues also include sales of crop nutrient products due to the acquisition of that business from our Agriliance LLC joint venture. Our Processing segment derives its revenues from the sales of soybean meal and soybean refined oil, and records equity income from wheat milling joint ventures, a vegetable oil-based food manufacturing and distribution joint venture, and an ethanol manufacturing company. We include other business operations in Corporate and Other because of the nature of their products and services, as well as the relative revenue size of those businesses. These businesses primarily include our insurance, hedging and other service activities related to crop production.
 
In May 2005, we sold the majority of our Mexican foods business for proceeds of $38.3 million resulting in a loss on disposition of $6.2 million. During the year ended August 31, 2006, we sold all of the remaining assets for proceeds of $4.2 million and a gain of $1.6 million. The operating results of the Mexican foods business are reported as discontinued operations.
 
Membership in CHS is restricted to certain producers of agricultural products and to associations of producers of agricultural products that are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended. Our Board of Directors may establish other qualifications for membership, as it may from time to time deem advisable.
 
Our earnings from cooperative business are allocated to members (and to a limited extent to non-members with which we have agreed to do business on a patronage basis) based on the volume of business they do with us. We allocate these earnings to our patrons in the form of patronage refunds (which are also called patronage dividends) in cash and patron’s equities, which may be redeemed over time. Earnings derived from non-members, which are not allocated patronage, are taxed at federal and state statutory corporate rates and are retained by us as unallocated capital reserve. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and if we qualify for patronage refunds from them.
 
Our origins date back to the early 1930s with the founding of the predecessor companies of Cenex, Inc. and Harvest States Cooperatives. CHS Inc. emerged as the result of the merger of those two entities in 1998, and is headquartered in Inver Grove Heights, Minnesota.


15


 

The following table presents a summary of our primary subsidiary holdings and equity investments for each of our business segments at November 30, 2007:
 
                     
            CHS
    Income
Business Segment
 
Entity Name
 
Business Activity
  Ownership%     Recognition
 
Energy
  National Cooperative Refinery Association   Petroleum refining     74.5 %   Consolidated
    Provista Renewable Fuels
Marketing, LLC
  Ethanol marketing     50 %   Consolidated
    Front Range Pipeline, LLC   Crude oil transportation     100 %   Consolidated
    Cenex Pipeline, LLC   Finished product transportation     100 %   Consolidated
Ag Business
  Agriliance LLC   Wholesale and retail distribution of agronomy products.     50 %   Equity Method
    CHS do Brasil Ltda.   Soybean procurement in Brazil     100 %   Consolidated
    United Harvest, LLC   Grain exporter     50 %   Equity Method
    TEMCO, LLC   Grain exporter     50 %   Equity Method
    Multigrain S.A.   Soybean procurement in Brazil     37.5 %   Equity Method
    Xingu Ag   Production farmland and related operations in Brazil     37.5 %   Equity Method
Processing
  Horizon Milling, LLC   Wheat milling in U.S.     24 %   Equity Method
    Horizon Milling General Partnership   Wheat milling in Canada     24 %   Equity Method
    Ventura Foods, LLC   Food manufacturing     50 %   Equity Method
    US BioEnergy Corporation   Ethanol manufacturing     20 %   Equity Method
Corporate and Other
  Country Hedging, Inc.   Risk management products broker     100 %   Consolidated
    Ag States Agency, LLC   Insurance agency     100 %   Consolidated
    Cofina Financial, LLC   Finance company     49 %   Equity Method
 
Our international sales information and segment information in Notes 2 and 12 to the consolidated financial statements, as well as Selected Consolidated Financial Data section of this prospectus, are incorporated by reference into the following business segment descriptions.
 
The business segment financial information presented below may not represent the results that would have been obtained had the relevant business segment been operated as an independent business due to efficiencies in scale, corporate cost allocations and intersegment activity.
 
ENERGY
 
Overview
 
We are the nation’s largest cooperative energy company based on revenues and identifiable assets, with operations that include petroleum refining and pipelines; the supply, marketing (including ethanol and biodiesel) and distribution of refined fuels (gasoline, diesel and other energy products); the blending, sale and distribution of lubricants; and the wholesale supply of propane. Our Energy segment processes crude oil into refined petroleum products at refineries in Laurel, Montana (wholly-owned) and McPherson, Kansas (an entity in which we have an approximate 74.5% ownership interest) and sells those products under the Cenex® brand to member cooperatives and others through a network of approximately 1,600 independent retail sites, including approximately 850 that operate Cenex/Ampride convenience stores.
 
Operations
 
Laurel Refinery.  Our Laurel, Montana refinery processes medium and high sulfur crude oil into refined petroleum products that primarily include gasoline, diesel and asphalt. Our Laurel refinery sources approximately 92% of its crude oil supply from Canada, with the balance obtained from domestic sources, and we have access to Canadian and northwest Montana crude through our wholly-owned Front Range Pipeline, LLC


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and other common carrier pipelines. Our Laurel refinery also has access to Wyoming crude via common carrier pipelines from the south.
 
Our Laurel facility processes approximately 55,000 barrels of crude oil per day to produce refined products that consist of approximately 37% gasoline, 31% diesel and other distillates, and 32% asphalt and other residual products. During fiscal 2005, our Board of Directors approved the installation of a coker unit at Laurel, along with other refinery improvements, which will allow us to extract a greater volume of high value gasoline and diesel fuel from a barrel of crude oil and less relatively low value asphalt. Total cost for this project is expected to be approximately $380.0 million, of which $346.3 million has been spent through November 30, 2007, with completion planned in February 2008. Refined fuels produced at Laurel, Montana are available via the Yellowstone Pipeline to western Montana terminals and to Spokane and Moses Lake, Washington, south via common carrier pipelines to Wyoming terminals and Denver, Colorado, and east via our wholly-owned Cenex Pipeline, LLC to Glendive, Montana, and Minot and Fargo, North Dakota. Our Board of Directors has approved $30 million in capital expenditures to construct three product terminals tied into the Yellowstone Pipeline that include rail capabilities. These investments are being undertaken to preserve our long-term ability to participate in western U.S. markets.
 
McPherson Refinery.  The McPherson, Kansas refinery is owned and operated by National Cooperative Refinery Association (NCRA), of which we own approximately 74.5%. The McPherson refinery processes approximately 85% low and medium sulfur crude oil and 15% heavy sulfur crude oil into gasoline, diesel and other distillates, propane and other products. NCRA sources its crude oil through its own pipelines as well as common carrier pipelines. The low and medium sulfur crude oil is sourced from Kansas, Oklahoma and Texas, and the heavy sulfur crude oil is sourced from Canada.
 
The McPherson refinery processes approximately 80,000 barrels of crude oil per day to produce refined products that consist of approximately 53% gasoline, 40% diesel and other distillates, and 7% propane and other products. Approximately 32% of the refined fuels are loaded into trucks at the McPherson refinery or shipped via NCRA’s proprietary products pipeline to its terminal in Council Bluffs, Iowa. The remaining refined fuel products are shipped to other markets via common carrier pipelines.
 
Provista Renewable Fuels Marketing, LLC.  In fiscal 2006, we acquired a 50% ownership interest in an ethanol and biodiesel marketing and distribution company, Provista Renewable Fuels Marketing, LLC, (Provista) formally known as United BioEnergy Fuels, LLC. US BioEnergy Corporation (US BioEnergy), of which we own approximately 20%, is the other 50% owner of Provista. Provista contracts with ethanol and biodiesel production plants, including US BioEnergy, to market and distribute their finished products. During fiscal 2007, volume totaled 405.8 million gallons of ethanol. Provista is consolidated within our financial statements, and we currently guarantee up to $10.0 million of Provista’s $25.0 million revolving credit facility. We are the operating manager of Provista.
 
Other Energy Operations.  We own and operate a propane terminal, four asphalt terminals, five refined product terminals and three lubricants blending and packaging facilities. We also own and lease a fleet of liquid and pressure trailers and tractors, which are used to transport refined fuels, propane, anhydrous ammonia and other products.
 
Products and Services
 
Our Energy segment produces and sells (primarily wholesale) gasoline, diesel, propane, asphalt, lubricants and other related products and provides transportation services. We obtain the petroleum products that we sell from our Laurel and McPherson refineries, and from third parties. Over the past two years, we have obtained approximately 55% of the petroleum products we sell from our Laurel and McPherson refineries, and approximately 45% from third parties.
 
Sales and Marketing; Customers
 
We make approximately 72% of our refined fuel sales to members, with the balance sold to non-members. Sales are made wholesale to member cooperatives and through a network of independent retailers


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that operate convenience stores under the Cenex/Ampride tradename. We sold approximately 1.3 billion gallons of gasoline and approximately 1.5 billion gallons of diesel fuel in fiscal 2007. We also blend, package and wholesale auto and farm machinery lubricants to both members and non-members. In fiscal 2007, our lubricants operations sold approximately 20 million gallons of lube oil. We are one of the nation’s largest propane wholesalers based on revenues. In fiscal 2007, our propane operations sold approximately 567 million gallons of propane. Most of the propane sold in rural areas is for heating and agricultural usage. Annual sales volumes of propane vary greatly depending on weather patterns and crop conditions.
 
Industry; Competition
 
Regulation.  Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, have a significant impact on our Energy segment. Our Energy segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to the environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Failure to comply with these laws, regulations and rules could subject us (and, in the case of the McPherson refinery, NCRA) to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we and NCRA are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on capital expenditures, earnings or competitive position, of either us or NCRA.
 
Like many other refineries, our Energy segment’s refineries recently focused their capital spending on reducing pollution emissions and at the same time increasing production to help pay for those expenditures. In particular, our refineries have completed work to comply with the Environmental Protection Agency low sulfur fuel regulations required by 2006, which are intended to lower the sulfur content of gasoline and diesel. We incurred capital expenditures from fiscal 2003 through 2006 related to this compliance of $88.1 million for our Laurel, Montana refinery and $328.7 million for NCRA’s McPherson, Kansas refinery.
 
The petroleum business is highly cyclical. Demand for crude oil and energy products is driven by the condition of local and worldwide economies, local and regional weather patterns and taxation relative to other energy sources, which can significantly affect the price of refined fuel products. Most of our energy product market is located in rural areas, so sales activity tends to follow the planting and harvesting cycles. More fuel-efficient equipment, reduced crop tillage, depressed prices for crops, weather conditions and government programs which encourage idle acres, may all reduce demand for our energy products.
 
Competition.  The petroleum refining and wholesale fuels business is very competitive. Among our competitors are some of the world’s largest integrated petroleum companies, which have their own crude oil supplies, distribution and marketing systems. We also compete with smaller domestic refiners and marketers in the midwestern and northwestern United States, with foreign refiners who import products into the United States and with producers and marketers in other industries supplying other forms of energy and fuels to consumers. Given the commodity nature of the end products, profitability in the refining and marketing industry depends largely on margins, as well as operating efficiency, product mix, and costs of product distribution and transportation. The retail gasoline market is highly competitive, with much larger competitors that have greater brand recognition and distribution outlets throughout the country and the world. Our owned and non-owned retail outlets are located primarily in the northwestern, midwestern and southern United States.
 
We market refined fuels, motor gasoline and distillate products in five principal geographic areas. The first area includes the Midwest and northern plains. Competition at the wholesale level in this area includes the major oil companies ConocoPhillips, Valero and Citgo, independent refiners including Flint Hills Resources and Growmark, Inc., and wholesale brokers/suppliers including Western Petroleum Company. This area has a robust spot market and is influenced by the large refinery center along the Gulf coast.
 
To the East is another unique marketing area. This area centers around Chicago, Illinois and includes eastern Wisconsin, Illinois and Indiana. CHS principally competes with the major oil companies Marathon, BP


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Amoco and ExxonMobil, independent refineries including Flint Hills Resources and Growmark, Inc., and wholesale brokers/suppliers including U.S. Oil.
 
Another market area is located south of Chicago, Illinois. Most of this area includes Arkansas, Missouri and the northern part of Texas. Competition in this area includes the major oil companies Valero and ExxonMobil, and independent refiners including Lion. This area is principally supplied from the Gulf coast refinery center and is also driven by a strong spot market that reacts quickly to changes in the international and national supply balance.
 
Another geographic area includes Montana, western North Dakota, Wyoming, Utah, Idaho, Colorado and western South Dakota. Competition at the wholesale level in this area include the major oil companies ExxonMobil and ConocoPhillips, and independent refiners including Frontier Refining and Sinclair. This area is also noted for being fairly well balanced in demand and supply, but is typically influenced by Canadian refined fuels moving into the U.S. through terminals in Canada and by rail from independent Canadian refiners.
 
The last area includes much of Washington and Oregon. We compete with the major oil companies Tesoro, BP Amoco and Chevron in this area. This area is also known for volatile prices and an active spot market.
 
Summary Operating Results
 
Summary operating results and identifiable assets for our Energy segment for the three months ended November 30, 2007 and 2006 and the fiscal years ended August 31, 2007, 2006 and 2005 are shown below:
 
                                         
    Three Months Ended                    
    November 30     Years Ended August 31  
    2007     2006*     2007*     2006*     2005*  
    (unaudited)     (unaudited)                    
    (Dollars in thousands)  
 
Revenues
  $ 2,521,688     $ 1,853,409     $ 8,105,067     $ 7,414,361     $ 5,794,266  
Cost of goods sold
    2,374,735       1,702,628       7,264,180       6,804,454       5,476,428  
                                         
Gross profit
    146,953       150,781       840,887       609,907       317,838  
Marketing, general and administrative
    22,566       20,987       94,939       82,867       69,951  
                                         
Operating earnings
    124,387       129,794       745,948       527,040       247,887  
Gain on investments
    (17 )                             (862 )
Interest, net
    (5,846 )     385       (6,106 )     6,534       8,918  
Equity income from investments
    (1,163 )     (1,056 )     (4,468 )     (3,840 )     (3,478 )
Minority interests
    22,921       18,961       143,230       91,588       48,830  
                                         
Income before income taxes
  $ 108,492     $ 111,504     $ 613,292     $ 432,758     $ 194,479  
                                         
Intersegment revenues
  $ (77,964 )   $ (67,820 )   $ (228,930 )   $ (242,430 )   $ (170,642 )
                                         
Total identifiable assets at end of period
  $ 2,732,125     $ 2,169,863     $ 2,797,831     $ 2,215,800     $ 2,260,331  
                                         
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see “Change in Accounting Principle — Turnarounds.”


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AG BUSINESS
 
Our Ag Business segment includes agronomy, country operations and grain marketing.
 
Agronomy
 
Overview
 
Through our fiscal year ended August 31, 2007, we conducted our wholesale and some of our retail agronomy operations through our 50% ownership interest in Agriliance LLC (Agriliance), in which Land O’Lakes, Inc. (Land O’Lakes) holds the other 50% ownership interest. Prior to September 2007, Agriliance was one of North America’s largest wholesale distributors of crop nutrients, crop protection products and other agronomy products based upon annual sales. Our 50% ownership interest in Agriliance is treated as an equity method investment, and therefore, Agriliance’s revenues and expenses are not reflected in our operating results. At November 30, 2007, our equity investment in Agriliance was $145.6 million.
 
In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail business. We currently are exploring, with Land O’Lakes, the repositioning options for the remaining portions of the Agriliance retail distribution business. During the three months ended November 30, 2007, we contributed $230.0 million to Agriliance to support their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets.
 
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, we were each entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O’Lakes owed us $133.5 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance’s debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made a true-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during our current fiscal year.
 
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Preliminary values assigned to the net assets as of September 1, 2007 totaled $268.7 million.
 
In August 2005, we sold 81% of our 20% ownership interest in CF Industries, Inc., a crop nutrients manufacturer and distributor, in an initial public offering (IPO). After the IPO, our ownership interest was reduced to approximately 3.9% in the post-IPO company named CF Industries Holdings, Inc. (CF). During our fiscal year ended August 31, 2007, we sold 540,000 shares of our CF stock for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million. During the first quarter of fiscal 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million.
 
There is significant seasonality in the sale of agronomy products and services, with peak activity coinciding with the planting and input seasons.
 
Operations
 
Our wholesale crop nutrients business sells approximately 6.0 million tons of fertilizer annually, making it one of the largest wholesale fertilizer operations in the United States based on revenues. Product is either delivered directly to the customer from the manufacturer, or through our 15 inland or river warehouse terminals and other non-owned storage facilities located throughout the country. In addition, our Galveston, Texas deep water port and terminal receives fertilizer by vessel from originations such as the Middle East and


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Caribbean basin where less expensive natural gas tends to give a price advantage over domestically produced fertilizer. The fertilizer is then shipped by rail to destinations within crop producing regions of the country. Based on fertilizer market data, the Agriliance sales of crop nutrients account for an estimated 9% of the U.S. market. The demand for corn by the expanding ethanol industry has in turn increased sales of nitrogen fertilizer, an input on which corn is highly dependant.
 
Primary suppliers for our wholesale crop nutrients business include CF, PCS, Mosaic, Koch Industries, Yara and PIC. During the year ended August 31, 2007, CF was the largest supplier of crop nutrients to Agriliance, and as we operate the crop nutrients business in the future, CF will continue to be a primary supplier to us.
 
Products and Services
 
Our wholesale crop nutrients business sells nitrogen, phosphorus, potassium and sulfate based products. During the year ended August 31, 2007, the primary products purchased by Agriliance were urea, potash, UAN, phosphates and ammonia.
 
Sales and Marketing; Customers
 
Our wholesale crop nutrients business sells product to approximately 2,200 local retailers from Ohio to the west coast and from the Canadian border south to Texas. Our largest customer is our own country operations business, also included in our Ag Business segment. During the year ended August 31, 2007, Agriliance sales for the wholesale crop nutrients business were $1.9 billion with about 6% of those sales made to our country operations business. Many of the customers of the crop nutrients business are also customers of our Energy segment or suppliers to our grain marketing business.
 
Industry; Competition
 
Regulation.  Our wholesale crop nutrients operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to the environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.
 
Competition.  The wholesale distribution of agronomy products is highly competitive and dependent upon relationships with local cooperatives and private retailers, proximity to the customer and competitive pricing. We compete with other large agronomy distributors, as well as other regional or local distributors, retailers and manufacturers.
 
Major competitors in crop nutrients distribution include Agrium, Mosaic, Koch Industries, United Agri-Products (UAP) and United Suppliers.
 
Country Operations
 
Overview
 
Our country operations business purchases a variety of grains from our producer members and other third parties, and provides cooperative members and producers with access to a full range of products and services including farm supplies and programs for crop and livestock production. Country operations operates at 335 locations, which includes 3 sunflower plants, dispersed throughout Minnesota, North Dakota, South Dakota, Montana, Nebraska, Kansas, Oklahoma, Colorado, Idaho, Washington and Oregon. Most of these locations purchase grain from farmers and sell agronomy products, energy products and feed to those same producers and others, although not all locations provide every product and service.


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Products and Services
 
Grain Purchasing.  We are one of the largest country elevator operators in North America based on revenues. Through a majority of our elevator locations, the country operations business purchases grain from member and non-member producers and other elevators and grain dealers. Most of the grain purchased is either sold through our grain marketing operations or used for local feed and processing operations. For the year ended August 31, 2007, country operations purchased approximately 408 million bushels of grain, primarily wheat (201 million bushels), corn (98 million bushels) and soybeans (62 million bushels). Of these bushels, 368 million were purchased from members and 262 million were sold through our grain marketing operations.
 
Other Products.  Our country operations business manufactures and sells other products, both directly and through ownership interests in other entities. These include seed, crop nutrients, crop protection products, energy products, animal feed, animal health products and processed sunflowers. We sell agronomy products at 191 locations, feed products at 125 locations and energy products at 135 locations.
 
Fin-Ag, Inc.  In the past, through our wholly-owned subsidiary Fin-Ag, Inc., we provided seasonal cattle feeding and swine financing loans, facility financing loans and crop production loans to our members. Financing activity through Fin-Ag, Inc. has decreased substantially as most of the production loans were contributed to Cofina Financial, LLC (Cofina Financial), a 49% owned joint venture that was formed during the fourth quarter of fiscal 2005 (see “Corporate and Other” section below). The only activity of Fin-Ag, Inc. is seasonal cattle feeding financing and a small amount of crop loans not transferred to Cofina Financial.
 
Industry; Competition
 
Regulation.  Our country operations business is subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to the environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Our country operations business is also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the Federal Food and Drug Administration, and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of feed and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.
 
Competition.  We compete primarily on the basis of price, services and patronage. Competitors for the purchase of grain include Archer Daniels Midland (ADM), Cargill, Incorporated (Cargill), local cooperatives and smaller private grain companies and processors at the majority of our locations in our trade territory, as previously defined in the “Overview”. In addition, Columbia Grain is also our competitor in Montana.
 
Competitors for our farm supply businesses include Cargill, United Agri-Products (UAP), local cooperatives and smaller private companies at the majority of locations throughout our trade territory. In addition, Land O’Lakes Purina Feed, LLC, Hubbard Feed and Cargill are our major competitors for the sale of feed products.
 
Grain Marketing
 
Overview
 
We are the nation’s largest cooperative marketer of grain and oilseed based on grain storage capacity and grain sales, handling about 1.5 billion bushels annually. During fiscal 2007, we purchased approximately 60% of our total grain volumes from individual and cooperative association members and our country operations business, with the balance purchased from third parties. We arrange for the transportation of the grains either


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directly to customers or to our owned or leased grain terminals and elevators awaiting delivery to domestic and foreign purchasers. We primarily conduct our grain marketing operations directly, but do conduct some of our business through joint ventures.
 
Operations
 
Our grain marketing operations purchases grain directly and indirectly from agricultural producers primarily in the midwestern and western United States. The purchased grain is typically contracted for sale for future delivery at a specified location, and we are responsible for handling the grain and arranging for its transportation to that location. The sale of grain is recorded after title to the commodity has transferred and final weights, grades and settlement price have been agreed upon. Amounts billed to the customer as part of a sales transaction include the costs for shipping and handling. Our ability to arrange efficient transportation, including loading capabilities onto unit trains, ocean-going vessels and barges, is a significant part of the services we offer to our customers. Rail, vessel, barge and truck transportation is carried out by third parties, often under long-term freight agreements with us. Grain intended for export is usually shipped by rail or barge to an export terminal, where it is loaded onto ocean-going vessels. Grain intended for domestic use is usually shipped by rail or truck to various locations throughout the country.
 
We own and operate export terminals, river terminals and elevators involved in the handling and transport of grain. Our river terminals at Savage and Winona, Minnesota, Davenport, Iowa and a terminal in St. Louis, Missouri in which we have a put-through agreement with Bulk Services, are used to load grain onto barges for shipment to both domestic and export customers via the Mississippi River system. Our export terminal at Superior, Wisconsin provides access to the Great Lakes and St. Lawrence Seaway, and our export terminal at Myrtle Grove, Louisiana serves the gulf market. In the Pacific Northwest, we conduct our grain marketing operations through United Harvest, LLC (a 50% joint venture with United Grain Corporation), and TEMCO, LLC (a 50% joint venture with Cargill, Incorporated). United Harvest, LLC, operates grain terminals in Vancouver and Kalama, Washington, and primarily exports wheat. TEMCO, LLC operates an export terminal in Tacoma, Washington, and primarily exports corn and soybeans. These facilities serve the Pacific market, as well as domestic grain customers in the western United States. We also own two 110-car shuttle-receiving elevator facilities in Friona, Texas and Collins, Mississippi that serve large-scale feeder cattle, dairy and poultry producers in those regions. In 2003, we opened an office in Sao Paulo, Brazil for the procurement of soybeans for our grain marketing operations international customers. During the year ended August 31, 2007, we invested $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil, and currently have a 37.5% ownership interest. This venture, which includes grain storage and export facilities, builds on our South American soybean origination and helps meet customer needs year-round.
 
During the three months ended November 30, 2007, we invested $30.3 million in a joint venture (37.5% ownership) that acquired production farmland and related operations in Brazil, intended to strengthen our ability to serve customers globally. The operations include production of soybeans, corn, cotton and sugar cane, as well as cotton processing in four locations.
 
Our grain marketing operations purchases most of its grain during the summer and fall harvest period. Because of our geographic location and the fact that we are further from our export facilities, the grain that we handle tends to be sold later, after the harvest period, than in other parts of the country. However, as many producers have significant on-farm storage capacity and in light of our own storage capacity, our grain marketing operations buys and ships grain throughout the year. Due to the amount of grain purchased and held in inventory, our grain marketing operations has significant working capital needs at various times of the year. The amount of borrowings for this purpose, and the interest rate charged on those borrowings, directly affects the profitability of our grain marketing operations.
 
Products and Services
 
The primary grains purchased by our grain marketing operations for the year ended August 31, 2007 were corn (507 million bushels), wheat (424 million bushels) and soybeans (354 million bushels). Of the total grains purchased by our grain marketing operations during the year ended August 31, 2007, there were 537 million


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bushels from our individual and cooperative association members, 262 million bushels from our country operations business, and the remainder was from third parties.
 
Sales and Marketing; Customers
 
Purchasers of our grain and oilseed include domestic and foreign millers, maltsters, feeders, crushers and other processors. To a much lesser extent purchasers include intermediaries and distributors. Our grain marketing operations are not dependent on any one customer, and its supply relationships call for delivery of grain at prevailing market prices.
 
Industry; Competition
 
Regulation.  Our grain marketing operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; and the transportation, handling and disposition of wastes. Our grain marketing operations are also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the Federal Food and Drug Administration, and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of food and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.
 
Competition.  Our grain marketing operations compete for both the purchase and the sale of grain. Competition is intense and margins are low. Some competitors are integrated food producers, which may also be customers. A few major competitors have substantially greater financial resources than we have.
 
In the purchase of grain from producers, location of a delivery facility is a prime consideration, but producers are increasingly willing to transport grain longer distances for sale. Price is affected by the capabilities of the facility; for example, if it is cheaper to deliver to a customer by unit train than by truck, a facility with unit train capabilities provides a price advantage. We believe that our relationships with individual members serviced by our local country operations locations and with our cooperative members give us a broad origination capability.
 
Our grain marketing operations compete for grain sales based on price, services and ability to provide the desired quantity and quality of grains. Location of facilities is a major factor in the ability to compete. Our grain marketing operations compete with numerous grain merchandisers, including major grain merchandising companies such as Archer Daniels Midland (ADM), Cargill, Incorporated (Cargill), ConAgra, Bunge and Louis Dreyfus, each of which handle grain volumes of more than one billion bushels annually.
 
The results of our grain marketing operations may be adversely affected by relative levels of supply and demand, both domestic and international, commodity price levels (including grain prices reported on national markets) and transportation costs and conditions. Supply is affected by weather conditions, disease, insect damage, acreage planted and government regulations and policies. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, population growth, the level of per capita consumption of some products and the level of renewable fuels production.


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Summary Operating Results
 
Summary operating results and identifiable assets for our Ag Business segment for the three months ended November 30, 2007 and 2006 and the fiscal years ended August 31, 2007, 2006 and 2005 are shown below:
 
                                         
    Three Months Ended
                   
    November 30     Years Ended August 31  
    2007     2006     2007     2006     2005  
    (unaudited)     (unaudited)                    
    (Dollars in thousands)  
 
Revenues
  $ 3,835,251     $ 1,804,616     $ 8,575,389     $ 6,575,165     $ 5,670,644  
Cost of goods sold
    3,686,458       1,746,843       8,388,476       6,401,527       5,541,282  
                                         
Gross profit
    148,793       57,773       186,913       173,638       129,362  
Marketing, general and administrative
    30,688       19,285       97,299       99,777       83,600  
                                         
Operating earnings
    118,105       38,488       89,614       73,861       45,762  
Gain on investments
    (94,545 )     (5,348 )     (5,348 )             (11,358 )
Interest, net
    15,128       5,170       28,550       23,559       20,535  
Equity (income) loss from investments
    (7,193 )     10,589       (51,830 )     (40,902 )     (55,473 )
Minority interests
    58       (49 )     (16 )     (509 )     (41 )
                                         
Income before income taxes
  $ 204,657     $ 28,126     $ 118,258     $ 91,713     $ 92,099  
                                         
Intersegment revenues
  $ (4,421 )   $ (1,381 )   $ (18,372 )   $ (8,779 )   $ (9,640 )
                                         
Total identifiable assets at end of period
  $ 4,322,309     $ 2,240,442     $ 2,846,950     $ 1,806,243     $ 1,604,571  
                                         
 
PROCESSING
 
Overview
 
Our Processing segment converts raw agricultural commodities into ingredients for finished food products or into finished consumer food products. We have focused on areas that allow us to utilize the products supplied by our member producers. These areas are oilseed processing and our joint ventures in wheat milling, foods and renewable fuels.
 
Regulation.  Our Processing segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; and the transportation, handling and disposition of wastes. Our Processing segment’s operations are also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the Federal Food and Drug Administration, and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of food and grain products. Failure to comply with these laws, regulations and rules could subject us, or our foods partners, or our renewable fuels partners to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.


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Oilseed Processing
 
Our oilseed processing operations convert soybeans into soybean meal, soyflour, crude soyoil, refined soybean oil and associated by-products. These operations are conducted at a facility in Mankato, Minnesota that can crush approximately 39 million bushels of soybeans on an annual basis, producing approximately 940,000 short tons of soybean meal and 460 million pounds of crude soybean oil. The same facility is able to process approximately 1 billion pounds of refined soybean oil annually. Another crushing facility in Fairmont, Minnesota has a crushing capacity of over 45 million bushels of soybeans on an annual basis.
 
Our oilseed processing operations produce three primary products: refined oils, soybean meal and soyflour. Refined oils are used in processed foods, such as margarine, shortening, salad dressings and baked goods, as well as methyl ester/biodiesel production, and to a lesser extent, for certain industrial uses such as plastics, inks and paints. Soybean meal has high protein content and is used for feeding livestock. Soyflour is used in the baking industry, as a milk replacement in animal feed and in industrial applications.
 
Our soy processing facilities are located in areas with a strong production base of soybeans and end-user market for the meal and soyflour. We purchase virtually all of our soybeans from members. Our oilseed crushing operations currently produce approximately 90% of the crude oil that we refine, and purchase the balance from outside suppliers.
 
Our customers for refined oil are principally large food product companies located throughout the United States. However, over 50% of our customers are located in the midwest due to relatively lower freight costs and slightly higher profitability potential. Our largest customer for refined oil products is Ventura Foods, LLC (Ventura Foods), in which we hold a 50% ownership interest and with which we have a long-term supply agreement to supply minimum quantities of edible soybean oils as long as we maintain a minimum 25.5% ownership interest and our price is competitive with other suppliers of the product. Our sales to Ventura Foods were $62.3 million in fiscal 2007. We also sell soymeal to about 350 customers, primarily feed lots and feed mills in southern Minnesota. In fiscal 2007, Commodity Specialists Company accounted for 14% of soymeal sold and Land O’Lakes Purina Feed, LLC accounted for 12% of soymeal sold. We sell soyflour to customers in the baking industry both domestically and for export.
 
The refined soybean products industry is highly competitive. Major industry competitors include ADM, Cargill, Ag Processing Inc. and Bunge. These and other competitors have acquired other processors, expanded existing plants, or constructed new plants, both domestically and internationally. Price, transportation costs, services and product quality drive competition. We estimate that we have a market share of approximately 4% to 5% of the domestic refined soybean oil market and also the domestic soybean crushing capacity.
 
Soybeans are a commodity and their price can fluctuate significantly depending on production levels, demand for the products, and other supply factors.
 
Wheat Milling
 
In January 2002, we formed a joint venture with Cargill named Horizon Milling, LLC (Horizon Milling), in which we hold an ownership interest of 24%, with Cargill owning the remaining 76%. Horizon Milling is the largest U.S. wheat miller based on output volume. We own five mills that we lease to Horizon Milling. Sales and purchases of wheat and durum by us to Horizon Milling during fiscal 2007 were $241.1 million and $10.5 million, respectively. Horizon Milling’s advance payments on grain to us were $5.9 million on August 31, 2007, and are included in customer advance payments on our Consolidated Balance Sheet. We account for Horizon Milling using the equity method of accounting. At August 31, 2007, our net book value of assets leased to Horizon Milling was $76.4 million.
 
During the year ended August 31, 2007, we invested $15.6 million in Horizon Milling G.P. (24% CHS ownership with Cargill owning the remaining 76%), a joint venture that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of Canada, which includes three flour milling operations and two dry baking mixing facilities in Canada. We account for Horizon Milling G.P. using the equity method of accounting.


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Foods
 
Our primary focus in the foods area is Ventura Foods, which produces and distributes vegetable oil-based products such as margarine, salad dressing and other food products. Ventura Foods was created in 1996, and is owned 50% by us and 50% by Wilsey Foods, Inc., a majority owned subsidiary of Mitsui & Co., Ltd. We account for our Ventura Foods investment under the equity method of accounting, and at November 30, 2007 our investment was $144.7 million.
 
Ventura Foods manufactures, packages, distributes and markets bulk margarine, salad dressings, mayonnaise, salad oils, syrups, soup bases and sauces, many of which utilize soybean oil as a primary ingredient. Approximately 40% of Ventura Foods’ volume, based on sales, comes from products for which Ventura Foods owns the brand, and the remainder comes from products that it produces for third parties. A variety of Ventura Foods’ product formulations and processes are proprietary to it or its customers. Ventura Foods is the largest manufacturer of margarine for the foodservice sector in the U.S. and is a major producer of many other products.
 
Ventura Foods currently has 13 manufacturing and distribution locations across the United States, and is expected to complete a new facility in Ontario, California, in calendar 2008, that will combine some of its existing locations. It sources its raw materials, which consist primarily of soybean oil, canola oil, cottonseed oil, peanut oil and various other ingredients and supplies, from various national suppliers, including our oilseed processing operations. It sells the products it manufactures to third parties as a contract manufacturer, as well as directly to retailers, food distribution companies and large institutional food service companies. Ventura Foods sales are approximately 60% in foodservice and the remainder is split between retail and industrial customers who use edible oil products as ingredients in foods they manufacture for resale. During Ventura Foods’ 2007 fiscal year, Sysco accounted for 22% of its net sales. During our fourth quarter of fiscal 2005, Ventura Foods purchased two Dean Foods businesses: Marie’s dressings and Dean’s dips. This transaction included a license agreement for Ventura Foods to use the Dean’s trademark on dips.
 
Ventura Foods competes with a variety of large companies in the food manufacturing industry. Some of its major competitors are ADM, Cargill, Bunge, Unilever, ConAgra, ACH Food Companies, Smuckers, Kraft and CF Sauer, Ken’s, Marzetti and Nestle.
 
Renewable Fuels
 
In fiscal 2006, we invested $70.0 million in US BioEnergy Corporation (US BioEnergy), an ethanol manufacturing company, representing an approximate 24% ownership on August 31, 2006. During the year ended August 31, 2007, we made additional investments of $45.4 million in US BioEnergy, bringing our total cash investment for common stock in that company to $115.4 million. In December 2006, US BioEnergy completed an initial public offering (IPO), and the effect of the issuance of additional shares of its stock was to dilute our ownership interest from approximately 25% to 21%. In addition, on August 29, 2007, US BioEnergy completed an acquisition with total aggregate net consideration comprised of the issuance of US BioEnergy common stock and cash. Due to US BioEnergy’s increase in equity, primarily from these two transactions, we recognized a non-cash net gain of $15.3 million on our investment during the year ended August 31, 2007, to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. On August 31, 2007, our ownership interest in US BioEnergy was approximately 19%, and based upon the market price of US BioEnergy’s stock of $10.41 per share on that date, our investment had a fair value of approximately $159.3 million. During the first quarter of fiscal 2008, we purchased additional shares of US BioEnergy common stock for $6.5 million, which increased our ownership interest to approximately 20%. We are recognizing earnings of US BioEnergy, to the extent of our ownership interest, using the equity method of accounting.
 
On November 29, 2007, US BioEnergy and VeraSun Energy Corporation announced that they have entered into a definitive merger agreement subject to shareholder and regulatory approval. If the merger is consummated, we would own approximately eight percent of the combined entity.


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US BioEnergy currently has four ethanol plants in operation which have a combined production capacity of 310 million gallons per year and are located in Iowa, Michigan and Nebraska. In addition, there are four ethanol plants under construction in Iowa, Minnesota, Nebraska and South Dakota with expected combined production capacity of 440 million gallons per year.
 
Summary Operating Results
 
Summary operating results and identifiable assets for our Processing segment for the three months ended November 30, 2007 and 2006 and the fiscal years ended August 31, 2007, 2006 and 2005 are shown below:
 
                                         
    Three Months Ended
       
    November 30     Years Ended August 31  
    2007     2006     2007     2006     2005  
    (unaudited)     (unaudited)                    
    (Dollars in thousands)  
 
Revenues
  $ 243,296     $ 155,024     $ 754,743     $ 614,471     $ 613,766  
Cost of goods sold
    233,117       148,463       726,510       588,732       604,198  
                                         
Gross profit
    10,179       6,561       28,233       25,739       9,568  
Marketing, general and administrative
    5,497       5,956       23,545       21,645       20,750  
                                         
Operating earnings (losses)
    4,682       605       4,688       4,094       (11,182 )
Loss (gain) on investments
    611               (15,268 )             (457 )
Interest, net
    5,024       2,887       14,783       11,096       12,287  
Equity income from investments
    (21,138 )     (12,850 )     (48,446 )     (35,504 )     (36,202 )
                                         
Income before income taxes
  $ 20,185     $ 10,568     $ 53,619     $ 28,502     $ 13,190  
                                         
Intersegment revenues
  $ (90 )   $ (84 )   $ (370 )   $ (368 )   $ (502 )
                                         
Total identifiable assets at end of period
  $ 741,777     $ 600,463     $ 681,118     $ 518,186     $ 420,373  
                                         
 
CORPORATE AND OTHER
 
Services
 
Financial Services.  We have provided open account financing to approximately 115 of our members that are cooperatives (cooperative association members) in the past year. These arrangements involve the discretionary extension of credit in the form of a clearing account for settlement of grain purchases and as a cash management tool.
 
Cofina Financial, a joint venture finance company in which we hold a 49% ownership interest, makes seasonal and term loans to member cooperatives and individuals. During the fourth quarter of fiscal 2005, we contributed certain assets related to our financial services business and related to Fin-Ag Inc., along with cash, to form Cofina Financial. Cenex Finance Association, which prior to the formation of Cofina Financial operated as an independent finance company, owns the other 51% of Cofina Financial, however, the governance of this joint venture is 50/50. We participated in the formation of Cofina Financial for the purpose of expanding the size of our financing platform, to improve the scope of services offered to customers, to gain efficiencies in sourcing funds and to achieve some synergies through participation in larger customer-financing programs. We account for our Cofina Financial investment using the equity method of accounting.
 
We may, at our own discretion, choose to guarantee certain loans made by Cofina Financial. On August 31, 2007, we had guarantees related to Cofina Financial loans totaling $24.5 million.


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Country Hedging, Inc.  Our wholly-owned subsidiary Country Hedging, Inc., which is a registered futures commission merchant and a clearing member of both the Minneapolis Grain Exchange and the Kansas City Board of Trade, is a full-service commodity futures and options broker.
 
Ag States Agency, LLC.  Ag States Agency, LLC, is an independent insurance agency, and after the purchase of the minority owner’s interest during fiscal 2005, is now a wholly-owned subsidiary. It sells insurance, including group benefits, property and casualty, and bonding programs. Its approximately 1,800 customers are primarily agricultural businesses, including local cooperatives and independent elevators, petroleum outlets, agronomy, feed and seed plants, implement dealers, fruit and vegetable packers/warehouses, and food processors.
 
PRICE RISK AND HEDGING
 
When we enter into a commodity purchase commitment, we incur risks of carrying inventory, including risks related to price change and performance (including delivery, quality, quantity, and shipment period). We are exposed to risk of loss in the market value of positions held, consisting of inventory and purchase contracts at a fixed or partially fixed price in the event market prices decrease. We are also exposed to risk of loss on our fixed price or partially fixed price sales contracts in the event market prices increase.
 
To reduce the price change risks associated with holding fixed price commitments, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges for grain, and regulated mercantile exchanges for refined products and crude oil. The crude oil and most of the grain and oilseed volume we handle can be hedged. Some grains cannot be hedged because there are no futures for certain commodities. For those commodities, risk is managed through the use of forward sales and various pricing arrangements and to some extent cross-commodity futures hedging. While hedging activities reduce the risk of loss from changing market values of inventory, such activities also limit the gain potential which otherwise could result from changes in market prices of inventory. Our policy is to generally maintain hedged positions in grain. Our profitability from operations is primarily derived from margins on products sold and grain merchandised, not from hedging transactions. Hedging arrangements do not protect against nonperformance by counterparties to contracts, and therefore, contract values are reviewed and adjusted to reflect potential non-performance.
 
When a futures contract is entered into, an initial margin deposit must be sent to the applicable exchange or broker. The amount of the deposit is set by the exchange and varies by commodity. If the market price of a short futures contract increases, then an additional maintenance margin deposit would be required. Similarly, if the price of a long futures contract decreases, a maintenance margin deposit would be required and sent to the applicable exchange. Subsequent price changes could require additional maintenance margins or could result in the return of maintenance margins.
 
At any one time, inventory and purchase contracts for delivery to us may be substantial. We have risk management policies and procedures that include net position limits. These limits are defined for each commodity and include both trader and management limits. This policy, and computerized procedures in our grain marketing operations, requires a review by operations management when any trader is outside of position limits and also a review by our senior management if operating areas are outside of position limits. A similar process is used in our energy operations. The position limits are reviewed at least annually with our management. We monitor current market conditions and may expand or reduce our risk management policies or procedures in response to changes in those conditions. In addition, all purchase and sales contracts are subject to credit approvals and appropriate terms and conditions.
 
EMPLOYEES
 
At August 31, 2007, we had approximately 6,885 full, part-time, temporary and seasonal employees, which included approximately 615 employees of NCRA. Of that total, approximately 2,080 were employed in our Energy segment, 3,695 in our country operations business (including approximately 1,325 seasonal and temporary employees), 450 in our grain marketing operations, 260 in our Processing segment and 400 in


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Corporate and Other. In addition to those employed directly by us, many employees work for joint ventures in which we have a 50% or less ownership interest, and are not included in these totals. A portion of all of our business segments and Corporate and Other are employed in this manner.
 
In September 2007, we added 171 employees in our Ag Business segment of which 47 were seasonal, related to the distribution of the crop nutrients business we received from Agriliance.
 
Employees in certain areas are represented by collective bargaining agreements. Refinery and pipeline workers in Laurel, Montana are represented by agreements with two unions: United Steel Workers of America (USWA) (198 employees) and Oil Basin Pipeliners Union (OBP) (19 employees), for which agreements are in place through 2009 and 2008, respectively, in regards to wages and benefits. The contracts covering the NCRA McPherson, Kansas refinery (272 employees in the USWA union) are also in place through 2009. There are approximately 152 employees in transportation and lubricant plant operations that are covered by other collective bargaining agreements that expire at various times. Certain production workers in our oilseed processing operations are subject to collective bargaining agreements with the Bakery, Confectionary, Tobacco Worker and Grain Millers (BTWGM) (120 employees) and the Pipefitters’ Union (2 employees) for which agreements are in place through 2009. The BTWGM also represents 50 employees at our Superior, Wisconsin grain export terminal with a contract expiring in 2010. The USWA represents 79 employees at our Myrtle Grove, Louisiana grain export terminal with a contract expiring in 2009, the Teamsters represent 9 employees at our Winona, Minnesota export terminal with a contract expiring in 2008, and the International Longshoremen’s and Warehousemen’s Union (ILWU) represents 38 employees at our Kalama, Washington export terminal with a contract in place through 2009. Finally, certain employees in our country operations business are represented by collective bargaining agreements with two unions; the BTWGM (24 employees), with contracts expiring in December 2008 and June 2010, and the United Food and Commercial Workers (11 employees), with a contract expiring in July 2008.
 
LEGAL PROCEEDINGS
 
We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, our management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
 
In October 2003, we and NCRA reached agreements with the Environmental Protection Agency (EPA) and the State of Montana’s Department of Environmental Quality and the State of Kansas Department of Health and Environment, regarding the terms of settlements with respect to reducing air emissions at our Laurel, Montana and NCRA’s McPherson, Kansas refineries. These settlements are part of a series of similar settlements that the EPA has negotiated with major refiners under the EPA’s Petroleum Refinery Initiative. The settlements take the form of consent decrees filed with the U.S. District Court for the District of Montana (Billings Division) and the U.S. District Court for the District of Kansas. Each consent decree details potential capital improvements, supplemental environmental projects and operational changes that we and NCRA have agreed to implement at the relevant refinery over several years. The consent decrees also required us, and NCRA, to pay approximately $0.5 million in aggregate civil cash penalties. As of November 30, 2007, the aggregate capital expenditures for us and NCRA related to these settlements was approximately $22 million, and we anticipate spending an additional $9 million over the next four years. We do not believe that the settlements will have a material adverse affect on us or NCRA.
 
PROPERTIES
 
We own or lease energy, grain handling and processing, and agronomy related facilities throughout the United States. Below is a summary of these locations.


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Energy
 
Facilities in our Energy segment include the following, all of which are owned except where indicated as leased:
 
     
Refinery
  Laurel, Montana
Propane terminal
  Glenwood, Minnesota
Transportation terminals/repair facilities
  12 locations in Iowa, Kansas, Minnesota, Montana, North Dakota, South Dakota, Texas, Washington and Wisconsin, 3 of which are leased
Petroleum & asphalt terminals/storage facilities
  9 locations in Montana, North Dakota and Wisconsin
Pump stations
  11 locations in Montana and North Dakota
Pipelines:
   
Cenex Pipeline, LLC
  Laurel, Montana to Fargo, North Dakota
Front Range Pipeline, LLC
  Canadian border to Laurel, Montana and on to Billings, Montana
Convenience stores/gas stations
  42 locations in Iowa, Minnesota, Montana, North Dakota, South Dakota and Wyoming, 13 of which are leased
Lubricant plants/warehouses
  3 locations in Minnesota, Ohio and Texas, 1 of which is leased
 
We have a 74.5% interest in NCRA,which owns and operates the following facilities:
 
     
Refinery
  McPherson, Kansas
Petroleum terminals/storage
  2 locations in Iowa and Kansas
Pipeline 
  McPherson, Kansas to Council Bluffs, Iowa
Jayhawk Pipeline, LLC
  Throughout Kansas, with branches in Oklahoma, Texas and Nebraska
Jayhawk stations
  26 locations located in Kansas, Oklahoma and Nebraska
Osage Pipeline (50% owned by NCRA)
  Oklahoma to Kansas
Kaw Pipeline (67% owned by NCRA)
  Throughout Kansas
 
Ag Business
 
Within our Ag Business segment, we own or lease the following facilities:
 
Crop Nutrients
 
As of September 1, 2007, we use ports and terminals in our crop nutrients operations at the following locations:
 
Galveston, Texas (deep water port, land leased from port authority)
Little Rock, Arkansas (river terminal, owned; land and building, leased)
Post Falls, Idaho (terminal, owned)
Crescent City, Illinois (terminal, owned)
Briggs, Indiana (terminal, owned)
Hagerstown, Indiana (terminal, leased)
Indianapolis, Indiana (terminal, leased)
Muscatine, Iowa (river terminal, owned)
St. Paul, Minnesota (river terminal, owned)
Winona, Minnesota (river terminal, owned)
Grand Forks, North Dakota (terminal, owned)
Crestline, Ohio (terminal, owned)
Fostoria, Ohio (terminal, owned)
Watertown, South Dakota (terminal, owned)


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Memphis, Tennessee (river terminal, owned)
Green Bay, Wisconsin (terminal, owned)
 
Country Operations
 
In our country operations business, we own 316 agri-operations locations (of which some of the facilities are on leased land), 9 feed manufacturing facilities and 2 sunflower plants located in Minnesota, North Dakota, South Dakota, Montana, Nebraska, Kansas, Oklahoma, Colorado, Idaho, Washington and Oregon. In addition, we lease 6 agri-operations locations, 1 feed manufacturing facility and 1 sunflower plant.
 
Grain Marketing
 
We use grain terminals in our grain marketing operations at the following locations:
 
Collins, Mississippi (owned)
Davenport, Iowa (2 owned)
Friona, Texas (owned)
Kalama, Washington (leased)
Minneapolis, Minnesota (owned, idle)
Myrtle Grove, Louisiana (owned)
Savage, Minnesota (owned)
Spokane, Washington (owned)
Superior, Wisconsin (owned)
Winona, Minnesota (1 owned, 1 leased)
 
Processing
 
Within our Processing segment, we own and lease the following facilities:
 
Oilseed Processing
 
We own a campus in Mankato, Minnesota, comprised of a soybean crushing plant, an oilseed refinery, a soyflour plant, a quality control laboratory and an administration office. We also own a crushing plant in Fairmont, Minnesota.
 
Wheat Milling
 
We own five milling facilities at the following locations, all of which are leased to Horizon Milling:
 
Rush City, Minnesota
Kenosha, Wisconsin
Houston, Texas
Mount Pocono, Pennsylvania
Fairmount, North Dakota
 
Corporate Headquarters
 
We are headquartered in Inver Grove Heights, Minnesota. We own a 33-acre campus consisting of one main building with approximately 320,000 square feet of office space and two smaller buildings with approximately 13,400 and 9,000 square feet of space.
 
Our internet address is www.chsinc.com.


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MEMBERSHIP IN CHS AND AUTHORIZED CAPITAL
 
Introduction
 
We are an agricultural membership cooperative organized under Minnesota cooperative law to do business with member and non-member patrons. Our patrons, not us, are subject to income taxes on income from patronage sources, which is distributed to them. We are subject to income taxes on undistributed patronage income and non-patronage-sourced income. See “— Tax Treatment” below.
 
Distribution of Net Income; Patronage Dividends
 
We are required by our organizational documents annually to distribute net earnings derived from patronage business with members, after payment of dividends on equity capital, to members on the basis of patronage, except that the Board of Directors may elect to retain and add to our unallocated capital reserve an amount not to exceed 10% of the distributable net income from patronage business. We may also distribute net income derived from patronage business with a non-member if we have agreed to conduct business with the non-member on a patronage basis. Net income from non-patronage business may be distributed to members or added to the unallocated capital reserve, in whatever proportions the Board of Directors deems appropriate.
 
These distributions, referred to as “patronage dividends,” may be made in cash, patrons’ equities, revolving fund certificates, our securities, securities of others, or any combination designated by the Board of Directors. Since fiscal 1998 through fiscal 2005, the Board of Directors has distributed patronage dividends in the form of 30% cash and 70% patrons’ equities (see “— Patrons’ Equities” below). For fiscal 2006 and 2007, the Board of Directors approved the distribution of patronage dividends in the form of 35% cash and 65% patrons’ equities. The Board of Directors may change the mix in the form of the patronage dividends in the future. In making distributions, the Board of Directors may use any method of allocation that, in its judgment, is reasonable and equitable.
 
Patronage dividends distributed during the years ended August 31, 2007, 2006 and 2005 were $379.9 million ($133.1 million in cash), $207.9 million ($62.5 million in cash) and $171.3 million ($51.6 million in cash), respectively.
 
Patrons’ Equities
 
Patrons’ equities are in the form of book entries and represent a right to receive cash or other property when we redeem them. Patrons’ equities form part of our capital, do not bear interest, and are not subject to redemption upon request of a member. Patrons’ equities are redeemable only at the discretion of the Board of Directors and in accordance with the terms of the redemption policy adopted by the Board of Directors, which may be modified at any time without member consent. Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities held by them, and another for individuals who are eligible for equity redemptions at age 72 or upon death. Commencing in fiscal 2008, until further resolution, the Board of Directors has reduced the age for individuals who are eligible for equity redemptions to age 70. The amount that each non-individual receives under the pro-rata program in any year will be determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the face value of patronage certificates eligible for redemption held by them, and the denominator of which is the sum of the patronage certificates eligible for redemption held by all eligible holders of patronage certificates that are not individuals. In addition to the annual pro-rata program, the Board of Directors approved additional equity redemptions targeting older capital equity certificates which were paid in fiscal 2007 and that are authorized to be paid in fiscal 2008. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2007, that will be distributed in fiscal 2008, to be approximately $179.4 million, of which $3.8 million was redeemed in cash during the three months ended November 30, 2007, compared to $47.1 million during the three months ended November 30, 2006. Included in our redemptions during the


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second quarter of fiscal 2008 is the planned redemption of $46.4 million by issuing shares of our 8% Cumulative Preferred Stock pursuant to this prospectus.
 
Cash redemptions of patrons and other equities during the years ended August 31, 2007, 2006 and 2005 were $70.8 million, $55.9 million and $23.7 million, respectively. An additional $35.9 million, $23.8 and $20.0 million of equities were redeemed by issuance of shares of our 8% Cumulative Redeemable Preferred Stock during the years ended August 31, 2007, 2006 and 2005, respectively.
 
Governance
 
We are managed by a Board of Directors of not less than 17 persons elected by the members at our annual meeting. Terms of directors are staggered so that no more than six directors are elected in any year. The Board of Directors is currently comprised of 17 directors. Our articles of incorporation and bylaws may be amended only upon approval of a majority of the votes cast at an annual or special meeting of our members, except for the higher vote described under ‘‘— Certain Antitakeover Measures” below.
 
Membership
 
Membership in CHS is restricted to certain producers of agricultural products and to associations of producers of agricultural products that are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended. The Board of Directors may establish other qualifications for membership, as it may from time to time deem advisable.
 
As a membership cooperative, we do not have common stock. We may issue equity or debt instruments, on a patronage basis or otherwise, to our members. We have two classes of outstanding membership. Individual members are individuals actually engaged in the production of agricultural products. Cooperative associations are associations of agricultural producers and may be either cooperatives or other associations organized and operated under the provisions of the Agricultural Marketing Act and the Capper-Volstead Act.
 
Voting Rights
 
Voting rights arise by virtue of membership in CHS, not because of ownership of any equity or debt instruments. Members that are cooperative associations are entitled to vote based upon a formula that takes into account the equity held by the cooperative in CHS and the average amount of business done with us over the previous three years.
 
Members who are individuals are entitled to one vote each. Individual members may exercise their voting power directly or through a patrons’ association affiliated with a grain elevator, feed mill, seed plant or any other of our facilities (with certain historical exceptions) recognized by the Board of Directors. The number of votes of patrons’ associations is determined under the same formula as cooperative association members.
 
Most matters submitted to a vote of the members require the approval of a majority of the votes cast at a meeting of the members, although certain actions require a greater vote. See “— Certain Antitakeover Measures” below.
 
Debt and Equity Instruments
 
We may issue debt and equity instruments to our current members and patrons, on a patronage basis or otherwise, and to persons who are neither members nor patrons. Capital Equity Certificates issued by us are subject to a first lien in favor of us for all indebtedness of the holder to us. On November 30, 2007, our outstanding capital included patrons’ equities (consisting of capital equity certificates and non-patronage earnings certificates), 8% Cumulative Redeemable Preferred Stock and certain capital reserves.
 
Distribution of Assets upon Dissolution; Merger and Consolidation
 
In the event of our dissolution, liquidation or winding up, whether voluntary or involuntary, all of our debts and liabilities would be paid first according to their respective priorities. After such payment, the holders


34


 

of each share of our preferred stock would then be entitled to receive out of available assets, up to $25.00 per share, plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date of distribution. This distribution to the holders of our preferred stock would be made before any payment is made or assets distributed to the holders of any security that ranks junior to the preferred stock but after the payment of the liquidation preference of any of our securities that rank senior to the preferred stock. After such distribution to the holders of equity capital, any excess would be paid to patrons on the basis of their past patronage with us. Our bylaws provide for the allocation among our members and nonmember patrons of the consideration received in any merger or consolidation to which we are a party.
 
Certain Antitakeover Measures
 
Our governing documents may be amended upon the approval of a majority of the votes cast at an annual or special meeting. However, if the Board of Directors, in its sole discretion, declares that a proposed amendment to our governing documents involves or is related to a “hostile takeover,” the amendment must be adopted by 80% of the total voting power of our members.
 
The approval of not less than two-thirds of the votes cast at a meeting is required to approve a “change of control” transaction which would include a merger, consolidation, liquidation, dissolution, or sale of all or substantially all of our assets. If the Board of Directors determines that a proposed change of control transaction involves a hostile takeover, the 80% approval requirement applies. The term “hostile takeover” is not further defined in the Minnesota cooperative law or our governing documents.
 
Tax Treatment
 
Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies to both cooperatives exempt from taxation under Section 521 of the Internal Revenue Code and to nonexempt corporations operating on a cooperative basis. We are a nonexempt cooperative.
 
As a cooperative, we are not taxed on qualified patronage dividends (minimum cash requirement of 20%) allocated and distributed to our members in the form of cash and equities. Consequently, those amounts are taxed only at the patron level. However, the amounts of any allocated but undistributed patronage earnings (called non-qualified unit retains) are taxable to us when allocated. Upon redemption of any non-qualified unit retains, the amount is deductible to us and taxable to the member.
 
Income derived by us from non-patronage sources is not entitled to the “single tax” benefit of Subchapter T and is taxed to us at corporate income tax rates.
 
NCRA is not consolidated for tax purposes.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
The selected consolidated financial data below has been derived from our consolidated financial statements for the periods indicated below. The selected consolidated financial data for August 31, 2007, 2006 and 2005 and for the three months ended November 30, 2007 and 2006 should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this filing. In May 2005, we sold the majority of our Mexican foods business and have recorded the Mexican foods business as discontinued operations. In the opinion of our management, the unaudited historical financial data were prepared on the same basis as the audited historical financial data and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of this information. Results of operations for the three-month periods are not necessarily indicative of results of operations that may be expected for the full fiscal year.
 
Summary Consolidated Financial Data
 
                                                         
    Three Months Ended
       
    November 30     Years Ended August 31  
    2007     2006(1)     2007(1)     2006(1)     2005(1)     2004(1)     2003(1)  
    (unaudited)     (unaudited)                                
    (Dollars in thousands)  
 
Income Statement Data:
                                                       
Revenues
  $ 6,525,386     $ 3,751,070     $ 17,215,992     $ 14,383,835     $ 11,926,962     $ 10,969,081     $ 9,314,116  
Cost of goods sold
    6,210,749       3,528,636       16,129,233       13,540,285       11,438,473       10,525,746       8,985,066  
                                                         
Gross profit
    314,637       222,434       1,086,759       843,550       488,489       443,335       329,050  
Marketing, general and administrative
    66,459       52,102       245,357       231,238       199,354       202,455       175,662  
                                                         
Operating earnings
    248,178       170,332       841,402       612,312       289,135       240,880       153,388  
Gain on investments
    (94,948 )     (5,348 )     (20,616 )             (13,013 )     (14,666 )        
Gain on legal settlements
                                            (692 )     (10,867 )
Interest, net
    13,537       7,688       31,098       41,305       41,509       42,758       40,516  
Equity income from investments
    (31,190 )     (4,531 )     (109,685 )     (84,188 )     (95,742 )     (79,022 )     (47,299 )
Minority interests
    22,979       18,912       143,214       91,079       49,825       34,184       22,099  
                                                         
Income from continuing operations before income taxes
    337,800       153,611       797,391       564,116       306,556       258,318       148,939  
Income taxes
    36,900       17,232       40,668       59,350       34,153       30,108       17,530  
                                                         
Income from continuing operations
    300,900       136,379       756,723       504,766       272,403       228,210       131,409  
(Income) loss on discontinued operations, net of taxes
                            (625 )     16,810       5,909       5,232  
                                                         
Net income
  $ 300,900     $ 136,379     $ 756,723     $ 505,391     $ 255,593     $ 222,301     $ 126,177  
                                                         
Balance Sheet Data (at end of period):
                                                       
Working capital
  $ 1,265,415     $ 843,240     $ 821,878     $ 848,344     $ 766,807     $ 500,315     $ 469,758  
Net property, plant and equipment
    1,836,372       1,525,028       1,728,171       1,476,239       1,359,535       1,249,655       1,122,982  
Total assets
    8,438,759       5,550,481       6,754,373       4,994,166       4,748,654       4,047,710       3,821,386  
Long-term debt, including current maturities
    1,071,514       727,199       688,321       744,745       773,074       683,818       663,173  
Total equities
    2,602,172       2,162,248       2,475,455       2,053,466       1,778,879       1,643,491       1,496,147  
Ratio of earnings to fixed charges and preferred dividends(2)
    11.5x       9.8x       10.1x       8.2x       4.7x       4.5x       3.3x  
 
 
(1) Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see “Change in Accounting Principle — Turnarounds.”
 
(2) For purposes of computing the ratio of earnings to fixed charges and preferred dividends, earnings consist of income from continuing operations before income taxes on consolidated operations, distributed income from


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equity investees and fixed charges. Fixed charges consist of interest expense and one-third of rental expense, considered representative of that portion of rental expense estimated to be attributable to interest.
 
The selected financial data below has been derived from our three business segments, and Corporate and Other, for the three months ended November 30, 2007 and 2006 and the fiscal years ended August 31, 2007, 2006 and 2005. The intercompany revenues between segments were $247.7 million, $251.6 million and $180.8 million for the fiscal years ended August 31, 2007, 2006 and 2005, respectively. The intercompany revenues between segments were $82.5 million and $69.3 million for the three months ended November 30, 2007 and 2006, respectively.
 
Summary Financial Data By Business Segment
 
                                         
                Energy              
    Three Months Ended
       
    November 30     Years Ended August 31  
    2007     2006*     2007*     2006*     2005*  
    (unaudited)     (unaudited)                    
    (Dollars in thousands)  
 
Revenues
  $ 2,521,688     $ 1,853,409     $ 8,105,067     $ 7,414,361     $ 5,794,266  
Cost of goods sold
    2,374,735       1,702,628       7,264,180       6,804,454       5,476,428  
                                         
Gross profit
    146,953       150,781       840,887       609,907       317,838  
Marketing, general and administrative
    22,566       20,987       94,939       82,867       69,951  
                                         
Operating earnings
    124,387       129,794       745,948       527,040       247,887  
Gain on investments
    (17 )                             (862 )
Interest, net
    (5,846 )     385       (6,106 )     6,534       8,918  
Equity income from investments
    (1,163 )     (1,056 )     (4,468 )     (3,840 )     (3,478 )
Minority interests
    22,921       18,961       143,230       91,588       48,830  
                                         
Income before income taxes
  $ 108,492     $ 111,504     $ 613,292     $ 432,758     $ 194,479  
                                         
Intersegment revenues
  $ (77,964 )   $ (67,820 )   $ (228,930 )   $ (242,430 )   $ (170,642 )
                                         
Total identifiable assets at end of period
  $ 2,732,125     $ 2,169,863     $ 2,797,831     $ 2,215,800     $ 2,260,331  
                                         
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see “Changes to Accounting Principle — Turnarounds.”
                                         
                Ag Business              
    Three Months Ended
       
    November 30     Years Ended August 31  
    2007     2006     2007     2006     2005  
    (unaudited)     (unaudited)                    
    (Dollars in thousands)  
 
Revenues
  $ 3,835,251     $ 1,804,616     $ 8,575,389     $ 6,575,165     $ 5,670,644  
Cost of goods sold
    3,686,458       1,746,843       8,388,476       6,401,527       5,541,282  
                                         
Gross profit
    148,793       57,773       186,913       173,638       129,362  
Marketing, general and administrative
    30,688       19,285       97,299       99,777       83,600  
                                         
Operating earnings
    118,105       38,488       89,614       73,861       45,762  
Gain on investments
    (94,545 )     (5,348 )     (5,348 )             (11,358 )
Interest, net
    15,128       5,170       28,550       23,559       20,535  
Equity (income) loss from investments
    (7,193 )     10,589       (51,830 )     (40,902 )     (55,473 )
Minority interests
    58       (49 )     (16 )     (509 )     (41 )
                                         
Income before income taxes
  $ 204,657     $ 28,126     $ 118,258     $ 91,713     $ 92,099  
                                         
Intersegment revenues
  $ (4,421 )   $ (1,381 )   $ (18,372 )   $ (8,779 )   $ (9,640 )
                                         
Total identifiable assets at end of period
  $ 4,322,309     $ 2,240,442     $ 2,846,950     $ 1,806,243     $ 1,604,571  
                                         
 


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                Processing              
    Three Months Ended
       
    November 30     Years Ended August 31  
    2007     2006     2007     2006     2005  
    (unaudited)     (unaudited)                    
    (Dollars in thousands)  
 
Revenues
  $ 243,296     $ 155,024     $ 754,743     $ 614,471     $ 613,766  
Cost of goods sold
    233,117       148,463       726,510       588,732       604,198  
                                         
Gross profit
    10,179       6,561       28,233       25,739       9,568  
Marketing, general and administrative
    5,497       5,956       23,545       21,645       20,750  
                                         
Operating earnings (losses)
    4,682       605       4,688       4,094       (11,182 )
Loss (gain) on investments
    611               (15,268 )             (457 )
Interest, net
    5,024       2,887       14,783       11,096       12,287  
Equity income from investments
    (21,138 )     (12,850 )     (48,446 )     (35,504 )     (36,202 )
                                         
Income before income taxes
  $ 20,185     $ 10,568     $ 53,619     $ 28,502     $ 13,190  
                                         
Intersegment revenues
  $ (90 )   $ (84 )   $ (370 )   $ (368 )   $ (502 )
                                         
Total identifiable at end of period
  $ 741,777     $ 600,463     $ 681,118     $ 518,186     $ 420,373  
                                         
 
                                         
                Corporate
             
                and Other              
    Three Months Ended
       
    November 30     Years Ended August 31  
    2007     2006     2007     2006     2005  
    (unaudited)     (unaudited)                    
    (Dollars in thousands)  
 
Revenues
  $ 7,626     $ 7,306     $ 28,465     $ 31,415     $ 29,070  
Cost of goods sold
    (1,086 )     (13 )     (2,261 )     (2,851 )     (2,651 )
                                         
Gross profit
    8,712       7,319       30,726       34,266       31,721  
Marketing, general and administrative
    7,708       5,874       29,574       26,949       25,053  
                                         
Operating earnings
    1,004       1,445       1,152       7,317       6,668  
Gain on investments
    (997 )                             (336 )
Interest, net
    (769 )     (754 )     (6,129 )     116       (231 )
Equity income from investments
    (1,696 )     (1,214 )     (4,941 )     (3,942 )     (589 )
Minority interests
                                    1,036  
                                         
Income before income taxes
  $ 4,466     $ 3,413     $ 12,222     $ 11,143     $ 6,788  
                                         
Intersegment revenues
                                       
Total identifiable at end of period
  $ 642,548     $ 539,713     $ 428,474     $ 453,937     $ 463,379  
                                         

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Supplementary Financial Information
 
Supplementary financial information required by Item 302 of Regulation S-K for the three months ended November 30, 2007 and each quarter during the years ended August 31, 2007 and 2006 is presented below.
 
(Unaudited)
(Dollars in thousands)
 
         
    November 30,
 
    2007  
 
Revenues
  $ 6,525,386  
Gross profit
    314,637  
Income before income taxes
    337,800  
Net income
    300,900  
 
                                         
          November 30,
    February 28,
    May 31,
    August 31,
 
          2006*     2007*     2007*     2007*  
 
Revenues
          $ 3,751,070     $ 3,734,580     $ 4,732,465     $ 4,997,877  
Gross profit
            222,434       147,941       330,908       385,476  
Income before income taxes
            153,611       89,592       262,717       291,471  
Net income
            136,379       83,673       239,596       297,075  
 
                                         
          November 30,
    February 28,
    May 31,
    August 31,
 
          2005*     2006*     2006*     2006*  
 
Revenues
          $ 3,453,513     $ 3,156,617     $ 3,742,482     $ 4,031,223  
Gross profit
            255,751       115,757       219,294       252,748  
Income from continuing
operations before income taxes
            175,365       45,346       159,863       183,542  
Income from continuing operations
            154,543       40,764       137,079       172,380  
Net income
            154,751       40,665       137,109       172,866  
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; See “Change in Accounting Principle — Turnarounds.”


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
CHS Inc. (CHS, we or us) is a diversified company, which provides grain, foods and energy resources to businesses and consumers on a global basis. As a cooperative, we are owned by farmers, ranchers and their member cooperatives from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock.
 
We provide a full range of production agricultural inputs such as refined fuels, propane, farm supplies, animal nutrition and agronomy products, as well as services, which include hedging, financing and insurance services. We own and operate petroleum refineries and pipelines and market and distribute refined fuels and other energy products under the Cenex® brand through a network of member cooperatives and independent retailers. We purchase grains and oilseeds directly and indirectly from agricultural producers primarily in the midwestern and western United States. These grains and oilseeds are either sold to domestic and international customers, or further processed into a variety of grain-based food products.
 
The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies, including National Cooperative Refinery Association (NCRA) and Provista Renewable Fuels Marketing, LLC (Provista) included in our Energy Segment. The effects of all significant intercompany transactions have been eliminated.
 
We operate three business segments: Energy, Ag Business and Processing. Together, our three business segments create vertical integration to link producers with consumers. Corporate and Other primarily represents our business solutions operations, which consist of commodities hedging, insurance and financial services related to crop production. Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transports those products. Our Ag Business segment purchases and resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as wholesaler and retailer of crop inputs. Our Processing segment converts grains and oilseeds into value-added products.
 
Summary data for each of our business segments for the fiscal years ended August 31, 2007, 2006 and 2005 and for the three months ended November 30, 2007 and 2006 is provided in the Selected Consolidated Financial Data section of this prospectus. Except as otherwise specified, references to years indicate our fiscal year ended August 31, 2007 or ended August 31 of the year referenced.
 
Corporate administrative expenses are allocated to all three business segments, and Corporate and Other, based on either direct usage for services that can be tracked, 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 operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, our retail agronomy, crop nutrients and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.
 
Our revenues can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds, 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


40


 

the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.
 
While our revenues and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and 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 Consolidated Statements of Operations. These investments principally include our 50% ownership in each of the following companies: Agriliance LLC (Agriliance), TEMCO, LLC (TEMCO) and United Harvest, LLC (United Harvest), and our 37.5% ownership in Multigrain S.A. and Xingu Ag included in our Ag Business segment; our 50% ownership in Ventura Foods, LLC (Ventura Foods), our 24% ownership in Horizon Milling, LLC (Horizon Milling) and Horizon Milling G.P., and our approximately 20% ownership in US BioEnergy Corporation (US BioEnergy) included in our Processing segment; and our 49% ownership in Cofina Financial, LLC (Cofina Financial) included in Corporate and Other.
 
Agriliance is owned and governed by United Country Brands, LLC (50%) and Land O’Lakes, Inc. (Land O’Lakes) (50%). United Country Brands, LLC is a 100% owned subsidiary of CHS. We account for our share of the Agriliance investment using the equity method of accounting. In June 2007, we announced that two business segments of Agriliance were being repositioned. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail business. We currently are exploring, with Land O’Lakes, the repositioning options for the remaining portions of the Agriliance retail distribution business. During the three months ended November 30, 2007, we contributed $230.0 million to Agriliance to support their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets.
 
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, we were each entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O’Lakes owed us $133.5 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance’s debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made a true-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during our current fiscal year.
 
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Preliminary values assigned to the net assets as of September 1, 2007 totaled $268.7 million.
 
In May 2005, we sold the majority of our Mexican foods business for proceeds of $38.3 million resulting in a loss on disposition of $6.2 million, with minor activity continuing in 2006. During the year ended August 31, 2006, we sold all of the remaining assets for proceeds of $4.2 million and a gain of $1.6 million. The operating results of the Mexican foods business have been reported as discontinued operations.
 
Certain reclassifications have been made to prior period’s amounts to conform to current period classifications. These reclassifications had no effect on previously reported net income, equities or total cash flows.
 
During the first fiscal quarter of 2008, we changed our accounting method for the costs of turnarounds from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to


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adhere to Financial Accounting Standards Board (FASB) Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The affect of this change in accounting principle to the consolidated income statement for the three months ended November 30, 2006, was to increase net income by $97 thousand. In addition, equity was increased by $42.5 million and $36.2 million as of August 31, 2007 and November 30, 2006, respectively.
 
Effective September 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under FASB Statement 109, “Accounting for Income Taxes”, and requires additional disclosures about uncertain tax positions. FIN 48 requires a taxpayer to determine whether a tax position is more likely than not (greater than 50 percent) to be sustained based solely on the technical merits of the position. If this threshold is met, the tax benefit is measured and recognized at the largest amount that is greater than 50 percent likely of being realized. The total amount of unrecognized tax benefits as of September 1 and November 30, 2007 was $7.5 million. There was no impact to our equity as a result of adoption of FIN 48. Recognition of all or a portion of the unrecognized tax benefits would affect our effective income tax rate in the respective period of change. Any applicable interest and penalties on uncertain tax positions were included as a component of income tax expense prior to the adoption of FIN 48, and we continued this classification subsequent to the adoption. The liability for uncertain income taxes as of September 1, 2007 and November 30, 2007, includes interest and penalties of $0.3 million. We file income tax returns in the U.S. federal jurisdiction, and various U.S. state and foreign jurisdictions. The U.S. income tax returns for periods ended after August 31, 2004, remain subject to examination. With limited exceptions, we are not subject to state and local income tax examinations for years before August 31, 2001. It is not expected that the amount of unrecognized tax benefits will significantly change within the next twelve months.
 
Recent Events
 
On November 29, 2007, US BioEnergy and VeraSun Energy Corporation announced that they have entered into a definitive merger agreement subject to shareholder and regulatory approval. If the merger is consummated, we would own approximately eight percent of the combined entity.
 
On December 12, 2007, we established a ten-year long-term credit agreement through a syndication of cooperative banks in the amount of $150.0 million, with an interest rate of 5.59%. Repayments are due in equal semi-annual installments of $15.0 million each starting in June 2013 through December 2018.
 
We amended our Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. primarily to extend the maturity date of the shelf feature to October 27, 2009. In addition, we borrowed $50.0 million under the arrangement on February 8, 2008. The aggregate long-term notes have an interest rate of 5.78% and are due in equal annual installments of $10.0 million during the years 2014 through 2018.
 
Results of Operations
 
Comparison of the three months ended November 30, 2007 and 2006
 
General.  We recorded income before income taxes of $337.8 million during the three months ended November 30, 2007 compared to $153.6 million during the three months ended November 30, 2006, an increase of $184.2 million (120%). These results reflected increased pretax earnings in each of our Ag Business and Processing segments and in Corporate and Other, and were partially offset by slightly decreased earnings in our Energy segment.
 
Our Energy segment generated income before income taxes of $108.5 million for the three months ended November 30, 2007 compared to $111.5 million in the three months ended November 30, 2006. This decrease in earnings of $3.0 million (3%) is primarily from a net reduction to margins on refined fuels, which resulted mainly from a planned major maintenance, during which time our production was reduced at our Laurel, Montana refinery and were partially offset by improved margins at our NCRA refinery in McPherson, Kansas, which resulted from continued strong global demand and tight supply in our trade area. Earnings in our lubricants, propane, transportation and renewable fuels marketing businesses also improved during the three months ended November 30, 2007 when compared to the same three-month period of the previous year.


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Our Ag Business segment generated income before income taxes of $204.7 million for the three months ended November 30, 2007 compared to $28.1 million in the three months ended November 30, 2006, an increase in earnings of $176.6 million. In our first fiscal quarter of 2007, we sold approximately 25% of our investment in CF, a domestic fertilizer manufacturer in which we held a minority interest, for which we received cash of $10.9 million and recorded a gain of $5.3 million. During the first quarter of fiscal 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. As previously discussed, during the first quarter of fiscal 2008, we acquired the crop nutrients business of Agriliance and recorded $12.8 million in earnings for the three months ended November 30, 2007 for the operations of this business. We previously reflected 50% of these earnings through our equity income from our investment in Agriliance. Strong demand and increased volumes for grain and oilseed products, much of it driven by increased U.S. ethanol production, contributed to improved performances by both our grain marketing and country operations businesses. Our country operations earnings increased $24.3 million, primarily as a result of overall improved product margins, including historically high margins on grain, agronomy, feed and processed sunflower transactions. Continued market expansion into Oklahoma and Kansas also increased country operations volumes. Our grain marketing operations improved earnings by $46.3 million during the three months ended November 30, 2007 compared with the same three-month period in fiscal 2007, primarily from increased grain volumes and included strong earning performances from our joint ventures. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during fiscal 2007 and 2008, increased interest in renewable fuels, and changes in transportation costs shifted marketing patterns and dynamics for our grain marketing business. Improved retail margins generated by Agriliance, an agronomy joint venture in which we hold a 50% interest, net of allocated internal expenses, resulted in a $6.8 million increase in our share of that joint venture’s earnings.
 
Our Processing segment generated income before income taxes of $20.2 million for the three months ended November 30, 2007 compared to $10.6 million in the three months ended November 30, 2006, an increase in earnings of $9.6 million. Oilseed processing earnings increased $2.7 million during the three months ended November 30, 2007 compared to the same period in the prior year, primarily due to improved margins in our refining operations, partially offset by decreased margins in our crushing operations. Our share of earnings from our wheat milling joint ventures, net of allocated expenses, reported improved net earnings of $6.5 million for the three months ended November 30, 2007 compared to the same period in the prior year. Our share of pretax earnings, net of allocated internal expenses, related to US BioEnergy, an ethanol manufacturing company in which we hold a minority ownership interest, increased $0.3 million for the three months ended November 30, 2007 compared to the same period in the prior year. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated internal expenses, increased $0.1 million during the three months ended November 30, 2007, compared to the same period in the prior year.
 
Corporate and Other generated income before income taxes of $4.5 million for the three months ended November 30, 2007 compared to $3.4 million in the three months ended November 30, 2006, an increase in earnings of $1.1 million. This improvement is primarily attributable to our business solutions’ financial and hedging services.
 
Net Income.  Consolidated net income for the three months ended November 30, 2007 was $300.9 million compared to $136.4 million for the three months ended November 30, 2006, which represents a $164.5 million (121%) increase.
 
Revenues.  Consolidated revenues were $6.5 billion for the three months ended November 30, 2007 compared to $3.8 billion for the three months ended November 30, 2006, which represents a $2.7 billion (74%) increase. In September, 2007 we began consolidating revenues from our crop nutrients business acquisition as previously discussed.
 
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevators and agri-service centers derive other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations


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receives other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our hedging and insurance operations.
 
Our Energy segment revenues, after elimination of intersegment revenues, of $2.4 billion increased by $658.1 million (37%) during the three months ended November 30, 2007 compared to the three months ended November 30, 2006. During the three months ended November 30, 2007 and 2006, our Energy segment recorded revenues from our Ag Business segment of $78.0 million and $67.8 million, respectively. The net increase in revenues of $658.1 million is comprised of a $197.0 million net increase in sales volume and a net increase of $461.1 million related to price appreciation on refined fuels and propane products. Refined fuels revenues increased $482.9 million (38%), of which $414.4 million was related to a net average selling price increase and $68.5 million was attributable to increased volumes, compared to the same period in the previous year. The sales price of refined fuels increased $0.61 per gallon (33%) and volumes increased 4% when comparing the three months ended November 30, 2007 with the same period a year ago. Higher crude oil prices, strong global demand and limited refining capacity contributed to the increase in refined fuels selling prices. Renewable fuels marketing revenues increased $90.3 million (65%) mostly from a 79% increase in volumes when compared with the same three-month period in the previous year. Propane revenues increased by $10.4 million (7%), of which $41.0 million related to an increase in the net average selling price, and were partially offset by $30.6 million related to a decrease in volumes, when compared to the same period in the previous year. Propane sales volume decreased 15% in comparison to the same period of the prior year, while the average selling price increased $0.28 per gallon (26%). Propane prices tend to follow the prices of crude oil and natural gas, both of which increased during the three months ended November 30, 2007 compared to the same period in 2007. Propane prices are also affected by changes in propane demand and domestic inventory levels. The decrease in propane volumes primarily reflects a loss of crop drying season with less moisture in the fall 2007 crop and reduced heating fuel season due to milder temperatures.
 
Our Ag Business segment revenues, after elimination of intersegment revenues, of $3.8 billion, increased $2.0 billion (112%) during the three months ended November 30, 2007 compared to the three months ended November 30, 2006. Grain revenues in our Ag Business segment totaled $2,882.2 million and $1,504.5 million during the three months ended November 30, 2007 and 2006, respectively. Of the grain revenues increase of $1,377.7 million (92%), $690.5 million is due to increased average grain selling prices and $687.2 million is attributable to increased volumes during the three months ended November 30, 2007 compared to the same period last fiscal year. The average sales price of all grain and oilseed commodities sold reflected an increase of $2.10 per bushel (46%). The 2007 fall harvest produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. Despite the good harvest, prices for nearly all grain commodity prices increased because of strong demand, particularly for corn which is used as the feedstock for most ethanol plants as well as for livestock feed. The average month-end market price per bushel of soybeans, spring wheat and corn increased approximately $4.06, $4.06 and $0.58, respectively, when compared to the prices of those same grains for the three months ended November 30, 2006. Volumes increased 28% during the three months ended November 30, 2007 compared with the same period of a year ago. Wheat, soybeans and barley reflected the largest volume increases compared to the three months ended November 30, 2006. Beginning in September, 2007 we began recording revenues from our crop nutrients business acquisition of $533.5 million for the three months ended November 30, 2007. Our Ag Business segment non-grain product revenues of $373.0 million increased by $107.3 million (40%) during the three months ended November 30, 2007 compared to the three months ended November 30, 2006, primarily the result of increased revenues of crop nutrient, energy, feed, seed and crop protection products. Other revenues within our Ag Business segment of $42.1 million during the three months ended November 30, 2007 increased $9.2 million (28%) compared to the three months ended November 30, 2006, primarily from grain handling and service revenues.
 
Our Processing segment revenues, after elimination of intersegment revenues, of $243.2 million increased $88.3 million (57%) during the three months ended November 30, 2007 compared to the three months ended November 30, 2006. Because our wheat milling and packaged foods operations are operated through non-consolidated joint ventures, revenues reported in our Processing segment are entirely from our oilseed processing operations. Higher average sales price of processed oilseed increased revenues by $35.5 million, while processed soybean volumes increased 13%, accounting for an increase in revenues of $13.7 million.


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Oilseed refining revenues increased $37.8 million (48%), of which $30.1 million was due to higher average sales price and $7.7 million was due to a 7% net increase in sales volume. The average selling price of processed oilseed increased $75 per ton and the average selling price of refined oilseed products increased $0.12 per pound compared to the same three-month period of fiscal 2007. The changes in the average selling price of products are primarily driven by the higher price of soybeans.
 
Cost of Goods Sold.  Cost of goods sold of $6.2 billion increased $2.7 billion (76%) during the three months ended November 30, 2007 compared to the three months ended November 30, 2006.
 
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $2.3 billion increased by $662.0 million (41%) during the three months ended November 30, 2007 compared to the same period of the prior year. The increase in cost of goods sold is primarily due to increased per unit costs for refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased $0.65 (37%) per gallon and volumes increased 4% compared to the three months ended November 30, 2006. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost increase is primarily related to higher input costs at our two crude oil refineries and higher average prices on the refined products that we purchased for resale compared to the three months ended November 30, 2006. The average per unit cost of crude oil purchased for the two refineries increased 42% compared to the three months ended November 30, 2006. The average cost of propane increased $0.27 (26%) per gallon, while volumes decreased 16% compared to the three months ended November 30, 2006.
 
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $3.7 billion increased $1.9 billion (111%) during the three months ended November 30, 2007 compared to the same period of the prior year. Grain cost of goods sold in our Ag Business segment totaled $2,793.9 million and $1,471.8 million during the three months ended November 30, 2007 and 2006, respectively. The cost of grains and oilseed procured through our Ag Business segment increased $1,322.1 million (90%) compared to the three months ended November 30, 2006. This is the result of an increase of $1.88 (42%) average cost per bushel along with a 28% net increase in bushels sold as compared to the prior year. Wheat, soybeans and barley reflected the largest volume increases compared to the three months ended November 30, 2006. Commodity prices on soybeans, spring wheat and corn have increased compared to the prices that were prevalent during the same three-month period in 2007. Beginning in September, 2007 we began recording cost of goods sold from our crop nutrients business acquisition of $512.0 million for the three months ended November 30, 2007. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased during the three months ended November 30, 2007 compared to the three months ended November 30, 2006, primarily due to higher volumes and price per unit costs for crop nutrient, energy, feed and seed products. The volume increases resulted primarily from acquisitions made and reflected in the reporting periods.
 
Our Processing segment cost of goods sold, after elimination of intersegment costs of $233.0 million, increased $84.6 million (57%) compared to the three months ended November 30, 2006, which was primarily due to increased costs of soybeans in addition to volume increases in oilseed refining and soybean crushing.
 
Marketing, General and Administrative.  Marketing, general and administrative expenses of $66.5 million for the three months ended November 30, 2007 increased by $14.4 million (28%) compared to the three months ended November 30, 2006. The net increase of $14.4 million includes $6.7 million for our crop nutrients business reflected in our Ag Business segment. The remaining net change includes increased performance-based incentive plan expense, in addition to other employee benefits and general inflation.
 
Gain on Investments.  During our first fiscal quarter in 2007, we sold 540,000 shares of our CF Industries Holdings, Inc. (CF) stock, included in our Ag Business segment, for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing our ownership interest in CF to approximately 2.9%. During the three months ended November 30, 2007, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. Also included in our Energy and Ag Business segments and Corporate and Other were gains on available for sale securities sold of $17 thousand,


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$2.9 million and $1.0 million, respectively. These gains were partially offset by losses on investments of $0.6 million in our Processing segment.
 
Interest, net.  Net interest of $13.5 million for the three months ended November 30, 2007 increased $5.8 million (76%) compared to the same period in fiscal 2007. Interest expense for the three months ended November 30, 2007 and 2006 was $18.4 million and $11.3 million, respectively. Interest income, generated primarily from marketable securities, was $4.9 million and $3.6 million, for the three months ended November 30, 2007 and 2006, respectively. The interest expense increase of $7.1 million (63%) includes an increase in short-term borrowings, primarily created by higher working capital needs, and an increase in the average short-term interest rate, partially offset by an increase in capitalized interest of $2.4 million. For the three months ended November 30, 2007 and 2006, we capitalized interest of $4.3 million and $1.9 million, respectively, primarily related to construction projects in our Energy segment for financing interest on our coker project. The average level of short-term borrowings increased $644.9 million during the three months ended November 30, 2007 compared to the same three-month period in fiscal 2007, and the average short-term interest rate increased 0.07%. Higher commodity prices within our Ag Business segment in addition to increased volumes and working capital needs from our crop nutrients business acquisition increased that segment’s interest, net by $10.0 million. Also, in October, 2007, we entered into a private placement with several insurance companies and banks for additional long-term debt in the amount of $400.0 million with an interest rate of 6.18%. The interest income increase of $1.3 million (34%) was primarily at NCRA within our Energy segment and relates to marketable securities and were partially offset by reduced interest income in Corporate and Other, which relates to a decrease of interest income on our hedging and other services.
 
Equity Income from Investments.  Equity income from investments of $31.2 million for the three months ended November 30, 2007 increased $26.7 million compared to the three months ended November 30, 2006. We record equity income or loss primarily from the investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. The net increase in equity income from investments was attributable to improved earnings from investments in all of our business segments and Corporate and Other. These improvements included $0.1 million for Energy, $17.8 million for Ag Business, $8.3 million for Processing and $0.5 million for Corporate and Other.
 
Our Ag Business segment generated improved earnings of $17.8 million from equity investments. Our share of equity investment earnings or losses in Agriliance increased earnings by $4.1 million and includes improved margins for their retail operations. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes, Inc. Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail distribution business. During the first fiscal quarter of 2007, we invested $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil. We recorded income of $2.5 million during the three months ended November 30, 2007 for that equity investment. Our wheat exporting investment in United Harvest contributed improved earnings of $3.9 million, and our equity income from our investment in TEMCO, a joint venture which exports primarily corn and soybeans, also reflected $5.8 million of improved earnings. Our country operations business reported an aggregate increase in equity investment earnings of $1.5 million from several small equity investments.
 
Our Processing segment generated improved earnings of $8.3 million from equity investments. During fiscal years 2006, 2007 and through November 30, 2007, we invested $121.9 million in US BioEnergy, an ethanol manufacturing company, and recorded improved equity investment earnings of $1.7 million during the three months ended November 30, 2007 compared to the same period in the previous year, primarily from operating margins as US BioEnergy had additional plants put into production. Ventura Foods, our vegetable oil-based products and packaged foods joint venture, recorded slightly reduced earnings of $0.2 million, and Horizon Milling, our domestic and Canadian wheat milling joint ventures, both recorded improved earnings of $6.9 million, net compared to the same three-month period in fiscal 2007. Ventura Foods’ decrease in earnings were primarily due to higher selling, general and administrative expenses. A shifting demand balance for soybeans for both food and renewable fuels meant addressing supply and price challenges for both CHS and


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our Ventura Foods joint venture. Horizon Milling’s results are primarily affected by U.S. dietary habits. Although the preference for a low carbohydrate diet appears to have reached the bottom of its cycle, milling capacity, which had been idled over the past few years because of lack of demand for flour products, can easily be put back into production as consumption of flour products increases, which may depress gross margins in the milling industry.
 
Our Energy segment generated increased equity investment earnings of $0.1 million related to improved margins in an equity investment held by NCRA, and Corporate and Other generated improved earnings of $0.5 million from equity investment earnings, primarily from Cofina Financial, our financial services equity investment, as compared to the three months ended November 30, 2006.
 
Minority Interests.  Minority interests of $23.0 million for the three months ended November 30, 2007 increased by $4.1 million (22%) compared to the three months ended November 30, 2006. This net increase was a result of more profitable operations within our majority-owned subsidiaries compared to the same three-month period in the prior year. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary, which we consolidate in our Energy segment.
 
Income Taxes.  Income tax expense of $36.9 million for the three months ended November 30, 2007 compares with $17.2 million for the three months ended November 30, 2006, resulting in effective tax rates of 10.9% and 11.2%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the three-month periods ended November 30, 2007 and 2006. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.
 
Comparison of the years ended August 31, 2007 and 2006
 
General.  We recorded income from continuing operations before income taxes of $797.4 million in fiscal 2007 compared to $564.1 million in fiscal 2006, an increase of $233.3 million (41%). These results reflected increased pretax earnings in our Energy, Ag Business and Processing segments, and Corporate and Other.
 
Our Energy segment generated income from continuing operations before income taxes of $613.3 million for the year ended August 31, 2007 compared to $432.8 million in fiscal 2006. This increase in earnings of $180.5 million (42%) is primarily attributable to higher margins on refined fuels, which resulted mainly from changes in the refining capacity and global demand, including industry supply shortages. Earnings in our propane business increased significantly, from a $1.5 million loss in fiscal 2006 to income of $9.7 million during 2007. Earnings in our renewable fuels marketing, lubricants and transportation businesses also improved during fiscal 2007 when compared to 2006.
 
Our Ag Business segment generated income from continuing operations before income taxes of $118.3 million for the year ended August 31, 2007 compared to $91.7 million in fiscal 2006, an increase in earnings of $26.6 million (29%). Strong demand for grain and oilseeds, much of it driven by increased U.S. ethanol production, contributed to improved performances by both our grain marketing and country operations businesses. Our country operations earnings increased $17.0 million, primarily as a result of overall improved product margins, including historically high margins on agronomy, energy, processed sunflower and grain transactions. Continued market expansion into Oklahoma and Kansas also increased country operations volumes. Our grain marketing operations improved earnings by $2.3 million during the year ended August 31, 2007 compared with fiscal 2006, primarily from increased grain volumes. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during 2007, increased interest in renewable fuels, and changes in transportation costs shifted marketing patterns and dynamics for our grain marketing business. Improved earnings generated by Agriliance, an agronomy joint venture in which we hold a 50% interest, resulted in a $2.0 million increase in our share of that joint venture’s earnings, net of an impairment of retail assets, a Canadian agronomy joint venture and allocated internal expenses. These improved earnings were attributable to improved margins for wholesale and retail crop nutrient products sold during the spring planting season, partially offset by our share of an impairment of retail assets of $10.2 million. Additionally, in our first fiscal quarter of 2007, we sold approximately 25% of our investment in CF, a domestic fertilizer manufacturer in which we held a minority interest, for which we received cash of $10.9 million and recorded


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a gain of $5.3 million. During the first quarter of fiscal 2008, CHS sold all of its remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million.
 
Our Processing segment generated income from continuing operations before income taxes of $53.6 million for the year ended August 31, 2007 compared to $28.5 million in fiscal 2006, an increase in earnings of $25.1 million (88%). Oilseed processing earnings increased $2.2 million during the year ended August 31, 2007 as compared to fiscal 2006. This was primarily the result of improved crushing margins, partially offset by reduced oilseed refining margins. Contributing factors include a 7% increase in volume at our two crushing facilities, but primarily includes significant improvement in oilseed crushing margins, when comparing the year ended August 31, 2007 with fiscal 2006. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated internal expenses, increased by $3.0 million during the year ended August 31, 2007 compared to fiscal 2006, primarily from improved product margins. Our share of earnings from our wheat milling joint ventures, net of allocated internal expenses, reported improved earnings of $0.8 million for fiscal 2007 compared to 2006. Our share of earnings from US BioEnergy, an ethanol manufacturing company in which we hold a minority ownership interest, net of allocated internal expenses, increased by $3.8 million during fiscal 2007 compared to 2006. In December 2006, US BioEnergy completed an initial public offering (IPO) and the effect of the issuance of additional shares of its stock was to dilute our ownership interest from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $11.4 million on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. Subsequent to the IPO, our ownership interest decreased to approximately 19%, and our gain was increased by $3.9 million, to bring the net gain to a total of $15.3 million during fiscal 2007.
 
Corporate and Other generated income from continuing operations before income taxes of $12.2 million for the year ended August 31, 2007 compared to $11.1 million in fiscal 2006, an increase in earnings of $1.1 million (10%). This improvement is primarily attributable to our business solutions’ financial and hedging services.
 
Net Income.  Consolidated net income for the year ended August 31, 2007 was $756.7 million compared to $505.4 million for the year ended August 31, 2006, which represented a $251.3 million (50%) increase.
 
Revenues.  Consolidated revenues of $17.2 billion for the year ended August 31, 2007 compared to $14.4 billion for the year ended August 31, 2006, which represented a $2.8 billion (20%) increase.
 
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevators and agri-service centers derive other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receive other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our hedging and insurance operations.
 
Our Energy segment revenues, after elimination of intersegment revenues, of $7.9 billion increased by $704.2 million (10%) during the year ended August 31, 2007 compared to fiscal 2006. During the years ended August 31, 2007 and 2006, our Energy segment recorded revenues from our Ag Business segment of $228.9 million and $242.4 million, respectively. The revenues net increase of $704.2 million is comprised of a net increase of $609.5 million in sales volume and a $94.7 million increase related to a net price appreciation on refined fuels, renewable fuels and propane products. The net change in revenues includes volume increases of $606.0 million from our ethanol marketing venture, which we acquired in April of fiscal 2006. Refined fuels revenues increased $94.5 million (2%), of which $111.2 million was due to increased volumes, partially offset by $16.7 million related to a net average selling price decrease compared to fiscal 2006. Our refined fuels volumes increased 2%, while the sales price of refined fuels decreased, only slightly, or less than $.01 per gallon, when comparing the year ended August 31, 2007 with fiscal 2006. Lower crude oil prices during fiscal 2007 compared to 2006 were primarily attributable to the effects of the hurricanes in the United States during the fall of 2005. Production disruptions due to hurricanes during the fall of 2005 along with strong demand contributed to the increases in refined fuels selling prices during fiscal 2006. Propane revenues decreased by $125.5 million (17%), of which, $165.1 million was related to decreases in volume, partially


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offset by $39.6 million related to a net average selling price increase when compared to fiscal 2006. Propane sales volume decreased 22% in comparison to fiscal 2006, while the average selling price of propane increased $0.06 per gallon (6%). Propane prices tend to follow the prices of crude oil and natural gas, both of which decreased during the year ended August 31, 2007 compared to 2006, and are also affected by changes in propane demand and domestic inventory levels. The decrease in propane volumes reflects a loss of exclusive propane marketing rights at our former supplier’s proprietary terminals.
 
Our Ag Business segment revenues, after elimination of intersegment revenues, of $8.6 billion increased $2.0 billion (30%) during the year ended August 31, 2007 compared to fiscal 2006. Grain revenues in our Ag Business segment totaled $7,136.3 million and $5,337.2 million during the years ended August 31, 2007 and 2006, respectively. Of the grain revenues increase of $1,799.1 million (34%), $1,278.1 million is due to increased average grain selling prices and $521.0 million is attributable to increased volumes during the year ended August 31, 2007 compared to fiscal 2006. The average sales price of all grain and oilseed commodities sold reflected an increase of $1.05 per bushel (24%). The 2006 fall harvest produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. Despite the good harvest, prices for nearly all grain commodities increased because of strong demand, particularly for corn, which is used as the feedstock for most ethanol plants as well as for livestock feed. The average month-end market price per bushel of corn, soybeans and spring wheat increased approximately $1.33, $1.63 and $1.20, respectively, when compared to the prices of those same grains for fiscal 2006. Volumes increased 8% during the year ended August 31, 2007 compared with fiscal 2006. Corn and soybeans had the largest volume increases compared to fiscal 2006, followed by barley and wheat. Our Ag Business segment non-grain product revenues of $1,291.9 million increased by $197.4 million (18%) during the year ended August 31, 2007 compared to fiscal 2006, primarily the result of increased revenues of crop nutrients, energy, seed, crop protection, feed and processed sunflower products. Other revenues within our Ag Business segment of $128.8 million during the year ended August 31, 2007 decreased $5.9 million (4%) compared to fiscal 2006 and is primarily attributable to reduced storage and handling revenues.
 
Our Processing segment revenues, after elimination of intersegment revenues, of $754.4 million increased $140.3 million (23%) during the year ended August 31, 2007 compared to fiscal 2006. Because our wheat milling, renewable fuels and packaged foods operations are operated through non-consolidated joint ventures, revenues reported in our Processing segment are entirely from our oilseed processing operations. Processed soybean volumes increased 7%, accounting for an increase in revenues of $27.8 million, and a higher average sales price of processed oilseed and other revenues increased total revenues for this segment by $42.4 million. Oilseed refining revenues increased $66.6 million (23%), of which $50.4 million was due to a higher average sales price and $16.1 million was due to a net increase in sales volume. The average selling price of processed oilseed increased $22 per ton and the average selling price of refined oilseed products increased $0.05 per pound compared to 2006. Increased processed soyflour sales of $3.5 million (27%) accounts for the remaining increase in revenues. The changes in the average selling price of products are primarily driven by the higher price of soybeans.
 
Cost of Goods Sold.  Consolidated cost of goods sold of $16.1 billion for the year ended August 31, 2007 compared to $13.5 billion for the year ended August 31, 2006, which represents a $2.6 billion (19%) increase.
 
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $7.0 billion increased by $473.2 million (7%) during the year ended August 31, 2007 compared to fiscal 2006. This net change includes increased cost of goods sold of $624.5 million related to changes in volume from our ethanol marketing venture, which we acquired in April of fiscal 2006. The remaining change in cost of goods sold is primarily due to decreased volumes of propane, partially offset by increased net average per gallon costs of propane. The propane volumes decreased 22%, while the average cost of propane increased $0.05 (5%) compared to the year ended August 31, 2006. The average cost of refined fuels decreased by $0.02 (1%) per gallon, while volumes increased 2% compared to the year ended August 31, 2006. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost decrease on refined fuels is reflective of lower input


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costs at our two crude oil refineries compared to the year ended August 31, 2006. The average per unit cost of crude oil purchased for the two refineries decreased 5% compared to the year ended August 31, 2006.
 
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $8.4 billion increased $2.0 billion (31%) during the year ended August 31, 2007 compared to fiscal 2006. Grain cost of goods sold in our Ag Business segment totaled $7,037.3 million and $5,265.3 million during the years ended August 31, 2007 and 2006, respectively. The cost of grains and oilseed procured through our Ag Business segment increased $1,772.0 million (34%) compared to the year ended August 31, 2006. This is the result of an 8% increase in bushels sold along with an increase of $1.04 (24%) average cost per bushel as compared to fiscal 2006. Corn and soybeans had the largest volume increase compared to the year ended August 31, 2006 followed by barley and wheat. Commodity prices on corn, spring wheat and soybeans have increased compared to the prices that were prevalent during the same period in fiscal 2006. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased during the year ended August 31, 2007 compared to fiscal 2006, primarily due to higher volumes and price per unit costs of crop nutrients, energy, seed, crop protection, feed and processed sunflower products. The higher volumes are primarily related to acquisitions.
 
Our Processing segment cost of goods sold, after elimination of intersegment costs, of $726.1 million increased $137.8 million (23%) compared to the year ended August 31, 2006, which was primarily due to increased costs of soybeans in addition to increased volumes.
 
Marketing, General and Administrative.  Marketing, general and administrative expenses of $245.4 million for the year ended August 31, 2007 increased by $14.1 million (6%) compared to fiscal 2006. The net increase of $14.1 million is primarily due to an increase of $1.0 million for educational funding and increased performance-based incentive plan expense, in addition to other employee benefits and general inflation, partially offset by a $3.0 million net increase in gains on disposals of fixed assets.
 
Gain on Investments.  During our first fiscal quarter in 2007, we sold approximately 25% of our investment in CF. We received cash proceeds of $10.9 million and recorded a gain of $5.3 million, which is reflected within the results reported for our Ag Business segment. In December 2006, US BioEnergy completed an initial public offering (IPO) and the effect of the issuance of additional shares of its stock was to dilute our ownership interest from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $11.4 million on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. Subsequent to the IPO, our ownership interest decreased to approximately 19% and our gain was increased by $3.9 million, which brings the net gain to a total of $15.3 million. This net gain is reflected in our Processing segment.
 
Interest, net.  Net interest of $31.1 million for the year ended August 31, 2007 decreased $10.2 million (25%) compared to fiscal 2006. Interest expense for the years ended August 31, 2007 and 2006 was $51.8 million and $50.6 million, respectively. Interest income, generated primarily from marketable securities, was $20.7 million and $9.3 million, for the years ended August 31, 2007 and 2006, respectively. The interest expense increase of $1.2 million (2%) includes an increase in short-term borrowings, primarily created by higher working capital needs, and an increase in the average short-term interest rate, partially offset by an increase in capitalized interest of $7.1 million. For the years ended August 31, 2007 and 2006, we capitalized interest of $11.7 million and $4.6 million, respectively, primarily related to construction projects in our Energy segment. The increase in capitalized interest primarily relates to financing interest on our coker project mostly during 2007, partially offset by the final stages of the ultra-low sulfur upgrades at our energy refineries during fiscal 2006. The average level of short-term borrowings increased $263.6 million during the year ended August 31, 2007 compared to fiscal 2006, and the average short-term interest rate increased 0.69%. The interest income increase of $11.4 million (124%) was primarily at NCRA within our Energy segment and relates to marketable securities and in Corporate and Other which relates to an increase in interest income on our hedging services.
 
Equity Income from Investments.  Equity income from investments of $109.7 million for the year ended August 31, 2007 increased $25.5 million (30%) compared to fiscal 2006. We record equity income or loss primarily from the investments in which we have an ownership interest of 50% or less and have significant


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influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. The net increase in equity income from investments was attributable to improved earnings from investments in all of our business segments and Corporate and Other. These improvements included $0.6 million for Energy, $10.9 million for Ag Business, $13.0 million for Processing and $1.0 million for Corporate and Other.
 
Our Ag Business segment generated improved earnings of $10.9 million from equity investments. Our share of equity investment earnings or losses in Agriliance increased earnings by $3.0 million and is primarily attributable to improved margins for wholesale and retail crop nutrient products sold during the spring planting season, partially offset by an impairment related to repositioning of their retail operations. Our investment in a Canadian agronomy joint venture contributed an increase in earnings of $0.4 million. During the first fiscal quarter of 2007, we invested $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., which was owned jointly (50/50) with Multigrain Comercia, an agricultural commodities business headquartered in Sao Paulo, Brazil. We recorded income of $4.8 million during the year ended August 31, 2007 for that equity investment. This income for Multigrain S.A. includes a gain of $2.1 million on a sale of 25% of its investment during the fourth fiscal quarter of 2007. At the same time, Mitsui Corporation invested in this business so that as of August 31, 2007, our ownership interest in Multigrain S.A. was 37.5%. Our wheat exporting investment in United Harvest contributed improved earnings of $0.2 million, and our equity income from our investment in TEMCO, a joint venture which exports primarily corn and soybeans, also reflected $2.7 million of improved earnings. Our country operations business reported an aggregate decrease in equity investment earnings of $0.2 million for several small equity investments.
 
Our Processing segment generated improved earnings of $13.0 million from equity investments. During fiscal 2006 and 2007, we invested $115.4 million in US BioEnergy, an ethanol manufacturing company, and recorded improved earnings of $9.3 million during the year ended August 31, 2007 compared to fiscal 2006, primarily from operating margins as US BioEnergy had additional plants put into production compared to fiscal 2006. Ventura Foods, our vegetable oil-based products and packaged foods joint venture, recorded improved earnings of $2.3 million, and Horizon Milling, our domestic and Canadian wheat milling joint ventures, recorded improved earnings of $1.1 million compared to fiscal 2006. Ventura Foods’ improved results were primarily due to improved product margins. A shifting demand balance for soybeans for both food and renewable fuels meant addressing supply and price challenges for both CHS and our Ventura Foods joint venture. Horizon Milling’s results are primarily affected by U.S. dietary habits. Although the preference for a low carbohydrate diet appears to have reached the bottom of its cycle, milling capacity, which had been idled over the past few years because of lack of demand for flour products, can easily be put back into production as consumption of flour products increases, which may continue to depress gross margins in the milling industry.
 
Our Energy segment generated increased equity investment earnings of $0.6 million related to improved margins in an equity investment held by NCRA, and Corporate and Other generated improved earnings of $1.0 million from equity investment earnings, primarily from Cofina Financial, our financial services equity investment, as compared to fiscal 2006.
 
Minority Interests.  Minority interests of $143.2 million for the year ended August 31, 2007 increased by $52.1 million (57%) compared to fiscal 2006. This net increase was a result of more profitable operations within our majority-owned subsidiaries compared to fiscal 2006. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary, which we consolidate in our Energy segment.
 
Income Taxes.  Income tax expense, excluding discontinued operations, of $40.7 million for the year ended August 31, 2007 compares with $59.4 million for fiscal 2006, resulting in effective tax rates of 5.1% and 10.5%, respectively. During the year ended August 31, 2007, we recognized additional tax benefits of $9.6 million upon the receipt of a tax refund from the Internal Revenue Service related to export incentive credits. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the years ended August 31, 2007 and 2006. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.


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Discontinued Operations.  During the year ended August, 31, 2005, we reclassified our Mexican foods operations, previously reported in Corporate and Other, along with gains and losses recognized on sales of assets, and impairments on assets for sale, as discontinued operations that were sold or have met required criteria for such classification. In our Consolidated Statements of Operations, all of our Mexican foods operations have been accounted for as discontinued operations. The amounts recorded for the years ended August 31, 2006 and 2005 were $1.0 million income ($0.6 million in income, net of taxes), primarily the result of the sale of remaining assets, and $27.5 million loss ($16.8 million loss, net of taxes), respectively.
 
Comparison of the years ended August 31, 2006 and 2005
 
General.  We recorded income from continuing operations before income taxes of $564.1 million in fiscal 2006 compared to $306.6 million in fiscal 2005, an increase of $257.5 million (84%). These results reflected increased pretax earnings in our Energy and Processing segments, and Corporate and Other, partially offset by slightly decreased earnings in our Ag Business segment.
 
Our Energy segment generated income from continuing operations before income taxes of $432.8 million for the year ended August 31, 2006 compared to $194.5 million in fiscal 2005. This increase in earnings of $238.3 million (123%) is primarily attributable to higher margins on refined fuels, which resulted mainly from limited refining capacity and increased global demand. With hurricane damages in the fall of 2005, the energy industry faced supply restrictions and distribution disruptions. Pipeline shutdowns later in fiscal 2006 also limited crude oil volumes. Earnings in our propane and transportation operations also improved compared to 2005. These improvements were partially offset by decreased earnings in our lubricants and petroleum equipment businesses.
 
Our Ag Business segment generated income from continuing operations before income taxes of $91.7 million for the year ended August 31, 2006 compared to $92.1 million in fiscal 2005, a decrease in earnings of $0.4 million (less than 1%). Strong domestic grain movement, much of it driven by increased U.S. ethanol production, contributed to good performances by both our country operations and grain marketing businesses. Our country operations earnings increased $14.3 million, primarily as a result of increased grain volumes and overall improved product margins, including historically high margins on grain and energy transactions. Market expansion into Oklahoma and Kansas also increased country operations’ volumes. Our grain marketing operations improved earnings by $11.0 million in fiscal 2006 compared with 2005, primarily from increased grain volumes and improved margins on those grains. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during fiscal 2006, increased interest in renewable fuels, and higher transportation costs shifted marketing patterns and dynamics for our grain marketing business. These improvements in earnings in our country operations and grain marketing businesses were partially offset by reduced earnings generated through our wholesale and retail agronomy ownership interests, primarily Agriliance, net of allocated internal expenses, which decreased $16.1 million, primarily in reduced crop nutrients and crop protection margins. Weather-interrupted supply patterns and resulting price fluctuations dramatically reduced crop nutrients use and sales during fiscal 2006. High natural gas prices, increasing international demand for nitrogen, and hurricane damage to warehouse facilities and the resulting transportation grid led to price increases early in the year. Coupled with high energy costs and low grain prices, many crop producers elected to scale back nutrients applications for the 2006 growing year. As a result, larger remaining inventories later in the year drove significant devaluation and reduced revenues.
 
Also affecting the agronomy business of our Ag Business segment, in February 2005, the board of directors of CF Industries, Inc. (CF), a domestic fertilizer manufacturer in which CHS held a minority interest, determined after reviewing indicative values from strategic buyers that a greater value could be derived for the business through an initial public offering of stock in the company. The initial public offering (IPO) was completed in August 2005. Prior to the IPO, CHS held an ownership interest of approximately 20% in CF, with a carrying value of $153.0 million, which consisted primarily of noncash patronage refunds received from CF over the years. Through the IPO, CHS sold approximately 81% of its ownership interest for cash proceeds of $140.4 million. As a result, the Company recognized a pretax gain of $9.6 million pretax gain ($8.8 million net of taxes) during 2005.


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Our Processing segment generated income from continuing operations before income taxes of $28.5 million for the year ended August 31, 2006 compared to $13.2 million in fiscal 2005, an increase in earnings of $15.3 million (116%). Oilseed processing earnings increased $13.8 million, which was primarily the result of improved crushing margins, partially offset by slightly decreased oilseed refining margins. Contrasting the two years, the soybean harvest in the geographical area near our two crushing facilities was greatly improved in the fall of 2005 (fiscal 2006) compared with the fall of 2004 (fiscal 2005) harvest. During fiscal 2005, basis levels we paid for soybeans were higher than in most of the other soybean producing areas of the country. The improved 2005 fall harvest (fiscal 2006) normalized soybean prices in our geographical area. These lower soybean prices translated into lower raw material costs and higher volumes of soybeans crushed at our two crushing facilities. Our share of earnings from Horizon Milling, our wheat milling joint venture, increased $1.9 million for the year ended August 31, 2006 compared to fiscal 2005. In addition, we recorded a loss of $2.4 million in fiscal 2005 on the disposition of wheat milling equipment at a closed facility. Our share of earnings from Ventura Foods, our packaged foods joint venture, decreased $2.0 million compared to fiscal 2005. During fiscal 2006, we invested $70.0 million in US BioEnergy, an ethanol manufacturing company, in which we recorded a loss of $0.7 million; including allocated interest and internal expenses we recorded a pretax loss of $3.2 million.
 
Corporate and Other generated income from continuing operations before income taxes of $11.1 million for the year ended August 31, 2006 compared to $6.8 million in fiscal 2005, an increase in earnings of $4.3 million (64%). The primary increase in earnings resulted from our business solutions operations which reflected improved earnings of $4.2 million, primarily as a result of improved hedging and financial services income and reduced internal expenses.
 
Net Income.  Consolidated net income for the year ended August 31, 2006 was $505.4 million compared to $255.6 million for the year ended August 31, 2005, which represented a $249.8 million (98%) increase.
 
Revenues.  Consolidated revenues of $14.4 billion for the year ended August 31, 2006 compared to $11.9 billion for the year ended August 31, 2005, which represented a $2.5 billion (21%) increase.
 
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevator and agri-service centers derives other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receives other revenues at our export terminals from activities related to loading vessels.
 
Our Energy segment revenues, after elimination of intersegment revenues, of $7.2 billion increased $1,548.3 million (28%) during the year ended August 31, 2006 compared to the year ended August 31, 2005. During the years ended August 31, 2006 and 2005, our Energy segment recorded revenues to our Ag Business segment of $242.4 million and $170.6 million, respectively. The revenues increase of $1,548.3 million was comprised of a net increase of $1,490.1 million related to price appreciation on refined fuels and propane products and $58.2 million related to a net increase in sales volume. Refined fuels revenues increased $1,186.1 million (28%), of which $1,452.4 million was related to a net average selling price increase, partially offset by $266.3 million, which was related to decreased volumes, compared to fiscal 2005. The increased revenues also included $220.6 million from ethanol marketing, which was partially offset by decreased volumes of other refined fuels and propane products. The sales price of refined fuels increased $0.53 per gallon (35%) while volumes decreased 5% when comparing the year ended August 31, 2006 with the fiscal 2005. Higher crude oil prices, strong global demand and limited refining capacity contributed to the increase in refined fuels selling prices. The decrease in refined fuels volumes reflected intentional reduction of lower margin unbranded volumes. Propane revenues increased by $57.8 million (9%), of which $125.8 million was related to a net average selling price increase, partially offset by $68.0 million which was related to decreased volumes compared to the same period in fiscal 2005. Propane prices increased $0.17 per gallon (19%) and sales volume decreased 9% in comparison to the same period of fiscal 2005. Propane prices tend to follow the prices of crude oil and natural gas, both of which increased during the year ended August 31, 2006 compared to the same period in 2005. The decrease in propane volumes reflected a loss of exclusive propane marketing rights at our former supplier’s proprietary terminals.


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Our Ag Business segment revenues, after elimination of intersegment revenues, of $6.6 billion increased $905.4 million (16%) during the year ended August 31, 2006 compared to the year ended August 31, 2005. Grain revenues in our Ag Business segment totaled $5,337.2 million and $4,613.6 million during the years ended August 31, 2006 and 2005, respectively. Of the grain revenues increase of $723.6 million (16%), $417.1 million was attributable to increased volumes and $306.5 million was due to increased average selling grain prices during the year ended August 31, 2006 compared to fiscal 2005. The average sales price of all grain and oilseed commodities sold reflected an increase of $0.27 per bushel (7%). Commodity prices in general increased following a strong fall 2005 harvest that produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. The higher average market price per bushel of spring wheat and corn were approximately $0.74 and $0.15, respectively, partially offset by lower average market price per bushel of soybeans of approximately $0.15, as compared to the prices of those same grains for the year ended August 31, 2005. Volumes increased 8% during the year ended August 31, 2006 compared with the same period of fiscal 2005. Corn, winter wheat and soybeans reflected the largest volume increases compared to the year ended August 31, 2005. While some areas of the U.S. experienced drought conditions there was a large harvest in 2006. Our Ag Business segment non-grain revenues of $1.2 billion increased by $181.8 million (17%) during the year ended August 31, 2006 compared to the year ended August 31, 2005, primarily the result of increased revenues of energy, crop nutrients, feed and crop protection products, in addition to seed and processed sunflower revenues. These increased non-grain revenues included expansion into Oklahoma and Kansas. The average selling price of energy products increased due to overall market conditions while volumes, not including acquisitions, were fairly consistent to the year ended August 31, 2005.
 
Our Processing segment revenues, after elimination of intersegment revenues, of $614.1 million increased $0.8 million (less than 1%) during the year ended August 31, 2006 compared to the year ended August 31, 2005. Because our wheat milling and packaged foods operations are operated through non-consolidated joint ventures, revenues reported in our Processing segment are entirely from our oilseed processing operations. Processed soybean volumes increased 10%, accounting for an increase in revenues of $22.6 million, and were partially offset by lower average sales price of processed oilseed and other revenues which reduced revenues by $21.8 million. Oilseed refining revenues decreased $14.3 million (5%), of which $9.3 million was due to lower average sales price and $5.0 million was due to a 2% net decrease in sales volume. The average selling price of processed oilseed decreased $7 per ton and the average selling price of refined oilseed products decreased $0.01 per pound compared to the same period of fiscal 2005. These changes in the selling price of products were primarily driven by the average price of soybeans.
 
Cost of Goods Sold.  Cost of goods sold of $13.5 billion increased $2.1 billion (18%) during the year ended August 31, 2006 compared to the year ended August 31, 2005.
 
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $6.6 billion increased by $1,256.2 million (24%) during the year ended August 31, 2006 compared to the same period of fiscal 2005, primarily due to increased average costs of refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased by $0.49 (33%) per gallon, which included an increased cost of $220.8 million from ethanol marketing, and was partially offset by a 5% decrease in volumes compared to the year ended August 31, 2005. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost increase on refined fuels was reflective of higher input costs at our two crude oil refineries and higher average prices on the refined products that we purchased for resale compared to the year ended August 31, 2005. The average per unit cost of crude oil purchased for the two refineries increased 26% compared to the year ended August 31, 2005. The average cost of propane increased $0.16 (19%) per gallon, partially offset by a 9% decrease in volumes compared to the year ended August 31, 2005. The average price of propane increased due to higher procurement costs.
 
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $6.4 billion increased $861.1 million (16%) during the year ended August 31, 2006 compared to the same period of fiscal 2005. Grain cost of goods sold in our Ag Business segment totaled $5,265.3 million and $4,550.2 million during the years ended August 31, 2006 and 2005, respectively. The cost of grains and oilseeds procured


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through our Ag Business segment increased $715.1 million (16%) compared to the year ended August 31, 2005. This was primarily the result of a 14% increase in bushels along with an increase of $0.07 (2%) average cost per bushel as compared to fiscal 2005. Corn, winter wheat and soybeans reflected the largest volume increases compared to the year ended August 31, 2005. Commodity prices on spring wheat and corn increased, while soybean commodity prices showed an average decrease, compared to the prices that were prevalent during the majority of fiscal 2005. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased during the year ended August 31, 2006 compared to the year ended August 31, 2005, primarily due to energy, crop nutrients, feed and crop protection products, in addition to seed and processed sunflower products. These increased costs for products included expansion into Oklahoma and Kansas. The average cost of energy products increased due to overall market conditions while volumes, not including acquisitions, were fairly consistent to the year ended August 31, 2005.
 
Our Processing segment cost of goods sold, after elimination of intersegment costs, of $588.4 million decreased $15.3 million (3%) compared to the year ended August 31, 2005, which was primarily due to decreased input costs of soybeans processed at our two crushing plants, partially offset by higher volumes of soybeans processed at those plants.
 
Marketing, General and Administrative.  Marketing, general and administrative expenses of $231.2 million for the year ended August 31, 2006 increased by $31.9 million (16%) compared to the year ended August 31, 2005. The net increase of $31.9 million was primarily due to increased performance-based incentive plan expense, in addition to other compensation benefits, pension and general inflation.
 
Gain on Investments.  During the fourth quarter of fiscal 2005, we sold approximately 81% of our investment in CF Industries, Inc. through an initial public offering of our equity in that company. We received cash proceeds of $140.4 million and recorded a gain of $9.6 million, net of an impairment charge of $35.0 million recognized during the first quarter of fiscal 2005. This gain is reflected within the results reported for our Ag Business segment.
 
During the second quarter of fiscal 2005, we sold stock representing a portion of our investment in a publicly-traded company for cash proceeds of $7.4 million and recorded a gain of $3.4 million.
 
Interest, net.  Interest, net of $41.3 million for the year ended August 31, 2006 decreased $0.2 million (less than 1%) compared to the year ended August 31, 2005. Interest expense for the years ended August 31, 2006 and 2005 was $50.6 million and $51.5 million, respectively. Interest income, primarily from marketable securities, for the years ended August 31, 2006 and 2005 was $9.3 million and $10.0 million, respectively. The interest expense decrease of $0.9 million (2%) includes a decrease of short-term borrowings primarily related to a net decrease in working capital, partially offset by an increase in the average short-term interest rate and a reduction in capitalized interest. For the fiscal years ended August 31, 2006 and 2005, we capitalized interest of $4.7 million and $6.8 million, respectively, primarily related to capitalized construction projects in our Energy segment. The reduction in capitalized interest relates to the interest on financing the final stages of the ultra-low sulfur upgrades at our energy refineries. The average level of short-term borrowings decreased $143.4 million during fiscal 2006 compared to the year ended August 31, 2005, while the average short-term interest rate increased 1.50%. The interest income decrease of $0.7 million (8%) was primarily in our Energy segment related to a decrease in interest income from short term investments, primarily at NCRA.
 
Equity Income from Investments.  Equity income from investments of $84.2 million for the year ended August 31, 2006 decreased $11.6 million (12%) compared to the year ended August 31, 2005. We record equity income or loss from the investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. The net decrease in equity income from investments was attributable to reduced earnings from investments within our Ag Business and Processing segments of $14.6 million and $0.7 million, respectively and was partially offset by improved earnings within our Energy segment and Corporate and Other of $0.4 million and $3.3 million, respectively.


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Our Ag Business segment generated reduced earnings of $14.6 million from equity investments. Our investment in a Canadian joint venture contributed reduced earnings of $1.5 million. Our share of equity investment earnings in Agriliance decreased $12.4 million and primarily relates to reduced crop nutrients and crop protection margins. Weather-interrupted supply patterns and resulting wide price fluctuations dramatically reduced crop nutrients use and sales during fiscal 2006. High natural gas prices, increasing international demand for nitrogen, and hurricane damage to warehouse facilities and the related transportation grid led to price increases early in fiscal 2006. Coupled with high energy costs and low grain prices, many crop producers elected to scale back nutrient applications for the 2006 growing year. As a result, larger remaining inventories later in fiscal 2006 drove significant devaluation and reduced revenues. Our equity income from our investment in TEMCO, a joint venture, which exports primarily corn and soybeans, recorded reduced earnings primarily on logistics of $4.2 million, while our wheat exporting investment in United Harvest contributed improved earnings of $2.4 million. Our country operations reported an aggregate increase in equity investment earnings of $1.1 million for several small equity investments.
 
Our Processing segment generated reduced earnings of $0.7 million from equity investments. Ventura Foods, our vegetable oil-based products and packaged foods joint venture, recorded reduced earnings of $2.0 million, partially offset by Horizon Milling, our wheat milling joint venture, which recorded improved earnings of $1.9 million compared to fiscal 2005. During 2006, we invested $70.0 million in US BioEnergy Corporation (US BioEnergy), an ethanol manufacturing company, representing an approximate 24% ownership and recorded losses of $0.7 million. A shifting demand balance for soybeans for both food and renewable fuels meant addressing supply and price challenges for both CHS and our joint venture with Ventura Foods. Ventura Foods also completed integration of its dressing and dips acquisition, and exited a large part of its nutritional products business, all of which resulted in increased general expenses. Horizon Milling’s results are primarily affected by U.S. dietary habits. Although the preference for a low carbohydrate diet appears to have reached the bottom of its cycle, milling capacity, which had been idled over the past few years because of lack of demand for flour products, can easily be put back in production as consumption of flour products increases, which will continue to depress gross margins in the milling industry.
 
Our Energy segment generated improved earnings of $0.4 million related to improved margins in an NCRA equity investment, and Corporate and Other generated improved earnings of $3.3 million from equity investments, primarily from Cofina Financial, our financial services equity investment, as compared to the year ended August 31, 2005.
 
Minority Interests.  Minority interests of $91.1 million for the year ended August 31, 2006 increased by $41.3 million (83%) compared to the year ended August 31, 2005. This net increase was a result of more profitable operations within our majority-owned subsidiaries compared to fiscal 2005. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary, which we consolidate in our Energy segment.
 
Income Taxes.  Income tax expense, excluding discontinued operations, of $59.4 million for the year ended August 31, 2006 compares with $34.2 million for the year ended August 31, 2005, resulting in effective tax rates of 10.5% and 11.1%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the years ended August 31, 2006 and 2005. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.
 
Discontinued Operations.  During the year ended August, 31, 2005, we reclassified our Mexican foods operations, previously reported in Corporate and Other, along with gains and losses recognized on sales of assets, and impairments on assets for sale, as discontinued operations that were sold or have met required criteria for such classification. In our Consolidated Statements of Operations, all of our Mexican foods operations have been accounted for as discontinued operations. The amounts recorded for the years ended August 31, 2006 and 2005 were $1.0 million income ($0.6 million in income, net of taxes), primarily the result of the sale of remaining assets, and $27.5 million loss ($16.8 million loss, net of taxes), respectively.


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Liquidity and Capital Resources
 
On November 30, 2007, we had working capital, defined as current assets less current liabilities, of $1,265.4 million and a current ratio, defined as current assets divided by current liabilities, of 1.3 to 1.0, compared to working capital of $821.9 million and a current ratio of 1.3 to 1.0 on August 31, 2007. On November 30, 2006, we had working capital of $843.2 million and a current ratio of 1.4 to 1.0 compared to working capital of $848.3 million and a current ratio of 1.5 to 1.0 on August 31, 2006. During the three months ended November 30, 2007, increases in working capital included the impact of the cash received from additional long-term borrowings of $400.0 million and a distribution of crop nutrients net assets received from Agriliance, our agronomy joint venture, as previously discussed.
 
On November 30, 2007 our committed line of credit consisted of a five-year revolving facility in the amount of $1.3 billion. This credit facility was established with a syndicate of domestic and international banks, and our inventories and receivables financed with it are highly liquid. On November 30, 2007, we had $425.0 million outstanding on this line of credit compared with $280.0 million outstanding on November 30, 2006. In addition, we have two commercial paper programs totaling $125.0 million with banks participating in our five-year revolver. On November 30, 2007, we had $10.9 million of commercial paper outstanding compared with no amount outstanding on November 30, 2006. Due to recent appreciation in commodity prices, as further discussed in “Cash Flows from Operations”, our average borrowings have been much higher in comparison to prior years. In addition to the $400.0 million of long-term borrowing during the three months ended November 30, 2007, we borrowed $150.0 million and $50.0 million of long-term debt in December 2007 and February 2008, respectively. With this recent additional borrowing capacity, we believe that we have adequate liquidity to cover any increase in net operating assets and liabilities in the foreseeable future.
 
Cash Flows from Operations
 
Cash flows from operations are generally affected by commodity prices and the seasonality of our businesses. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions. These factors are described in the preceding cautionary statements and may affect net operating assets and liabilities, and liquidity.
 
Our cash flows provided by operating activities were $14.5 million for the three months ended November 30, 2007, compared to cash flows used in operating activities of $33.3 million for the three months ended November 30, 2006. Although cash flows provided by and used in operating activities were generally comparable in total for the two three-month periods, there was volatility in the components of the cash flows, which primarily included greater net income and non-cash gains on investments, and a larger net increase in operating assets and liabilities during the three months ended November 30, 2007 compared to the same period in the prior year. Grain prices have been quite volatile, and because we hedge most of our grain positions with futures contracts on regulated exchanges, volatile prices create margin calls which are reflected in other current assets and are a use of cash. In addition, higher commodity prices affect inventory and receivable balances which consume cash until inventories are sold and receivables are collected.
 
Our operating activities provided net cash of $14.5 million during the three months ended November 30, 2007. Net income of $300.9 million was partially offset by net non-cash gains and cash distributions from equity investments of $8.3 million and an increase in net operating assets and liabilities of $278.1 million. The primary components of net non-cash gains and cash distributions from equity investments included gains on investments of $94.9 million and income from equity investments, net of redemptions from those investments, of $18.9 million, partially offset by depreciation and amortization, including major repair costs, of $47.2 million, deferred tax expense of $36.9 million and minority interests of $23.0 million. Gains on investments were previously discussed in “Results of Operations”, and primarily includes the gain on the sale of all of our shares of CF common stock. The increase in net operating assets and liabilities was caused primarily by increased commodity prices reflected in increased receivables, inventories and derivative assets and hedging deposits, both included in other current assets, partially offset by an increase in accounts payable and accrued


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expenses, and customer advance payments on November 30, 2007, when compared to August 31, 2007. On November 30, 2007, the market prices of our three primary grain commodities, spring wheat, soybeans and corn, increased by $2.58 (37%) per bushel, $2.12 (24%) per bushel and $0.61 (19%) per bushel, respectively, when compared to the prices on August 31, 2007. In addition, grain inventories in our Ag Business segment increased by 23.0 million bushels (15%) when comparing inventories at November 30, 2007 and August 31, 2007, as the fall 2007 harvest took place. In general, crude oil prices increased $14.67 (20%) per barrel on November 30, 2007 when compared to August 31, 2007.
 
Our operating activities used net cash of $33.3 million during the three months ended November 30, 2006. Net income of $136.4 million and net non-cash expenses and cash distributions from equity investments of $81.7 million were exceeded by an increase in net operating assets and liabilities of $251.4 million. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including major repair costs, of $40.4 million, redemptions from equity investments net of income from those investments of $10.7 million, minority interests of $18.9 million and deferred tax expense of $17.2 million, which were partially offset by a pretax gain of $5.3 million from the sale of 540,000 shares of our CF stock, included in our Ag Business segment. The increase in net operating assets and liabilities was caused primarily by an increase of $210.5 million in derivative assets and hedging deposits (included in other current assets) due to increases in grain prices on November 30, 2006 when compared to August 31, 2006. On November 30, 2006, the market prices of our three primary grain commodities (corn, soybeans and spring wheat) had increased by $1.45 (63%) per bushel, $1.43 (26%) per bushel and $0.54 (12%) per bushel, respectively, when compared to August 31, 2006. Grain inventory quantities also increased in our Ag Business segment by 18.4 million bushels (17%) when comparing inventories on November 30, 2006 to August 31, 2006, due to the fall 2006 harvest. In addition, another cause for the increase in net operating assets and liabilities was that our country operations locations had prepayments of product inventory to suppliers in anticipation of the spring planting season, primarily to secure product pricing discounts. Product prepayments increased $81.8 million on November 30, 2006 when compared to August 31, 2006.
 
Cash flows provided by operating activities were $407.3 million, $497.8 million and $292.0 million for the years ended August 31, 2007, 2006 and 2005, respectively. Volatility in cash flows from operations between fiscal 2007 and 2006 is primarily the result of an increase in operating assets and liabilities partially offset by greater net income during fiscal 2007. Grain prices during fiscal 2007 were quite volatile. Because we hedge most of our grain positions with futures contracts on regulated exchanges, volatile prices create margin calls, reflected in other current assets, which are a use of cash. In addition, higher commodity prices affect inventory and receivable balances which consume cash until inventories are sold and receivables are collected. Volatility in cash flows from operations between fiscal 2006 and 2005 is primarily the result of greater net income during fiscal 2006.
 
Our operating activities provided net cash of $407.3 million during the year ended August 31, 2007. Net income of $756.7 million and net non-cash expenses and cash distributions from equity investments of $288.4 million were partially offset by an increase in net operating assets and liabilities of $637.8 million. The primary components of net non-cash expenses and cash distributions from equity investments included minority interests of $143.2 million, depreciation and amortization, including major repair costs, of $163.8 million and deferred taxes of $50.9 million, which were partially offset by income from equity investments, net of distributions, of $43.0 million and a pretax gain on investments of $20.6 million. The increase in net operating assets and liabilities was caused primarily by increased commodity prices reflected in increased inventories, receivables, and derivative assets and hedging deposits, both included in other current assets, partially offset by an increase in accounts payable and accrued expenses on August 31, 2007 when compared to August 31, 2006. On August 31, 2007, the market prices of our three primary grain commodities, soybeans, spring wheat and corn, increased by $3.26 (60%) per bushel, $2.37 (52%) per bushel and $0.92 (40%) per bushel, respectively, when compared to the prices on August 31, 2006. In addition, grain inventories in our Ag Business segment increased by 39.6 million bushels (36%) when comparing inventories at August 31, 2007 and 2006. In general, crude oil prices increased $3.78 (5%) per barrel on August 31, 2007 when compared to August 31, 2006.


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Our operating activities provided net cash of $497.8 million during the year ended August 31, 2006. Net income of $505.4 million and net non-cash expenses and cash distributions from equity investments of $285.2 million were partially offset by an increase in net operating assets and liabilities of $292.8 million. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including major repair costs, of $141.5 million, minority interests of $91.1 million and deferred taxes of $88.3 million, which were partially offset by income from equity investments, net of distributions, of $25.9 million. The increase in net operating assets and liabilities was caused primarily by an increase in inventories and a decrease in payables on August 31, 2006 when compared to August 31, 2005. The increase in inventories was primarily due to an increase in grain prices and grain inventory quantities in our Ag Business segment. On August 31, 2006, the market prices of two of our primary grain commodities, spring wheat and corn, increased by $1.04 (29%) per bushel and $0.31 (15%) per bushel, respectively, and soybeans, another high volume commodity, saw a decline in price of $0.45 (8%) per bushel when compared to August 31, 2005. Grain inventories in our Ag Business segment increased by 16.3 million bushels (18%) when comparing inventories at August 31, 2006 and 2005. In addition, energy inventories at NCRA increased by 763 thousand barrels (26%) on August 31, 2006 when compared to August 31, 2005, and were also valued using prices that were 46% higher than the previous year. The decrease in accounts payable is related to NCRA, and is primarily due to a decrease in payables for crude oil purchased. The decrease in crude oil payables was related to the planned major maintenance turnaround, during which time the refinery was shut down and inventory was not used for production. The turnaround was completed by the end of August 2006.
 
Our operating activities provided net cash of $292.0 million during the year ended August 31, 2005. Net income of $255.6 million and net non-cash expenses and cash distributions from equity investments of $153.3 million were partially offset by an increase in net operating assets and liabilities of $116.9 million. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including major repair costs, of $120.5 million, minority interests of $49.8 million and deferred tax expense of $30.1 million, which were partially offset by income from equity investments, net of distributions, of $30.9 million, and a pretax gain on the sale of investments of $13.0 million. The increase in net operating assets and liabilities was caused primarily by an increase in crude oil prices of $26.82 per barrel (64%) on August 31, 2005 when compared to August 31, 2004, and an increase in grain and oilseed inventories in our Ag Business segment of 36.1 million bushels (64%) when comparing those same fiscal year-end dates.
 
Crude oil prices are expected to be volatile in the foreseeable future, but related inventories and receivables are turned in a relatively short period, thus somewhat mitigating the effects on operating assets and liabilities. Grain prices are influenced significantly by global projections of grain stocks available until the next harvest. Demand for corn by the ethanol industry created an incentive to divert acres from soybeans and wheat to corn this past planting year. The affect has been to stabilize corn prices at a relatively high level, with soybeans and wheat also showing price appreciation. Grain prices were volatile during fiscal 2007 and have continued to be volatile during the first quarter and into the beginning of the second quarter of fiscal 2008. We anticipate that high demand for all grains and oilseeds will likely continue to create high prices and price volatility for those commodities.
 
We expect our net operating assets and liabilities to increase through our second quarter of fiscal 2008 when compared to the levels on November 30, 2007. We expect to increase crop nutrient and crop protection product inventories and prepayments to suppliers of these products in our crop nutrients and country operations businesses during our second quarter of fiscal 2008. At the same time, we expect this increase in net operating assets and liabilities to be partially offset by the collection of prepayments from our own customers for these products. Prepayments are frequently used for agronomy products to assure supply and at times to guarantee prices. In addition, during our second fiscal quarter of 2008 we will make payments on deferred payment contracts for those producers that sold grain to us during prior quarters and requested payment after the end of the calendar year. We believe that we have adequate capacity through our committed credit facilities to meet any likely increase in net operating assets and liabilities.


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Cash Flows from Investing Activities
 
For the three months ended November 30, 2007 and 2006, the net cash flows used in our investing activities totaled $317.0 million and $180.8 million, respectively.
 
Excluding investments in Agriliance, further discussed below, the acquisition of property, plant and equipment comprised the primary use of cash totaling $108.7 million and $80.2 million for the three months ended November 30, 2007 and 2006, respectively. For the year ending August 31, 2008, we expect to spend approximately $355.0 million for the acquisition of property, plant and equipment. Included in our projected capital spending through fiscal 2008 is completion of the installation of a coker unit at our Laurel, Montana refinery, along with other refinery improvements, which will allow us to extract a greater volume of high value gasoline and diesel fuel from a barrel of crude oil and less relatively lower value asphalt, that is expected to increase yields by about 14 percent. The total cost for this project is expected to be approximately $380.0 million, with completion planned for February 2008. Total expenditures for this project as of November 30, 2007, were $346.3 million, of which $62.0 million and $47.1 million were incurred during the three months ended November 30, 2007 and 2006, respectively.
 
During the first fiscal quarter of 2008, we retrospectively changed our accounting method for the costs of turnarounds from the accrual method to the deferral method, as previously discussed. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Expenditures for these major repairs during the three months ended November 30, 2007 and 2006 were $21.7 million and $1.3 million, respectively.
 
In October 2003, we and NCRA reached agreements with the EPA and the State of Montana’s Department of Environmental Quality and the State of Kansas Department of Health and Environment regarding the terms of settlements with respect to reducing air emissions at our Laurel, Montana and NCRA’s McPherson, Kansas refineries. These settlements are part of a series of similar settlements that the EPA has negotiated with major refiners under the EPA’s Petroleum Refinery Initiative. The settlements take the form of consent decrees filed with the U.S. District Court for the District of Montana (Billings Division) and the U.S. District Court for the District of Kansas. Each consent decree details potential capital improvements, supplemental environmental projects and operational changes that we and NCRA have agreed to implement at the relevant refinery over several years. The consent decrees also required us and NCRA to pay approximately $0.5 million in aggregate civil cash penalties. As of November 30, 2007, the aggregate capital expenditures for us and NCRA related to these settlements was approximately $22 million, and we anticipate spending an additional $9 million over the next four years. We do not believe that the settlements will have a material adverse effect on us or NCRA.
 
Investments made during the three months ended November 30, 2007 and 2006, totaled $267.3 million and $77.4 million, respectively. As previously discussed, in September 2007, Agriliance distributed primarily its wholesale crop nutrients and crop protection assets to us and Land O’Lakes, respectively, and continues to operate primarily its retail distribution business until further repositioning of that business occurs. During the three months ended November 30, 2007, we made a $13.0 million net cash payment to Land O’Lakes in order to maintain equal capital accounts in Agriliance, as previously discussed. During the same period, we contributed $230.0 million to Agriliance to support their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets. Also during the three months ended November 30, 2007, we invested $30.3 million in a joint venture (37.5% ownership) included in our Ag Business segment, that acquired production farmland and related operations in Brazil, intended to strengthen our ability to serve customers around the world. These operations include production of soybeans, corn, cotton and sugarcane, as well as cotton processing at four locations. Another investment was the purchase of $6.5 million of additional shares of common stock in US BioEnergy, included in our Processing segment, during the three months ended November 30, 2007, compared to $35.0 million during the three months ended November 30, 2006. As of November 30, 2007, our ownership in US BioEnergy was approximately 20%, and based upon the market value of $9.07 per share on that date, our investment had a market value of approximately $144.5 million. On November 29, 2007, US BioEnergy


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and VeraSun Corporation announced that they entered into a definitive merger agreement subject to shareholder and regulatory approval. If the merger is consummated, we would own approximately eight percent of the combined entity. An additional investment during the three months ended November 30, 2006, included $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil, in which we have a current ownership interest of 37.5% and is included in our Ag Business segment. This venture, which includes grain storage and export facilities, builds on our South American soybean origination, and helps meet customer needs year-round. We also invested $15.6 million in Horizon Milling G.P. (24% CHS ownership) during the three months ended November 30, 2006, a joint venture included in our Processing segment, that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of Canada, which includes three flour milling operations and two dry baking mixing facilities in Canada.
 
During the three months ended November 30, 2007 and 2006, changes in notes receivable resulted in a decrease in cash flows of $18.9 million and $32.5 million, respectively. The notes were primarily from related party notes receivable at NCRA from its minority owners, Growmark, Inc. and MFA Oil Company. During the three months ended November 30, 2006, $8.0 million of the decrease in cash flows resulted from a note receivable related to our investment in Multigrain S.A.
 
Acquisitions of intangibles were $4.7 million and $0.5 million for the three months ended November 30, 2007 and 2006, respectively.
 
Partially offsetting our cash outlays for investing activities for the three months ended November 30, 2007 and 2006, were proceeds from the sale of investments of $114.2 million and $10.9 million, respectively, which were previously discussed in “Results of Operations”, and primarily include proceeds from the sale of all of our shares of CF common stock. Also partially offsetting cash usages for the three months ended November 30, 2007 and 2006, were proceeds from the disposition of property, plant and equipment of $2.7 million and $1.4 million, respectively, and investments redeemed totaling $0.1 million and $1.4 million, respectively.
 
For the years ended August 31, 2007, 2006 and 2005, the net cash flows used in our investing activities totaled $530.0 million, $308.2 million and $107.4 million, respectively.
 
The acquisition of property, plant and equipment comprised the primary use of cash totaling $373.3 million, $235.0 million and $257.5 million for the years ended August 31, 2007, 2006 and 2005, respectively. Capital expenditures primarily related to the U.S. Environmental Protection Agency (EPA) low sulfur fuel regulations required by 2006 are complete at our Laurel, Montana refinery and NCRA’s McPherson, Kansas refinery. We incurred capital expenditures from fiscal 2003 through 2006 related to these projects of $88.1 million for our Laurel, Montana refinery and $328.7 million for NCRA’s McPherson, Kansas refinery. Expenditures for the projects at the two refineries in total during the years ended August 31, 2006 and 2005 were $71.5 million and $165.1 million, respectively.
 
Expenditures for major repairs related to our refinery turnarounds were $34.7 million, $42.9 million and $15.5 million during the years ended August 31, 2007, 2006 and 2005, respectively.
 
Investments made during the years ended August 31, 2007, 2006 and 2005 totaled $95.8 million, $73.0 million and $25.9 million, respectively. During the year ended August 31, 2007, we invested $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil, and currently have a 37.5% ownership interest which is included in our Ag Business segment. This venture, which includes grain storage and export facilities, builds on our South American soybean origination, and helps meet customer needs year-round. We plan to continue to expand our presence in South America by exploring processing opportunities in other commodity areas. Our grain marketing operations have also added to our global presence by opening offices in Geneva and Hong Kong, and continue to explore other opportunities to establish a presence in emerging grain origination and export markets. We have also invested $15.6 million in Horizon Milling G.P. (24% CHS ownership) during the year ended August 31, 2007, a joint venture included in our Processing segment, that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of


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Canada, which includes three flour milling operations and two dry baking mixing facilities in Canada. During the year ended August 31, 2007, we made additional investments of $45.4 million in US BioEnergy, bringing our total cash investment for common stock in that company to $115.4 million. Prior investments in US BioEnergy include $70.0 million of stock purchased during the year ended August 31, 2006. In December 2006, US BioEnergy completed an initial public offering (IPO), and the effect of the issuance of additional shares of its stock was to dilute our ownership interest from approximately 25% to 21%. In addition, on August 29, 2007, US BioEnergy completed an acquisition with total aggregate net consideration comprised of the issuance of US BioEnergy common stock and cash. Due to US BioEnergy’s increase in equity, primarily from these two transactions, we recognized a non-cash net gain of $15.3 million on our investment during the year ended August 31, 2007, to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. This gain is reflected in our Processing segment. On August 31, 2007, our ownership interest in US BioEnergy was approximately 19%, and based upon the market price of $10.41 per share on that date, our investment had a fair value of approximately $159.3 million. During the first quarter of fiscal 2008, we purchased additional shares of US BioEnergy common stock for $6.5 million, which increased our ownership interest to approximately 20%. We are recognizing earnings of US BioEnergy to the extent of our ownership interest using the equity method of accounting. During the year ended August 31, 2005, we contributed $19.6 million in cash (plus an additional $18.5 million in net assets, primarily loans) to Cofina Financial for a 49% equity interest. Cofina Financial was formed by us and Cenex Finance Association to provide financing for agricultural cooperatives and businesses, and to producers of agricultural products
 
During the years ended August 31, 2007, 2006 and 2005, changes in notes receivable resulted in a decrease in cash flows of $29.3 million, an increase in cash flows of $21.0 million and a decrease in cash flows of $23.8 million, respectively. The notes were primarily from related party notes receivable at NCRA from its minority owners, Growmark, Inc. and MFA Oil Company.
 
Various cash acquisitions of intangibles totaled $15.6 million during the year ended August 31, 2007. The largest intangible acquired was $6.5 million, which was included in the $15.1 million total acquisition price of a distillers dried grain business included in our Ag Business segment. The balance of this business acquisition included $8.6 million of net working capital. During the years ended August 31, 2006 and 2005, acquisitions of intangibles totaled $2.9 million and $0.4 million, respectively.
 
Partially offsetting our cash outlays for investing activities were proceeds from the disposition of property, plant and equipment of $13.5 million, $13.9 million and $21.1 million for the years ended August 31, 2007, 2006 and 2005, respectively. During the year ended August 31, 2005, we sold the majority of our Mexican foods business for proceeds of $38.3 million. The proceeds from the sale of our Mexican foods business includes $13.8 million received for equipment that was used to buy out operating leases during the same period. Also partially offsetting cash usages were investments redeemed totaling $4.9 million, $7.3 million and $13.5 million for the years ended August 31, 2007, 2006 and 2005, respectively. During the year ended August 31, 2007, we sold 540,000 shares of our CF stock, included in our Ag Business segment, for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing our ownership interest in CF to approximately 2.9%. During the first quarter of fiscal 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. During the year ended August 31, 2005, we received proceeds of $140.4 million from the sale of our CF Industries, Inc. investment and recorded a pretax gain of $9.6 million.
 
Cash Flows from Financing Activities
 
We finance our working capital needs through short-term lines of credit with a syndication of domestic and international banks. In May 2006, we renewed and expanded our committed lines of revolving credit to include a five-year revolver in the amount of $1.1 billion, with the ability to expand the facility an additional $200.0 million. In October 2007, we exercised our ability to expand the facility and obtained additional commitments in the amount of $200.0 million from certain lenders under the agreement. The additional commitments increased the total borrowing capacity to $1.3 billion on the facility. On November 30, 2007, interest rates for amounts outstanding on this credit facility ranged from 4.90% to 5.24%. In addition to this line of credit, we have a revolving credit facility dedicated to NCRA, with a syndication of banks in the


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amount of $15.0 million committed. In November 2007, the line of credit dedicated to NCRA was renewed for an additional year. We also have a committed revolving line of credit dedicated to Provista Renewable Fuels Marketing, LLC (Provista), which expires in November 2009, in the amount of $25.0 million. On November 30, 2007, August 31, 2007 and November 30 2006, we had total short-term indebtedness outstanding on these various facilities and other miscellaneous short-term notes payable totaling $443.4 million, $620.7 million and $291.4 million, respectively.
 
During the three months ended November 30, 2006, we instituted two commercial paper programs, totaling up to $125.0 million, with two banks participating in our five-year revolving credit facility. Terms of our five-year revolving credit facility allow a maximum usage of commercial paper of $100.0 million at any point in time. The commercial paper programs do not increase our committed borrowing capacity in that we are required to have at least an equal amount of undrawn capacity available on our five-year revolving facility as to the amount of commercial paper issued. We had no commercial paper outstanding on November 30, 2006. On August 31, 2007, we had $51.9 million of commercial paper outstanding. On November 30, 2007, we had $10.9 million of commercial paper outstanding, all with maturities of three months or less from their date of issuance with interest rates ranging from 5.00% to 6.60%.
 
We typically finance our long-term capital needs, primarily for the acquisition of property, plant and equipment, with long-term agreements with various insurance companies and banks. In June 1998, we established a long-term credit agreement through the cooperative banks. This facility committed $200.0 million of long-term borrowing capacity to us, with repayments through fiscal 2009. The amount outstanding on this credit facility was $68.9 million, $75.4 and $92.7 million on November 30, 2007, August 31, 2007 and November 30, 2006, respectively. Interest rates on November 30, 2007 ranged from 6.47% to 7.13%. Repayments of $6.6 million and $5.7 million were made on this facility during the three months ended November 30, 2007 and 2006, respectively.
 
Also in June 1998, we completed a private placement offering with several insurance companies for long-term debt in the amount of $225.0 million with an interest rate of 6.81%. Repayments are due in equal annual installments of $37.5 million each in the years 2008 through 2013.
 
In January 2001, we entered into a note purchase and private shelf agreement with Prudential Insurance Company. The long-term note in the amount of $25.0 million has an interest rate of 7.9% and is due in equal annual installments of approximately $3.6 million, in the years 2005 through 2011. A subsequent note for $55.0 million was issued in March 2001, related to the private shelf facility. The $55.0 million note has an interest rate 7.43% and is due in equal annual installments of approximately $7.9 million, in the years 2005 through 2011. During the three months ended November 30, 2007 and 2006, no repayments were due on these notes.
 
In October 2002, we completed a private placement with several insurance companies for long-term debt in the amount of $175.0 million, which was layered into two series. The first series of $115.0 million has an interest rate of 4.96% and is due in equal semi-annual installments of approximately $8.8 million during the years 2007 through 2013. The second series of $60.0 million has an interest rate of 5.60% and is due in equal semi-annual installments of approximately $4.6 million during years 2012 through 2018. Repayments of $8.8 million were made on the first series notes during each of the three months ended November 30, 2007 and 2006.
 
In March 2004, we entered into a note purchase and private shelf agreement with Prudential Capital Group, and in April 2004, we borrowed $30.0 million under this arrangement. One long-term note in the amount of $15.0 million has an interest rate of 4.08% and is due in full at the end of the six-year term in 2010. Another long-term note in the amount of $15.0 million has an interest rate of 4.39% and is due in full at the end of the seven-year term in 2011. In April 2007, we amended our Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. and several other participating insurance companies to expand the uncommitted facility from $70.0 million to $150.0 million. We borrowed $50.0 million under the shelf arrangement in February 2008, for which the aggregate long-term notes have an interest rate of 5.78% and are due in equal annual installments of $10.0 million during the years 2014 through 2018.


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In September 2004, we entered into a private placement with several insurance companies for long-term debt in the amount of $125.0 million with an interest rate of 5.25%. The debt is due in equal annual installments of $25.0 million during years 2011 through 2015.
 
In October 2007, we entered into a private placement with several insurance companies and banks for long-term debt in the amount of $400.0 million with an interest rate of 6.18%. The debt is due in equal annual installments of $80.0 million during years 2013 through 2017.
 
Through NCRA, we had revolving term loans outstanding of $2.3 million, $3.0 million and $5.3 million on November 30, 2007, August 31, 2007 and November 30, 2006, respectively. Interest rates on November 30, 2007 ranged from 6.48% to 6.99%. Repayments of $0.8 million were made during each of the three months ended November 30, 2007 and 2006.
 
On November 30, 2007, we had total long-term debt outstanding of $1,071.5 million, of which $71.1 million was bank financing, $974.2 million was private placement debt and $26.2 million was industrial development revenue bonds and other notes and contracts payable. The aggregate amount of long-term debt payable presented in the Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2007 has not changed materially during the three months ended November 30, 2007, other than for the $400.0 million of private placement debt discussed previously, of which repayments will start in 2013. On August 31, 2007 and November 30, 2006, we had long-term debt outstanding of $688.3 million and $727.2 million, respectively. Our long-term debt is unsecured except for other notes and contracts in the amount of $8.1 million; however, restrictive covenants under various agreements have requirements for maintenance of minimum working capital levels and other financial ratios. In addition, NCRA term loans of $2.3 million are collateralized by NCRA’s investment in CoBank, ACB. We were in compliance with all debt covenants and restrictions as of November 30, 2007. The aggregate amount of long-term debt payable as of August 31, 2007 was as follows (dollars in thousands):
 
         
2008
  $ 98,977  
2009
    117,910  
2010
    82,634  
2011
    111,665  
2012
    94,517  
Thereafter
    182,618  
         
    $ 688,321  
         
 
In December 2006, NCRA entered into an agreement with the City of McPherson, Kansas related to certain of its ultra-low sulfur fuel assets, with a cost of approximately $325.0 million. The City of McPherson issued $325.0 million of Industrial Revenue Bonds (IRBs) which were transferred to NCRA as consideration in a financing agreement between the City of McPherson and NCRA related to the ultra-low sulfur fuel assets. The term of the financing obligation is ten years, at which time NCRA has the option of extending the financing obligation or purchasing the assets for a nominal amount. NCRA has the right at anytime to offset the financing obligation to the City of McPherson against the IRBs. No cash was exchanged in the transaction and none is anticipated to be exchanged in the future. Due to the structure of the agreement, the financing obligation and the IRBs are shown net in our consolidated financial statements. In March 2007, notification was sent to the bond trustees to pay the IRBs down by $324.0 million, at which time the financing obligation to the City of McPherson was offset against the IRBs. The balance of $1.0 million will remain outstanding until final maturity in ten years.
 
During the three months ended November 30, 2007 we borrowed on a long-term basis, $400.0 million, and did not have any new borrowings during the three months ended November 30, 2006. During the three months ended November 30, 2007 and 2006, we repaid long-term debt of $18.7 million and $17.6 million, respectively.
 
During the years ended August 31, 2007 and 2005, we borrowed on a long-term basis, $4.1 million and $125.0 million, respectively. There were no long-term borrowings during the year ended August 31, 2006.


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During the years ended August 31, 2007, 2006 and 2005, we repaid long-term debt of $60.9 million, $36.7 million and $36.0 million, respectively.
 
Subsequent to our fiscal quarter ended November 30, 2007, we established a ten-year long-term credit agreement through a syndication of cooperative banks in the amount of $150.0 million, with an interest rate of 5.59%. Repayments are due in equal semi-annual installments of $15.0 million each starting in June 2013 through December 2018.
 
Distributions to minority owners for the three months ended November 30, 2007 and 2006, were $38.4 million and $8.3 million, respectively, and were primarily related to NCRA.
 
Distributions to minority owners for the years ended August 31, 2007, 2006 and 2005 were $76.8 million, $80.5 million and $29.9 million, respectively, and were primarily related to NCRA. NCRA’s cash distributions to members were lower as a percent of earnings in 2005 and 2004 when compared to other years, due to the funding requirements for environmental capital expenditures previously discussed.
 
During the three months ended November 30, 2007 and 2006, changes in checks and drafts outstanding resulted in an increase in cash flows of $26.9 million $20.5 million, respectively.
 
During the years ended August 31, 2007, 2006 and 2005, changes in checks and drafts outstanding resulted in an increase in cash flows of $85.4 million, a decrease in cash flows of $10.5 million and an increase in cash flows of $2.8 million, respectively.
 
In accordance with the bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year. Patronage refunds are calculated based on amounts using financial statement earnings. The cash portion of the patronage distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates. The patronage earnings from the fiscal year ended August 31, 2007, are expected to be distributed primarily during the second fiscal quarter of the year ended August 31, 2008. The cash portion of this distribution deemed by the Board of Directors to be 35% is expected to be approximately $192.5 million, and is classified as a current liability on the November 30, 2007 and August 31, 2007 Consolidated Balance Sheets in dividends and equities payable.
 
During the years ended August 31, 2007, 2006 and 2005, we distributed cash patronage of $133.1 million, $62.5 million and $51.6 million, respectively.
 
Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities held by them, and another for individuals who are eligible for equity redemptions at age 70 or upon death. The amount that each non-individual receives under the pro-rata program in any year is determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates eligible for redemption held by them, and the denominator of which is the sum of the patronage certificates eligible for redemption held by all eligible holders of patronage certificates that are not individuals. In addition to the annual pro-rata program, the Board of Directors approved additional equity redemptions targeting older capital equity certificates which were paid in fiscal 2007 and that are authorized to be paid in fiscal 2008. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2007, that will be distributed in fiscal 2008, to be approximately $179.4 million, of which $3.8 million was redeemed in cash during the three months ended November 30, 2007 compared to $47.1 million during the three months ended November 30, 2006. Included in our redemptions during the second quarter of fiscal 2008, we intend to redeem $46.4 million by issuing shares of our 8% Cumulative Redeemable Preferred Stock pursuant to this prospectus and the registration statement of which it is a part.
 
For the years ended August 31, 2007, 2006 and 2005, we redeemed in cash, equities in accordance with authorization from the Board of Directors, in the amounts of $70.8 million, $55.9 million and $23.7 million, respectively. An additional $35.9 million, $23.8 million and $20.0 million of capital equity certificates were redeemed in fiscal 2007, 2006 and 2005, respectively, by issuance of shares of our 8% Cumulative


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Redeemable Preferred Stock (Preferred Stock). The amount of equities redeemed with each share of Preferred Stock issued was $26.09, $26.10 and $27.58, which was the closing price per share of the stock on the NASDAQ Global Select Market on February 8, 2007, January 23, 2006 and January 24, 2005, respectively.
 
Our Preferred Stock is listed on the NASDAQ Global Select Market under the symbol CHSCP. On November 30, 2007, we had 7,240,221 shares of Preferred Stock outstanding with a total redemption value of approximately $181.0 million, excluding accumulated dividends. Our Preferred Stock accumulates dividends at a rate of 8% per year, which are payable quarterly, and is redeemable at our option after February 1, 2008. We have not redeemed any of our Preferred Stock. At this time, we have no current plan or intention to redeem any Preferred Stock. Dividends paid on our preferred stock during the three months ended November 30, 2007 and 2006 were $3.6 million and $2.9 million, respectively. Dividends paid on our Preferred Stock during the years ended August 31, 2007, 2006 and 2005 were $13.1 million, $10.8 million and $9.2 million, respectively.
 
Off Balance Sheet Financing Arrangements
 
Lease Commitments:
 
We have commitments under operating leases for various refinery, manufacturing and transportation equipment, rail cars, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the lease term.
 
Total rental expense for all operating leases, net of rail car mileage credits received from the railroad and sublease income for the years ended August 31, 2007, 2006 and 2005, was $44.3 million, $38.5 million and $31.0 million, respectively.
 
Minimum future lease payments required under noncancellable operating leases as of August 31, 2007 were as follows:
 
         
    Total  
    (Dollars in millions)  
 
2008
  $ 32.9  
2009
    24.6  
2010
    20.1  
2011
    13.0  
2012
    8.7  
Thereafter
    8.2  
         
Total minimum future lease payments
  $ 107.5  
         
 
Guarantees:
 
We are a guarantor for lines of credit for related companies. Our bank covenants allow maximum guarantees of $150.0 million, of which $54.5 million was outstanding on November 30, 2007. In addition, our bank covenants allow for guarantees dedicated solely for NCRA in the amount of $125.0 million, for which there are no outstanding guarantees as of November 30, 2007. All outstanding loans with respective creditors are current as of November 30, 2007.
 
Debt:
 
There is no material off balance sheet debt.


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Contractual Obligations
 
We had certain contractual obligations at August 31, 2007 which require the following payments to be made:
 
                                         
    Payments Due by Period  
          Less Than
    1 - 3
    3 - 5
    More Than
 
Contractual Obligations
  Total     1 Year     Years     Years     5 Years  
    (Dollars in thousands)  
 
Notes payable(1)
  $ 672,571     $ 672,571                          
Long-term debt(1)
    688,321       98,977     $ 200,544     $ 206,182     $ 182,618  
Interest payments(2)
    147,300       40,394       59,981       32,692       14,233  
Operating leases
    107,476       32,877       44,754       21,663       8,182  
Purchase obligations(3)
    3,686,847       2,434,178       1,244,419       2,212       6,038  
Other liabilities(4)
    215,611               21,237       48,187       146,187  
                                         
Total obligations
  $ 5,518,126     $ 3,278,997     $ 1,570,935     $ 310,936     $ 357,258  
                                         
 
 
(1) Included on our Consolidated Balance Sheet.
 
(2) Based on interest rates and long-term debt balances as of August 31, 2007.
 
(3) Purchase obligations are legally binding and enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities; fixed, minimum or variable price provisions; and time of the transactions. Of our total purchase obligations, $1,199.8 million is included in accounts payable and accrued expenses on our Consolidated Balance Sheet.
 
(4) Other liabilities includes the long-term portion of deferred compensation, deferred income taxes, accrued turnaround and contractual redemptions, and is included on our Consolidated Balance Sheet. Of our total other liabilities on our Consolidated Balance Sheet in the amount of $359.2 million, the timing of the payments of $143.6 million of such liabilities cannot be determined.
 
Our total contractual obligations above did not materially change during the three months ended November 30, 2007, except for the balance sheet changes in payables and long-term debt and a 73% increase in grain purchase contracts related to recent appreciation in grain prices.
 
On September 1, 2007, Agriliance distributed the net assets of their crop nutrients business to us, as previously discussed. We now have additional purchase obligations as of that date related to the crop nutrients business that were previously obligations of Agriliance. On November 30, 2007, we had obligations to purchase approximately 4.7 million tons of fertilizer through fiscal 2010. The average price per ton estimated for these purchase obligations was approximately $385.
 
Critical Accounting Policies
 
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the use of estimates as well as management’s judgments and assumptions regarding matters that are subjective, uncertain or involve a high degree of complexity, all of which affect the results of operations and financial condition for the periods presented. We believe that of our significant accounting policies, the following may involve a higher degree of estimates, judgments and complexity.
 
Allowances for Doubtful Accounts
 
The allowances for doubtful accounts are maintained at a level considered appropriate by our management based on analyses of credit quality for specific accounts, historical trends of charge-offs and recoveries, and current and projected economic, market and other conditions. Different assumptions, changes in economic circumstances, or the deterioration of the financial condition of our customers, could result in additional provisions to the allowances for doubtful accounts and increased bad debt expense.


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Inventory Valuation and Reserves
 
Grain, processed grains, oilseed and processed oilseeds are stated at net realizable values which approximates market values. All other inventories are stated at the lower of cost or market. The cost of certain energy inventories (wholesale refined products, crude oil and asphalt), are determined on the last-in, first-out (LIFO) method; all other energy inventories are valued on the first-in, first-out (FIFO) and average cost methods. Estimates are used in determining the net realizable value of grain and oilseed and processed grains and oilseeds inventories. These estimates include the measurement of grain in bins and other storage facilities, which use formulas in addition to actual measurements taken to arrive at appropriate quantity. Other determinations made by management include quality of the inventory and estimates for freight. Grain shrink reserves and other reserves that account for spoilage also affect inventory valuations. If estimates regarding the valuation of inventories, or the adequacy of reserves, are less favorable than management’s assumptions, then additional reserves or write-downs of inventories may be required.
 
Derivative Financial Instruments
 
We enter into exchange-traded commodity futures and options contracts to hedge our exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk. We do not use derivatives for speculative purposes. Futures and options contracts used for hedging are purchased and sold through regulated commodity exchanges. Fluctuations in inventory valuations, however, may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and, in part, to our assessment of our exposure from expected price fluctuations. We also manage our risks by entering into fixed-price purchase contracts with pre-approved producers and establishing appropriate limits for individual suppliers. Fixed-price sales contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The fair value of futures and options contracts are determined primarily from quotes listed on regulated commodity exchanges. Fixed-price purchase and sales contracts are with various counterparties, and the fair values of such contracts are determined from the market price of the underlying product. We are exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance.
 
Pension and Other Postretirement Benefits
 
Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates and other factors. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expenses and the recorded obligations in future periods. While our management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses.
 
Deferred Tax Assets
 
We assess whether a valuation allowance is necessary to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income, as well as other factors, in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize all, or part of, our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to income in the period such determination was made. We are also significantly impacted by the utilization of loss carryforwards and tax benefits primarily passed to us from National Cooperative Refinery Association (NCRA), which are associated with refinery upgrades that enable NCRA to produce ultra-low sulfur fuels. Our net operating loss carryforwards for tax purposes are available to offset future taxable income. If our loss carryforwards are not used, these loss carryforwards will expire.


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Long-Lived Assets
 
Depreciation and amortization of our property, plant and equipment is provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances, or other factors, may cause management’s estimates of expected useful lives to differ from actual.
 
All long-lived assets, including property plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment on the basis of undiscounted cash flows, at least annually for goodwill, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and may differ from actual.
 
Environmental Liabilities
 
Liabilities, including legal costs, related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regulations. Recoveries, if any, are recorded in the period in which recovery is considered probable. It is often difficult to estimate the cost of environmental compliance, remediation and potential claims given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternate cleanup methods. All liabilities are monitored and adjusted as new facts or changes in law or technology occur and management believes adequate provisions have been made for environmental liabilities. Changes in facts or circumstances may have an adverse impact on our consolidated financial results.
 
Revenue Recognition
 
We record revenue from grain and oilseed sales after the commodity has been delivered to its destination and final weights, grades and settlement prices have been agreed upon. All other sales are recognized upon transfer of title, which could occur upon either shipment or receipt by the customer, depending upon the transaction. Amounts billed to a customer as part of a sales transaction related to shipping and handling are included in revenues. Service revenues are recorded only after such services have been rendered and are included in other revenues.
 
Effect of Inflation and Foreign Currency Transactions
 
We believe that inflation and foreign currency fluctuations have not had a significant effect on our operations during the three months ended November 30, 2007 or the three years ended August 31, 2007, since we conduct essentially all of our business in U.S. dollars.
 
Recent Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and


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liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated results of operations and financial condition.
 
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. We are currently evaluating the impact SFAS No. 141R will have on our future business combinations.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in our Consolidated Balance Sheet. Income and comprehensive income attributed to the noncontrolling interest will be included in our Consolidated Statement of Operations and our Consolidated Statement of Equities and Comprehensive Income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of this standard must be applied retrospectively upon adoption. We are in the process of evaluating the impact the adoption of SFAS No. 160 will have on our consolidated financial statements.


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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Commodity Price Risk
 
We are exposed to price fluctuations on energy, grain and oilseed transactions due to fluctuations in the market value of inventories and fixed or partially fixed purchase and sales contracts. Our use of derivative instruments, reduces the effects of price volatility, thereby protecting against adverse short-term price movements, while somewhat limiting the benefits of short-term price movements. However, fluctuations in inventory valuations may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and, in part, to our assessment of our exposure from expected price fluctuations.
 
We generally enter into opposite and offsetting positions using futures contracts or options to the extent practical, in order to arrive at a net commodity position within the formal position limits we have established and deemed prudent for each of those commodities. These contracts are purchased and sold through regulated commodity exchanges. The contracts are economic hedges of price risk, but are not designated or accounted for as hedging instruments for accounting purposes in any of our operations, with the exception of some contracts included in our Energy segment operations discussed below. These contracts are recorded on the Consolidated Balance Sheet at fair values based on quotes listed on regulated commodity exchanges. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.
 
We also manage our risks by entering into fixed-price purchase and sales contracts with pre-approved producers and by establishing appropriate limits for individual suppliers. Fixed-price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. We are also exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance. These contracts are recorded on the Consolidated Balance Sheet at fair values based on the market prices of the underlying products listed on regulated commodity exchanges, except for certain fixed-price contracts related to propane in our Energy segment. The propane contracts within our Energy segment meet the normal purchase and sales exemption, and thus are not required to be marked to fair value. Unrealized gains and losses on fixed-price contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.
 
Changes in the fair values of derivative instruments described above are recognized in cost of goods sold, in our Consolidated Statements of Operations; in the period such changes occur for all operations with the exception of some derivative instruments included in our Energy segment. Included in other current assets on November 30, 2007, August 31, 2007 and November 30, 2006, are derivative assets of $446.8 million, $247.1 million and $252.3 million, respectively. Included in accrued expenses on November 30, 2007, August 31, 2007 and November 30, 2006, are derivative liabilities of $235.7 million, $177.2 million and $174.7 million, respectively.
 
In our Energy segment, certain financial contracts entered into for the spread between crude oil purchase value and distillate selling price have been designated and accounted for as hedging instruments (cash flow hedges). The unrealized gains or losses of these contracts are deferred to accumulated other comprehensive income in the equity section of our Consolidated Balance Sheet for the fiscal year ended August 31, 2006, and will be included in earnings upon settlement. Settlement dates for cash flow hedges extend through December 31, 2007. At August 31, 2007, the cash flow hedges did not qualify for hedge accounting and, therefore, are recorded in cost of goods sold in our Consolidated Statements of Operations. A loss of $2.8 million and a gain of $2.8 million, net of taxes, were recorded in accumulated other comprehensive income for the years ended August 31, 2007 and 2006, respectively, for the change in the fair value of cash flow hedges related to these derivatives. During the year ended August 31, 2007, net gains of $9.7 million from these contract settlements were recorded in the Consolidated Statement of Operations. No gains or losses were recorded in the Consolidated Statement of Operations during the year ended August 31, 2006, since there were no settlements.


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A 10% adverse change in market prices would not materially affect our results of operations, financial position or liquidity, since our operations have effective economic hedging requirements as a general business practice.
 
Interest Rate Risk
 
We use fixed and floating rate debt to lessen the effects of interest rate fluctuations on interest expense. Short-term debt used to finance inventories and receivables is represented by notes payable with maturities of 30 days or less, so that our blended interest rate for all such notes approximates current market rates. Long-term debt used to finance non-current assets carries various fixed interest rates and is payable at various dates to minimize the effect of market interest rate changes. Our effective interest rate on fixed rate debt outstanding on August 31, 2007, was approximately 6.0%.
 
We entered into interest rate treasury lock instruments to fix interest rates related to a portion of our private placement debts. These instruments were designated and are effective as cash flow hedges for accounting purposes and, accordingly, changes in fair value of $2.2 million, net of taxes, are included in accumulated other comprehensive income. Interest expense for each of the years ended August 31, 2007, 2006 and 2005, includes $0.9 million which relates to the interest rate derivatives. The additional interest expense is an offset to the lower actual interest paid on the outstanding debt instruments.
 
Foreign Currency Risk
 
We conduct essentially all of our business in U.S. dollars, except for grain marketing operations in Brazil and purchases of products from Canada, and had minimal risk regarding foreign currency fluctuations during 2007 or in recent years. Foreign currency fluctuations do, however, impact 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.
 
MANAGEMENT
 
The information specified in Items 10, 11, 12 and 13 of Part III of our Annual Report on Form 10-K for the year ended August 31, 2007 is incorporated herein by reference. Except as set forth below with regard to recently re-elected directors, this information has not materially changed since our Annual Report on Form 10-K for the year ended August 31, 2007 was filed on November 20, 2007.
 
We held our Annual Meeting November 29, 2007 through November 30, 2007 and the following directors were re-elected to the Board of Directors for a three-year term: Robert Bass, Dennis Carlson, Randy Knecht, Steve Riegel and Michael Toelle. The following directors’ terms of office continued after the meeting: Bruce Anderson, Donald Anthony, Curt Eischens, Steve Fritel, Robert Grabarski, Jerry Hasnedl, David Kayser, James Kile, Michael Mulcahey, Richard Owen, Daniel Schurr and Duane Stenzel.
 
DESCRIPTION OF THE PREFERRED STOCK
 
The following section summarizes the material terms and provisions of our preferred stock. This summary is not a complete legal description of our preferred stock, and is qualified in its entirety by reference to our restated articles of incorporation, as amended, our bylaws, as amended, and the resolution of our board of directors establishing the preferred stock.
 
General
 
The shares of preferred stock are shares of a series of preferred equity securities created by our board of directors. Subject to the restrictions noted below under “Limitations and Restrictions on Future Issuances,” there is no limit on the number of shares in the series and shares may be issued from time to time. Our board of directors has expressly authorized the initial sale and subsequent transfer of the shares of preferred stock in accordance with our articles of incorporation.


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The shares of preferred stock to be issued as described in this prospectus will be fully paid and nonassessable when issued.
 
Rank
 
As to payment of dividends and as to distributions of assets upon the liquidation, dissolution or winding up of CHS, whether voluntary or involuntary, the preferred stock ranks prior to:
 
  •  any patronage refund (as that term is used in our bylaws), whether or not represented by a certificate, and any redemption thereof;
 
  •  any other class or series of our capital stock designated by our board of directors as junior to the preferred stock; and
 
  •  our common stock, if any.
 
Shares of any class or series of our capital stock that are not junior to the preferred stock rank equally with the preferred stock as to the payment of dividends and the distribution of assets.
 
Dividends
 
Holders of the preferred stock are entitled to receive quarterly dividends when, as and if declared by our board of directors out of funds legally available for that purpose at the rate of $2.00 per share per year. Dividends are payable on March 31, June 30, September 30 and December 31 of each year (each a “payment date”), except that if a payment date is a Saturday, Sunday or legal holiday, the dividend is payable without interest on the next day that is not a Saturday, Sunday or legal holiday. Dividends on the preferred stock are fully cumulative and accumulate without interest from and including the day immediately following the most recent date as to which dividends have been paid. The most recent date as to which dividends have been paid is December 31, 2007.
 
Dividends are computed on the basis of a 360-day year of twelve 30-day months. Each payment of dividends includes dividends to and including the date on which paid.
 
Dividends are paid to holders of record as they appear on our books ten business days prior to the relevant payment date. We may, in our sole discretion, pay dividends by any one or more of the following means:
 
  •  check mailed to the address of the record holder as it appears on our books;
 
  •  electronic transfer in accordance with instructions provided by the record holder; or
 
  •  any other means mutually agreed between us and the record holder.
 
We may not make any distribution to the holders of any security that ranks junior to the preferred stock unless and until all accumulated and unpaid dividends on the preferred stock and on any other class or series of our capital stock that ranks equally with the preferred stock, including the full dividend for the then-current dividend period, have been paid or declared and set apart for payment. For these purposes, a “distribution” does not include any distribution made in connection with a liquidation, dissolution or winding up, which will be governed by the provisions summarized under “Description of the Preferred Stock — Liquidation Preference” below.
 
Liquidation Preference
 
In a liquidation, dissolution or winding up of CHS, whether voluntary or involuntary, the holders of the preferred stock are entitled to receive out of our available assets $25.00 per share plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date of distribution. This distribution to the holders of the preferred stock will be made before any payment is made or assets distributed to the holders of any security that ranks junior to the preferred stock but after the payment of the liquidation preference of any of our securities that rank senior to the preferred stock. Any distribution to the holders of


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the preferred stock will be made ratably among the holders of the preferred stock and any other of our capital stock which ranks on a parity as to liquidation rights with the preferred stock in proportion to the respective preferential amounts to which each is entitled. After payment in full of the liquidation preference of the shares of preferred stock, the holders of the preferred stock will not participate further in the distribution of our assets.
 
Neither a consolidation or merger with another entity nor a sale or transfer of all or part of our assets for cash, securities or other property will constitute a liquidation, dissolution or winding up if, following the transaction, the preferred stock remains outstanding as duly authorized stock of us or any successor entity.
 
Redemption
 
At Our Option
 
From and after February 1, 2008, we may, at our option, redeem at any time all, or from time to time any portion, of the preferred stock. Any optional redemption will be at a price of $25.00 per share plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date fixed for redemption. If we redeem less than all of the then outstanding shares of preferred stock, we will designate the shares to be redeemed either by lot or in any other manner that our board of directors may determine or may effect the redemption pro rata. However, we may not redeem less than all of the then outstanding shares of preferred stock until all dividends accumulated and unpaid on all then outstanding shares of preferred stock have been paid for all past dividend periods. We have not redeemed any of our Preferred Stock. We have no current plan or intention to redeem the preferred stock.
 
At the Holder’s Option
 
If at any time there has been a change in control (as defined below), each record holder of shares of the preferred stock will have the right, for a period of 90 days from the date of the change in control, to require us to redeem all or any portion of the shares of preferred stock owned by that record holder. Not later than 130 days after the date of the change in control (or, if that date is a Saturday, Sunday or legal holiday, the next day that is not a Saturday, Sunday or legal holiday) we will redeem all shares the record holder has elected to have redeemed in a written notice delivered to us on or prior to the 90th day after the change in control. The redemption price is $25.00 per share plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date fixed for redemption.
 
A “change in control” will have occurred if, in connection with a merger or consolidation that has been approved by our board of directors (prior to submitting the merger or consolidation to our members for approval), whether or not we are the surviving entity, those persons who were members of our board of directors on January 1, 2003, together with those persons who became members of our board of directors after that date at our annual meeting, have ceased to constitute a majority of our board of directors. Under the Minnesota cooperative statute, our members could initiate a merger or consolidation without the approval of our board of directors; a member-initiated merger or consolidation would not meet this definition and thus would not trigger a redemption right.
 
Mechanics of Redemption
 
Not less than 30 days prior to any redemption date pursuant to the exercise of our optional redemption right, we will give written notice to the holders of record of the shares of preferred stock to be redeemed. This notice will specify:
 
  •  the redemption date;
 
  •  the redemption price;
 
  •  the number of shares of preferred stock held by the record holder that are subject to redemption;
 
  •  the time, place and manner in which the holder should surrender the certificate or certificates, if any, representing the shares of preferred stock to be redeemed, including the steps that a holder should take


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  with respect to any certificates which have been lost, stolen or destroyed or to any uncertificated shares; and
 
  •  that from and after the redemption date, dividends will cease to accumulate on the shares and the shares will no longer be deemed outstanding.
 
On or after the redemption date, once a holder surrenders the certificate or certificates representing the shares of preferred stock called for redemption in the manner provided in the redemption notice or takes the appropriate steps with respect to lost, stolen or destroyed certificates or uncertificated shares, the holder will be entitled to receive payment of the redemption price. If fewer than all of the shares of preferred stock represented by a surrendered certificate or certificates are redeemed, we will issue a new certificate representing the unredeemed shares.
 
Effect of Redemption
 
From and after the redemption date, if funds necessary for the redemption are and have been irrevocably deposited or set aside, then:
 
  •  dividends will cease to accumulate with respect to the shares of preferred stock called for redemption;
 
  •  the shares will no longer be deemed outstanding;
 
  •  the holders of the shares will cease to be shareholders; and
 
  •  all rights with respect to the shares of preferred stock will terminate except the right of the holders to receive the redemption price, without interest.
 
Purchases
 
We may at any time and from time to time in compliance with applicable law purchase shares of preferred stock on the open market, pursuant to a tender offer or otherwise, at whatever price or prices and other terms we determine. We may not make any purchases at a time when there are accumulated but unpaid dividends for past dividend periods.
 
Voting
 
Except as described below, the holders of the preferred stock have only those voting rights that are required by applicable law. As a result, the holders of the preferred stock have very limited voting rights and, among other things, do not have any right to vote for the election of directors.
 
Unless the preferred stock is redeemed pursuant to its terms, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the preferred stock, voting separately as a class, is required:
 
  •  for any amendment, alteration or repeal, whether by merger or consolidation or otherwise, of our articles of incorporation or the resolutions establishing the terms of the preferred stock, if the amendment, alteration or repeal adversely affects the rights or preferences of the preferred stock; and
 
  •  to establish, by board resolution or otherwise, any class or series of our equity securities having rights senior to the preferred stock as to the payment of dividends or distribution of assets upon the liquidation, dissolution or winding up of CHS, whether voluntary or involuntary.
 
The creation and issuance of any other class of our securities ranking on a parity with or junior to the preferred stock, including an increase in the authorized number of shares of any such securities, will not be deemed to adversely affect the rights or preferences of the preferred stock.
 
Our board of director’s ability to authorize, without preferred shareholder approval, the issuance of additional classes or series of preferred stock with conversion and other rights may adversely affect you as a holder of preferred stock or the rights of holders of any series of preferred stock that may be outstanding.


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Limitations and Restrictions on Future Issuances
 
We may not offer to issue additional shares of preferred stock in exchange for or in redemption of outstanding patrons’ equities or other equity securities held by our members more than one time per calendar year. If, in connection with an offer of this type, any member would receive more than 0.25% of the number of shares of preferred stock outstanding at the end of the prior calendar year, that member will instead be entitled to receive the shares in quarterly installments as nearly equal as possible. In any calendar year, we may not issue additional shares of preferred stock in exchange for or in redemption of outstanding patrons’ equities or other equity securities held by our members in excess of:
 
  •  for issuances during the years 2004, 2005 and 2006, 20% of the number of shares of preferred stock outstanding at the end of the prior calendar year or 400,000 shares, whichever is greater; and
 
  •  for issuances during any calendar year after the year 2006, 25% of the number of shares of preferred stock outstanding at the end of the prior calendar year or 400,000 shares, whichever is greater.
 
We may not issue additional shares of preferred stock in exchange for or in redemption of outstanding patrons’ equities owned by an estate of one of our former individual members or in redemption of outstanding patrons’ equities owned by individual members who have reached age 70, pursuant to our current policy.
 
No Exchange or Conversion Rights; No Sinking Fund
 
Shares of the preferred stock are not exchangeable or convertible into other class or series of our capital stock or other securities or property. The preferred stock is not subject to the operation of a purchase, retirement or sinking fund.
 
Certain Charter Provisions
 
For a description of some of the provisions of our articles of incorporation that might have an effect of delaying, deferring or preventing a change in control of us, see “Membership in CHS and Authorized Capital — Certain Antitakeover Measures.”
 
As noted above under “Membership in CHS and Authorized Capital — Debt and Equity Instruments,” under our articles of incorporation all equity we issue (including the preferred stock) is subject to a first lien in favor of us for all indebtedness of the holder to us. However, we have not to date taken, and do not intend to take, any steps to perfect this lien against shares of the preferred stock.
 
No Preemptive Rights
 
Holders of the preferred stock have no preemptive right to acquire shares of any class or series of our capital stock.
 
Market for the Preferred Stock
 
The preferred stock is currently listed on The NASDAQ Global Select Market under the symbol “CHSCP.” The following is a listing of the high and low sales prices as listed on The NASDAQ Global Select Market for the preferred stock during our fiscal quarters ended November 30, 2007, August 31, 2007, May 31, 2007, February 28, 2007, November 30, 2006, August 31, 2006, May 31, 2006 and February 28, 2006:
 
                                                                 
    November 30,
    August 31,
    May 31,
    February 28,
    November 30,
    August 31,
    May 31,
    February 28,
 
Price
  2007     2007     2007     2007     2006     2006     2006     2006  
 
High
  $ 25.90     $ 25.90     $ 26.16     $ 26.50     $ 26.60     $ 26.55     $ 26.20     $ 26.55  
Low
  $ 25.15     $ 25.12     $ 25.50     $ 25.90     $ 25.81     $ 25.01     $ 25.23     $ 25.49  
 
Transfer Agent and Registrar
 
Wells Fargo Bank, National Association serves as transfer agent and registrar with respect to the preferred stock.


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COMPARISON OF RIGHTS OF HOLDERS OF PATRONS’
EQUITIES AND RIGHTS OF HOLDERS OF PREFERRED STOCK
 
The following describes the material differences between the rights that the patrons’ equities being redeemed provided to the members of CHS holding them and the rights that the preferred stock provides to the holders. While CHS believes that the description covers the material differences between the two, this summary may not contain all of the information that is important to you. You should carefully read this entire prospectus, including the sections entitled “Membership in CHS and Authorized Capital” and “Description of the Preferred Stock,” and refer to the documents discussed in those sections for a more complete understanding of the differences.
 
Priority on Liquidation
 
In a liquidation, dissolution or winding up of CHS, the rights of a holder of preferred stock rank senior to those of a holder of patrons’ equities.
 
Dividends
 
A holder of patrons’ equities is not entitled to any interest or dividends on those patrons’ equities. A holder of preferred stock is entitled to dividends as described under “Description of the Preferred Stock — Dividends.”
 
Redemption
 
Patrons’ equities are redeemable only at the discretion of our board of directors and in accordance with the terms of the redemption policy adopted by our board of directors, as in effect from time to time. See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of the redemption policy as currently in effect. Shares of preferred stock are subject to redemption both at the option of CHS and at the holder’s option under certain circumstances, both as described under “Description of the Preferred Stock — Redemption.”
 
Voting Rights
 
Ownership of patrons’ equities does not, by itself, entail any voting rights, although the amount of patrons’ equities held by a member that is a cooperative association or a member that is part of a patron’s association is considered in the formula used to determine the level of the member’s voting rights of that cooperative association or patron’s association. See “Membership in CHS and Authorized Capital — Voting Rights.” Ownership of preferred stock entails the limited voting rights described under “Description of the Preferred Stock — Voting.”
 
Transfers
 
Patrons’ equities may not be transferred without the approval of our board of directors. Shares of preferred stock are not subject to any similar restrictions on transfer.
 
Market
 
There is no public market for patrons’ equities. The preferred stock is listed on The NASDAQ Global Select Market.


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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
 
The following summarizes the material federal income tax consequences of the issuance of shares of our preferred stock in redemption of patrons’ equities (the “Exchange”) and the consequences of the ownership, redemption and disposition of the preferred stock. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the final, temporary and proposed regulations promulgated thereunder and administrative rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect). This summary addresses only the tax consequences to a person who is a U.S. holder of patrons’ equities or the preferred stock. You are a U.S. holder if you are:
 
  •  an individual who is a citizen or resident of the U.S.;
 
  •  a corporation (or any entity treated as a corporation for U.S. federal income tax purposes, such as a cooperative) organized under the laws of the U.S. or any political subdivision of the U.S.;
 
  •  an estate if its income is subject to U.S. federal income tax regardless of its source; or
 
  •  a trust if a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust.
 
This summary assumes that you will hold your shares of preferred stock as capital assets within the meaning of Section 1221 of the Code. The summary also assumes that all dividends will be paid as they accrue and that, if the preferred stock is redeemed, there will be no dividend arrearages at the time of redemption. The summary does not purport to deal with all aspects of federal taxation that may be relevant to your receipt of preferred stock pursuant to the Exchange, or to your ownership, redemption or disposition of the preferred stock, such as estate and gift tax consequences, nor does it deal with tax consequences arising under the laws of any state, local or other taxing jurisdiction. This summary also does not apply to you if you belong to a category of investors subject to special tax rules, such as dealers in securities, financial institutions, insurance companies, tax-exempt organizations, foreign persons, qualified retirement plans, individual retirement accounts, regulated investment companies, U.S. expatriates, pass-through entities or investors in pass-through entities or persons subject to the alternative minimum tax.
 
We can give no assurance that the Internal Revenue Service (the “IRS”) will take a similar view with respect to the tax consequences described below. We have not requested, nor do we plan to request, a ruling from the IRS on any tax matters relating to the Exchange or the preferred stock. We strongly encourage you to consult your own tax advisor regarding the federal, state, local, and foreign tax consequences to you of the Exchange and of the ownership, redemption, and disposition of the preferred stock in light of your particular tax circumstances.
 
The Exchange
 
Although no transaction closely comparable to the Exchange, as described in this prospectus, has been the subject of any Treasury regulation, ruling or administrative or judicial decision, we will receive an opinion of Dorsey & Whitney LLP that the exchange of patron’s equities for preferred stock should constitute a reorganization within the meaning of Section 368(a)(1)(E) of the Code.
 
You should be aware that the opinion of Dorsey & Whitney LLP will be subject to the following qualifications and assumptions: it relies on certifications of relevant facts by us, is based upon provisions of the Code, regulations, and administrative and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect), is subject to the assumption that the Exchange will be effected in the manner described in this prospectus, and is limited to the federal income tax matters expressly set forth therein. In addition, the opinion assumes that the fair market value of the preferred stock received will be approximately equal to the fair market value of the patrons’ equities surrendered in exchange therefor and that we have no current plan or intention to redeem the preferred stock. The opinion represents counsel’s legal judgment and is not binding on the IRS or the courts.


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If the exchange of patrons’ equities for preferred stock constitutes a reorganization within the meaning of Section 368(a)(1)(E), the following tax consequences will result:
 
l. We will be “a party to a reorganization” within the meaning of Section 368(b) of the Code.
 
2. We will recognize no gain or loss upon the receipt of the patrons’ equities in exchange for the preferred stock.
 
3. The participants will recognize no gain or loss on the exchange of patrons’ equities for preferred stock, assuming that Section 305(c) of the Code does not apply in connection with the Exchange.
 
4. Provided the participants recognize no gain or loss on the exchange of patrons’ equities for preferred stock, the basis of the preferred stock received by the participants in the transaction will be the same as the basis of the patrons’ equities surrendered in exchange therefor.
 
5. The holding period of the preferred stock received by each participant will include the period during which the participant held the patrons’ equities surrendered in exchange therefor, provided that the patrons’ equities surrendered were held as capital assets on the date of the Exchange and assuming that Section 305(c) of the Code does not apply in connection with the Exchange.
 
6. It is also the opinion of Dorsey & Whitney LLP that the preferred stock received by the participants in the Exchange will not constitute “section 306 stock” within the meaning of Section 306(c) of the Code. Accordingly, a disposition of the Preferred Stock will not be subject to Section 306(a) of the Code, which provides generally that the gross proceeds from the sale or redemption of section 306 stock shall be treated either as ordinary income or as a distribution of property to which section 301 of the Code (concerning amounts taxable as dividends) applies.
 
Dorsey & Whitney LLP will express no opinion regarding whether Section 305(c) of the Code will apply in connection with the Exchange, including, but not limited to whether a participant in the Exchange will be deemed to receive a distribution to which Section 301 of the Code applies by means of Section 305(c) of the Code. Pursuant to Section 305(c) of the Code and applicable Treasury Regulations, a recapitalization may be deemed to result in the receipt of a taxable stock dividend by some shareholders of a corporation, if the recapitalization is pursuant to a plan to periodically increase a shareholder’s proportionate interest in the assets or earnings and profits of the corporation. The amount of any such deemed stock dividend would generally be equal to the amount of the increase in the shareholder’s proportionate interest in the assets or earnings and profits of a corporation. Although the matter is not free from doubt, we believe, based on the nature of cooperatives and cooperative taxation, and the fact that the members in a cooperative share in the assets and earnings and profits of the cooperative primarily in accordance with each member’s annual patronage, that the Exchange is not part of any plan to periodically increase the proportionate interests of any participants. Accordingly, although there is no authority directly on point, we believe that no participant in the exchange should be deemed to receive a taxable stock dividend pursuant to Section 305(c) of the Code. You should consult your own tax advisor about the possibility that Section 305(c) could apply in these circumstances.
 
Dividends and Other Distributions on the Preferred Stock
 
Distributions on the preferred stock are treated as dividends and taxable as ordinary income to the extent of our current or accumulated earnings and profits, as determined for federal income tax purposes taking into account the special rules applicable to cooperatives. Any distribution in excess of our current or accumulated earnings and profits is treated first as a nontaxable return of capital reducing your tax basis in the preferred stock. Any amount in excess of your tax basis is treated as a capital gain.
 
Dividends received by corporate holders of the preferred stock may be eligible for a dividends received deduction equal to 70% of the amount of the distribution, subject to applicable limitations, including limitations related to “debt financed portfolio stock” under Section 246A of the Code and to the holding period requirements of Section 246 of the Code. In addition, any amount received by a corporate holder that is treated as a dividend may constitute an “extraordinary dividend” subject to the provisions of Section 1059 of the Code (except as may otherwise be provided in Treasury Regulations yet to be promulgated). Under Section 1059, a corporate holder generally must reduce the tax basis of all of the holder’s shares (but not below zero) by the “non-taxed portion” of any “extraordinary dividend” and, if the non-taxed portion exceeds


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the holder’s tax basis for the shares, must treat any excess as gain from the sale or exchange of the shares in the year the payment is received. If you are a corporate holder, we strongly encourage you to consult your own tax advisor regarding the extent, if any, to which these provisions may apply to you in light of your particular facts and circumstances. Under current law, qualifying dividends received by individual shareholders are taxed at a 15% rate.
 
Sale or Exchange of Preferred Stock
 
On the sale or exchange of the preferred stock to a party other than us, you generally will realize capital gain or loss in an amount equal to the difference between (a) the amount of cash and the fair market value of any property you receive on the sale and (b) your adjusted tax basis in the preferred stock. We strongly encourage you to consult your own tax advisor regarding applicable rates, holding periods and netting rules for capital gains and losses in light of your particular facts and circumstances. Certain limitations exist on the deduction of capital losses by both corporate and non-corporate taxpayers.
 
Redemption of Preferred Stock
 
If we exercise our right to redeem the preferred stock or if you exercise your right to redeem the preferred stock upon a change in control, your surrender of the preferred stock for the redemption proceeds will be treated either as a payment received upon sale or exchange of the preferred stock or as a distribution with respect to all of your equity interests in us. Resolution of this issue will turn on the application of Section 302 of the Code to your individual facts and circumstances.
 
The redemption will be treated as gain or loss from the sale or exchange of the preferred stock (as discussed above under “— Sale or Exchange of Preferred Stock”) if:
 
  •  the redemption is “substantially disproportionate” with respect to you within the meaning of Section 302(b)(2) of the Code; or
 
  •  your interest in the preferred stock and any other equity interest in us is completely terminated (within the meaning of Section 302(b) (3) of the Code) as a result of such redemption; or
 
  •  the redemption is “not essentially equivalent to a dividend” (within the meaning of Section 302(b)(1) of the Code). In general, redemption proceeds are “not essentially equivalent to a dividend” if the redemption results in a “meaningful reduction” of your interest in the issuer.
 
In determining whether any of these tests has been met, you must take into account not only shares of preferred stock and other equity interests in us (including patrons’ equities and other equity interests) that you actually own, but also shares and other equity interests that you constructively own within the meaning of Section 318 of the Code.
 
If none of the above tests giving rise to sale treatment is satisfied, then a payment made in redemption of the preferred stock will be treated as a distribution that is subject to the tax treatment described above under “ — Dividends and other Distributions on the Preferred Stock.” The amount of the distribution will be measured by the amount of cash and the fair market value of property you receive without any offset for your basis in the preferred stock. Your adjusted tax basis in the redeemed shares of preferred stock will be transferred to any of your remaining stock holdings in us. If, however, you have no remaining stock holdings in us, your basis could be lost.
 
We strongly encourage you to consult your own tax advisor regarding:
 
  •  whether the redemption payment will qualify for sale or exchange treatment under Section 302 of the Code or, alternatively, will be characterized as a distribution; and
 
  •  the resulting tax consequences to you in light of your individual facts and circumstances.


80


 

 
Backup Withholding
 
We may be required to withhold federal income tax at a rate of 28% from dividends and redemption proceeds paid to you if (i) you fail to furnish us with your correct taxpayer identification number in the manner required (ii) the IRS notifies us that your taxpayer identification number is incorrect (iii) the IRS notifies us that you have failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect or (iv) when required to do so, you fail to certify that you are not subject to backup withholding. Any amounts withheld can be credited against your federal income tax liability.
 
PLAN OF DISTRIBUTION
 
On October 3, 2007, our board of directors authorized us to redeem, on a pro rata basis, $46,363,888 of our “patrons’ equities.” In connection with this redemption, shares of preferred stock issued in redemption of the patrons’ equities will be issued only to non-individual active members who have conducted business with us during the past five years and whose pro rata share of the redemption amount is equal to or greater than $500 and, for each member eligible to receive such preferred stock, only in a number that does not exceed 18,100 shares of preferred stock (which equals one-quarter of one percent (0.25%) of our total shares of preferred stock outstanding as of December 31, 2007). See “Membership in CHS and Authorized Capital — Patrons’ Equities” for a description of patrons’ equities and our annual pro rata redemptions of patrons’ equities. The amount of patrons’ equities that will be redeemed with each share of preferred stock issued will be $25.65, which is the greater of $25.28 (equal to the $25.00 liquidation preference per share of preferred stock plus $0.28 of accumulated dividends from and including January 1, 2008 to and including February 19, 2008) or the closing price for one share of the preferred stock on The NASDAQ Global Select Market on February 11, 2008, subject to the exceptions described below. We will not issue any fractional shares of preferred stock. The amount of patrons’ equities that would otherwise be issued as a fractional share to any member will instead be retained as part of that member’s patron’s equities.
 
We are issuing the shares of preferred stock directly to the relevant members. We have not engaged and will not engage any underwriter, broker-dealer, placement agent or similar agent or representative in connection with the issuance of the preferred stock described in this prospectus.
 
We will not pay any commissions or other compensation related to the issuance of the shares of preferred stock. We estimate that the total expenses of the issuance will be approximately $115,000, all of which we will bear.
 
Except in the circumstances described below, we will not prepare or distribute stock certificates to represent the shares of preferred stock so issued. Instead, we will issue the shares of preferred stock in book-entry form on the records of our transfer agent for the preferred stock (Wells Fargo Bank, National Association). Members who require a stock certificate should contact Wells Fargo Shareowner Services in writing or by telephoning at the following address or telephone number:
 
Wells Fargo Shareowner Services
161 North Concord Exchange
South St. Paul, Minnesota 55075
(800) 468-9716
 
Some of our members have pledged their patrons’ equities and made those pledged patrons’ equities the subject of control agreements between us and various financial institutions. For these members, we will prepare stock certificates representing the shares issued in redemption of their patrons’ equities. We will retain those stock certificates subject to our control agreements with the relevant financial institutions until otherwise instructed by the relevant financial institution. We will also instruct the transfer agent to place a “stop transfer” order with respect to those shares. Members whose shares are issued as described in this paragraph may obtain more information by contacting David Kastelic in writing or by telephone at the following address or telephone number:
 
David Kastelic
Senior Vice President and General Counsel
CHS Inc.
5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-3712


81


 

 
LEGAL MATTERS
 
Dorsey & Whitney LLP, Minneapolis, Minnesota, is providing an opinion that the shares of preferred stock issued pursuant to this prospectus have been duly authorized and validly issued and will be fully paid and nonassessable.
 
EXPERTS
 
The consolidated financial statements and financial statement schedule of CHS Inc. and subsidiaries as of August 31, 2007 and 2006 and for each of the three years in the period ended August 31, 2007 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We are subject to the information requirements of the Securities Exchange Act of 1934, as amended, and file reports and other information with the Securities and Exchange Commission. Our SEC filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Additionally, you can obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its Public Reference Room.
 
The SEC allows us to “incorporate by reference” into this prospectus information we have filed with it. The information incorporated by reference is an important part of this prospectus and is considered to be part of this prospectus. We incorporate by reference the documents listed below:
 
  •  our Annual Report on Form 10-K for the fiscal year ended August 31, 2007,
 
  •  our Quarterly Report on Form 10-Q for the three months ended November 30, 2007, and
 
  •  our Current Reports on Form 8-K filed November 29, 2007 and February 11, 2008.
 
You may request a copy of these filings, at no cost, by writing or telephoning us at the following address:
 
CHS Inc.
Attention: Jodell M. Heller, Vice President and Controller
5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-5270
 
We maintain a web site at www.chsinc.com. You may access our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge through our web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
 
You should rely only on the information provided in or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information.


82


 

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus and the information incorporated by reference in it include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words and phrases such as “will likely result,” “are expected to,” “is anticipated,” “estimate,” “project” and similar expressions identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, risks related to the level of commodity prices, loss of member business, competition, changes in the taxation of cooperatives, compliance with laws and regulations, environmental liabilities, perceptions of food quality and safety, business interruptions and casualty losses, access to equity capital, consolidation of producers and customers, fluctuations in prices for crude oil and refined petroleum products, alternative energy sources, the performance of our agronomy business, technological improvements and joint ventures. These risks and uncertainties are further described under “Risk Factors” and elsewhere in this prospectus.
 
We do not guarantee future results, levels of activity, performance or achievements and we wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date on which they were made.


83


 

 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC.
 
         
    Page No.
 
CHS Inc.
       
Report of Independent Registered Public Accounting Firm
    F-1  
Consolidated Balance Sheets as of August 31, 2007 and 2006
    F-2  
Consolidated Statements of Operations for the years ended August 31, 2007, 2006 and 2005
    F-3  
Consolidated Statements of Equities and Comprehensive Income for the years ended August 31, 2007, 2006 and 2005
    F-4  
Consolidated Statements of Cash Flows for the years ended August 31, 2007, 2006 and 2005
    F-5  
Notes to Consolidated Financial Statements
    F-6  
Consolidated Balance Sheets as of November 30, 2007, August 31, 2007 and November 30, 2006 (Unaudited)
    F-34  
Consolidated Statements of Operations for the three months ended November 30, 2007 and 2006 (Unaudited)
    F-35  
Consolidated Statements of Cash Flows for the three months ended November 30, 2007, and 2006 (Unaudited)
    F-36  
Notes to Consolidated Financial Statements (Unaudited)
    F-37  


F-i


 

 
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 equities and comprehensive income and of cash flows present fairly, in all material respects, the financial position of CHS Inc. and subsidiaries at August 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2007, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 11 to the consolidated financial statements, CHS Inc. changed the manner in which it accounts for defined benefit arrangements effective August 31, 2007.
 
-s- PricewaterhouseCoopers LLP
 
November 2, 2007, except as it relates to the effects of the adoption of FSP No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” as discussed in Note 17 as to which the date is February 14, 2008.
Minneapolis, Minnesota


F-1


 

 
CONSOLIDATED BALANCE SHEETS
 
                 
    August 31  
    2007     2006  
    (Dollars in thousands)  
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 357,712     $ 112,525  
Receivables
    1,401,251       1,076,602  
Inventories
    1,666,632       1,130,824  
Other current assets
    511,263       298,666  
                 
Total current assets
    3,936,858       2,618,617  
Investments
    880,592       624,253  
Property, plant and equipment
    1,728,171       1,476,239  
Other assets
    208,752       275,057  
                 
Total assets
  $ 6,754,373     $ 4,994,166  
                 
 
LIABILITIES AND EQUITIES
Current liabilities:
               
Notes payable
  $ 672,571     $ 22,007  
Current portion of long-term debt
    98,977       60,748  
Customer credit balances
    110,818       66,468  
Customer advance payments
    161,525       82,362  
Checks and drafts outstanding
    143,133       57,083  
Accounts payable
    1,120,822       904,143  
Accrued expenses
    432,840       327,688  
Dividends and equities payable
    374,294       249,774  
                 
Total current liabilities
    3,114,980       1,770,273  
Long-term debt
    589,344       683,997  
Other liabilities
    377,208       338,499  
Minority interests in subsidiaries
    197,386       147,931  
Commitments and contingencies
               
Equities
    2,475,455       2,053,466  
                 
Total liabilities and equities
  $ 6,754,373     $ 4,994,166  
                 
 
The accompanying notes are an integral part of the consolidated financial statements.


F-2


 

 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                         
    For the Years Ended August 31  
    2007     2006     2005  
    (Dollars in thousands)
 
Revenues
  $ 17,215,992     $ 14,383,835     $ 11,926,962  
Cost of goods sold
    16,129,233       13,540,285       11,438,473  
                         
Gross profit
    1,086,759       843,550       488,489  
Marketing, general and administrative
    245,357       231,238       199,354  
                         
Operating earnings
    841,402       612,312       289,135  
Gain on investments
    (20,616 )             (13,013 )
Interest, net
    31,098       41,305       41,509  
Equity income from investments
    (109,685 )     (84,188 )     (95,742 )
Minority interests
    143,214       91,079       49,825  
                         
Income from continuing operations before income taxes
    797,391       564,116       306,556  
Income taxes
    40,668       59,350       34,153  
                         
Income from continuing operations
    756,723       504,766       272,403  
(Income) loss from discontinued operations, net of taxes
            (625 )     16,810  
                         
Net income
  $ 756,723     $ 505,391     $ 255,593  
                         
Distribution of net income:
                       
Patronage refunds
  $ 550,000     $ 374,000     $ 203,000  
Unallocated capital reserve
    206,723       131,391       52,593  
                         
Net income
  $ 756,723     $ 505,391     $ 255,593  
                         
 
The accompanying notes are an integral part of the consolidated financial statements.


F-3


 

 
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
 
                                                                 
    For the Years Ended August 31, 2007, 2006 and 2005  
                                  Accumulated
             
    Capital
    Nonpatronage
                Unallocated
    Other
    Allocated
       
    Equity
    Equity
    Preferred
    Patronage
    Capital
    Comprehensive
    Capital
    Total
 
    Certificates     Certificates     Stock     Refunds     Reserve     Income (Loss)     Reserve     Equities  
    (Dollars in thousands)  
 
Balances, September 1, 2004
  $ 1,114,641     $ 27,586     $ 106,692     $ 116,790     $ 276,866     $ (7,135 )   $ 8,050     $ 1,643,490  
Dividends and equity retirement determination
    32,100                       50,060       1,409                       83,569  
Patronage distribution
    119,736                       (166,850 )     (4,464 )                     (51,578 )
Equities retired
    (23,625 )     (48 )                                             (23,673 )
Capital equity certificates exchanged for preferred stock
    (19,996 )             19,996               (87 )                     (87 )
Equities issued
    1,375                                                       1,375  
Preferred stock dividends
                                    (9,178 )                     (9,178 )
Other, net
    (666 )     (71 )                     404                       (333 )
Comprehensive income:
                                                               
Net income
                            203,000       52,593                       255,593  
Other comprehensive income
                                            12,106               12,106  
                                                                 
Total comprehensive income
                                                            267,699  
                                                                 
Dividends and equities payable
    (69,856 )                     (60,900 )     (1,650 )                     (132,406 )
                                                                 
Balances, August 31, 2005
    1,153,709       27,467       126,688       142,100       315,893       4,971       8,050       1,778,878  
Dividends and equity retirement determination
    69,856                       60,900       1,650                       132,406  
Patronage distribution
    145,333                       (203,000 )     (4,850 )                     (62,517 )
Equities retired
    (55,836 )     (97 )                                             (55,933 )
Capital equity certificates exchanged for preferred stock
    (23,824 )             23,824               (88 )                     (88 )
Equities issued
    11,064                                                       11,064  
Preferred stock dividends
                                    (10,816 )                     (10,816 )
Other, net
    (3,300 )     (197 )                     221                       (3,276 )
Comprehensive income:
                                                               
Net income
                            374,000       131,391                       505,391  
Other comprehensive income
                                            8,131               8,131  
                                                                 
Total comprehensive income
                                                            513,522  
                                                                 
Dividends and equities payable
    (116,919 )                     (130,900 )     (1,955 )                     (249,774 )
                                                                 
Balances, August 31, 2006
    1,180,083       27,173       150,512       243,100       431,446       13,102       8,050       2,053,466  
Dividends and equity retirement determination
    116,919                       130,900       1,955                       249,774  
Patronage distribution
    246,802                       (374,000 )     (5,860 )                     (133,058 )
Equities retired
    (70,402 )     (382 )                                             (70,784 )
Capital equity certificates exchanged for preferred stock
    (35,899 )             35,899               (145 )                     (145 )
Equities issued
    10,132                                                       10,132  
Preferred stock dividends
                                    (13,104 )                     (13,104 )
Other, net
    (3,203 )     (145 )                     168               (9 )     (3,189 )
Comprehensive income:
                                                               
Net income
                            550,000       206,723                       756,723  
Other comprehensive income
                                            62,353               62,353  
                                                                 
Total comprehensive income
                                                            819,076  
                                                                 
Adjustment to initially apply FASB Statement No. 158
                                            (62,419 )             (62,419 )
Dividends and equities payable
    (179,381 )                     (192,500 )     (2,413 )                     (374,294 )
                                                                 
Balances, August 31, 2007
  $ 1,265,051     $ 26,646     $ 186,411     $ 357,500     $ 618,770     $ 13,036     $ 8,041     $ 2,475,455  
                                                                 
 
The accompanying notes are an integral part of the consolidated financial statements.


F-4


 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    For the Years Ended August 31  
    2007     2006     2005  
    (Dollars in thousands)  
Cash flows from operating activities:
                       
Net income
  $ 756,723     $ 505,391     $ 255,593  
Adjustment to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    140,596       126,777       110,332  
Amortization of deferred major repair costs
    23,250       14,716       10,174  
Income from equity investments
    (109,685 )     (84,188 )     (95,742 )
Distributions from equity investments
    66,693       58,240       64,869  
Minority interests
    143,214       91,079       49,825  
Noncash portion of patronage dividends received
    (3,302 )     (4,969 )     (3,060 )
Gain on sale of property, plant and equipment
    (6,916 )     (5,232 )     (7,370 )
Loss on sale of business
                    6,163  
Gain on investments
    (20,616 )             (13,013 )
Deferred taxes
    50,868       88,323       30,119  
Other, net
    4,261       460       1,027  
Changes in operating assets and liabilities:
                       
Receivables
    (278,179 )     44,650       (250,202 )
Inventories
    (528,288 )     (198,501 )     (190,081 )
Other current assets and other assets
    (254,715 )     62,973       (74,911 )
Customer credit balances
    44,030       (25,915 )     3,216  
Customer advance payments
    79,138       (48,062 )     62,773  
Accounts payable and accrued expenses
    290,868       (156,292 )     326,303  
Other liabilities
    9,346       28,371       5,988  
                         
Net cash provided by operating activities
    407,286       497,821       292,003  
                         
Cash flows from investing activities:
                       
Acquisition of property, plant and equipment
    (373,300 )     (234,992 )     (257,470 )
Proceeds from disposition of property, plant and equipment
    13,548       13,911       21,109  
Expenditures for major repairs
    (34,664 )     (42,879 )     (15,472 )
Proceeds from sale of business
                    38,286  
Investments
    (95,834 )     (72,989 )     (25,938 )
Investments redeemed
    4,935       7,283       13,514  
Proceeds from sale of investments
    10,918               147,801  
Changes in notes receivable
    (29,320 )     20,955       (23,770 )
Acquisition of intangibles
    (15,583 )     (2,867 )     (372 )
Acquisition of working capital, net
    (8,604 )                
Other investing activities, net
    (2,051 )     3,351       (5,062 )
                         
Net cash used in investing activities
    (529,955 )     (308,227 )     (107,374 )
                         
Cash flows from financing activities:
                       
Changes in notes payable
    633,203       (59,025 )     (54,968 )
Borrowings on long-term debt
    4,050               125,000  
Principal payments on long-term debt
    (60,851 )     (36,669 )     (36,033 )
Payments for bank fees on debt
    (104 )     (1,997 )     (2,474 )
Changes in checks and drafts outstanding
    85,412       (10,513 )     2,814  
Distributions to minority owners
    (76,763 )     (80,529 )     (29,925 )
Costs incurred — capital equity certificates redeemed
    (145 )     (88 )     (87 )
Preferred stock dividends paid
    (13,104 )     (10,816 )     (9,178 )
Retirements of equities
    (70,784 )     (55,933 )     (23,673 )
Cash patronage dividends paid
    (133,058 )     (62,517 )     (51,578 )
                         
Net cash provided by (used in) financing activities
    367,856       (318,087 )     (80,102 )
                         
Net increase (decrease) in cash and cash equivalents
    245,187       (128,493 )     104,527  
Cash and cash equivalents at beginning of period
    112,525       241,018       136,491  
                         
Cash and cash equivalents at end of period
  $ 357,712     $ 112,525     $ 241,018  
                         
 
The accompanying notes are an integral part of the consolidated financial statements.


F-5


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  Summary of Significant Accounting Policies
 
Organization
 
CHS Inc. (CHS or the Company) is an agricultural supply, energy and grain-based foods cooperative company organized for the mutual benefit of its members. Members of the cooperative are located throughout the United States. The Company provides a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies and agronomy products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing and food products. Revenues are both domestic and international.
 
  Consolidation
 
The consolidated financial statements include the accounts of CHS and all of its wholly-owned and majority-owned subsidiaries and limited liability companies, including National Cooperative Refinery Association (NCRA), included in our Energy segment. The effects of all significant intercompany transactions have been eliminated.
 
The Company had various insignificant acquisitions, during the three years ended August 31, 2007, which have been accounted for using the purchase method of accounting. Operating results of the acquisitions are included in the consolidated financial statements since the respective acquisition dates. The respective purchase prices were allocated to the assets and liabilities acquired based upon the estimated fair values. The excess purchase prices over the estimated fair values of the net assets acquired have been reported as identifiable intangible assets. During 2006, our investment in Provista Renewable Fuels Marketing, LLC (Provista) resulted in financial statement consolidation of that entity.
 
  Cash Equivalents
 
Cash equivalents include short-term, highly liquid investments with original maturities of three months or less at the date of acquisition.
 
  Inventories
 
Grain, processed grain, oilseed and processed oilseed are stated at net realizable values which approximates market values. All other inventories are stated at the lower of cost or market. Costs for inventories produced or modified by the Company through a manufacturing process include fixed and variable production and raw material costs, and in-bound freight costs for raw materials over the amount charged to cost of goods sold. Costs for inventories purchased for resale include the cost of products and freight incurred to place the products at the Company’s points of sales. The cost of certain energy inventories (wholesale refined products, crude oil and asphalt) is determined on the last-in, first-out (LIFO) method; all other inventories of non-grain products purchased for resale are valued on the first-in, first-out (FIFO) and average cost methods.
 
Derivative Financial Instruments
 
  Commodity Price Risk
 
The Company is exposed to price fluctuations on energy, grain and oilseed transactions due to fluctuations in the market value of inventories and fixed or partially fixed purchase and sales contracts. The Company’s use of derivative instruments reduces the effects of price volatility, thereby protecting against adverse short-term price movements, while somewhat limiting the benefits of short-term price movements. However, fluctuations in inventory valuations may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and in part to the Company’s assessment of its exposure from expected price fluctuations.
 
The Company generally enters into opposite and offsetting positions using futures contracts or options to the extent practical, in order to arrive at a net commodity position within the formal position limits set by the


F-6


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Company and deemed prudent for each of those commodities. These contracts are purchased and sold through regulated commodity exchanges. The contracts are economic hedges of price risk, but are not designated or accounted for as hedging instruments for accounting purposes in any operations, with the exception of some contracts included in the Energy segment discussed below. These contracts are recorded on the Consolidated Balance Sheet at fair values based on quotes listed on regulated commodity exchanges. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.
 
The Company also manages its risks by entering into fixed-price purchase and sales contracts with pre-approved producers and by establishing appropriate limits for individual suppliers. Fixed-price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The Company is also exposed to loss in the event of nonperformance by the counterparties to the contracts and therefore, contract values are reviewed and adjusted to reflect potential nonperformance. These contracts are recorded on the Consolidated Balance Sheet at fair values based on the market prices of the underlying products listed on regulated commodity exchanges, except for certain fixed-price contracts related to propane in the Energy segment. The propane contracts within the Energy segment meet the normal purchase and sales exemption, and thus are not required to be marked to fair value. Unrealized gains and losses on fixed-price contracts are recognized in cost of goods sold using market-based prices.
 
Changes in the fair values of derivative instruments described above are recognized in cost of goods sold in the Consolidated Statements of Operations in the period such changes occur for all operations with the exception of some derivative instruments included in the Energy segment. Included in other current assets on August 31, 2007 and 2006, are derivative assets of $247.1 million and $74.3 million, respectively. Included in accrued expenses on August 31, 2007 and 2006, are derivative liabilities of $177.2 million and $97.8 million, respectively.
 
In the Energy segment, certain financial contracts entered into for the spread between crude oil purchase value and distillate selling price have been designated and accounted for as hedging instruments (cash flow hedges). The unrealized gains or losses of these contracts are deferred to accumulated other comprehensive income in the equity section of the Consolidated Balance Sheet for the fiscal year ended August 31, 2006, and will be included in earnings upon settlement. Settlement dates for cash flow hedges extend through December 31, 2007. At August 31, 2007, the cash flow hedges did not qualify for hedge accounting and therefore are recorded in cost of goods sold in the Consolidated Statements of Operations. A loss of $2.8 million and a gain of $2.8 million, net of taxes, were recorded in accumulated other comprehensive income for the years ended August 31, 2007 and 2006, respectively, for the change in the fair value of cash flow hedges related to these derivatives. During the year ended August 31, 2007, net gains of $9.7 million from these contract settlements were recorded in the Consolidated Statement of Operations. No gains or losses were recorded in the Consolidated Statement of Operations during the year ended August 31, 2006, since there were no settlements.
 
Interest Rate Risk
 
The Company uses fixed and floating rate debt to lessen the effects of interest rate fluctuations on interest expense. Short-term debt used to finance inventories and receivables is represented by notes payable with maturities of 30 days or less, so that the blended interest rate to the Company for all such notes approximates current market rates. Long-term debt used to finance non-current assets carries various fixed interest rates and is payable at various dates to minimize the effect of market interest rate changes. The effective interest rate on fixed rate debt outstanding on August 31, 2007, was approximately 6.0%.
 
The Company enters into interest rate treasury lock instruments to fix interest rates related to a portion of its private placement debts. These instruments were designated and are effective as cash flow hedges for accounting purposes and, accordingly, changes in fair value of $2.2 million, net of taxes, are included in accumulated other comprehensive income. Interest expense for each of the years ended August 31, 2007, 2006


F-7


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
and 2005, includes $0.9 million which relates to the interest rate derivatives. The additional interest expense is an offset to the lower actual interest paid on the outstanding debt instruments.
 
Foreign Currency Risk
 
The Company conducts essentially all of its business in U.S. dollars, except for grain marketing operations in Brazil and purchases of products from Canada, and had minimal risk regarding foreign currency fluctuations during 2007 or in recent years. Foreign currency fluctuations do, however, impact 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.
 
  Investments
 
Investments in other cooperatives are stated at cost, plus patronage dividends received in the form of capital stock and other equities. Patronage dividends are recorded in cost of goods sold at the time qualified written notices of allocation are received. Joint ventures and other investments, in which the Company has significant ownership and influence, but not control, are accounted for in the consolidated financial statements under the equity method of accounting. Investments in other debt and equity securities are considered available for sale financial instruments and are stated at fair value, with unrealized amounts included as a component of accumulated other comprehensive income (loss).
 
Disclosure of the fair value of financial instruments, to which the Company is a party, includes estimates and assumptions which may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Investments in debt and equity instruments are carried at amounts that approximate estimated fair values. Investments in cooperatives and joint ventures have no quoted market prices.
 
  Property, Plant and Equipment
 
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets (primarily 15 to 40 years for land improvements and buildings and 3 to 20 years for machinery, equipment, office and other). The cost and related accumulated depreciation and amortization of assets sold or otherwise disposed of are removed from the related accounts and resulting gains or losses are reflected in operations. Expenditures for maintenance and repairs and minor renewals are expensed, while costs of major renewals and betterments are capitalized.
 
The Company reviews property, plant and equipment and other long-lived assets in order to assess recoverability based on projected income and related cash flows on an undiscounted basis when triggering events occur. Should the sum of the expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset.
 
As of August 31, 2006, the Company has adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, and FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. The Company has asset retirement obligations with respect to certain of its refineries and related assets due to various legal obligations to clean and/or dispose of various component parts at the time they are retired. However, these assets can be used for extended and indeterminate periods of time, as long as they are properly maintained and/or upgraded. It is the Company’s practice and current intent to maintain refinery and related assets and to continue making improvements to those assets based on technological advances. As a result, the Company believes that its refineries and related assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which the Company would retire refinery and related assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be


F-8


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
estimated for the retirement of any component part of a refinery or related asset, the Company will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using established present value techniques.
 
  Goodwill and Other Intangible Assets
 
Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets acquired and liabilities assumed. Goodwill and other intangible assets are reviewed for impairment annually or more frequently if certain impairment conditions arise. Goodwill and other intangible assets that are impaired are written down to fair value. Other intangible assets consist primarily of trademarks, customer lists and agreements not to compete. Intangible assets subject to amortization are expensed over their respective useful lives (ranging from 3 to 15 years). The Company has no material intangible assets with indefinite useful lives.
 
  Revenue Recognition
 
The Company provides 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. Grain and oilseed sales are recorded after the commodity has been delivered to its destination and final weights, grades and settlement prices have been agreed upon. All other sales are recognized upon transfer of title, which could occur upon either shipment or receipt by the customer, depending upon the transaction. Amounts billed to a customer as part of a sales transaction related to shipping and handling are included in revenues. Service revenues are recorded only after such services have been rendered.
 
  Environmental Expenditures
 
Liabilities, including legal costs, related to remediation of contaminated properties are recognized when the related costs are considered 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. Recoveries, if any, are recorded in the period in which recovery is considered probable. Liabilities are monitored and adjusted as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits.
 
  Income Taxes
 
The Company is a nonexempt agricultural cooperative and files a consolidated federal income tax return with its 80% or more owned subsidiaries. The Company is subject to tax on income from nonpatronage sources and undistributed patronage-sourced income. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for federal and state income tax purposes, at each fiscal year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
  Comprehensive Income
 
Comprehensive income primarily includes net income, unrealized net gains or losses on available for sale investments and energy derivatives, and changes in the funded status of pension and other postretirement plans. Total comprehensive income is reflected in the Consolidated Statements of Equities and Comprehensive Income.


F-9


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
  Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the 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 June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company does not expect that the adoption of FIN 48 will have a material impact on its financial statements.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157) to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the effect that the adoption of SFAS No. 157 will have on its consolidated results of operations and financial condition.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the effect that the adoption of SFAS No. 159 will have on its consolidated results of operations and financial condition.
 
  Reclassifications
 
Certain reclassifications have been made to prior year’s amounts to conform to current year classifications. These reclassifications had no effect on previously reported net income, equities and comprehensive income, or cash flows.
 


F-10


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
2.  Receivables
 
Receivables as of August 31, 2007 and 2006 are as follows:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Trade
  $ 1,366,428     $ 1,056,514  
Other
    97,783       73,986  
                 
      1,464,211       1,130,500  
Less allowances for doubtful accounts
    62,960       53,898  
                 
    $ 1,401,251     $ 1,076,602  
                 
 
All international sales are denominated in U.S. dollars. International sales for the years ended August 31, 2007, 2006 and 2005 are as follows:
 
                         
    2007     2006     2005  
    (Dollars in millions)  
 
Africa
  $ 229     $ 119     $ 83  
Asia
    1,130       904       880  
Europe
    178       183       129  
North America, excluding U.S.
    900       717       605  
South America
    608       156       271  
                         
    $ 3,045     $ 2,079     $ 1,968  
                         
 
The Company routinely enters into buy/sell contracts associated with crude oil. These contracts are used to facilitate the Company’s crude oil purchasing activity and supply requirements. Physical delivery occurs for each side of the transaction, and the risk and reward of ownership are evidenced by title transfer, assumption of environmental risk, transportation scheduling, credit risk and risk of nonperformance by the counterparty. As a result, the Company accounts for these buy/sell transactions, net, in cost of goods sold in the Consolidated Statements of Operations.
 
3.  Inventories
 
Inventories as of August 31, 2007 and 2006 are as follows:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Grain and oilseed
  $ 928,567     $ 511,413  
Energy
    490,675       447,664  
Feed and farm supplies
    178,167       137,978  
Processed grain and oilseed
    66,407       32,198  
Other
    2,816       1,571  
                 
    $ 1,666,632     $ 1,130,824  
                 
 
As of August 31, 2007, the Company valued approximately 17% of inventories, primarily related to energy, using the lower of cost, determined on the LIFO method, or market (21% as of August 31, 2006). If the FIFO method of accounting for these inventories had been used, inventories would have been higher than the reported amount by $389.0 million and $370.5 million at August 31, 2007 and 2006, respectively. During 2005, energy inventory quantities were reduced, which resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of 2005 purchases. The effect of the liquidation decreased cost of goods sold by $15.8 million during 2005.


F-11


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
4.  Investments
 
Investments as of August 31, 2007 and 2006 are as follows:
                 
    2007     2006  
    (Dollars in thousands)  
 
CF Industries Holdings, Inc. 
  $ 101,986     $ 34,105  
Cooperatives:
               
Land O’Lakes, Inc. 
    41,061       38,929  
Ag Processing Inc. 
    20,416       21,297  
CoBank, ACB (CoBank)
    12,659       11,956  
Joint ventures:
               
United Country Brands, LLC (Agriliance LLC)
    182,834       175,306  
US BioEnergy Corporation
    138,474       69,264  
Ventura Foods, LLC
    134,079       132,222  
Cofina Financial, LLC
    39,805       38,752  
Horizon Milling, LLC
    36,092       30,753  
Horizon Milling G.P. 
    15,500          
Multigrain AG
    23,082          
TEMCO, LLC
    11,957       3,486  
Other
    122,647       68,183  
                 
    $ 880,592     $ 624,253  
                 
 
In February 2005, the board of directors of CF Industries, Inc. (CF), a domestic fertilizer manufacturer in which CHS held a minority interest, determined after reviewing indicative values from strategic buyers that a greater value could be derived for the business through an initial public offering (IPO) of stock in the company. The IPO was completed in August 2005. Prior to the IPO, CHS held an ownership interest of approximately 20% in CF, with a carrying value of $153.0 million, which consisted primarily of noncash patronage refunds received from CF over the years. Through the IPO, CHS sold approximately 81% of its ownership interest for cash proceeds of $140.4 million. As a result, the Company recognized a pretax gain of $9.6 million ($8.8 million net of taxes) during 2005.
 
After the IPO transaction, CHS held an ownership interest in CF Industries Holdings, Inc. (the post-IPO name) of approximately 3.9% or 2,150,396 shares. During the year ended August 31, 2007, CHS sold 540,000 shares of the stock for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing its ownership interest in CF Industries Holdings, Inc. to approximately 2.9%. CHS accounts for this investment as an available for sale security, and accordingly, it has adjusted the carrying value of the shares to the $102.0 million market value on August 31, 2007. An unrealized pretax gain of $85.4 million related to this investment is included in accumulated other comprehensive income on August 31, 2007. During the first quarter of fiscal 2008, CHS sold all of its remaining 1,610,396 shares of stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million ($84.1 million net of taxes).
 
During the year ended August 31, 2007, the Company made additional investments of $45.4 million in US BioEnergy Corporation (US BioEnergy), bringing its total cash investment for common stock in US BioEnergy to $115.4 million. Prior investments in US BioEnergy include $70.0 million of stock purchased during the year ended August 31, 2006. In December 2006, US BioEnergy completed an IPO, and the effect of the issuance of additional shares of its stock was to dilute the Company’s ownership interest from approximately 25% to 21%. In addition, on August 29, 2007, US BioEnergy completed an acquisition with total aggregate net consideration comprised of the issuance of US BioEnergy common stock and cash. Due to US BioEnergy’s increase in equity, primarily from these two transactions, the Company recognized a non-cash net gain of $15.3 million on its investment during the year ended August 31, 2007, to reflect its proportionate


F-12


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
share of the increase in the underlying equity of US BioEnergy. This gain is reflected in the Processing segment. On August 31, 2007, the Company’s ownership interest in US BioEnergy was approximately 19%, and based upon the market price of $10.41 per share on that date, the Company’s investment had a fair value of approximately $159.3 million. During the first quarter of fiscal 2008, the Company purchased additional shares of US BioEnergy common stock for $6.5 million, which increased its ownership interest to approximately 20%. The Company is recognizing earnings of US BioEnergy to the extent of its ownership interest using the equity method of accounting. The carrying value of the Company’s investment in US BioEnergy of $138.5 million exceeds its share of US BioEnergy’s equity by $19.0 million, and represents equity method goodwill.
 
During the year ended August 31, 2007, the Company invested in two new ventures. The Company invested $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil, and currently has a 37.5% ownership interest which is included in the Ag Business segment. This venture includes grain storage and export facilities and builds on the Company’s South American soybean origination. The Company also invested $15.6 million in Horizon Milling G.P. (24% CHS ownership), a joint venture included in the Processing segment, that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of Canada, which includes three flour milling operations and two dry baking mixing facilities in Canada.
 
As of August 31, 2007, the carrying value of the Company’s equity method investees, Agriliance LLC (Agriliance) and Ventura Foods, LLC, exceeds its share of their equity by $43.1 million, of which $3.5 million is being amortized with a remaining life of approximately five years. The remaining basis difference represents equity method goodwill.
 
The Company has a 50% interest in Ventura Foods, LLC, a joint venture entity, which produces and distributes vegetable oil-based products. The following provides summarized unaudited financial information for Ventura Foods, LLC balance sheets as of August 31, 2007 and 2006, and statements of operations for the twelve months ended August 31, 2007, 2006 and 2005:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Current assets
  $ 269,156     $ 237,117  
Non-current assets
    470,359       441,435  
Current liabilities
    195,376       141,080  
Non-current liabilities
    309,221       308,377  
 
                         
    2007     2006     2005  
    (Dollars in thousands)  
 
Net sales
  $ 1,637,998     $ 1,483,583     $ 1,413,426  
Gross profit
    207,148       196,847       184,466  
Net income
    62,366       57,756       61,779  
 
Agriliance is a wholesale and retail crop nutrients and crop protections products company and is owned and governed by United Country Brands, LLC (50%) and Land O’Lakes, Inc. (50%). United Country Brands, LLC is 100% owned by CHS. The Company accounts for its Agriliance investment using the equity method of accounting within the Ag Business segment.
 
In June 2007, the Company announced that two business segments of Agriliance were being repositioned. In September 2007, the Company acquired the crop nutrients business of Agriliance and Land O’Lakes, Inc. acquired the crop protection business.


F-13


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following provides summarized financial information for Agriliance balance sheets as of August 31, 2007 and 2006, and statements of operations for the years ended August 31, 2007, 2006 and 2005:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Current assets
  $ 1,534,432     $ 1,261,874  
Non-current assets
    130,347       166,365  
Current liabilities
    1,214,019       999,038  
Non-current liabilities
    138,173       132,071  
 
                         
    2007     2006     2005  
    (Dollars in thousands)  
 
Net sales
  $ 4,049,088     $ 3,739,632     $ 3,735,125  
Earnings from operations
    116,584       76,052       90,812  
Net income
    58,701       52,268       77,113  
 
Various agreements with other owners of investee companies and a majority-owned subsidiary set out parameters whereby CHS may buy and sell additional interests in those companies, upon the occurrence of certain events, at fair values determinable as set forth in the specific agreements.
 
5.  Property, Plant and Equipment
 
A summary of property, plant and equipment as of August 31, 2007 and 2006 is as follows:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Land and land improvements
  $ 90,263     $ 84,347  
Buildings
    410,556       395,833  
Machinery and equipment
    2,258,108       2,112,629  
Office and other
    81,091       75,836  
Construction in progress
    320,101       121,379  
                 
      3,160,119       2,790,024  
Less accumulated depreciation and amortization
    1,431,948       1,313,785  
                 
    $ 1,728,171     $ 1,476,239  
                 
 
 
In January 2002, the Company formed a limited liability company with Cargill, Incorporated, to engage in wheat flour milling and processing. The Company holds a 24% interest in the entity, which is known as Horizon Milling, LLC. The Company is leasing certain of its wheat milling facilities and related equipment to Horizon Milling, LLC under an operating lease agreement. The book value of the leased milling assets at August 31, 2007 and 2006, was $76.4 million and $82.0 million, respectively, net of accumulated depreciation of $54.0 million and $48.4 million, respectively.
 
For the years ended August 31, 2007, 2006 and 2005, the Company capitalized interest of $11.7 million, $4.7 million and $6.8 million, respectively, related to capitalized construction projects.
 
6.  Discontinued Operations
 
In May 2005, CHS sold the majority of its Mexican foods business for proceeds of $38.3 million resulting in a loss on disposition of $6.2 million. During 2006, the Company sold or disposed of the remaining assets. The operating results of the Mexican foods business are reported as discontinued operations.


F-14


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Summarized results from discontinued operations for the years ended August 31, 2006 and 2005 are as follows:
 
                 
    2006     2005  
    (Dollars in thousands)  
 
Revenues
          $ 43,556  
Cost of goods sold
            49,919  
Marketing, general and administrative*
  $ (1,168 )     18,246  
Interest, net
    145       2,903  
Income tax expense (benefit)
    398       (10,702 )
                 
Income (loss) from discontinued operations
  $ 625     $ (16,810 )
                 
 
 
2006 and 2005 include a $1.6 million gain and a $6.2 million loss on disposition, respectively.
 
7.  Other Assets
 
Other assets as of August 31, 2007 and 2006 are as follows:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Goodwill
  $ 3,804     $ 3,904  
Customer lists, less accumulated amortization of $2,898 and $11,498, respectively
    13,894       3,381  
Non-compete covenants, less accumulated amortization of $1,826 and $1,678, respectively
    3,201       1,531  
Trademarks and other intangible assets, less accumulated amortization of $7,249 and $5,379, respectively
    15,823       12,838  
Prepaid pension and other benefits
    101,073       192,180  
Capitalized major maintenance
    60,787       51,583  
Notes receivable
    5,874       3,859  
Other
    4,296       5,781  
                 
    $ 208,752     $ 275,057  
                 
 
 
The decrease in goodwill of $0.1 million during 2007 is related to a disposal in the Ag Business segment.
 
Various cash acquisitions of intangibles totaled $15.6 million during the year ended August 31, 2007. The largest intangible acquired was $6.5 million, which was included in the $15.1 million total acquisition price of a distillers dried grain business in the Ag Business segment. The balance of this business acquisition included $8.6 million of net working capital.
 
Intangible assets amortization expense for the years ended August 31, 2007, 2006 and 2005 were $3.2 million, $4.9 million and $4.2 million, respectively. The estimated amortization expense related to intangible assets subject to amortization for the next five years will approximate $5.0 million annually for the first three years, $4.5 million for the next year, and $4.0 million for the following year.


F-15


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
8.  Notes Payable and Long-Term Debt
 
Notes payable and long-term debt as of August 31, 2007 and 2006 consisted of the following:
 
                     
    Interest Rates at
           
    August 31, 2007   2007     2006  
        (Dollars in thousands)  
 
Notes payable(a)(i)
  1.00% to 8.25%   $ 672,571     $ 22,007  
                     
Long-term debt:
                   
Revolving term loans from cooperative and other banks, payable in installments through 2009, when the balance is due(b)(i)
  6.17% to 13.00%   $ 80,594     $ 110,477  
Private placement, payable in equal installments beginning in 2008 through 2013(c)(i)
  6.81%     225,000       225,000  
Private placement, payable in installments beginning in 2007 through 2018(d)(i)
  4.96% to 5.60%     157,308       175,000  
Private placement, payable in equal installments beginning in 2011 through 2015(e)(i)
  5.25%     125,000       125,000  
Private placement, payable in equal installments in 2005 through 2011(f)(i)
  7.43% to 7.90%     45,714       57,143  
Private placement, payable in its entirety in 2010(g)(i)
  4.08%     15,000       15,000  
Private placement, payable in its entirety in 2011(g)(i)
  4.39%     15,000       15,000  
Industrial revenue bonds, payable in its entirety in 2011
  5.23%     3,925       3,925  
Other notes and contracts(h)
  1.89% to 12.17%     20,780       18,200  
                     
Total long-term debt
        688,321       744,745  
Less current portion
        98,977       60,748  
                     
Long-term portion
      $ 589,344     $ 683,997  
                     
 
                     
    2007     2006      
 
Weighted-average interest rates at August 31:
                   
Short-term debt
    6.50%       7.58%      
Long-term debt
    6.03%       6.09%      
 
 
 
(a) The Company finances its working capital needs through a short-term line of credit with a syndication of domestic and international banks. This revolving line of credit was a five-year $1.1 billion committed facility on August 31, 2007, with $600.0 million outstanding on that date. On October 1, 2007, the Company exercised the accordion feature of the agreement and obtained additional commitments in the amount of $200.0 million from certain lenders under the agreement. The additional commitments increased the total to $1.3 billion on the facility. In addition to this short-term line of credit, the Company has a one-year committed credit facility dedicated to NCRA, with a syndication of banks in the amount of $15.0 million, with no amount outstanding on August 31, 2007. The Company also has a committed revolving line of credit dedicated to Provista in the amount of $25.0 million, with $2.0 million outstanding on August 31, 2007. In addition, the Company has two commercial paper programs totaling up to $125.0 million with two banks participating in the five-year revolving credit facility. The commercial paper programs do not increase the committed borrowing capacity in that the Company is required to have at least an equal amount of undrawn capacity


F-16


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
available on the five-year revolving facility as to the amount of commercial paper issued. On August 31, 2007, $51.9 million of commercial paper was outstanding. Other miscellaneous notes payable totaled $18.7 million on August 31, 2007.
 
(b) The Company established a long-term credit agreement, which committed $200.0 million of long-term borrowing capacity to the Company through May 31, 1999, of which $164.0 million was drawn before the expiration date of that commitment. On August 31, 2007, $75.4 million was outstanding. NCRA term loans of $3.0 million are collateralized by NCRA’s investment in CoBank.
 
(c) In June 1998, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $225.0 million.
 
(d) In October 2002, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $175.0 million.
 
(e) In September 2004, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $125.0 million.
 
(f) In January 2001, the Company entered into a note purchase and private shelf agreement with Prudential Insurance Company. A long-term note was issued for $25.0 million and a subsequent note for $55.0 million was issued in March 2001.
 
(g) In March 2004, the Company entered into a note purchase and private shelf agreement with Prudential Capital Group. In April 2004, two long-term notes were issued for $15.0 million each. In April 2007, the agreement was amended with Prudential Investment Management, Inc. and several other participating insurance companies to expand the uncommitted facility from $70.0 million to $150.0 million.
 
(h) Other notes and contracts payable of $8.3 million are collateralized by property, plant and equipment, with a cost of $16.9 million, less accumulated depreciation of $5.0 million on August 31, 2007.
 
(i) The debt is unsecured; however restrictive covenants under various agreements have requirements for maintenance of minimum working capital levels and other financial ratios.
 
In December 2006, NCRA entered into an agreement with the City of McPherson, Kansas related to certain of its ultra-low sulfur fuel assets (cost of approximately $325.0 million). The City of McPherson issued $325.0 million of Industrial Revenue Bonds (IRBs) which were transferred to NCRA as consideration in a financing agreement between the City of McPherson and NCRA related to the ultra-low sulfur fuel assets. The term of the financing obligation is ten years, at which time NCRA has the option of extending the financing obligation or purchasing the assets for a nominal amount. NCRA has the right at anytime to offset the financing obligation to the City of McPherson against the IRBs. No cash was exchanged in the transaction and none is anticipated to be exchanged in the future. Due to the structure of the agreement, the financing obligation and the IRBs are shown net in the Company’s consolidated financial statements. On March 18, 2007, notification was sent to the bond trustees to pay the IRBs down by $324.0 million, at which time the financing obligation to the City of McPherson was offset against the IRBs. The balance of $1.0 million will remain outstanding until final maturity in ten years.
 
The fair value of long-term debt approximates book value as of August 31, 2007 and 2006.
 
On October 4, 2007, the Company entered into a private placement note purchase agreement and received proceeds of $400.0 million. The unsecured notes have a ten-year term and an interest rate of 6.18%.


F-17


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The aggregate amount of long-term debt payable as of August 31, 2007 is as follows:
 
         
    (Dollars in thousands)  
 
2008
  $ 98,977  
2009
    117,910  
2010
    82,634  
2011
    111,665  
2012
    94,517  
Thereafter
    182,618  
         
    $ 688,321  
         
 
Interest, net for the years ended August 31, 2007, 2006 and 2005 is as follows:
 
                         
    2007     2006     2005  
    (Dollars in thousands)  
 
Interest expense
  $ 51,811     $ 50,562     $ 51,531  
Interest income
    20,713       9,257       10,022  
                         
Interest, net
  $ 31,098     $ 41,305     $ 41,509  
                         
 
9.  Income Taxes
 
The provision for income taxes for the years ended August 31, 2007, 2006 and 2005 is as follows:
 
                         
    2007     2006     2005  
    (Dollars in thousands)  
 
Continuing operations:
                       
Current
  $ (10,200 )   $ (28,973 )   $ 4,034  
Deferred
    42,068       91,123       37,919  
Valuation allowance
    8,800       (2,800 )     (7,800 )
                         
Income taxes from continuing operations
    40,668       59,350       34,153  
Income taxes from discontinued operations
            398       (10,702 )
                         
Income taxes
  $ 40,668     $ 59,748     $ 23,451  
                         
 
The Company’s current tax provision is significantly impacted by the utilization of loss carryforwards and tax benefits passed to the Company from NCRA. The passthrough tax benefits are associated with refinery upgrades that enable NCRA to produce ultra-low sulfur fuels as mandated by the Environmental Protection Agency.
 
Deferred taxes are comprised of basis differences related to investments, accrued liabilities and certain federal and state tax credits. NCRA files separate tax returns and, as such, these items must be assessed independent of the Company’s deferred tax assets when determining recoverability.


F-18


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The tax effect of temporary differences of deferred tax assets and liabilities as of August 31, 2007 and 2006 is as follows:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Deferred tax assets:
               
Accrued expenses and valuation reserves
  $ 81,653     $ 76,582  
Postretirement health care and deferred compensation
    65,339       49,652  
Tax credits
    50,402       16,763  
Loss carryforward
    6,427       25,027  
Major maintenance
    32,411       28,342  
Other
    15,169       14,573  
                 
Total deferred tax assets
    251,401       210,939  
                 
Deferred tax liabilities:
               
Pension, including minimum liability
    55,957       52,715  
Equity method investments
    84,671       55,128  
Property, plant and equipment
    191,369       159,034  
Other
    25,928       12,960  
                 
Total deferred tax liabilities
    357,925       279,837  
                 
Deferred tax assets valuation reserve
    (9,375 )     (571 )
                 
Net deferred tax liability
  $ 115,899     $ 69,469  
                 
 
During fiscal years ended August 31, 2007 and 2006, the Company reduced its valuation allowance on a capital loss carryforward due to capital gains generated during those years. During the year ended August 31, 2007, NCRA provided a $9.4 million valuation allowance related to its carryforward of certain state tax credits. The allowance was necessary due to the limited amount of taxable income generated by NCRA on an annual basis. As of August 31, 2007, NCRA has net operating loss carryforwards of $14.8 million for tax purposes available to offset future taxable income. If not used, these carryforwards will expire in fiscal years beginning in 2024 and through 2025.
 
As of August 31, 2007, net deferred taxes of $5.5 million and $157.9 million are included in current assets and other liabilities, respectively ($77.6 million and $185.4 million in current assets and other liabilities, respectively, as of August 31, 2006).
 
The reconciliation of the statutory federal income tax rates to the effective tax rates for continuing operations for the years ended August 31, 2007, 2006 and 2005 is as follows:
 
                         
    2007     2006     2005  
 
Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
State and local income taxes, net of federal income tax benefit
    3.9       3.9       3.9  
Patronage earnings
    (27.5 )     (27.4 )     (26.9 )
Export activities at rates other than the U.S. statutory rate
    (1.6 )     (0.8 )     (2.4 )
Valuation allowance
    1.1       (0.5 )     (2.6 )
Tax credits
    (3.6 )     (1.8 )        
Other
    (2.2 )     2.1       4.1  
                         
Effective tax rate
    5.1 %     10.5 %     11.1 %
                         


F-19


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
10.  Equities
 
In accordance with the by-laws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year, and are based on amounts using financial statement earnings. The cash portion of the patronage distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates.
 
Annual net savings from sources other than patronage may be added to the unallocated capital reserve or, upon action by the Board of Directors, may be allocated to members in the form of nonpatronage equity certificates. Redemptions are at the discretion of the Board of Directors.
 
Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities held by them, and another for individual members who are eligible for equity redemptions at age 72 or upon death. Commencing in fiscal 2008, until further resolution, the Board of Directors has reduced the age for individuals who are eligible for equity redemptions to age 70. The amount that each non-individual member receives under the pro-rata program in any year will be determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates eligible for redemption held by them, and the denominator of which is the sum of the patronage certificates eligible for redemption held by all eligible holders of patronage certificates that are not individuals. In addition to the annual pro-rata program, the Board of Directors has approved additional equity redemptions targeting older capital equity certificates which were paid in fiscal 2007 and that are authorized to be paid in fiscal 2008. In accordance with authorization from the Board of Directors, the Company expects total redemptions related to the year ended August 31, 2007, that will be distributed in fiscal 2008, to be approximately $179.4 million. These expected distributions are classified as a current liability on the August 31, 2007 Consolidated Balance Sheet.
 
For the years ended August 31, 2007, 2006 and 2005, the Company redeemed in cash, equities in accordance with authorization from the Board of Directors, $70.8 million, $55.9 million and $23.7 million, respectively. An additional $35.9 million, $23.8 million and $20.0 million of capital equity certificates were redeemed in fiscal years 2007, 2006 and 2005, respectively, by issuance of shares of the Company’s 8% Cumulative Redeemable Preferred Stock (Preferred Stock). The amount of equities redeemed with each share of Preferred Stock issued was $26.09, $26.10 and $27.58, which was the closing price per share of the stock on the NASDAQ Global Select Market on February 8, 2007, January 23, 2006 and January 24, 2005, respectively.
 
The Preferred Stock is listed on the NASDAQ Global Select Market under the symbol CHSCP. On August 31, 2007, the Company had 7,240,221 shares of Preferred Stock outstanding with a total redemption value of approximately $181.0 million, excluding accumulated dividends. The Preferred Stock accumulates dividends at a rate of 8% per year (dividends are payable quarterly) and is redeemable at the Company’s option after February 1, 2008. At this time, the Company has no intention of redeeming any Preferred Stock.
 
11.  Benefit Plans
 
The Company has various pension and other defined benefit and defined contribution plans, in which substantially all employees may participate. The Company also has non-qualified supplemental executive and board retirement plans.
 
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement No. 87, 88, 106 and 132(R)”. This standard requires employers to recognize the underfunded or overfunded status of defined benefit pension and postretirement plans as an asset or liability in its statement of financial position, and recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders’ equity. This standard also eliminates the requirement for Additional Minimum


F-20


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Pension Liability (AML) required under SFAS No. 87. As of August 31, 2007, NCRA’S measurement date was August 31, 2007 and CHS measurement date was June 30, 2007.
 
The following table illustrates the adjustments to the balance sheet to record the funded status as of August 31, 2007:
 
                         
    Pre-SFAS No. 158
    SFAS No. 158
       
    With AML
    Adoption
    Post SFAS
 
    Adjustments     Adjustments     No. 158  
    (Dollars in thousands)  
 
Prepaid pension
  $ 131,322     $ (95,239 )   $ 36,083  
Accrued pension liability
    (47,663 )     (15,057 )     (62,720 )
Intangible asset
    291       (291 )      
Deferred tax asset
    189       39,699       39,888  
Minority interest
            8,469       8,469  
Accumulated other comprehensive income, net of tax
    296       62,419       62,715  
Accumulated other comprehensive income, pre-tax
    485       102,118       102,603  
 
Financial information on changes in benefit obligation and plan assets funded and balance sheets status as of August 31, 2007 and 2006 is as follows:
 
                                                 
    Qualified
    Non-Qualified
             
    Pension Benefits     Pension Benefits     Other Benefits  
    2007     2006     2007     2006     2007     2006  
    (Dollars in thousands)  
Change in benefit obligation:
                                               
Benefit obligation at beginning of period
  $ 328,125     $ 333,464     $ 23,381     $ 27,440     $ 28,315     $ 29,845  
Service cost
    14,360       14,892       1,023       2,195       957       1,024  
Interest cost
    19,259       17,037       1,480       1,368       1,668       1,568  
Plan amendments
    14,960       430       727       345                  
Transfers
                            (5,049 )                
Actuarial (gain) loss
    (852 )     (8,813 )     9,794       (885 )     881       (552 )
Special agreement
                            85                  
Assumption change
    (5,401 )     (6,614 )     (37 )     (1,333 )     (1,482 )     (1,124 )
Medicare D
                                    262          
Benefits paid
    (24,132 )     (22,271 )     (724 )     (785 )     (2,600 )     (2,446 )
                                                 
Benefit obligation at end of measurement date
  $ 346,319     $ 328,125     $ 35,644     $ 23,381     $ 28,001     $ 28,315  
                                                 
Change in plan assets:
                                               
Fair value of plan assets at beginning of period
  $ 345,860     $ 335,488                                  
Actual income on plan assets
    45,826       25,688                                  
Company contributions
    14,877       6,955     $ 724     $ 785     $ 2,600     $ 2,446  
Benefits paid
    (24,132 )     (22,271 )     (724 )     (785 )     (2,600 )     (2,446 )
                                                 
Fair value of plan assets at end of measurement date
  $ 382,431     $ 345,860     $     $     $     $  
                                                 
Funded status of plans as of August 31, 2006
          $ 17,401             $ (23,381 )           $ (28,315 )
Employer contributions after measurement date
                            328               205  
Unrecognized actuarial loss (gain)
            104,665               888               (1,181 )
Unrecognized transition obligation
                                            6,452  
Unrecognized prior service cost (benefit)
            5,513               2,009               (1,362 )
Special agreement
                            (85 )                
                                                 
Prepaid benefit cost (accrued)
          $ 127,579             $ (20,241 )           $ (24,201 )
                                                 


F-21


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    Qualified
    Non-Qualified
             
    Pension Benefits     Pension Benefits     Other Benefits  
    2007     2006     2007     2006     2007     2006  
    (Dollars in thousands)  
Amounts recognized on balance sheet as of
August 31, 2006
                                               
Other assets (accrued benefit liability)
          $ 127,579             $ (21,396 )           $ (24,201 )
Intangible assets
                            599                  
Accumulated other comprehensive loss
                            556                  
                                                 
Net amounts recognized
          $ 127,579             $ (20,241 )           $ (24,201 )
                                                 
Amounts recognized on balance sheet as of August 31, 2007
                                               
Non-current assets
  $ 36,083                                          
Accrued benefit cost:
                                               
Current liabilities
                  $ (1,862 )           $ (1,911 )        
Non-current liabilities
                    (33,119 )             (25,828 )        
                                                 
Ending balance
  $ 36,083             $ (34,981 )           $ (27,739 )        
                                                 
Amounts recognized in accumulated other comprehensive income (pre-tax) as of August 31, 2007
                                               
Net transition obligation
                                  $ 5,516          
Prior service cost
  $ 19,608             $ 2,276               (1,044 )        
Net loss (gain)
    75,886               10,434               (1,603 )        
Minority interest
    (7,191 )             (53 )             (1,226 )        
                                                 
Ending balance
  $ 88,303             $ 12,657             $ 1,643          
                                                 
 
For measurement purposes, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 2007. The rate was assumed to decrease gradually to

F-22


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
5.0% for 2012 and remain at that level thereafter. Components of net periodic benefit costs for the years ended August 31, 2007, 2006 and 2005 are as follows:
 
                                                                         
    Qualified
    Non-Qualified
       
    Pension Benefits     Pension Benefits     Other Benefits  
    2007     2006     2005     2007     2006     2005     2007     2006     2005  
    (Dollars in thousands)  
Components of net periodic benefit cost:
                                                                       
Service cost
  $ 14,360     $ 14,892     $ 12,749     $ 1,023     $ 2,195     $ 991     $ 957     $ 1,024     $ 874  
Interest cost
    19,259       17,037       18,039       1,479       1,368       1,175       1,668       1,568       1,776  
Expected return on assets
    (29,171 )     (28,362 )     (27,648 )                                                
Prior service cost amortization
    867       855       792       494       516       519       (319 )     (305 )     (294 )
Actuarial loss (gain) amortization
    5,766       7,513       5,759       77       210       124       (231 )     17       43  
Transition amount amortization
                                                    936       936       936  
                                                                         
Net periodic benefit cost
  $ 11,081     $ 11,935     $ 9,691     $ 3,073     $ 4,289     $ 2,809     $ 3,011     $ 3,240     $ 3,335  
                                                                         
Average assumptions:
                                                                       
Discount rate
    6.25%       6.05%       5.25%       6.25%       6.05%       5.25%       6.25%       6.05%       5.25%  
Expected return on plan assets
    8.75%       8.80%       9.00%       N/A       N/A       N/A       N/A       N/A       N/A  
Rate of compensation increase
    4.50%       4.50%       4.80%       4.50%       4.50%       4.50%       4.50%       4.50%       4.80%  
 
The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for non-qualified pension benefits, with accumulated benefit obligations in excess of plan assets, were as follows as of August 31, 2007 and 2006:
 
                 
    Non-Qualified
 
    Pension Benefits  
    2007     2006  
    (Dollars in thousands)  
Projected benefit obligation
  $ 35,644     $ 23,381  
Accumulated benefit obligation
    22,731       21,491  
Fair value of plan assets
           
 
The estimated amortization from accumulated other comprehensive income into net periodic benefit cost in fiscal 2008 is as follows:
 
                         
    Qualified
    Non-Qualified
       
    Pension Benefits     Pension Benefits     Other Benefits  
    (Dollars in thousands)  
Amortization of transition asset
  $     $     $ 202  
Amortization of prior service cost (benefit)
    2,164       578       (319 )
Amortization of net actuarial loss (gain)
    4,398       823       (258 )


F-23


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in the assumed health care cost trend rates would have the following effects:
 
                 
    1% Increase     1% Decrease  
    (Dollars in thousands)  
Effect on total of service and interest cost components
  $ 300     $ (267 )
Effect on postretirement benefit obligation
    2,571       (2,318 )
 
The Company provides defined life insurance and health care benefits for certain retired employees and Board of Directors’ participants. The plan is contributory based on years of service and family status, with retiree contributions adjusted annually.
 
The Company has other contributory defined contribution plans covering substantially all employees. Total contributions by the Company to these plans were $10.7 million, $9.7 million and $9.5 million, for the years ended August 31, 2007, 2006 and 2005, respectively.
 
The Company contributed $14.9 million to qualified pension plans in fiscal year 2007. Because the plans are fully funded, the Company does not expect to contribute to the pension plans in fiscal year 2008. The Company expects to pay $3.7 million to participants of the non-qualified pension and postretirement benefit plans during fiscal 2008.
 
The Company’s retiree benefit payments which reflect expected future service are anticipated to be paid as follows:
                                 
                Other Benefits  
    Qualified
    Non-Qualified
          Part D
 
    Pension Benefits     Pension Benefits     Gross     Reimbursement  
    (Dollars in thousands)  
2008
  $ 24,317     $ 1,862     $ 1,911     $ 200  
2009
    24,999       560       1,973       200  
2010
    27,275       1,268       2,210       200  
2011
    27,915       5,376       2,405       200  
2012
    29,946       5,665       2,640       200  
2013-2017
    186,647       13,664       14,680       800  
 
The Company has trusts that hold the assets for the defined benefit plans. The Company and NCRA have qualified plan committees that set investment guidelines with the assistance of external consultants. Investment objectives for the Company’s plan assets are to:
 
  •  optimize the long-term returns on plan assets at an acceptable level of risk, and
 
  •  maintain broad diversification across asset classes and among investment managers, and focus on long-term return objectives.
 
Asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the pension plans. An annual analysis on the risk versus the return of the investment portfolio is conducted to justify the expected long-term rate of return assumption. The Company generally uses long-term historical return information for the targeted asset mix identified in asset and liability studies. Adjustments are made to the expected long-term rate of return assumption, when deemed necessary, based upon revised expectations of future investment performance of the overall investment markets.
 
The discount rate reflects the rate at which the associated benefits could be effectively settled as of the measurement date. In estimating this rate, the Company looks at rates of return on fixed-income investments of similar duration to the liabilities in the plans that receive high, investment grade ratings by recognized ratings agencies.


F-24


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The investment portfolio contains a diversified portfolio of investment categories, including domestic and international equities, fixed income securities and real estate. Securities are also diversified in terms of domestic and 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 in the future.
 
The Company’s pension plans’ average asset allocations by asset categories are as follows:
 
                 
    2007     2006  
 
Cash
    2.7 %     0.0 %
Debt
    29.7       31.3  
Equities
    62.0       63.7  
Real estate
    3.9       3.8  
Other
    1.7       1.2  
                 
Total
    100.0 %     100.0 %
                 
 
12.  Segment Reporting
 
 
The Company aligned its business segments based on an assessment of how its businesses operate and the products and services it sells. As a result of this assessment, the Company has three chief operating officers to lead its three business segments: Energy, Ag Business and Processing.
 
The Energy segment derives its revenues through refining, wholesaling, marketing and retailing of petroleum products. The Ag Business segment derives its revenues through the origination and marketing of grain, including service activities conducted at export terminals, through the retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies, and records equity income from investments in the Company’s agronomy joint ventures, grain export joint ventures and other investments. The Processing segment derives its revenues from the sales of soybean meal and soybean refined oil, and records equity income from two wheat milling joint ventures, a vegetable oil-based food manufacturing and distribution joint venture, and an ethanol manufacturing company. The Company includes other business operations in Corporate and Other because of the nature of their products and services, as well as the relative revenue size of those businesses. These businesses primarily include the Company’s insurance, hedging and other service activities related to crop production.
 
Reconciling Amounts represent the elimination of revenues between segments. Such transactions are conducted at market prices to more accurately evaluate the profitability of the individual business segments.
 
The Company assigns certain corporate general and administrative expenses to its business segments based on use of such services and allocates other services based on factors or considerations relevant to the costs incurred.
 
Expenses that are incurred at the corporate level for the purpose of the general operation of the Company are allocated to the segments based upon factors which management considers being non-symmetrical. Due to efficiencies in scale, cost allocations, and intersegment activity, management does not represent that these segments, if operated independently, would report the income before income taxes and other financial information as presented.


F-25


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Segment information for the years ended August 31, 2007, 2006 and 2005 is as follows:
 
                                                     
                      Corporate
    Reconciling
           
    Energy     Ag Business     Processing     and Other     Amounts     Total      
    (Dollars in thousands)      
For the year ended August 31, 2007:
                                                   
Revenues
  $ 8,105,067     $ 8,575,389     $ 754,743     $ 28,465     $ (247,672 )   $ 17,215,992      
Cost of goods sold
    7,264,180       8,388,476       726,510       (2,261 )     (247,672 )     16,129,233      
                                                     
Gross profit
    840,887       186,913       28,233       30,726             1,086,759      
Marketing, general and administrative
    94,939       97,299       23,545       29,574               245,357      
                                                     
Operating earnings
    745,948       89,614       4,688       1,152             841,402      
Gain on investments
            (5,348 )     (15,268 )                     (20,616 )    
Interest, net
    (6,106 )     28,550       14,783       (6,129 )             31,098      
Equity income from investments
    (4,468 )     (51,830 )     (48,446 )     (4,941 )             (109,685 )    
Minority interests
    143,230       (16 )                             143,214      
                                                     
Income from continuing operations before income taxes
  $ 613,292     $ 118,258     $ 53,619     $ 12,222     $     $ 797,391      
                                                     
Intersegment revenues
  $ (228,930 )   $ (18,372 )   $ (370 )           $ 247,672     $      
                                                     
Goodwill
  $ 3,654     $ 150                             $ 3,804      
                                                     
Capital expenditures
  $ 313,246     $ 44,020     $ 12,092     $ 3,942             $ 373,300      
                                                     
Depreciation and amortization
  $ 86,558     $ 33,567     $ 15,116     $ 5,355             $ 140,596      
                                                     
Total identifiable assets at August 31, 2007
  $ 2,797,831     $ 2,846,950     $ 681,118     $ 428,474             $ 6,754,373      
                                                     
For the year ended August 31, 2006:
                                                   
Revenues
  $ 7,414,361     $ 6,575,165     $ 614,471     $ 31,415     $ (251,577 )   $ 14,383,835      
Cost of goods sold
    6,804,454       6,401,527       588,732       (2,851 )     (251,577 )     13,540,285      
                                                     
Gross profit
    609,907       173,638       25,739       34,266             843,550      
Marketing, general and administrative
    82,867       99,777       21,645       26,949               231,238      
                                                     
Operating earnings
    527,040       73,861       4,094       7,317             612,312      
Interest, net
    6,534       23,559       11,096       116               41,305      
Equity income from investments
    (3,840 )     (40,902 )     (35,504 )     (3,942 )             (84,188 )    
Minority interests
    91,588       (509 )                             91,079      
                                                     
Income from continuing operations before income taxes
  $ 432,758     $ 91,713     $ 28,502     $ 11,143     $     $ 564,116      
                                                     
Intersegment revenues
  $ (242,430 )   $ (8,779 )   $ (368 )           $ 251,577     $      
                                                     
Goodwill
  $ 3,654     $ 250                             $ 3,904      
                                                     
Capital expenditures
  $ 175,231     $ 44,542     $ 13,313     $ 1,906             $ 234,992      
                                                     
Depreciation and amortization
  $ 75,581     $ 31,471     $ 14,049     $ 5,676             $ 126,777      
                                                     
Total identifiable assets at August 31, 2006
  $ 2,215,800     $ 1,806,243     $ 518,186     $ 453,937             $ 4,994,166      
                                                     


F-26


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                     
                      Corporate
    Reconciling
           
    Energy     Ag Business     Processing     and Other     Amounts     Total      
    (Dollars in thousands)      
For the year ended August 31, 2005:
                                                   
Revenues
  $ 5,794,266     $ 5,670,644     $ 613,766     $ 29,070     $ (180,784 )   $ 11,926,962      
Cost of goods sold
    5,476,428       5,541,282       604,198       (2,651 )     (180,784 )     11,438,473      
                                                     
Gross profit
    317,838       129,362       9,568       31,721             488,489      
Marketing, general and administrative
    69,951       83,600       20,750       25,053               199,354      
                                                     
Operating earnings (losses)
    247,887       45,762       (11,182 )     6,668             289,135      
Gain on investments
    (862 )     (11,358 )     (457 )     (336 )             (13,013 )    
Interest, net
    8,918       20,535       12,287       (231 )             41,509      
Equity income from investments
    (3,478 )     (55,473 )     (36,202 )     (589 )             (95,742 )    
Minority interests
    48,830       (41 )             1,036               49,825      
                                                     
Income from continuing operations before income taxes
  $ 194,479     $ 92,099     $ 13,190     $ 6,788     $     $ 306,556      
                                                     
Intersegment revenues
  $ (170,642 )   $ (9,640 )   $ (502 )           $ 180,784     $      
                                                     
Capital expenditures
  $ 205,484     $ 27,600     $ 4,751     $ 19,635             $ 257,470      
                                                     
Depreciation and amortization
  $ 59,847     $ 30,748     $ 13,868     $ 5,869             $ 110,332      
                                                     
 
13.  Commitments and Contingencies
 
  Environmental
 
The Company is required to comply with various environmental laws and regulations incidental to its normal business operations. In order to meet its compliance requirements, the Company establishes reserves for the probable future costs of remediation of identified issues, which are included in cost of goods sold and marketing, general and administrative expenses in the Consolidated Statements of Operations. The resolution of any such matters may affect consolidated net income for any fiscal period; however, management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company during any fiscal year.
 
In connection with certain refinery upgrades and enhancements now complete, in order to comply with existing environmental regulations, the Company incurred capital expenditures from fiscal years 2003 through 2006 totaling $88.1 million for the Company’s Laurel, Montana refinery and $328.7 million for NCRA’s McPherson, Kansas refinery.
 
  Other Litigation and Claims
 
The Company is involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of the Company’s business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company during any fiscal year.

F-27


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
  Grain Storage
 
As of August 31, 2007 and 2006, the Company stored grain and processed grain products for third parties totaling $184.1 million and $199.2 million, respectively. Such stored commodities and products are not the property of the Company and therefore are not included in the Company’s inventories.
 
  Guarantees
 
The Company is a guarantor for lines of credit for related companies. The Company’s bank covenants allow maximum guarantees of $150.0 million, of which $33.2 million was outstanding as of August 31, 2007. In addition, the Company’s bank covenants allow for guarantees dedicated solely for NCRA in the amount of $125.0 million, for which there are no outstanding guarantees.
 
Certain agricultural seasonal and term loans to member cooperatives and individuals are made by Cofina Financial, LLC and guaranteed by the Company, at the Company’s discretion. In addition, the Company also guarantees certain debt and obligations under contracts for its subsidiaries and members.


F-28


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s obligations pursuant to its guarantees as of August 31, 2007 are as follows:
 
                                     
    Guarantee/
    Exposure on
                     
    Maximum
    August 31,
    Nature of
      Triggering
  Recourse
  Assets Held
Entities
 
Exposure
   
2007
   
Guarantee
 
Expiration Date
 
Event
 
Provisions
 
as Collateral
    (Dollars in thousands)
                     
Mountain Country, LLC   $ 150     $ 3     Obligations by Mountain Country, LLC under credit agreement   None stated, but may be terminated upon 90 days prior notice in regard to future obligations   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure
Provista Renewable Fuels Marketing, LLC
  $ 20,000       2,000     Obligations by Provista under credit agreement   None stated   Credit agreement default   Subrogation against Provista   None
Horizon Milling, LLC
  $ 5,000             Indemnification and reimbursement of 24% of damages related to Horizon Milling, LLC’s performance under a flour sales agreement   None stated, but may be terminated by any party upon 90 days prior notice in regard to future obligations   Nonperformance under flour sale agreement   Subrogation against Horizon Milling, LLC   None
TEMCO, LLC
  $ 25,000             Obligations by TEMCO under credit agreement   None stated   Credit agreement default   Subrogation against TEMCO, LLC   None
TEMCO, LLC
  $ 1,000       66     Obligations by TEMCO under counterparty agreement   None stated, but may be terminated upon 5 days prior notice in regard to future obligations   Nonpayment   Subrogation against TEMCO, LLC   None
Third parties
    *       1,000     Surety for, or indemnification of surety for sales contracts between affiliates and sellers of grain under deferred payment contracts   Annual renewal on December 1 in regard to surety for one third party, otherwise none stated and may be terminated by the Company at any time in regard to future obligations   Nonpayment   Subrogation against affiliates   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Cofina Financial, LLC
  $ 18,839       15,706     Loans to our customers that are originated by Cofina and then sold to ProPartners, which is an affiliate of CoBank   None stated   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Cofina Financial, LLC
  $ 10,700       8,785     Loans made by Cofina to our customers   None stated   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Agriliance LLC
  $ 5,674       5,674     Outstanding letter of credit from CoBank to Agriliance LLC   None stated   Default under letter of credit reimbursement agreement   Subrogation against borrower   None
Ag Business
segment subsidiaries
  $ 1,473             Contribution obligations as a participating employer in the Co-op Retirement Plan   None stated   Nonpayment   None   None
                                     
              $33,234                      
                                     
 
 
* The Company’s bank covenants allow for guarantees of up to $150.0 million, but the Company is under no obligation to extend these guarantees. The maximum exposure on any given date is equal to the actual guarantees extended as of that date.


F-29


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Lease Commitments
 
The Company leases approximately 2,000 rail cars with remaining lease terms of one to ten years. In addition, the Company has commitments under other operating leases for various refinery, manufacturing and transportation equipment, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the leases term.
 
Total rental expense for all operating leases, net of rail car mileage credits received from railroad and sublease income, was $44.3 million, $38.5 million and $31.0 million for the years ended August 31, 2007, 2006 and 2005, respectively. Mileage credits and sublease income totaled $3.9 million, $3.2 million and $8.6 million for the years ended August 31, 2007, 2006 and 2005, respectively.
 
Minimum future lease payments, required under noncancellable operating leases as of August 31, 2007 are as follows:
 
                                 
    Rail
          Equipment
       
    Cars     Vehicles     and Other     Total  
    (Dollars in thousands)  
 
2008
  $ 11,463     $ 18,101     $ 3,313     $ 32,877  
2009
    7,507       14,184       2,921       24,612  
2010
    6,188       11,409       2,545       20,142  
2011
    5,166       5,436       2,348       12,950  
2012
    3,708       3,114       1,891       8,713  
Thereafter
    5,328       449       2,405       8,182  
                                 
Total minimum future lease payments
  $ 39,360     $ 52,693     $ 15,423     $ 107,476  
                                 
 
14.   Supplemental Cash Flow and Other Information
 
Additional information concerning supplemental disclosures of cash flow activities for the years ended August 31, 2007, 2006 and 2005 is as follows:
 
                         
    2007     2006     2005  
    (Dollars in thousands)  
 
Net cash paid (received) during the period for:
Interest
  $ 52,323     $ 54,228     $ 57,569  
Income taxes
    (20,274 )     (23,724 )     (8,804 )
Other significant noncash investing and financing transactions:
Capital equity certificates exchanged for preferred stock
    35,899       23,824       19,996  
Capital equity certificates issued in exchange for elevator properties
    10,132       11,064       1,375  
Accrual of dividends and equities payable
    (374,294 )     (249,774 )     (132,406 )
 
15.   Related Party Transactions
 
Related party transactions with equity investees as of August 31, 2007 and 2006 are as follows:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Sales
  $ 1,639,689     $ 1,475,478  
Purchases
    1,176,462       468,286  
Receivables
    50,733       27,208  
Payables
    111,195       50,105  


F-30


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The related party transactions were primarily with TEMCO, LLC, Agriliance LLC, Horizon Milling, LLC, United Harvest, LLC, US BioEnergy Corporation and Ventura Foods, LLC.
 
16.   Comprehensive Income
 
The components of comprehensive income, net of taxes, for the years ended August 31, 2007, 2006 and 2005 are as follows:
 
                         
    2007     2006     2005  
    (Dollars in thousands)  
 
Net income
  $ 756,723     $ 505,391     $ 255,593  
Additional minimum pension liability, net of tax (benefit) expense of ($759), $282 and $1,854 in 2007, 2006 and 2005, respectively
    (1,193 )     444       2,822  
Unrealized net gains on available for sale investments, net of tax expense of $41,722, $1,138 and $5,147 in 2007, 2006 and 2005, respectively
    65,533       1,787       8,085  
Interest rate hedges, net of tax (benefit) expense of ($65), $826 and $279 in 2007, 2006 and 2005, respectively
    (102 )     1,298       439  
Energy derivative instruments qualified for hedge accounting, net of tax (benefit) expense of ($1,787) and $1,787 in 2007 and 2006, respectively
    (2,806 )     2,806          
Foreign currency translation adjustment, net of tax expense of $588, $1,142 and $484 in 2007, 2006 and 2005, respectively
    921       1,796       760  
                         
Comprehensive income
  $ 819,076     $ 513,522     $ 267,699  
                         
 
The components of accumulated other comprehensive income, net of taxes, as of August 31, 2007 and 2006 are as follows:
 
                 
    2007     2006  
    (Dollars in thousands)  
 
Pension liability adjustment, net of tax benefit of $40,881 and $423 in 2007 and 2006, respectively
  $ (64,276 )   $ (664 )
Unrealized net gains on available for sale investments, net of tax expense of $48,347 and $6,625 in 2007 and 2006, respectively
    75,939       10,406  
Interest rate hedges, net of tax benefit of $1,397 and $1,332 in 2007 and 2006, respectively
    (2,194 )     (2,092 )
Energy derivative instruments qualified for hedge accounting, net of tax expense of $1,787 in 2006
            2,806  
Foreign currency translation adjustment, net of tax expense of $2,271 and $1,683 in 2007 and 2006, respectively
    3,567       2,646  
                 
Accumulated other comprehensive income
  $ 13,036     $ 13,102  
                 
 
Note 17.   Change in Accounting Principal—Turnarounds
 
During the first fiscal quarter of 2008, the Company changed its accounting method for the costs of turnarounds from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to FASB Staff Position (“FSP”) No. AUG AIR-1 “Accounting for


F-31


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The comparative financial statements for years ended August 31, 2007, 2006 and 2005 have been adjusted to apply the new method retrospectively. These deferred costs are included in the Company’s Consolidated Balance Sheets in other assets. The amortization expenses are included in cost of goods sold in the Company’s Consolidated Statements of Operations. The following consolidated financial statement line items were affected by this change in accounting principle.
 
                         
    As of and For The Year Ended August 31, 2007  
    As
    FSP AUG
       
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted  
 
Consolidated Balance Sheets
                       
Other assets
  $ 147,965     $ 60,787     $ 208,752  
Accrued expenses
    439,084       (6,244 )     432,840  
Other liabilities
    359,198       18,010       377,208  
Minority interests in subsidiaries
    190,830       6,556       197,386  
Equities
    2,432,990       42,465       2,475,455  
Consolidated Statements of Operations
                       
Cost of goods sold
  $ 16,139,691     $ (10,458 )   $ 16,129,233  
Income before income taxes
    786,933       10,458       797,391  
Income taxes
    36,600       4,068       40,668  
Net income
    750,333       6,390       756,723  
Consolidated Statements of Cash Flows
                       
Operating activities
                       
Net income
  $ 750,333     $ 6,390     $ 756,723  
Amortization of deferred major repair costs
            23,250       23,250  
Deferred taxes
    46,800       4,068       50,868  
Changes in operating assets and liabilities:
                       
Other current assets and other assets
    (256,925 )     2,210       (254,715 )
Accounts payable and accrued expenses
    277,722       13,146       290,868  
Other liabilities
    23,746       (14,400 )     9,346  
Net cash provided by operating activities
    372,622       34,664       407,286  
Investing activities
                       
Expenditures for major repairs
            (34,664 )     (34,664 )
Net cash used in investing activities
    (495,291 )     (34,664 )     (529,955 )
 


F-32


 

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    As of and for the Year Ended August 31, 2006     For the Year Ended August 31, 2005  
    As
    FSP AUG
          As
    FSP AUG
       
    Previously
    AIR-1
    As
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted     Reported     Adjustment     Adjusted  
 
Consolidated Balance Sheets
                                               
Other assets
  $ 223,474     $ 51,583     $ 275,057                          
Accrued expenses
    347,078       (19,390 )     327,688                          
Other liabilities
    310,157       28,342       338,499                          
Minority interests in subsidiaries
    141,375       6,556       147,931                          
Equities
    2,017,391       36,075       2,053,466                          
Consolidated Statements of Operations
                                               
Cost of goods sold
  $ 13,570,507     $ (30,222 )   $ 13,540,285     $ 11,449,858     $ (11,385 )   $ 11,438,473  
Minority interests
    85,974       5,105       91,079       47,736       2,089       49,825  
Income from continuing operations before income taxes
    538,999       25,117       564,116       297,260       9,296       306,556  
Income taxes
    49,327       10,023       59,350       30,434       3,719       34,153  
Net income
    490,297       15,094       505,391       250,016       5,577       255,593  
Consolidated Statements of Cash Flows
                                               
Operating activities
                                               
Net income
  $ 490,297     $ 15,094     $ 505,391     $ 250,016     $ 5,577     $ 255,593  
Amortization of deferred major repair costs
            14,716       14,716               10,174       10,174  
Minority interests
    85,974       5,105       91,079       47,736       2,089       49,825  
Deferred taxes
    78,300       10,023       88,323       26,400       3,719       30,119  
Changes in operating assets and liabilities:
                                               
Other current assets and other assets
    64,677       (1,704 )     62,973       (74,911 )             (74,911 )
Accounts payable and accrued expenses
    (142,934 )     (13,358 )     (156,292 )     328,961       (2,658 )     326,303  
Other liabilities
    15,368       13,003       28,371       9,417       (3,429 )     5,988  
Net cash provided by operating activities
    454,942       42,879       497,821       276,531       15,472       292,003  
Investing activities
                                               
Expenditures for major repairs
            (42,879 )     (42,879 )             (15,472 )     (15,472 )
Net cash used in investing activities
    (265,348 )     (42,879 )     (308,227 )     (91,902 )     (15,472 )     (107,374 )

F-33


 

 
CHS INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
                         
    November 30,
    August 31,
    November 30,
 
    2007     2007 *     2006 *  
    (dollars in thousands)  
 
ASSETS
Current assets:
                       
Cash and cash equivalents
  $ 186,754     $ 357,712     $ 112,232  
Receivables
    1,966,793       1,401,251       1,141,811  
Inventories
    2,235,967       1,666,632       1,180,498  
Other current assets
    1,164,723       511,263       593,341  
                         
Total current assets
    5,554,237       3,936,858       3,027,882  
Investments
    806,610       880,592       713,382  
Property, plant and equipment
    1,836,372       1,728,171       1,525,028  
Other assets
    241,540       208,752       284,189  
                         
Total assets
  $ 8,438,759     $ 6,754,373     $ 5,550,481  
                         
 
LIABILITIES AND EQUITIES
Current liabilities:
                       
Notes payable
  $ 443,413     $ 672,571     $ 291,422  
Current portion of long-term debt
    96,123       98,977       61,443  
Customer credit balances
    123,699       110,818       75,907  
Customer advance payments
    697,357       161,525       118,319  
Checks and drafts outstanding
    170,038       143,133       77,558  
Accounts payable
    1,785,143       1,120,822       917,719  
Accrued expenses
    484,322       432,840       387,735  
Dividends and equities payable
    488,727       374,294       254,539  
                         
Total current liabilities
    4,288,822       3,114,980       2,184,642  
Long-term debt
    975,391       589,344       665,756  
Other liabilities
    381,438       377,208       374,409  
Minority interests in subsidiaries
    190,936       197,386       163,426  
Commitments and contingencies
                       
Equities
    2,602,172       2,475,455       2,162,248  
                         
Total liabilities and equities
  $ 8,438,759     $ 6,754,373     $ 5,550,481  
                         
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2
 
The accompanying notes are an integral part of the consolidated financial statements (unaudited).


F-34


 

CHS INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
                 
    For the Three Months Ended
 
    November 30,  
    2007     2006 *  
    (dollars in thousands)  
 
Revenues
  $ 6,525,386     $ 3,751,070  
Cost of goods sold
    6,210,749       3,528,636  
                 
Gross profit
    314,637       222,434  
Marketing, general and administrative
    66,459       52,102  
                 
Operating earnings
    248,178       170,332  
Gain on investments
    (94,948 )     (5,348 )
Interest, net
    13,537       7,688  
Equity income from investments
    (31,190 )     (4,531 )
Minority interests
    22,979       18,912  
                 
Income before income taxes
    337,800       153,611  
Income taxes
    36,900       17,232  
                 
Net income
  $ 300,900     $ 136,379  
                 
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2
 
The accompanying notes are an integral part of the consolidated financial statements (unaudited).


F-35


 

 
CHS INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
                 
    For the Three Months Ended
 
    November 30,  
    2007     2006 *  
    (dollars in thousands)  
 
Cash flows from operating activities:
               
Net income
  $ 300,900     $ 136,379  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    40,517       34,201  
Amortization of deferred major repair costs
    6,664       6,244  
Income from equity investments
    (31,190 )     (4,531 )
Distributions from equity investments
    12,332       15,272  
Minority interests
    22,979       18,912  
Noncash patronage dividends received
    (445 )     (321 )
Gain on sale of property, plant and equipment
    (899 )     (302 )
Gain on investments
    (94,948 )     (5,348 )
Deferred taxes
    36,900       17,232  
Other, net
    (244 )     375  
Changes in operating assets and liabilities:
               
Receivables
    (545,482 )     (39,841 )
Inventories
    (394,715 )     (45,118 )
Other current assets and other assets
    (403,839 )     (298,720 )
Customer credit balances
    12,881       9,439  
Customer advance payments
    329,580       35,932  
Accounts payable and accrued expenses
    716,854       79,021  
Other liabilities
    6,662       7,858  
                 
Net cash provided by (used in) operating activities
    14,507       (33,316 )
                 
Cash flows from investing activities:
               
Acquisition of property, plant and equipment
    (108,698 )     (80,192 )
Proceeds from disposition of property, plant and equipment
    2,653       1,415  
Expenditures for major repairs
    (21,662 )     (1,297 )
Investments
    (267,317 )     (77,420 )
Investments redeemed
    66       1,376  
Proceeds from sale of investments
    114,198       10,918  
Acquisition of business transaction, net
    (13,024 )        
Changes in notes receivable
    (18,912 )     (32,546 )
Acquisition of intangibles
    (4,721 )     (548 )
Other investing activities, net
    432       (2,549 )
                 
Net cash used in investing activities
    (316,985 )     (180,843 )
                 
Cash flows from financing activities:
               
Changes in notes payable
    (229,120 )     269,415  
Long-term debt borrowings
    400,000          
Principal payments on long-term debt
    (18,675 )     (17,641 )
Payments for bank fees on debt
    (1,794 )        
Changes in checks and drafts outstanding
    26,906       20,475  
Distribution to minority owners
    (38,409 )     (8,313 )
Costs incurred — capital equity certificates redeemed
            (4 )
Preferred stock dividends paid
    (3,620 )     (2,932 )
Retirements of equities
    (3,768 )     (47,134 )
                 
Net cash provided by financing activities
    131,520       213,866  
                 
Net decrease in cash and cash equivalents
    (170,958 )     (293 )
                 
Cash and cash equivalents at beginning of period
    357,712       112,525  
                 
Cash and cash equivalents at end of period
  $ 186,754     $ 112,232  
                 
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2
 
The accompanying notes are an integral part of the consolidated financial statements (unaudited).


F-36


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(dollars in thousands)
 
Note 1.   Accounting Policies
 
The unaudited consolidated balance sheets as of November 30, 2007 and 2006, the statements of operations for the three months ended November 30, 2007 and 2006, and the statements of cash flows for the three months ended November 30, 2007 and 2006 reflect, in the opinion of our management, all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim 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, among other things, the seasonal nature of our businesses. The consolidated balance sheet data as of August 31, 2007 has been derived from our audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
 
The consolidated financial statements include our accounts and the accounts of all of our wholly-owned and majority-owned subsidiaries and limited liability companies. The effects of all significant intercompany accounts and transactions have been eliminated.
 
These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2007, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission.
 
Goodwill and Other Intangible Assets
 
Goodwill was $3.8 million, $3.8 million and $3.9 million on November 30, 2007, August 31, 2007 and November 30, 2006, respectively, and is included in other assets in the Consolidated Balance Sheets.
 
Intangible assets subject to amortization primarily include trademarks, customer lists, supply contracts and agreements not to compete, and are amortized over the number of years that approximate their respective useful lives (ranging from 1 to 15 years). The gross carrying amount of these intangible assets was $56.3 million with total accumulated amortization of $14.2 million as of November 30, 2007. Intangible assets of $11.9 million (includes $7.2 million related to the crop nutrients business transaction) and $2.7 million ($2.1 million non-cash) were acquired during the three months ended November 30, 2007 and 2006, respectively. Total amortization expense for intangible assets during the three-month periods ended November 30, 2007 and 2006, was $2.7 million and $0.7 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years will approximate $10.0 million annually for the first year, $6.5 million for the next three years and $3.0 million for the following year.
 
Recent Accounting Pronouncements
 
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157) to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of


F-37


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated results of operations and financial condition.
 
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. We are currently evaluating the impact SFAS No. 141R will have on our process of analyzing business combinations.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51.” This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in our Consolidated Balance Sheets. Income and comprehensive income attributed to the noncontrolling interest will be included in our Consolidated Statements of Operations and our Consolidated Statements of Equities and Comprehensive Income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of this standard must be applied retrospectively upon adoption. We are in the process of evaluating the impact the adoption of SFAS No. 160 will have on our consolidated financial statements.
 
Reclassifications
 
Certain reclassifications have been made to prior period’s amounts to conform to current period classifications. These reclassifications had no effect on previously reported net income, equities or total cash flows.
 
Note 2.   Change in Accounting Principle — Turnarounds
 
During the first fiscal quarter of 2008, we changed our accounting method for the costs of turnarounds from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to FASB Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The comparative financial statements for the three months ended November 30, 2006 have been adjusted to apply the new method retrospectively. These deferred costs are included in our Consolidated Balance Sheets in other assets. The amortization expenses are included in cost of goods sold in our Consolidated Statements of Operations. The following consolidated financial statement line items as of August 31, 2007 and November 30, 2006, and for the three months ended November 30, 2006 were affected by this change in accounting principle.
 


F-38


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
                         
    August 31, 2007  
    As
    FSP AUG
       
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted  
 
Consolidated Balance Sheets
                       
Other assets
  $ 147,965     $ 60,787     $ 208,752  
Accrued expenses
    439,084       (6,244 )     432,840  
Other liabilities
    359,198       12,164       371,362  
Minority interests in subsidiaries
    190,830       6,556       197,386  
Equities
    2,432,990       42,465       2,475,455  
 
                         
    November 30, 2006  
    As
    FSP AUG
       
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted  
 
Consolidated Balance Sheets
                       
Other current assets
  $ 600,990     $ (7,649 )   $ 593,341  
Other assets
    237,553       46,636       284,189  
Accrued expenses
    410,433       (22,698 )     387,735  
Other liabilities
    355,452       18,957       374,409  
Minority interests in subsidiaries
    156,870       6,556       163,426  
Equities
    2,126,076       36,172       2,162,248  
 
                         
    Three Months Ended
 
    November 30, 2006  
    As
    FSP AUG
       
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted  
 
Consolidated Statements of Operations
                       
Cost of goods sold
  $ 3,528,794     $ (158 )   $ 3,528,636  
Income before income taxes
    153,453       158       153,611  
Income taxes
    17,171       61       17,232  
Net income
    136,282       97       136,379  
Consolidated Statements of Cash Flows
                       
Operating activities
                       
Net income
  $ 136,282     $ 97     $ 136,379  
Amortization of deferred major repair costs
            6,244       6,244  
Deferred taxes
    17,171       61       17,232  
Changes in operating assets and liabilities:
                       
Other current assets and other assets
    (300,523 )     1,803       (298,720 )
Accounts payable and accrued expenses
    82,329       (3,308 )     79,021  
Other liabilities
    11,458       (3,600 )     7,858  
Net cash (used in) provided by operating activities
    (34,613 )     1,297       (33,316 )
Investing activities
                       
Expenditures for major repairs
            (1,297 )     (1,297 )
Net cash used in investing activities
    (179,546 )     (1,297 )     (180,843 )

F-39


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
Note 3.   Receivables
 
                         
    November 30,
    August 31,
    November 30,
 
    2007     2007     2006  
 
Trade
  $ 1,912,160     $ 1,366,428     $ 1,101,845  
Other
    118,636       97,783       95,215  
                         
      2,030,796       1,464,211       1,197,060  
Less allowances for doubtful accounts
    64,003       62,960       55,249  
                         
    $ 1,966,793     $ 1,401,251     $ 1,141,811  
                         
 
Note 4.   Inventories
 
                         
    November 30,
    August 31,
    November 30,
 
    2007     2007     2006  
 
Grain and oilseed
  $ 1,301,441     $ 928,567     $ 619,913  
Energy
    481,960       490,675       378,260  
Crop nutrients
    192,775                  
Feed and farm supplies
    215,570       178,167       146,516  
Processed grain and oilseed
    39,932       66,407       34,128  
Other
    4,289       2,816       1,681  
                         
    $ 2,235,967     $ 1,666,632     $ 1,180,498  
                         
 
Note 5.   Derivative Assets and Liabilities
 
Included in other current assets on November 30, 2007, August 31, 2007 and November 30, 2006 are derivative assets of $446.8 million, $247.1 million and $252.3 million, respectively. Included in accrued expenses on November 30, 2007, August 31, 2007 and November 30, 2006 are derivative liabilities of $235.7 million, $177.2 million and $174.7 million, respectively.
 
Note 6.   Investments
 
US BioEnergy Corporation (US BioEnergy), is an ethanol production company which currently owns and operates four ethanol plants and has four additional ethanol plants under construction. During the three months ended November 30, 2007, we purchased $6.5 million of additional shares of common stock in US BioEnergy, compared to $35.0 million during the three months ended November 30, 2006. As of November 30, 2007, our ownership in US BioEnergy was approximately 20%, and based upon the market value of $9.07 per share on that date, our investment had a market value of approximately $144.5 million. The carrying value of our investment in US BioEnergy of $146.8 million exceeds our share of their equity by approximately $20 million, and represents equity method goodwill. We are currently recognizing earnings of US BioEnergy in our Processing segment, to the extent of our ownership interest, using the equity method of accounting. On November 29, 2007, US BioEnergy and VeraSun Corporation announced that they entered into a definitive merger agreement subject to shareholder and regulatory approval. If the merger is consummated, we would own approximately eight percent of the combined entity.
 
During the three months ended November 30, 2007, we invested $30.3 million in a joint venture (37.5% ownership) included in our Ag Business segment, that acquired production farmland and related operations in Brazil, intended to strengthen our ability to serve customers around the world. The operations include production of soybeans, corn, cotton and sugarcane, as well as cotton processing in four locations.


F-40


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
During the three months ended November 30, 2006, we sold 540,000 shares of our CF Industries Holdings, Inc. (CF) stock, included in our Ag Business segment, for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing our ownership interest in CF to approximately 2.9%. During the three months ended November 30, 2007, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million.
 
Agriliance LLC (Agriliance) is owned and governed by United Country Brands, LLC (50%) and Land O’Lakes, Inc. (Land O’Lakes) (50%). United Country Brands, LLC is a 100% owned subsidiary of CHS. We account for our share of the Agriliance investment using the equity method of accounting. In June 2007, we announced that two business segments of Agriliance were being repositioned. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail distribution business. We currently are exploring, with Land O’Lakes, the repositioning options for the remaining portions of the Agriliance retail distribution business. During the three months ended November 30, 2007, we contributed $230.0 million to Agriliance to support their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets.
 
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, we were each entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O’Lakes owed us $133.5 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance’s debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made a true-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during our current fiscal year.
 
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Preliminary values assigned to the net assets as of September 1, 2007 were as follows:
 
         
Receivables
  $ 5,219  
Inventories
    174,620  
Other current assets
    256,390  
Investments
    6,096  
Property, plant and equipment
    32,382  
Other assets
    9,017  
Customer advance payments
    (206,252 )
Accounts payable
    (5,584 )
Accrued expenses
    (3,163 )
         
Total net assets received
  $ 268,725  
         
 
We have a 50% interest in Ventura Foods, LLC, (Ventura Foods), a joint venture which produces and distributes vegetable oil-based products, and is included in our Processing segment.
 
As of November 30, 2007, the carrying value of our equity method investees, Agriliance and Ventura Foods, exceeded our share of their equity by $42.9 million. Of this basis difference $3.3 million is being amortized over the remaining life of the corresponding assets, which is approximately five years. The balance of the basis difference represents equity method goodwill.


F-41


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
The following provides summarized unaudited financial information for our unconsolidated significant equity investments in Ventura Foods and Agriliance, for the balance sheets as of November 30, 2007, August 31, 2007 and November 30, 2006 and statements of operations for the three-month periods as indicated below.
 
Ventura Foods, LLC
 
                 
    For the Three Months Ended
 
    November 30,  
    2007     2006  
 
Net sales
  $ 480,958     $ 398,133  
Gross profit
    56,729       55,464  
Net income
    21,661       22,007  
 
                         
    November 30,
    August 31,
    November 30,
 
    2007     2007     2006  
 
Current assets
  $ 324,760     $ 269,156     $ 267,583  
Non-current assets
    477,158       470,359       440,261  
Current liabilities
    235,958       195,376       166,172  
Non-current liabilities
    308,993       309,221       308,172  
 
Agriliance LLC
 
                 
    For the Three Months Ended
 
    November 30,  
    2007     2006  
 
Net sales
  $ 210,590     $ 669,993  
Gross profit
    33,874       45,623  
Net income
    (23,516 )     (31,389 )
 
                         
    November 30,
    August 31,
    November 30,
 
    2007     2007     2006  
 
Current assets
  $ 732,209     $ 1,534,432     $ 1,485,243  
Non-current assets
    66,850       130,347       165,704  
Current liabilities
    392,483       1,214,019       1,253,078  
Non-current liabilities
    35,698       138,173       132,128  
 
Note 7.   Notes Payable and Long-term Debt
 
As of August 31, 2007, we had a five-year revolving line of credit with a syndication of domestic and international banks in the amount of $1.1 billion, with the ability to expand the facility an additional $200.0 million. In October 2007, we exercised our ability to expand the facility and obtained additional commitments in the amount of $200.0 million from certain lenders under the agreement. The additional commitments increased the total borrowing capacity to $1.3 billion on the facility.
 
In October 2007, we entered into a private placement with several insurance companies and banks for long-term debt in the amount of $400.0 million with an interest rate of 6.18%. The debt is due in equal annual installments of $80.0 million during years 2013 through 2017.
 
Subsequent to our fiscal quarter ended November 30, 2007, we established a ten-year long-term credit agreement through a syndication of cooperative banks in the amount of $150.0 million, with an interest rate of


F-42


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
5.59%. Repayments are due in equal semi-annual installments of $15.0 million each, starting in June 2013 through December 2018.
 
Note 8.   Interest, net
 
Interest, net for the three months ended November 30, 2007 and 2006 is as follows:
 
                 
    For the Three Months Ended
 
    November 30,  
    2007     2006  
 
Interest expense
  $ 18,371     $ 11,283  
Interest income
    4,834       3,595  
                 
Interest, net
  $ 13,537     $ 7,688  
                 
 
Note 9.   Income Taxes
 
Effective September 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under FASB Statement 109, “Accounting for Income Taxes”, and requires additional disclosures about uncertain tax positions. FIN 48 requires a taxpayer to determine whether a tax position is more likely than not (greater than 50 percent) to be sustained based solely on the technical merits of the position. If this threshold is met, the tax benefit is measured and recognized at the largest amount that is greater than 50 percent likely of being realized.
 
The total amount of unrecognized tax benefits as of September 1 and November 30, 2007 was $7.5 million. There was no impact to our equity as a result of adoption of FIN 48. Recognition of all or a portion of the unrecognized tax benefits would affect our effective income tax rate in the respective period of change.
 
Any applicable interest and penalties on uncertain tax positions were included as a component of income tax expense prior to the adoption of FIN 48, and we continued this classification subsequent to the adoption. The liability for uncertain income taxes as of September 1 and November 30, 2007, includes interest and penalties of $0.3 million.
 
We file income tax returns in the U.S. federal jurisdiction, and various U.S. state and foreign jurisdictions. The U.S. income tax returns for periods ended after August 31, 2004, remain subject to examination. With limited exceptions, we are not subject to state and local income tax examinations for years before August 31, 2001. It is not expected that the amount of unrecognized tax benefits will significantly change within the next twelve months.


F-43


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
Note 10.   Equities
 
Changes in equity for the three-month periods ended November 30, 2007 and 2006 are as follows:
 
                 
    Fiscal 2008*     Fiscal 2007*  
 
Balances, September 1, 2007 and 2006
  $ 2,475,455     $ 2,053,466  
Net income
    300,900       136,379  
Other comprehensive (loss) income
    (52,460 )     26,259  
Equities retired
    (3,768 )     (47,134 )
Equity retirements accrued
    3,768       47,134  
Equities issued in exchange for elevator properties
            864  
Preferred stock dividends
    (3,620 )     (2,932 )
Preferred stock dividends accrued
    2,413       1,955  
Accrued dividends and equities payable
    (120,613 )     (53,855 )
Other, net
    97       112  
                 
Balances, November 30, 2007 and 2006
  $ 2,602,172     $ 2,162,248  
                 
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; See Note 2
 
Note 11.   Comprehensive Income
 
Total comprehensive income of $248.4 million and $162.6 million for the three months ended November 30, 2007 and 2006, respectively, primarily consists of net income and unrealized net gains or losses on available for sale investments for the current period. Accumulated other comprehensive loss on November 30, 2007, was $39.4 million and primarily consisted of pension liability adjustments and unrealized net gains or losses on available for sale investments. On August 31, 2007 and November 30, 2006, accumulated other comprehensive income was $13.0 million and $39.4 million, respectively.
 
Note 12.   Employee Benefit Plans
 
Employee benefit information for the three months ended November 30, 2007 and 2006 is as follows:
 
                                                 
    Qualified
    Non-Qualified
             
    Pension Benefits     Pension Benefits     Other Benefits  
    2007     2006     2007     2006     2007     2006  
 
Components of net periodic benefit
costs for the three months ended November 30:
                                               
Service cost
  $ 3,773     $ 3,624     $ 308     $ 254     $ 261     $ 256  
Interest cost
    5,213       4,817       545       360       425       416  
Expected return on plan assets
    (7,804 )     (7,211 )                                
Unrecognized net asset obligation amortization
                                    184          
Prior service cost amortization
    541       211       145       125       (80 )     (128 )
Actuarial loss (gain) amortization
    1,100       1,502       206       16       (65 )     (14 )
Transition amount amortization
                                    51       234  
                                                 
Net periodic benefit cost
  $ 2,823     $ 2,943     $ 1,204     $ 755     $ 776     $ 764  
                                                 


F-44


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
Employer Contributions:
 
National Cooperative Refinery Association (NCRA), of which we own approximately 74.5%, expects to contribute $2.2 million to its pension plan during fiscal 2008. No other contributions are expected.
 
Note 13.   Segment Reporting
 
We have aligned our business segments based on an assessment of how our businesses operate and the products and services they sell. Our three business segments: Energy, Ag Business and Processing, create vertical integration to link producers with consumers. Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transports those products. Our Ag Business segment purchases and resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as wholesaler and retailer of crop inputs. Our Processing segment converts grains and oilseeds into value-added products.
 
Corporate administrative expenses are allocated to all three business segments, and Corporate and Other, based on either direct usage for services that can be tracked, 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 operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, agronomy and country operations businesses experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.
 
Our revenues and assets can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds, 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 the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.
 
While our revenues and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and 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 Consolidated Statements of Operations. These investments principally include our 50% ownership in each of the following companies: Agriliance LLC (Agriliance), TEMCO, LLC (TEMCO) and United Harvest, LLC (United Harvest), and our 37.5% ownership in Multigrain S.A. included in our Ag Business segment; our 50% ownership in Ventura Foods, LLC (Ventura Foods), our 24% ownership in Horizon Milling, LLC (Horizon Milling) and Horizon Milling G.P., and our approximate 20% ownership in US BioEnergy Corporation (US BioEnergy) included in our Processing segment; and our 49% ownership in Cofina Financial, LLC (Cofina Financial) included in Corporate and Other.
 
The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies, including NCRA and Provista Renewable Fuels


F-45


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
Marketing, LLC (Provista), included in our Energy segment. The effects of all significant intercompany transactions have been eliminated.
 
Reconciling Amounts represent the elimination of revenues between segments. Such transactions are conducted at market prices to more accurately evaluate the profitability of the individual business segments.
 
Segment information for the three months ended November 30, 2007 and 2006 is as follows:
 
                                                 
          Ag
          Corporate
    Reconciling
       
    Energy*     Business     Processing     and Other     Amounts     Total*  
 
For the Three Months Ended November 30, 2007
                                               
Revenues
  $ 2,521,688     $ 3,835,251     $ 243,296     $ 7,626     $ (82,475 )   $ 6,525,386  
Cost of goods sold
    2,374,735       3,686,458       233,117       (1,086 )     (82,475 )     6,210,749  
                                                 
Gross profit
    146,953       148,793       10,179       8,712             314,637  
Marketing, general and administrative
    22,566       30,688       5,497       7,708               66,459  
                                                 
Operating earnings
    124,387       118,105       4,682       1,004             248,178  
(Gain) loss on investments
    (17 )     (94,545 )     611       (997 )             (94,948 )
Interest, net
    (5,846 )     15,128       5,024       (769 )             13,537  
Equity income from investments
    (1,163 )     (7,193 )     (21,138 )     (1,696 )             (31,190 )
Minority interests
    22,921       58                               22,979  
                                                 
Income before income taxes
  $ 108,492     $ 204,657     $ 20,185     $ 4,466     $     $ 337,800  
                                                 
Intersegment revenues
  $ (77,964 )   $ (4,421 )   $ (90 )           $ 82,475     $  
                                                 
Goodwill
  $ 3,654     $ 150                             $ 3,804  
                                                 
Capital expenditures
  $ 90,748     $ 16,040     $ 1,279     $ 631             $ 108,698  
                                                 
Depreciation and amortization
  $ 23,745     $ 11,513     $ 3,808     $ 1,451             $ 40,517  
                                                 
Total identifiable assets at November 30, 2007
  $ 2,732,125     $ 4,322,309     $ 741,777     $ 642,548             $ 8,438,759  
                                                 


F-46


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
                                                 
          Ag
          Corporate
    Reconciling
       
    Energy*     Business     Processing     and Other     Amounts     Total*  
 
For the Three Months Ended November 30, 2006
                                               
Revenues
  $ 1,853,409     $ 1,804,616     $ 155,024     $ 7,306     $ (69,285 )   $ 3,751,070  
Cost of goods sold
    1,702,628       1,746,843       148,463       (13 )     (69,285 )     3,528,636  
                                                 
Gross profit
    150,781       57,773       6,561       7,319             222,434  
Marketing, general and administrative
    20,987       19,285       5,956       5,874               52,102  
                                                 
Operating earnings
    129,794       38,488       605       1,445             170,332  
Gain on investments
            (5,348 )                             (5,348 )
Interest, net
    385       5,170       2,887       (754 )             7,688  
Equity (income) loss from investments
    (1,056 )     10,589       (12,850 )     (1,214 )             (4,531 )
Minority interests
    18,961       (49 )                             18,912  
                                                 
Income before income taxes
  $ 111,504     $ 28,126     $ 10,568     $ 3,413     $     $ 153,611  
                                                 
Intersegment revenues
  $ (67,820 )   $ (1,381 )   $ (84 )           $ 69,285     $  
                                                 
Goodwill
  $ 3,654     $ 250                             $ 3,904  
                                                 
Capital expenditures
  $ 66,143     $ 8,600     $ 4,949     $ 500             $ 80,192  
                                                 
Depreciation and amortization
  $ 21,016     $ 8,186     $ 3,650     $ 1,349             $ 34,201  
                                                 
Total identifiable assets at November 30, 2006
  $ 2,169,863     $ 2,240,442     $ 600,463     $ 539,713             $ 5,550,481  
                                                 
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; See Note 2.
 
Note 14.   Commitments and Contingencies
 
Guarantees
 
We are a guarantor for lines of credit for related companies. Our bank covenants allow maximum guarantees of $150.0 million, of which $54.5 million was outstanding on November 30, 2007. In addition, our bank covenants allow for guarantees dedicated solely for NCRA in the amount of $125.0 million, for which there are no outstanding guarantees.
 
In the past, we made seasonal and term loans to member cooperatives, and our wholly-owned subsidiary, Fin-Ag, Inc., made loans for agricultural purposes to individual producers. Some of these loans were sold to CoBank, ACB (Cobank), and we guaranteed a portion of the loans sold, some of which are still outstanding. Currently these loans are made by Cofina Financial, in which we have a 49% ownership interest. We may, at our own discretion, choose to guarantee certain loans made by Cofina Financial. In addition, we also guarantee certain debt and obligations under contracts for our subsidiaries and members.
 
Our obligations pursuant to our guarantees as of November 30, 2007 are as follows:
 
                                     
    Guarantee
    Exposure on
                     
    Maximum
    November 30,
            Triggering
  Recourse
  Assets Held
Entities
  Exposure     2007     Nature of Guarantee   Expiration Date   Event   Provisions   as Collateral
 
Mountain Country, LLC
  $ 150     $ 5     Obligations by Mountain Country, LLC under credit agreement   None stated, but may be terminated upon 90 days prior notice in regard to future obligations   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure

F-47


 

CHS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
 
                                     
    Guarantee
    Exposure on
                     
    Maximum
    November 30,
            Triggering
  Recourse
  Assets Held
Entities
  Exposure     2007     Nature of Guarantee   Expiration Date   Event   Provisions   as Collateral
 
Provista Renewable Fuels Marketing, LLC
  $ 10,000       3,058     Obligations by Provista under credit agreement   None stated   Credit agreement default   Subrogation against Provista   None
Horizon Milling, LLC
  $ 5,000             Indemnification and reimbursement of 24% of damages related to Horizon Milling, LLC’s performance under a flour sales agreement   None stated, but may be terminated by any party upon 90 days prior notice in regard to future obligations   Nonperformance under flour sale agreement   Subrogation against Horizon Milling, LLC   None
TEMCO, LLC
  $ 25,000       15,400     Obligations by TEMCO, LLC under credit agreement   None stated   Credit agreement default   Subrogation against TEMCO, LLC   None
TEMCO, LLC
  $ 1,000       1,000     Obligations by TEMCO, LLC under counterparty agreement   None stated, but may be terminated upon 5 days prior notice in regard to future obligations   Nonpayment   Subrogation against TEMCO, LLC   None
Third parties
    *     1,000     Surety for, or indemnificaton of surety for sales contracts between affiliates and sellers of grain under deferred payment contracts   Annual renewal on December 1 in regard to surety for one third party, otherwise none stated and may be terminated by the Company at any time in regard to future obligations   Nonpayment   Subrogation against affiliates   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Cofina Financial, LLC
  $ 13,769       10,639     Loans to our customers that are originated by Cofina and then sold to ProPartners, which is an affiliate of CoBank   None stated   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Cofina Financial, LLC
  $ 17,700       17,700     Loans made by Cofina to our customers   None stated   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Agriliance LLC
  $ 5,674       5,674     Outstanding letter of credit from CoBank to Agriliance LLC   None stated   Default under letter of credit reimbursement agreement   Subrogation against borrower   None
Ag Business segment subsidiaries
  $ 2,810             Contribution obligations as a participating employer in the Co-op Retirement Plan   None stated   Nonpayment   None   None
                                     
            $ 54,476                      
                                     
 
 
* The maximum exposure on any given date is equal to the actual guarantees extended as of that date.

F-48


 

 
(GHS LOGO)
 
       1,807,559 Shares
 
CHS Inc.
 
8% Cumulative Redeemable Preferred Stock
 
 
PROSPECTUS
 
 
       February   , 2008
 


 

 
PART II.
 
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13.   Other Expenses of Issuance and Distribution
 
         
SEC Registration Fee
  $ 1,430.29  
Accounting Fees and Expenses
  $ 13,000.00  
Legal Fees and Expenses
  $ 45,000.00  
Printing Fees
  $ 50,000.00  
Miscellaneous
  $ 5,000.00  
Total
  $ 114,430.29  
 
All fees and expenses other than the SEC registration fee are estimated. The expenses listed above will be paid by CHS.
 
Item 14.   Indemnification of Officers and Directors
 
Section 308A.325 of the Minnesota cooperative law provides that a cooperative may eliminate or limit the personal liability of a director of a cooperative for breach of fiduciary duty as a director in the cooperative’s articles of incorporation, provided, however, that the articles may not limit the liability of a director for:
 
  •  breach of the director’s duty of loyalty to the cooperative or its members;
 
  •  acts or omissions that are not in good faith or involve intentional misconduct or a knowing violation of law;
 
  •  a transaction from which the director derived an improper personal benefit; or
 
  •  an act or omission occurring before the date when the provision in the articles eliminating or limiting liability becomes effective.
 
Article IX of our Articles of Incorporation, as amended to date, eliminates or limits the personal liability of our directors to the greatest extent permissible under Minnesota law.
 
Article VI of our Bylaws provides that we shall indemnify each person who is or was a director, officer, manager, employee, or agent of this cooperative, and any person serving at the request of this cooperative as a director, officer, manager, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred to the fullest extent to which such directors, officers, managers, employees or agents of a cooperative may be indemnified under Minnesota law, as amended from time to time.
 
We maintain directors’ and officers’ liability insurance which covers certain liabilities and expenses of our directors and officers and cover us for reimbursement of payments to our directors and officers in respect of such liabilities and expenses.


I-1


 

Item 16.   Exhibits and Financial Statement Schedules
 
(a)
 
         
Exhibit
 
Description
 
  3 .1   Articles of Incorporation of CHS Inc., as amended. (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2006, filed on January 11, 2007).
  3 .2   Bylaws of CHS Inc. (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2005, filed on January 11, 2006).
  4 .1   Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock. (Incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-2 (File No. 333-101916), dated January 13, 2003).
  4 .2   Form of Certificate Representing 8% Cumulative Redeemable Preferred Stock. (Incorporated by reference to Amendment No. 2 to our Registration Statement on Form S-2 (File No. 333-101916), dated January 23, 2003).
  4 .3   Unanimous Written Consent Resolution of the Board of Directors Amending the Amended and Restated Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock. (Incorporated by reference to Amendment No. 2 to our Registration Statement on Form S-2 (File No. 333-101916), dated January 23, 2003).
  4 .4   Unanimous Written consent Resolution of the Board of Directors Amending the Amended and Restated Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock to change the record date for dividends. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2003, filed July 2, 2003).
  5 .1   Opinion of Dorsey & Whitney LLP Regarding Legality of Securities Being Registered (including consent). (**)
  8 .1   Opinion of Dorsey & Whitney LLP Regarding Tax Matters (including consent). (**)
  10 .1   Lease between the Port of Kalama and North Pacific Grain Growers, Inc., dated November 22, 1960. (Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-17865), filed December 13, 1996).
  10 .2   Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC dated July 24, 1996. (Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-17865), filed December 13, 1996).
  10 .3   Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and Harvest States Cooperatives dated August 30, 1996. (Incorporated by reference to our Registration Statement on Form S-1/A (File No. 333-17865), filed January 24, 1997).(*)
  10 .4   TEMCO, LLC Limited Liability Company Agreement between Cargill, Incorporated and Cenex Harvest States Cooperatives dated as of August 26, 2002. (Incorporated by reference to our Form 10-K for the year ended August 31, 2002, filed November 25, 2002).
  10 .5   Cenex Harvest States Cooperatives Supplemental Savings Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .5A   Amendment No. 3 to the CHS Inc. Supplemental Savings Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006, filed July 12, 2006).
  10 .6   Cenex Harvest States Cooperatives Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .6A   Amendment No. 4 to the CHS Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006, filed July 12, 2006).
  10 .7   Cenex Harvest States Cooperatives Senior Management Compensation Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .8   Cenex Harvest States Cooperatives Executive Long-Term Variable Compensation Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .9   Cenex Harvest States Cooperatives Share Option Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .9A   Amendment to Cenex Harvest States Share Option Plan, dated June 28, 2001. (Incorporated by reference to our Registration Statement on Form S-2 (File No. 333-65364), filed July 18, 2001).
  10 .9B   Amendment No. 2 to Cenex Harvest States Share Option Plan, dated May 2, 2001. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).


I-2


 

         
Exhibit
 
Description
 
  10 .9C   Amendment No. 3 to Cenex Harvest States Share Option Plan, dated June 4, 2002. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .9D   Amendment No. 4 to Cenex Harvest States Share Option Plan, dated April 6, 2004. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .10   CHS Inc. Share Option Plan Option Agreement. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .11   CHS Inc. Share Option Plan Trust Agreement. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .11A   Amendment No. 1 to the Trust Agreement. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .12   $225,000,000 Note Agreement (Private Placement Agreement) dated as of June 19, 1998 among Cenex Harvest States Cooperatives and each of the Purchasers of the Notes. (Incorporated by Reference to our Form 10-Q Transition Report for the period June 1, 1998 to August 31, 1998, filed October 14, 1998).
  10 .12A   First Amendment to Note Agreement ($225,000,000 Private Placement), effective September 10, 2003, among CHS Inc. and each of the Purchasers of the notes. (Incorporated by reference to our Form 10-K for the year ended August 31, 2003, filed November 21, 2003).
  10 .13   2006 Amended and Restated Credit Agreement (Revolving Loan) by and between CHS Inc. and the Syndication Parties dated as of May 18, 2006. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006, filed July 12, 2006).
  10 .13A   First Amendment to 2006 Amended and Restated Credit Agreement by and among CHS Inc., CoBank, ACB and the Syndication Parties, dated May 8, 2007 (Incorporated by reference to our Current Report on Form 8-K filed May 11, 2007).
  10 .14   $200 Million Term Loan Credit Agreement dated as of June 1, 1998 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives, including Exhibit 2.4 (form of $200 Million Promissory Note). (Incorporated by Reference to our Form 10-Q Transition Report for the period June 1, 1998 to August 31, 1998, filed October 14, 1998).
  10 .14A   First Amendment to Credit Agreement (Term Loan), effective as of May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 1999, filed July 13, 1999).
  10 .14B   Second Amendment to Credit Agreement (Term Loan) dated May 23, 2000 by and among Cenex Harvest States Cooperatives, CoBank, ACB, St. Paul Bank for Cooperatives and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2000, filed July 10, 2000).
  10 .14C   Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001 among Cenex Harvest States Cooperatives, CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2001, filed July 3, 2001).
  10 .14D   Fourth Amendment to Credit Agreement (Term Loan) dated May 22, 2002 among Cenex Harvest States Cooperatives, CoBank, ACB and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2002, filed July 3, 2002).
  10 .14E   Fifth Amendment to Credit Agreement (Term Loan) dated May 21, 2003 by and among Cenex Harvest States Cooperatives, CoBank, ACB and the Syndication Parties. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .14F   Sixth Amendment to Credit Agreement (Term Loan) dated as of May 20, 2004 by and among CHS Inc., CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2004, filed July 12, 2004).
  10 .14G   Seventh Amendment to Credit Agreement (Term Loan) dated as of May 19, 2005 by and among CHS Inc., CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our form 10-K for the year ended August 31, 2005, filed on November 18, 2005).
  10 .14H   Eighth Amendment to Credit Agreement (Term Loan) dated as of November 18, 2005 by and among CHS Inc., CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our form 10-K for the year ended August 31, 2005, filed on November 18, 2005).
  10 .14I   Ninth Amendment to Credit Agreement (Term Loan) dated as of May 18, 2006 by and among CHS Inc., CoBank, ACB and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006).

I-3


 

         
Exhibit
 
Description
 
  10 .14J   Tenth Amendment to Credit Agreement (Term Loan) dated as of May 8, 2007 by and among CHS Inc. and CoBank, ACB (Incorporated by reference to our Current Report on Form 8-K filed May 11, 2007).
  10 .15   Limited Liability Agreement of United Harvest, LLC dated November 9, 1998 between United Grain Corporation and Cenex Harvest States Cooperatives. (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 1998, filed January 13, 1999).
  10 .16   Joint Venture Agreement for Agriliance LLC, dated as of January 1, 2000 among Farmland Industries, Inc., Cenex Harvest States Cooperatives, United Country Brands, LLC and Land O’ Lakes, Inc. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 29, 2000, filed April 11, 2000).
  10 .17   Employment Agreement dated November 6, 2003 by and between John D. Johnson and CHS Inc. (Incorporated by reference to our Form 10-K for the year ended August 31, 2003, filed November 21, 2003).
  10 .17A   Amended and Restated Employment Agreement between John D. Johnson and CHS Inc., effective as of August 1, 2007 (Incorporated by reference to our Current Report on Form 8-K filed August 10, 2007).
  10 .18   CHS Inc. Special Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2003, filed November 21, 2003).
  10 .19   Note purchase and Private Shelf Agreement dated as of January 10, 2001 between Cenex Harvest States Cooperatives and The Prudential Insurance Company of America. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 28, 2001, filed April 10, 2001).
  10 .19A   Amendment No. 1 to Note Purchase and Private Shelf Agreement, dated as of March 2, 2001. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 28, 2001, filed April 10, 2001).
  10 .20   Note Purchase Agreement and Series D & E Senior Notes dated October 18, 2002. (Incorporated by reference to our Form 10-K for the year ended August 31, 2002, filed November 25, 2002).
  10 .21   2003 Amended and Restated Credit Agreement ($15 million, 2 Year Facility) dated December 16, 2003 between CoBank, ACB, U.S. AgBank, FCB and the National Cooperative Refinery Association, Inc. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 29, 2004, filed April 7, 2004).
  10 .21A   First Amendment to the 2003 Amended and Restated Credit Agreement between the National Cooperative Refinery Association and the Syndication Parties. (Incorporated by reference to our Current Report on Form 8-K filed December 20, 2005).
  10 .21B   Third Amendment to 2003 Amended and Restated Credit Agreement between National Cooperative Refinery Association and the Syndication Parties (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .21C   Fifth Amendment to 2003 Amended and Restated Credit Agreement between National Cooperative Refinery Association and the Syndication Parties (Incorporated by reference to our Registration Statement on Form S-1 (file No. 333-148091), filed December 14, 2007).
  10 .22   Note Purchase and Private Shelf Agreement between CHS Inc. and Prudential Capital Group dated as of April 13, 2004. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2004, filed July 12, 2004).
  10 .22A   Amendment No. 1 to Note Purchase and Private Shelf Agreement dated April 9, 2007, among CHS Inc., Prudential Investment Management, Inc. and the Prudential Affiliate parties (Incorporated by reference to our Form 10-Q for the quarterly period ended February 28, 2007 filed April 9, 2007).
  10 .23   Note Purchase Agreement for Series H Senior Notes dated September 21, 2004. (Incorporated by reference to our Current Report on Form 8-K filed September 22, 2004).
  10 .24   Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-121161), filed December 10, 2004).
  10 .24A   First Amendment to CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-129464), filed November 4, 2005).
  10 .24B   Second Amendment to the CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006, filed July 12, 2006).
  10 .25   New Plan Participants 2005 Plan Agreement and Election Form for the CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-121161), filed December 10, 2004).

I-4


 

         
Exhibit
 
Description
 
  10 .26   Beneficiary Designation Form for the CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-121161), filed December 10, 2004).
  10 .27   Share Option Plan Participants 2005 Plan Agreement and Election Form. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-129464), filed November 4, 2005).
  10 .28   Amended and Restated Loan and Security Agreement dated August 31, 2006, by and between Provista Renewable Fuels Marketing, LLC and LaSalle Bank National Association (Incorporated by reference to our Form 10-K for the year ended August 31, 2006, filed November 22, 2006).
  10 .28A   First Amendment to Amended and Restated Loan and Security Agreement by and among Provista Renewable Fuels Marketing, LLC and LaSalle Bank National Association dated January 30, 2007 (Incorporated by reference to our Current Report on Form 8-K filed January 31, 2007).
  10 .28B   Second Amendment to Amended and Restated Loan and Security Agreement by and among Provista Renewable Fuels Marketing, LLC and LaSalle Bank National Association dated November 2, 2007 (Incorporated by reference to our Current Report on Form 8-K filed November 6, 2007).
  10 .29   City of McPherson, Kansas Taxable Industrial Revenue Bond Series 2006 registered to National Cooperative Refinery Association in the amount of $325 million (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .30   Bond Purchase Agreement between National Cooperative Refinery Association, as purchaser, and City of McPherson, Kansas, as issuer, dated as of December 18, 2006 (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .31   Trust Indenture between City of McPherson, Kansas, as issuer, and Security Bank of Kansas City, Kansas City, Kansas, as trustee, dated as of December 18, 2006 (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .32   Lease agreement between City of McPherson, Kansas, as issuer, and National Cooperative Refinery Association, as tenant, dated as of December 18, 2006 (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .33   Commercial Paper Placement Agreement by and between CHS Inc. and Marshall & Ilsley Bank dated October 30, 2006 (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2006, filed January 11, 2007).
  10 .34   Commercial Paper Dealer Agreement by and between CHS Inc. and SunTrust Capital Markets, Inc. dated October 6, 2006 (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2006, filed January 11, 2007).
  10 .35   Note Purchase Agreement and Series I Senior Notes dated as of October 4, 2007 (Incorporated by reference to our Current Report on Form 8-K filed October 4, 2007).
  10 .36   Agreement Regarding Distribution of Assets, by and among CHS Inc., United Country Brands, LLC, Land O’Lakes, Inc. and Winfield Solutions, LLC, made as of September 4, 2007 (Incorporated by reference to our Form 10-K for the year ended August 31, 2007, filed November 20, 2007).
  10 .37   $150 Million Term Loan Credit Agreement by and between CHS Inc., CoBank, ACB and the Syndication Parties dated as of December 12, 2007. (Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-148091), filed December 14, 2007).
  10 .38   Amendment No. 2 to Note Purchase and Shelf Agreement and Senior Series J Notes dated February 8, 2008. (Incorporated by reference to our Current Report on Form 8-K filed February 11, 2008).
  12 .1   Statement of Computation of Ratios. (**)
  21 .1   Subsidiaries of the Registrant (Incorporated by reference to our Form 10-K for the year ended August 31, 2007, filed November 20, 2007).
  23 .1   Consent of Independent Registered Public Accounting Firm. (**)
  24 .1   Power of Attorney. (***)
 
 
(*) Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential portions of Exhibit 10.3 have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
 
(**) Filed herewith.
 
(***) Previously filed.

I-5


 

(b)
 
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
                                         
    Balance at
    Additions:
    Additions:
    Deductions:
    Balance at
 
    Beginning
    Charged to Costs
    Charged to
    Write-offs, net
    End
 
    of Year     and Expenses     Other Accounts     of Recoveries     of Year  
    (Dollars in thousands)  
 
Allowances for Doubtful Accounts
                                       
2007
  $ 53,898     $ 12,358             $ (3,296 )   $ 62,960  
2006
    60,041       11,414               (17,557 )     53,898  
2005
    55,809       12,962               (8,730 )     60,041  


I-6


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
 
To the Board of Directors and Members and Patrons of CHS Inc.:
 
Our audits of the consolidated financial statements referred to in our report dated November 2, 2007 appearing on page F-1 of this Registration Statement on Form S-1 of CHS Inc. and subsidiaries also included an audit of the financial statement schedule included in Item 16(b) of this Registration Statement on Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
 
-s- PricewaterhouseCoopers LLP
 
Minneapolis, Minnesota
November 2, 2007, except as it relates to the effects of the adoption of FSP No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities” as discussed in Note 17 to the consolidated financial statements, as to which the date is February 14, 2008.


I-7


 

Item 17.   Undertakings
 
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
 
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.


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SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Amendment No. 1 to Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Inver Grove Heights, State of Minnesota, on February 14, 2008.
 
CHS Inc.
 
  By: 
/s/  DAVID KASTELIC
David Kastelic
General Counsel
 
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
 
             
Name
 
Title
 
Date
 
/s/  JOHN D. JOHNSON

John D. Johnson
  President and Chief Executive Officer (Principal Executive Officer)   February 14, 2008
         
/s/  JOHN SCHMITZ

John Schmitz
  Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
  February 14, 2008
         
/s/  JODELL M. HELLER

Jodell M. Heller
  Vice President and Controller (Principal Accounting Officer)   February 14, 2008
         
*

Michael Toelle
  Director and Chairman of the Board   February 14, 2008
         
*

Bruce Anderson
  Director   February 14, 2008
         
*

Donald Anthony
  Director   February 14, 2008
         
*

Robert Bass
  Director   February 14, 2008
         
*

Dennis Carlson
  Director   February 14, 2008
         
*

Curt Eischens
  Director   February 14, 2008
         
*

Steve Fritel
  Director   February 14, 2008
         
*

Robert Grabarski
  Director   February 14, 2008


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Name
 
Title
 
Date
 
*

Jerry Hasnedl
  Director   February 14, 2008
         
*

David Kayser
  Director   February 14, 2008
         
*

James Kile
  Director   February 14, 2008
         
*

Randy Knecht
  Director   February 14, 2008
         
*

Michael Mulcahey
  Director   February 14, 2008
         
*

Richard Owen
  Director   February 14, 2008
         
*

Steve Riegel
  Director   February 14, 2008
         
*

Dan Schurr
  Director   February 14, 2008
         
*

Duane Stenzel
  Director   February 14, 2008
             
By:  
/s/  DAVID KASTELIC

David Kastelic
Attorney in Fact
       
 
 
Executed pursuant to a power of attorney filed with this Registration Statement on Form S-1

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