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CHS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

General

The following discussions of financial condition and results of operations should be read in conjunction with the unaudited interim financial statements and notes to such statements and the cautionary statement regarding forward-looking statements found at the beginning of Part I, Item 1, of this Quarterly Report on Form 10-Q, as well as our consolidated financial statements and notes thereto for the year ended August 31, 2012, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission. This discussion contains forward-looking statements based on current expectations, assumptions, estimates and projections of management. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described in the cautionary statement and elsewhere in this Quarterly Report on Form 10-Q.

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 across the United States. 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 independents. 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.

Our 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) in our Energy segment. The effects of all significant intercompany transactions have been eliminated.


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We have aligned our segments based on an assessment of how our businesses operate and the products and services they sell.

Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag segment purchases and further processes or resells 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. Corporate and Other primarily represents our non-consolidated wheat milling and packaged food joint ventures, as well as our business solutions operations, which consist of commodities hedging, insurance and financial services related to crop production.

New Strategy to avoid RMDs

Corporate administrative expenses are allocated to each business segment, and Corporate and Other, based on 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 vary throughout the year. Our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. For example, in our Ag segment, our 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. Our grain marketing operations are also 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, assets and cash flows 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. In our Ag segment, this principally includes our 50% ownership in TEMCO. In Corporate and Other, these investments principally include our 50% ownership in Ventura Foods and our 24% ownership in Horizon Milling and Horizon Milling G.P.

Results of Operations

Comparison of the three months ended November, 2012 and 2011

General. We recorded income before income taxes of $381.9 million during the three months ended November 30, 2012 compared to $530.8 million during the three months ended November 30, 2011, a decrease of $148.9 million (28%). Operating results reflected decreased pretax earnings in our Energy segment and our Ag segment, partially offset by increased pretax earnings in Corporate and Other.

New Strategy to avoid RMDs

Our Energy segment generated income before income taxes of $253.0 million for the three months ended November 30, 2012 compared to $397.3 million in the three months ended November 30, 2011, representing a decrease of $144.3 million (36%). During the three months ended November 30, 2012, we had a net loss on the mark-to-market for our refinery margin hedges of $42.3 million compared to a net gain of $113.0 million during the same period of the previous year. Without this impact, margins in our refined fuels would have improved. Earnings in our propane, transportation and renewable fuels marketing businesses improved, while our lubricants business experienced decreased earnings during the three months ended November 30, 2012, when compared to the same three-month period of the previous year.



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Our Ag segment generated income before income taxes of $112.4 million for the three months ended November 30, 2012 compared to $121.4 million in the three months ended November 30, 2011, a decrease in earnings of $9.0 million (7%). Earnings from our wholesale crop nutrients business decreased $5.4 million for the three months ended November 30, 2012 compared with the three months ended November 30, 2011, primarily due to decreased margins. Our country operations earnings increased $4.3 million during the three months ended November 30, 2012, compared to the same three-month period of the previous year, primarily as a result of increased retail merchandise volumes and grain volumes. Our grain marketing earnings decreased by $14.8 million during the three months ended November 30, 2012 compared with the three months ended November 30, 2011, primarily as a result of decreased margins. Our processing and food ingredients businesses experienced an increase in earnings of $5.6 million for the three months ended November 30, 2012 compared to the same period of the previous year, primarily related to increased margins from our soybean crushing and refining businesses.

Corporate and Other generated income before income taxes of $16.5 million during the three months ended November 30, 2012 compared to $12.2 million during the three months ended November 30, 2011, an increase in earnings of $4.3 million (36%). Business solutions earnings increased $1.3 million during the three months ended November 30, 2012 compared with the three months ended November 30, 2011, which reflected increased loan volumes in our financial services business, partially offset by decreased volumes in our hedging activities. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated expenses, increased by $3.0 million during the three months ended November 30, 2012, compared to the same period of the previous year, primarily from improved margins. Our share of earnings from our wheat milling joint ventures, net of allocated expenses, remained relatively flat for the three months ended November 30, 2012 compared to the same period of the previous year.

New Strategy to avoid RMDs

Net Income attributable to CHS Inc. Consolidated net income attributable to CHS Inc. for the three months ended November 30, 2012 was $343.7 million compared to $416.2 million for the three months ended November 30, 2011, which represents a $72.5 million (17%) decrease.

Revenues. Consolidated revenues were $11.7 billion for the three months ended November 30, 2012 compared to $9.7 billion for the three months ended November 30, 2011, which represents a $2.0 billion (20%) increase.

Our Energy segment revenues, after elimination of intersegment revenues, of $3.2 billion decreased by $76.2 million (2%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011. During the three months ended November 30, 2012 and 2011, our Energy segment recorded revenues from sales to our Ag segment of $133.6 million and $130.1 million, respectively, which are eliminated as part of the consolidation process. The net decrease of $76.2 million is comprised of a net decrease of $40.3 million related to lower prices and $35.9 million related to lower sales volumes. Refined fuels revenues increased $12.7 million (1%), of which $12.9 million was related to a net average selling price increase, partially offset by $0.1 million related to lower volumes, compared to the same period of the previous year. The sales price of refined fuels increased $0.02 per gallon, while volumes remained relatively flat. Propane revenues decreased $67.8 million (27%), which included $77.9 million related to a decrease in the net average selling price, partially offset by $10.1 million from a 4% increase in volumes, when compared to the same period of the previous year. The average selling price of propane decreased $0.46 per gallon (30%), when compared to the same period of the previous year. Renewable fuels marketing revenues decreased $27.2 million (7%), primarily from a decrease in the average selling price of $0.34 per gallon (12%), partially offset by a 6% increase in volumes, when compared with the same period of the previous year.

Our Ag segment revenues, after elimination of intersegment revenues, of $8.5 billion increased $2.1 billion (32%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011.

Grain revenues in our Ag segment totaled $6.5 billion and $4.7 billion during the three months ended November 30, 2012 and 2011, respectively. Of the grain revenues increase of $1.8 billion (38%), $1.2 billion is due to increased average grain selling prices and $557.6 million is due to a 12% net increase in volumes, during the three months ended November 30, 2012 compared to the same period of the previous year. The average sales price of all grain and oilseed commodities sold reflected an increase of $2.09 per bushel (23%) over the three months ended November 30, 2011. Corn and soybeans had increased volumes, while wheat had decreased volumes compared to the three months ended November 30, 2011.

Our processing and food ingredients revenues in our Ag segment of $480.6 million increased $131.8 million (38%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011. The net increase in revenues is comprised of $73.9 million from an increase in the average selling price of our oilseed products and a net increase of $58.0 million related to increased volumes, including volumes from recent acquisitions, as compared to the three months ended November 30, 2011. Typically, changes in average selling prices of oilseed products are primarily driven by the average market prices of soybeans.



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Wholesale crop nutrient revenues in our Ag segment totaled $756.4 million and $662.7 million during the three months ended November 30, 2012 and 2011, respectively. Of the wholesale crop nutrient revenues increase of $93.8 million (14%), $0.5 million was related to increased average fertilizer selling prices and $93.2 million was due to increased volumes during the three months ended November 30, 2012 compared to the same period of the previous year. The average sales price of all fertilizers sold was relatively flat, which reflected an increase of $0.37 per ton compared to the same period of the previous year. Our wholesale crop nutrient volumes increased 16% during the three months ended November 30, 2012 compared with the three months ended November 30, 2011.

Our Ag segment other product revenues, primarily feed and farm supplies, of $747.6 million increased by $78.3 million (12%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011, primarily the result of increased revenues in our country operations sales of retail crop nutrients, feed, crop protection and energy products, which includes additional volumes from acquisitions. Other revenues within our Ag segment of $59.2 million during the three months ended November 30, 2012 remained relatively flat compared to the same period of the previous year.

Total revenues also include other revenues generated primarily within our Ag segment and Corporate and Other. Our Ag 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 financing, hedging and insurance operations.

Cost of Goods Sold. Consolidated cost of goods sold was $11.2 billion for the three months ended November 30, 2012 compared to $9.1 billion for the three months ended November 30, 2011, which represents a $2.1 billion (23%) increase.

Our Energy segment cost of goods sold, after elimination of intersegment costs, of $2.9 billion increased by $22.2 million (1%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011. The increase in cost of goods sold is primarily due to an increase in the cost of goods sold for refined fuels products. Specifically, refined fuels cost of goods sold increased $93.8 million (5%), which reflects an increase in the average cost of refined fuels of $0.07 per gallon (2%) compared to the three months ended November 30, 2011, while volumes remained relatively flat. On average, we process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 85,000 barrels of crude oil per day at NCRA's McPherson, Kansas refinery. The aggregate average per unit cost of crude oil purchased for the two refineries increased 6% compared to the three months ended November 30, 2011, which is reflected in the $0.07 per gallon increase in average cost of refined fuels. The increase in refined fuels cost of goods sold included a net loss on the mark-to-market of our refinery margin hedges of $42.3 million, compared to a net gain of $113.0 million in the same period of the previous fiscal year, and an increase in the contingent crack spread liability related to our purchase of the noncontrolling interests of NCRA of $43.1 million. The cost of propane decreased $69.1 million, which was reflected by an average cost decrease of $0.46 per gallon (31%), partially offset by a 4% increase in volumes, when compared to the three months ended November 30, 2011. Renewable fuels marketing costs decreased $29.9 million (8%), primarily from a decrease in the average cost of $0.36 per gallon (13%), partially offset by a 6% increase in volumes, when compared with the same period of the previous year.

Our Ag segment cost of goods sold, after elimination of intersegment costs, of $8.3 billion increased $2.0 billion (33%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011. Grain cost of goods sold in our Ag segment totaled $6.3 billion and $4.6 billion during the three months ended November 30, 2012 and 2011, respectively. The cost of grains and oilseed procured through our Ag segment increased $1.7 billion (37%) compared to the three months ended November 30, 2011. This is primarily the result of a $1.98 (22%) increase in the average cost per bushel, and a 12% net increase in bushels sold, as compared to the same period of the previous year. The average month-end market price per bushel of soybeans, corn and spring wheat increased compared to the same period of the previous year.

Our processing and food ingredients cost of goods sold in our Ag segment of $466.1 million increased $122.0 million (35%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011, which was primarily due to increases in the cost of soybeans purchased and higher volumes of oilseed refined products sold, which includes volumes from recent acquisitions.

Wholesale crop nutrients cost of goods sold in our Ag segment totaled $726.3 million and $631.4 million during the three months ended November 30, 2012 and 2011 respectively. The net increase of $95.0 million (15%) is comprised of a net increase in tons sold of 16%, partially offset by a decrease in the average cost per ton of fertilizer of $5 (1%), primarily relating to lower of cost or market adjustments, when compared to the same period of the previous year.



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Our Ag segment other product cost of goods sold, primarily feed and farm supplies, increased $65.2 million (12%) during the three months ended November 30, 2012 compared to the three months ended November 30, 2011, primarily the result of increased revenues in our country operations sales of retail crop nutrients, feed, crop protection and energy products, and includes additional volumes from acquisitions.

Marketing, General and Administrative. Marketing, general and administrative expenses of $124.5 million for the three months ended November 30, 2012 increased by $12.0 million (11%) compared to the three months ended November 30, 2011. This net increase is primarily due to the expansion of foreign operations and acquisitions in our Ag segment.

Interest, net. Net interest of $67.2 million for the three months ended November 30, 2012 increased $46.4 million compared to the three months ended November 30, 2011. Interest expense for the three months ended November 30, 2012 and 2011 was $71.1 million and $23.3 million, respectively. The increase in interest expense of $47.8 million is primarily due to interest accretion of $1.6 million related to the purchase of the NCRA noncontrolling interests and $45.0 million of patronage earned by the noncontrolling interests of NCRA. The increase in interest expense was also partially due to increased short-term borrowings during the three months ended November 30, 2012 compared to the same period of the previous year. The average level of short-term borrowings increased $64.5 million during the year ended November 30, 2012 compared to the same period of the previous year, of which $43.7 million related to CHS Capital activity. For the three months ended November 30, 2012 and 2011, we capitalized interest of $2.9 million and $1.8 million, respectively, primarily related to construction projects at both refineries in our Energy segment. Interest income was $1.0 million and $0.7 million for the three months ended November 30, 2012 and 2011, respectively.

Equity Income from Investments. Equity income from investments of $28.1 million for the three months ended November 30, 2012 increased $3.9 million (16%) compared to the three months ended November 30, 2011. 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 increased earnings from investments in our Ag segment and Corporate and Other of $0.8 million and $3.2 million, respectively, while earnings from investments in our Energy segment remained relatively flat when compared to the same period of the previous year.

Our Ag segment generated increased equity investment earnings of $0.8 million. Our country operations business reported an aggregate increase in equity investment earnings of $2.4 million from several small equity investments. We had a net decrease of $1.5 million from our share of equity investment earnings in our grain marketing joint ventures during the three months ended November 30, 2012 compared to the same period of the previous year.

Corporate and Other generated increased equity investment earnings of $3.2 million, primarily from Ventura Foods, our vegetable oil-based products and packaged foods joint venture, which increased $2.8 million compared to the three months ended November 30, 2011, as well as our wheat milling joint venture earnings, which also increased by $0.3 million compared to the three months ended November 30, 2011.

Income Taxes. Income tax expense of $36.0 million for the three months ended November 30, 2012, compared with $42.0 million for the three months ended November 30, 2011, resulting in effective tax rates of 9.4% and 7.9%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.1% and 38.9% for the three months ended November 30, 2012 and 2011, respectively. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.

Noncontrolling interests. Net income from noncontrolling interests of $2.2 million for the three months ended November 30, 2012 decreased by $70.5 million (97%) compared to the three months ended November 30, 2011. Beginning in the second quarter of fiscal 2012, earnings from NCRA are no longer attributable to the noncontrolling interests, and patronage earned by the noncontrolling interests of NCRA after November 29, 2011 are included as interest, net in our Consolidated Statements of Operations.

Liquidity and Capital Resources

On November 30, 2012, we had working capital, defined as current assets less current liabilities, of $2,961.0 million and a current ratio, defined as current assets divided by current liabilities, of 1.4 to 1.0 compared to working capital of $2,848.5 million and a current ratio of 1.4 to 1.0 on August 31, 2012. On November 30, 2011, we had working capital of $2,881.7 million and a current ratio of 1.5 to 1.0, compared to working capital of $2,776.5 million and a current ratio of 1.5 to 1.0 on August 31, 2011.


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On November 30, 2012, August 31, 2012 and November 30, 2011, we had two primary committed lines of credit. We had a three-year revolving facility and a five-year revolving facility, each with committed amounts of $1.25 billion, for a total of $2.5 billion, which had no amounts outstanding as of November 30, 2012, August 31, 2012 and November 30, 2011. The major financial covenants for both revolving facilities require us to maintain a minimum consolidated net worth, adjusted as defined in the credit agreements, of $2.5 billion and a consolidated funded debt to consolidated cash flow ratio of no greater than 3.00 to 1.00. The term consolidated cash flow is principally our earnings before interest, taxes, depreciation and amortization (EBITDA) with adjustments as defined in the credit agreements. A third financial ratio does not allow our adjusted consolidated funded debt to adjusted consolidated equity to exceed 0.80 to 1.00 at any time. As of November 30, 2012, we were in compliance with all covenants. Our credit facilities are established with a syndication of domestic and international banks, and our inventories and receivables financed with them are highly liquid. With our current cash balances and our available capacity on our committed lines of credit, we believe that we have adequate liquidity to cover any increase in net operating assets and liabilities and expected maintenance capital expenditures.

In addition, our wholly-owned subsidiary, CHS Capital, makes seasonal and term loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities, and has its own financing explained in further detail below under "Cash Flows from Financing Activities."

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 cautionary statements and may affect net operating assets and liabilities, and liquidity.

Our cash flows provided by operating activities were $1,086.4 million and $1,157.5 million for the three months ended November 30, 2012 and November 30, 2011, respectively. Cash flows were similar when comparing the two periods primarily from significant increases in cash inflows for net changes in operating assets and liabilities during the three months ended November 30, 2012 and 2011. Commodity prices decreased during the three months ended November 30, 2012 and 2011, and resulted in decreased working capital needs compared to August 31, 2012 and 2011, respectively.

Our operating activities provided net cash of $1,086.4 million during the three months ended November 30, 2012. Net income including noncontrolling interests of $345.9 million, net non-cash expenses and cash distributions from equity investments of $110.0 million and a decrease in net operating assets and liabilities of $630.5 million provided the net cash from operating activities. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including amortization of major repair costs, of $64.9 million and the loss on the crack spread contingent liability of $43.1 million. The decrease in net operating assets and liabilities was caused primarily by a decrease in commodity prices resulting in a decrease in margin deposits and an increase in accounts payable, partially offset by a decrease in customer margin deposits and an increase in inventory quantities on November 30, 2012, when compared to August 31, 2012. On November 30, 2012, the per bushel market prices of two of our primary grain commodities, corn and soybeans, decreased by $0.50 (6%) and $3.26 (18%), respectively; while the per bushel market price of our third primary commodity, spring wheat, was relatively flat when compared to the spot prices on August 31, 2012. In general, crude oil market prices decreased $8 per barrel (8%) on November 30, 2012 when compared to August 31, 2012. On November 30, 2012, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses reflected decreases between 1% and 11%, depending on the specific products, with the exception of ammonia prices which increased 5% compared to prices on August 31, 2012. An increase in grain inventory quantities in our Ag segment of 30.5 million bushels (21%) partially offset the decreases in net operating assets and liabilities when comparing inventories at November 30, 2012 to August 31, 2012.

Our operating activities provided net cash of $1,157.5 million during the three months ended November 30, 2011. Net income including noncontrolling interests of $488.9 million, net non-cash expenses and cash distributions from equity investments of $76.4 million and a decrease in net operating assets and liabilities of $592.1 million provided the net cash from operating activities. The primary components of adjustments to reconcile net income to net cash provided by operating activities included depreciation and amortization, and amortization of deferred major repair costs, of $59.5 million, and redemptions from equity investments, net of income from those investments, of $16.8 million. The decrease in net operating assets and liabilities was caused primarily by a decrease in commodity prices resulting in a decrease in margin deposits, partially offset by a decrease in customer margin deposits and an increase in inventory quantities on November 30, 2011, when


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compared to August 31, 2011. On November 30, 2011, the per bushel market prices of our three primary grain commodities decreased as follows: corn $1.56 (21%), soybeans $3.18 (22%) and spring wheat $1.31 (14%) when compared to market prices on August 31, 2011. In general, crude oil market prices increased $12 (13%) per barrel on November 30, 2011 compared to August 31, 2011. On November 30, 2011, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses generally remained flat or decreased up to 5%, depending on the specific products, compared to prices on August 31, 2011. An increase in grain inventory quantities in our Ag Business segment of 17.6 million bushels (14%) partially offset the decreases in net operating assets and liabilities when comparing inventories at November 30, 2011 to August 31, 2011.

We expect our net operating assets and liabilities to increase through our second quarter of fiscal 2013, resulting in increased cash needs. Our second quarter has typically been the period of our highest short-term borrowings. We expect to increase crop nutrient and crop protection product inventories and prepayments to suppliers of these products in our wholesale crop nutrients and country operations businesses during our second quarter of fiscal 2013. 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 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 2013, 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 current cash balances and committed credit facilities to meet any likely increase in net operating assets and liabilities.

Cash Flows from Investing Activities

For the three months ended November 30, 2012 and 2011, the net cash flows used in our investing activities totaled, $230.8 million and $116.6 million, respectively.

The acquisition of property, plant and equipment comprised the primary use of cash totaling $138.1 million and $98.9 million for the three months ended November 30, 2012 and 2011, respectively.

Expenditures for major repairs related to our refinery turnarounds were $3.9 million and $16.6 million during the three months ended November 30, 2012 and 2011, respectively. Refineries have planned major maintenance to overhaul, repair, inspect and replace process materials and equipment which typically occur for a five-to-six week period every 2-4 years. Our Laurel, Montana refinery completed a turnaround during the three months ended November 30, 2011 and has a scheduled turnaround for maintenance for the spring of 2013. We estimate total expenditures related to this turnaround to be approximately $50.0 million.

For the year ending August 31, 2013, we expect total expenditures for the acquisition of property, plant and equipment and major repairs at our refineries to be approximately $750.0 million. Included in our expected capital expenditures for fiscal 2013, is $164.0 million for a project to replace a coker at one of our refineries with an expected total cost of $555.0 million and expected completion in fiscal 2015. We incurred $60.4 million of costs related to the coker project in fiscal 2012 and $28.5 million in the first quarter of fiscal 2013.

Cash acquisitions of businesses, net of cash acquired, totaled $8.1 million and $32.3 million during the three months ended November 30, 2012 and 2011, respectively. During the three months ended November 30, 2011, we acquired a crushing facility in Creston, Iowa, which is included in our Ag segment.

Investments made in joint ventures and other investments during the three months ended November 30, 2012 and 2011, totaled $7.7 million and $3.2 million, respectively.

Changes in notes receivable during the three months ended November 30, 2012 resulted in a net decrease in cash flows of $74.2 million compared to a net increase of $31.5 million during the three months ended November 30, 2011. The primary cause of the decrease in cash flows during fiscal 2013 was an increase in CHS Capital notes receivable on November 30, 2012 compared to August 31, 2012 of $53.4 million. During fiscal 2012, the primary cause of the increase in cash flows was a decrease in CHS Capital notes receivable on November 30, 2011 compared to August 31, 2011 of $68.0 million.

Cash Flows from Financing Activities

For the three months ended November 30, 2012 and 2011, the net cash flows used in our financing activities totaled $10.1 million and $178.3 million, respectively.



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Working Capital Financing:

We finance our working capital needs through short-term lines of credit with a syndication of domestic and international banks. On November 30, 2012 and 2011, we had two primary committed lines of credit. We had a three-year revolving facility and a five-year revolving facility, each with committed amounts of $1.25 billion, for a total of $2.5 billion. In addition to our primary revolving lines of credit, we have a committed revolving credit facility dedicated to NCRA, with a syndication of banks in the amount of $15.0 million. In December 2011, the line of credit dedicated to NCRA was renewed and expires in December 2014. We also have a three-year, $40.0 million committed revolving facility, with the right to increase the capacity to $120.0 million that expires in November 2013. Our wholly-owned subsidiaries, CHS Europe S.A. and CHS Agronegocio Industria e Comercio Ltda., have uncommitted lines of credit which are collateralized by $208.1 million of inventories and receivables at November 30, 2012. In addition, other international subsidiaries have lines of credit totaling $45.4 million outstanding at November 30, 2012, of which $18.0 million is collateralized. On November 30, 2012, August 31, 2012 and November 30, 2011, we had total short-term indebtedness outstanding on these various facilities and other miscellaneous short-term notes payable totaling $275.0, $269.8 million and $124.5 million.

We have two commercial paper programs totaling up to $125.0 million, with two banks participating in our revolving credit facilities. Terms of our credit facilities allow a maximum usage of $200.0 million to pay principal under any commercial paper facility. On November 30, 2012, August 31, 2012 and November 30, 2011, we had no commercial paper outstanding.

CHS Capital Financing:

Cofina Funding, LLC (Cofina Funding), a wholly-owned subsidiary of CHS Capital, has commitments totaling $300.0 million as of November 30, 2012, under note purchase agreements with various purchasers, through the issuance of short-term notes payable. CHS Capital sells eligible commercial loans receivable it has originated to Cofina Funding, which are then pledged as collateral under the note purchase agreements. The notes payable issued by Cofina Funding bear interest at variable rates based on commercial paper with a weighted average rate of 1.21% as of November 30, 2012. Borrowings by Cofina Funding utilizing the issuance of commercial paper under the note purchase agreements totaled $121.5 million as of November 30, 2012.

CHS Capital has available credit under master participation agreements with numerous counterparties. Borrowings under these agreements are accounted for as secured borrowings and bear interest at variable rates ranging from 2.03% to 2.96% as of November 30, 2012. As of November 30, 2012, the total funding commitment under these agreements was $257.4 million, of which $100.4 million was borrowed.

CHS Capital sells loan commitments it has originated to ProPartners Financial (ProPartners) on a recourse basis. The total capacity for commitments under the ProPartners program is $300.0 million. The total outstanding commitments under the program totaled $224.7 million as of November 30, 2012, of which $128.7 million was borrowed under these commitments with an interest rate of 1.67%.

CHS Capital borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and bear interest at variable rates ranging from 0.80% to 1.10% as of November 30, 2012, and are due upon demand. Borrowings under these notes totaled $251.3 million as of November 30, 2012.

Long-term Debt Financing:

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.

On November 30, 2012, we had total long-term debt outstanding of $1,393.9 million, of which $150.0 million was bank financing, $1,183.6 million was private placement debt and $60.3 million was 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, 2012, has not changed significantly during the three months ended November 30, 2012. On August 31, 2012 and November 30, 2011, we had total long-term debt outstanding of $1,440.4 million and $1,475.7 million, respectively. Our long-term debt is unsecured except for other notes and contracts in the amount of $26.2 million; however, restrictive covenants under various agreements have requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants and restrictions as of November 30, 2012.



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We did not have any new long-term borrowings during the three months ended November 30, 2012 and 2011. During the three months ended November 30, 2012 and 2011, we repaid long-term debt of $46.5 million and $39.2 million, respectively.

Other Financing:

During the three months ended November 30, 2012, pursuant to our agreement to acquire the remaining shares of NCRA, we made the first payments for the mandatorily redeemable noncontrolling interests to Growmark and MFA in the amounts of $48.0 million and $18.0 million, respectively; increasing our ownership to 79.2%.

Changes in checks and drafts outstanding resulted in an increase in cash flows of $36.5 million during the three months ended November 30, 2012, and a decrease in cash flows of $41.6 million during the three months ended November 30, 2011.

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. Consenting patrons have agreed to take both the cash and capital equity certificate portion allocated to them from our previous fiscal year's income into their taxable income, and as a result, we are allowed a deduction from our taxable income for both the cash distribution and the allocated capital equity certificates, as long as the cash distribution is at least 20% of the total patronage distribution. Distributable patronage earnings from the fiscal year ended August 31, 2012, are expected to be distributed during the three months ended February 28, 2013. The cash portion of this distribution, deemed by the Board of Directors to be 35% for individual members and 40% for nonindividual members, is expected to be approximately $378.7 million and is classified as a current liability on our November 30, 2012 and August 31, 2012 Consolidated Balance Sheets in dividends and equities payable.

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 retirement program for equities held by them and another for individuals who are eligible for equity redemptions at age 70 or upon death. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2012, that will be distributed in fiscal 2013, to be approximately $196.0 million, of which $2.4 million was redeemed in cash during the three months ended November 30, 2012, compared to $2.4 million distributed in cash during the three months ended November 30, 2011.

Our 8% Cumulative Redeemable Preferred Stock (Preferred Stock) is listed on the NASDAQ Stock Market LLC under the symbol CHSCP. On November 30, 2012, we had 12,272,003 shares of Preferred Stock outstanding with a total redemption value of approximately $306.8 million, excluding accumulated dividends. Our Preferred Stock accumulates dividends at a rate of 8% per year, which are payable quarterly. Dividends paid on our Preferred Stock during the three months ended November 30, 2012 and 2011, were $6.1 million and $6.1 million, respectively.

Our Preferred Stock is redeemable at our option. At this time, we have no current plan or intent to redeem any Preferred Stock.

Off Balance Sheet Financing Arrangements

Lease Commitments:

Our lease commitments presented in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2012, have not materially changed during the three months ended November 30, 2012.

Guarantees:

We are a guarantor for lines of credit and performance obligations of related companies. As of November 30, 2012, our bank covenants allowed maximum guarantees of $500.0 million, of which $71.3 million was outstanding. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide guarantees are current as of November 30, 2012.



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Debt:

There is no material off balance sheet debt.

Contractual Obligations

Our contractual obligations presented in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2012, have not materially changed during the three months ended November 30, 2012.

Critical Accounting Policies

Our critical accounting policies presented in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2012, have not materially changed during the three months ended November 30, 2012.

Effect of Inflation and Foreign Currency Transactions

We believe that inflation and foreign currency fluctuations have not had a significant effect on our operations since we conduct a significant portion of our business in U.S. dollars.

Recent Accounting Pronouncements

In September 2011, the FASB issued ASU No. 2011-08, "Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment." ASU No. 2011-08 allows entities to use a qualitative approach to test goodwill for impairment. It permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance became effective for us during the three months ended November 30, 2012. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities." ASU No. 2011-11 creates new disclosure requirements about the nature of an entity's rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements in this update are effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. We are currently evaluating the impact that the adoption will have on our consolidated financial statements in fiscal 2014.

CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT

Any statements contained in this report regarding the outlook for our businesses and their respective markets, such as projections of future performance, statements of our plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on our assumptions and beliefs. Such statements may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "will benefit," "is anticipated," "estimate," "project," "management believes" or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.



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Certain factors could cause our future results to differ materially from those expressed or implied in any forward-looking statements contained in this report. These factors include the factors discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2012 under the caption "Risk Factors," the factors discussed below and any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statements. Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive.

•          Our revenues and operating results could be adversely affected by
           changes in commodity prices.


•          Our operating results could be adversely affected if our members were
           to do business with others rather than with us.


•          We participate in highly competitive business markets in which we may
           not be able to continue to compete successfully.


•          Changes in federal income tax laws or in our tax status could increase
           our tax liability and reduce our net income.


•          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.


•          Changing environmental and energy laws and regulation, including those
           related to climate change and Green House Gas ("GHG") emissions, may
           result in increased operating costs and capital expenditures and may
           have an adverse effect on our business operations.


•          Government policies and regulation affecting the agricultural sector
           and related industries could adversely affect our operations and
           profitability.


•          Environmental liabilities could adversely affect our results and
           financial condition.


•          Actual or perceived quality, safety or health risks associated with
           our products could subject us to liability and damage our business and
           reputation.


•          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 cooperative structure limits our ability to access equity capital.


•          Consolidation among the producers of products we purchase and
           customers for products we sell could adversely affect our revenues and
           operating results.


•          If our customers choose alternatives to our refined petroleum products
           our revenues and profits may decline.


•          Operating results from our agronomy business could be volatile and are
           dependent upon certain factors outside of our control.


•          Technological improvements in agriculture could decrease the demand
           for our agronomy and energy products.


•          We operate some of our business through joint ventures in which our
           rights to control business decisions are limited.
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