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

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...

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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.

We have aligned our business 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.

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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.



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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, LLC and Horizon Milling G.P.

Recent Events

Horizon Milling, LLC and Horizon Milling G.P. are flour milling joint ventures with Cargill, of which we own 24%. On March 4, 2013, we entered into a definitive agreement with Cargill and ConAgra Foods, Inc. to form Ardent Mills, a joint venture combining the North American flour milling operations of the three parent companies, including the Horizon Milling, LLC and Horizon Milling G.P. assets, with CHS holding a 12% interest. The transaction is expected to close in our fiscal 2014.

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We are currently taking steps toward construction of a more than $1 billion nitrogen fertilizer manufacturing plant to be located in Spiritwood, North Dakota, which would provide the region's farmers with enhanced supplies of crop nutrients essential to raising corn and other crops. We plan to spend up to $25 million on an engineering design study to determine feasibility of the project, to be completed in the fall of 2013.

Results of Operations

Comparison of the three months ended May 31, 2013 and 2012

General. We recorded income before income taxes of $279.5 million during the three months ended May 31, 2013 compared to $440.7 million during the three months ended May 31, 2012, a decrease of $161.2 million (37%). Operating results reflected decreased pretax earnings in both our Energy and Ag segments, partially offset by increased earnings in Corporate and Other.

Our Energy segment generated income before income taxes of $220.4 million for the three months ended May 31, 2013 compared to $294.7 million in the three months ended May 31, 2012, representing a decrease of $74.4 million (25%). During the three months ended May 31, 2013, we had a net gain on the mark-to-market for our refinery margin hedges of $51.7 million compared to a net loss of $2.7 million during the same period of the previous year. Earnings in our propane, lubricants and transportation businesses improved, while our renewable fuels marketing and refined fuels businesses experienced decreased earnings during the three months ended May 31, 2013, when compared to the same period of the previous year. Our refined fuels margins decreased primarily due to the turnaround at our Laurel, Montana refinery during the third quarter of fiscal 2013. We are subject to the renewable fuel standard (RFS) which requires refiners to blend renewable fuels (e.g., ethanol, biodiesel) into their finished transportation fuels or purchase renewable energy credits, called RINs, in lieu of blending. The EPA generally establishes new annual renewable fuels percentage standards for each compliance year in the preceding year. We generate RINs in our marketing operations under the RFS, however it is not enough to meet the needs of our refining capacity and RINs must be purchased on the open market. Recently the price of RINs has been extremely volatile with prices increasing. As a result, the purchase of RINs could have a negative impact on our future refined fuels margins, the impact of which we are not able to estimate at this time.



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Our Ag segment generated income before income taxes of $40.0 million for the three months ended May 31, 2013 compared to $131.9 million in the three months ended May 31, 2012, a decrease in earnings of $92.0 million (70%). Earnings from our wholesale crop nutrients business decreased $32.3 million for the three months ended May 31, 2013 compared with the three months ended May 31, 2012, primarily due to decreased margins resulting from lower volumes. Our country operations earnings decreased $28.2 million during the three months ended May 31, 2013, compared to the same period of the previous year, primarily as a result of decreased margins on our retail merchandise sales. Our grain marketing earnings decreased by $14.6 million during the three months ended May 31, 2013 compared with the three months ended May 31, 2012, primarily as a result of decreased margins. Cold weather and high precipitation in our trade areas delayed the spring planting season this year. Due to the late planting season, fewer crops were planted and less acreage was fertilized as some crops were planted without fertilizer during our third fiscal quarter when compared to the same period of the previous fiscal year, which benefited from an early planting season. We anticipate a late harvest in the fall due to the late planting season, which could possibly bring additional risks such as frost. Additionally, we expect lower grain volumes across our Ag segment during the fourth fiscal quarter driven by a short U.S. crop during the last harvest and the expectation of decreases in grain prices. Our processing and food ingredients businesses experienced a decrease in earnings of $16.7 million for the three months ended May 31, 2013 compared to the same period of the previous year. The decrease in earnings in our processing and food ingredients businesses primarily related to costs associated with a voluntary recall of certain soy protein products produced at our Ashdod, Israel facility. We initiated the recall during our third fiscal quarter, which resulted in a $15.5 million reserve based on the minimum amount in our estimated loss range of $15.5 million to $65.0 million. We maintain liability insurance, which we believe is sufficient to offset most related product liability expenses. However, as of May 31, 2013, no insurance recoveries have been recorded related to this incident. In addition, we incurred costs of $8.9 million in connection with plant downtime, inventory write-downs and other costs in connection with the recall. Additional costs may be incurred in the future related to the recall. The decreased earnings in our processing and food ingredients businesses was partially offset by increased margins from our soybean crushing and refining businesses.

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Corporate and Other generated income before income taxes of $19.1 million during the three months ended May 31, 2013 compared to $14.1 million during the three months ended May 31, 2012, an increase in earnings of $5.1 million (36%). Business solutions earnings decreased $0.8 million during the three months ended May 31, 2013 compared with the three months ended May 31, 2012, which reflected decreased operating margins in our financial services, hedging and insurance activities. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated expenses, increased $3.8 million during the three months ended May 31, 2013, compared to the same period of the previous year. Our share of earnings from our wheat milling joint ventures, net of allocated expenses, increased $3.1 million during the three months ended May 31, 2013 compared to the same period of the previous year, primarily due to improved margins.

Net Income attributable to CHS Inc. Consolidated net income attributable to CHS Inc. for the three months ended May 31, 2013 was $250.8 million compared to $405.1 million for the three months ended May 31, 2012, which represents a $154.3 million (38%) decrease.

Revenues. Consolidated revenues were $11.9 billion for the three months ended May 31, 2013 compared to $11.0 billion for the three months ended May 31, 2012, which represents a $0.9 billion (8%) increase.

Our Energy segment revenues, after elimination of intersegment revenues, of $3.1 billion increased by $83.1 million (3%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012. During the three months ended May 31, 2013 and 2012, our Energy segment recorded revenues from sales to our Ag segment of $116.1 million and $111.1 million, respectively, which are eliminated as part of the consolidation process. The net increase of $83.1 million is comprised of $168.1 million related to increased sales volumes, partially offset by a net decrease of $85.0 million related to decreased prices. Refined fuels revenues decreased $41.6 million (2%), of which $79.3 million related to a net average selling price decrease, partially offset by $37.6 million related to a 2% increase in volumes, compared to the same period of the previous year. The sales price of refined fuels decreased by $0.10 per gallon (3%). Sales volumes increased 2%, when compared with the same period of the previous year. Propane revenues increased $47.8 million (44%), which included $82.5 million from a 76% increase in volumes, partially offset by $34.7 million related to a decrease in the net average selling price, when compared to the same period of the previous year. The average selling price of propane decreased $0.23 per gallon (18%), when compared to the same period of the previous year. Renewable fuels marketing revenues increased $80.1 million (24%), primarily from a 7% increase in volumes and an increase in the average selling price of $0.37 per gallon (16%), when compared with the same period of the previous year.

Our Ag segment revenues, after elimination of intersegment revenues, of $8.8 billion increased $832.7 million (10%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012.



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Grain revenues in our Ag segment totaled $6.1 billion and $5.1 billion during the three months ended May 31, 2013 and 2012, respectively. The grain revenues increase of $1.0 billion (21%) is primarily due to a net increase in volumes of $1.3 billion (27%), partially offset by $308.9 million in decreased average grain selling prices, during the three months ended May 31, 2013 compared to the same period of the previous year. The average sales price of all grain and oilseed commodities sold reflected a decrease of $0.45 per bushel (5%) over the three months ended May 31, 2012. Wheat, corn and soybeans had increased volumes compared to the three months ended May 31, 2012.

Our processing and food ingredients revenues in our Ag segment of $508.6 million increased $77.8 million (18%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012. The net increase in revenues is comprised of $11.7 million from an increase in the average selling price of our oilseed products and a $66.1 million increase related to higher volumes, as compared to the three months ended May 31, 2012. Typically, changes in average selling prices of oilseed products are primarily driven by the average market prices of soybeans.

Wholesale crop nutrients revenues in our Ag segment totaled $924.7 million and $1.1 billion during the three months ended May 31, 2013 and 2012, respectively. Of the wholesale crop nutrients revenues decrease of $193.1 million (17%), $127.9 million was due to decreased volumes and $65.2 million related to a decrease in the average fertilizer selling prices, during the three months ended May 31, 2013 compared to the same period of the previous year. The average sales price of all fertilizers sold decreased $33.84 (7%) per ton compared to the same period of the previous year. Our wholesale crop nutrients volumes decreased 11% during the three months ended May 31, 2013 compared with the three months ended May 31, 2012 and was primarily due to the late planting season, as previously discussed.

Our Ag segment other product revenues, primarily feed and farm supplies, of $1.3 billion decreased by $79.2 million (6%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012, primarily the result of decreased revenues in our country operations sales of retail crop nutrients and crop protection products and was primarily due to the late planting season, as previously discussed. Other revenues within our Ag segment of $65.1 million increased $4.6 million (8%) during the three months ended May 31, 2013 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 $11.5 billion for the three months ended May 31, 2013 compared to $10.4 billion for the three months ended May 31, 2012, which represents a $1.1 billion (10%) increase.

Our Energy segment cost of goods sold, after elimination of intersegment costs, of $2.8 billion increased by $161.7 million (6%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012. The increase in cost of goods sold is primarily due to increases in the cost of goods sold for refined fuels, propane and renewable fuels marketing products. Specifically, refined fuels cost of goods sold increased $38.0 million (2%), which reflects a 2% increase in volumes, while the average cost of refined fuels remained relatively flat when compared to the three months ended May 31, 2012. On average, we process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 88,000 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 9% compared to the three months ended May 31, 2012, which is reflected in the average cost of refined fuels. The increase in refined fuels cost of goods sold was partially offset by a net gain on the mark-to-market of our refinery margin hedges of $51.7 million compared to a net loss of $2.7 million in the same period of the previous fiscal year, and included an increase in the contingent crack spread liability related to our purchase of the noncontrolling interests of NCRA of $5.3 million, compared to a decrease of $2.6 million in the same period of the previous year. The cost of goods sold of propane increased $46.5 million (44%), which was reflected by a 76% increase in volumes, partially offset by an average cost decrease of $0.22 per gallon (18%), when compared to the three months ended May 31, 2012. Renewable fuels marketing costs increased $80.3 million (24%), primarily from a 7% increase in sales volumes, and an increase in the average cost of $0.37 per gallon (17%), when compared with the same period of the previous year.

Our Ag segment cost of goods sold, after elimination of intersegment costs, of $8.7 billion increased $911.1 million (12%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012.

Grain cost of goods sold in our Ag segment totaled $5.8 billion and $5.0 billion during the three months ended May 31, 2013 and 2012, respectively. The cost of grains and oilseed procured through our Ag segment increased $744.7 million (15%) compared to the three months ended May 31, 2012. This is primarily the result of a 27% increase in volumes, partially


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offset by a $0.87 (9%) decrease in the average cost per bushel, 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 $520.4 million increased $106.4 million (26%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012, which was primarily due to increases in the cost of soybeans purchased and increased volumes of oilseed refined products sold. The increase in cost of goods sold in our processing and food ingredients businesses included $15.5 million of costs associated with the previously discussed voluntary recall of certain soy protein products. In addition, we incurred costs of $8.9 million in connection with plant downtime, inventory write-downs and other costs in connection with the recall. Additional costs may be incurred in the future related to the recall.

Wholesale crop nutrients cost of goods sold in our Ag segment totaled $889.8 million and $1.1 billion during the three months ended May 31, 2013 and 2012, respectively. The net decrease of $163.2 million (15%) is comprised of a net decrease in tons sold of 11% and a decrease in the average cost per ton of fertilizer of $22 (5%), when compared to the same period of the previous year.

Our Ag segment other product cost of goods sold, primarily feed and farm supplies, decreased $71.0 million (6%) during the three months ended May 31, 2013 compared to the three months ended May 31, 2012, primarily the result of decreased revenues in our country operations sales of retail crop nutrients and crop protection products.

Marketing, General and Administrative. Marketing, general and administrative expenses of $138.8 million for the three months ended May 31, 2013 increased by $9.5 million (7%) compared to the three months ended May 31, 2012. This net increase is primarily due to the expansion of foreign operations and acquisitions in our Ag segment.

Interest, net. Net interest of $66.4 million for the three months ended May 31, 2013 decreased $4.7 million compared to the three months ended May 31, 2012. Interest expense for the three months ended May 31, 2013 and 2012 was $71.2 million and $74.5 million, respectively. The decrease in interest expense of $3.2 million is primarily due to a $5.6 million decrease in patronage earned by the noncontrolling interests of NCRA when compared with the same period of the previous year. For the three months ended May 31, 2013 and 2012, we capitalized interest of $2.6 million and $2.4 million, respectively, primarily related to construction projects at both refineries in our Energy segment. Interest income was $2.3 million and $0.9 million for the three months ended May 31, 2013 and 2012, respectively.

Equity Income from Investments. Equity income from investments of $27.6 million for the three months ended May 31, 2013 increased $2.8 million (11%) compared to the three months ended May 31, 2012. 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 Corporate and Other of $6.7 million, primarily from Ventura Foods, our vegetable oil-based products and packaged foods joint venture, which increased $3.5 million and our wheat milling joint venture which also increased by $3.4 million compared to the three months ended May 31, 2012. The increase in Corporate and Other was partially offset by decreased earnings from investments in our Ag segment and Energy segment of $3.1 million and $0.9 million, respectively, when compared to the same period of the previous year.

Income Taxes. Income tax expense of $27.1 million for the three months ended May 31, 2013, compared with $34.0 million for the three months ended May 31, 2012, resulting in effective tax rates of 9.7% and 7.7%, respectively. The federal and state statutory rates applied to nonpatronage business activity were 38.1% and 38.9% for the three months ended May 31, 2013 and 2012, respectively. The income taxes and effective tax rates vary each year based upon profitability and nonpatronage business activity during each of the comparable years.

Noncontrolling interests. Net income from noncontrolling interests of $1.5 million for the three months ended May 31, 2013 decreased by $0.1 million (7%) compared to the three months ended May 31, 2012.

Comparison of the nine months ended May 31, 2013 and 2012

General. We recorded income before income taxes of $960.8 million during the nine months ended May 31, 2013 compared to $1.1 billion during the nine months ended May 31, 2012, a decrease of $100.7 million (9%). Operating results reflected decreased pretax earnings in both our Energy and Ag segments, partially offset by increased earnings in Corporate and Other.


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Our Energy segment generated income before income taxes of $707.6 million for the nine months ended May 31, 2013 compared to $734.1 million in the nine months ended May 31, 2012, representing a decrease of $26.5 million (4%). During the nine months ended May 31, 2013, we had a net loss on the mark-to-market for our refinery margin hedges of $6.0 million compared to a net gain of $50.0 million during the same period of the previous year. We experienced lower earnings in our refined fuels and renewable fuels marketing businesses, while our propane, lubricants and transportation businesses had improved earnings during the nine months ended May 31, 2013 when compared to the same period of the previous year. We are subject to the RFS which requires refiners to blend renewable fuels (e.g., ethanol, biodiesel) into their finished transportation fuels or purchase renewable energy credits, called RINs, in lieu of blending. The EPA generally establishes new annual renewable fuels percentage standards for each compliance year in the preceding year. We generate RINs in our marketing operations under the RFS, however it is not enough to meet the needs of our refining capacity and RINs must be purchased on the open market. Recently the price of RINs has been extremely volatile with prices increasing. As a result, the purchase of RINs could have a negative impact on our future refined fuels margins, the impact of which we are not able to estimate at this time.

Our Ag segment generated income before income taxes of $202.7 million for the nine months ended May 31, 2013 compared to $289.5 million in the nine months ended May 31, 2012, a decrease in earnings of $86.7 million (30%). Our grain marketing earnings decreased by $43.7 million during the nine months ended May 31, 2013 compared with the same period in the prior year, primarily due to lower margins. Earnings from our wholesale crop nutrients business decreased $22.4 million for the nine months ended May 31, 2013 compared with the same period in fiscal 2012, primarily due to decreased product margins. Our country operations earnings decreased $19.5 million during the nine months ended May 31, 2013 compared to the same period in the prior year, primarily as a result of the late planting season which resulted in fewer acres being fertilized as some crops were planted without fertilizer. We expect lower grain volumes across our Ag segment during the fourth fiscal quarter driven by a short U.S. crop during the last harvest and the expectation of decreases in grain prices. Our processing and food ingredients businesses experienced a decrease in earnings of $2.5 million for the nine months ended May 31, 2013 compared to the same period of the previous year. The decrease in earnings in our processing and food ingredients businesses primarily related to $15.5 million of costs associated with the previously discussed voluntary recall of certain soy protein products In addition, we incurred costs of $8.9 million in connection with plant downtime, inventory write-downs and other costs in connection with the recall. Additional costs may be incurred in the future related to the recall. The decrease earnings in our processing and food ingredients businesses was partially offset by increased margins from our soybean crushing and refining businesses and $5.6 million in acquisition costs related to our acquisition of Solbar during the nine months ended May 31, 2012.

Corporate and Other generated income before income taxes of $50.4 million for the nine months ended May 31, 2013 compared to $37.8 million during the same period of the previous year, an increase in earnings of $12.6 million (33%). Business solutions experienced a net increase in earnings of $1.5 million for the nine months ended May 31, 2013 compared with the same period in the prior year, primarily due to increased earnings from our financing and insurance businesses. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated expenses, increased by $6.8 million for the nine months ended May 31, 2013, compared to the same period of the previous year, primarily from increased margins. Our share of earnings from our wheat milling joint ventures, net of allocated expenses, increased by $5.7 million during the nine months ended May 31, 2013 compared to the same period in the previous year.

Net Income attributable to CHS Inc. Consolidated net income attributable to CHS Inc. for the nine months ended May 31, 2013 was $869.6 million compared to $899.7 million for the nine months ended May 31, 2012, which represents a $30.2 million decrease (3%).

Revenues. Consolidated revenues were $33.5 billion for the nine months ended May 31, 2013 compared to $29.6 billion for the nine months ended May 31, 2012, which represents a $3.9 billion increase (13%).

Our Energy segment revenues of $9.0 billion, after elimination of intersegment revenues, decreased by $100.1 million (1%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012. During the nine months ended May 31, 2013 and 2012, our Energy segment recorded revenues from sales to our Ag segment of $352.6 million and $340.3 million, respectively. The net decrease in revenues is comprised of a net decrease of $221.2 million related to decreased prices, partially offset by an increase of $121.1 million related to increased sales volumes. Refined fuels revenues were relatively flat, as the $35.1 million increase in the net average selling price, was almost completely offset by a net decrease of $33.6 million in sales volumes, compared to the same period in the previous year. The sales price of refined fuels products increased $0.02 per gallon (1%), and sales volumes experienced a slight decrease of less than 1%, when compared to the same period of the previous year. Propane revenues decreased $60.9 million (9%), of which $228.9 million was related to a decrease in the net average selling price, partially offset by an increase of $168.0 million attributable to volume, when compared to the


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same period in the previous year. Propane sales volume increased 25%, while the average selling price of propane decreased $0.38 per gallon (27%) in comparison to the same period of the previous year. Renewable fuels marketing revenues decreased $44.1 million (4%), from a 6% decrease in volumes, partially offset by an increase in the average selling price of $0.06 per gallon (2%), when compared with the same period in the previous year.

Our Ag segment revenues of $24.5 billion increased $4.0 billion (20%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012.

Grain revenues in our Ag segment totaled $18.2 billion and $14.5 billion during the nine months ended May 31, 2013 and 2012, respectively. Of the grain revenues increase of $3.7 billion (26%), $2.1 billion is due to increased average grain selling prices and $1.6 billion is attributable to a net increase in volumes of 11% during the nine months ended May 31, 2013 compared to the same period in the prior fiscal year. The average sales price of all grain and oilseed commodities sold reflected an increase of $1.17 per bushel (13%) over the same period in the previous year. Corn, wheat, and soybeans had increased volumes compared to the nine months ended May 31, 2012.

Our processing and food ingredients revenues in our Ag segment of $1.5 billion increased $365.8 million (34%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012. The net increase in revenues is comprised of $161.3 million from an increase in the average selling price of our oilseed products and an increase of $204.5 million related to increased volumes, including volumes from recent acquisitions, as compared to the nine months ended May 31, 2012. Typically, changes in average selling prices of oilseed products are primarily driven by the average market prices of soybeans.

Our wholesale crop nutrients revenues in our Ag segment of $2.3 billion decreased $63.5 million (3%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012. Of the wholesale crop nutrients revenues decrease, $102.0 million related to a decreased in average fertilizer selling prices, partially offset by $38.5 million related to increased volumes, during the nine months ended May 31, 2013 compared to the same period of the previous year. Our wholesale crop nutrients volumes increased 2% during the nine months ended May 31, 2013 compared with the same period in the previous year. The average sales price of all fertilizers sold reflected a decrease of $21.87 per ton (4%) compared with the same period of the previous year.

Our Ag segment other product revenues, primarily feed and farm supplies, of $2.5 billion increased by $38.9 million (2%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012, primarily the result of increased revenues in our country operations sales of retail crop nutrients and feed, partially offset by decreased crop protection products, which includes additional volumes from acquisitions. Other revenues within our Ag segment of $169.3 million during the nine months ended May 31, 2013 increased $9.5 million (6%) compared to the nine months ended May 31, 2012.

Total revenues 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 $32.1 billion for the nine months ended May 31, 2013 compared to $28.1 billion for the nine months ended May 31, 2012, which represents a $3.9 billion (14%) increase.

Our Energy segment cost of goods sold, after elimination of intersegment costs, of $8.0 billion decreased by $135.9 million (2%) during the nine months ended May 31, 2013 compared to the same period of the prior year. The decrease in cost of goods sold is primarily due to decreases in the cost of goods sold for refined fuels, propane and renewable fuels marketing products. Specifically, refined fuels cost of goods sold decreased $40.6 million (1%) which reflects a decrease in the average cost of refined fuels of $0.02 per gallon (1%), while volumes remained relatively flat when compared to the same period of the previous year. On average, we process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 88,000 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 remained relatively flat when compared to the nine months ended May 31, 2012. The decrease in refined fuels cost of goods sold was partially offset by a net loss on the mark-to-market of our refinery margin hedges of $6.0 million compared to a net gain of $50.0 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 $18.7 million, compared to a decrease of $6.7 million in the same period of the previous year. The cost of goods sold of propane decreased $63.6 million (10%) primarily from an average cost decrease of $0.38 per gallon (27%), partially offset by a 25% increase in volumes, when compared to the same period of the previous year. Renewable fuels marketing costs decreased $45.2 million (4%), primarily


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from a 6% decrease in volumes, partially offset by an increase in the average cost of $0.05 per gallon (2%), when compared with the same period in the previous year.

Our Ag segment cost of goods sold, after elimination of intersegment costs, of $24.0 billion, increased $4.1 billion (20%) during the nine months ended May 31, 2013 compared to the same period of the prior year.

Grain cost of goods sold in our Ag segment totaled $17.7 billion and $14.3 billion during the nine months ended May 31, 2013 and 2012, respectively. The cost of grains and oilseed procured through our Ag segment increased $3.4 billion (24%) compared to the nine months ended May 31, 2012. This is primarily the result of a $0.99 (11%) increase in the average cost per bushel and an 11% net increase in bushels sold, as compared to the same period in the prior 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 $1.4 billion increased $350.3 million (33%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012, 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. The increase in cost of goods sold in our processing and food ingredients businesses included $15.5 million of costs associated with the previously discussed voluntary recall of certain soy protein products In addition, we incurred costs of $8.9 million in connection with plant downtime, inventory write-downs and other costs in connection with the recall. Additional costs may be incurred in the future related to the recall.

Our wholesale crop nutrients cost of goods sold in our Ag segment of $2.2 billion decreased $51.3 million (2%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012. The net decrease is comprised of a decrease in the average cost per ton of fertilizer of $18.91 (4%), partially offset by a 2% increase in tons sold, when compared to the same period of the previous year.

Our Ag segment other product cost of goods sold, primarily feed and farm supplies, increased $17.9 million (1%) during the nine months ended May 31, 2013 compared to the nine months ended May 31, 2012, primarily the result of increased revenues of retail crop nutrients and crop protection products.

Marketing, General and Administrative. Marketing, general and administrative expenses of $397.9 million for the nine months ended May 31, 2013 increased by $29.6 million (8%) compared to the nine months ended May 31, 2012. This net increase is primarily due to the expansion of foreign operations and acquisitions in our Ag segment.

Interest, net. Net interest of $187.0 million for the nine months ended May 31, 2013 increased $60.4 million compared to the same period of the previous year. Interest expense for the nine months ended May 31, 2013 and 2012 was $199.6 million and $135.8 million, respectively. The increase in interest expense of $63.8 million is primarily due to a $57.9 million increase in patronage earned by the noncontrolling interests of NCRA when compared with the same period of the previous year. The increase in interest expense was also partially due to increased short-term borrowings during the nine months ended May 31, 2013 compared to the same period of the previous year. The average level of short-term borrowings increased $27.6 million during the nine months ended May 31, 2013 compared to the same period of the previous year, of which $24.1 million related to CHS Capital activity. For the nine months ended May 31, 2013 and 2012, we capitalized interest of $8.2 million and $6.1 million, respectively, primarily related to construction projects at both refineries in our Energy segment. Interest income was $4.4 million and $3.1 million for the nine months ended May 31, 2013 and 2012, respectively.

Equity Income from Investments. Equity income from investments of $72.4 million for the nine months ended May 31, 2013 increased $3.5 million (5%) compared to the nine months ended May 31, 2012. 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 increase in equity income from investments was attributable to increased earnings from investments in Corporate and Other of $12.2 million, primarily from Ventura Foods, our vegetable oil-based products and packaged foods joint venture, which increased $6.0 million and our wheat milling joint venture which also increased by $6.3 million. The increase in Corporate and Other was partially offset by decreased equity investment earnings in our Ag and Energy segments of $3.6 million and $5.1 million, respectively.

Income Taxes. Income tax expense was $87.0 million for the nine months ended May 31, 2013 compared with $86.6 million for the nine months ended May 31, 2012, resulting in effective tax rates of 9.1% and 8.2%, respectively. The federal and state statutory rates applied to nonpatronage business activity were 38.1% and 38.9% for the nine month periods ended May 31, 2013 and 2012, respectively. The income taxes and effective tax rates vary each year based upon profitability and nonpatronage business activity during each of the comparable years.


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Noncontrolling Interests. Income attributable to noncontrolling interests of $4.1 million for the nine months ended May 31, 2013 decreased by $71.0 million (94%) compared to the nine months ended May 31, 2012. Beginning in the second quarter of fiscal 2012, in connection with our agreement to purchase the noncontrolling interests, earnings from NCRA are no longer attributable to the noncontrolling interests, and patronage earned by the noncontrolling interests of NCRA are included as interest, net in our Consolidated Statements of Operations.

Liquidity and Capital Resources

On May 31, 2013, we had working capital, defined as current assets less current liabilities, of $2,959.8 million and a current ratio, defined as current assets divided by current liabilities, of 1.5 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 May 31, 2012, we had working capital of $2,854.6 million and a current ratio of 1.6 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.

On May 31, 2013, August 31, 2012 and May 31, 2012, 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 May 31, 2013, August 31, 2012 and May 31, 2012. In June 2013, we terminated and replaced both of the existing revolving credit facilities with a new five-year revolving facility with a committed amount of $2.5 billion. The major financial covenants for the revolving facility 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 3.0 to 1.0. 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 0.8 to 1.0 at any time. As of May 31, 2013, 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 $1,446.3 million and $995.3 million for the nine months ended May 31, 2013 and 2012, respectively. The fluctuation in cash flows when comparing the two periods is primarily from significant increases in cash inflows for net changes in operating assets and liabilities during the nine months ended May 31, 2013, compared to a slight decrease during the nine months ended May 31, 2012. Commodity prices decreased during the nine months ended May 31, 2013, and resulted in decreased working capital needs compared to August 31, 2012.

Our operating activities provided net cash of $1,446.3 million during the nine months ended May 31, 2013. Net income including noncontrolling interests of $873.7 million, net non-cash expenses and cash distributions from equity investments of $189.6 million and a decrease in net operating assets and liabilities of $382.9 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 $199.1 million and the loss on the crack spread contingent liability of $18.7 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, net derivative assets and a decrease in inventory quantities on May 31, 2013, when compared to August 31, 2012. These decreases were partially offset by a decrease in customer margin deposits. On May 31, 2013, the per bushel market prices of our primary grain commodities; corn, soybeans and spring wheat, decreased by $1.41 (18%), $2.55 (14%) and $1.12 (12%), respectively when compared to the spot prices on August 31, 2012. In general, crude oil market prices decreased $5 per barrel (5%) on May 31, 2013 when compared to August 31, 2012. On May 31, 2013, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses


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reflected decreases between 1% and 19%, depending on the specific products, compared to prices on August 31, 2012. A decrease in grain inventory quantities in our Ag segment of 35.5 million bushels (25%) contributed to the decreases in net operating assets and liabilities when comparing inventories at May 31, 2013 to August 31, 2012.


Our operating activities provided net cash of $995.3 million during the nine
months ended May 31, 2012. Net
income including noncontrolling interests of $974.8 million and net non-cash
expenses and income from equity
investments of $192.3 million were partially offset by an increase in net
operating assets and liabilities of $171.8
million. 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 $187.9 million, deferred
tax of $19.8 million, and income from equity investments, net of redemptions
from those investments, was $2.8
million. The slight increase in net operating assets and liabilities was caused
primarily by an increase in receivables
and a decrease in accounts payable and accrued expenses. Partially offsetting
this was a decrease in inventories, net
margin deposits and net derivative assets which resulted from the decrease in
commodity prices on May 31, 2012,
when compared to August 31, 2011. On May 31, 2012, the per bushel market prices
of our three primary grain
commodities decreased as follows: corn $2.02 (27%), soybeans $1.09 (8%) and
spring wheat $2.14 (22%) when
compared to market prices on August 31, 2011. In general, crude oil market
prices decreased $2 (3%) per barrel on
May 31, 2012 compared to August 31, 2011. On May 31, 2012, fertilizer commodity
prices affecting our wholesale
crop nutrients and country operations retail businesses generally decreased
between 9% and 19%, depending on the
specific products, compared to prices on August 31, 2011, with the exception of
Urea, which increased 30%. Grain
inventory quantities decreased in our Ag Business segment by 14.8 million
bushels (12%) when comparing
inventories at May 31, 2012 to August 31, 2011.

Our cash usage in our operating activities has generally been the lowest during our fourth fiscal quarter. Historically by this time we have sold a large portion of our seasonal agronomy-related inventories in our Ag Business segment operations and continue to collect cash from the related receivables.

Cash Flows from Investing Activities

For the nine months ended May 31, 2013 and 2012, the net cash flows used in our investing activities totaled $468.0 million and $450.3 million, respectively.

The acquisition of property, plant and equipment comprised the primary use of cash, totaling $427.1 million and $315.6 million for the nine months ended May 31, 2013 and 2012, respectively.

Expenditures for major repairs related to our refinery turnarounds were $53.8 million and $20.9 million during the nine months ended May 31, 2013 and 2012, 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 turnarounds during the nine months ended May 31, 2013 and 2012.

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 $71.3 million during the nine months ended May 31, 2013. We also began a $327.0 million expansion at NCRA's McPherson, Kansas refinery in the third quarter of fiscal 2013 which is anticipated to be completed in fiscal 2016.

Cash acquisitions of businesses, net of cash acquired, totaled $12.4 million and $159.4 million during the nine months ended May 31, 2013 and 2012, respectively. During the nine months ended May 31, 2012, we acquired Solbar for $127.8 million and a soybean crushing facility in Creston, Iowa, for $32.3 million, which are included in our Ag segment.

Investments made in joint ventures and other investments during the nine months ended May 31, 2013 and 2012 totaled $13.9 million and $29.6 million, respectively.

Changes in notes receivable during the nine months ended May 31, 2013 and 2012 resulted in net increases in cash flows of $27.7 million and $65.9 million, respectively. The primary cause of the increase in cash flows during the nine months ended May 31, 2013 was a decrease in CHS Capital notes receivable of $94.6 million. During the nine months ended 2012, the primary cause of the increase in cash flows was a decrease in CHS Capital notes receivable of $112.3 million.

Cash Flows from Financing Activities


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For the nine months ended May 31, 2013 and 2012, the net cash flows used in our financing activities totaled $556.1 million and $784.0 million, respectively.

Working Capital Financing:

We finance our working capital needs through short-term lines of credit with a syndication of domestic and international banks. On May 31, 2013 and 2012, 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 June 2013, we terminated and replaced both of the existing revolving credit facilities with a new five-year revolving facility with a committed amount 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 $290.4 million of inventories and receivables at May 31, 2013. In addition, other international subsidiaries have lines of credit totaling $142.5 million outstanding at May 31, 2013, of which $20.9 million is collateralized. On May 31, 2013, August 31, 2012 and May 31, 2012, we had total short-term indebtedness outstanding on these various facilities and other miscellaneous short-term notes payable totaling $432.9 million, $269.8 million and $201.6 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 May 31, 2013, August 31, 2012 and May 31, 2012, 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 May 31, 2013, 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 1.07% as of May 31, 2013. Borrowings by Cofina Funding utilizing the issuance of commercial paper under the note purchase agreements totaled $103.5 million as of May 31, 2013.

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 2.01% to 2.95% as of May 31, 2013. As of May 31, 2013, the total funding commitment under these agreements was $260.8 million, of which $78.0 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 $249.6 million as of May 31, 2013, of which $133.3 million was borrowed under these commitments with an interest rate of 1.65%.

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 May 31, 2013, and are due upon demand. Borrowings under these notes totaled $124.4 million as of May 31, 2013.

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 May 31, 2013, we had total long-term debt outstanding of $1,484.1 million, of which $150.0 million was bank financing, $1,279.1 million was private placement debt and $55.0 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 nine months ended May 31, 2013. On August 31, 2012 and May 31, 2012, we had total long-term debt outstanding of $1,440.4 million and $1,481.4 million, respectively. Our long-term debt is unsecured except for other notes and contracts in the amount of $21.7 million; however, restrictive covenants


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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 May 31, 2013.

During the nine months ended May 31, 2013, we borrowed $100.0 million on a long-term basis. We did not have any new long-term borrowings during the nine months ended May 31, 2012. During the nine months ended May 31, 2013 and 2012, we repaid long-term debt of $56.4 million and $55.7 million, respectively.

Other Financing:

During the nine months ended May 31, 2013, 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 decreases in cash flows of $18.9 million and $35.1 million during the nine months ended May 31, 2013 and 2012.

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, were distributed during the nine months ended May 31, 2013. The cash portion of this distribution, deemed by the Board of Directors to be 35% for individual members and 40% for nonindividual members was $381.0 million. During the nine months ended May 31, 2012, we distributed cash patronage of $260.6 million.

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, $185.0 million was redeemed in cash during the nine months ended May 31, 2013, compared to $138.4 million distributed in cash during the nine months ended May 31, 2012.

Our 8% Cumulative Redeemable Preferred Stock (Preferred Stock) is listed on the NASDAQ Stock Market LLC under the symbol CHSCP. On May 31, 2013, 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 nine months ended May 31, 2013 and 2012, were $18.4 million and $18.4 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 nine months ended May 31, 2013.

Guarantees

We are a guarantor for lines of credit and performance obligations of related companies. As of May 31, 2013, our bank covenants allowed maximum guarantees of $500.0 million, of which $35.7 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 May 31, 2013.



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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 nine months ended May 31, 2013.

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 nine months ended May 31, 2013.

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 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.

In February 2013, the FASB issued ASU No. 2013-02, "Comprehensive Income." ASU No. 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either in the consolidated statements of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required that provide additional detail about those amounts. These amendments are only disclosure related and will not have an impact on our financial position, results of operations, comprehensive income or cash flows. ASU No. 2013-02 will become effective for us in fiscal 2014.

In February 2013, the FASB issued ASU No. 2013-04, "Liabilities." ASU No. 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the impact that the adoption will have on our consolidated financial statements in fiscal 2015.

In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters." The amendments in this ASU clarify the applicable guidance for the release of the cumulative translation adjustment under current accounting standards. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are currently evaluating the impact that the adoption will have on our consolidated financial statements in fiscal 2015.



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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.

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, 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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