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2012 CHS
ANNUAL REPORT
GREATER TOGETHER

Table of contents

  • Page 1
    2012 CHS AnnuAl RepoRt gReAteR togetHeR

  • Page 2
    ... to products, services ahd market opportuhities that deliver value for their busihesses today. Ahd they khow that cohhectioh will deliver future behefits as CHS ihvests ih ehergy, graihs ahd food ihgrediehts opportuhities to serve them tomorrow. CONTENTS Leadership Letter Review of Operations...

  • Page 3
    31 % $ net income growth 431 million cash returned to owners in fiscal 2012 chs owners 70 chs retail service centers with more than 400 locations 2.5 million meals supplied to food banks 15 global commodity offices 1,100 cooperative owners 140 thousand barrels of refining capacity

  • Page 4
    ...with revenues at a record $40.6 billion. Equally important, those earn- Greater Together is also about how your system adds ings represented solid financial performance through- value for you, not only today, but also for the long term. out more than a dozen business operations, even as 2 CHs 2012

  • Page 5
    ... in our refined fuels produc- President and Chief Executive Officer tion and distribution network. Through acquisitions and expansion in global grain. Through establishing sources of crop nutrients in strategic geographies. And through providing new opportunities to add value Jerry hasnedl to...

  • Page 6
    ...anf a growing preqence in the global marketplace. ® goessel, kansas Farmer Matt Voth can fuel planting, harvest and everything in between with confidence, knowing his cooperative system's McPherson, Kan., refinery is just down the road, dedicated to serving rural America and rewarding him with an...

  • Page 7
    ... Energy specialiqtq, working through member cooperativeq anf CHs retail locationq, enqure cuqtomerq make the energy choiceq that help their buqineqqeq qucceef. hillsboro, kansas Certified Energy Specialist Chad Nowak connects customers of Cooperative Grain and Supply with energy to fuel their...

  • Page 8
    ... allow CHS and its Brazilian partner Andali to expand crop nutrients sales in this increasingly important geography. Andali CEO Rafael Vaccari Goncalves says, "We share common values with CHS and together we will be well positioned to deliver high-quality fertilizer services to customers throughout...

  • Page 9
    ...a rapidly globalizing commodity market a decade ago when it opened a São Paulo, Brazil, grain marketing office. Today, the CHS U.S. grain origination staff teams up with the system's expanding global operations - most recently in Paraguay - to help CHS producers and cooperatives feed the world year...

  • Page 10
    ... leaving producer Dave Schultz' southern Minnesota fields may travel long distances through the food system or they may quickly return to his farm as feed ingredients for his pork-production operation. Schultz markets his beans to the CHS oilseed processing plant in Mankato, Minn., where they...

  • Page 11
    ... both global population growth anf health concernq. CHs iq inveqting qignificantly in qoyfoofq profuction. c reston, iowa Steve Tomlinson, manager of the newest CHS oilseed processing plant at Creston, Iowa, is overseeing major facility upgrades that will send soy flour to other company locations...

  • Page 12
    ...VALUE WITH PRECISION The right crop inputq - anf the lateqt technology - frive crop profuction qucceqq. Throughout the qyqtem, CHs haq partneref with member co-opq, inclufing sunriqe Cooperative..., location manager for the crop nutrients hub plant joint venture between Sunrise Cooperative and CHS, ...

  • Page 13
    ... team memberq that bring profucerq back for profuctq anf qerviceq qeaqon after qeaqon. rushville, indiana Young producer Adam Schwering uses his smartphone to connect to agronomic data and his trusted advisor, Branch Manager Kent Van Meter of Harvest Land Cooperative, a CHS crop nutrients customer...

  • Page 14
    ...qince qwitching to premium fieqel qupplief by the cooperative network. washburn, north dakota Michelle Blair, CHS Country Operations National Energy Accounts, serves as the "conductor" to ensure all the co-op players are in sync to keep DMVW's engines fueled around the clock every day of the year.

  • Page 15
    .... laurel, montana Unit Supervisor Rusty Lohof and the CHS refinery team at Laurel, Mont., keep the 55,000-barrels-per-day operation running. With their counterparts at McPherson, Kan., they are building for the future with initiatives like a new coker completed at Laurel and a similar project...

  • Page 16
    ..., these results will generate record patronage returns to those CHS owners in fiscal 2013. Refinery investments essential to meeting the needs of our producer and cooperative owners and other customers led the way in 2012 as CHS announced plans for capital improvements at its Laurel, Mont., refinery...

  • Page 17
    ... To address that need, CHS boosted its refined fuels distribution system in northern-tier states, expanding storage capacity at Laurel; Minot, N.D.; and Sioux Falls, S.D.; installing new loading and unloading equipment at key terminals; adding railcar distribution; increasing transportation capacity...

  • Page 18
    ... alternative fuel for fleet products. A new rail terminal under construction at Biddeford, Maine, will expand the CHS propane market area and solidify customer relationships in the Northeast. The CHS propane team, the company's Country Operations retail network and CHS Transportation also teamed up...

  • Page 19
    ... a backdrop for volatile commodity businesses in fiscal 2012. CHS owners and customers benefitted from the company's expanding global origination base for crop nutrients, as A newly formef partnerqhip with a Brazilian logiqticq company will give CHs grain qtorage anf terminal acceqq now unfer...

  • Page 20
    ... distribution company. The addition will support both CHS global grain marketing and crop nutrients businesses. CHS also partnered in a major construction project to enhance Brazilian export terminal facilities, which are expected to be online in late 2013. CROP NUTRIENTS Success in crop production...

  • Page 21
    ... distribution system. At the Galveston, Texas, import terminal, a $4 million project has more than doubled railcar capacity and added switching capability to rapidly deliver more urea to customers. In the nation's critical crop production areas, CHS continued to partner with member cooperatives and...

  • Page 22
    ... the system's farm supply retailers and the farmers they serve with much-needed anhydrous ammonia, urea and UAN. COUNTRY OPERATIONS In 2012, CHS Country Operations, the CHS network of aligned retail sites, exceeded its record-breaking 2011 results with combined internal and external sales revenues...

  • Page 23
    ... customer needs through quality products that drive countries, along with market response to anticipated performance, despite facing higher input costs in 2012 drought-challenged 2012 supplies, created strong due to sharply increased demand for commodities demand and higher prices for CHS Processing...

  • Page 24
    ... CHS Business Solutions - CHS Hedging Inc.; stronger role in the growing demand for soy-enhanced CHS Capital, LLC; and Ag States Group - foods as global manufacturers seek lower-cost, high- collaborated closely with each other and with the quality options for food and health products. In 2012, CHS...

  • Page 25
    ... payment ness, grew its producer financing portfolio by more bond products provided additional risk management than 50 percent in 2012 through its expanding net- options for cooperative customers. Ag States Group work of cooperative Country Business Partners. divested its Impact Risk Solutions, LLC...

  • Page 26
    ... market. Ventura Foods also is pursuing international opportunities to support global growth Positioning the CHS system to add value for its owners of customers who want to continue to leverage Ventura and customers over time means attracting, developing Foods quality as they expand across the world...

  • Page 27
    ...for U.S. high schools. CHS employees also gave back in 2012, as groups and individuals took advantage of the CHS Day of Service volunteer program that allows time away from work for community projects. Efforts have included local restoration projects, relief program supply drives, food bank work and...

  • Page 28
    OWNER RETURN ON CHS EQUITY CASH RETURN percent dollars in millions* 32.2% $ 430.9 32.4 2008 12.9 2009 16.2 2010 28.8 2011 32.2 2012 339.5 2008 347.2 2009 237.0 2010 227.3 2011 430.9 2012 *includes preferred stock and dividends NET REVENUE NET INCOME dollars in billions dollars ...

  • Page 29
    ... business services operations, during the year. as well as two food processing-related joint ventures, under the Corporate and Other heading. Combined Largely as a result of increased values for the energy, earnings for CHS insurance, risk management and crop nutrients, grains and other commodities...

  • Page 30
    ... as services, which include hedging, financing and insurance. CHS owns and operates petroleum refineries and pipelines and markets and distributes refined fuels and other energy products under the Cenex௡ brand through a network of member cooperatives and independents. The Company purchases grains...

  • Page 31
    ... of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 32
    ... 31 (DOLLARS IN THOUSANDS) 2012 2011 ASSETS Current assets: Cash and cash equivalents Receivables Inventories Derivative assets Margin deposits Other current assets Total current assets Investments Property, plant and equipment Other assets Total assets LIABILITIES AND EQUITIES $ 314,029 3,590...

  • Page 33
    ... AUGUST 31 (DOLLARS IN THOUSANDS) 2012 2011 2010 Revenues Cost of goods sold Gross profit Marketing, general and administrative Operating earnings Loss (gain) on investments Interest, net Equity income from investments Income before income taxes Income taxes Net income Net income attributable to...

  • Page 34
    ...2009 Dividends and equity retirement determination Patronage distribution Equities retired Capital equity certificates exchanged for preferred stock Equities issued Preferred stock dividends Distributions to noncontrolling interests Changes in dividends and equities payable Other, net Comprehensive...

  • Page 35
    PREFERRED STOCK ACCUMULATED OTHER COMPREHENSIVE LOSS CAPITAL RESERVES NONCONTROLLING INTERESTS TOTAL EQUITIES $ 282,694 $ (156,270) $ 749,054 3,659 (11,522) (142) (23,248) $ 242,862 36,674 ... (82,138) 958 290,766 (43,130) (4,091) $ 1,258,944 $ 319,368 $ (232,587) $ 17,982 CHS 2012 33

  • Page 36
    ... from equity investments Noncash patronage dividends received Gain on sale of property, plant and equipment Loss (gain) on investments Loss on crack spread contingent liability Deferred taxes Other, net Changes in operating assets and liabilities, net of acquisitions: Receivables Inventories...

  • Page 37
    ... Stock, which is listed on the NASDAQ Stock Market LLC under the symbol CHSCP. On August 31, 2012, the Company had 12,272,003 shares of preferred stock outstanding. The Company buys commodities from and provides products and services to patrons (including member and other non-member customers...

  • Page 38
    ...gross fair values of the value of positions held, consisting of inventory and purchase Company's derivative assets and liabilities not designated as contracts at a fixed or partially fixed price in the event market prices decrease. The Company is also exposed to risk of loss hedging instruments were...

  • Page 39
    ... any trader is outside of position limits and also a term of the agreements. CHS Capital, LLC (CHS Capital), review by the Company's senior management if operating the Company's wholly-owned finance subsidiary, has interest areas are outside of position limits. A similar process is used rate swaps...

  • Page 40
    ... equity method of accounting. Investments in other coop- The Company has asset retirement obligations with respect eratives are stated at cost, plus patronage dividends received to certain of its refineries and related assets due to various in the form of capital stock and other equities. Patronage...

  • Page 41
    ... of the related cash outflows as investing activities in the Consolidated Statements of Cash Flows, whereas expensing these costs as incurred, would result in classifying the cash outflows as operating activities. REVENUE RECOGNITION include grain and oilseed, processed grains and oilseeds and food...

  • Page 42
    ...05, ''Com- qualitative disclosures will provide users with more detailed prehensive Income (Topic 220): Presentation of Compre- information about an employer's involvement in multiemhensive Income.'' ASU No. 2011-05 eliminates the option to ployer pension plans. This guidance is effective for annual...

  • Page 43
    ... contract. As of August 31, 2012, CHS Capital's customers have additional available credit of $841.3 million. Trade accounts receivable are initially recorded at a selling price, which approximates fair value, upon the sale of goods or services to customers. The carrying value of CHS Capital notes...

  • Page 44
    ...ventures: a pre-tax gain of $119.7 million. FOUR Ventura Foods, LLC Ventura Foods, LLC TEMCO, LLC TEMCO, LLC $ 292,393 78,372 $ 278,865 79,770 Horizon Milling, LLC Horizon Milling, LLC Horizon Milling G.P. Horizon Milling G.P. Cooperatives: Land O'Lakes, Inc. Land O'Lakes, Inc. Ag Ag Processing...

  • Page 45
    ... and related equipment to Horizon Milling, LLC (Horizon Milling) under an operating lease agreement. The net book The following provides combined financial information for value of the leased milling assets at August 31, 2012 and the Company's major equity investments, excluding Ventura 2011...

  • Page 46
    ...and $6,306, respectively Trademarks and other intangible assets, less accumulated amortization of $15,949 and $14,731, respectively Notes receivable Long-term receivable Prepaid pension and other benefits Capitalized major maintenance Other 1,987 22,185 173,054 37,589 86,477 70,554 24,053 $ 518,286...

  • Page 47
    ...) AUGUST 31, 2012 2012 2011 Notes payable(a)(j) CHS Capital notes payable(k) Long-term debt: Revolving term loans from cooperative and other banks, payable in equal installments beginning in 2013 through 2018(b)(j) Private placement, payable in equal installments beginning in 2014 through 2018...

  • Page 48
    ...Notes Payable and Long-Term Debt, continued (g) In March 2004, the Company entered into a note purchase and private shelf agreement with Prudential Capital Group. In April 2007, the agreement was amended with Prudential Investment Management, Inc. and several other participating insurance companies...

  • Page 49
    ...) 2012 2011 Deferred tax assets: Accrued expenses Postretirement health care and deferred compensation Tax credit carryforwards Loss carryforwards Other Deferred tax assets valuation Total deferred tax assets Deferred tax liabilities: Pension Investments Major maintenance Property, plant and...

  • Page 50
    ...the Board of Directors, may be allocated to members in the form of nonpatronage equity certificates. The Board of Directors authorized, in accordance with the Company's bylaws, that 10% of the earnings from patronage business for fiscal years 2012 and 2011, be added to the Company's capital reserves...

  • Page 51
    ... in an annual program for equities held by them and another for individual members who are eligible for equity redemptions at age 70 or upon death. In accordance with authorization from the Board of Directors, the Company expects total redemptions related to the year ended August 31, 2012, that will...

  • Page 52
    ... may participate. The Company also has non-qualified supplemental executive and board retirement plans. Financial information on changes in benefit obligation and plan assets funded and balance sheets status as of August 31, 2012 and 2011 is as follows: QUALIFIED PENSION BENEFITS (DOLLARS IN...

  • Page 53
    ... benefit obligation of the non-qualified pension plans was $19.7 million and $17.0 million at August 31, 2012 and 2011, respectively. As discussed in Note 4, Investments, Agriliance is owned and governed by CHS (50%) and Land O'Lakes Inc. (50%) and has essentially ceased its business activities...

  • Page 54
    ...the long-term time horizon for The Company provides defined life insurance and health care benefits for certain retired employees and Board of Directors' participants. The plan is contributory based on years of service and family status, with retiree contributions adjusted annually. The Company has...

  • Page 55
    The Company's pension plans' fair value measurements at Hedge funds: Valued at estimated fair value based on prices August 31, 2012 and 2011 are as follows: quoted by various national markets and publications and/or independent financial analysts. These investments are classi2012 fied within Level 3...

  • Page 56
    ...IN THOUSANDS) CONTRIBUTIONS OF CHS EXPIRATION DATE OF COLLECTIVE BARGAINING AGREEMENT PLAN NAME EIN/PLAN NUMBER 2012 2011 2010 SURCHARGE IMPOSED Co-op Retirement Plan 01-0689331/001 $ 1,885 $ 1,279 $ 1,325 N/A N/A The Company's contributions for the years stated above did not represent...

  • Page 57
    ... the business solu- government regulations and policies, world events, and gentions operations, which consists of commodities hedging, eral political and economic conditions. insurance and financial services related to crop production. While the Company's revenues and operating results are Corporate...

  • Page 58
    ... year ended August 31, 2012: Revenues Cost of goods sold Gross profit Marketing, general and administrative Operating earnings Loss on investments Interest, net Equity income from investments Income before income taxes Intersegment revenues Goodwill Capital expenditures Depreciation and amortization...

  • Page 59
    ... Company's readily marketable inventories, interest rate swaps, forward commodity and freight purchase and sales contracts, flat price or basis fixed derivative contracts and other OTC derivatives whose value is determined with inputs that are based on exchange traded prices, adjusted for location...

  • Page 60
    ... of Operations as a component of cost of goods sold. Commodity, Freight and Foreign Currency Derivatives: Exchange traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. The Company's forward commodity purchase and...

  • Page 61
    ... interest, net over the term of the agreements. Other Assets: The Company's available-for-sale investments in common stock of other companies and Rabbi Trust assets Accrued Liability for Contingent Crack Spread Payment are valued based on unadjusted quoted prices on active Related to Purchase of...

  • Page 62
    ... periods in which quotes cannot be obtained. Each reporting period, management reviews the unobservable inputs provided by third-party vendors for reasonableness utilizing relevant information available to the Company. Management also takes into consideration current and expected market trends and...

  • Page 63
    ... other operating leases for various in the Company's inventories. refinery, manufacturing and transportation equipment, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the lease terms. GUARANTEES The Company is a guarantor for lines of...

  • Page 64
    ...2012 2011 2010 Sales Purchases (DOLLARS IN THOUSANDS) $ 2,185,348 1,143,285 $ 3,004,303 1,461,391 2012 $ 2,276,682 961,062 2011 Receivables Payables $ 51,716 60,659 $ 51,831 29,398 The related party transactions were primarily with TEMCO, Horizon Milling, United Harvest and Ventura Foods...

  • Page 65
    ...sale investments, net of tax expense (benefit) of $199, $455 and $(477) in 2012, 2011 and 2010, respectively Treasury locks and swaps, net of tax expense (benefit) of $449, $(2,180) and $227 in 2012, 2011 and 2010, respectively Energy derivative instruments qualified for hedge accounting, net of tax...

  • Page 66
    ... used in the energy closing). In addition, Growmark is entitled to receive up to industry to value options. As of August 31, 2012, the fair two contingent purchase price payments following each indi- value of the crack spread contingent payment was vidual closing, calculated as set forth in the...

  • Page 67
    ... impact on the Company's consolidated results of operations. Purchase accounting has been finalized and fair values assigned to the net assets acquired were as follows: (DOLLARS IN THOUSANDS) Current assets Investments Property, plant and equipment Goodwill Definite-lived intangible assets Current...

  • Page 68
    ...Government Relations Committee. Chairman of CHS Foundation, which provides grants, scholarships and other financial support for qualified programs in areas of agriculture, cooperative education and rural development. Serves on Nationwide Insurance Board Council. Member and past director of Northwest...

  • Page 69
    ... of Corporate Responsibility Committee and a member of the CHS Foundation Finance and Investment Committee. Director for Farmers Co-op Association in Canby, Minn., for nine years, including eight years as board chairman. Currently vice chairman of Cooperative Network and a member of the Minnesota...

  • Page 70
    ... 14,000 acres that utilizes federal, state and private land leases. Malesich Ranch also raises wheat, malt barley and hay on 2,000 irrigated acres and operates a custom haying business. Holds a bachelor's degree in agricultural production from Montana State University and is a member of Alpha Gamma...

  • Page 71
    ... North Dakota and Minnesota Managers Association, Triangle Agronomy LLC, CHS and Land O'Lakes Managers Council, and business unit advisory committees. Holds a bachelor's degree in agricultural economics from North Dakota State University. david kastelic, executive vice president, Corporate Services...

  • Page 72
    ... 2012. Represents CHS on the boards of the National Cooperative Refinery Association, CHS Capital and numerous Country Operations partners. Serves as executive committee member of the Grain Elevator and Processing Society. Pursued a bachelor's degree in political science from the University of North...

  • Page 73
    ...platform of CHS businesses, to the grain, foods and energy customers we serve at home and around the world, we're all Greater Together. CHS thanks the dozens of people who assisted in telling the story of our shared success in this year's annual report. FUELING RELIABLE ENERGY SUPPLY: Producers Matt...

  • Page 74
    5500 Cenex Drive Inver grove Heights, Mn 55077 651-355-6000 chsinc.com nASDAQ: CHSCp