-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WaVu9kX07CY1/Ai/+Xg672u/eX8U9DSHT4QBhw/22nzyvHp99v2NHcXsZS8oNulT rVctda0rvGfHYjeXy6o6/w== 0000950137-08-013893.txt : 20081121 0000950137-08-013893.hdr.sgml : 20081121 20081121155017 ACCESSION NUMBER: 0000950137-08-013893 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20080831 FILED AS OF DATE: 20081121 DATE AS OF CHANGE: 20081121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHS INC CENTRAL INDEX KEY: 0000823277 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 410251095 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-50150 FILM NUMBER: 081207498 BUSINESS ADDRESS: STREET 1: 5500 CENEX DRIVE CITY: INVER GROVE HEIGHTS STATE: MN ZIP: 55077 BUSINESS PHONE: 651-355-6000 MAIL ADDRESS: STREET 1: 5500 CENEX DRIVE CITY: INVER GROVE HEIGHTS STATE: MN ZIP: 55077 FORMER COMPANY: FORMER CONFORMED NAME: CENEX HARVEST STATES COOPERATIVES DATE OF NAME CHANGE: 19980611 FORMER COMPANY: FORMER CONFORMED NAME: HARVEST STATES COOPERATIVES DATE OF NAME CHANGE: 19961212 10-K 1 c47494e10vk.htm FORM 10-K FORM 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
 
 
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the fiscal year ended August 31, 2008
or
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from          to          .
 
Commission file number: 0-50150
 
 
 
 
CHS Inc.
(Exact name of registrant as specified in its charter)
 
     
Minnesota
  41-0251095
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)
  Identification Number)
5500 Cenex Drive
   
Inver Grove Heights, Minnesota 55077
(Address of principal executive office,
including zip code)
  (651) 355-6000
(Registrant’s Telephone number,
including area code)
 
 
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
     
8% Cumulative Redeemable Preferred Stock
  The NASDAQ Global Select Market
(Title of Class)
  (Name of Each Exchange on Which Registered)
 
 
 
 
 
Indicate by check mark whether the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
 
YES o     NO þ
 
Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
 
YES o     NO þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES þ     NO o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o  Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
YES o     NO þ
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:
 
The registrant’s voting and non-voting common equity has no market value (the registrant is a member cooperative).
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: The registrant has no common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 


 

 
INDEX
 
             
        Page
        No.
 
  Business     1  
    The Company     1  
    Energy     2  
    Ag Business     5  
    Processing     11  
    Corporate and Other     14  
    Price Risk and Hedging     15  
    Employees     15  
    Membership in CHS and Authorized Capital     16  
  Risk Factors     19  
  Unresolved Staff Comments     23  
  Properties     23  
  Legal Proceedings     25  
  Submission of Matters to a Vote of Security Holders     26  
 
PART II.
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     26  
  Selected Financial Data     26  
  Management’s Discussion and Analysis of Financial Condition and Results of Operation     29  
  Quantitative and Qualitative Disclosures about Market Risk     53  
  Financial Statements and Supplementary Data     55  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     55  
  Controls and Procedures     55  
  Other Information     56  
 
PART III.
  Directors, Executive Officers and Corporate Governance     57  
  Board of Directors     57  
  Executive Officers     61  
  Section 16(a) Beneficial Ownership Reporting Compliance     62  
  Code of Ethics     62  
  Audit Committee Matters     63  
  Executive Compensation     63  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     82  
  Certain Relationships and Related Transactions and Director Independence     83  
  Principal Accountant Fees and Services     84  
 
PART IV.
  Exhibits, Financial Statement Schedules     85  
    91  
    92  
 EX-10.3D
 EX-10.10B
 EX-10.18D
 EX-10.35
 EX-10.36
 EX-21.1
 EX-23.1
 EX-24.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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PART I.
 
ITEM 1.  BUSINESS
 
THE COMPANY
 
CHS Inc. (referred to herein as “CHS”, “we” or “us”) is one of the nation’s leading integrated agricultural companies. As a cooperative, we are owned by farmers and ranchers and their member cooperatives (referred to herein as “members”) from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock, which is listed on the NASDAQ Global Select Market under the symbol CHSCP. On August 31, 2008, we had 9,047,780 shares of preferred stock outstanding. We buy commodities from and provide products and services to patrons (including our members and other non-member customers), both domestic and international. We provide a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those entities is included as a component in our net income under the equity method of accounting. For the fiscal year ended August 31, 2008, our total revenues were $32.2 billion and net income was $803.0 million.
 
We have aligned our business segments based on an assessment of how our businesses operate and the products and services they sell. Our three business segments: Energy, Ag Business and Processing, create vertical integration to link producers with consumers. Our Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. Our Ag Business segment derives its revenues through the origination and marketing of grain, including service activities conducted at export terminals, through the retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies, and records equity income from investments in our agronomy joint ventures, grain export joint ventures and other investments. As of September 2007, our Ag Business segment revenues also include sales of crop nutrient products due to the distribution of that business to us from our Agriliance LLC joint venture. Our Processing segment derives its revenues from the sales of soybean meal and soybean refined oil, and records equity income from wheat milling joint ventures, a vegetable oil-based food manufacturing and distribution joint venture, and through March 2008, an ethanol manufacturing company. We include other business operations in Corporate and Other because of the nature of their products and services, as well as the relative revenue size of those businesses. These businesses primarily include our insurance, hedging and other service activities related to crop production.
 
In May 2005, we sold the majority of our Mexican foods business. During the year ended August 31, 2006, we sold all of the remaining assets for proceeds of $4.2 million and a gain of $1.6 million. The operating results of the Mexican foods business are reported as discontinued operations.
 
Membership in CHS is restricted to certain producers of agricultural products and to associations of producers of agricultural products that are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended. Our Board of Directors may establish other qualifications for membership, as it may from time to time deem advisable.
 
Our earnings from cooperative business are allocated to members (and to a limited extent to non-members with which we have agreed to do business on a patronage basis) based on the volume of business they do with us. We allocate these earnings to our patrons in the form of patronage refunds (which are also called patronage dividends) in cash and patron’s equities, which may be redeemed over time. Earnings derived from non-members, which are not allocated patronage, are taxed at federal and state statutory corporate rates and are retained by us as unallocated capital reserve. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and if we qualify for patronage refunds from them.


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Our origins date back to the early 1930s with the founding of the predecessor companies of Cenex, Inc. and Harvest States Cooperatives. CHS Inc. emerged as the result of the merger of those two entities in 1998, and is headquartered in Inver Grove Heights, Minnesota.
 
The following table presents a summary of our primary subsidiary holdings and equity investments for each of our business segments at August 31, 2008:
 
                     
            CHS
    Income
Business Segment
 
Entity Name
 
Business Activity
 
Ownership%
   
Recognition
 
Energy
  National Cooperative Refinery Association  
Petroleum refining
    74.5 %   Consolidated
    Provista Renewable Fuels Marketing, LLC  
Ethanol marketing
    100 %   Consolidated
    Front Range Pipeline, LLC  
Crude oil transportation
    100 %   Consolidated
    Cenex Pipeline, LLC  
Finished product transportation
    100 %   Consolidated
                     
Ag Business
  Agriliance LLC  
Retail distribution of agronomy products
    50 %   Equity Method
    CHS do Brasil Ltda.  
Soybean procurement in Brazil
    100 %   Consolidated
    United Harvest, LLC  
Grain exporter
    50 %   Equity Method
    TEMCO, LLC  
Grain exporter
    50 %   Equity Method
    Multigrain A.G.  
Grain procurement and production
farmland in Brazil
    40 %   Equity Method
    CHS Europe SA  
Grain merchandising in Europe
    100 %   Consolidated
    LLC CHS Ukraine  
Grain procurement and merchandising in Ukraine
    100 %   Consolidated
                     
Processing
  Horizon Milling, LLC  
Wheat milling in U.S.
    24 %   Equity Method
    Horizon Milling General Partnership  
Wheat milling in Canada
    24 %   Equity Method
    Ventura Foods, LLC  
Food manufacturing
    50 %   Equity Method
                     
Corporate and Other
  Country Hedging, Inc.  
Risk management products broker
    100 %   Consolidated
    Ag States Agency, LLC  
Insurance agency
    100 %   Consolidated
    Impact Risk Solutions, LLC  
Insurance brokerage
    100 %   Consolidated
    Cofina Financial, LLC  
Finance company
    49 %   Equity Method
 
Our international sales information and segment information in Notes 3 and 13 of the Notes to Consolidated Financial Statements, as well as Item 6 of this Annual Report on Form 10-K, are incorporated by reference into the following business segment descriptions.
 
The business segment financial information presented below may not represent the results that would have been obtained had the relevant business segment been operated as an independent business due to efficiencies in scale, corporate cost allocations and intersegment activity.
 
ENERGY
 
Overview
 
We are the nation’s largest cooperative energy company based on revenues and identifiable assets, with operations that include petroleum refining and pipelines; the supply, marketing (including ethanol and biodiesel) and distribution of refined fuels (gasoline, diesel fuel and other energy products); the blending, sale and distribution of lubricants; and the wholesale supply of propane. Our Energy segment processes crude oil into refined petroleum products at refineries in Laurel, Montana (wholly-owned) and McPherson, Kansas (an entity in which we have an approximate 74.5% ownership interest) and sells those products under the Cenex® brand to member cooperatives and others through a network of approximately 1,650 independent retail sites, of which the majority are convenience stores marketing Cenex® branded fuels.
 
Operations
 
Laurel Refinery.  Our Laurel, Montana refinery processes medium and high sulfur crude oil into refined petroleum products that primarily include gasoline, diesel fuel and asphalt. Our Laurel refinery sources approximately 92% of its crude oil supply from Canada, with the balance obtained from domestic sources, and we have access to Canadian and northwest Montana crude through our wholly-owned Front Range Pipeline, LLC and other common carrier pipelines. Our Laurel refinery also has access to Wyoming crude via common carrier pipelines from the south.
 
Our Laurel facility processes approximately 55,000 barrels of crude oil per day to produce refined products that consist of approximately 47% gasoline, 42% diesel fuel and other distillates, and 11% asphalt


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and other products. During fiscal 2005, our Board of Directors approved the installation of a coker unit at Laurel, along with other refinery improvements, which allows us to extract a greater volume of high value gasoline and diesel fuel from a barrel of crude oil and less relatively low value asphalt. The project became operational in April 2008, and has a total cost of $418.0 million, of which $416.8 million had been spent through August 31, 2008. Refined fuels produced at Laurel are available via the Yellowstone Pipeline to western Montana terminals and to Spokane and Moses Lake, Washington, south via common carrier pipelines to Wyoming terminals and Denver, Colorado, and east via our wholly-owned Cenex Pipeline, LLC to Glendive, Montana, and Minot and Fargo, North Dakota. Primarily during fiscal 2008, we incurred approximately $25 million in capital expenditures to construct two product terminals, one of which is tied into the Yellowstone Pipeline. Both new terminals are complete and include rail capabilities. These investments were undertaken to preserve our long-term ability to participate in western U.S. markets.
 
McPherson Refinery.  The McPherson, Kansas refinery is owned and operated by National Cooperative Refinery Association (NCRA), of which we own approximately 74.5%. The McPherson refinery processes approximately 85% low and medium sulfur crude oil and 15% heavy sulfur crude oil into gasoline, diesel fuel and other distillates, propane and other products. NCRA sources its crude oil through its own pipelines as well as common carrier pipelines. The low and medium sulfur crude oil is sourced from Kansas, Oklahoma and Texas, and the heavy sulfur crude oil is sourced from Canada.
 
The McPherson refinery processes approximately 80,000 barrels of crude oil per day to produce refined products that consist of approximately 53% gasoline, 40% diesel fuel and other distillates, and 7% propane and other products. Approximately 32% of the refined fuels are loaded into trucks at the McPherson refinery or shipped via NCRA’s proprietary products pipeline to its terminal in Council Bluffs, Iowa. The remaining refined fuel products are shipped to other markets via common carrier pipelines.
 
Provista Renewable Fuels Marketing, LLC.  In fiscal 2006, we acquired a 50% ownership interest in an ethanol and biodiesel marketing and distribution company, Provista Renewable Fuels Marketing, LLC, (Provista) formerly known as United BioEnergy Fuels, LLC. In fiscal 2008, we acquired the remaining 50% ownership interest from US BioEnergy Corporation (US BioEnergy), prior to its merger with VeraSun Energy Corporation (VeraSun). Provista contracts with ethanol and biodiesel production plants to market and distribute their finished products. During fiscal 2008, total volumes were 525 million gallons of ethanol. Provista has been consolidated within our financial statements since fiscal 2006.
 
Other Energy Operations.  We own and operate a propane terminal, four asphalt terminals, seven refined product terminals and three lubricants blending and packaging facilities. We also own and lease a fleet of liquid and pressure trailers and tractors, which are used to transport refined fuels, propane, anhydrous ammonia and other products.
 
Products and Services
 
Our Energy segment produces and sells (primarily wholesale) gasoline, diesel fuel, propane, asphalt, lubricants and other related products and provides transportation services. We obtain the petroleum products that we sell from our Laurel and McPherson refineries, and from third parties. Over the past two years, we have obtained approximately 55% of the petroleum products we sell from our Laurel and McPherson refineries, and approximately 45% from third parties.
 
Sales and Marketing; Customers
 
We make approximately 73% of our refined fuel sales to members, with the balance sold to non-members. Sales are made wholesale to member cooperatives and through a network of independent retailers that operate convenience stores under the Cenex/Ampride tradename. We sold approximately 1.3 billion gallons of gasoline and approximately 1.5 billion gallons of diesel fuel in fiscal 2008. We also blend, package and wholesale auto and farm machinery lubricants to both members and non-members. In fiscal 2008, our lubricants operations sold approximately 22 million gallons of lube oil. We are one of the nation’s largest propane wholesalers based on revenues. In fiscal 2008, our propane operations sold approximately 546 million


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gallons of propane. Most of the propane sold in rural areas is for heating and agricultural usage. Annual sales volumes of propane vary greatly depending on weather patterns and crop conditions.
 
Industry; Competition
 
Regulation.  Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, have a significant impact on our Energy segment. Our Energy segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency (EPA), the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to the environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Failure to comply with these laws, regulations and rules could subject us (and, in the case of the McPherson refinery, NCRA) to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we and NCRA are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on capital expenditures, earnings or competitive position, of either us or NCRA.
 
Like many other refineries, our Energy segment’s refineries recently focused their capital spending on reducing pollution emissions and at the same time increasing production to help pay for those expenditures. In particular, our refineries have completed work to comply with the EPA low sulfur fuel regulations that were required by 2006, which are intended to lower the sulfur content of gasoline and diesel fuel. We incurred capital expenditures from fiscal 2003 through 2006 related to this compliance of $88.1 million for our Laurel, Montana refinery and $328.7 million for NCRA’s McPherson, Kansas refinery. The EPA has passed a regulation that requires the reduction of the benzene level in gasoline to be less than 0.62% volume by January 1, 2011. As a result of this regulation, our refineries will incur capital expenditures to reduce the current gasoline benzene levels to the regulated levels. We anticipate the combined capital expenditures for the Laurel and NCRA refineries to be approximately $130 million, for which $73 million is included in budgeted capital expenditures for fiscal 2009.
 
The petroleum business is highly cyclical. Demand for crude oil and energy products is driven by the condition of local and worldwide economies, local and regional weather patterns and taxation relative to other energy sources, which can significantly affect the price of refined fuel products. Most of our energy product market is located in rural areas, so sales activity tends to follow the planting and harvesting cycles. More fuel-efficient equipment, reduced crop tillage, depressed prices for crops, weather conditions and government programs which encourage idle acres, may all reduce demand for our energy products.
 
Competition.  The petroleum refining and wholesale fuels business is very competitive. Among our competitors are some of the world’s largest integrated petroleum companies, which have their own crude oil supplies, distribution and marketing systems. We also compete with smaller domestic refiners and marketers in the midwestern and northwestern United States, with foreign refiners who import products into the United States and with producers and marketers in other industries supplying other forms of energy and fuels to consumers. Given the commodity nature of the end products, profitability in the refining and marketing industry depends largely on margins, as well as operating efficiency, product mix, and costs of product distribution and transportation. The retail gasoline market is highly competitive, with much larger competitors that have greater brand recognition and distribution outlets throughout the country and the world. Our owned and non-owned retail outlets are located primarily in the northwestern, midwestern and southern United States.
 
We market refined fuels, motor gasoline and distillate products in five principal geographic areas. The first area includes the midwest and northern plains. Competition at the wholesale level in this area includes the major oil companies ConocoPhillips, Valero and Citgo, independent refiners including Flint Hills Resources and Growmark, Inc., and wholesale brokers/suppliers including Western Petroleum Company. This area has a robust spot market and is influenced by the large refinery center along the gulf coast.
 
To the east of the midwest and northern plains is another unique marketing area. This area centers around Chicago, Illinois and includes eastern Wisconsin, Illinois and Indiana. CHS principally competes with the


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major oil companies Marathon, BP Amoco and ExxonMobil, independent refineries including Flint Hills Resources and Growmark, Inc., and wholesale brokers/suppliers including U.S. Oil.
 
Another market area is located south of Chicago, Illinois. Most of this area includes Arkansas, Missouri and the northern part of Texas. Competition in this area includes the major oil companies Valero and ExxonMobil, and independent refiners including Lion. This area is principally supplied from the Gulf coast refinery center and is also driven by a strong spot market that reacts quickly to changes in the international and national supply balance.
 
Another geographic area includes Montana, western North Dakota, Wyoming, Utah, Idaho, Colorado and western South Dakota. Competition at the wholesale level in this area include the major oil companies ExxonMobil and ConocoPhillips, and independent refiners including Frontier Refining and Sinclair. This area is also noted for being fairly well balanced in demand and supply, but is typically influenced by Canadian refined fuels moving into the U.S. through terminals in Canada and by rail from independent Canadian refiners.
 
The last area includes much of Washington and Oregon. We compete with the major oil companies Tesoro, BP Amoco and Chevron in this area. This area is also known for volatile prices and an active spot market.
 
Summary Operating Results
 
Summary operating results and identifiable assets for our Energy segment for the fiscal years ended August 31, 2008, 2007 and 2006 are shown below:
 
                         
    2008     2007*     2006*  
    (Dollars in thousands)  
 
Revenues
  $ 11,499,814     $ 8,105,067     $ 7,414,361  
Cost of goods sold
    11,027,459       7,264,180       6,804,454  
                         
Gross profit
    472,355       840,887       609,907  
Marketing, general and administrative
    111,121       94,939       82,867  
                         
Operating earnings
    361,234       745,948       527,040  
Gain on investments
    (35 )                
Interest, net
    (5,227 )     (6,106 )     6,534  
Equity income from investments
    (5,054 )     (4,468 )     (3,840 )
Minority interests
    71,805       143,230       91,588  
                         
Income before income taxes
  $ 299,745     $ 613,292     $ 432,758  
                         
Intersegment revenues
  $ (322,522 )   $ (228,930 )   $ (242,430 )
                         
Total identifiable assets — August 31
  $ 3,216,852     $ 2,797,831     $ 2,215,800  
                         
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 of the Notes to Consolidated Financial Statements
 
AG BUSINESS
 
Our Ag Business segment includes agronomy, country operations and grain marketing.
 
Agronomy
 
Overview
 
Through our fiscal year ended August 31, 2007, we conducted our wholesale, and some of our retail, agronomy operations through our 50% ownership interest in Agriliance LLC (Agriliance), in which Land O’Lakes, Inc. (Land O’Lakes) holds the other 50% ownership interest. Prior to September 2007, Agriliance


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was one of North America’s largest wholesale distributors of crop nutrients, crop protection products and other agronomy products based upon annual sales. Our 50% ownership interest in Agriliance is treated as an equity method investment, and therefore, Agriliance’s revenues and expenses are not reflected in our operating results. On August 31, 2008, our equity investment in Agriliance was $147.4 million.
 
In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a 50-50 joint venture and primarily operates and sells agronomy products on a retail basis. We currently are exploring, with Land O’Lakes, the repositioning options for the remaining portions of the Agriliance retail business.
 
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, each company was entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O’Lakes owed us $133.5 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance’s debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made a true-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during fiscal 2009.
 
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Values assigned to the net assets acquired totaled $268.7 million.
 
After a fiscal 2005 initial public offering (IPO) transaction for CF Industries, Inc., a crop nutrients manufacturer and distributor, we held an ownership interest in the post-IPO company named CF Industries Holdings, Inc. (CF) of approximately 3.9% or 2,150,396 shares. During our year ended August 31, 2007, we sold 540,000 shares of our CF stock for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing our ownership in CF to approximately 2.9%. During the year ended August 31, 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million.
 
There is significant seasonality in the sale of agronomy products and services, with peak activity coinciding with the planting and input seasons. There is also significant volatility in the prices for the crop nutrient products we purchase and that we sell.
 
Operations
 
Our wholesale crop nutrients business sells approximately 6.7 million tons of fertilizer annually, making it one of the largest wholesale fertilizer operations in the United States based on tons sold. Product is either delivered directly to the customer from the manufacturer, or through our 15 inland or river warehouse terminals and other non-owned storage facilities located throughout the country. In addition, our Galveston, Texas deep water port and terminal receives fertilizer by vessel from originations such as the Middle East and Caribbean basin where less expensive natural gas tends to give a price advantage over domestically produced fertilizer. The fertilizer is then shipped by rail to destinations within crop producing regions of the country. Based on fertilizer market data, our wholesale crop nutrients sales account for over 11% of the U.S. market. The demand for corn by the ethanol industry has increased sales of our products, for which corn is highly dependent.
 
Primary suppliers for our wholesale crop nutrients business include CF, Potash Corporation of Saskatchewan, Mosaic, Koch Industries, Yara, PIC (Kuwait) and Sabic America. During the year ended August 31, 2008, CF was the largest supplier of crop nutrients to us.


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Products and Services
 
Our wholesale crop nutrients business sells nitrogen, phosphorus, potassium and sulfate based products. During the year ended August 31, 2008, the primary crop nutrients products purchased by us were urea, potash, UAN, phosphates and ammonia.
 
Sales and Marketing; Customers
 
Our wholesale crop nutrients business sells product to approximately 2,100 local retailers from New York to the west coast and from the Canadian border south to Texas. Our largest customers include Agriliance retail operations and our own country operations business, also included in our Ag Business segment. During the year ended August 31, 2008, our wholesale crop nutrients sales were $2.9 billion, with less than 10% of those sales made to Agriliance or to our country operations business. Many of the customers of our crop nutrients business are also customers of our Energy segment or suppliers to our grain marketing business.
 
Industry; Competition
 
Regulation.  Our wholesale crop nutrients operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to the environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.
 
Competition.  The wholesale distribution of crop nutrients products is highly competitive and dependent upon relationships with local cooperatives and private retailers, proximity to the customer and competitive pricing. We compete with other large agronomy distributors, as well as other regional or local distributors, retailers and manufacturers.
 
Major competitors in crop nutrients distribution include Koch Industries, Agrium, Terra Industries and a variety of traders and brokers.
 
Country Operations
 
Overview
 
Our country operations business purchases a variety of grains from our producer members and other third parties, and provides cooperative members and producers with access to a full range of products and services including farm supplies and programs for crop and livestock production. Country operations operates at 376 locations dispersed throughout Minnesota, Iowa, North Dakota, South Dakota, Montana, Nebraska, Kansas, Oklahoma, Colorado, Idaho, Washington and Oregon. Most of these locations purchase grain from farmers and sell agronomy products, energy products, feed and seed to those same producers and others, although not all locations provide every product and service.
 
Products and Services
 
Grain Purchasing.  We are one of the largest country elevator operators in North America based on revenues. Through a majority of our elevator locations, our country operations business purchases grain from member and non-member producers and other elevators and grain dealers. Most of the grain purchased is either sold through our grain marketing operations or used for local feed and processing operations. For the year ended August 31, 2008, country operations purchased approximately 427 million bushels of grain, primarily wheat (176 million bushels), corn (144 million bushels) and soybeans (60 million bushels). Of these bushels, 391 million were purchased from members and 312 million were sold through our grain marketing operations.


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Other Products.  Our country operations business manufactures and sells other products, both directly and through ownership interests in other entities. These include seed, crop nutrients, crop protection products, energy products, animal feed, animal health products and processed sunflowers. We sell agronomy products at 212 locations, feed products at 132 locations and energy products at 137 locations.
 
Industry; Competition
 
Regulation.  Our country operations business is subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to the environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Our country operations business is also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the United Sates Food and Drug Administration, and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of feed and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.
 
Competition.  We compete primarily on the basis of price, services and patronage. Competitors for the purchase of grain include Archer Daniels Midland (ADM), Cargill, Incorporated (Cargill), local cooperatives and smaller private grain companies and processors at the majority of our locations in our trade territory, as previously defined in the “Overview.” In addition, Columbia Grain is also our competitor in Montana and North Dakota.
 
Competitors for our farm supply businesses include Cargill, Agrium, Simplot, Helena, Wilbur Ellis, local cooperatives and smaller private companies at the majority of locations throughout our trade territory. In addition, Land O’Lakes Purina Feed, Ridley Inc., ADM and Cargill are our major competitors for the sale of feed products.
 
Grain Marketing
 
Overview
 
We are the nation’s largest cooperative marketer of grain and oilseed based on grain storage capacity and grain sales, handling almost 1.8 billion bushels annually. During fiscal 2008, we purchased approximately 56% of our total grain volumes from individual and cooperative association members and our country operations business, with the balance purchased from third parties. We arrange for the transportation of the grains either directly to customers or to our owned or leased grain terminals and elevators awaiting delivery to domestic and foreign purchasers. We primarily conduct our grain marketing operations directly, but do conduct some of our business through joint ventures.
 
Operations
 
Our grain marketing operations purchases grain directly and indirectly from agricultural producers primarily in the midwestern and western United States. The purchased grain is typically contracted for sale for future delivery at a specified location, and we are responsible for handling the grain and arranging for its transportation to that location. The sale of grain is recorded after title to the commodity has transferred and final weights, grades and settlement price have been agreed upon. Amounts billed to the customer as part of a sales transaction include the costs for shipping and handling. Our ability to arrange efficient transportation, including loading capabilities onto unit trains, ocean-going vessels and barges, is a significant part of the services we offer to our customers. Rail, vessel, barge and truck transportation is carried out by third parties, often under long-term freight agreements with us. Grain intended for export is usually shipped by rail or barge to an export terminal, where it is loaded onto ocean-going vessels. Grain intended for domestic use is usually shipped by rail or truck to various locations throughout the country.


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We own and operate export terminals, river terminals and elevators involved in the handling and transport of grain. Our river terminals are used to load grain onto barges for shipment to both domestic and export customers via the Mississippi River system. These river terminals are located at Savage and Winona, Minnesota and Davenport, Iowa, as well as terminals in which we have put-through agreements located at St. Louis, Missouri and Beardstown and Havana, Illinois. Our export terminal at Superior, Wisconsin provides access to the Great Lakes and St. Lawrence Seaway, and our export terminal at Myrtle Grove, Louisiana serves the gulf market. In the Pacific Northwest, we conduct our grain marketing operations through United Harvest, LLC (a 50% joint venture with United Grain Corporation, a subsidiary of Mitsui & Co., Ltd. (Mitsui), and TEMCO, LLC (a 50% joint venture with Cargill). United Harvest, LLC, operates grain terminals in Vancouver and Kalama, Washington, and primarily exports wheat. TEMCO, LLC operates an export terminal in Tacoma, Washington, and primarily exports corn and soybeans. These facilities serve the Pacific market, as well as domestic grain customers in the western United States. We also own two 110-car shuttle-receiving elevator facilities in Friona, Texas and Collins, Mississippi that serve large-scale feeder cattle, dairy and poultry producers in those regions.
 
In 2003, we opened an office in Sao Paulo, Brazil for the procurement of soybeans for our grain marketing operations international customers. During the year ended August 31, 2007, we invested $22.2 million in Multigrain AG (Multigrain) for a 37.5% equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil. The venture, which includes grain storage and export facilities, builds on our South American soybean origination and helps meet customer needs year-round. During the year ended August 31, 2008, we increased our equity position through a purchase from an existing equity holder for $10.0 million, and also invested an additional $30.3 million which was used by Multigrain to invest in a joint venture that acquired production farmland and related operations which include production of soybeans, corn, cotton and sugarcane, as well as cotton processing, at four locations. As of August 31, 2008, we had a 40.0% ownership interest in Multigrain, which is included in our Ag Business segment. During the first quarter of fiscal 2009, CHS and Mitsui invested an additional $200.0 million for Multigrain’s increased capital needs resulting from expansion of their operations. Our share of the $200.0 million investment was $76.3 million, resulting in our current ownership interest of 39.35%, equal to Mitsui’s ownership interest.
 
We have recently opened additional international offices between July 2007 and August 2008. These include Geneva, Switzerland and Kiev, Ukraine for sourcing and marketing grains and oilseeds through the Black Sea and Mediterranean Basin regions to customers worldwide. Offices in Hong Kong and Shanghai, China serve Pacific Rim customers receiving grains and oilseeds from our origination points in North and South America.
 
Our grain marketing operations may have significant working capital needs at any time depending on commodity prices and other factors. The amount of borrowings for this purpose, and the interest rate charged on those borrowings, directly affects the profitability of our grain marketing operations.
 
Products and Services
 
The primary grains purchased by our grain marketing operations for the year ended August 31, 2008, were corn (633 million bushels), wheat (484 million bushels), soybeans (435 million bushels) and distillers dried grains (DDGs) (115 million bushels). Of the total grains purchased by our grain marketing operations during the year ended August 31, 2008, there were 679 million bushels from our individual and cooperative association members, 312 million bushels from our country operations business, and the remainder was from third parties.
 
Sales and Marketing; Customers
 
Purchasers of our grain and oilseed include domestic and foreign millers, maltsters, feeders, crushers and other processors. To a much lesser extent purchasers include intermediaries and distributors. Our grain marketing operations are not dependent on any one customer, and its supply relationships call for delivery of grain at prevailing market prices.


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


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Summary Operating Results
 
Summary operating results and identifiable assets for our Ag Business segment for the fiscal years ended August 31, 2008, 2007 and 2006 are shown below:
 
                         
    2008     2007     2006  
    (Dollars in thousands)  
 
Revenues
  $ 19,696,907     $ 8,575,389     $ 6,575,165  
Cost of goods sold
    19,088,079       8,388,476       6,401,527  
                         
Gross profit
    608,828       186,913       173,638  
Marketing, general and administrative
    160,364       97,299       99,777  
                         
Operating earnings
    448,464       89,614       73,861  
Gain on investments
    (100,830 )     (5,348 )        
Interest, net
    63,665       28,550       23,559  
Equity income from investments
    (83,053 )     (51,830 )     (40,902 )
Minority interests
    355       (16 )     (509 )
                         
Income before income taxes
  $ 568,327     $ 118,258     $ 91,713  
                         
Intersegment revenues
  $ (36,972 )   $ (18,372 )   $ (8,779 )
                         
Total identifiable assets — August 31
  $ 4,172,950     $ 2,846,950     $ 1,806,243  
                         
 
PROCESSING
 
Overview
 
Our Processing segment converts raw agricultural commodities into ingredients for finished food products or into finished consumer food products. We have focused on areas that allow us to utilize the products supplied by our member producers. These areas are oilseed processing and our joint ventures in wheat milling, foods and renewable fuels.
 
Regulation.  Our Processing segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA, the Department of Transportation and similar government agencies. These laws, regulations and rules govern the discharge of materials to environment, air and water; reporting storage of hazardous wastes; and the transportation, handling and disposition of wastes. Our Processing segment’s operations are also subject to laws and related regulations and rules administered by the United States Department of Agriculture, the United States Food and Drug Administration, and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of food and grain products. Failure to comply with these laws, regulations and rules could subject us, or our foods partners, or our renewable fuels partners to administrative penalties, injunctive relief, civil remedies and possible recalls of products. We believe that we are in compliance with these laws, regulations and rules in all material respects and do not expect continued compliance to have a material effect on our capital expenditures, earnings or competitive position.
 
Oilseed Processing
 
Our oilseed processing operations convert soybeans into soybean meal, soyflour, crude soyoil, refined soybean oil and associated by-products. These operations are conducted at a facility in Mankato, Minnesota that can crush approximately 40 million bushels of soybeans on an annual basis, producing approximately 960,000 short tons of soybean meal and 460 million pounds of crude soybean oil. The same facility is able to process approximately 1 billion pounds of refined soybean oil annually. Another crushing facility in Fairmont, Minnesota has a crushing capacity of over 45 million bushels of soybeans on an annual basis.


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Our oilseed processing operations produce three primary products: refined oils, soybean meal and soyflour. Refined oils are used in processed foods, such as margarine, shortening, salad dressings and baked goods, as well as methyl ester/biodiesel production, and to a lesser extent, for certain industrial uses such as plastics, inks and paints. Soybean meal has high protein content and is used for feeding livestock. Soyflour is used in the baking industry, as a milk replacement in animal feed and in industrial applications. We produce approximately 50,000 tons of soyflour annually, and approximately 20% is further processed at our manufacturing facility in Hutchinson, Kansas, which was a recent business acquisition in April 2008. This facility manufactures unflavored and flavored textured soy proteins used in human and pet food products, and we expect that it will account for approximately 2% of our oilseed processing annual sales.
 
Our soy processing facilities are located in areas with a strong production base of soybeans and end-user market for the meal and soyflour. We purchase virtually all of our soybeans from members. Our oilseed crushing operations currently produce approximately 95% of the crude oil that we refine, and purchase the balance from outside suppliers.
 
Our customers for refined oil are principally large food product companies located throughout the United States. However, over 50% of our customers are located in the midwest due to relatively lower freight costs and slightly higher profitability potential. Our largest customer for refined oil products is Ventura Foods, LLC (Ventura Foods), in which we hold a 50% ownership interest and with which we have a long-term supply agreement to supply minimum quantities of edible soybean oils as long as we maintain a minimum 25.5% ownership interest and our price is competitive with other suppliers of the product. Our sales to Ventura Foods accounted for 20% of our soybean oil sold. We also sell soymeal to about 350 customers, primarily feed lots and feed mills in southern Minnesota. In fiscal 2008, Commodity Specialists Company accounted for 19% of soymeal sold and Land O’Lakes Purina Feed, LLC accounted for 10% of soymeal sold. We sell soyflour to customers in the baking industry both domestically and for export.
 
The refined soybean products industry is highly competitive. Major industry competitors include ADM, Cargill, Ag Processing Inc. and Bunge. These and other competitors have acquired other processors, expanded existing plants, or constructed new plants, both domestically and internationally. Price, transportation costs, services and product quality drive competition. We estimate that we have a market share of approximately 4% to 5% of the domestic refined soybean oil market and also the domestic soybean crushing capacity.
 
Soybeans are a commodity and their price can fluctuate significantly depending on production levels, demand for the products and other supply factors.
 
Wheat Milling
 
In January 2002, we formed a joint venture with Cargill named Horizon Milling, LLC (Horizon Milling), in which we hold an ownership interest of 24%, with Cargill owning the remaining 76%. Horizon Milling is the largest U.S. wheat miller based on output volume. We own five mills that we lease to Horizon Milling. Sales and purchases of wheat and durum by us to Horizon Milling during fiscal 2008 were $596.0 million and $3.8 million, respectively. Horizon Milling’s advance payments on grain to us were $31.5 million on August 31, 2008, and are included in customer advance payments on our Consolidated Balance Sheet. We account for Horizon Milling using the equity method of accounting. On August 31, 2008, our net book value of assets leased to Horizon Milling was $70.8 million.
 
During the year ended August 31, 2007, we invested $15.6 million in Horizon Milling G.P. (24% CHS ownership with Cargill owning the remaining 76%), a joint venture that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of Canada, which includes three flour milling operations and two dry baking mixing facilities in Canada. During the year ended August 31, 2008, we invested an additional $1.9 million in Horizon Milling G.P. We account for the investment using the equity method of accounting.


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Foods
 
Our primary focus in the foods area is Ventura Foods, which produces and distributes vegetable oil-based products such as margarine, salad dressing and other food products. Ventura Foods was created in 1996, and is owned 50% by us and 50% by Wilsey Foods, Inc., a majority owned subsidiary of Mitsui. We account for our Ventura Foods investment under the equity method of accounting, and on August 31, 2008, our investment was $156.4 million.
 
Ventura Foods manufactures, packages, distributes and markets bulk margarine, salad dressings, mayonnaise, salad oils, syrups, soup bases and sauces, many of which utilize soybean oil as a primary ingredient. Approximately 40% of Ventura Foods’ volume, based on sales, comes from products for which Ventura Foods owns the brand, and the remainder comes from products that it produces for third parties. A variety of Ventura Foods’ product formulations and processes are proprietary to it or its customers. Ventura Foods is the largest manufacturer of margarine for the foodservice sector in the U.S. and is a major producer of many other products.
 
Ventura Foods currently has 11 manufacturing and distribution locations across the United States. During our year ended August 31, 2008, three manufacturing locations in Southern California were consolidated into a single location in Ontario, California. Ventura Foods sources its raw materials, which consist primarily of soybean oil, canola oil, cottonseed oil, peanut oil and other ingredients and supplies, from various national suppliers, including our oilseed processing operations. It sells the products it manufactures to third parties as a contract manufacturer, as well as directly to retailers, food distribution companies and large institutional food service companies. Ventura Foods sales are approximately 60% in foodservice and the remainder is split between retail and industrial customers who use edible oil products as ingredients in foods they manufacture for resale. During Ventura Foods’ 2008 fiscal year, Sysco accounted for 23% of its net sales.
 
Ventura Foods competes with a variety of large companies in the food manufacturing industry. Some of its major competitors are ADM, Cargill, Bunge, Unilever, ConAgra, ACH Food Companies, Smuckers, Kraft and CF Sauer, Ken’s, Marzetti and Nestle.
 
Renewable Fuels
 
In fiscal 2006, we purchased $70.0 million of common stock in US BioEnergy, an ethanol production company, representing an approximate 24% ownership interest on August 31, 2006. During the year ended August 31, 2007, we made additional investments of $45.4 million. In December 2006, US BioEnergy completed an IPO, and the effect of the issuance of additional shares of its stock was to dilute our ownership interest from approximately 25% to 21%. In addition, on August 29, 2007, US BioEnergy completed an acquisition with total aggregate net consideration comprised of the issuance of US BioEnergy common stock and cash. Due to US BioEnergy’s increase in equity, primarily from these two transactions, we recognized a non-cash net gain of $15.3 million on our investment during the year ended August 31, 2007, to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. This gain was reflected in our Processing segment. During the first quarter of fiscal 2008, we purchased additional shares of US BioEnergy common stock for $6.5 million. Through March 31, 2008, we were recognizing our share of the earnings of US BioEnergy, using the equity method of accounting. Effective April 1, 2008, US BioEnergy and VeraSun completed a merger, and our current ownership interest in the combined entity was reduced to approximately 8%, compared to an approximate 20% interest in US BioEnergy prior to the merger. As part of the merger transaction, our shares held in US BioEnergy were converted to shares held in the surviving company, VeraSun, at .810 per share. As a result of our change in ownership interest, we no longer have significant influence, and account for VeraSun as an available-for-sale investment. Due to the continued decline of the ethanol industry and other considerations, we determined that an impairment of our VeraSun investment was necessary, and as a result, based on VeraSun’s market value of $5.76 per share on August 29, 2008, an impairment charge of $71.7 million ($55.3 million net of taxes) was recorded during the fourth quarter of our year ended August 31, 2008. Subsequent to August 31, 2008, the market value of VeraSun’s stock price continued to decline, and VeraSun filed for voluntary petitions for relief under Chapter 11 of the


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U.S. Bankruptcy Code on October 31, 2008. We will be evaluating an additional impairment during our first quarter of fiscal 2009. Our investment on August 31, 2008, was $74.3 million.
 
VeraSun has 16 production facilities in eight states, of which one was still under construction, and was scheduled to have an annual production capacity of approximately 1.64 billion gallons of ethanol and more than 5 million tons of distillers’ grains by the end of calendar 2008.
 
Summary Operating Results
 
Summary operating results and identifiable assets for our Processing segment for the fiscal years ended August 31, 2008, 2007 and 2006 are shown below:
 
                         
    2008     2007     2006  
    (Dollars in thousands)  
 
Revenues
  $ 1,299,209     $ 754,743     $ 614,471  
Cost of goods sold
    1,240,944       726,510       588,732  
                         
Gross profit
    58,265       28,233       25,739  
Marketing, general and administrative
    26,089       23,545       21,645  
                         
Operating earnings
    32,176       4,688       4,094  
Loss (gain) on investments
    72,602       (15,268 )        
Interest, net
    21,995       14,783       11,096  
Equity income from investments
    (56,615 )     (48,446 )     (35,504 )
                         
(Loss) income before income taxes
  $ (5,806 )   $ 53,619     $ 28,502  
                         
Intersegment revenues
  $ (338 )   $ (370 )   $ (368 )
                         
Total identifiable assets — August 31
  $ 748,989     $ 681,118     $ 518,186  
                         
 
CORPORATE AND OTHER
 
Business Solutions
 
Financial Services.  We have provided open account financing to approximately 110 of our members that are cooperatives (cooperative association members) in the past year. These arrangements involve the discretionary extension of credit in the form of a clearing account for settlement of grain purchases and as a cash management tool.
 
Cofina Financial, LLC.  Cofina Financial, LLC (Cofina Financial) a finance company formed in fiscal 2005, makes seasonal and term loans to member cooperatives and individuals. Through August 31, 2008, we held a 49% ownership interest in Cofina Financial and accounted for our investment using the equity method of accounting. On September 1, 2008, we purchased Cenex Finance Association’s 51% ownership interest so that we now have sole ownership of Cofina Financial.
 
Country Hedging, Inc.  Our wholly-owned subsidiary Country Hedging, Inc., is a registered futures commission merchant and a clearing member of both the Minneapolis Grain Exchange and the Kansas City Board of Trade, and is also a full-service commodity futures and options broker.
 
Ag States Group.  Our wholly-owned subsidiary Ag States Agency, LLC, is an independent insurance agency. It sells insurance, including group benefits, property and casualty, and bonding programs. Its approximately 2,000 customers are primarily agricultural businesses, including local cooperatives and independent elevators, petroleum outlets, agronomy, feed and seed plants, implement dealers, fruit and vegetable packers/warehouses, and food processors. Impact Risk Solutions, LLC, a wholly-owned subsidiary of Ag States Agency, LLC, conducts the insurance brokerage business of Ag States Group.


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PRICE RISK AND HEDGING
 
When we enter into a commodity purchase commitment, we incur risks of carrying inventory, including risks related to price change and performance (including delivery, quality, quantity, and shipment period). We are exposed to risk of loss in the market value of positions held, consisting of inventory and purchase contracts at a fixed or partially fixed price in the event market prices decrease. We are also exposed to risk of loss on our fixed price or partially fixed price sales contracts in the event market prices increase.
 
To reduce the price change risks associated with holding fixed price commitments, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) on regulated commodity futures exchanges for grain, and regulated mercantile exchanges for refined products and crude oil. The crude oil and most of the grain and oilseed volume we handle can be hedged. Fertilizer and certain grains cannot be hedged because there are no futures for these commodities and, as a result, risk is managed through the use of forward sales and various pricing arrangements and, to some extent, cross-commodity futures hedging. We also use over-the-counter (OTC) instruments to hedge our exposure on flat price fluctuations. While hedging activities reduce the risk of loss from changing market values of inventory, such activities also limit the gain potential which otherwise could result from changes in market prices of inventory. Our policy is to generally maintain hedged positions in grain. Our profitability from operations is primarily derived from margins on products sold and grain merchandised, not from hedging transactions. Hedging arrangements do not protect against nonperformance by counterparties to contracts, and therefore, contract values are reviewed and adjusted to reflect potential non-performance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and also the risk that the counterparty will refuse to perform on a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. Subsequent to our year ended August 31, 2008, the market prices of our input products have significantly decreased, thereby increasing the risk of nonperformance by counterparties.
 
When a futures contract is entered into, an initial margin deposit must be sent to the applicable exchange or broker. The amount of the deposit is set by the exchange and varies by commodity. If the market price of a short futures contract increases, then an additional maintenance margin deposit would be required. Similarly, if the price of a long futures contract decreases, a maintenance margin deposit would be required and sent to the applicable exchange. Subsequent price changes could require additional maintenance margins or could result in the return of maintenance margins.
 
At any one time, inventory and purchase contracts for delivery to us may be substantial. We have risk management policies and procedures that include net position limits. These limits are defined for each commodity and include both trader and management limits. This policy, and computerized procedures in our grain marketing operations, requires a review by operations management when any trader is outside of position limits and also a review by our senior management if operating areas are outside of position limits. A similar process is used in our energy and wholesale crop nutrients operations. The position limits are reviewed, at least annually, with our management. We monitor current market conditions and may expand or reduce our risk management policies or procedures in response to changes in those conditions. In addition, all purchase and sales contracts are subject to credit approvals and appropriate terms and conditions.
 
EMPLOYEES
 
On August 31, 2008, we had 8,099 full, part-time, temporary and seasonal employees, which included approximately 630 employees of NCRA. Of that total, 2,531 were employed in our Energy segment, 4,053 in our country operations business (including approximately 1,215 seasonal and temporary employees), 175 in our crop nutrients operations, 569 in our grain marketing operations, 327 in our Processing segment and 444 in Corporate and Other. In addition to those employed directly by us, many employees work for joint ventures in which we have a 50% or less ownership interest, and are not included in these totals. A portion of all of our business segments and Corporate and Other are employed in this manner.
 
Effective September 1, 2008, we had an additional 24 employees in Corporate and Other due to the acquisition of the remaining 51% of Cofina Financial.


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Employees in certain areas are represented by collective bargaining agreements. Refinery and pipeline workers in Laurel, Montana are represented by agreements with two unions: United Steel Workers of America (USWA) (201 employees), for which agreements are in place through January 2009, and Oil Basin Pipeliners Union (OBP) (18 employees), for which negotiations are ongoing regarding the current contract, however there is a no strike agreement in place. The contracts covering the NCRA McPherson, Kansas refinery (272 employees in the USWA union) are also in place through 2009. There are approximately 176 employees in transportation and lubricant plant operations that are covered by other collective bargaining agreements that expire at various times. Certain production workers in our oilseed processing operations are subject to collective bargaining agreements with the Bakery, Confectionary, Tobacco Worker and Grain Millers (BTWGM) (120 employees) and the Pipefitters’ Union (2 employees) for which agreements are in place through 2009. The BTWGM also represents 47 employees at our Superior, Wisconsin grain export terminal with a contract expiring in 2010. The USWA represents 76 employees at our Myrtle Grove, Louisiana grain export terminal with a contract expiring in 2010, the Teamsters represent 8 employees at our Winona, Minnesota export terminal with a contract expiring in 2011, and the International Longshoremen’s and Warehousemen’s Union (ILWU) represents 30 employees at our Kalama, Washington export terminal with a contract in place through 2009. Finally, certain employees in our country operations business are represented by collective bargaining agreements with two unions; the BTWGM (25 employees), with contracts expiring in December 2008 and June 2010, and the United Food and Commercial Workers (8 employees), with a contract expiring in July 2011.
 
MEMBERSHIP IN CHS AND AUTHORIZED CAPITAL
 
Introduction
 
We are an agricultural membership cooperative organized under Minnesota cooperative law to do business with member and non-member patrons. Our patrons, not us, are subject to income taxes on income from patronage sources, which is distributed to them. We are subject to income taxes on undistributed patronage income and non-patronage-sourced income. See “— Tax Treatment” below.
 
Distribution of Net Income; Patronage Dividends
 
We are required by our organizational documents annually to distribute net earnings derived from patronage business with members, after payment of dividends on equity capital, to members on the basis of patronage, except that the Board of Directors may elect to retain and add to our unallocated capital reserve an amount not to exceed 10% of the distributable net income from patronage business. We may also distribute net income derived from patronage business with a non-member if we have agreed to conduct business with the non-member on a patronage basis. Net income from non-patronage business may be distributed to members or added to the unallocated capital reserve, in whatever proportions the Board of Directors deems appropriate.
 
These distributions, referred to as “patronage dividends,” may be made in cash, patrons’ equities, revolving fund certificates, our securities, securities of others, or any combination designated by the Board of Directors. From fiscal 1998 and through fiscal 2005, the Board of Directors approved the distributed patronage dividends to be in the form of 30% cash and 70% patrons’ equities (see “— Patrons’ Equities” below). For fiscal 2006 through 2008, the Board of Directors approved the distribution of patronage dividends in the form of 35% cash and 65% patrons’ equities. The Board of Directors may change the mix in the form of the patronage dividends in the future. In making distributions, the Board of Directors may use any method of allocation that, in its judgment, is reasonable and equitable.
 
Patronage dividends distributed during the years ended August 31, 2008, 2007 and 2006, were $557.2 million ($195.0 million in cash), $379.9 million ($133.1 million in cash) and $207.9 million ($62.5 million in cash), respectively.


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Patrons’ Equities
 
Patrons’ equities are in the form of book entries and represent a right to receive cash or other property when we redeem them. Patrons’ equities form part of our capital, do not bear interest, and are not subject to redemption upon request of a member. Patrons’ equities are redeemable only at the discretion of the Board of Directors and in accordance with the terms of the redemption policy adopted by the Board of Directors, which may be modified at any time without member consent. Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities held by them and another for individuals who are eligible for equity redemptions at age 70 or upon death. The amount that each non-individual receives under the pro-rata program in any year will be determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the face value of patronage certificates eligible for redemption held by them, and the denominator of which is the sum of the patronage certificates eligible for redemption held by all eligible holders of patronage certificates that are not individuals. In addition to the annual pro-rata program, the Board of Directors approved additional equity redemptions to non-individuals in prior years targeting older capital equity certificates which were redeemed in cash in fiscal 2008 and 2007. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2008, that will be distributed in fiscal 2009, to be approximately $93.8 million.
 
Cash redemptions of patrons and other equities during the years ended August 31, 2008, 2007 and 2006 were $81.8 million, $70.8 million and $55.9 million, respectively. An additional $46.4 million, $35.9 and $23.8 million of equities were redeemed by issuance of shares of our 8% Cumulative Redeemable Preferred Stock during the years ended August 31, 2008, 2007 and 2006, respectively.
 
Governance
 
We are managed by a Board of Directors of not less than 17 persons elected by the members at our annual meeting. Terms of directors are staggered so that no more than six directors are elected in any year. The Board of Directors is currently comprised of 17 directors. Our articles of incorporation and bylaws may be amended only upon approval of a majority of the votes cast at an annual or special meeting of our members, except for the higher vote described under ‘— Certain Antitakeover Measures” below.
 
Membership
 
Membership in CHS is restricted to certain producers of agricultural products and to associations of producers of agricultural products that are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended. The Board of Directors may establish other qualifications for membership, as it may from time to time deem advisable.
 
As a membership cooperative, we do not have common stock. We may issue equity or debt instruments, on a patronage basis or otherwise, to our members. We have two classes of outstanding membership. Individual members are individuals actually engaged in the production of agricultural products. Cooperative associations are associations of agricultural producers and may be either cooperatives or other associations organized and operated under the provisions of the Agricultural Marketing Act and the Capper-Volstead Act.
 
Voting Rights
 
Voting rights arise by virtue of membership in CHS, not because of ownership of any equity or debt instruments. Members that are cooperative associations are entitled to vote based upon a formula that takes into account the equity held by the cooperative in CHS and the average amount of business done with us over the previous three years.
 
Members who are individuals are entitled to one vote each. Individual members may exercise their voting power directly or through patrons’ associations affiliated with a grain elevator, feed mill, seed plant or any


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other of our facilities (with certain historical exceptions) recognized by the Board of Directors. The number of votes of patrons’ associations is determined under the same formula as cooperative association members.
 
Most matters submitted to a vote of the members require the approval of a majority of the votes cast at a meeting of the members, although certain actions require a greater vote. See “— Certain Antitakeover Measures” below.
 
Debt and Equity Instruments
 
We may issue debt and equity instruments to our current members and patrons, on a patronage basis or otherwise, and to persons who are neither members nor patrons. Capital Equity Certificates issued by us are subject to a first lien in favor of us for all indebtedness of the holder to us. On August 31, 2008, our outstanding capital includes patrons’ equities (consisting of capital equity certificates and non-patronage earnings certificates), 8% Cumulative Redeemable Preferred Stock and certain capital reserves.
 
Distribution of Assets upon Dissolution; Merger and Consolidation
 
In the event of our dissolution, liquidation or winding up, whether voluntary or involuntary, all of our debts and liabilities would be paid first according to their respective priorities. After such payment, the holders of each share of our preferred stock would then be entitled to receive out of available assets, up to $25.00 per share, plus all dividends accumulated and unpaid on that share, whether or not declared, to and including the date of distribution. This distribution to the holders of our preferred stock would be made before any payment is made or assets distributed to the holders of any security that ranks junior to the preferred stock but after the payment of the liquidation preference of any of our securities that rank senior to the preferred stock. After such distribution to the holders of equity capital, any excess would be paid to patrons on the basis of their past patronage with us. Our bylaws provide for the allocation among our members and nonmember patrons of the consideration received in any merger or consolidation to which we are a party.
 
Certain Antitakeover Measures
 
Our governing documents may be amended upon the approval of a majority of the votes cast at an annual or special meeting. However, if the Board of Directors, in its sole discretion, declares that a proposed amendment to our governing documents involves or is related to a “hostile takeover,” the amendment must be adopted by 80% of the total voting power of our members.
 
The approval of not less than two-thirds of the votes cast at a meeting is required to approve a “change of control” transaction which would include a merger, consolidation, liquidation, dissolution, or sale of all or substantially all of our assets. If the Board of Directors determines that a proposed change of control transaction involves a hostile takeover, the 80% approval requirement applies. The term “hostile takeover” is not further defined in the Minnesota cooperative law or our governing documents.
 
Tax Treatment
 
Subchapter T of the Internal Revenue Code sets forth rules for the tax treatment of cooperatives and applies to both cooperatives exempt from taxation under Section 521 of the Internal Revenue Code and to nonexempt corporations operating on a cooperative basis. We are a nonexempt cooperative.
 
As a cooperative, we are not taxed on qualified patronage (minimum cash requirement of 20%) allocated to our members either in the form of equities or cash. Consequently, those amounts are taxed only at the patron level. However, the amounts of any allocated but undistributed patronage earnings (called non-qualified unit retains) are taxable to us when allocated. Upon redemption of any non-qualified unit retains, the amount is deductible to us and taxable to the member.
 
Income derived by us from non-patronage sources is not entitled to the “single tax” benefit of Subchapter T and is taxed to us at corporate income tax rates.
 
NCRA is not consolidated for tax purposes.


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ITEM 1A.  RISK FACTORS
 
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
The information in this Annual Report on Form 10-K for the year ended August 31, 2008, includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to CHS. In addition, CHS and its representatives and agents may from time to time make other written or oral forward-looking statements, including statements contained in its filings with the Securities and Exchange Commission and its reports to its members and securityholders. Words and phrases such as “will likely result,” “are expected to,” “is anticipated,” “estimate,” “project” and similar expressions identify forward-looking statements. We wish to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made.
 
Our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. This Cautionary Statement is for the purpose of qualifying for the “safe harbor” provisions of the Act and is intended to be a readily available written document that contains factors which could cause results to differ materially from those projected in the forward-looking statements. The following matters, among others, may have a material adverse effect on our business, financial condition, liquidity, results of operations or prospects, financial or otherwise. Reference to this Cautionary Statement in the context of a forward-looking statement shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those which might be projected, forecasted, estimated or budgeted by us in the forward-looking statement or statements.
 
The following factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any particular forward-looking statement. The following review should not be construed as exhaustive.
 
We undertake no obligation to revise any forward-looking statements to reflect future events or circumstances.
 
Our revenues and operating results could be adversely affected by changes in commodity prices.
 
Our revenues, earnings and cash flows are affected by market prices for commodities such as crude oil, natural gas, fertilizer, grain, oilseed, flour, and crude and refined vegetable oils. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, disease, insect damage, drought, the availability and adequacy of supply, government regulation and policies, and general political and economic conditions. We are also exposed to fluctuating commodity prices as the result of our inventories of commodities, typically grain, fertilizer and petroleum products, and purchase and sale contracts at fixed or partially fixed prices. At any time, our inventory levels and unfulfilled fixed or partially fixed price contract obligations may be substantial. In addition, we are exposed to the risk of nonperformance by counterparties to contracts. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and also the risk that the counterparty will refuse to perform a contract during a period of price fluctuations where contract prices are significantly different than the current market prices. Subsequent to our year ended August 31, 2008, the market prices of our input products have significantly decreased, thereby increasing the risk of nonperformance by counterparties. Increases in market prices for commodities that we purchase without a corresponding increase in the prices of our products or our sales volume or a decrease in our other operating expenses could reduce our revenues and net income.
 
In our energy operations, profitability depends largely on the margin between the cost of crude oil that we refine and the selling prices that we obtain for our refined products. Although the prices for crude oil reached historical highs during 2008, the prices for both crude oil and for gasoline, diesel fuel and other refined petroleum products fluctuate widely. Factors influencing these prices, many of which are beyond our control, include:
 
  •  levels of worldwide and domestic supplies;
 
  •  capacities of domestic and foreign refineries;


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  •  the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree to and maintain oil price and production controls, and the price and level of foreign imports;
 
  •  disruption in supply;
 
  •  political instability or armed conflict in oil-producing regions;
 
  •  the level of consumer demand;
 
  •  the price and availability of alternative fuels;
 
  •  the availability of pipeline capacity; and
 
  •  domestic and foreign governmental regulations and taxes.
 
The long-term effects of these and other conditions on the prices of crude oil and refined petroleum products are uncertain and ever-changing. Increases in crude oil prices without a corresponding increase in the prices of our refined petroleum products could reduce our net income. Accordingly, we expect our margins on, and the profitability of our energy business to fluctuate, possibly significantly, over time.
 
Our operating results could be adversely affected if our members were to do business with others rather than with us.
 
We do not have an exclusive relationship with our members and our members are not obligated to supply us with their products or purchase products from us. Our members often have a variety of distribution outlets and product sources available to them. If our members were to sell their products to other purchasers or purchase products from other sellers, our revenues would decline and our results of operations could be adversely affected.
 
We participate in highly competitive business markets in which we may not be able to continue to compete successfully.
 
We operate in several highly competitive business segments and our competitors may succeed in developing new or enhanced products that are better than ours, and may be more successful in marketing and selling their products than we are with ours. Competitive factors include price, service level, proximity to markets, product quality and marketing. In some of our business segments, such as Energy, we compete with companies that are larger, better known and have greater marketing, financial, personnel and other resources. As a result, we may not be able to continue to compete successfully with our competitors.
 
Changes in federal income tax laws or in our tax status could increase our tax liability and reduce our net income.
 
Current federal income tax laws, regulations and interpretations regarding the taxation of cooperatives, which allow us to exclude income generated through business with or for a member (patronage income) from our taxable income, could be changed. If this occurred, or if in the future we were not eligible to be taxed as a cooperative, our tax liability would significantly increase and our net income significantly decrease.
 
We incur significant costs in complying with applicable laws and regulations. Any failure to make the capital investments necessary to comply with these laws and regulations could expose us to financial liability.
 
We are subject to numerous federal, state and local provisions regulating our business and operations and we incur and expect to incur significant capital and operating expenses to comply with these laws and regulations. We may be unable to pass on those expenses to customers without experiencing volume and margin losses. For example, capital expenditures for upgrading our refineries, largely to comply with regulations requiring the reduction of sulfur levels in refined petroleum products, were completed in fiscal 2006. We incurred capital expenditures from fiscal years 2003 through 2006 related to these upgrades of $88.1 million for our Laurel, Montana refinery and $328.7 million for the National Cooperative Refinery


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Association’s (NCRA) McPherson, Kansas refinery. The Environmental Protection Agency has passed a regulation that requires the reduction of the benzene level in gasoline to be less than 0.62% volume by January 1, 2011. As a result of this regulation, our refineries will incur capital expenditures to reduce the current gasoline benzene levels to the regulated levels. We anticipate the combined capital expenditures for the Laurel and NCRA refineries to be approximately $130 million, for which $73 million is included in budgeted capital expenditures for fiscal 2009.
 
We establish reserves for the future cost of known compliance obligations, such as remediation of identified environmental issues. However, these reserves may prove inadequate to meet our actual liability. Moreover, amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of currently unknown compliance issues may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. Furthermore, our failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, civil remedies including fines and injunctions, and recalls of our products.
 
Environmental liabilities could adversely affect our results and financial condition.
 
Many of our current and former facilities have been in operation for many years and, over that time, we and other operators of those facilities have generated, used, stored and disposed of substances or wastes that are or might be considered hazardous under applicable environmental laws, including liquid fertilizers, chemicals and fuels stored in underground and above-ground tanks. Any past or future actions in violation of applicable environmental laws could subject us to administrative penalties, fines and injunctions. Moreover, future or unknown past releases of hazardous substances could subject us to private lawsuits claiming damages and to adverse publicity. Liabilities, including legal costs, related to remediation of contaminated properties are not recognized until the related costs are considered probable and can be reasonable estimated.
 
Actual or perceived quality, safety or health risks associated with our products could subject us to liability and damage our business and reputation.
 
If any of our food or feed products became adulterated or misbranded, we would need to recall those items and could experience product liability claims if consumers were injured as a result. A widespread product recall or a significant product liability judgment could cause our products to be unavailable for a period of time or a loss of consumer confidence in our products. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. In addition, general public perceptions regarding the quality, safety or health risks associated with particular food or feed products, such as concerns regarding genetically modified crops, could reduce demand and prices for some of the products associated with our businesses. To the extent that consumer preferences evolve away from products that our members or we produce for health or other reasons, such as the growing demand for organic food products, and we are unable to develop products that satisfy new consumer preferences, there will be a decreased demand for our products.
 
Our operations are subject to business interruptions and casualty losses; we do not insure against all potential losses and could be seriously harmed by unexpected liabilities.
 
Our operations are subject to business interruptions due to unanticipated events such as explosions, fires, pipeline interruptions, transportation delays, equipment failures, crude oil or refined product spills, inclement weather and labor disputes. For example:
 
  •  our oil refineries and other facilities are potential targets for terrorist attacks that could halt or discontinue production;
 
  •  our inability to negotiate acceptable contracts with unionized workers in our operations could result in strikes or work stoppages;


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  •  the significant inventories that we carry or the facilities we own could be damaged or destroyed by catastrophic events, extreme weather conditions or contamination; and
 
  •  an occurrence of a pandemic flu or other disease affecting a substantial part of our workforce or our customers could cause an interruption in our business operations, the affects of which could be significant.
 
We maintain insurance coverages against many, but not all potential losses or liabilities arising from these operating hazards, but uninsured losses or losses above our coverage limits are possible. Uninsured losses and liabilities arising from operating hazards could have a material adverse effect on our financial position or results of operations.
 
Our cooperative structure limits our ability to access equity capital.
 
As a cooperative, we may not sell common stock in our company. In addition, existing laws and our articles of incorporation and bylaws contain limitations on dividends of 8% of any preferred stock that we may issue. These limitations restrict our ability to raise equity capital and may adversely affect our ability to compete with enterprises that do not face similar restrictions.
 
Consolidation among the producers of products we purchase and customers for products we sell could adversely affect our revenues and operating results.
 
Consolidation has occurred among the producers of products we purchase, including crude oil, fertilizer and grain, and it is likely to continue in the future. Consolidation could increase the price of these products and allow suppliers to negotiate pricing, supply availability and other contract terms that are less favorable to us. Consolidation also may increase the competition among consumers of these products to enter into supply relationships with a smaller number of producers resulting in potentially higher prices for the products we purchase.
 
Consolidation among purchasers of our products and in wholesale and retail distribution channels has resulted in a smaller customer base for our products and intensified the competition for these customers. For example, ongoing consolidation among distributors and brokers of food products and food retailers has altered the buying patterns of these businesses, as they have increasingly elected to work with product suppliers who can meet their needs nationwide rather than just regionally or locally. If these distributors, brokers and retailers elect not to purchase our products, our sales volumes, revenues and profitability could be significantly reduced.
 
In the fertilizer market, consolidation at both the producer and customer level increases the threat of direct sales from the producer to the consumer.
 
If our customers choose alternatives to our refined petroleum products our revenues and profits may decline.
 
Numerous alternative energy sources currently under development could serve as alternatives to our gasoline, diesel fuel and other refined petroleum products. If any of these alternative products become more economically viable or preferable to our products for environmental or other reasons, demand for our energy products would decline. Demand for our gasoline, diesel fuel and other refined petroleum products also could be adversely affected by increased fuel efficiencies.
 
Operating results from our agronomy business could be volatile and are dependent upon certain factors outside of our control.
 
Planted acreage, and consequently the volume of fertilizer and crop protection products applied, is partially dependent upon government programs, grain prices and the perception held by the producer of demand for production. Weather conditions during the spring planting season and early summer spraying season also affect agronomy product volumes and profitability.


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Technological improvements in agriculture could decrease the demand for our agronomy and energy products.
 
Technological advances in agriculture could decrease the demand for crop nutrients, energy and other crop input products and services that we provide. Genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could affect the demand for our crop nutrients and crop protection products. Demand for fuel that we sell could decline as technology allows for more efficient usage of equipment.
 
We operate some of our business through joint ventures in which our rights to control business decisions are limited.
 
Several parts of our business, including in particular, portions of our grain marketing, wheat milling, foods and renewable fuels operations, are operated through joint ventures with third parties. By operating a business through a joint venture, we have less control over business decisions than we have in our wholly-owned or majority-owned businesses. In particular, we generally cannot act on major business initiatives in our joint ventures without the consent of the other party or parties in those ventures.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
As of August 31, 2008, there were no unresolved comments from the Securities and Exchange Commission staff regarding our periodic or current reports.
 
ITEM 2.   PROPERTIES
 
We own or lease energy, grain handling and processing, and agronomy related facilities throughout the United States. Below is a summary of these locations.
 
Energy
 
Facilities in our Energy segment include the following, all of which are owned except where indicated as leased:
 
     
Refinery
  Laurel, Montana
Propane terminals
  Glenwood, Minnesota (operational) and Black Creek, Wisconsin (leased to another entity)
Transportation terminals/repair facilities
  12 locations in Iowa, Kansas, Minnesota, Montana, North Dakota, South Dakota, Texas, Washington and Wisconsin, 3 of which are leased
Petroleum & asphalt terminals/storage facilities
  11 locations in Montana, North Dakota and Wisconsin
Pump stations
  11 locations in Montana and North Dakota
Pipelines:
   
Cenex Pipeline, LLC
  Laurel, Montana to Fargo, North Dakota
Front Range Pipeline, LLC
  Canadian border to Laurel, Montana and on to Billings, Montana
Convenience stores/gas stations
  76 locations in Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Washington and Wyoming, 20 of which are leased
Lubricant plants/warehouses
  3 locations in Minnesota, Ohio and Texas, 1 of which is leased


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We have a 74.5% interest in NCRA, which owns and operates the following facilities:
 
     
Refinery
  McPherson, Kansas
Petroleum terminals/storage
  2 locations in Iowa and Kansas
Pipeline
  McPherson, Kansas to Council Bluffs, Iowa
Jayhawk Pipeline, LLC
  Throughout Kansas, with branches in Oklahoma, Texas and Nebraska
Jayhawk stations
  26 locations located in Kansas, Oklahoma and Nebraska
Osage Pipeline (50% owned by NCRA)
  Oklahoma to Kansas
Kaw Pipeline (67% owned by NCRA)
  Throughout Kansas
 
Ag Business
 
Within our Ag Business segment, we own or lease the following facilities:
 
Crop Nutrients
 
We use ports and terminals in our crop nutrients operations at the following locations:
 
Galveston, Texas (deep water port, land leased from port authority)
Little Rock, Arkansas (river terminal, leased)
Post Falls, Idaho (terminal, owned)
Crescent City, Illinois (terminal, owned)
Briggs, Indiana (terminal, owned)
Hagerstown, Indiana (terminal, leased)
Indianapolis, Indiana (terminal, leased)
Muscatine, Iowa (river terminal, owned)
St. Paul, Minnesota (river terminal, owned)
Winona, Minnesota (river terminal, owned)
Grand Forks, North Dakota (terminal, owned)
Crestline, Ohio (terminal, owned)
Fostoria, Ohio (terminal, owned)
Watertown, South Dakota (terminal, owned)
Memphis, Tennessee (river terminal, owned)
Green Bay, Wisconsin (terminal, owned)
 
Country Operations
 
In our country operations business, we own 363 agri-operations locations (of which some of the facilities are on leased land), 10 feed manufacturing facilities and 3 sunflower plants located in Minnesota, Iowa, North Dakota, South Dakota, Montana, Nebraska, Kansas, Oklahoma, Colorado, Idaho, Washington and Oregon.
 
Grain Marketing
 
We use grain terminals in our grain marketing operations at the following locations:
 
Collins, Mississippi (owned)
Davenport, Iowa (2 owned)
Friona, Texas (owned)
Kalama, Washington (leased)
Myrtle Grove, Louisiana (owned)
Savage, Minnesota (owned)
Spokane, Washington (owned)
Superior, Wisconsin (owned)
Winona, Minnesota (1 owned, 1 leased)


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In addition to office space at our corporate headquarters, we have grain marketing offices at the following leased locations:
 
Davenport, Iowa
Geneva, Switzerland
Hong Kong
Kansas City, Missouri
Kiev, Ukraine
Lincoln, Nebraska
Sao Paulo, Brazil
Shanghai, China
Winona, Minnesota
 
Processing
 
Within our Processing segment, we own and lease the following facilities:
 
Oilseed Processing
 
We own a campus in Mankato, Minnesota, comprised of a soybean crushing plant, an oilseed refinery, a soyflour plant, a quality control laboratory and an administration office. We also own a crushing plant in Fairmont, Minnesota. In addition, we own a textured soy protein manufacturing plant in Hutchinson, Kansas.
 
Wheat Milling
 
We own five milling facilities at the following locations, all of which are leased to Horizon Milling:
 
Rush City, Minnesota
Kenosha, Wisconsin
Houston, Texas
Mount Pocono, Pennsylvania
Fairmount, North Dakota
 
Corporate and Other
 
Business Solutions
 
In addition to office space at our corporate headquarters, we have offices at the following leased locations:
 
Kewanee, Illinois (Ag States Group)
Indianapolis, Indiana (Ag States Group and Country Hedging, Inc.)
Houston, Texas (Ag States Group)
Kansas City, Missouri (Country Hedging, Inc.)
Minneapolis, Minnesota (Country Hedging, Inc.)
 
Corporate Headquarters
 
We are headquartered in Inver Grove Heights, Minnesota. We own a 33-acre campus consisting of one main building with approximately 320,000 square feet of office space and two smaller buildings with approximately 13,400 and 9,000 square feet of space.
 
Our internet address is www.chsinc.com.
 
ITEM 3.   LEGAL PROCEEDINGS
 
We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period;


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however, our management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.
 
In October 2003, we and NCRA reached agreements with the Environmental Protection Agency (EPA) and the State of Montana’s Department of Environmental Quality and the State of Kansas Department of Health and Environment, regarding the terms of settlements with respect to reducing air emissions at our Laurel, Montana and NCRA’s McPherson, Kansas refineries. These settlements are part of a series of similar settlements that the EPA has negotiated with major refiners under the EPA’s Petroleum Refinery Initiative. The settlements take the form of consent decrees filed with the U.S. District Court for the District of Montana (Billings Division) and the U.S. District Court for the District of Kansas. Each consent decree details potential capital improvements, supplemental environmental projects and operational changes that we and NCRA have agreed to implement at the relevant refinery over several years. The consent decrees also required us, and NCRA, to pay approximately $0.5 million in aggregate civil cash penalties. As of August 31, 2008, the aggregate capital expenditures for us and NCRA related to these settlements was approximately $33 million, and we anticipate spending an additional $4 million over the next few years. We do not believe that the settlements will have a material adverse affect on us or NCRA.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
PART II.
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
We have approximately 60,000 members, of which approximately 1,400 are cooperative association members and approximately 58,600 are individual members. As a cooperative, we do not have any common stock that is traded.
 
On August 31, 2008, we had 9,047,780 shares of 8% Cumulative Redeemable Preferred Stock outstanding, which is listed on the NASDAQ Global Select Market under the symbol CHSCP.
 
We have not sold any equity securities during the three years ended August 31, 2008 that were not registered under the Securities Act of 1933, as amended.
 
ITEM 6.   SELECTED FINANCIAL DATA
 
The selected financial information below has been derived from our consolidated financial statements for the years ended August 31. The selected consolidated financial information for August 31, 2008, 2007 and 2006, should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this filing. In May 2005, we sold the majority of our Mexican foods business and have recorded the Mexican foods business as discontinued operations.


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Summary Consolidated Financial Data
 
                                         
    2008     2007*     2006*     2005*     2004*  
    (Dollars in thousands)  
 
Income Statement Data:
                                       
Revenues
  $ 32,167,461     $ 17,215,992     $ 14,383,835     $ 11,926,962     $ 10,969,081  
Cost of goods sold
    30,993,899       16,129,233       13,540,285       11,438,473       10,525,746  
                                         
Gross profit
    1,173,562       1,086,759       843,550       488,489       443,335  
Marketing, general and administrative
    329,965       245,357       231,238       199,354       202,455  
                                         
Operating earnings
    843,597       841,402       612,312       289,135       240,880  
Gain on investments
    (29,193 )     (20,616 )             (13,013 )     (14,666 )
Gain on legal settlements
                                    (692 )
Interest, net
    76,460       31,098       41,305       41,509       42,758  
Equity income from investments
    (150,413 )     (109,685 )     (84,188 )     (95,742 )     (79,022 )
Minority interests
    72,160       143,214       91,079       49,825       34,184  
                                         
Income from continuing operations before income taxes
    874,583       797,391       564,116       306,556       258,318  
Income taxes
    71,538       40,668       59,350       34,153       30,108  
                                         
Income from continuing operations
    803,045       756,723       504,766       272,403       228,210  
(Income) loss on discontinued operations, net of taxes
                    (625 )     16,810       5,909  
                                         
Net income
  $ 803,045     $ 756,723     $ 505,391     $ 255,593     $ 222,301  
                                         
Balance Sheet Data (August 31):
                                       
Working capital
  $ 1,738,600     $ 821,878     $ 848,344     $ 766,807     $ 500,315  
Net property, plant and equipment
    1,948,305       1,728,171       1,476,239       1,359,535       1,249,655  
Total assets
    8,771,978       6,754,373       4,994,166       4,748,654       4,047,710  
Long-term debt, including current maturities
    1,194,855       688,321       744,745       773,074       683,818  
Total equities
    2,955,686       2,475,455       2,053,466       1,778,879       1,643,491  
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 of the Notes to Consolidated Financial Statements


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The selected financial information below has been derived from our three business segments, and Corporate and Other, for the fiscal years ended August 31, 2008, 2007 and 2006. The intercompany revenues between segments were $359.8 million, $247.7 million and $251.6 million for the fiscal years ended August 31, 2008, 2007 and 2006, respectively.
 
Summary Financial Data By Business Segment
 
                                                 
    Energy     Ag Business  
    2008     2007*     2006*     2008     2007     2006  
    (Dollars in thousands)  
 
Revenues
  $ 11,499,814     $ 8,105,067     $ 7,414,361     $ 19,696,907     $ 8,575,389     $ 6,575,165  
Cost of goods sold
    11,027,459       7,264,180       6,804,454       19,088,079       8,388,476       6,401,527  
                                                 
Gross profit
    472,355       840,887       609,907       608,828       186,913       173,638  
Marketing, general and administrative
    111,121       94,939       82,867       160,364       97,299       99,777  
                                                 
Operating earnings
    361,234       745,948       527,040       448,464       89,614       73,861  
Gain on investments
    (35 )                     (100,830 )     (5,348 )        
Interest, net
    (5,227 )     (6,106 )     6,534       63,665       28,550       23,559  
Equity income from investments
    (5,054 )     (4,468 )     (3,840 )     (83,053 )     (51,830 )     (40,902 )
Minority interests
    71,805       143,230       91,588       355       (16 )     (509 )
                                                 
Income before income taxes
  $ 299,745     $ 613,292     $ 432,758     $ 568,327     $ 118,258     $ 91,713  
                                                 
Intersegment revenues
  $ (322,522 )   $ (228,930 )   $ (242,430 )   $ (36,972 )   $ (18,372 )   $ (8,779 )
                                                 
Total identifiable assets — August 31
  $ 3,216,852     $ 2,797,831     $ 2,215,800     $ 4,172,950     $ 2,846,950     $ 1,806,243  
                                                 
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 of the Notes to Consolidated Financial Statements
 
                                                 
    Processing     Corporate and Other  
    2008     2007     2006     2008     2007     2006  
    (Dollars in thousands)  
 
Revenues
  $  1,299,209     $   754,743     $    614,471     $    31,363     $    28,465     $   31,415  
Cost of goods sold
    1,240,944       726,510       588,732       (2,751 )     (2,261 )     (2,851 )
                                                 
Gross profit
    58,265       28,233       25,739       34,114       30,726       34,266  
Marketing, general and administrative
    26,089       23,545       21,645       32,391       29,574       26,949  
                                                 
Operating earnings
    32,176       4,688       4,094       1,723       1,152       7,317  
(Loss) gain on investments
    72,602       (15,268 )             (930 )                
Interest, net
    21,995       14,783       11,096       (3,973 )     (6,129 )     116  
Equity income from investments
    (56,615 )     (48,446 )     (35,504 )     (5,691 )     (4,941 )     (3,942 )
                                                 
(Loss) income before income taxes
  $ (5,806 )   $ 53,619     $ 28,502     $ 12,317     $ 12,222     $ 11,143  
                                                 
Intersegment revenues
  $ (338 )   $ (370 )   $ (368 )                        
                                                 
Total identifiable assets — August 31
  $ 748,989     $ 681,118     $ 518,186     $ 633,187     $ 428,474     $ 453,937  
                                                 


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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
The following discussions of financial condition and results of operations should be read in conjunction with the accompanying audited financial statements and notes to such statements and the cautionary statement regarding forward-looking statements found in Part I, Item 1A of this Form 10-K. This discussion contains forward-looking statements based on current expectations, assumptions, estimates and projections of our 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 Form 10-K.
 
CHS Inc. (CHS, we or us) is a diversified company, which provides grain, foods and energy resources to businesses and consumers on a global basis. As a cooperative, we are owned by farmers, ranchers and their member cooperatives from the Great Lakes to the Pacific Northwest and from the Canadian border to Texas. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock.
 
We provide a full range of production agricultural inputs such as refined fuels, propane, farm supplies, animal nutrition and agronomy products, as well as services, which include hedging, financing and insurance. We own and operate petroleum refineries and pipelines and market and distribute refined fuels and other energy products under the Cenex® brand through a network of member cooperatives and independent retailers. We purchase grains and oilseeds directly and indirectly from agricultural producers primarily in the midwestern and western United States. These grains and oilseeds are either sold to domestic and international customers, or further processed into a variety of grain-based food products.
 
We have aligned our business segments based on an assessment of how our businesses operate and the products and services they sell. Our three business segments: Energy, Ag Business and Processing, create vertical integration to link producers with consumers. Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transports those products. Our Ag Business segment purchases and resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as wholesaler and retailer of crop inputs. Our Processing segment converts grains and oilseeds into value-added products.
 
Summary data for each of our business segments for the fiscal years ended August 31, 2008, 2007 and 2006, is provided in Item 6 “Selected Financial Data”. Except as otherwise specified, references to years indicate our fiscal year ended August 31, 2008, or ended August 31 of the year referenced.
 
Corporate administrative expenses are allocated to all three business segments, and Corporate and Other, based on either direct usage for services that can be tracked, such as information technology and legal, and other factors or considerations relevant to the costs incurred.
 
Many of our business activities are highly seasonal and operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, our retail agronomy, wholesale crop nutrients and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.
 
Our revenues, 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


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affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.
 
While our revenues and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. These investments principally include our 50% ownership in each of the following companies: Agriliance LLC (Agriliance), TEMCO, LLC (TEMCO) and United Harvest, LLC (United Harvest), and our 40% ownership in Multigrain S.A. included in our Ag Business segment; our 50% ownership in Ventura Foods, LLC (Ventura Foods), our 24% ownership in Horizon Milling, LLC (Horizon Milling) and Horizon Milling G.P., included in our Processing segment; and our 49% ownership in Cofina Financial, LLC (Cofina Financial) included in Corporate and Other.
 
Agriliance is owned and governed by United Country Brands, LLC (50%) and Land O’Lakes, Inc. (Land O’Lakes) (50%). United Country Brands, LLC is a 100% owned subsidiary of CHS. We account for our share of the Agriliance investment using the equity method of accounting. Prior to September 1, 2007, Agriliance was a wholesale and retail crop nutrients and crop protection products company. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. After the distributions, Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail distribution business. During the year ended August 31, 2008, our net contribution to Agriliance was $235.0 million, which supported their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, and includes crop nutrient and crop protection product net trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets, as well as Agriliance’s ongoing retail operations.
 
Due to our 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, each company was entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transaction Land O’Lakes owed us $133.5 million. Land O’Lakes paid us $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance debt on our behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, we made a true-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during fiscal 2009.
 
The distribution of assets we received from Agriliance for the crop nutrients business had a book value of $248.2 million. We recorded 50% of the value of the net assets received at book value due to our ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Values assigned to the net assets acquired totaled $268.7 million.
 
During the first quarter of fiscal 2008, we changed our accounting method for the costs of major maintenance (turnarounds) from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to Financial Accounting Standards Board (FASB) Staff Position (“FSP”) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The affect of this change in accounting principle to our Consolidated Statements of Operations for the years ended August 31, 2007 and 2006, was to increase net income by $6.4 million and $15.1 million, respectively. In addition, equity was increased by $42.5 million and $36.1 million as of August 31, 2007 and 2006, respectively.
 
Effective September 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). This interpretation clarifies the criteria for recognizing income tax benefits under


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FASB Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”, and requires additional disclosures about uncertain tax positions. FIN 48 requires a taxpayer to determine whether a tax position is more likely than not (greater than 50 percent) to be sustained based solely on the technical merits of the position. If this threshold is met, the tax benefit is measured and recognized at the largest amount that is greater than 50 percent likely of being realized. The total amount of unrecognized tax benefits, including penalties and interest, as of September 1, 2007 and August 31, 2008, were $7.5 million and $6.2 million, respectively. There was no impact to our equity as a result of adoption of FIN 48. Recognition of all or a portion of the unrecognized tax benefits would affect our effective income tax rate in the respective period of change. Any applicable interest and penalties on uncertain tax positions were included as a component of income tax expense prior to the adoption of FIN 48, and we have continued this classification subsequent to the adoption. The liability for uncertain income taxes as of September 1, 2007 and August 31, 2008, includes estimated interest and penalties of $0.3 million. We file income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. The U.S. income tax returns for periods ended after August 31, 2004, remain subject to examination. With limited exceptions, we are not subject to state and local income tax examinations for years before August 31, 2004. We do not expect that the amount of unrecognized tax benefits will significantly change within the next twelve months.
 
We own 12,905,882 shares of the outstanding common stock of VeraSun Corporation (VeraSun), which represents an approximate 8% ownership interest that is accounted for as an available-for-sale investment under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Due to the continued decline of the ethanol industry and the Current Report on Form 8-K filed by VeraSun on September 16, 2008, we determined that an impairment was necessary of our investment in VeraSun. We applied FSP “FAS 115-1/124-1: The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” to determine the amount of the impairment. As a result, based on VeraSun’s market value of $5.76 per share on August 29, 2008, an impairment charge in the amount of $71.7 million ($55.3 million net of taxes) was recorded during the fourth quarter of our year ended August 31, 2008. The impairment did not affect our cash flows and did not have a bearing upon our compliance with any covenants under our credit facilities. Subsequent to August 31, 2008, the market value of VeraSun’s stock price continued to decline, and on October 31, 2008, VeraSun filed for voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. We will be evaluating an additional impairment during our first quarter of fiscal 2009. Our investment on August 31, 2008, was $74.3 million.
 
In May 2005, we sold the majority of our Mexican foods business, with minor activity continuing in 2006. During the year ended August 31, 2006, we sold all of the remaining assets for proceeds of $4.2 million and a gain of $1.6 million. The operating results of the Mexican foods business have been reported as discontinued operations.
 
The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries, including the National Cooperative Refinery Association (NCRA), which is in our Energy segment. All significant intercompany accounts and transactions have been eliminated.
 
Certain reclassifications have been made to prior year’s amounts to conform to current year classifications. These reclassifications had no effect on previously reported net income, equities and comprehensive income, or cash flows.
 
Recent Events
 
Cofina Financial, a joint venture finance company formed in fiscal 2005, makes seasonal and term loans to member cooperatives and businesses and to individual producers of agricultural products. Through August 31, 2008, we held a 49% ownership interest in Cofina Financial and accounted for our investment using the equity method of accounting. On September 1, 2008, we purchased Cenex Finance Association’s remaining 51% ownership interest for $53.3 million.


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Results of Operations
 
Comparison of the years ended August 31, 2008 and 2007
 
General.  We recorded income before income taxes of $874.6 million in fiscal 2008 compared to $797.4 million in fiscal 2007, an increase of $77.2 million (10%). These results reflected increased pretax earnings in our Ag Business segment, and Corporate and Other, while our Energy and Processing segments reflected decreased pretax earnings.
 
Our Energy segment generated income from continuing operations before income taxes of $299.7 million for the year ended August 31, 2008 compared to $613.3 million in fiscal 2007. This decrease in earnings of $313.6 million (51%) is primarily from lower margins at the NCRA refinery in McPherson, Kansas and at our Laurel refinery, in addition to reduced margins on refined fuels from a planned major maintenance project, during which time our production was reduced at our Laurel, Montana refinery. Earnings in our lubricants, renewable fuels marketing, propane and transportation businesses improved during fiscal 2008 when compared to fiscal 2007.
 
Our Ag Business segment generated income from continuing operations before income taxes of $568.3 million for the year ended August 31, 2008 compared to $118.3 million in fiscal 2007, an increase in earnings of $450.0 million (381%). In our first fiscal quarter of 2007, we sold approximately 25% of our investment in CF, a domestic fertilizer manufacturer in which we held a minority interest, for which we received cash of $10.9 million and recorded a gain of $5.3 million. During the first quarter of fiscal 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. As previously discussed, during the first quarter of fiscal 2008, we received the crop nutrients business of Agriliance through a distribution of assets to us which generated $137.5 million in pretax earnings for fiscal 2008, and includes strong demand for fertilizer. Prior to the distribution, we reflected 50% of these earnings through our equity income from our investment in Agriliance. Due to the distribution by Agriliance of the wholesale and some of the retail businesses to us and Land O’Lakes, the operating performance remaining within the Agriliance operations for fiscal 2008 is primarily their retail business. Our share of the remaining agronomy joint venture earnings, net of allocated internal expenses, was $32.0 million less than in fiscal 2007. Strong demand and increased volumes for grain and oilseed products, much of it driven by increased U.S. ethanol production, contributed to improved performances by our country operations and grain marketing businesses. Our country operations earnings increased $74.4 million, primarily as a result of overall improved product margins, including historically high margins on grain and agronomy transactions. Continued market expansion into Colorado, Oklahoma and Kansas also increased country operations volumes. Our grain marketing operations improved earnings by $183.7 million during fiscal 2008 compared with fiscal 2007, primarily from increased grain volumes and improved margins on those grains, and also included strong earning performances from our joint ventures. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during fiscal years 2007 and 2008, increased interest in renewable fuels, and changes in transportation costs, shifted marketing patterns and dynamics for our grain marketing business.
 
Our Processing segment generated a net loss from continuing operations before income taxes of $5.8 million for the year ended August 31, 2008, compared to income of $53.6 million in fiscal 2007, a decrease in earnings of $59.4 million (111%). Our share of earnings, net of allocated internal expenses, related to US BioEnergy, an ethanol manufacturing company in which we held a minority ownership interest, decreased $96.1 million for fiscal 2008 compared to fiscal 2007. During the fiscal quarter ended August 31, 2008, we recorded an impairment $71.7 million to our investment in VeraSun, as previously discussed. Effective April 1, 2008, US BioEnergy and VeraSun completed a merger, and as a result of our change in ownership interest, we no longer have significant influence, and account for VeraSun, the surviving entity, as an available-for-sale investment. In August 2006, US BioEnergy filed a registration statement with the Securities and Exchange Commission to register shares of common stock for sale in an initial public offering (IPO), and in December 2006, the IPO was completed. The effect of the issuance of additional shares of US BioEnergy was to dilute our ownership interest down from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $15.3 million during fiscal 2007 on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy.


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Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated internal expenses, decreased $15.8 million during fiscal 2008 compared to fiscal 2007, primarily as the result of increased commodity prices reducing margins on the products sold compared to fiscal 2007. Oilseed processing earnings increased $23.5 million during fiscal 2008 compared to fiscal 2007, primarily due to improved margins in our crushing operations, partially offset by slightly reduced margins in our refining operations. Our share of earnings from our wheat milling joint ventures, net of allocated internal expenses, improved by $29.0 million in fiscal 2008 compared to fiscal 2007.
 
Corporate and Other generated income from continuing operations before income taxes of $12.3 million for the year ended August 31, 2008 compared to $12.2 million in fiscal 2007, an increase in earnings of $0.1 million (1%). This improvement is primarily attributable to our business solutions’ financial and hedging services.
 
Net Income.  Consolidated net income for the year ended August 31, 2008 was $803.0 million compared to $756.7 million for the year ended August 31, 2007, which represented a $46.3 million (6%) increase.
 
Revenues.  Consolidated revenues of $32.2 billion for the year ended August 31, 2008 compared to $17.2 billion for the year ended August 31, 2007, which represented a $15.0 billion (87%) increase.
 
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevators and agri-service centers derive other revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receive other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our hedging and insurance operations.
 
Our Energy segment revenues, after elimination of intersegment revenues, of $11.2 billion increased by $3.3 billion (42%) during the year ended August 31, 2008 compared to fiscal 2007. During the years ended August 31, 2008 and 2007, our Energy segment recorded revenues from our Ag Business segment of $322.5 million and $228.9 million, respectively. The net increase in revenues of $3.3 billion is comprised of a net increase of $3.0 billion related to price appreciation, primarily on refined fuels and a $253.7 million net increase in sales volume, primarily on renewable fuels marketing. Refined fuels revenues increased $2.5 billion (46%), of which $2.3 billion was related to a net average selling price increase and $158.3 million was attributable to increased volumes, compared to fiscal 2007. The sales price of refined fuels increased $0.88 per gallon (43%) and volumes increased 2% when comparing fiscal 2008 with fiscal 2007. Higher crude oil prices, strong global demand and limited refining capacity contributed to the increase in refined fuels selling prices. Renewable fuels marketing revenues increased $289.3 million (34%), mostly from a 28% increase in volumes when compared with the same period in the previous year. Propane revenues increased by $148.6 million (25%), of which $199.6 million related to an increase in the net average selling price, and were partially offset by $51.0 million related to a decrease in volumes, when compared to fiscal 2007. Propane sales volume decreased 6% in comparison to the same period of the prior year, while the average selling price increased $0.37 per gallon (34%). Propane prices tend to follow the prices of crude oil and natural gas, both of which increased during fiscal 2008 compared to the same period in 2007. Propane prices are also affected by changes in propane demand and domestic inventory levels. The decrease in propane volumes primarily reflects a loss of crop drying season with less moisture in the fall 2007 harvest and reduced demand due to higher prices.
 
Our Ag Business segment revenues, after elimination of intersegment revenues, of $19.7 billion increased $11.1 billion (130%) during the year ended August 31, 2008 compared to fiscal 2007. Grain revenues in our Ag Business segment totaled $15.0 billion and $7.1 billion during the years ended August 31, 2008 and 2007, respectively. Of the grain revenues increase of $7.8 billion (110%), $3.6 billion is attributable to increased volumes and $4.2 billion is due to increased average grain selling prices during fiscal 2008 compared to fiscal 2007. The average sales price of all grain and oilseed commodities sold reflected an increase of $3.19 per bushel (59%). The 2007 fall harvest produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. Despite the good harvest, prices for nearly all grain commodities increased because of strong demand, particularly for corn, which is used as the feedstock for most ethanol plants as well as for livestock feed. The average month-end market price per bushel of spring


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wheat, soybeans and corn increased approximately $5.62, $5.32 and $1.67, respectively, when compared to the prices of those same grains for fiscal 2007. Volumes increased 32% during fiscal 2008 compared with the same period of a year ago. Corn, wheat, soybeans and barley reflected the largest volume increases compared to fiscal 2007. In September 2007, we began recording revenues from the distributed crop nutrients business of Agriliance reflecting $2.7 billion for fiscal 2008. Our Ag Business segment revenues of $1.8 billion for products other than grain and wholesale crop nutrients increased by $554.2 million (43%) during fiscal 2008 compared to the same period in fiscal 2007, primarily the result of increased revenues of retail crop nutrients, energy, crop protection, feed, seed and processed sunflower products. Other revenues within our Ag Business segment of $177.4 million during fiscal 2008 increased $47.2 million (36%) compared to fiscal 2007, primarily from grain handling and service revenues.
 
Our Processing segment revenues, after elimination of intersegment revenues, of $1.3 billion increased $544.5 million (72%) during the year ended August 31, 2008 compared to fiscal 2007. Because our wheat milling and packaged foods operations through non-consolidated joint ventures, sales revenues reported in our Processing segment are entirely from our oilseed processing operations. Higher average sales prices of processed oilseed increased revenues by $259.4 million, while processed soybean volumes increased 8%, accounting for an increase in revenues of $51.9 million. Oilseed refining revenues increased $216.6 million (60%), of which $220.2 million was due to higher average sales prices and were partially offset by $3.6 million due to a less than 1% decrease in sales volume. Oilseed flour revenues increased $8.0 million (49%). The average selling price of processed oilseed increased $124 per ton (69%) and the average selling price of refined oilseed products increased $0.20 per pound (61%) compared to the same period of fiscal 2007. The changes in the average selling price of products are primarily driven by the higher price of soybeans.
 
Cost of Goods Sold.  Consolidated cost of goods sold of $31.0 billion for the year ended August 31, 2008 compared to $16.1 billion for the year ended August 31, 2007, which represents a $14.9 billion (92%) increase.
 
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $10.7 billion increased by $3.7 billion (52%) during the year ended August 31, 2008 compared to fiscal 2007. The increase in cost of goods sold is primarily due to increased per unit costs for refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased $0.93 (47%) per gallon and volumes increased 2% compared to fiscal 2007. We refine approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost increase is primarily related to higher input costs at our two crude oil refineries and higher average prices on the refined products that we purchased for resale compared to fiscal 2007. The average per unit cost of crude oil purchased for the two refineries increased 67% compared to fiscal 2007. The average cost of propane increased $0.36 (33%) per gallon, while volumes decreased 6% compared to fiscal 2007.
 
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $19.1 billion increased $10.7 billion (128%) during the year ended August 31, 2008 compared to fiscal 2007. Grain cost of goods sold in our Ag Business segment totaled $14.6 billion and $7.0 billion during the years ended August 31, 2008 and 2007, respectively. The cost of grains and oilseed procured through our Ag Business segment increased $7.6 billion (108%) compared to fiscal 2007. This is the result of an increase of $3.06 (57%) in the average cost per bushel along with a 32% net increase in bushels sold as compared to the prior year. Corn, wheat, soybeans and barley reflected the largest volume increases compared to fiscal 2007. Commodity prices on spring wheat, soybeans and corn have increased compared to the prices that were prevalent during the same period in fiscal 2007. In September 2007, we began recording cost of goods sold from the distributed crop nutrients business of Agriliance reflecting $2.5 billion for the year ended August 31, 2008. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased during the year ended August 31, 2008 compared to fiscal 2007, primarily due to higher volumes and price per unit costs for crop nutrients, energy, feed, crop protection, seed and processed sunflower products. The volume increases resulted primarily from acquisitions made and reflected in the reporting periods.
 
Our Processing segment cost of goods sold, after elimination of intersegment costs, of $1.2 billion, increased $514.5 million (71%) during the year ended August 31, 2008 compared to fiscal 2007, which was


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primarily due to increased costs of soybeans in addition to volume increases in our soybean crushing operations.
 
Marketing, General and Administrative.  Marketing, general and administrative expenses of $330.0 million for the year ended August 31, 2008 increased by $84.6 million (35%) compared to fiscal 2007. The net increase of $84.6 million includes $35.6 million from our crop nutrients business reflected in our Ag Business segment, which was previously recorded in our equity investment reported earnings of Agriliance. The remaining net change of $49.0 million (20%) includes increased performance-based incentive plan expense, in addition to other employee benefits (primarily medical and pension), general inflation and acquisitions.
 
Gain on Investments.  Gain on investments of $29.2 million for the year ended August 31, 2008, increased by $8.6 million (42%). During fiscal 2007, we sold 540,000 shares of our CF Industries Holdings, Inc. (CF) stock, included in our Ag Business segment, for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing our ownership interest in CF to approximately 2.9%. During fiscal 2008, we sold all of our remaining 1,610,396 shares of CF stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million. Also during fiscal 2008 included in our Energy and Ag Business segments and Corporate and Other were gains on available-for-sale securities sold of $35 thousand, $9.1 million and $0.9 million, respectively. These gains were partially offset by losses on investments of $72.5 million in our Processing segment. During the fiscal quarter ended August 31, 2008, we recorded an impairment of our investment in VeraSun by $71.7 million ($55.3 million net of taxes), based on VeraSun’s market value of $5.76 per share on August 29, 2008 as previously discussed. Also in August 2006, US BioEnergy, now VeraSun, filed a registration statement with the Securities and Exchange Commission to register shares of common stock for sale in an initial public offering (IPO), and in December 2006, the IPO was completed. The affect of the issuance of additional shares of US BioEnergy was to dilute our ownership interest down from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $15.3 million during fiscal 2007 on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy.
 
Interest, net.  Net interest of $76.5 million for the year ended August 31, 2008 increased $45.4 million (146%) compared to fiscal 2007. Interest expense for the years ended August 31, 2008 and 2007 was $90.4 million and $51.8 million, respectively. Interest income, generated primarily from marketable securities, was $13.9 million and $20.7 million, for the years ended August 31, 2008 and 2007, respectively. The interest expense increase of $38.6 million (74%) primarily relates to an increase in borrowings, which was created by higher working capital needs, in addition to a decrease in capitalized interest of $1.9 million, partially offset by a decrease in the average short-term interest rate. For the years ended August 31, 2008 and 2007, we capitalized interest of $9.8 million and $11.7 million, respectively, primarily related to construction projects in our Energy segment for financing interest on our coker project. The average level of short-term borrowings increased $473.0 million (149%) during the year ended August 31, 2008 compared to fiscal 2007, while the average short-term interest rate decreased 1.70% (30%). Higher commodity prices and increased volumes, primarily within our Ag Business (including working capital needs from our crop nutrients business) and Processing segments, increased those segments’ interest, net by $35.1 million and $7.2 million, respectively. Also, in October 2007, we entered into a private placement with several insurance companies and banks for additional long-term debt in the amount of $400.0 million with an interest rate of 6.18%, which primarily replaced short-term debt. The net decrease in interest income of $6.8 million (33%), was primarily Corporate and Other relating to a decrease of interest income on our hedging and other services, and was partially offset by increased interest income at NCRA within our Energy segment, which primarily relates to marketable securities.
 
Equity Income from Investments.  Equity income from investments of $150.4 million for the year ended August 31, 2008 increased $40.7 million (37%) compared to fiscal 2007. 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 improved earnings from investments in our Energy, Ag Business and Processing segments, and Corporate and Other. These improvements included $0.6 million for Energy, $31.2 million for Ag Business, $8.2 million for Processing, and $0.7 million for Corporate and Other.


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Our Ag Business segment generated improved earnings of $31.2 million from equity investments. Our share of equity investment earnings or losses in Agriliance and a Canadian agronomy joint venture decreased earnings by $37.0 million, primarily related to the distribution of their wholesale crop nutrient and crop protection products businesses, partially offset by improved margins for their southern retail operations. In September 2007, Agriliance distributed the assets of the crop nutrients business to us, and the assets of the crop protection business to Land O’Lakes. Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail distribution business. We had improvements of $65.9 million from our share of equity investment earnings in our grain marketing joint ventures during the year ended August 31, 2008, compared to fiscal 2007. The improvements in earnings of our grain marketing equity investments are primarily related to increased volumes and improved margins on those volumes at export terminals. Our country operations business reported an aggregate increase in equity investment earnings of $2.3 million from several small equity investments.
 
Our Processing segment generated improved earnings of $8.2 million from equity investments. Our equity investment earnings from US BioEnergy, prior to the merger with VeraSun, were $6.7 million less during fiscal 2008 compared to fiscal 2007, primarily from reduced margins resulting from higher input costs. Ventura Foods, our vegetable oil-based products and packaged foods joint venture, recorded reduced earnings of $15.6 million, and Horizon Milling, our domestic and Canadian wheat milling joint ventures, along with a small milling investment, recorded combined improved earnings of $30.5 million, net compared to fiscal 2007. Ventura Foods’ decrease in earnings was primarily due to higher commodity prices resulting in lower margins on the products sold. A shifting demand balance for soybeans for both food and renewable fuels meant addressing supply and price challenges for both CHS and our Ventura Foods joint venture. Horizon Milling’s improved results were related to merchandising margins during our fiscal year ended August 31, 2008. Typically, results are affected by U.S. dietary habits and although the preference for a low carbohydrate diet appears to have reached the bottom of its cycle, milling capacity, which had been idled over the past few years because of lack of demand for flour products, can easily be put back into production as consumption of flour products increase, which may depress gross margins in the milling industry.
 
Our Energy segment generated increased equity investment earnings of $0.6 million primarily related to improved margins in an equity investment held by NCRA, and Corporate and Other generated improved earnings of $0.7 million from equity investment earnings, primarily from Cofina Financial, our financial services equity investment, as compared to fiscal 2007.
 
Minority Interests.  Minority interests of $72.2 million for the year ended August 31, 2008 decreased by $71.1 million (50%) compared to fiscal 2007. This net decrease was a result of less profitable operations within our majority-owned subsidiaries compared to fiscal 2007. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary, which we consolidate in our Energy segment.
 
Income Taxes.  Income tax expense of $71.5 million for the year ended August 31, 2008, compares with $40.7 million for fiscal 2007, resulting in effective tax rates of 8.2% and 5.1%, respectively. During the year ended August 31, 2007, we recognized additional tax benefits of $9.6 million related to export incentive credits. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the years ended August 31, 2008 and 2007. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.
 
Comparison of the years ended August 31, 2007 and 2006
 
General.  We recorded income from continuing operations before income taxes of $797.4 million in fiscal 2007 compared to $564.1 million in fiscal 2006, an increase of $233.3 million (41%). These results reflected increased pretax earnings in our Energy, Ag Business and Processing segments, and Corporate and Other.
 
Our Energy segment generated income from continuing operations before income taxes of $613.3 million for the year ended August 31, 2007 compared to $432.8 million in fiscal 2006. This increase in earnings of $180.5 million (42%) is primarily attributable to higher margins on refined fuels, which resulted mainly from changes in the refining capacity and global demand, including industry supply shortages. Earnings in our


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propane business increased significantly, from a $1.5 million loss in fiscal 2006 to income of $9.7 million during fiscal 2007. Earnings in our renewable fuels marketing, lubricants and transportation businesses also improved during fiscal 2007 when compared to fiscal 2006.
 
Our Ag Business segment generated income from continuing operations before income taxes of $118.3 million for the year ended August 31, 2007 compared to $91.7 million in fiscal 2006, an increase in earnings of $26.6 million (29%). Strong demand for grain and oilseeds, much of it driven by increased U.S. ethanol production, contributed to improved performances by both our grain marketing and country operations businesses. Our country operations earnings increased $17.0 million, primarily as a result of overall improved product margins, including historically high margins on agronomy, energy, processed sunflower and grain transactions. Continued market expansion into Oklahoma and Kansas also increased country operations volumes. Our grain marketing operations improved earnings by $2.3 million during the year ended August 31, 2007 compared with fiscal 2006, primarily from increased grain volumes. Volatility in the grain markets creates opportunities for increased grain margins, and additionally during 2007, increased interest in renewable fuels, and changes in transportation costs shifted marketing patterns and dynamics for our grain marketing business. Improved earnings generated by Agriliance, an agronomy joint venture in which we hold a 50% interest, resulted in a $2.0 million increase in our share of that joint venture’s earnings, net of an impairment of retail assets, a Canadian agronomy joint venture and allocated internal expenses. These improved earnings were attributable to improved margins for wholesale and retail crop nutrient products sold during the spring planting season, partially offset by our share of an impairment of retail assets of $10.2 million. Additionally, in our first fiscal quarter of 2007, we sold approximately 25% of our investment in CF, a domestic fertilizer manufacturer in which we held a minority interest, for which we received cash of $10.9 million and recorded a gain of $5.3 million.
 
Our Processing segment generated income from continuing operations before income taxes of $53.6 million for the year ended August 31, 2007 compared to $28.5 million in fiscal 2006, an increase in earnings of $25.1 million (88%). Oilseed processing earnings increased $2.2 million during the year ended August 31, 2007 as compared to fiscal 2006. This was primarily the result of improved crushing margins, partially offset by reduced oilseed refining margins. Contributing factors include a 7% increase in volume at our two crushing facilities, but primarily includes significant improvement in oilseed crushing margins, when comparing the year ended August 31, 2007 with fiscal 2006. Our share of earnings from Ventura Foods, our packaged foods joint venture, net of allocated internal expenses, increased by $3.0 million during the year ended August 31, 2007 compared to fiscal 2006, primarily from improved product margins. Our share of earnings from our wheat milling joint ventures, net of allocated internal expenses, reported improved earnings of $0.8 million for fiscal 2007 compared to fiscal 2006. Our share of earnings from US BioEnergy, an ethanol manufacturing company in which we hold a minority ownership interest, net of allocated internal expenses, increased by $3.8 million during fiscal 2007 compared to fiscal 2006. In December 2006, US BioEnergy completed an initial public offering (IPO) and the effect of the issuance of additional shares of its stock was to dilute our ownership interest from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $11.4 million on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. Subsequent to the IPO, our ownership interest decreased to approximately 19%, and our gain was increased by $3.9 million, to bring the net gain to a total of $15.3 million during fiscal 2007.
 
Corporate and Other generated income from continuing operations before income taxes of $12.2 million for the year ended August 31, 2007 compared to $11.1 million in fiscal 2006, an increase in earnings of $1.1 million (10%). This improvement is primarily attributable to our business solutions’ financial and hedging services.
 
Net Income.  Consolidated net income for the year ended August 31, 2007 was $756.7 million compared to $505.4 million for the year ended August 31, 2006, which represented a $251.3 million (50%) increase.
 
Revenues.  Consolidated revenues of $17.2 billion for the year ended August 31, 2007 compared to $14.4 billion for the year ended August 31, 2006, which represented a $2.8 billion (20%) increase.
 
Total revenues include other revenues generated primarily within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevators and agri-service centers derive other


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revenues from activities related to production agriculture, which include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other services of this nature, and our grain marketing operations receive other revenues at our export terminals from activities related to loading vessels. Corporate and Other derives revenues primarily from our hedging and insurance operations.
 
Our Energy segment revenues, after elimination of intersegment revenues, of $7.9 billion increased by $704.2 million (10%) during the year ended August 31, 2007 compared to fiscal 2006. During the years ended August 31, 2007 and 2006, our Energy segment recorded revenues from our Ag Business segment of $228.9 million and $242.4 million, respectively. The revenues net increase of $704.2 million is comprised of a net increase of $624.0 million in sales volume and a $80.2 million increase related to a net price appreciation on refined fuels, renewable fuels and propane products. The net change in revenues includes volume increases of $606.0 million from our ethanol marketing venture, which we acquired in April of fiscal 2006. Refined fuels revenues increased $94.5 million (2%), of which $111.2 million was due to increased volumes, partially offset by $16.7 million related to a net average selling price decrease compared to fiscal 2006. Our refined fuels volumes increased 2%, while the sales price of refined fuels decreased, only slightly, or less than $.01 per gallon, when comparing the year ended August 31, 2007 with fiscal 2006. Lower crude oil prices during fiscal 2007 compared to fiscal 2006 were primarily attributable to the effects of the hurricanes in the United States during the fall of 2005. Production disruptions due to hurricanes during the fall of 2005 along with strong demand contributed to the increases in refined fuels selling prices during fiscal 2006. Propane revenues decreased by $125.5 million (17%), of which $165.1 million was related to decreases in volume, partially offset by $39.6 million related to a net average selling price increase when compared to fiscal 2006. Propane sales volume decreased 22% in comparison to fiscal 2006, while the average selling price of propane increased $0.06 per gallon (6%). Propane prices tend to follow the prices of crude oil and natural gas, both of which decreased during the year ended August 31, 2007 compared to fiscal 2006, and are also affected by changes in propane demand and domestic inventory levels. The decrease in propane volumes reflects a loss of exclusive propane marketing rights at our former supplier’s proprietary terminals.
 
Our Ag Business segment revenues, after elimination of intersegment revenues, of $8.6 billion increased $2.0 billion (30%) during the year ended August 31, 2007 compared to fiscal 2006. Grain revenues in our Ag Business segment totaled $7.1 billion and $5.3 billion during the years ended August 31, 2007 and 2006, respectively. Of the grain revenues increase of $1.8 billion (34%), $1.3 billion is due to increased average grain selling prices and $521.0 million is attributable to increased volumes during the year ended August 31, 2007 compared to fiscal 2006. The average sales price of all grain and oilseed commodities sold reflected an increase of $1.05 per bushel (24%). The 2006 fall harvest produced good yields throughout most of the United States, with the quality of most grains rated as excellent or good. Despite the good harvest, prices for nearly all grain commodities increased because of strong demand, particularly for corn, which is used as the feedstock for most ethanol plants as well as for livestock feed. The average month-end market price per bushel of corn, soybeans and spring wheat increased approximately $1.33, $1.63 and $1.20, respectively, when compared to the prices of those same grains for fiscal 2006. Volumes increased 8% during the year ended August 31, 2007 compared with fiscal 2006. Corn and soybeans had the largest volume increases compared to fiscal 2006, followed by barley and wheat. Our Ag Business segment non-grain product revenues of $1.3 billion increased by $196.0 million (18%) during the year ended August 31, 2007 compared to fiscal 2006, primarily the result of increased revenues of crop nutrients, energy, seed, crop protection, feed and processed sunflower products. Other revenues within our Ag Business segment of $130.2 million during the year ended August 31, 2007 decreased $4.7 million (4%) compared to fiscal 2006 and is primarily attributable to reduced storage and handling revenues.
 
Our Processing segment revenues, after elimination of intersegment revenues, of $754.4 million increased $140.3 million (23%) during the year ended August 31, 2007 compared to fiscal 2006. Because our wheat milling, renewable fuels and packaged foods operations are operated through non-consolidated joint ventures, revenues reported in our Processing segment are entirely from our oilseed processing operations. Processed soybean volumes increased 8%, accounting for an increase in revenues of $27.8 million, and a higher average sales price of processed oilseed and other revenues increased total revenues for this segment by $42.4 million. Oilseed refining revenues increased $66.6 million (23%), of which $50.4 million was due to a higher average


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sales price and $16.1 million was due to a net increase in sales volume. The average selling price of processed oilseed increased $22 per ton and the average selling price of refined oilseed products increased $0.05 per pound compared to 2006. Increased processed soyflour sales of $3.5 million (27%) accounts for the remaining increase in revenues. The changes in the average selling price of products are primarily driven by the higher price of soybeans.
 
Cost of Goods Sold.  Consolidated cost of goods sold of $16.1 billion for the year ended August 31, 2007 compared to $13.5 billion for the year ended August 31, 2006, which represents a $2.6 billion (19%) increase.
 
Our Energy segment cost of goods sold, after elimination of intersegment costs, of $7.0 billion increased by $473.2 million (7%) during the year ended August 31, 2007 compared to fiscal 2006. This net change includes increased cost of goods sold of $624.5 million related to changes in volume from our ethanol marketing venture, which we acquired in April of fiscal 2006. The remaining change in cost of goods sold is primarily due to decreased volumes of propane, partially offset by increased net average per gallon costs of propane. The propane volumes decreased 22%, while the average cost of propane increased $0.05 (5%) compared to the year ended August 31, 2006. The average cost of refined fuels decreased by $0.02 (1%) per gallon, while volumes increased 2% compared to the year ended August 31, 2006. We process approximately 55,000 barrels of crude oil per day at our Laurel, Montana refinery and 80,000 barrels of crude oil per day at NCRA’s McPherson, Kansas refinery. The average cost decrease on refined fuels is reflective of lower input costs at our two crude oil refineries compared to the year ended August 31, 2006. The average per unit cost of crude oil purchased for the two refineries decreased 4% compared to the year ended August 31, 2006.
 
Our Ag Business segment cost of goods sold, after elimination of intersegment costs, of $8.4 billion increased $2.0 billion (31%) during the year ended August 31, 2007 compared to fiscal 2006. Grain cost of goods sold in our Ag Business segment totaled $7.0 billion and $5.3 billion during the years ended August 31, 2007 and 2006, respectively. The cost of grains and oilseed procured through our Ag Business segment increased $1.7 billion (34%) compared to the year ended August 31, 2006. This is the result of an 8% increase in bushels sold along with an increase of $1.04 (24%) average cost per bushel as compared to fiscal 2006. Corn and soybeans had the largest volume increase compared to the year ended August 31, 2006 followed by barley and wheat. Commodity prices on corn, spring wheat and soybeans have increased compared to the prices that were prevalent during the same period in fiscal 2006. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased during the year ended August 31, 2007 compared to fiscal 2006, primarily due to higher volumes and price per unit costs of crop nutrients, energy, seed, crop protection, feed and processed sunflower products. The higher volumes are primarily related to acquisitions.
 
Our Processing segment cost of goods sold, after elimination of intersegment costs, of $726.1 million increased $137.8 million (23%) compared to the year ended August 31, 2006, which was primarily due to increased costs of soybeans in addition to increased volumes.
 
Marketing, General and Administrative.  Marketing, general and administrative expenses of $245.4 million for the year ended August 31, 2007 increased by $14.1 million (6%) compared to fiscal 2006. The net increase of $14.1 million is primarily due to an increase of $1.0 million for educational funding and increased performance-based incentive plan expense, in addition to other employee benefits and general inflation, partially offset by a $3.0 million net increase in gains on disposals of fixed assets.
 
Gain on Investments.  During our first fiscal quarter in 2007, we sold approximately 25% of our investment in CF. We received cash proceeds of $10.9 million and recorded a gain of $5.3 million, which is reflected within the results reported for our Ag Business segment. In December 2006, US BioEnergy completed an initial public offering (IPO) and the effect of the issuance of additional shares of its stock was to dilute our ownership interest from approximately 25% to 21%. Due to US BioEnergy’s increase in equity, we recognized a non-cash net gain of $11.4 million on our investment to reflect our proportionate share of the increase in the underlying equity of US BioEnergy. Subsequent to the IPO, our ownership interest decreased to approximately 19% and our gain was increased by $3.9 million, which brings the net gain to a total of $15.3 million. This net gain is reflected in our Processing segment.


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Interest, net.  Net interest of $31.1 million for the year ended August 31, 2007 decreased $10.2 million (25%) compared to fiscal 2006. Interest expense for the years ended August 31, 2007 and 2006 was $51.8 million and $50.6 million, respectively. Interest income, generated primarily from marketable securities, was $20.7 million and $9.3 million, for the years ended August 31, 2007 and 2006, respectively. The interest expense increase of $1.2 million (2%) includes an increase in short-term borrowings, primarily created by higher working capital needs, and an increase in the average short-term interest rate, partially offset by an increase in capitalized interest of $7.1 million. For the years ended August 31, 2007 and 2006, we capitalized interest of $11.7 million and $4.6 million, respectively, primarily related to construction projects in our Energy segment. The increase in capitalized interest primarily relates to financing interest on our coker project mostly during 2007, partially offset by the final stages of the ultra-low sulfur upgrades at our energy refineries during fiscal 2006. The average level of short-term borrowings increased $263.6 million during the year ended August 31, 2007 compared to fiscal 2006, and the average short-term interest rate increased 0.69%. The interest income increase of $11.4 million (124%) was primarily at NCRA within our Energy segment and relates to marketable securities and in Corporate and Other which relates to an increase in interest income on our hedging services.
 
Equity Income from Investments.  Equity income from investments of $109.7 million for the year ended August 31, 2007 increased $25.5 million (30%) compared to fiscal 2006. We record equity income or loss primarily from the investments in which we have an ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. The net increase in equity income from investments was attributable to improved earnings from investments in all of our business segments and Corporate and Other. These improvements included $0.6 million for Energy, $10.9 million for Ag Business, $13.0 million for Processing, and $1.0 million for Corporate and Other.
 
Our Ag Business segment generated improved earnings of $10.9 million from equity investments. Our share of equity investment earnings or losses in Agriliance increased earnings by $3.0 million and is primarily attributable to improved margins for wholesale and retail crop nutrient products sold during the spring planting season, partially offset by an impairment related to repositioning of their retail operations. Our investment in a Canadian agronomy joint venture contributed an increase in earnings of $0.4 million. During the first fiscal quarter of 2007, we invested $22.2 million for an equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., which was owned jointly (50/50) with Multigrain Comercia, an agricultural commodities business headquartered in Sao Paulo, Brazil. We recorded income of $4.8 million during the year ended August 31, 2007 for that equity investment. This income for Multigrain S.A. includes a gain of $2.1 million on a sale of 25% of its investment during the fourth fiscal quarter of 2007. At the same time, Mitsui Corporation invested in this business so that as of August 31, 2007, our ownership interest in Multigrain S.A. was 37.5%. Our wheat exporting investment in United Harvest contributed improved earnings of $0.2 million, and our equity income from our investment in TEMCO, a joint venture which exports primarily corn and soybeans, also reflected $2.7 million of improved earnings. Our country operations business reported an aggregate decrease in equity investment earnings of $0.2 million for several small equity investments.
 
Our Processing segment generated improved earnings of $13.0 million from equity investments. During fiscal 2006 and 2007, we invested $115.4 million in US BioEnergy, an ethanol manufacturing company, and recorded improved earnings of $9.3 million during the year ended August 31, 2007 compared to fiscal 2006, primarily from operating margins as US BioEnergy had additional plants put into production compared to fiscal 2006. Ventura Foods, our vegetable oil-based products and packaged foods joint venture, recorded improved earnings of $2.3 million, and Horizon Milling, our domestic and Canadian wheat milling joint ventures, recorded improved earnings of $1.1 million compared to fiscal 2006. Ventura Foods’ improved results were primarily due to improved product margins. A shifting demand balance for soybeans for both food and renewable fuels meant addressing supply and price challenges for both CHS and our Ventura Foods joint venture. Horizon Milling’s results are primarily affected by U.S. dietary habits. Although the preference for a low carbohydrate diet appears to have reached the bottom of its cycle, milling capacity, which had been idled over the past few years because of lack of demand for flour products, can easily be put back into


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production as consumption of flour products increase, which may continue to depress gross margins in the milling industry.
 
Our Energy segment generated increased equity investment earnings of $0.6 million primarily related to improved margins in an equity investment held by NCRA, and Corporate and Other generated improved earnings of $1.0 million from equity investment earnings, primarily from Cofina Financial, our financial services equity investment, as compared to fiscal 2006.
 
Minority Interests.  Minority interests of $143.2 million for the year ended August 31, 2007 increased by $52.1 million (57%) compared to fiscal 2006. This net increase was a result of more profitable operations within our majority-owned subsidiaries compared to fiscal 2006. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary, which we consolidate in our Energy segment.
 
Income Taxes.  Income tax expense, excluding discontinued operations, of $40.7 million for the year ended August 31, 2007 compares with $59.4 million for fiscal 2006, resulting in effective tax rates of 5.1% and 10.5%, respectively. During the year ended August 31, 2007, we recognized additional tax benefits of $9.6 million upon the receipt of a tax refund from the Internal Revenue Service related to export incentive credits. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the years ended August 31, 2007 and 2006. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.
 
Discontinued Operations.  During the year ended August, 31, 2005, we reclassified our Mexican foods operations, previously reported in Corporate and Other, along with gains and losses recognized on sales of assets, and impairments on assets for sale, as discontinued operations that were sold or have met required criteria for such classification. During fiscal 2006, we sold or disposed of the remaining Mexican foods assets and recorded $1.0 million income ($0.6 million in income, net of taxes).
 
Liquidity and Capital Resources
 
On August 31, 2008, we had working capital, defined as current assets less current liabilities, of $1,738.6 million and a current ratio, defined as current assets divided by current liabilities, of 1.4 to 1.0 compared to working capital of $821.9 million and a current ratio of 1.3 to 1.0 on August 31, 2007. During the year ended August 31, 2008, increases in working capital included the impact of the cash received from additional long-term borrowings of $600.0 million and the distribution of crop nutrients net assets from Agriliance, our agronomy joint venture, as previously discussed.
 
On August 31, 2008, our committed lines of credit consisted of a five-year revolving facility in the amount of $1.3 billion which expires in May 2011 and a 364-day revolving facility in the amount of $500.0 million which expires in February 2009. These credit facilities are established with a syndication of domestic and international banks, and our inventories and receivables financed with them are highly liquid. On August 31, 2008, we had $75.0 million outstanding on our five-year revolver compared with $600.0 million outstanding on August 31, 2007. On August 31, 2008, we had no amount outstanding on our 364-day revolver. In addition, we have two commercial paper programs totaling $125.0 million with banks participating in our five-year revolver. On August 31, 2008, we had no commercial paper outstanding compared with $51.9 million on August 31, 2007. Late summer and early fall are typically our lowest points of seasonal borrowings, however, due to the appreciation in commodity prices, as further discussed in “Cash Flows from Operations”, our borrowings were much higher at the end of fiscal 2007 and during the year ended August 31, 2008, when compared to prior years. With our current 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 capital expenditures in the foreseeable future.
 
Cash Flows from Operations
 
Cash flows from operations are generally affected by commodity prices and the seasonality of our businesses. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government


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regulations and policies, world events, and general political and economic conditions. These factors are described in the cautionary statement in Part I, Item 1A of this Form 10-K, and may affect net operating assets and liabilities, and liquidity.
 
Cash flows provided by operating activities were $805.8 million, $407.3 million and $497.8 million for the years ended August 31, 2008, 2007 and 2006, respectively. The fluctuation in cash flows from operations between fiscal 2008 and 2007 was primarily the result of a smaller net increase in operating assets and liabilities during fiscal 2008 when compared to fiscal 2007. Commodity prices have been very volatile during the past two fiscal years, and higher prices affect inventory and receivable balances which consume cash until inventories are sold and receivables are collected. In addition, we hedge most of our grain positions with futures contracts on regulated exchanges, and volatile prices create margin calls, reflected in other current assets, which are a use of cash. The fluctuations in cash flows from operations between fiscal 2007 and 2006 was primarily the result of an increase in operating assets and liabilities partially offset by greater net income during fiscal 2007.
 
Our operating activities provided net cash of $805.8 million during the year ended August 31, 2008. Net income of $803.0 million and net non-cash expenses and cash distributions from equity investments of $230.0 million were partially offset by an increase in net operating assets and liabilities of $227.2 million. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including major repair costs, of $210.4 million, minority interests of $72.2 million and deferred taxes of $26.0 million, which were partially offset by income from equity investments, net of distributions, of $40.4 million and a pretax net gain on investments of $29.2 million. Gains on investments were previously discussed in “Results of Operations”, and primarily include the gain on the sale of all of our shares of CF common stock, partially off set by an impairment of our VeraSun investment. The increase in net operating assets and liabilities was caused primarily by increased commodity prices reflected in increased inventories, receivables, derivative assets and hedging deposits included in other current assets, partially offset by an increase in accounts payable and accrued expenses, customer advance payments and derivative liabilities on August 31, 2008, when compared to August 31, 2007. On August 31, 2008, the per bushel market prices of our three primary grain commodities, corn, soybeans and spring wheat, increased by $2.44 (75%), $4.64 (53%) and $1.69 (24%), respectively, when compared to the prices on August 31, 2007. The affect of increased grain prices on our operating assets and liabilities was partially offset by a decrease in our Ag Business segment grain inventories of 44.7 million bushels (30%) when comparing inventories at August 31, 2008 and 2007. In general, crude oil market prices increased $41.42 (56%) per barrel on August 31, 2008, when compared to August 31, 2007. In addition, on August 31, 2008, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses generally had increases between 73% and 248%, depending on the product, compared to prices on August 31, 2007.
 
Our operating activities provided net cash of $407.3 million during the year ended August 31, 2007. Net income of $756.7 million and net non-cash expenses and cash distributions from equity investments of $288.4 million were partially offset by an increase in net operating assets and liabilities of $637.8 million. The primary components of net non-cash expenses and cash distributions from equity investments included minority interests of $143.2 million, depreciation and amortization, including major repair costs, of $163.8 million and deferred taxes of $50.9 million, which were partially offset by income from equity investments, net of distributions, of $43.0 million and a pretax gain on investments of $20.6 million. The increase in net operating assets and liabilities was caused primarily by increased commodity prices reflected in increased inventories, receivables, derivative assets and hedging deposits included in other current assets, partially offset by an increase in accounts payable and accrued expenses, derivative liabilities and customer advances on August 31, 2007, when compared to August 31, 2006. On August 31, 2007, the per bushel market prices of our three primary grain commodities, soybeans, spring wheat and corn, increased by $3.26 (60%), $2.37 (52%) and $0.92 (40%), respectively, when compared to the prices on August 31, 2006. In addition, grain inventories in our Ag Business segment increased by 39.6 million bushels (36%) when comparing inventories at August 31, 2007 and 2006. In general, crude oil prices increased $3.78 (5%) per barrel on August 31, 2007, when compared to August 31, 2006.


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Our operating activities provided net cash of $497.8 million during the year ended August 31, 2006. Net income of $505.4 million and net non-cash expenses and cash distributions from equity investments of $285.2 million were partially offset by an increase in net operating assets and liabilities of $292.8 million. The primary components of net non-cash expenses and cash distributions from equity investments included depreciation and amortization, including major repair costs, of $141.5 million, minority interests of $91.1 million and deferred taxes of $88.3 million, which were partially offset by income from equity investments, net of distributions, of $25.9 million. The increase in net operating assets and liabilities was caused primarily by an increase in inventories and a decrease in payables on August 31, 2006, when compared to August 31, 2005. The increase in inventories was primarily due to an increase in grain prices and grain inventory quantities in our Ag Business segment. On August 31, 2006, the per bushel market prices of two of our primary grain commodities, spring wheat and corn, increased by $1.04 (29%) and $0.31 (15%), respectively, and soybeans, another high volume commodity, saw a decline in price of $0.45 (8%) when compared to August 31, 2005. Grain inventories in our Ag Business segment increased by 16.3 million bushels (18%) when comparing inventories at August 31, 2006 and 2005. In addition, energy inventories at NCRA increased by 763 thousand barrels (26%) on August 31, 2006 when compared to August 31, 2005, and were also valued using prices that were 46% higher than the previous year. The decrease in accounts payable is related to NCRA, and is primarily due to a decrease in payables for crude oil purchased. The decrease in crude oil payables was related to the planned major maintenance turnaround, during which time the refinery was shut down and inventory was not used for production. The turnaround was completed by the end of August 2006.
 
Crude oil prices have been volatile and are expected to be volatile in the foreseeable future, but related inventories and receivables are turned in a relatively short period, thus somewhat mitigating the effect on operating assets and liabilities. Grain prices were volatile during fiscal 2008 and 2007, and are influenced significantly by global projections of grain stocks available until the next harvest, which has been affected by demand from the ethanol industry in recent years. Although grain prices have declined subsequent to August 31, 2008, we anticipate continued price volatility but within a narrower band of real values.
 
Cash Flows from Investing Activities
 
For the years ended August 31, 2008, 2007 and 2006, the net cash flows used in our investing activities totaled $663.7 million, $530.0 million and $308.2 million, respectively.
 
The acquisition of property, plant and equipment comprised the primary use of cash totaling $318.6 million, $373.3 million and $235.0 million for the years ended August 31, 2008, 2007 and 2006, respectively. Included in our total acquisitions of property, plant and equipment for those same three years were capital expenditures for the installation of a coker unit at our Laurel, Montana refinery, along with refinery improvements, in the amounts of $132.5 million, $221.5 million and $62.8 million, respectively. The coker project was completed in fiscal 2008, and allows us to extract a greater volume of high value gasoline and diesel fuel from a barrel of crude oil and less relatively low value asphalt. Included in our total acquisitions of property, plant and equipment for year ended August 31, 2006, were $71.5 million of capital expenditures primarily related to the U.S. Environmental Protection Agency (EPA) low sulfur fuel regulations at our Laurel, Montana refinery and NCRA’s McPherson, Kansas refinery.
 
For the year ending August 31, 2009, we expect to spend approximately $577.8 million for the acquisition of property, plant and equipment. The EPA has passed a regulation that requires the reduction of the benzene level in gasoline to be less than 0.62% volume by January 1, 2011. As a result of this regulation, our refineries will incur capital expenditures to reduce the current gasoline benzene levels to the regulated levels. We anticipate the combined capital expenditures for the Laurel and NCRA refineries to be approximately $130 million, for which $73 million is included in budgeted capital expenditures for fiscal 2009.
 
Expenditures for major repairs related to our refinery turnarounds were $21.7 million, $34.7 million and $42.9 million during the years ended August 31, 2008, 2007 and 2006, respectively.
 
In October 2003, we and NCRA reached agreements with the EPA and the State of Montana’s Department of Environmental Quality and the State of Kansas Department of Health and Environment regarding the terms of settlements with respect to reducing air emissions at our Laurel, Montana and NCRA’s


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McPherson, Kansas refineries. These settlements are part of a series of similar settlements that the EPA has negotiated with major refiners under the EPA’s Petroleum Refinery Initiative. The settlements take the form of consent decrees filed with the U.S. District Court for the District of Montana (Billings Division) and the U.S. District Court for the District of Kansas. Each consent decree details potential capital improvements, supplemental environmental projects and operational changes that we and NCRA have agreed to implement at the relevant refinery over several years. The consent decrees also required us, and NCRA, to pay approximately $0.5 million in aggregate civil cash penalties. As of August 31, 2008, the aggregate capital expenditures for us and NCRA related to these settlements was approximately $33 million, and we anticipate spending approximately an additional $4 million over the next few years. We do not believe that the settlements will have a material adverse effect on us, or NCRA.
 
Investments made during the years ended August 31, 2008, 2007 and 2006 totaled $370.2 million, $95.8 million and $73.0 million, respectively.
 
As previously discussed, in September 2007, Agriliance distributed primarily its wholesale crop nutrients and crop protection assets to us and Land O’Lakes, respectively, and continues to operate primarily its retail distribution business until further repositioning of that business occurs. During the year ended August 31, 2008, we made a $13.0 million net cash payment to Land O’Lakes in order to maintain equal capital accounts in Agriliance, as previously discussed, and Land O’Lakes paid us $8.3 million for additional assets distributed to them by Agriliance related to joint venture ownership interests. In addition, during the year ended August 31, 2008, our net contribution to Agriliance was $235.0 million which supported their working capital requirements, with Land O’Lakes making equal contributions to Agriliance, primarily for crop nutrient and crop protection product net trade payables that were not assumed by us or Land O’Lakes upon the distribution of the crop nutrients and crop protection assets, as well as for Agriliance’s ongoing retail operations.
 
Also during the year ended August 31, 2008, we invested an additional $20.0 million in Ventura Foods, included in our Processing segment.
 
During the year ended August 31, 2007, we invested $22.2 million in Multigrain AG (Multigrain) for a 37.5% equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil. The venture, included in our Ag Business segment, includes grain storage and export facilities and builds on our South American soybean origination. During the year ended August 31, 2008, we increased our equity position through a purchase from an existing equity holder for $10.0 million, and also invested an additional $30.3 million which was used by Multigrain to invest in a joint venture that acquired production farmland and related operations. On August 31, 2008, we had a 40.0% ownership interest in Multigrain. During the first quarter of fiscal 2009, we and Mitsui & Co., Ltd. (Mitsui) invested an additional $200.0 million for Multigrain’s increased capital needs resulting from expansion of their operations. Our share of the $200.0 million investment was $76.3 million, resulting in our current ownership interest of 39.35%, equal to Mitsui’s ownership interest. During fiscal 2008 and 2007, our grain marketing operations have also added to our global presence by opening offices in Geneva, Switzerland; Kiev, Ukraine; Shanghai, China; and Hong Kong, and continue to explore other opportunities to establish a presence in emerging grain origination and export markets.
 
During the year ended August 31, 2007, we invested $15.6 million in Horizon Milling G.P. (24% CHS ownership), a joint venture included in our Processing segment, that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of Canada, whose operations include flour milling and dry baking mixing facilities in Canada. During the year ended August 31, 2008, we invested an additional $1.9 million in Horizon Milling G.P.
 
We purchased $70.0 million of common stock in US BioEnergy, an ethanol production company, during the year ended August 31, 2006. During the years ended August 31, 2007 and 2008, we made additional investments of $45.4 million and $6.5 million, respectively. Through March 31, 2008, we were recognizing our share of the earnings of US BioEnergy in our Processing segment, using the equity method of accounting. Effective April 1, 2008, US BioEnergy and VeraSun completed a merger, and our current ownership interest in the combined entity was reduced to approximately 8%, compared to an approximate 20% interest in US BioEnergy prior to the merger. As part of the merger transaction, our shares held in US BioEnergy were


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converted to shares held in the surviving company, VeraSun, at .810 per share. As a result of our change in ownership interest we no longer have significant influence, and account for VeraSun as an available-for-sale investment. Due to the continued decline of the ethanol industry and other considerations, we determined that an impairment of our VeraSun investment was necessary, and as a result, based on VeraSun’s market value of $5.76 per share on August 29, 2008, an impairment charge of $71.7 million ($55.3 million net of taxes) was recorded during the fourth quarter of our year ended August 31, 2008. Subsequent to August 31, 2008, the market value of VeraSun’s stock price continued to decline, and VeraSun filed for voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on October 31, 2008. We will be evaluating an additional impairment during our first quarter of fiscal 2009.
 
For the years ended August 31, 2008, 2007 and 2006, changes in notes receivable resulted in a decrease in cash flows of $67.1 million, a decrease in cash flows of $29.3 million and an increase in cash flows of $21.0 million, respectively. For the year ended August 31, 2008, $46.0 million of the decrease in cash flows resulted from a note receivable from Cofina Financial, and the balance was primarily from related party notes receivable at NCRA from its minority owners, Growmark, Inc. and MFA Oil Company. For the years ended August 31, 2007 and 2006, the changes in notes receivable were primarily from related party notes receivable at NCRA.
 
Cash acquisitions of businesses totaled $47.0 million and $15.1 million during the years ended August 31, 2008 and 2007, respectively. In fiscal 2008, we purchased a soy-based food ingredients business included in our Processing segment and an energy and convenience store business included in our Energy segment. In addition, we acquired and paid for a distillers dried grain business included in our Ag Business segment during fiscal 2008 and 2007.
 
Various other cash acquisitions of intangible assets totaled $3.4 million, $9.1 million and $2.9 million during the years ended August 31, 2008, 2007 and 2006, respectively.
 
Partially offsetting our cash outlays for investing activities during the years ended August 31, 2008 and 2007, were proceeds from the sale of investments of $122.1 million and $10.9 million, respectively, which were previously discussed in “Results of Operations”, and primarily include proceeds from the sale of all of our shares of CF common stock. Also partially offsetting cash usages for the years ended August 31, 2008, 2007 and 2006, were investments redeemed totaling $43.0 million, $4.9 million and $7.3 million, respectively, and proceeds from the disposition of property, plant and equipment of $9.3 million, $13.5 million and $13.9 million, respectively.
 
Cash Flows from Financing Activities
 
We finance our working capital needs through short-term lines of credit with a syndication of domestic and international banks. In May 2006, we renewed and expanded our committed lines of revolving credit to include a five-year revolver in the amount of $1.1 billion, with the ability to expand the facility an additional $200.0 million. In October 2007, we expanded that facility, receiving additional commitments in the amount of $200.0 million from certain lenders under the agreement. The additional commitments increased the total borrowing capacity to $1.3 billion on the facility. In February 2008, we increased our short-term borrowing capacity by establishing a $500.0 million committed line of credit with a syndication of banks consisting of a 364-day revolver. In addition to these 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 November 2007, the line of credit dedicated to NCRA was renewed for an additional year, with another renewal planned for December 2008. We also have a committed revolving line of credit dedicated to Provista Renewable Fuels Marketing, LLC (Provista), which expires in November 2009, in the amount of $25.0 million. During the year ended August 31, 2008, our wholly-owned subsidiary, CHS Europe S.A., entered into uncommitted lines of credit to finance its normal trade grain transactions, which are collateralized by $31.2 million of inventories and receivables as of August 31, 2008. On August 31, 2008 and 2007, we had total short-term indebtedness outstanding on these various facilities and other miscellaneous short-term notes payable totaling $106.2 million and $620.7 million, respectively, with interest rates ranging from 2.43% to 3.74%. Proceeds from our long-term borrowings


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totaling $600.0 million during the year ended August 31, 2008, were used to pay down our five-year revolver and are explained in further detail below.
 
During the year ended August 31, 2007, we instituted two commercial paper programs, totaling up to $125.0 million, with two banks participating in our five-year revolving credit facility. Terms of our five-year revolving credit facility allow a maximum usage of commercial paper of $200.0 million at any point in time. The commercial paper programs do not increase our committed borrowing capacity in that we are required to have at least an equal amount of undrawn capacity available on our five-year revolving facility as to the amount of commercial paper issued. On August 31, 2008, we had no commercial paper outstanding, and on August 31, 2007, we had $51.9 million outstanding.
 
We typically finance our long-term capital needs, primarily for the acquisition of property, plant and equipment, with long-term agreements with various insurance companies and banks. In June 1998, we established a long-term credit agreement through cooperative banks. This facility committed $200.0 million of long-term borrowing capacity to us, with repayments through fiscal 2009. The amount outstanding on this credit facility was $49.2 million and $75.4 million on August 31, 2008 and 2007, respectively. Interest rates on August 31, 2008 ranged from 3.96% to 7.13%. Repayments of $26.2 million, $23.0 million and $16.4 million were made on this facility during the three years ended August 31, 2008, 2007 and 2006, respectively.
 
Also in June 1998, we completed a private placement offering with several insurance companies for long-term debt in the amount of $225.0 million with an interest rate of 6.81%. Repayments are due in equal annual installments of $37.5 million each in the years 2008 through 2013. During the year ended August 31, 2008, repayments totaled $37.5 million.
 
In January 2001, we entered into a note purchase and private shelf agreement with Prudential Insurance Company. The long-term note in the amount of $25.0 million has an interest rate of 7.9% and is due in equal annual installments of approximately $3.6 million, in the years 2005 through 2011. A subsequent note for $55.0 million was issued in March 2001, related to the private shelf facility. The $55.0 million note has an interest rate of 7.43% and is due in equal annual installments of approximately $7.9 million, in the years 2005 through 2011. During each of the years ended August 31, 2008, 2007 and 2006, repayments on these notes totaled $11.4 million.
 
In October 2002, we completed a private placement with several insurance companies for long-term debt in the amount of $175.0 million, which was layered into two series. The first series of $115.0 million has an interest rate of 4.96% and is due in equal semi-annual installments of approximately $8.8 million during the years 2007 through 2013. The second series of $60.0 million has an interest rate of 5.60% and is due in equal semi-annual installments of approximately $4.6 million during years 2012 through 2018. Repayments of $17.7 million were made on the first series notes during each of the years ended August 31, 2008 and 2007.
 
In March 2004, we entered into a note purchase and private shelf agreement with Prudential Capital Group, and in April 2004, we borrowed $30.0 million under this arrangement. One long-term note in the amount of $15.0 million has an interest rate of 4.08% and is due in full at the end of the six-year term in 2010. Another long-term note in the amount of $15.0 million has an interest rate of 4.39% and is due in full at the end of the seven-year term in 2011. In April 2007, we amended our Note Purchase and Private Shelf Agreement with Prudential Investment Management, Inc. and several other participating insurance companies to expand the uncommitted facility from $70.0 million to $150.0 million. We borrowed $50.0 million under the shelf arrangement in February 2008, for which the aggregate long-term notes have an interest rate of 5.78% and are due in equal annual installments of $10.0 million during the years 2014 through 2018.
 
In September 2004, we entered into a private placement with several insurance companies for long-term debt in the amount of $125.0 million with an interest rate of 5.25%. The debt is due in equal annual installments of $25.0 million during years 2011 through 2015.
 
In October 2007, we entered into a private placement with several insurance companies and banks for long-term debt in the amount of $400.0 million with an interest rate of 6.18%. Repayments are due in equal annual installments of $80.0 million during the years 2013 through 2017.


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In December 2007, we established a ten-year long-term credit agreement through a syndication of cooperative banks in the amount of $150.0 million, with an interest rate of 5.59%. Repayments are due in equal semi-annual installments of $15.0 million each, starting in June 2013 through December 2018.
 
Through NCRA, we had revolving term loans outstanding of $0.5 million and $3.0 million for the years ended August 31, 2008 and 2007, respectively. The interest rate on August 31, 2008 was 6.48%. Repayments of $2.5 million, $3.0 million and $3.0 million were made during the three years ended August 31, 2008, 2007 and 2006, respectively.
 
On August 31, 2008, we had total long-term debt outstanding of $1,194.9 million, of which $199.7 million was bank financing, $966.4 million was private placement debt and $28.8 million was industrial revenue bonds and other notes and contracts payable. On August 31, 2007, we had long-term debt outstanding of $688.3 million. Our long-term debt is unsecured except for other notes and contracts in the amount of $11.6 million; however, restrictive covenants under various agreements have requirements for maintenance of minimum working capital levels and other financial ratios. In addition, NCRA’s term loan of $0.5 million is collateralized by NCRA’s investment in CoBank, ACB. We were in compliance with all debt covenants and restrictions as of August 31, 2008. The aggregate amount of long-term debt payable as of August 31, 2008, was as follows (dollars in thousands):
 
         
2009
  $ 118,636  
2010
    83,386  
2011
    112,329  
2012
    95,102  
2013
    181,085  
Thereafter
    604,317  
         
    $ 1,194,855  
         
 
In December 2006, NCRA entered into an agreement with the City of McPherson, Kansas related to certain of its ultra-low sulfur fuel assets, with a cost of approximately $325.0 million. The City of McPherson issued $325.0 million of Industrial Revenue Bonds (IRBs) which were transferred to NCRA as consideration in a financing agreement between the City of McPherson and NCRA related to the ultra-low sulfur fuel assets. The term of the financing obligation is ten years, at which time NCRA has the option of extending the financing obligation or purchasing the assets for a nominal amount. NCRA has the right at anytime to offset the financing obligation to the City of McPherson against the IRBs. No cash was exchanged in the transaction and none is anticipated to be exchanged in the future. Due to the structure of the agreement, the financing obligation and the IRBs are shown net in our consolidated financial statements. On March 18, 2007, notification was sent to the bond trustees to pay the IRBs down by $324.0 million, at which time the financing obligation to the City of McPherson was offset against the IRBs. The balance of $1.0 million will remain outstanding until its final ten-year maturity.
 
During the years ended August 31, 2008 and 2007, we borrowed on a long-term basis, $600.0 million and $4.1 million, respectively. There were no long-term borrowings during the year ended August 31, 2006. During the years ended August 31, 2008, 2007 and 2006, we repaid long-term debt of $99.5 million, $60.9 million and $36.7 million, respectively.
 
Distributions to minority owners for the years ended August 31, 2008, 2007 and 2006 were $63.1 million, $76.8 million and $80.5 million, respectively, and were primarily related to NCRA.
 
During the years ended August 31, 2008 and 2007, changes in checks and drafts outstanding resulted in an increase in cash flows of $61.1 million and $85.4 million, respectively, and during the year ended August 31, 2006, resulted in a decrease in cash flows of $10.5 million.
 
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


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distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates. The patronage earnings from the fiscal year ended August 31, 2007, were primarily distributed during the second fiscal quarter of the year ended August 31, 2008. The cash portion of this distribution deemed by the Board of Directors to be 35% was $195.0 million. During the years ended August 31, 2007 and 2006, we distributed cash patronage of $133.1 million and $62.5 million, respectively.
 
Cash patronage for the year ended August 31, 2008, determined by the Board of Directors to be 35% and to be distributed in fiscal 2009, is expected to be approximately $228.2 million and is classified as a current liability on the August 31, 2008 Consolidated Balance Sheet in dividends and equities payable.
 
Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities held by them and another for individuals who are eligible for equity redemptions at age 70 or upon death. The amount that each non-individual receives under the pro-rata program in any year is determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates eligible for redemption held by them, and the denominator of which is the sum of the patronage certificates eligible for redemption held by all eligible holders of patronage certificates that are not individuals. In addition to the annual pro-rata program, the Board of Directors approved additional equity redemptions to non-individuals in prior years targeting older capital equity certificates which were redeemed in cash in fiscal 2008 and 2007. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2008, that will be distributed in fiscal 2009, to be approximately $93.8 million. These expected distributions are classified as a current liability on the August 31, 2008 Consolidated Balance Sheet.
 
For the years ended August 31, 2008, 2007 and 2006, we redeemed in cash, equities in accordance with authorization from the Board of Directors, in the amounts of $81.8 million, $70.8 million and $55.9 million, respectively. An additional $46.4 million, $35.9 million and $23.8 million of capital equity certificates were redeemed in fiscal 2008, 2007 and 2006, respectively, by issuance of shares of our 8% Cumulative Redeemable Preferred Stock (Preferred Stock). The amount of equities redeemed with each share of Preferred Stock issued was $25.65, $26.09 and $26.10, which was the closing price per share of the stock on the NASDAQ Global Select Market on February 11, 2008, February 8, 2007 and January 23, 2006, respectively.
 
Our Preferred Stock is listed on the NASDAQ Global Select Market under the symbol CHSCP. On August 31, 2008, we had 9,047,780 shares of Preferred Stock outstanding with a total redemption value of approximately $226.2 million, excluding accumulated dividends. Our Preferred Stock accumulates dividends at a rate of 8% per year, which are payable quarterly, and is redeemable at our option. At this time, we have no current plan or intent to redeem any Preferred Stock. Dividends paid on our preferred stock during the years ended August 31, 2008, 2007 and 2006, were $16.3 million, $13.1 million and $10.8 million, respectively.
 
Off Balance Sheet Financing Arrangements
 
Lease Commitments:
 
We have commitments under operating leases for various refinery, manufacturing and transportation equipment, rail cars, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the lease term.
 
Total rental expense for all operating leases, net of rail car mileage credits received from the railroad and sublease income for the years ended August 31, 2008, 2007 and 2006, was $58.3 million, $44.3 million and $38.5 million, respectively.


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Minimum future lease payments required under noncancellable operating leases as of August 31, 2008 were as follows:
 
         
    Total  
    (Dollars in millions)  
 
2009
  $ 39.6  
2010
    34.3  
2011
    25.3  
2012
    18.8  
2013
    11.3  
Thereafter
    23.0  
         
Total minimum future lease payments
  $ 152.3  
         
 
Guarantees:
 
We are a guarantor for lines of credit for related companies. Our bank covenants allow maximum guarantees of $500.0 million, of which $41.7 million was outstanding on August 31, 2008. All outstanding loans with respective creditors are current as of August 31, 2008.
 
Debt:
 
There is no material off balance sheet debt.
 
Contractual Obligations
 
We had certain contractual obligations at August 31, 2008 which require the following payments to be made:
 
                                         
    Payments Due by Period  
          Less than
    1 - 3
    3 - 5
    More than
 
Contractual Obligations
  Total     1 Year     Years     Years     5 Years  
    (Dollars in thousands)  
 
Notes payable(1)
  $ 106,154     $ 106,154                          
Long-term debt(1)
    1,194,855       118,636     $ 195,715     $ 276,187     $ 604,317  
Interest payments(2)
    362,228       58,941       118,221       93,268       91,798  
Operating leases
    152,328       39,652       59,576       30,067       23,033  
Purchase obligations(3)
    7,534,494       4,357,023       3,095,208       76,190       6,073  
Other liabilities(4)
    197,481               57,704       59,552       80,225  
                                         
Total obligations
  $ 9,547,540     $ 4,680,406     $ 3,526,424     $ 535,264     $ 805,446  
                                         
 
 
(1) Included on our Consolidated Balance Sheet.
 
(2) Based on interest rates and long-term debt balances as of August 31, 2008.
 
(3) Purchase obligations are legally binding and enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities; fixed, minimum or variable price provisions; and time of the transactions. Of our total purchase obligations, $1,954.6 million is included in accounts payable and accrued expenses on our Consolidated Balance Sheet.
 
(4) Other liabilities include the long-term portion of deferred compensation, deferred income taxes and contractual redemptions, and are included on our Consolidated Balance Sheet. Of our total other liabilities on our Consolidated Balance Sheet in the amount of $423.7 million, the timing of the payments of $226.2 million of such liabilities cannot be determined.


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Critical Accounting Policies
 
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the use of estimates as well as management’s judgments and assumptions regarding matters that are subjective, uncertain or involve a high degree of complexity, all of which affect the results of operations and financial condition for the periods presented. We believe that of our significant accounting policies, the following may involve a higher degree of estimates, judgments and complexity.
 
Allowances for Doubtful Accounts
 
The allowances for doubtful accounts are maintained at a level considered appropriate by our management based on analyses of credit quality for specific accounts, historical trends of charge-offs and recoveries, and current and projected economic, market and other conditions. Different assumptions, changes in economic circumstances, or the deterioration of the financial condition of our customers, could result in additional provisions to the allowances for doubtful accounts and increased bad debt expense.
 
Inventory Valuation and Reserves
 
Grain, processed grains, oilseed and processed oilseeds are stated at net realizable values which approximates market values. All other inventories are stated at the lower of cost or market. The cost of certain energy inventories (wholesale refined products, crude oil and asphalt), are determined on the last-in, first-out (LIFO) method; all other energy inventories are valued on the first-in, first-out (FIFO) and average cost methods. Estimates are used in determining the net realizable value of grain and oilseed and processed grains and oilseeds inventories. These estimates include the measurement of grain in bins and other storage facilities, which use formulas in addition to actual measurements taken to arrive at appropriate quantity. Other determinations made by management include quality of the inventory and estimates for freight. Grain shrink reserves and other reserves that account for spoilage also affect inventory valuations. If estimates regarding the valuation of inventories, or the adequacy of reserves, are less favorable than management’s assumptions, then additional reserves or write-downs of inventories may be required.
 
Derivative Financial Instruments
 
We enter into exchange-traded commodity futures and options contracts to hedge our exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk. We do not use derivatives for speculative purposes. Futures and options contracts used for hedging are purchased and sold through regulated commodity exchanges. We also use over-the-counter (OTC) instruments to hedge our exposure on flat price fluctuations. Fluctuations in inventory valuations, however, may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and, in part, to our assessment of our exposure from expected price fluctuations. We also manage our risks by entering into fixed-price purchase contracts with pre-approved producers and establishing appropriate limits for individual suppliers. Fixed-price sales contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The fair value of futures and options contracts is determined primarily from quotes listed on regulated commodity exchanges. Fixed-price purchase and sales contracts are with various counterparties, and the fair values of such contracts are determined from the market price of the underlying product. We are exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and also the risk that the counterparty will refuse to perform a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. Subsequent to our year ended August 31, 2008, the market prices of our input products have significantly decreased, thereby increasing the risk of nonperformance by counterparties.


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Pension and Other Postretirement Benefits
 
Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates and other factors. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expenses and the recorded obligations in future periods. While our management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses. Based on changes in market conditions subsequent to our year ended August 31, 2008, the expected return on plan assets may not be realized.
 
Deferred Tax Assets
 
We assess whether a valuation allowance is necessary to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income, as well as other factors, in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize all, or part of, our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to income in the period such determination was made. We are also significantly impacted by the utilization of loss carryforwards and tax benefits primarily passed to us from National Cooperative Refinery Association (NCRA), which are associated with refinery upgrades that enable NCRA to produce ultra-low sulfur fuels. Our net operating loss carryforwards for tax purposes are available to offset future taxable income. If our loss carryforwards are not used, these loss carryforwards will expire.
 
Long-Lived Assets
 
Depreciation and amortization of our property, plant and equipment is provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances, or other factors, may cause management’s estimates of expected useful lives to differ from actual.
 
All long-lived assets, including property plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment on the basis of undiscounted cash flows, at least annually for goodwill, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Estimated fair market value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and may differ from actual.
 
Environmental Liabilities
 
Liabilities, including legal costs, related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regulations. Recoveries, if any, are recorded in the period in which recovery is considered probable. It is often difficult to estimate the cost of environmental compliance, remediation and potential claims given the uncertainties regarding the interpretation and enforcement of applicable environmental laws and regulations, the extent of environmental contamination and the existence of alternate cleanup methods. All liabilities are monitored and adjusted as new facts or changes in law or technology occur and management believes adequate provisions have been made for environmental liabilities. Changes in facts or circumstances may have an adverse impact on our consolidated financial results.
 
Revenue Recognition
 
We record revenue from grain and oilseed sales after the commodity has been delivered to its destination and final weights, grades and settlement prices have been agreed upon. All other sales are recognized upon


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transfer of title, which could occur upon either shipment or receipt by the customer, depending upon the transaction. Amounts billed to a customer as part of a sales transaction related to shipping and handling are included in revenues. Service revenues are recorded only after such services have been rendered and are included in other revenues.
 
Effect of Inflation and Foreign Currency Transactions
 
We believe that inflation and foreign currency fluctuations have not had a significant effect on our operations during the three years ended August 31, 2008, since we conduct essentially all of our business in U.S. dollars.
 
Recent Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157.” FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis until fiscal years beginning after November 15, 2008. Any amounts recognized upon adoption of this rule as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. We are in the process of evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated results of operations and financial condition.
 
In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP 157-3 clarifies the definition of fair value by stating that a transaction price is not necessarily indicative of fair value in a market that is not active or in a forced liquidation or distressed sale. Rather, if the company has the ability and intent to hold the asset, the company may use its assumptions about future cash flows and appropriately adjusted discount rates in measuring fair value of the asset. The guidance in FSP 157-3 was effective immediately upon issuance, including prior periods for which financial statements have not been issued. The adoption of FSP 157-3 was not material to our consolidated results of operations, statement of financial position or cash flows.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated results of operations and financial condition.
 
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree, as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. The impact on our consolidated financial statements of adopting SFAS No. 141R will depend on the nature, terms and size of business combinations completed after the effective date.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51.” This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a


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subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in our consolidated balance sheets. Income and comprehensive income attributed to the noncontrolling interest will be included in consolidated statements of operations and consolidated statements of equities and comprehensive income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of this standard must be applied retrospectively upon adoption. We are in the process of evaluating the impact the adoption of SFAS No. 160 will have on our consolidated financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133.” SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. We are currently evaluating the impact of the adoption of SFAS No. 161 on our consolidated financial statements.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
COMMODITY PRICE RISK
 
We are exposed to price fluctuations on energy, fertilizer, grain and oilseed transactions due to fluctuations in the market value of inventories and fixed or partially fixed purchase and sales contracts. Our use of derivative instruments reduces the effects of price volatility, thereby protecting against adverse short-term price movements, while somewhat limiting the benefits of short-term price movements. However, fluctuations in inventory valuations may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and, in part, to our assessment of our exposure from expected price fluctuations.
 
When available, we generally enter into opposite and offsetting positions using futures contracts or options to the extent practical, in order to arrive at a net commodity position within the formal position limits we have established and deemed prudent for each commodity. These contracts are purchased and sold through regulated commodity exchanges. The contracts are economic hedges of price risk, but are not designated or accounted for as hedging instruments for accounting purposes in any of our operations, with the exception of some contracts in prior years included in our Energy segment operations discussed below. These contracts are recorded on our Consolidated Balance Sheets at fair values based on quotes listed on regulated commodity exchanges. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.
 
We also manage our risks by entering into fixed-price purchase and sales contracts with pre-approved producers and by establishing appropriate limits for individual suppliers. Fixed-price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. We are also exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and also the risk that the counterparty will refuse to perform a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. Subsequent to our year ended August 31, 2008, the market prices of our input products have significantly decreased, thereby increasing the risk of nonperformance by counterparties. These contracts are recorded on our Consolidated Balance Sheets at fair values based on the market prices of the underlying products listed on regulated commodity exchanges, except for certain fixed-price contracts related to propane in our Energy segment. The propane contracts within our Energy segment meet the normal purchase and sales exemption, and thus are not required to be marked to fair value. Unrealized gains and losses on fixed-price contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.


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Changes in the fair values of derivative instruments described above are recognized in cost of goods sold, in our Consolidated Statements of Operations; in the period such changes occur for all operations with the exception of some derivative instruments in prior years included in our Energy segment.
 
In our Energy segment, certain financial contracts entered into for the spread between crude oil purchase value and distillate selling price have been designated and accounted for as hedging instruments (cash flow hedges) in prior years. The unrealized gains or losses of these contracts were deferred to accumulated other comprehensive income in the equity section of our Consolidated Balance Sheet for the fiscal year ended August 31, 2006, and were included in earnings upon settlement. Settlement dates for these instruments extend through June 2009. On August 31, 2007, these instruments did not qualify for hedge accounting and therefore were recorded in cost of goods sold in our Consolidated Statements of Operations. On August 31, 2006, these contracts had a gain of $2.8 million, net of taxes, recorded in accumulated other comprehensive income, which was then recorded in earnings during fiscal 2007, when the instruments no longer qualified for hedge accounting.
 
A 10% adverse change in market prices would not materially affect our results of operations, financial position or liquidity, since our operations have effective economic hedging requirements as a general business practice.
 
INTEREST RATE RISK
 
We use fixed and floating rate debt to lessen the effects of interest rate fluctuations on interest expense. Short-term debt used to finance inventories and receivables is represented by notes payable with maturities of 30 days or less, so that our blended interest rate for all such notes approximates current market rates. Long-term debt used to finance non-current assets carries various fixed interest rates and is payable at various dates to minimize the effect of market interest rate changes. Our effective interest rate on fixed rate debt outstanding on August 31, 2008, was approximately 5.9%.
 
We entered into interest rate treasury lock instruments to fix interest rates related to a portion of our private placement indebtedness. These instruments were designated and are effective as cash flow hedges for accounting purposes and, accordingly, changes in fair value of $1.7 million loss, net of taxes, are included in accumulated other comprehensive income on August 31, 2008. Interest expense for each of the years ended August 31, 2008, 2007 and 2006, includes $0.8 million, $0.9 million and $0.9 million, respectively, which relates to interest rate derivatives. The additional interest expense is an offset to the lower actual interest paid on the outstanding debt instruments.
 
FOREIGN CURRENCY RISK
 
We conduct essentially all of our business in U.S. dollars, except for grain marketing operations primarily in Brazil and Switzerland, and purchases of products from Canada. We had minimal risk regarding foreign currency fluctuations during 2008 and in prior years, as substantially all international sales were denominated in U.S. dollars. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements listed in Item 15(a)(1) are set forth beginning on page F-1. Financial statement schedules are included in Schedule II in Item 15(a)(2). Supplementary financial information required by Item 302 of Regulation S-K for each quarter during the years ended August 31, 2008 and 2007 is presented below.
 
                                 
    November 30,
    February 29,
    May 31,
    August 31,
 
    2007     2008     2008     2008  
    (Unaudited)  
    (Dollars in thousands)  
 
Revenues
  $ 6,525,386     $ 6,891,345     $ 9,336,609     $ 9,414,121  
Gross profit
    314,637       257,625       280,642       320,658  
Income before income taxes
    337,800       197,366       212,347       127,070  
Net income
    300,900       168,031       188,716       145,398  
 
                                 
    November 30,
    February 28,
    May 31,
    August 31,
 
    2006*     2007*     2007*     2007*  
 
Revenues
  $ 3,751,070     $ 3,734,580     $ 4,732,465     $ 4,997,877  
Gross profit
    222,434       147,941       330,908       385,476  
Income before income taxes
    153,611       89,592       262,717       291,471  
Net income
    136,379       83,673       239,596       297,075  
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2 of the Notes to Consolidated Financial Statements
 
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A(T).   CONTROLS AND PROCEDURES
 
Disclosure of Controls and Procedures:
 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating our disclosure procedures, we recognize that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2008. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of August 31, 2008, the end of the period covered in this Annual Report on Form 10-K.
 
Management’s Annual Report on Internal Control Over Financial Reporting:
 
The financial statements, financial analyses and all other information included in this Annual Report on Form 10-K were prepared by our management, which is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: pertain to the


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maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and our dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition and use or disposition of our assets that could have a material effect on the financial statements.
 
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.
 
Management assessed the design and operating effectiveness of our internal control over financial reporting as of August 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on management’s assessment using this framework, we believe that, as of August 31, 2008, our internal control over financial reporting is effective.
 
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
 
Change in Internal Control over Financial Reporting:
 
During our fourth fiscal quarter, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B.   OTHER INFORMATION
 
Cofina Financial, LLC (Cofina Financial), a joint venture company formed in 2005, makes seasonal and term loans to member cooperatives and businesses and to individual producers of agricultural products. Through August 31, 2008, we held a 49% ownership interest in Cofina Financial and accounted for our investment using the equity method of accounting. On September 1, 2008, we purchased Cenex Finance Association’s remaining 51% ownership interest for $53.3 million. The purchase price included cash of $48.5 million and the assumption of certain liabilities of $4.8 million. The notes payable balances of Cofina Financial as of August 31, 2008, discussed below were not consolidated within our financial statements as of the same date.
 
Cofina Funding, LLC (Cofina Funding), a wholly-owned subsidiary of Cofina Financial, had obtained available credit totaling $400.0 million as of August 31, 2008, under note purchase agreements with various purchasers, through the issuance of notes payable maturing at various dates through May 2009. Cofina Financial sells eligible commercial loans receivable it has originated to Cofina Funding, which are then pledged as security under the note purchase agreements. The notes payable issued by Cofina Funding bear interest at variable rates tied to the LIBOR, all of which were at 3.00% on August 31, 2008. Borrowings by Cofina Funding under the note purchase agreements totaled $257.9 million as of August 31, 2008.
 
Cofina Financial also sells loan commitments it has originated to ProPartners Financial on a recourse basis. The total capacity for commitments under the ProPartners program is $120.0 million. The total outstanding commitments under the program totaled $91.7 million as of August 31, 2008. As of August 31, 2008, there was $66.0 million borrowed under these commitments.
 
Cofina Financial has available credit under two loan agreements with us totaling $100.0 million as of August 31, 2008. Outstanding amounts under the two loan agreements bear interest at the 30 day LIBOR plus 0.75%. At August 31, 2008, the rate was 3.21%. Borrowing under the loan agreements totaled $40.8 million as of August 31, 2008. Borrowings under the loan agreements are due and payable in full on December 31, 2008.


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Cofina Financial also 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 2.00% to 2.50% on August 31, 2008) and are due upon demand. Borrowings under these notes totaled $63.9 million on August 31, 2008.
 
The foregoing descriptions of Cofina Financial’s financing arrangements do not purport to be complete and are qualified in their entirety by reference to the relevant material agreements which will be attached to our Quarterly Report on Form 10-Q for the quarter ending November 30, 2008.
 
PART III.
 
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
BOARD OF DIRECTORS
 
The table below lists our directors as of August 31, 2008.
 
                         
          Director
       
Name and Address
  Age     Region     Since  
 
Bruce Anderson
    56       3       1995  
13500 — 42nd St NE
Glenburn, ND 58740-9564
                       
Donald Anthony
    58       8       2006  
43970 Road 758
Lexington, NE 68850
                       
Robert Bass
    54       5       1994  
E 6391 Bass Road
Reedsburg, WI 53959
                       
Dennis Carlson
    47       3       2001  
3255 — 50th Street
Mandan, ND 58554
                       
Curt Eischens
    56       1       1990  
2153 — 330th Street North
Minneota, MN 56264-1880
                       
Steve Fritel
    53       3       2003  
2851 — 77th Street NE
Barton, ND 58384
                       
Robert Grabarski
    59       5       1999  
1770 Highway 21
Arkdale, WI 54613
                       
Jerry Hasnedl
    62       1       1995  
12276 — 150th Avenue SE
St. Hilaire, MN 56754 -9776
                       
David Kayser
    50       4       2006  
42046 — 257th Street
Alexandria, SD 57311
                       
James Kile
    60       6       1992  
508 W. Bell Lane
St. John, WA 99171
                       
Randy Knecht
    58       4       2001  
40193 — 112th Street
Houghton, SD 57449
                       
Michael Mulcahey
    60       1       2003  
8109 — 360th Avenue
Waseca, MN 56093
                       


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          Director
       
Name and Address
  Age     Region     Since  
 
Richard Owen
    54       2       1999  
1591 Hawarden Road
Geraldine, MT 59446
                       
Steve Riegel
    56       8       2006  
12748 Ridge Road
Ford, KS 67842
                       
Daniel Schurr
    43       7       2006  
3009 Wisconsin Street
LeClaire, IA 52753
                       
Duane Stenzel
    62       1       1993  
62904 — 295th Street
Wells, MN 56097
                       
Michael Toelle
    46       1       1992  
5085 St. Anthony Drive
Browns Valley, MN 56219
                       
 
Bruce Anderson, secretary-treasurer (1995):  Chairman of the Governance Committee. Vice chairman of the North Dakota Agricultural Products Utilization Commission, and past board secretary for North Dakota Farmers Union and Farmers Union Mutual Insurance Company. Serves on North Dakota Coordinating Council for Cooperatives and advisory board for Quentin Burdick Center for Cooperatives. Served two terms in the North Dakota House of Representatives. Raises small grains near Glenburn, N.D. Mr. Anderson’s principal occupation has been farming for the last five years or longer.
 
Donald Anthony (2006):  Serves on Corporate Responsibility and CHS Foundation Finance and Investment committees. Served as director and chairman for All Points Cooperative of Gothenburg, Neb., and Lexington (Neb.) Co-op Oil. Former director of Farmland Industries. Active in several state and local cooperative and agricultural organizations. Holds a bachelor’s degree in agricultural economics from the University of Nebraska. Raises corn, soybeans and alfalfa near Lexington, Neb. Mr. Anthony’s principal occupation has been farming for the last five years or longer.
 
Robert Bass, first vice chairman (1994):  Chairman of Audit Committee. Director and officer for the former Co-op Country Partners Cooperative, Baraboo, Wis., and its predecessors for 15 years, and vice chairman of Wisconsin Federation of Cooperatives. Holds a bachelor’s degree in agricultural education from the University of Wisconsin — Madison. Operates a crop and dairy operation near Reedsburg, Wis. Mr. Bass’ principal occupation has been farming for the last five years or longer.
 
Dennis Carlson (2001):  Serves on Audit and CHS Foundation Finance and Investment Committees. Director and past chairman of Farmers Union Oil Company, Bismarck/Mandan, N.D., and is active in several agricultural and cooperative organizations. Operates a diverse grain and livestock operation near Mandan, N.D. Mr. Carlson’s principal occupation has been farming for the last five years or longer.
 
Curt Eischens (1990):  Chairman of Corporate Responsibility Committee. Served as a director and chairman of Farmers Co-op Association, Canby, Minn., and as chairman for the Minnesota Association of Cooperatives. Holds a certificate in farm management from Canby Vocational-Technical College. Operates a corn and soybean farm near Minneota, Minn. Mr. Eischens’ principal occupation has been farming for the last five years or longer.
 
Steve Fritel (2003):  Serves on Corporate Responsibility and Government Relations committees. Director for Rugby (N.D.) Farmers Union Oil Co., former director and chairman for Rugby Farmers Union Elevator, and previous member of the former CHS Wheat Milling Defined Board. Director of North Central Experiment Station Board of Visitors, past member of the Adult Farm and Ranch Business Management Advisory Board and member of numerous agricultural and cooperative organizations. Earned a bachelor’s degree from North Dakota State College of Science, Wahpeton. Raises small grains, corn, soybeans and sunflowers near Barton, N.D. Mr. Fritel’s principal occupation has been farming for the last five years or longer.

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Robert Grabarski, assistant secretary-treasurer (1999):  Chairman of the Capital Committee and serves on Government Relations Committee. Former director, first vice chairman and interim president of former Alto Dairy Cooperative, and chairman of Wisconsin River Cooperative. Holds a certificate in production agriculture from the University of Wisconsin-Madison. Recipient of 2004 Wisconsin Federation of Cooperatives Co-op Builder Award. Operates a diversified dairy and crop farm near Arkdale, Wis. Mr. Grabarski’s principal occupation has been farming for the last five years or longer.
 
Jerry Hasnedl (1995):  Serves on Capital and Government Relations committees. Previous chairman of the former CHS Wheat Milling Defined Member Board. Former director and secretary for St. Hilaire (Minn.) Cooperative Elevator and Northwest Grain. Member of American Coalition for Ethanol and the Minnesota Association of Cooperatives. Earned associate’s degree in agricultural economics and has certification in advanced farm business from Northland College, Thief River Falls, Minn. Operates a diverse operation near St. Hilaire, Minn., which includes small grains, soybeans, corn, sunflowers, malting barley, canola and alfalfa. Mr. Hasnedl’s principal occupation has been farming for the last five years or longer.
 
David Kayser (2006):  Serves on Governance and CHS Foundation Finance and Investment committees. Chairman of South Dakota Association of Cooperatives and previously served on CHS Resolutions Committee. Former director and chairman for Farmer’s Alliance, Mitchell, S.D. Raises corn, soybeans and hay near Alexandria, S.D., and operates a cow-calf and feeder calf business. Mr. Kayser’s principal occupation has been farming for the last five years or longer.
 
James Kile, second vice chairman (1992):  Member of Governance Committee. Served nearly two decades as a director and chairman of St. John (Wash.) Grange Supply. Represents CHS on the Washington State Council of Farmer Cooperatives and the Idaho Cooperative Council. Director and secretary for the SJE High School Foundation. Holds a bachelor’s degree in agricultural economics from Washington State University. Was employed in banking before returning to St. John, Wash., to operate a dryland wheat farm. Mr. Kile’s principal occupation has been farming for the last five years or longer.
 
Randy Knecht (2001):  Serves on Government Relations and Corporate Responsibility committees. Representative to CHS Managers Council. President of Four Seasons Cooperative, Britton, S.D. Former director and chairman of Northern Electric Cooperative and director of Dakota Value Capture Cooperative. Involved in local school, government and civic organizations, as well as agricultural and cooperative associations, including the American Coalition for Ethanol. Holds a bachelor’s degree in agriculture from South Dakota State University. Operates a diversified crop farm and cattle ranch near Houghton, S.D. Mr. Knecht’s principal occupation has been farming for the last five years or longer.
 
Michael Mulcahey (2003):  Serves on Capital and CHS Foundation Finance and Investment committees. Served for three decades as a director and officer for Crystal Valley Co-op, Mankato, Minn., and its predecessors. Has served as a director and chairman for South Central Federated Feeds and is active in many agricultural, cooperative and civic organizations. Attended Minnesota State University-Mankato and the University of Minnesota-Waseca. Operates a grain farm and raises beef cattle near Waseca, Minn. Mr. Mulcahey’s principal occupation has been farming for the last five years or longer.
 
Richard Owen (1999):  Serves on Audit and Government Relations committees. Director of Mountain View, LLC, president of the Montana Cooperative Development Center and president of ArmorAuto, LLC. Previously served as director and officer for Central Montana Cooperative, Lewistown, Mont., and its predecessor organization. Holds a bachelor’s degree in agricultural economics from Montana State University. Raises small grains and specialty crops near Geraldine, Mont. Mr. Owen’s principal occupation has been farming for the last five years or longer.
 
Steve Riegel (2006):  Serves on Capital and Government Relations committees. Director and chairman of Dodge City (Kan.), Cooperative Exchange. Previously served as director and officer for Co-op Service, Inc., advisory director for Bucklin (Kan.) National Bank, and has served on local school board. Attended Fort Hays (Kan.) State University, majoring in agriculture, business and animal science. Operates a 300-head cow-calf and stocker cattle operation and raises irrigated corn, soybeans, alfalfa, dryland wheat and milo near Ford, Kan. Mr. Riegel’s principal occupation has been farming for the last five years or longer.


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Daniel Schurr (2006):  Serves on Audit and Government Relations committees. Served as director and officer for River Valley Cooperative of Clarence, Iowa. Director and loan committee member for Great River Bank. Former local school board member, and active in numerous agricultural and community organizations. Named Iowa Jaycees Outstanding Young Farmer in 2004. Holds bachelor’s degree in agriculture from Iowa State University. Raises corn, soybeans and alfalfa near LeClaire, Iowa. Also owns and manages a beef feedlot and cow-calf herd. Mr. Schurr’s principal occupation has been farming for the last five years or longer.
 
Duane Stenzel (1993):  Serves on Governance Committee. Previous chairman of the former CHS Oilseed Processing and Refining Defined Board. Active in a wide range of agricultural and cooperative organizations. Member of WFS and Wells Farmers Elevator, where he served as board president and secretary. Raises soybeans, corn and sweet corn near Wells, Minn. Mr. Stenzel’s principal occupation has been farming for the last five years or longer.
 
Michael Toelle, chairman (elected in 1992; chairman since 2002): Chairman of CHS Foundation. Served more than 15 years as director and chairman of Country Partners Cooperative of Browns Valley, Minn., and its predecessor companies. Serves as a CHS representative on the Nationwide Insurance sponsors committee, serves on the 25x’25 Renewable Fuels steering committee, has served as director and chairman of Agriculture Council of America, and is active in several cooperative and commodity organizations. Holds a bachelor’s degree in industrial technology from Moorhead (Minn.) State University. Operates a grain, hog and beef farm near Browns Valley, Minn. Mr. Toelle’s principal occupation has been farming for the last five years or longer.
 
Director Elections and Voting
 
Director elections are for three-year terms and are open to any qualified candidate. The qualifications for the office of director are as follows:
 
  •  At the time of declaration of candidacy, the individual (except in the case of an incumbent) must have the written endorsement of a locally elected producer board that is part of the CHS system and located within the region from which the individual is to be a candidate.
 
  •  At the time of the election, the individual must be less than the age of 68.
 
The remaining qualifications set forth below must be met at all times commencing six months prior to the time of election and while the individual holds office.
 
  •  The individual must be a member of this cooperative or a member of a Cooperative Association Member.
 
  •  The individual must reside in the region from which he or she is to be elected.
 
  •  The individual must be an active farmer or rancher. “Active farmer or rancher” means an individual whose primary occupation is that of a farmer or rancher, excluding anyone who is an employee of ours or of a Cooperative Association Member.
 
The following positions on the Board of Directors will be up for re-election at the 2008 Annual Meeting of Members:
 
     
Region
  Current Incumbent
 
Region 1 (Minnesota)
  Curt Eischens
Region 1 (Minnesota)
  Jerry Hasnedl
Region 2 (Montana/Wyoming)
  Rich Owen
Region 3 (North Dakota)
  Bruce Anderson
Region 5 (Wisconsin, Connecticut, Indiana, Illinois, Kentucky, Michigan, Ohio)
  Robert Grabarski
Region 7 (Iowa, Alabama, Arkansas, Florida, Louisiana, Missouri, Mississippi)
  Dan Schurr
 
Voting rights, including those in regard to director elections, arise by virtue of membership in CHS, not because of ownership of any equity or debt instruments; therefore, our preferred stockholders can not recommend nominees to our Board of Directors unless they are members of CHS.


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EXECUTIVE OFFICERS
 
The table below lists our executive officers as of August 31, 2008. Officers are appointed by the Board of Directors.
 
             
Name
 
Age
 
Position
 
John D. Johnson
    60     President and Chief Executive Officer
Jay Debertin
    48     Executive Vice President and Chief Operating Officer, Processing
Patrick Kluempke
    60     Executive Vice President — Corporate Administration
Thomas D. Larson
    60     Executive Vice President — Business Solutions
Mark Palmquist
    51     Executive Vice President and Chief Operating Officer, Ag Business
John Schmitz
    58     Executive Vice President and Chief Financial Officer
Leon E. Westbrock
    61     Executive Vice President and Chief Operating Officer, Energy
 
John D. Johnson, President and Chief Executive Officer (CEO), began his career with the former Harvest States in 1976 as a feed consultant in the GTA Feeds Division and later became regional sales manager, director of sales and marketing, and general manager of GTA Feeds. Named group vice president of Harvest States Farm Marketing and Supply for Harvest States Cooperatives in 1992 and president and CEO of Harvest States in 1995. Selected president and general manager of CHS upon its creation in 1998 and was named president and CEO in 2000. Serves on the boards of Ventura Foods, LLC, CF Industries Holdings, Inc. and National Council of Farmer Cooperatives. Holds a degree in business administration from Black Hills State University, Spearfish, S.D.
 
Jay Debertin, Executive Vice President and Chief Operating Officer — Processing, joined CHS in 1984 in its energy division and held positions in energy marketing operations. Named vice president of crude oil supply in 1998, and added responsibilities for raw material supply, refining, pipelines and terminals, trading and risk management, and transportation in 2001. Named to his current position in 2005, where he is responsible for oilseed processing operations and CHS joint venture relationships in wheat milling through Horizon Milling, LLC, and in vegetable oil-based foods through Ventura Foods, LLC. Responsible for CHS strategic direction in renewable energy. Serves on the boards of National Cooperative Refinery Association and Ventura Foods, LLC. Earned a bachelor’s degree in economics from the University of North Dakota and a master’s of business administration degree from the University of Wisconsin — Madison.
 
Patrick Kluempke, Executive Vice President — Corporate Administration, is responsible for human resources, information technology, business risk control, building and office services, board coordination, corporate planning and international relations. Served in the U.S. Army with tours in South Vietnam and South Korea as Aide to General J. Guthrie. Began his career in grain trading and export marketing. Joined CHS in 1983, has held various positions in both the operations and corporate level, and was named to his current position in 2000. Serves on the board of Ventura Foods, LLC. Holds a bachelor’s degree from St. Cloud (Minn.) State University.
 
Thomas D. Larson, Executive Vice President — Business Solutions, began his career as a vocational agriculture teacher and later joined the former Cenex in agronomy sales. Managed a local cooperative in Hoffman, Minn., and then returned to Cenex to hold positions in marketing, planning, agronomy services and retail operation management. Was named Executive Vice President — Member and Public Affairs in 1999 which included responsibility for communications, corporate giving, meeting and travel and governmental affairs. Named to his current position in 2005. Received the National FFA Organization’s Honorary American Farmer Degree in 2006. Holds a bachelor’s degree in agricultural education from South Dakota State University.
 
Mark Palmquist, Executive Vice President and Chief Operating Officer — Ag Business, joined the former Harvest States in 1979 as a grain buyer, then moved into grain merchandising. Named vice president and


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director of grain marketing in 1990 and senior vice president in 1993. Assumed his current responsibilities for grain, crop nutrients and country operations businesses in 2005. Serves on the boards of Horizon Milling, LLC, InTrade/ACTI, National Cooperative Refinery Association, Schnitzer Steel Industries, Inc. and Agriliance LLC. Graduated from Gustavus Adolphus College, St. Peter, Minn., and attended the University of Minnesota MBA program.
 
John Schmitz, Executive Vice President and Chief Financial Officer (CFO), joined the former Harvest States Cooperatives in 1974. Held accounting and finance positions within the company, including division controller. Named vice president and controller in 1986 and became CFO for CHS in 1999. Serves on the boards of National Cooperative Refinery Association, Ventura Foods, LLC and Cofina Financial, LLC. Member of the American Institute of Certified Public Accountants, the Minnesota Society of Certified Public Accountants and the National Society of Accountants for Cooperatives. Holds a bachelor’s degree in accounting from St. Cloud (Minn.) State University,
 
Leon E. Westbrock, Executive Vice President and Chief Operating Officer — Energy, joined the former Cenex in 1976 in merchandising, and managed local cooperatives in North Dakota and Minnesota. Returned to Cenex to hold various positions, including lubricants manager, director of retailing, and executive vice president of energy. Appointed to his current position in 2000. Serves as chairman of National Cooperative Refinery Association. Former director of Agriliance LLC and Universal Cooperatives. Holds a bachelor’s degree from St. Cloud (Minn.) State University and serves on the St. Cloud State University Foundation Board of Directors.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors and persons who beneficially own more than 10% of our 8% Cumulative Redeemable Preferred Stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. Such executive officers, directors and greater than 10% beneficial owners are required by the regulations of the Commission to furnish us with copies of all Section 16(a) reports they file.
 
Based solely upon a review of copies of reports on Forms 3 and 4 and amendments thereto furnished to us during, and reports on Form 5 and amendments thereto furnished to us with respect to, the fiscal year ended August 31, 2008, and based further upon written representations received by us with respect to the need to file reports on Form 5, there were no late reports filed.
 
Code of Ethics
 
We have adopted a code of ethics within the meaning of Item 406(b) of Regulation S-K of the Securities and Exchange Commission. This code of ethics applies to all of our officers and employees. We will provide to any person, without charge, upon request, a copy of such code of ethics. A person may request a copy by writing or telephoning us at the following address:
 
CHS Inc.
Attention: Dave Kastelic
5500 Cenex Drive
Inver Grove Heights, Minnesota 55077
(651) 355-6000


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Audit Committee Matters
 
The Board of Directors has a separately designated standing Audit Committee for the purpose of overseeing our accounting and financial reporting processes and audits of our financial statements. The Audit Committee is comprised solely of directors Mr. Bass, Mr. Carlson, Mr. Owen and Mr. Schurr, each of whom is an independent director. The Audit Committee has oversight responsibility to our owners relating to our financial statements and the financial reporting process, preparation of the financial reports and other financial information provided by us to any governmental or regulatory body, the systems of internal accounting and financial controls, the internal audit function and the annual independent audit of our financial statements. The Audit Committee assures that the corporate information gathering and reporting systems developed by management represent a good faith attempt to provide senior management and the Board of Directors with information regarding material acts, events and conditions within the company. In addition, the Audit Committee is directly responsible for the appointment, compensation and oversight of the independent registered public accounting firm.
 
We do not believe that any member of the Audit Committee of the Board of Directors is an audit committee “financial expert” as defined in the Sarbanes-Oxley Act of 2002 and rules and regulations thereunder. As a cooperative, our 17-member Board of Directors is nominated and elected by our members. To ensure geographic representation of our members, the Board of Directors represent eight (8) regions in which our members are located. The members in each region nominate and elect the number of directors for that region as set forth in our bylaws. To be eligible for service as a director, a nominee must (i) be an active farmer or rancher, (ii) be a member of CHS or a Cooperative Association Member and (iii) reside in the geographic region from which he or she is nominated. Neither management nor the incumbent directors have any control over the nominating process for directors. Because of the nomination procedure and the election process, we cannot ensure that an elected director will be an audit committee “financial expert”.
 
However, many of our directors, including all of the Audit Committee members, are financially sophisticated and have experience or background in which they have had significant financial oversight responsibilities. The current Audit Committee includes directors who have served as presidents or chairmen of local cooperative association boards. Members of the Board of Directors, including the Audit Committee, also operate large commercial enterprises requiring expertise in all areas of management, including financial oversight.
 
ITEM 11.   EXECUTIVE COMPENSATION
 
Compensation Discussion and Analysis
 
Executive Compensation
 
Overview
 
CHS views employees as valued assets, and strives to provide total reward programs that are equitable and competitive within the market segments in which we compete, and within the framework of the CHS vision, mission and values. In this section, we will outline the compensation and benefit programs as well as the materials and factors used to assist us in making compensation decisions.
 
Compensation Philosophy and Objectives
 
The Corporate Responsibility Committee of our CHS Board of Directors oversees the administration of, and the fundamental changes to, the executive compensation and benefits programs. The primary principles and objectives in compensating executive officers include:
 
  •  Maintaining a strong external market focus in order to attract and retain top talent by:
 
  •  Aligning pay structures and total direct compensation at the market median through our benchmarking process
 
  •  Obtaining applicable and available survey data of similar sized companies


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  •  Maintaining reasonable internal pay equity among executives in order to allow for broad-based development opportunities in support of our talent management objectives
 
  •  Driving strong business performance through annual and long-term incentive programs by:
 
  •  Rewarding executives for company, business unit and individual performance
 
  •  Aligning executive rewards with competitive returns to our owner members
 
  •  Ensuring compensation components are mutually supportive and not contradictory
 
  •  Aligning annual and long-term results with performance goals
 
  •  Ensuring compliance with federal and state regulations
 
There are no material changes anticipated to our compensation philosophy or plans for fiscal 2009.
 
Components of Executive Compensation and Benefits
 
Our executive compensation programs are designed to attract and retain highly qualified executives and to motivate them to optimize member owner returns by achieving specified goals. The compensation program links executive compensation directly to our annual and long-term financial performance. A significant portion of each executive’s compensation is dependent upon meeting financial goals and a smaller portion is linked to other individual performance objectives.
 
Each year, the Corporate Responsibility Committee of the Board of Directors reviews our executive compensation policies with respect to the correlation between executive compensation and the creation of member owner value, as well as the competitiveness of the executive compensation programs. The Corporate Responsibility Committee, with input from a third party consultant if necessary, determines what, if any, changes are appropriate to our executive compensation programs including the incentive plan goals for the Named Executive Officers. The third party consultant is chosen and hired directly by the Corporate Responsibility Committee to provide guidance regarding market competitive levels of base pay, annual incentive pay and long-term incentive pay as well as market competitive allocations between base pay, annual variable pay and long-term incentive pay for the Chief Executive Officer. The data is shared with our Board of Directors who together make final decisions regarding the Chief Executive Officer’s base bay, annual incentive pay and long-term incentive pay, as well as the allocation of compensation between base pay, annual incentive pay and long-term incentive pay. There are no formal policies for allocation between long-term and cash compensation other than the intention of being competitive with the external market median level of compensation for comparable positions and being consistent with our compensation philosophy and objectives. The Corporate Responsibility Committee recommends to the Board of Directors salary actions relative to our Chief Executive Officer and approves annual and long-term incentive awards based on goal attainment. In turn, the Board communicates this pay information to the Chief Executive Officer. The Chief Executive Officer is not involved with the selection of the third party consultant and does not participate in or observe Corporate Responsibility Committee meetings. Based on review of compensation market data provided by our human resources department (survey sources and pricing methodology are explained under “Components of Compensation”), the Chief Executive Officer decides base compensation levels for the other Named Executive Officers, recommends for Board of Directors approval the annual and long-term incentive levels for the Named Executive Officers and communicates base and incentive compensation levels to the Named Executive Officers. The day-to-day design and administration of compensation and benefit plans are managed by our human resources, finance and legal departments.
 
We intend to preserve the deductibility, under the Internal Revenue Code, of compensation paid to our executive officers while maintaining compensation programs to attract and retain highly qualified executives in a competitive environment.


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Components of Compensation
 
The executive compensation and benefits programs consist of seven components. Each component is designed to be competitive within the executive compensation market. In determining competitive compensation levels, we analyze information from independent compensation surveys, which include information regarding comparable industries, markets, revenues and companies that compete with us for executive talent. The surveys used for this analysis included a combination of any of the following sources: Hay Executive Compensation Report, Hewitt Total Compensation Measurement, Mercer US Benchmark Database-Executive Positions, Towers Perrin US General Industry Executive Database and Watson Wyatt Survey of Top Management Compensation. The data extracted from these surveys includes median market rates for base salary, annual incentive, total cash compensation and total direct compensation. Companies included in the surveys vary by industry, revenue and number of employees, and represent both public and private ownership, as well as non-profit, government and mutual organizations. The number of companies participating in these surveys ranged from 389 to 2,486, with an average of 1,118. We have recently shifted the emphasis of our executive compensation package to focus more on pay-at-risk through annual variable pay and long-term incentive awards in order to better align our programs with general market practices. The goal is to provide our executives with an overall compensation package that is competitive to median compensation in comparable industries, companies and markets. We target the market median for base pay, annual variable pay and long-term incentive pay. In actuality, the Chief Executive Officer (CEO) and Named Executive Officers are paid in line with market median base pay and annual variable pay for comparable positions and are paid less than the market median for long-term compensation in relation to comparable positions. The following table presents a more detailed breakout of each compensation element:
 
         
Pay Element
 
Definition of Pay Element
 
Purpose of Pay Element
 
Base Salary
  Competitive base level of compensation provided relative to skills, experience, knowledge and contributions   These factors provide the fundamental element of compensation based on competitive market practice and internal equity considerations
Annual Variable Pay
  Broad-based employee short-term pay-at-risk incentive for achieving predetermined annual financial and individual performance objectives  
•   Provide a direct link between pay and annual business objectives

•   Pay for performance to motivate and encourage the achievement of critical business initiatives
Profit Sharing
  Broad-based employee short-term pay-at-risk program for achieving predetermined Return On Equity performance levels  
•   Provide a direct link between employee pay and CHS’ profitability

•   Encourage proper expense control and containment
Long-Term Incentive Plans
  Long-term pay-at-risk incentive for Senior Management to achieve predetermined triennial Return On Equity performance goals  
•   Provide a direct link between senior management pay and long-term strategic business objectives

•   Align management and member owner interests

•   Encourage retention of key management


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Pay Element
 
Definition of Pay Element
 
Purpose of Pay Element
 
Retirement Benefits
  Retirement benefits under the qualified retirement benefits plans are identical to the broad-based retirement plans generally available to all full-time employees   These benefits are a part of our broad-based employee total rewards program
    The supplemental plans include non-qualified retirement benefits that restore qualified benefits contained in our broad-based plans for employees whose retirement benefits are limited by salary caps under the Internal Revenue Code. In addition, the plans allow participants to voluntarily defer receipt of a portion of their income   These benefits are provided to attract and retain senior managers with total rewards programs that are competitive with comparable companies
Health & Welfare Benefits
  Medical, dental, vision, life insurance and disability benefits generally available to all full-time employees with supplemental executive long-term disability   These benefits are a part of our broad-based employee total rewards program
Additional Benefits and Perquisites
  Additional benefits and perquisites provided to certain officers, including our Named Executive Officers   These benefits are provided to remain competitive with comparable companies, retain individuals who are critical to CHS, facilitate the executives’ relationships with customers and to support their roles in the community
 
Base Pay:
 
Base salaries of the Named Executive Officers represent a fixed form of compensation paid on a semi-monthly basis. The base salaries are generally set at the median level of market data collected through our benchmarking process against other equivalent positions of comparable revenue-size companies. The individual’s actual salary relative to the market median is based on a number of factors, which include, but are not limited to: scope of responsibilities, individual experience and individual performance.
 
Base salaries for the Named Executive Officers are reviewed on an annual basis or at the time of significant changes in scope and level of responsibilities. Changes in base salaries are determined by competitive pay of comparable positions in the market, as well as individual performance and contribution. Changes are not governed by pre-established weighting factors or merit metrics. The Chief Executive Officer is responsible for this process for the Named Executive Officers. The Corporate Responsibility Committee is responsible for this process for the President and Chief Executive Officer. As a result of the changes in our executive compensation package mentioned above, more compensation is at risk. In accordance with Mr. Johnson’s contract, he received no increase in base pay for fiscal 2008. All other Named Executive Officers received base salary increases of up to 3.0 percent in fiscal 2008.
 
Annual Variable Pay:
 
Each Named Executive Officer is eligible to participate in our Annual Variable Pay Plan (the “Incentive Program”) for our fiscal year ended August 31, 2008. Target award levels are set with reference to competitive market compensation levels and are intended to motivate our executives by providing incentive payments for the achievement of predetermined goals. Our Incentive Program is based on financial performance and specific

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management business objectives with payout dependent on CHS triggering threshold financial performance. The financial performance components include return on equity (ROE) level for both CHS and the executive’s business unit. The CHS threshold, target and maximum ROE levels for fiscal 2008 were 8%, 10% and 14%, respectively. The threshold, target and maximum ROE goals for each business unit varies by unit. The management business objectives include individual performance against specific goals such as business profitability, strategic initiatives or talent development.
 
For fiscal 2008, CHS financial performance goals and award opportunities under our Annual Variable Pay Plan were as follows:
 
                     
    CHS Company
  Business Unit
  Management Business
  Percent of Target
 
Performance Level
 
Performance Goal
 
Performance Goal
 
Objectives
  Award  
 
Maximum
Target
Threshold
Below Threshold
  14% Return on Equity
10% Return on Equity
8% Return on Equity
  Threshold, Target and Maximum Return on Equity goals vary by business unit   Individual performance goals     200%
100%
20%
0%
 
 
The annual variable pay awards for the Named Executive Officers are calculated by applying the percent of target award to the applicable fiscal 2008 salary range midpoint for the Named Executive Officer.
 
The types and relative importance of specific financial and other business objectives varies among executives depending upon their positions and the particular business unit for which they were responsible. Financial objectives are given greater weight than other individual performance objectives in determining individual awards.
 
The CHS Board of Directors approves the Annual Variable Pay Plan total Company ROE objectives and determines the Chief Executive Officer’s individual goals. The weighting of the Chief Executive Officer’s goals is 70% CHS total company ROE, and 30% principle accountabilities and personal goals. The Chief Executive Officer approves business unit ROE objectives and determines non-financial objectives for the Named Executive Officers. The weighting of goals for the Named Executive Officers is 70% ROE, and 30% principle accountabilities and personal goals. The ROE goals for the Named Executive Officers are either total CHS, or combined CHS and business unit, depending on whether the position is responsible for an operating group or not. The Plan is designed such that if one-year threshold non-financial and financial performance is achieved, the annual variable pay award would equal 20 percent of market competitive awards; if target non-financial and financial performance goals are achieved, the Plan award would equal 100% of market competitive awards; and if maximum non-financial and financial performance goals are achieved, the Plan award would equal 200% of market competitive awards.
 
In conjunction with the annual performance appraisal process, the Board of Directors reviews the non-financial objectives, and in turn, determines and approves this portion of the annual variable pay award based upon completion or partial completion of the previously specified goals for the Chief Executive Officer. Likewise, the Chief Executive Officer uses the same process for determining individual goal attainment for the other Named Executive Officers. Named Executive Officers are covered by the same broad-based Annual Variable Pay Plan as other employees, and based on the plan provisions, when they retire they receive awards prorated to the number of months in the plan.
 
For fiscal 2008, CHS reached the Company’s maximum financial goal for ROE. Annual variable pay payments for the Named Executive Officers are as follows:
 
         
John D. Johnson
  $ 1,757,000  
John Schmitz
  $ 710,780  
Leon E. Westbrock
  $ 798,000  
Mark Palmquist
  $ 768,180  
Jay Debertin
  $ 591,220  


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Profit Sharing:
 
Each Named Executive Officer is eligible to participate in our Profit Sharing Plan applicable to other employees. The purpose of the Profit Sharing Plan is to provide a direct link between employee pay and CHS profitability. Annual profit sharing contributions are calculated as a percent of base pay and annual variable pay (total earnings) and are made to the CHS 401(k) savings plan account and Deferred Compensation Plan account of each Named Executive Officer. The levels of profit sharing awards vary in relation to the level of CHS ROE achieved and are displayed in the following table:
 
             
        Profit
    Equates to Net
  Sharing
Return On Equity
  Income for Fiscal 2008   Award
 
14.0%
  $340.6 Million     5 %
12.0%
  $292.0 Million     4 %
10.0%
  $243.3 Million     3 %
9.0%
  $219.0 Million     2 %
8.0%
  $194.6 Million     1 %
 
Effective fiscal 2009, threshold, target and maximum ROE goals are:
 
         
Return On Equity
  Profit Sharing Award
 
14.0%
    5 %
12.0%
    4 %
10.0%
    3 %
9.0%
    2 %
8.0%
    1 %
 
Long-Term Incentive Plans:
 
Each Named Executive Officer is eligible to participate in our Long-Term Incentive Plan (“LTIP”). The purpose of the LTIP is to align results with long-term performance goals, encouraging our Named Executive Officers to maximize long-term shareholder value and retain key executives.
 
The LTIP consists of three-year performance periods to ensure consideration is made for long-term CHS sustainability with a new performance period beginning every year. The LTIP is based on the CHS ROE over three-year periods. The CHS Board of Directors approves the LTIP ROE goals.
 
Award opportunities are expressed as a percentage of a participant’s average salary range midpoint for the three-year performance period. Threshold and maximum award opportunities are set between 20 percent and 200 percent of target payout. CHS must meet a three-year period threshold level of ROE for this plan to trigger a payout. The threshold, target and maximum return on equity for the fiscal 2006-2008 performance period were 7%, 10% and 12%, respectively, and will be the same for the fiscal 2007-2009 performance period.
 
Awards from the LTIP are contributed to the CHS Deferred Compensation Plan after the end of each plan period. These awards are earned over a three-year period and vest over an additional 26-month period. The extended earning and vesting provisions of the LTIP are designed to help CHS retain key executives. Participants who terminate from CHS prior to retirement forfeit all unearned and unvested LTIP award balances. Like the Annual Variable Pay Plan, award levels for the LTIP are set with regard to competitive considerations.


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For the fiscal year 2006-2008 plan, CHS reached the Company’s maximum level ROE for awards under the LTIP. Incentive payments for the Named Executive Officers are as follows:
 
         
John D. Johnson
  $ 1,800,000  
John Schmitz
  $ 692,440  
Leon E. Westbrock
  $ 778,074  
Mark Palmquist
  $ 748,394  
Jay Debertin
  $ 572,366  
 
Retirement Benefits:
 
We provide the following retirement and deferral programs to executive officers:
 
  •  CHS Inc. Pension Plan
 
  •  CHS Inc. Savings Plan
 
  •  CHS Inc. Supplemental Executive Retirement Plan
 
  •  CHS Inc. Deferred Compensation Plan
 
CHS Inc. Pension Plan
 
The CHS Inc. Pension Plan (the “Pension Plan”) is a tax-qualified defined benefit pension plan. Most full-time, non-union CHS employees are eligible to participate in the plan. All Named Executive Officers participate in the Pension Plan. A Named Executive Officer is fully vested in the plan after three years of vesting service. The Pension Plan provides for a monthly benefit (or a lump sum if elected) for the Named Executive Officer’s lifetime beginning at normal retirement age. Compensation includes total salary and annual variable pay. Compensation and benefits are limited based on limits imposed by the Internal Revenue Code. The normal form of benefit for a single Named Executive Officer is a life annuity and for a married Named Executive Officer the normal form is a 50% joint and survivor annuity. Other annuity forms are also available on an actuarial equivalent basis.
 
A Named Executive Officer’s benefit under the Pension Plan depends on 1) pay credits to the employee’s account, which are based on the Named Executive Officer’s total salary and annual variable pay for each year of employment, date of hire, age at date of hire and the length of service and 2) investment credits which are computed using the interest crediting rate and the Named Executive Officer’s account balance at the beginning of the year.
 
The amount of pay credits added to a Named Executive Officer’s account each year is a percentage of the Named Executive Officer’s base salary and annual variable pay plus compensation reduction pursuant to the CHS Inc. Savings Plan, the (“401(k) Plan”), and any pretax contribution to any of our welfare benefit plans, paid vacations, paid leaves of absence and pay received if away from work due to sickness or injury. The pay credits percentage received is determined on a yearly basis, based on the years of benefit service completed as of December 31 of each year. A Named Executive Officer receives one year of benefit service for every calendar year of employment in which the Named Executive Officer completed at least 1,000 hours of service.
 
Pay credits are earned according to the following schedule:
 
Regular Pay Credits
 
                 
    Pay Below Social Security
  Pay Above Social Security
Years of Benefit Service
  Taxable Wage Base   Taxable Wage Base
 
1 - 3 years
    3 %     6 %
4 - 7 years
    4 %     8 %
8 - 11 years
    5 %     10 %
12 - 15 years
    6 %     12 %
16 years or more
    7 %     14 %


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Mid-Career Pay Credits
 
Employees hired after age 40 qualify for the following minimum pay credit:
 
         
    Minimum Pay Credit
    Pay Below Social Security
  Pay Above Social Security
Age at Date of Hire
  Taxable Wage Base   Taxable Wage Base
 
Age 40 - 44
  4%   8%
Age 45 - 49
  5%   10%
Age 50 or more
  6%   12%
 
Special Career Credits
 
A Named Executive Officer who was a participant in the former Harvest States Cooperative Cash Balance Retirement Plan on January 1, 1988 and met certain age and service requirements on January 1, 1988 receives an additional credit based on the following table:
 
         
Total Age and Service
   
As of 1/01/1988
  Additional Credit of
 
50 - 54
    1 %
55 - 59
    2 %
60 - 64
    3 %
65 - 69
    4 %
70 or more
    5 %
 
Investment Credits
 
We credit a Named Executive Officer’s account at the end of the year with an investment credit based on the balance at the beginning of the year. The investment credit is based on the average return for one-year U.S. Treasury bills for the preceding 12-month period. The minimum interest rate under the Pension Plan is 4.65% and the maximum is 10%.
 
CHS Inc. Savings Plan
 
This 401(k) Plan is a tax-qualified defined contribution retirement plan. Most full-time, non-union CHS employees are eligible to participate in the plan. Each Named Executive Officer is eligible to participate in the 401(k) Plan. Participants may contribute between 1% and 50% of their pay on a pretax basis. IRS regulations limit “highly compensated” employees, including the Named Executive Officers, to 6% deferrals. We match 50% of the first 6% of pay contributed each year. The Board of Directors may elect to reduce or eliminate matching contributions for any year or any portion thereof. Participants are 100% vested in their own contributions and are fully vested after three years of service in matching contributions made on the participant’s behalf by CHS.
 
Effective January 1, 2009, CHS will match 100% of the first 1% and 50% of the next 5% contributed each year and participants will be fully vested after 2 years of vesting service in matching contributions made on the participant’s behalf by CHS.
 
Effective January 1, 2009, non-participants will automatically be enrolled in the plan at a 3% contribution rate. Effective each January 1st, the participant’s contribution will be increased by 1%. This escalation will stop once the participant’s contribution reaches 6%.
 
Also effective January 1, 2009, the name of the plan will be changed to “CHS Inc. 401(k) Plan.”
 
CHS Inc. Supplemental Executive Retirement Plan and CHS Inc. Deferred Compensation Plan
 
Because the Internal Revenue Code limits the benefits that may be paid from the tax-qualified plan, the CHS Inc. Supplemental Executive Retirement Plan (the “SERP”) and the CHS Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”) were established to provide certain employees participating in the


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qualified plans with supplemental benefits such that, in the aggregate, they receive the same benefits they would have been entitled to receive under the qualified plan had these limits not been in effect. The SERP also includes compensation deferred under the Deferred Compensation Plan that is excluded under the qualified retirement plan. All Named Executive Officers participate in the SERP. Participants in the plans are select management or highly compensated employees who have been designated as eligible by our President and Chief Executive Officer to participate.
 
All Named Executive Officers are eligible to participate in the Deferred Compensation Plan. Furthermore, Mr. Westbrock is eligible for pension benefits determined under additional formulas as described in the Pension Benefits table.
 
Mr. Johnson is eligible to participate in our Special Supplemental Executive Retirement Plan (the “Special SERP”). The Special SERP retirement benefit will be credited at the end of each plan year for which the participant completes a year of service. The amount credited shall be an amount equal to that set forth in a schedule of benefits stated in the Special SERP, as disclosed in the Pension Benefits table. The Special SERP is not funded and does not qualify for special tax treatment under the Internal Revenue Code.
 
Compensation includes total salary and annual variable pay without regard to limitations on compensation imposed by the Internal Revenue Code. Compensation waived under the Deferred Compensation Plan is not eligible for pay credits or company contributions under the Pension Plan and 401(k) Plan.
 
Certain Named Executive Officers may have accumulated non-qualified plan balances or benefits that have been carried over from predecessor companies as a result of past mergers and acquisitions. Some of the benefits from the SERP are funded by a rabbi trust, with a balance at August 31, 2008 of $4.9 million. No further contributions are being made to the trust. Currently, the plans are not being funded and do not qualify for special tax treatment under the Internal Revenue Code.
 
The Deferred Compensation Plan allows eligible Named Executive Officers to voluntarily defer receipt of up to 30% of their base salary and up to 100% of their annual variable pay. The election must occur prior to the beginning of the calendar year in which the compensation will be earned. During the fiscal year ended August 31, 2008, all of the Named Executive Officers participated in the non-elective portion of the Deferred Compensation Plan and only Mr. Debertin participated in the elective portion of the Deferred Compensation Plan.
 
Some of the benefits from a previous deferred compensation plan are funded in a rabbi trust, with a balance at August 31, 2008 of $46.0 million. No further contributions to the trust are planned.
 
Health & Welfare Benefits:
 
Like other CHS employees, each of the Named Executive Officers is entitled to receive benefits under our comprehensive health & welfare program. Like other non-executive full-time employees, participation in the individual benefit plans is based on each Named Executive Officer’s annual benefit elections and varies by individual.
 
Medical Plans
 
Named Executive Officers and their dependents may participate in our medical plan on the same basis as other eligible full-time employees. The plan provides each an opportunity to choose a level of coverage and coverage options with varying deductibles and co-pays in order to pay for hospitalization, physician and prescription drugs expenses. The cost of this coverage is shared by both CHS and the covered Named Executive Officer.


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Dental, Vision, Hearing Plan
 
Named Executive Officers and their dependents may participate in our Dental, Vision, and Hearing plan on the same basis as other eligible full-time employees. The plan provides coverage for basic dental, vision and hearing expenses. The cost of this coverage is shared by both CHS and the covered Named Executive Officer.
 
Life, Accidental Death and Dismemberment and Dependent Life Insurance
 
Named Executive Officers and their dependents may participate in our basic Life, Accidental Death and Dismemberment and dependent life plans on the same basis as other eligible full-time employees. The plans allow Named Executive Officers an opportunity to purchase group life insurance on the same basis as other eligible full-time employees. Named Executive Officers can choose various coverage levels as a multiple of pay. The cost of this coverage is paid by the Named Executive Officer. Effective January 1, 2009, basic life insurance equal to one times pay will be provided at CHS expense on the same basis as other eligible full-time employees. Optional life insurance in excess of 1 times pay will continue to be paid by the Named Executive Officer on the same basis as other eligible full-time employees.
 
Short-term and Long-term Disability
 
Named Executive Officers participate in our Short-Term Disability (“STD”) Plan on the same basis as other eligible full- time employees. The Named Executive Officers also participate in an executive Long-Term Disability (“LTD”) Plan. These plans replace a portion of income in the event that a Named Executive Officer is disabled under the terms of the plan and is unable to work full-time. The cost of STD coverage is paid by CHS. The cost of LTD is shared by both CHS and the covered Named Executive Officer. Effective January 1, 2009, the cost of LTD coverage will be paid by CHS.
 
Flexible Spending Accounts/Health Savings Accounts
 
Named Executive Officers may participate in our Flexible Spending Account (“FSA”) or Health Savings Account (“HSA”) on the same basis as other eligible full-time employees. The plan provides Named Executive Officers an opportunity to pay for certain eligible medical expenses on a pretax basis. Contributions to these plans are made by the Named Executive Officer.
 
Travel Assistance Program
 
Like other non-executive full-time CHS employees, each of the Named Executive Officers is covered by the travel assistance program. This broad-based program provides accidental death and dismemberment protection should a covered injury occur while on a CHS business trip.
 
Additional Benefits and Perquisites:
 
Certain benefits and perquisites such as a car allowance, club membership, executive physical and limited financial planning assistance are available to the Named Executive Officers. These are provided as part of an overall total rewards package that strives to be competitive with comparable companies, retain individuals who are critical to CHS, facilitate the Named Executive Officers’ relationships with customers and to support their roles in the community.


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Summary Compensation Table
 
                                                 
                      Change in Pension
             
                      Value and
             
                      Non-Qualified
             
                Non-Equity
    Deferred
             
                Incentive Plan
    Compensation
    All Other
       
Name and Principal Position
  Year     Salary(5)     Compensation(1),(5)     Earnings(2)     Compensation(3),(4)     Total  
 
John D. Johnson
    2008     $ 900,000     $ 3,557,000     $ 1,161,571     $ 279,193     $ 5,897,764  
President & Chief Executive Officer
    2007       900,000       3,542,366       1,050,906       267,018       5,760,290  
John Schmitz
    2008       507,700       1,403,220       221,711       114,197       2,246,828  
Executive Vice President & Chief Financial Officer
    2007       492,900       1,362,386       208,021       112,868       2,176,175  
Leon E. Westbrock
    2008       570,700       1,576,074       1,106,259       135,199       3,388,232  
Executive Vice President
    2007       554,100       1,531,554       991,223       129,683       3,206,560  
Mark Palmquist
    2008       548,700       1,516,574       186,642       156,707       2,408,623  
Executive Vice President
    2007       532,700       1,481,854       193,536       143,447       2,351,537  
Jay Debertin
    2008       422,300       1,163,586       115,784       102,039       1,803,709  
Executive Vice President
    2007       410,000       1,126,160       123,906       107,526       1,767,592  
 
 
(1) Amounts include CHS annual variable pay awards and long-term incentive awards.
 
(2) This column represents both changes in pension value and above-market earnings on deferred compensation. Change in pension value is the aggregate change in the actuarial present value of the Named Executive Officers’ benefit under their retirement program and non-qualified earnings, if applicable.
 
Above-market earnings represent earnings exceeding 120% of the Federal Reserve long-term rate as determined by the Internal Revenue Service (IRS) on applicable funds. The following Named Executive Officers had above market earnings in 2008: Mr. Johnson- $114,047; Mr. Schmitz- $9,951; Mr. Westbrock- $12,893; Mr. Palmquist- $10,502; and Mr. Debertin- $1,725, and above market earnings in 2007: Mr. Johnson- $26,787; Mr. Schmitz- $291; Mr. Westbrock- $835; and Mr. Palmquist- $342.
 
(3) Amounts include CHS paid executive LTD, travel accident insurance, executive physical, CHS contributions to qualified and non-qualified defined contribution plans, car allowance, spousal travel, sporting tickets, club dues/memberships and financial planning.
 
(4) This column includes car allowance amounts as follows: Mr. Johnson- $25,800; and $15,120 each for Mr. Schmitz, Mr. Westbrock, Mr. Palmquist and Mr. Debertin.
 
(5) Amounts reflect the gross compensation and include any applicable deferrals. Mr. Debertin deferred $585,890 in 2008 and $206,043 in 2007.
 
Material Terms of Named Executive Officer Employment Agreement
 
On August 1, 2007, CHS entered into an employment agreement with Mr. Johnson, its President and Chief Executive Officer. The agreement is effective August 1, 2007 and continues, subject to the agreement’s termination provisions, through August 31, 2009. Thereafter the agreement renews for additional one-year periods unless terminated by CHS upon at least one year’s prior written notice to Mr. Johnson. Mr. Johnson is entitled to receive an initial annual base salary of $900,000, subject to review annually, and is eligible to receive the benefits and incentive compensation described in the agreement. If Mr. Johnson’s employment is terminated for cause (as defined in the agreement), or for a reason other than cause (as defined in the agreement) upon at least one year’s prior written notice, CHS incurs no further obligations under the agreement. After August 31, 2009, if CHS does not renew the agreement upon at least one year’s prior written notice, CHS incurs no further obligations under the agreement. Mr. Johnson may terminate his employment in


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his sole discretion upon thirty days’ notice, in which event he is not entitled to receive further compensation or severance. In the event of Mr. Johnson’s death during the term of the agreement, his legal representative is entitled to his base salary for the month in which his death occurred and to any other benefits otherwise due in respect of his death. In the event of Mr. Johnson’s disability during the term of the agreement, Mr. Johnson is entitled to certain continued benefits for a period not to exceed twelve months as set forth in the agreement. Under the agreement, Mr. Johnson is subject to a two-year non-compete following termination of his employment. This summary is subject to the full text of the agreement, a copy of which was previously filed and is listed as Exhibit 10.1A to this Annual Report on Form 10-K.
 
Explanation of Ratio of Salary and Bonus to Total Compensation
 
We have recently shifted the emphasis of our executive compensation package to focus more on pay-at-risk through annual variable pay and long-term incentive awards in order to better align our programs with general market practices.
 
2008 Grants of Plan-Based Awards
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
 
                                 
Name
  Grant Date     Threshold     Target     Maximum  
 
John D. Johnson
    9-1-07 (1)   $ 180,000     $ 900,000     $ 1,800,000  
      9-1-07 (2)     180,000       900,000       1,800,000  
John Schmitz
    9-1-07 (1)     74,998       374,990       749,980  
      9-1-07 (2)     71,694       358,470       716,940  
Leon E. Westbrock
    9-1-07 (1)     82,320       411,600       823,200  
      9-1-07 (2)     79,898       399,490       798,980  
Mark Palmquist
    9-1-07 (1)     82,320       411,600       823,200  
      9-1-07 (2)     79,905       399,527       799,053  
Jay Debertin
    9-1-07 (1)     63,000       315,000       630,000  
      9-1-07 (2)     59,841       299,204       598,407  
 
 
(1) Represents range of possible awards under our 2009 Annual Variable Pay Plan. The actual amount of the award earned for fiscal 2008 is presented in the “Non-Equity Incentive Plan Compensation” column of our Summary Compensation Table. The Annual Variable Pay Plan is described in the “Compensation Discussion and Analysis.”
 
(2) Represents range of possible awards under our Long-Term Incentive Plan for the fiscal 2007-2009 performance period. Goals are based on achieving a three-year ROE of 7%, 10% and 12%. Awards are earned over a three-year period and vest over an additional 26-month period.
 
Grants of Plan-Based Award Table Material Terms of Awards Disclosed in Table
 
The material terms of annual variable pay and long-term incentive awards that are disclosed in this table, including the vesting schedule, are discussed in the Compensation, Discussion and Analysis.


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Pension Benefits Table
 
                         
        Number of
  Present
       
        Years of
  Value of
    Payments
 
        Credited
  Accumulated
    During Last
 
Name
 
Plan Name
  Service   Benefits     Fiscal Year  
 
John D. Johnson(1)
  CHS Inc. Pension Plan   31.6667   $ 570,921     $ 0  
    SERP   31.6667     3,966,702       0  
    Special SERP   31.6667     2,204,124       0  
John Schmitz(1)
  CHS Inc. Pension Plan   33.7500     511,464       0  
    SERP   33.7500     848,869       0  
Leon E. Westbrock(1)
  CHS Inc. Pension Plan   27.0000     685,684       0  
    SERP   27.0000     5,160,306       0  
Mark Palmquist
  CHS Inc. Pension Plan   28.8333     398,401       0  
    SERP   28.8333     880,170       0  
Jay Debertin
  CHS Inc. Pension Plan   24.0833     269,252       0  
    SERP   24.0833     388,421       0  
 
 
(1) The Named Executive Officer is eligible for early retirement in both the CHS Inc. Pension Plan and the Supplemental Executive Retirement Plan.
 
The above table shows the present value of accumulated retirement benefits that Named Executive Officers are entitled to under the Pension Plan and the SERP. It also includes the accrued benefit of Mr. Johnson’s Special SERP.
 
For a discussion of the material terms and conditions of the Pension Plan, SERP and the Special SERP, see the “Compensation Discussion and Analysis.”
 
The present value of accumulated benefits is determined in accordance with the same assumptions outlined in Note 12 of the Notes to Consolidated Financial Statements in Part II, Item 8 to this Annual Report on Form 10-K for the fiscal year ended August 31, 2008:
 
  •  Discount rate of 6.50%;
 
  •  RP-2000 Combined Healthy Participant mortality table (post-decrement only);
 
  •  Each Named Executive Officer is assumed to retire at the earliest retirement age at which unreduced benefits are available (age 62 for Mr. Westbrock and age 65 for all others). The early retirement benefits under the CENEX formula and the Farmer’s Union Central Exchange, Inc. formula are both currently described under the Pension Benefits Table. The early retirement benefit under the cash balance plan formula is equal to the participant’s account balance. Early retirement is not defined under the Special SERP; and
 
  •  Payments under the cash balance formula of the Pension Plan assume a lump sum payment, and payments under the grandfather formula of the Pension Plan assume a single-life annuity. SERP benefits are payable as a lump sum.
 
The normal form of benefit for a single employee is a life only annuity, and for a married employee the normal form of benefit is a 50% joint and survivor annuity. Other annuity forms are also available on an actuarial equivalent basis. A lump sum option is also available.
 
Mr. Johnson’s benefit at retirement will be equal to his accumulated benefit under the Pension Plan and SERP converted to a monthly single-life only annuity.
 
As Chief Executive Officer of CHS, in addition to the Pension Plan and Supplemental Executive Retirement Plan, Mr. Johnson is also eligible for a Special SERP benefit. Under the Special SERP, at the end of each year for which Mr. Johnson completes a year of service, an amount is credited to his account. There


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are two components to the contribution amount: 1) a base portion, and 2) a performance-based portion. The base portion is determined by the following table:
 
         
Year
  Amount  
 
2003-2007
  $ 263,663  
2008
    306,163  
2009
    350,428  
2010
    395,481  
 
The annual performance-based amount for any year shall not exceed $83,272. This amount shall be computed as $83,272 multiplied by a percentage. The percentage is determined by the Board of Directors and is based on Mr. Johnson’s performance for the plan year for which such determination is made pursuant to the performance standards under the CHS Annual Incentive Plan.
 
Mr. Johnson’s Special SERP account will receive interest at 8% per year. Vesting in this plan is immediate. At retirement or termination, Mr. Johnson will receive a lump sum.
 
Mr. Schmitz’s retirement benefit at retirement will be equal to his accumulated benefit under the Pension Plan and SERP, as described in the “Components of Executive Compensation and Benefits” section of our Compensation Discussion and Analysis, converted to a life only monthly annuity. The normal form of benefit for a single employee is a life only annuity, and for a married employee the normal form of benefit is a 50% joint and survivor annuity. Other annuity forms are also available on an actuarial equivalent basis. A lump sum option is also available.
 
Mr. Westbrock will receive benefits under a combination of qualified and non-qualified benefit formulas that produces the greatest benefit at the earlier of termination of employment or retirement.
 
Initial cash balance account balances in the CHS Inc. Pension Plan were established January 1, 1999. All former CENEX employees who were at least age 50 with 10 years of credited service as of January 1, 1999 (“CENEX grandfathered participants”), were eligible to continue to accrue pension benefits determined under the prior plan formula (“CENEX formula”). Mr. Westbrock was eligible for this transition benefit. This plan provides for a monthly benefit for the employee’s lifetime beginning at normal retirement age (social security retirement age), calculated according to the following formula: [[1.08% x Final Average Pay] + [.75% x (Final Average Pay-Covered Compensation)]] x years of credited service (up to a maximum of 30 years).
 
For the period from January 1, 1999 through December 31, 2001, CENEX grandfathered participants received the greater of the benefit derived under the CENEX formula or the cash balance plan benefit. In late 2001 and effective January 1, 2002, all CENEX grandfathered participants were given a one-time choice of which plan formula to continue benefit accruals under. Mr. Westbrock chose the cash balance formula under the Pension Plan.
 
Because of prior CENEX service, Mr. Westbrock is also grandfathered under the Farmers Union Central Exchange, Inc. formula. This formula provides for a monthly benefit for the employee’s lifetime beginning at normal retirement age (age 65), calculated according to the following formula: [[(63% x Final Average Pay) — Primary Social Security Benefit] x (years of credited service (up to a maximum of 30 years)/30)]. The formula provides for a non-qualified lump sum benefit upon retirement (age 65), calculated according to the following formula: [[(63% x Final Average Pay) — Primary Social Security Benefit] x (years of credited service (up to a maximum of 30 years)/30)] — benefit payable under the qualified plan.
 
Under the CENEX formula, terminated or retired employees who are at least 55 with 10 years of vesting service may elect a reduced early retirement benefit. These reductions are 62/3% per year for five years and 31/3% per year thereafter. Mr. Westbrock is currently eligible for early retirement under this plan benefit.
 
Under the Farmers Union Central Exchange, Inc. formula, terminated or retired employees who are at least 55 with 15 years of vesting service or at least age 60 with 10 years of vesting service may elect a reduced early retirement benefit. Unreduced benefits are payable at age 62. Early retirement reductions are


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62/3% per year from age 62 for up to five years and 31/3% per year thereafter. Mr. Westbrock is currently eligible for early retirement under this plan benefit.
 
Final Average Pay under the CENEX plan formula and the Farmer’s Union Central Exchange, Inc. formula is defined as the average monthly compensation for the highest paid 60 consecutive months of employment out of the last 132 months (over the entire service period for the Farmers Union Central Exchange, Inc. Plan) worked. Covered Compensation is an amount used to coordinate pension benefits with Social Security benefits. Covered Compensation varies based on the employee’s year of birth and the year in which employment ends.
 
Mr. Palmquist’s retirement benefit at retirement will be equal to his accumulated benefit under the Pension Plan and SERP, as described in the “Components of Executive Compensation and Benefits” section converted to a life only monthly annuity. The normal form of benefit for a single employee is a life only annuity and for a married employee the normal form of benefit is a 50% joint and survivor annuity. Other annuity forms are also available on an actuarial equivalent basis. A lump sum option is also available.
 
Mr. Debertin’s retirement benefit at retirement will be equal to his accumulated benefit under the Pension Plan and SERP, as described in the “Components of Executive Compensation and Benefits” section converted to a life only monthly annuity. The normal form of benefit for a single employee is a life only annuity and for a married employee the normal form of benefit is a 50% joint and survivor annuity. Other annuity forms are also available on an actuarial equivalent basis. A lump sum option is also available.
 
2008 Non-qualified Deferred Compensation Table
 
                                         
    Executive
    Registrant
    Aggregate Earnings
    Aggregate
    Aggregate Balance
 
    Contributions in
    Contributions in
    (Losses) in
    Withdrawals/
    at Last Fiscal Year
 
Name
  Last Fiscal Year(3)     Last Fiscal Year(1)     Last Fiscal Year(4)     Distributions     End (1),(2)  
 
John D. Johnson
  $ 0     $ 2,426,444     $ 930,323     $ 2,518,931     $ 16,581,384  
John Schmitz
    0       753,901       127,139       0       2,493,578  
Leon E. Westbrock
    0       850,008       136,361       1,471,745       3,801,778  
Mark Palmquist
    0       825,928       138,135       388,779       2,566,440  
Jay Debertin
    585,890       617,121       (471,120 )     0       5,137,558  
 
 
(1) Deferrals under the Deferred Compensation Plan are made by the Named Executive Officer. Amounts include Long-Term Incentive Plan (LTIP), retirement contributions on amounts exceeding IRS compensation limits, Profit Sharing, 401(k) match, plus Mr. Johnson’s Special SERP.
 
(2) Amounts vary in accordance with individual pension plan provisions and voluntary employee deferrals and withdrawals. These amounts include roll-overs, voluntary salary and voluntary incentive plan contributions from predecessor plans with predecessor employers that have increased in value over the course of the executive’s career. Named Executive Officers may defer up to 30% of their base salary and up to 100% of their annual variable pay to the Deferred Compensation Plan. Earnings on amounts deferred under the plan are determined based on the investment election made by the Named Executive Officer from five market based notional investments with a varying level of risk selected by CHS, and a fixed rate based on 10-year U.S. Treasury Notes. Named Executive Officers may change their investment election daily with a maximum of 12 changes per year. Payments of amounts deferred are made in accordance with elections by the Named Executive Officer and in accordance with IRC §409(A). Payments under the plan may be made at a specified date elected by the Named Executive Officer or deferred until retirement, disability, or death. Payments would be made in a lump sum. In the event of retirement, the Named Executive Officer can elect to receive payments either in a lump sum or annual installments of up to 10 years.
 
(3) Includes amounts deferred from salary and annual incentive pay reflected in the Summary Compensation Table.
 
(4) The amounts in this column include the change in value of the balance, not including contributions made by the Named Executive Officer.


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Post Employment
 
The Named Executive Officers are covered by a broad-based employee severance program which provides two weeks of pay per year of service. The Chief Executive Officer is the only Named Executive Officer with an employment agreement which is for a three-year term, which provides for a one year notice in the case employment is terminated without just cause. His severance package follows the same broad-based severance plan as other employees and Named Executive Officers. In accordance with their years of service and current base pay levels, the Named Executive Officers severance pay would be as follows:
 
         
John D. Johnson
  $ 900,000  
John Schmitz
  $ 507,700  
Leon E. Westbrock
  $ 570,000  
Mark Palmquist
  $ 548,700  
Jay Debertin
  $ 389,815  
 
These payments would be made if their positions are eliminated and the executives are laid off. There are no other severance benefits except for up to $5,000 of outplacement assistance, which would be included as imputed income, and government mandated benefits such as COBRA. The method of payment would be a lump sum.
 
Named Executive Officers are not offered any special postretirement medical benefits that aren’t offered to other similarly situated (i.e. age and service) salaried employees.
 
Director Compensation
 
Overview
 
The Board of Directors met monthly during the year ended August 31, 2008. Through August 31, 2008, each director was provided annual compensation of $48,000, paid in twelve monthly payments, plus actual expenses and travel allowance, with the Chairman of the Board receiving additional annual compensation of $18,000, and the First Vice Chairman, the Secretary-Treasurer and all board committee chairs receiving an additional annual compensation of $3,600. Effective September 1, 2008, each director will receive an additional $500 per month compensation. Each director receives a per diem of $300 plus actual expenses and travel allowance for each day spent on meetings other than regular board meetings and the CHS Annual Meeting. Effective September 1, 2006, the number of days per diem may not exceed 55 days annually, except that the Chairman of the Board will be exempt from this limit.
 
Director Retirement and Healthcare Benefits
 
Members of the Board of Directors are eligible for certain retirement and healthcare benefits. The retirement plan is a defined benefit plan and provides for a monthly benefit for the director’s lifetime, beginning at age 60. Benefits are immediately vested and the monthly benefit is determined according to the following formula: $200 times years of service on the board (up to a maximum of 15 years). Under no event will the benefit payment be payable for less than 120 months. Payment shall be made to the retired director’s beneficiary in the event of the director’s death before 120 payments are made. Prior to 2005, directors could elect to receive their benefit as an actuarial equivalent lump sum. In order to comply with IRS requirements, directors were required in 2005 to make a one-time irrevocable election whether to receive their accrued benefit in a lump sum or a monthly annuity upon retirement. If the lump sum was elected, the director would commence benefits upon expiration of board term.
 
Some of the retirement benefits are funded by a rabbi trust, with a balance at August 31, 2008 of $602,018.
 
Directors of CHS in place as of September 1, 2005, and their eligible dependents, will be eligible to participate in the medical, life, dental, vision and hearing plans. CHS will pay 100% of the life and medical premium for the director and eligible dependents until the director is eligible for Medicare. Term life insurance cost is paid by the director. Retired directors and their dependents are eligible to continue medical and dental


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insurance at the cost of CHS after they leave the board. In the event a director’s coverage ends due to death or Medicare eligibility, CHS will pay 100% of the premium for the eligible spouse and eligible dependents until the spouse reaches Medicare age or upon death, if earlier.
 
New directors elected on or after December 1, 2006, and their eligible dependents, will be eligible to participate in the medical, dental, vision and hearing plans. CHS will pay 100% of the premium for the director and eligible dependents until the director is eligible for Medicare. In the event a director leaves the board prior to Medicare eligibility, premiums will be shared based on the following schedule:
 
                 
Years of Service
  Director     CHS  
 
0 to 3
    100 %     0 %
3 to 6
    50 %     50 %
6+
    0 %     100 %
 
Director Life Insurance
 
Current and retired directors will be required to take possession of their whole life insurance policies by December 31, 2008. For directors whose policies are not yet paid up, they will have 12 months from the date the last premium is paid to take possession of the policy. We discontinued offering whole life insurance to new directors beginning service after September 1, 2006, however, those directors will have the ability to purchase additional term insurance that is offered to our active CHS employees, but at their own expense. Directors may purchase additional optional supplemental coverage and dependent life insurance at their own expense.
 
CHS Inc. Deferred Compensation Plan
 
Directors are eligible to participate in the Deferred Compensation Plan. Each participating director may elect to defer up to 100% of his or her monthly director fees into the Deferred Compensation Plan. This must be done prior to the beginning of the fiscal year in which the fees will be earned, or in the case of newly elected directors, upon election. Directors are eligible to participate in the Deferred Compensation Plan which allows directors to voluntarily defer receipt of up to 100% of their board fees. The election must occur prior to the beginning of the calendar year in which the compensation will be earned. During the year, the following directors deferred board fees into the Plan: Mr. Fritel, Mr. Hasnedl, Mr. Mulcahey, Mr. Riegel, and Mr. Toelle.
 
Some of the benefits from a previous deferred compensation plan are funded in a rabbi trust, with a total balance at August 31, 2008 of $46.0 million. This amount includes both director and executive accounts. No further contributions to the trust are planned. Except as noted above, both non-elective and voluntary deferrals under the Deferred Compensation Plan are not funded and do not qualify for special tax treatment under the IRS Code.


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2008 Director Compensation Table
 
                                 
          Change in Pension Value
             
    Fees Earned or
    and Nonqualified Deferred
    All Other
       
Name(1)
  Paid in Cash(4)     Compensation Earnings(2)     Compensation(3)     Total  
 
Bruce Anderson
  $ 66,000     $ 34,114     $ 7,994     $ 108,108  
Donald Anthony
    60,900       25,172       10,142       96,214  
Robert Bass
    69,600       28,230       12,588       110,418  
Dennis Carlson(5)
    61,050       16,079       11,206       88,335  
Curt Eischens
    64,050       14,824       13,425       92,299  
Steven Fritel
    62,400       20,491       18,355       101,246  
Robert Grabarski
    63,000       36,086       10,914       110,000  
Jerry Hasnedl(5)
    64,650       27,277       11,279       103,206  
David Kayser
    58,050       14,679       17,665       90,394  
James Kile
    63,300       23,515       10,934       97,749  
Randy Knecht
    64,200       31,341       11,698       107,239  
Michael Mulcahey
    64,200       32,089       14,708       110,997  
Richard Owen
    64,200       24,285       11,730       100,215  
Steve Riegel
    62,700       22,625       10,653       95,978  
Daniel Schurr
    60,600       9,994       17,391       87,985  
Duane Stenzel(5)
    64,350       26,295       10,468       101,113  
Michael Toelle
    79,500       9,630       15,461       104,591  
 
 
(1) There were no changes in board membership during the year ended August 31, 2008.
 
(2) This column represents both changes in pension value and above-market earnings on deferred compensation. Change in pension value is the aggregate change in the actuarial present value of the director’s benefit under their retirement program, and non-qualified earnings, if applicable. The change in pension value will vary by director based on several factors including, age, service, pension benefit elected (lump sum or annuity- see above), discount rate and mortality factor used to calculate the benefit due.
 
Above-market earnings represent earnings exceeding 120% of the Federal Reserve long-term rate as determined by the IRS on applicable funds. The following directors had above market earnings during the year: Mr. Bass, $114; Mr. Fritel, $11; Mr. Hasnedl, $37; Mr. Knecht, $25; Mr. Mulcahey; $6; and Mr. Toelle, $25.
 
(3) All other compensation includes health and life insurance premiums and spousal travel. These amounts vary primarily due to the variations in life and health insurance premiums. Premium variations are due to several factors including the director’s age, length of service and the number of dependents covered by health care benefits.
 
- Health care premiums paid for directors include: Mr. Anderson, $7,552; Mr. Anthony, $8,892; Mr. Bass, $11,056; Mr. Carlson, $8,892; Mr. Eischens, $12,038; Mr. Fritel, $13,220; Mr. Grabarski, $8,892; Mr. Hasnedl, $8,892; Mr. Kayser, $15,384; Mr. Kile, $8,892; Mr. Knecht, $8,892; Mr. Mulcahey, $8,892; Mr. Owen, $8,892; Mr. Riegel, $8,892; Mr. Schurr, $15,384; Mr. Stenzel, $8,892; and Mr. Toelle, $15,384.
 
- Life insurance premiums paid for directors include: Mr. Fritel, $2,931; and Mr. Mulcahey, $3,685.
 
- Spousal travel includes: Mr. Anderson, $365; Mr. Anthony, $1,173; Mr. Bass, $1,455; Mr. Carlson, $2,237; Mr. Eischens, $1,310; Mr. Fritel, $2,127; Mr. Grabarski, $1,945; Mr. Hasnedl, $2,310; Mr. Kayser, $2,204; Mr. Kile, $1,965; Mr. Knecht, $2,729; Mr. Mulcahey, $2,054; Mr. Owen, $2,761; Mr. Riegel, $1,684; Mr. Schurr, $1,930; and Mr. Stenzel, $1,499.
 
(4) Of this amount, the following directors defer the succeeding amounts to the Deferred Compensation Plan: Mr. Fritel, $2,400; Mr. Hasnedl,: $6,000; Mr. Mulcahey, $6,000; Mr. Riegel, $8,980; and Mr. Toelle, $6,000.


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(5) Made a one-time irrevocable retirement election in 2005 to receive a lump sum benefit under the director’s retirement plan. All other directors will receive a monthly annuity upon retirement.
 
Compensation Committee Interlocks and Insider Participation
 
As noted above, the Board of Directors does not have a compensation committee. The Corporate Responsibility Committee recommends to the entire Board of Directors salary actions relative to our Chief Executive Officer. The entire Board of Directors determines the compensation and the terms of the employment agreement with our President and Chief Executive Officer. Our President and Chief Executive Officer determines the compensation for all other Executive Officers.
 
None of the directors are officers of CHS. See Item 13 for directors that were a party to related transactions.
 
Report of the Corporate Responsibility Committee
 
The Corporate Responsibility Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Corporate Responsibility Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
 
Respectfully submitted,
 
Curt Eischens — Chairman
Donald Anthony
Steven Fritel
Randy Knecht


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ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Beneficial ownership of equity securities as of August 31, 2008 is shown below:
 
                     
        Amount and
       
        Nature of
       
        Beneficial
       
Title of Class
 
Name of Beneficial Owner
  Ownership     % of Class(1)  
 
8% Cumulative Redeemable Preferred Stock
  Directors:                
      Michael Toelle     420 shares (2)     *
      Bruce Anderson     351 shares       *
      Donald Anthony     100 shares       *
      Robert Bass     120 shares       *
      Dennis Carlson     710 shares (2)     *
      Curt Eischens     120 shares       *
      Steve Fritel     1,655 shares       *
      Robert Grabarski     6,580 shares (2)     *
      Jerry Hasnedl     200 shares       *
      David Kayser     0 shares       *
      James Kile     250 shares (2)     *
      Randy Knecht     438 shares (2)     *
      Michael Mulcahey     100 shares       *
      Richard Owen     240 shares       *
      Steve Riegel     0 shares       *
      Daniel Schurr     0 shares       *
      Duane Stenzel     850 shares       *
    Named Executive Officers:                
      John D. Johnson     7,220 shares (2)     *
      Jay Debertin     1,200 shares       *
      Patrick Kluempke     1,000 shares       *
      Thomas D. Larson     400 shares       *
      Mark Palmquist     400 shares       *
      John Schmitz     1,400 shares (2)     *
      Leon E. Westbrock     3,000 shares       *
                     
    Directors and executive officers as a group     26,754 shares       *
 
 
(1) As of August 31, 2008, there were 9,047,780 shares of 8% Cumulative Redeemable Preferred Stock Outstanding.
 
(2) Includes shares held by spouse, children and Individual Retirement Accounts (IRA).
 
* Less than 1%.
 
We have no compensation plans under which our equity securities are authorized for issuance.
 
To our knowledge, there is no person who owns beneficially more than 5% of our 8% Cumulative Redeemable Preferred Stock.


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ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Because our directors must be active patrons of ours, or of an affiliated association, transactions between us and our directors are customary and expected. Transactions include the sales of commodities to us and the purchases of products and services from us, as well as patronage refunds and equity redemptions received from us. During the year ended August 31, 2008, the value of those transactions between a particular director (and any immediate family member of a director, which includes any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, and any person (other than a tenant or employee) sharing the household of such director) and us in which the amount involved exceeded $120,000 are shown below.
 
                 
    Product Sales
    Patronage
 
Name
  and Purchases     Dividends  
 
Bruce Anderson
  $ 243,915     $ 6,055  
Curt Eischens
    375,123       4,559  
Steve Fritel
    173,849       6,757  
Jerry Hasnedl
    1,492,944       38,588  
David Kayser
    1,133,984       12,736  
Richard Owen
    149,977       1,782  
Michael Toelle
    1,051,592       30,385  
 
Review, Approval or Ratification of Related Party Transaction
 
Pursuant to its amended and restated charter, our Audit Committee has responsibility for the review and approval of all transactions between CHS and any related parties or affiliates of CHS, including its officers and directors, other than transactions in the ordinary course of business and on market terms as described above.
 
Related persons can include any of our directors or executive officers and any of their immediate family members, as defined by the Securities and Exchange Commission. In evaluating related person transactions, the committee members apply the same standards they apply to their general responsibilities as members of the committee of the Board of Directors. The committee will approve a related person transaction when, in its good faith judgment, the transaction is in the best interest of CHS. To identify related person transactions, each year we require our directors and officers to complete a questionnaire identifying any transactions with CHS in which the officer or director or their family members have an interest. In addition, we have a written policy in regard to related persons, included in our Corporate Compliance Code of Ethics that describes our expectation that all directors, officers and employees who may have a potential or apparent conflict of interest will notify our legal department.
 
Director Independence
 
We are a Minnesota cooperative corporation managed by a Board of Directors made up of seventeen members. Nomination and election of the directors is done by eight separate regions. In addition to meeting other requirements for directorship, candidates must reside in the region from which they are elected. Directors are elected for three-year terms. The terms of directors are staggered and no more than six director positions are elected at an annual meeting. Nominations for director elections are made by the members at the region caucuses at our annual meeting. Neither the Board of Directors, nor management, of CHS participates in the nomination process. Accordingly, we have no nominating committee.


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The following directors satisfy the definition of director independence set forth in the rules of the NASDAQ Global Select Market:
 
     
Bruce Anderson
  Donald Anthony
Robert Bass
  Dennis Carlson
Steve Fritel
  Robert Grabarski
Jerry Hasnedl
  David Kayser
James Kile
  Randy Knecht
Michael Mulcahey
  Richard Owen
Steve Riegel
  Daniel Schurr
Duane Stenzel
  Michael Toelle
 
Further, although we do not need to rely upon an exemption, we are exempt pursuant to the NASDAQ rules from the NASDAQ director independence requirements as they relate to the makeup of the Board of Directors as a whole and the makeup of the committee performing the functions of a compensation committee. The NASDAQ exemption applies to cooperatives that are structured to comply with relevant state law and federal tax law and that do not have a publicly traded class of common stock. All of the members of our Audit Committee are independent.
 
ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The following table shows the aggregate fees billed to us by PricewaterhouseCoopers for services rendered during the fiscal years ended August 31, 2008 and 2007:
 
                 
Description of Fees
  2008     2007  
 
Audit Fees(1)
  $ 1,460,750     $ 1,246,665  
Audit — Related Fees(2)
    86,550       122,072  
Tax Fees(3)
          20,850  
All Other Fees
           
                 
Total
  $ 1,547,300     $ 1,389,587  
                 
 
 
(1) Includes fees for audit of annual financial statements and reviews of the related quarterly financial statements, certain statutory audits, work related to filings of registration statements, and services for 404 readiness efforts.
 
(2) Includes fees for employee benefit plan audits.
 
(3) Includes fees related to tax compliance, tax advice and tax planning.
 
In accordance with the CHS Inc. Audit Committee Charter, as amended, our Audit Committee adopted the following policies and procedures for the approval of the engagement of an independent registered public accounting firm for audit, review or attest services and for pre-approval of certain permissible non-audit services, all to ensure auditor independence.
 
Our independent registered public accounting firm will provide audit, review and attest services only at the direction of, and pursuant to engagement fees and terms approved by our Audit Committee. Our Audit Committee approves, in advance, all non-audit services to be performed by the independent auditors and the fees and compensation to be paid to the independent auditors. Our Audit Committee approved all of the services listed above in advance.


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PART IV.
 
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)(1) FINANCIAL STATEMENTS
 
The following financial statements and the Reports of Independent Registered Public Accounting Firms are filed as part of this Form 10-K.
 
         
    Page No.
 
CHS Inc.
       
    F-1  
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
 
 
(a)(2) FINANCIAL STATEMENT SCHEDULES
 
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
                                         
    Balance at
    Additions:
    Additions:
    Deductions:
    Balance at
 
    Beginning
    Charged to Costs
    Charged to
    Write-offs, net
    End
 
    of Year     and Expenses     Other Accounts     of Recoveries     of Year  
    (Dollars in thousands)  
 
Allowances for Doubtful Accounts
                                       
2008
  $ 62,960     $ 20,691             $ (10,000 )   $ 73,651  
2007
    53,898       12,358               (3,296 )     62,960  
2006
    60,041       11,414               (17,557 )     53,898  


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Report of Independent Registered Public Accounting Firm on
 
Financial Statement Schedule
 
To the Board of Directors and Members and Patrons of CHS Inc.:
 
Our audits of the consolidated financial statements referred to in our report dated November 4, 2008 appearing on page F-1 of this Form 10-K of CHS Inc. and subsidiaries also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
 
/s/  PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 4, 2008


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(a)(3) EXHIBITS
 
         
  3 .1   Articles of Incorporation of CHS Inc., as amended. (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2006, filed on January 11, 2007).
  3 .2   Bylaws of CHS Inc. (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2005, filed on January 11, 2006).
  4 .1   Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock. (Incorporated by reference to Amendment No. 1 to our Registration Statement on Form S-2 (File No. 333-101916), dated January 13, 2003).
  4 .2   Form of Certificate Representing 8% Cumulative Redeemable Preferred Stock. (Incorporated by reference to Amendment No. 2 to our Registration Statement on Form S-2 (File No. 333-101916), dated January 23, 2003).
  4 .3   Unanimous Written Consent Resolution of the Board of Directors Amending the Amended and Restated Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock. (Incorporated by reference to Amendment No. 2 to our Registration Statement on Form S-2 (File No. 333-101916), dated January 23, 2003).
  4 .4   Unanimous Written consent Resolution of the Board of Directors Amending the Amended and Restated Resolution Creating a Series of Preferred Equity to be Designated 8% Cumulative Redeemable Preferred Stock to change the record date for dividends. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2003, filed July 2, 2003).
  10 .1   Employment Agreement dated November 6, 2003 by and between John D. Johnson and CHS Inc. (Incorporated by reference to our Form 10-K for the year ended August 31, 2003, filed November 21, 2003).
  10 .1A   Amended and Restated Employment Agreement between John D. Johnson and CHS Inc., effective as of August 1, 2007 (Incorporated by reference to our Current Report on Form 8-K filed August 10, 2007).
  10 .2   Cenex Harvest States Cooperatives Supplemental Savings Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .2A   Amendment No. 3 to the CHS Inc. Supplemental Savings Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006, filed July 12, 2006).
  10 .3   Cenex Harvest States Cooperatives Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .3A   Amendment No. 4 to the CHS Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006, filed July 12, 2006).
  10 .3B   Amendment No. 5 to the CHS Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 29, 2008, filed April 9, 2008).
  10 .3C   Amendment No. 6 to the CHS Inc. Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 29, 2008, filed April 9, 2008).
  10 .3D   Amendment No. 7 to the CHS Inc. Supplemental Executive Retirement Plan.(*).
  10 .4   Cenex Harvest States Cooperatives Senior Management Compensation Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .5   Cenex Harvest States Cooperatives Executive Long-Term Variable Compensation Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2000, filed November 22, 2000).
  10 .6   Cenex Harvest States Cooperatives Share Option Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .6A   Amendment to Cenex Harvest States Share Option Plan, dated June 28, 2001. (Incorporated by reference to our Registration Statement on Form S-2 (File No. 333-65364), filed July 18, 2001).
  10 .6B   Amendment No. 2 to Cenex Harvest States Share Option Plan, dated May 2, 2001. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .6C   Amendment No. 3 to Cenex Harvest States Share Option Plan, dated June 4, 2002. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .6D   Amendment No. 4 to Cenex Harvest States Share Option Plan, dated April 6, 2004. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .7   CHS Inc. Share Option Plan Option Agreement. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .8   CHS Inc. Share Option Plan Trust Agreement. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).


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  10 .8A   Amendment No. 1 to the Trust Agreement. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .9   $225,000,000 Note Agreement (Private Placement Agreement) dated as of June 19, 1998 among Cenex Harvest States Cooperatives and each of the Purchasers of the Notes. (Incorporated by Reference to our Form 10-Q Transition Report for the period June 1, 1998 to August 31, 1998, filed October 14, 1998).
  10 .9A   First Amendment to Note Agreement ($225,000,000 Private Placement), effective September 10, 2003, among CHS Inc. and each of the Purchasers of the notes. (Incorporated by reference to our Form 10-K for the year ended August 31, 2003, filed November 21, 2003).
  10 .10   2006 Amended and Restated Credit Agreement (Revolving Loan) by and between CHS Inc. and the Syndication Parties dated as of May 18, 2006. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006, filed July 12, 2006).
  10 .10A   First Amendment to 2006 Amended and Restated Credit Agreement by and among CHS Inc., CoBank, ACB and the Syndication Parties, dated May 8, 2007 (Incorporated by reference to our Current Report on Form 8-K filed May 11, 2007).
  10 .10B   Second Amendment to 2006 Amended and Restated Credit Agreement by and among CHS Inc., CoBank, ACB and the Syndication Parties, dated October 18, 2007. (*)
  10 .10C   Third Amendment to 2006 Amended and Restated Credit Agreement by and among CHS Inc., CoBank, ACB and the Syndication Parties, dated March 5, 2008 (Incorporated by reference to our Current Report on Form 8-K filed March 6, 2008).
  10 .10D   Fourth Amendment to 2006 Amended and Restated Credit Agreement by and among CHS Inc., CoBank, ACB and the Syndication Parties, dated May 1, 2008 (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2008 filed July 10, 2008).
  10 .11   $200 Million Term Loan Credit Agreement dated as of June 1, 1998 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives, including Exhibit 2.4 (form of $200 Million Promissory Note). (Incorporated by Reference to our Form 10-Q Transition Report for the period June 1, 1998 to August 31, 1998, filed October 14, 1998).
  10 .11A   First Amendment to Credit Agreement (Term Loan), effective as of May 31, 1999 among Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 1999, filed July 13, 1999).
  10 .11B   Second Amendment to Credit Agreement (Term Loan) dated May 23, 2000 by and among Cenex Harvest States Cooperatives, CoBank, ACB, St. Paul Bank for Cooperatives and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2000, filed July 10, 2000).
  10 .11C   Third Amendment to Credit Agreement (Term Loan) dated May 23, 2001 among Cenex Harvest States Cooperatives, CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2001, filed July 3, 2001).
  10 .11D   Fourth Amendment to Credit Agreement (Term Loan) dated May 22, 2002 among Cenex Harvest States Cooperatives, CoBank, ACB and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2002, filed July 3, 2002).
  10 .11E   Fifth Amendment to Credit Agreement (Term Loan) dated May 21, 2003 by and among Cenex Harvest States Cooperatives, CoBank, ACB and the Syndication Parties. (Incorporated by reference to our Form 10-K for the year ended August 31, 2004, filed November 18, 2004).
  10 .11F   Sixth Amendment to Credit Agreement (Term Loan) dated as of May 20, 2004 by and among CHS Inc., CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2004, filed July 12, 2004).
  10 .11G   Seventh Amendment to Credit Agreement (Term Loan) dated as of May 19, 2005 by and among CHS Inc., CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our form 10-K for the year ended August 31, 2005, filed on November 18, 2005).
  10 .11H   Eighth Amendment to Credit Agreement (Term Loan) dated as of November 18, 2005 by and among CHS Inc., CoBank, ACB, and the Syndication Parties. (Incorporated by reference to our form 10-K for the year ended August 31, 2005, filed on November 18, 2005).
  10 .11I   Ninth Amendment to Credit Agreement (Term Loan) dated as of May 18, 2006 by and among CHS Inc., CoBank, ACB and the Syndication Parties. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2006).
  10 .11J   Tenth Amendment to Credit Agreement (Term Loan) dated as of May 8, 2007 by and among CHS Inc. and CoBank, ACB (Incorporated by reference to our Current Report on Form 8-K filed May 11, 2007).

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  10 .12   CHS Inc. Special Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-K for the year ended August 31, 2003, filed November 21, 2003).
  10 .12A   Amendment No. 1 to the CHS Inc. Special Supplemental Executive Retirement Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 29, 2008, filed April 9, 2008).
  10 .13   Note purchase and Private Shelf Agreement dated as of January 10, 2001 between Cenex Harvest States Cooperatives and The Prudential Insurance Company of America. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 28, 2001, filed April 10, 2001).
  10 .13A   Amendment No. 1 to Note Purchase and Private Shelf Agreement, dated as of March 2, 2001. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 28, 2001, filed April 10, 2001).
  10 .14   Note Purchase Agreement and Series D & E Senior Notes dated October 18, 2002. (Incorporated by reference to our Form 10-K for the year ended August 31, 2002, filed November 25, 2002).
  10 .15   2003 Amended and Restated Credit Agreement ($15 million, 2 Year Facility) dated December 16, 2003 between CoBank, ACB, U.S. AgBank, FCB and the National Cooperative Refinery Association, Inc. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 29, 2004, filed April 7, 2004).
  10 .15A   First Amendment to the 2003 Amended and Restated Credit Agreement between the National Cooperative Refinery Association and the Syndication Parties. (Incorporated by reference to our Current Report on Form 8-K filed December 20, 2005).
  10 .15B   Third Amendment to 2003 Amended and Restated Credit Agreement between National Cooperative Refinery Association and the Syndication Parties (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .15C   Fifth Amendment to 2003 Amended and Restated Credit Agreement between National Cooperative Refinery Association and the Syndication Parties (Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-148091), filed December 14, 2007).
  10 .16   Note Purchase and Private Shelf Agreement between CHS Inc. and Prudential Capital Group dated as of April 13, 2004. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2004, filed July 12, 2004).
  10 .16A   Amendment No. 1 to Note Purchase and Private Shelf Agreement dated April 9, 2007, among CHS Inc., Prudential Investment Management, Inc. and the Prudential Affiliate parties (Incorporated by reference to our Form 10-Q for the quarterly period ended February 28, 2007 filed April 9, 2007).
  10 .16B   Amendment No. 2 to Note Purchase and Private Shelf Agreement and Senior Series J Notes totaling $50 million issued February 8, 2008 (Incorporated by reference to our Current Report on Form 8-K filed February 11, 2008).
  10 .17   Note Purchase Agreement for Series H Senior Notes ($125,000,000 Private Placement) dated September 21, 2004. (Incorporated by reference to our Current Report on Form 8-K filed September 22, 2004).
  10 .18   Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-121161), filed December 10, 2004).
  10 .18A   First Amendment to CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-129464), filed November 4, 2005).
  10 .18B   Second Amendment to CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended February 29, 2008, filed April 9, 2008).
  10 .18C   Third Amendment to CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2008, filed July 10, 2008).
  10 .18D   Fourth Amendment to CHS Inc. Deferred Compensation Plan. (*).
  10 .19   New Plan Participants 2005 Plan Agreement and Election Form for the CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-121161), filed December 10, 2004).
  10 .20   Beneficiary Designation Form for the CHS Inc. Deferred Compensation Plan. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-121161), filed December 10, 2004).
  10 .21   Share Option Plan Participants 2005 Plan Agreement and Election Form. (Incorporated by reference to our Registration Statement on Form S-8 (File No. 333-129464), filed November 4, 2005).
  10 .22   Amended and Restated Loan and Security Agreement dated August 31, 2006, by and between Provista Renewable Fuels Marketing, LLC and LaSalle Bank National Association (Incorporated by reference to our Form 10-K for the year ended August 31, 2006, filed November 22, 2006).

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  10 .22A   First Amendment to Amended and Restated Loan and Security Agreement by and among Provista Renewable Fuels Marketing, LLC and LaSalle Bank National Association dated January 30, 2007 (Incorporated by reference to our Current Report on Form 8-K filed January 31, 2007).
  10 .22B   Second Amendment to Amended and Restated Loan and Security Agreement by and among Provista Renewable Fuels Marketing, LLC and LaSalle Bank National Association dated November 2, 2007 (Incorporated by reference to our Current Report on Form 8-K filed November 6, 2007).
  10 .23   City of McPherson, Kansas Taxable Industrial Revenue Bond Series 2006 registered to National Cooperative Refinery Association in the amount of $325 million (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .24   Bond Purchase Agreement between National Cooperative Refinery Association, as purchaser, and City of McPherson, Kansas, as issuer, dated as of December 18, 2006 (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .25   Trust Indenture between City of McPherson, Kansas, as issuer, and Security Bank of Kansas City, Kansas City, Kansas, as trustee, dated as of December 18, 2006 (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .26   Lease agreement between City of McPherson, Kansas, as issuer, and National Cooperative Refinery Association, as tenant, dated as of December 18, 2006 (Incorporated by reference to our Current Report on Form 8-K filed December 18, 2006).
  10 .27   Commercial Paper Placement Agreement by and between CHS Inc. and Marshall & Ilsley Bank dated October 30, 2006 (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2006, filed January 11, 2007).
  10 .28   Commercial Paper Dealer Agreement by and between CHS Inc. and SunTrust Capital Markets, Inc. dated October 6, 2006 (Incorporated by reference to our Form 10-Q for the quarterly period ended November 30, 2006, filed January 11, 2007).
  10 .29   Note Purchase Agreement ($400,000,000 Private Placement) and Series I Senior Notes dated as of October 4, 2007 (Incorporated by reference to our Current Report on Form 8-K filed October 4, 2007).
  10 .30   Agreement Regarding Distribution of Assets, by and among CHS Inc., United Country Brands, LLC, Land O’Lakes, Inc. and Winfield Solutions, LLC, made as of September 4, 2007. (Incorporated by reference to our Form 10-K for the year ended August 31, 2008, filed November 20, 2007).
  10 .31   $150 Million Term Loan Credit Agreement by and between CHS Inc., CoBank, ACB and the Syndication Parties dated as of December 12, 2007 (Incorporated by reference to our Registration Statement on Form S-1 (File No. 333-148091), filed December 14, 2007).
  10 .31A   First Amendment to $150 Million Term Loan Credit Agreement by and between CHS Inc., CoBank, ACB and the Syndication Parties dated as of May 1, 2008 (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2008, filed July 10, 2008).
  10 .32   Credit Agreement (364-day Revolving Loan) by and between CHS Inc., CoBank, ACB and the Syndication Parties dated as of February 14, 2008 (Incorporated by reference to our Current Report on Form 8-K filed February 15, 2008).
  10 .32A   First Amendment to Credit Agreement (364-day Revolving Loan) by and between CHS Inc., CoBank, ACB and the Syndication Parties dated as of May 1, 2008 (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2008, filed July, 10 2008).
  10 .33   $75 Million Uncommitted Demand Facility by and between CHS Europe S.A. and Fortis Bank (Nederland) N.V. dated April 18, 2008 (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2008, filed July 10, 2008).
  10 .34   $60 Million Uncommitted Trade Finance Facility by and between CHS Europe S.A. and Societe Generale dated June 6, 2008 (Incorporated by reference to our Form 10-Q for the quarterly period ended May 31, 2008, filed July 10, 2008).
  10 .35   $70 Million Uncommitted Transactional Facility by and between CHS Europe S.A. and BNP Paribas dated July 17, 2008 (*).
  10 .36   $50 Million Private Shelf Agreement by and between CHS Inc. and John Hancock Life Insurance Company dated as of August 11, 2008 (*).
  21 .1   Subsidiaries of the Registrant. (*)
  23 .1   Consent of Independent Registered Public Accounting Firm. (*)
  24 .1   Power of Attorney. (*)
  31 .1   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)

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  31 .2   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (*)
  32 .1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)
  32 .2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (*)
 
 
(*) Filed herewith.
 
(b) EXHIBITS
 
The exhibits shown in Item 15(a)(3) above are being filed herewith.
 
(c) SCHEDULES
 
None.
 
SUPPLEMENTAL INFORMATION
 
As a cooperative, we do not utilize proxy statements.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 21, 2008.
 
CHS INC.
 
  By: 
/s/  John D. Johnson
John D. Johnson
President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on November 21, 2008:
 
         
Signature
 
Title
 
     
/s/  John D. Johnson

John D. Johnson
  President and Chief Executive Officer
(principal executive officer)
     
/s/  John Schmitz

John Schmitz
  Executive Vice President and Chief Financial Officer (principal financial officer)
     
/s/  Jodell Heller

Jodell Heller
  Vice President and Controller
(principal accounting officer)
     
    

Michael Toelle*
  Chairman of the Board of Directors
     
    

Bruce Anderson*
  Director
     
    

Don Anthony*
  Director
     
    

Robert Bass*
  Director
     
    

Dennis Carlson*
  Director
     
    

Curt Eischens*
  Director
     
    

Steve Fritel*
  Director
     
    

Robert Grabarski*
  Director


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Signature
 
Title
 
     
    

Jerry Hasnedl*
  Director
     
    

David Kayser*
  Director
     
    

James Kile*
  Director
     
    

Randy Knecht*
  Director
     
    

Michael Mulcahey*
  Director
     
    

Richard Owen*
  Director
     
    

Steve Riegel*
  Director
     
    

Dan Schurr*
  Director
     
    

Duane Stenzel*
  Director
         
*By  
/s/  John D. Johnson

John D. Johnson
Attorney-in-fact
   


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To The Board of Directors and Members and Patrons of CHS inc.:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of equities and comprehensive income and of cash flows present fairly, in all material respects, the financial position of CHS Inc. and its subsidiaries at August 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2008, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 12 to the consolidated financial statements, CHS Inc. changed the manner in which it accounts for defined benefit arrangements effective August 31, 2007.
 
/s/  PricewaterhouseCoopers LLP
November 4, 2008
Minneapolis, Minnesota


F-1


Table of Contents

 
Consolidated Financial Statements
 
 
                 
    August 31  
    2008     2007*  
    (Dollars in thousands)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 136,540     $ 357,712  
Receivables
    2,307,794       1,401,251  
Inventories
    2,368,024       1,666,632  
Derivative assets
    369,503       247,082  
Other current assets
    667,338       264,181  
                 
Total current assets
    5,849,199       3,936,858  
Investments
    784,516       880,592  
Property, plant and equipment
    1,948,305       1,728,171  
Other assets
    189,958       208,752  
                 
Total assets
  $ 8,771,978     $ 6,754,373  
                 
 
LIABILITIES AND EQUITIES
Current liabilities:
               
Notes payable
  $ 106,154     $ 672,571  
Current portion of long-term debt
    118,636       98,977  
Customer credit balances
    224,349       110,818  
Customer advance payments
    644,822       161,525  
Checks and drafts outstanding
    204,896       143,133  
Accounts payable
    1,838,214       1,120,822  
Derivative liabilities
    273,591       177,209  
Accrued expenses
    374,898       255,631  
Dividends and equities payable
    325,039       374,294  
                 
Total current liabilities
    4,110,599       3,114,980  
Long-term debt
    1,076,219       589,344  
Other liabilities
    423,742       377,208  
Minority interests in subsidiaries
    205,732       197,386  
Commitments and contingencies
               
Equities
    2,955,686       2,475,455  
                 
Total liabilities and equities
  $ 8,771,978     $ 6,754,373  
                 
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2
 
The accompanying notes are an integral part of the consolidated financial statements.
CHS Inc. and Subsidiaries


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Table of Contents

Consolidated Financial Statements
 
 
                         
    For the Years Ended August 31  
    2008     2007*     2006*  
    (Dollars in thousands)  
 
Revenues
  $ 32,167,461     $ 17,215,992     $ 14,383,835  
Cost of goods sold
    30,993,899       16,129,233       13,540,285  
                         
Gross profit
    1,173,562       1,086,759       843,550  
Marketing, general and administrative
    329,965       245,357       231,238  
                         
Operating earnings
    843,597       841,402       612,312  
Gain on investments
    (29,193 )     (20,616 )        
Interest, net
    76,460       31,098       41,305  
Equity income from investments
    (150,413 )     (109,685 )     (84,188 )
Minority interests
    72,160       143,214       91,079  
                         
Income from continuing operations before income taxes
    874,583       797,391       564,116  
Income taxes
    71,538       40,668       59,350  
                         
Income from continuing operations
    803,045       756,723       504,766  
Income from discontinued operations, net of taxes
                    625  
                         
Net income
  $ 803,045     $ 756,723     $ 505,391  
                         
Distribution of net income:
                       
Patronage refunds
  $ 652,000     $ 550,000     $ 374,000  
Unallocated capital reserve
    151,045       206,723       131,391  
                         
Net income
  $ 803,045     $ 756,723     $ 505,391  
                         
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2
 
The accompanying notes are an integral part of the consolidated financial statements.
CHS Inc. and Subsidiaries


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Table of Contents

 
Consolidated Financial Statements
 
CONSOLIDATED STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
 
                                                                 
    For the Years Ended August 31, 2008, 2007 and 2006  
                                  Accumulated
             
    Capital
    Nonpatronage
                Unallocated
    Other
    Allocated
       
    Equity
    Equity
    Preferred
    Patronage
    Capital
    Comprehensive
    Capital
    Total
 
    Certificates     Certificates     Stock     Refunds     Reserve     Income (Loss)     Reserve     Equities  
    (Dollars in thousands)  
 
Balances, September 1, 2005*
  $ 1,153,709     $ 27,467     $ 126,688     $ 142,100     $ 315,893     $ 4,971     $ 8,050     $ 1,778,878  
Dividends and equity retirement determination
    69,856                       60,900       1,650                       132,406  
Patronage distribution
    145,333                       (203,000 )     (4,850 )                     (62,517 )
Equities retired
    (55,836 )     (97 )                                             (55,933 )
Capital equity certificates exchanged for preferred stock
    (23,824 )             23,824               (88 )                     (88 )
Equities issued
    11,064                                                       11,064  
Preferred stock dividends
                                    (10,816 )                     (10,816 )
Other, net
    (3,300 )     (197 )                     221                       (3,276 )
Comprehensive income:
                                                               
Net income
                            374,000       131,391                       505,391  
Other comprehensive income
                                            8,131               8,131  
                                                                 
Total comprehensive income
                                                            513,522  
                                                                 
Dividends and equities payable
    (116,919 )                     (130,900 )     (1,955 )                     (249,774 )
                                                                 
Balances, August 31, 2006*
    1,180,083       27,173       150,512       243,100       431,446       13,102       8,050       2,053,466  
Dividends and equity retirement determination
    116,919                       130,900       1,955                       249,774  
Patronage distribution
    246,802                       (374,000 )     (5,860 )                     (133,058 )
Equities retired
    (70,402 )     (382 )                                             (70,784 )
Capital equity certificates exchanged for preferred stock
    (35,899 )             35,899               (145 )                     (145 )
Equities issued
    10,132                                                       10,132  
Preferred stock dividends
                                    (13,104 )                     (13,104 )
Other, net
    (3,203 )     (145 )                     168               (9 )     (3,189 )
Comprehensive income:
                                                               
Net income
                            550,000       206,723                       756,723  
Other comprehensive income
                                            62,353               62,353  
                                                                 
Total comprehensive income
                                                            819,076  
                                                                 
Adjustment to initially apply FASB Statement No. 158
                                            (62,419 )             (62,419 )
Dividends and equities payable
    (179,381 )                     (192,500 )     (2,413 )                     (374,294 )
                                                                 
Balances, August 31, 2007*
    1,265,051       26,646       186,411       357,500       618,770       13,036       8,041       2,475,455  
Dividends and equity retirement determination
    179,381                       192,500       2,413                       374,294  
Patronage distribution
    362,206                       (550,000 )     (7,210 )                     (195,004 )
Equities retired
    (81,295 )     (500 )                                             (81,795 )
Capital equity certificates exchanged for preferred stock
    (46,364 )             46,364               (135 )                     (135 )
Equities issued
    4,680                                                       4,680  
Preferred stock dividends
                                    (16,288 )                     (16,288 )
Other, net
    (2,057 )     (804 )                     429               (17 )     (2,449 )
Comprehensive income:
                                                               
Net income
                            652,000       151,045                       803,045  
Other comprehensive loss
                                            (81,078 )             (81,078 )
                                                                 
Total comprehensive income
                                                            721,967  
                                                                 
Dividends and equities payable
    (93,823 )                     (228,200 )     (3,016 )                     (325,039 )
                                                                 
Balances, August 31, 2008
  $ 1,587,779     $ 25,342     $ 232,775     $ 423,800     $ 746,008     $ (68,042 )   $ 8,024     $ 2,955,686  
                                                                 
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2
 
The accompanying notes are an integral part of the consolidated financial statements.
CHS Inc. and Subsidiaries


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Consolidated Financial Statements
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    For the Years Ended August 31  
    2008     2007*     2006*  
    (Dollars in thousands)  
 
Cash flows from operating activities:
                       
Net income
  $ 803,045     $ 756,723     $ 505,391  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    181,263       140,596       126,777  
Amortization of deferred major repair costs
    29,146       23,250       14,716  
Income from equity investments
    (150,413 )     (109,685 )     (84,188 )
Distributions from equity investments
    110,013       66,693       58,240  
Minority interests
    72,160       143,214       91,079  
Noncash patronage dividends received
    (4,083 )     (3,302 )     (4,969 )
Gain on sale of property, plant and equipment
    (5,668 )     (6,916 )     (5,232 )
Gain on investments
    (29,193 )     (20,616 )        
Deferred taxes
    26,011       50,868       88,323  
Other, net
    770       4,261       460  
Changes in operating assets and liabilities:
                       
Receivables
    (832,146 )     (278,179 )     44,650  
Inventories
    (517,515 )     (528,288 )     (198,501 )
Derivative assets
    (122,421 )     (172,809 )     28,421  
Other current assets and other assets
    (98,625 )     (81,906 )     34,552  
Customer credit balances
    113,501       44,030       (25,915 )
Customer advance payments
    275,386       79,138       (48,062 )
Accounts payable and accrued expenses
    827,997       211,469       (101,254 )
Derivative liabilities
    96,382       79,399       (55,038 )
Other liabilities
    30,152       9,346       28,371  
                         
Net cash provided by operating activities
    805,762       407,286       497,821  
                         
Cash flows from investing activities:
                       
Acquisition of property, plant and equipment
    (318,559 )     (373,300 )     (234,992 )
Proceeds from disposition of property, plant and equipment
    9,336       13,548       13,911  
Expenditures for major repairs
    (21,662 )     (34,664 )     (42,879 )
Investments
    (370,248 )     (95,834 )     (72,989 )
Investments redeemed
    43,046       4,935       7,283  
Proceeds from sale of investments
    122,075       10,918          
Joint venture distribution transaction, net
    (4,737 )                
Changes in notes receivable
    (67,119 )     (29,320 )     20,955  
Acquisition of intangibles
    (3,399 )     (9,083 )     (2,867 )
Business acquisitions
    (47,001 )     (15,104 )        
Other investing activities, net
    (5,444 )     (2,051 )     3,351  
                         
Net cash used in investing activities
    (663,712 )     (529,955 )     (308,227 )
                         
Cash flows from financing activities:
                       
Changes in notes payable
    (565,022 )     633,203       (59,025 )
Long-term debt borrowings
    600,000       4,050          
Principal payments on long-term debt
    (99,479 )     (60,851 )     (36,669 )
Payments for bank fees on debt
    (3,486 )     (104 )     (1,997 )
Changes in checks and drafts outstanding
    61,110       85,412       (10,513 )
Distributions to minority owners
    (63,123 )     (76,763 )     (80,529 )
Costs incurred — capital equity certificates redeemed
    (135 )     (145 )     (88 )
Preferred stock dividends paid
    (16,288 )     (13,104 )     (10,816 )
Retirements of equities
    (81,795 )     (70,784 )     (55,933 )
Cash patronage dividends paid
    (195,004 )     (133,058 )     (62,517 )
                         
Net cash (used in) provided by financing activities
    (363,222 )     367,856       (318,087 )
                         
Net (decrease) increase in cash and cash equivalents
    (221,172 )     245,187       (128,493 )
Cash and cash equivalents at beginning of period
    357,712       112,525       241,018  
                         
Cash and cash equivalents at end of period
  $ 136,540     $ 357,712     $ 112,525  
                         
 
 
* Adjusted to reflect adoption of FASB Staff Position No. AUG AIR-1; see Note 2
 
The accompanying notes are an integral part of the consolidated financial statements.
CHS Inc. and Subsidiaries


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1  Summary of Significant Accounting Policies:
 
Organization
 
CHS Inc. (CHS or the Company) is an agricultural supply, energy and grain-based foods cooperative company organized for the mutual benefit of its members. Members of the cooperative are located throughout the United States. The Company provides a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies and agronomy products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing and food products. Revenues are both domestic and international.
 
Consolidation
 
The consolidated financial statements include the accounts of CHS and all of its wholly-owned and majority-owned subsidiaries and limited liability companies, including National Cooperative Refinery Association (NCRA), included in the Energy segment. The effects of all significant intercompany transactions have been eliminated.
 
The Company had various acquisitions during the three years ended August 31, 2008, which have been accounted for using the purchase method of accounting. Operating results of the acquisitions are included in the consolidated financial statements since the respective acquisition dates. The respective purchase prices were allocated to the assets and liabilities acquired based upon the estimated fair values. The excess purchase prices over the estimated fair values of the net assets acquired have been reported as identifiable intangible assets.
 
Cash Equivalents
 
Cash equivalents include short-term, highly liquid investments with original maturities of three months or less at the date of acquisition.
 
Inventories
 
Grain, processed grain, oilseed and processed oilseed are stated at net realizable values which approximates market values. All other inventories are stated at the lower of cost or market. Costs for inventories produced or modified by the Company through a manufacturing process include fixed and variable production and raw material costs, and in-bound freight costs for raw materials. Costs for inventories purchased for resale include the cost of products and freight incurred to place the products at the Company’s points of sales. The costs of certain energy inventories (wholesale refined products, crude oil and asphalt) are determined on the last-in, first-out (LIFO) method; all other inventories of non-grain products purchased for resale are valued on the first-in, first-out (FIFO) and average cost methods.
 
Derivative Financial Instruments
 
Commodity Price Risk
 
The Company is exposed to price fluctuations on energy, grain and oilseed transactions due to fluctuations in the market value of inventories and fixed or partially fixed purchase and sales contracts. The Company’s use of derivative instruments reduces the effects of price volatility, thereby protecting against adverse short-term price movements, while somewhat limiting the benefits of short-term price movements. However, fluctuations in inventory valuations may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas, and in part to the Company’s assessment of its exposure from expected price fluctuations.
 
The Company generally enters into opposite and offsetting positions using futures contracts or options to the extent practical, in order to arrive at a net commodity position within the formal position limits set by the Company and deemed prudent for each commodity. These contracts are purchased and sold through regulated


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
commodity exchanges. The contracts are economic hedges of price risk, but are not designated or accounted for as hedging instruments for accounting purposes in any operations, with the exception of some contracts in prior years included in the Energy segment discussed below. These contracts are recorded on the Consolidated Balance Sheets at fair values based on quotes listed on regulated commodity exchanges. Unrealized gains and losses on these contracts are recognized in cost of goods sold in the Consolidated Statements of Operations using market-based prices. Hedging deposits related to these derivatives are $295.0 million and $181.9 million as of August 31, 2008 and 2007, respectively, and are included in other current assets.
 
The Company also manages its risks by entering into fixed-price purchase and sales contracts with pre-approved producers and by establishing appropriate limits for individual suppliers. Fixed-price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The Company is also exposed to loss in the event of nonperformance by the counterparties to the contracts and therefore, contract values are reviewed and adjusted to reflect potential nonperformance. These contracts are recorded on the Consolidated Balance Sheets at fair values based on the market prices of the underlying products listed on regulated commodity exchanges, except for certain fixed-price contracts related to propane in the Energy segment. The propane contracts within the Energy segment meet the normal purchase and sales exemption, and thus are not required to be marked to fair value. Unrealized gains and losses on fixed-price contracts are recognized in cost of goods sold in our Consolidated Statements of Operations using market-based prices.
 
Changes in the fair values of derivative instruments described above are recognized in cost of goods sold in the Consolidated Statements of Operations in the period such changes occur for all operations with the exception of some derivative instruments in prior years included in the Energy segment.
 
In the Energy segment, certain financial contracts entered into for the spread between crude oil purchase value and distillate selling price were designated and accounted for as hedging instruments (cash flow hedges) in prior years. The unrealized gains or losses of these contracts were deferred to accumulated other comprehensive income in the equity section of the Consolidated Balance Sheet for the fiscal year ended August 31, 2006, and were included in earnings upon settlement. Settlement dates for these instruments extend through June 2009. At August 31, 2007, these instruments did not qualify for hedge accounting and therefore were recorded in cost of goods sold in the Consolidated Statements of Operations. On August 31, 2006, these contracts had a gain of $2.8 million, net of taxes, recorded in accumulated other comprehensive income, which was then recorded in earnings during fiscal 2007, when the instruments no longer qualified for hedge accounting.
 
Interest Rate Risk
 
The Company uses fixed and floating rate debt to lessen the effects of interest rate fluctuations. Short-term debt used to finance inventories and receivables is represented by notes payable with maturities of 30 days or less, so that the blended interest rate to the Company for all such notes approximates current market rates. Long-term debt used to finance non-current assets carries various fixed interest rates and is payable at various dates to minimize the effect of market interest rate changes. The effective interest rate on fixed rate debt outstanding on August 31, 2008, was approximately 5.9%.
 
The Company enters into interest rate treasury lock instruments to fix interest rates related to a portion of its private placement indebtedness. These instruments were designated and are effective as cash flow hedges for accounting purposes and, accordingly, changes in fair value of $1.7 million loss, net of taxes, are included in accumulated other comprehensive income on August 31, 2008. Interest expense for each of the years ended August 31, 2008, 2007 and 2006, includes $0.8 million, $0.9 million and $0.9 million, respectively, which relates to the interest rate derivatives. The additional interest expense is an offset to the lower actual interest paid on the outstanding debt instruments.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Foreign Currency Risk
 
The Company conducts essentially all of its business in U.S. dollars, except for grain marketing operations primarily in Brazil and Switzerland, and purchases of products from Canada. The Company had minimal risk regarding foreign currency fluctuations during 2008 and in prior years, as substantially all international sales were denominated in U.S. dollars. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply.
 
Investments
 
Investments in other cooperatives are stated at cost, plus patronage dividends received in the form of capital stock and other equities. Patronage dividends are recorded in cost of goods sold at the time qualified written notices of allocation are received. Joint ventures and other investments, in which the Company has significant ownership and influence, but not control, are accounted for in the consolidated financial statements using the equity method of accounting. Investments in other debt and equity securities are considered available for sale financial instruments and are stated at fair value, with unrealized amounts included as a component of accumulated other comprehensive income (loss).
 
Disclosure of the fair value of financial instruments, to which the Company is a party, includes estimates and assumptions which may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Investments in debt and equity instruments are carried at amounts that approximate estimated fair values. Investments in cooperatives and joint ventures have no quoted market prices.
 
Property, Plant and Equipment
 
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets (primarily 15 to 40 years for land improvements and buildings and 3 to 20 years for machinery, equipment, office and other). The cost and related accumulated depreciation and amortization of assets sold or otherwise disposed of are removed from the related accounts and resulting gains or losses are reflected in operations. Expenditures for maintenance and repairs and minor renewals are expensed, while costs of major renewals and betterments are capitalized.
 
The Company reviews property, plant and equipment and other long-lived assets in order to assess recoverability based on projected income and related cash flows on an undiscounted basis when triggering events occur. Should the sum of the expected future net cash flows be less than the carrying value, an impairment loss would be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset.
 
The Company has adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations”, and FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”. The Company has asset retirement obligations with respect to certain of its refineries and related assets due to various legal obligations to clean and/or dispose of various component parts at the time they are retired. However, these assets can be used for extended and indeterminate periods of time, as long as they are properly maintained and/or upgraded. It is the Company’s practice and current intent to maintain refinery and related assets and to continue making improvements to those assets based on technological advances. As a result, the Company believes that its refineries and related assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which the Company would retire refinery and related assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery or related asset, the Company will estimate the cost of


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Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
performing the retirement activities and record a liability for the fair value of that cost using established present value techniques.
 
Goodwill and Other Intangible Assets
 
Goodwill represents the excess of the purchase price of an acquired entity over the amounts assigned to assets acquired and liabilities assumed. Goodwill and other intangible assets are reviewed for impairment annually or more frequently if certain impairment conditions arise, and those that are impaired are written down to fair value. Other intangible assets consist primarily of customer lists, trademarks and agreements not to compete. Intangible assets subject to amortization are expensed over their respective useful lives (ranging from 2 to 15 years). The Company has no material intangible assets with indefinite useful lives.
 
Revenue Recognition
 
The Company provides a wide variety of products and services, from production agricultural inputs such as fuels, farm supplies and crop nutrients, to agricultural outputs that include grain and oilseed, processed grains and oilseeds and food products. Grain and oilseed sales are recorded after the commodity has been delivered to its destination and final weights, grades and settlement prices have been agreed upon. All other sales are recognized upon transfer of title, which could occur upon either shipment or receipt by the customer, depending upon the terms of the transaction. Amounts billed to a customer as part of a sales transaction related to shipping and handling are included in revenues. Service revenues are recorded only after such services have been rendered.
 
Environmental Expenditures
 
Liabilities, including legal costs, related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of environmental costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regulations. Recoveries, if any, are recorded in the period in which recovery is considered probable. Liabilities are monitored and adjusted as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits.
 
Income Taxes
 
The Company is a nonexempt agricultural cooperative and files a consolidated federal income tax return with its 80% or more owned subsidiaries. The Company is subject to tax on income from nonpatronage sources and undistributed patronage-sourced income. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for federal and state income tax purposes, at each fiscal year end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
Comprehensive Income
 
Comprehensive income primarily includes net income, unrealized net gains or losses on available for sale investments and changes in the funded status of pension and other postretirement plans. Total comprehensive income is reflected in the Consolidated Statements of Equities and Comprehensive Income.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Recent Accounting Pronouncements
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial assets and liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157.” FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities that are not remeasured at fair value on a recurring basis until fiscal years beginning after November 15, 2008. Any amounts recognized upon adoption of this rule as a cumulative effect adjustment will be recorded to the opening balance of retained earnings in the year of adoption. The Company is in the process of evaluating the effect that the adoption of SFAS No. 157 will have on the consolidated results of operations and financial condition.
 
In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” FSP 157-3 clarifies the definition of fair value by stating that a transaction price is not necessarily indicative of fair value in a market that is not active or in a forced liquidation or distressed sale. Rather, if the company has the ability and intent to hold the asset, the company may use its assumptions about future cash flows and appropriately adjusted discount rates in measuring fair value of the asset. The guidance in FSP 157-3 was effective immediately upon issuance, including prior periods for which financial statements have not been issued. The adoption of FSP 157-3 was not material to the Company’s consolidated results of operations, statement of financial position or cash flows.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 provides entities with an option to report certain financial assets and liabilities at fair value, with changes in fair value reported in earnings, and requires additional disclosures related to an entity’s election to use fair value reporting. It also requires entities to display the fair value of those assets and liabilities for which the entity has elected to use fair value on the face of the balance sheet. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the effect that the adoption of SFAS No. 159 will have on the consolidated results of operations and financial condition.
 
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree, as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is not permitted. The impact on our consolidated financial statements of adopting SFAS No. 141R will depend on the nature, terms and size of business combinations completed after the effective date.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51.” This statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Upon its adoption, noncontrolling interests will be classified as equity in the consolidated balance sheets. Income and comprehensive income attributed to the noncontrolling interest will be included in the consolidated statements of operations and the consolidated statements of equities and comprehensive income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The provisions of this


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
standard must be applied retrospectively upon adoption. The Company is in the process of evaluating the impact the adoption of SFAS No. 160 will have on its consolidated financial statements.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133.” SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company is currently evaluating the impact of the adoption of SFAS No. 161 on the consolidated financial statements.
 
Reclassifications
 
Certain reclassifications have been made to prior year’s amounts to conform to current year classifications. These reclassifications had no effect on previously reported net income, equities and comprehensive income, or cash flows.
 
NOTE 2  Change in Accounting Principle — Turnarounds
 
During the first quarter of fiscal 2008, the Company changed its accounting method for the costs of major repairs (turnarounds) from the accrual method to the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral accounting method, the costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. The new method of accounting for turnarounds was adopted in order to adhere to FSP No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities” which prohibits the accrual method of accounting for planned major maintenance activities. The comparative financial statements for the years ended August 31, 2007 and 2006, have been adjusted to apply the new method retrospectively. These deferred costs are included in the Consolidated Balance Sheets in other assets. The amortization expenses related to turnaround costs are included in cost of goods sold in the Consolidated Statements of Operations. The following consolidated financial statement line items as of and for the years ended August 31, 2007 and August 31, 2006, were affected by this change in accounting principle:
 
                                                 
    As of and For the Year Ended
    As of and For the Year Ended
 
    August 31, 2007     August 31, 2006  
    As
    FSP AUG
          As
    FSP AUG
       
    Previously
    AIR-1
    As
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted     Reported     Adjustment     Adjusted  
    (Dollars in thousands)  
 
Consolidated Balance Sheets
                                                   
Other assets
  $ 147,965     $ 60,787     $ 208,752     $ 223,474     $ 51,583     $ 275,057  
Accrued expenses
    261,875       (6,244 )     255,631       249,268       (19,390 )     229,878  
Other liabilities
    359,198       18,010       377,208       310,157       28,342       338,499  
Minority interests in subsidiaries
    190,830       6,556       197,386       141,375       6,556       147,931  
Equities
    2,432,990       42,465       2,475,455       2,017,391       36,075       2,053,466  
Consolidated Statements of Operations
                                               
Cost of goods sold
  $ 16,139,691     $ (10,458 )   $ 16,129,233     $ 13,570,507     $ (30,222 )   $ 13,540,285  
Minority interests
                            85,974       5,105       91,079  
Income from continuing operations before income taxes
    786,933       10,458       797,391       538,999       25,117       564,116  
Income taxes
    36,600       4,068       40,668       49,327       10,023       59,350  
Net income
    750,333       6,390       756,723       490,297       15,094       505,391  


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                 
    As of and For the Year Ended
    As of and For the Year Ended
 
    August 31, 2007     August 31, 2006  
    As
    FSP AUG
          As
    FSP AUG
       
    Previously
    AIR-1
    As
    Previously
    AIR-1
    As
 
    Reported     Adjustment     Adjusted     Reported     Adjustment     Adjusted  
    (Dollars in thousands)  
 
Consolidated Statements of Cash Flows
                                               
Operating activities
                                               
Net income
  $ 750,333     $ 6,390     $ 756,723     $ 490,297     $ 15,094     $ 505,391  
Amortization of deferred major repair costs
            23,250       23,250               14,716       14,716  
Minority interests
                            85,974       5,105       91,079  
Deferred taxes
    46,800       4,068       50,868       78,300       10,023       88,323  
Changes in operating assets and liabilities:
                                               
Other current assets and other assets
    (84,116 )     2,210       (81,906 )     36,256       (1,704 )     34,552  
Accounts payable and accrued expenses
    198,323       13,146       211,469       (87,896 )     (13,358 )     (101,254 )
Other liabilities
    23,746       (14,400 )     9,346       15,368       13,003       28,371  
Net cash provided by operating activities
    372,622       34,664       407,286       454,942       42,879       497,821  
Investing activities
                                               
Expenditures for major repairs
            (34,664 )     (34,664 )             (42,879 )     (42,879 )
Net cash used in investing activities
    (495,291 )     (34,664 )     (529,955 )     (265,348 )     (42,879 )     (308,227 )
 
Note 3  Receivables
 
Receivables as of August 31, 2008 and 2007 are as follows:
 
                     
    2008       2007    
    (Dollars in thousands)    
Trade
  $ 2,181,132       $ 1,366,428    
Other
    200,313         97,783    
                 
      2,381,445         1,464,211    
Less allowances for doubtful accounts
    73,651         62,960    
                 
    $ 2,307,794       $ 1,401,251    
                 
 
International sales for the years ended August 31, 2008, 2007 and 2006 are as follows:
 
                         
    2008     2007     2006  
    (Dollars in millions)  
 
Africa
  $ 505     $ 229     $ 119  
Asia
    3,000       1,130       904  
Europe
    488       178       183  
North America, excluding U.S. 
    1,399       900       717  
South America
    922       608       156  
                         
    $ 6,314     $ 3,045     $ 2,079  
                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 4  Inventories
 
Inventories as of August 31, 2008 and 2007 are as follows:
 
                 
    2008     2007  
    (Dollars in thousands)  
Grain and oilseed
  $ 918,514     $ 928,567  
Energy
    596,487       490,675  
Crop nutrients
    399,986          
Feed and farm supplies
    371,670       178,167  
Processed grain and oilseed
    74,537       66,407  
Other
    6,830       2,816  
                 
    $ 2,368,024     $ 1,666,632  
                 
 
As of August 31, 2008, the Company valued approximately 10% of inventories, primarily related to energy, using the lower of cost, determined on the LIFO method, or market (17% as of August 31, 2007). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $691.7 million and $389.0 million at August 31, 2008 and 2007, respectively. During 2008, energy inventory quantities were reduced, which resulted in liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal 2008 purchases. The effect of the liquidation decreased cost of goods sold by $32.5 million during 2008.
 
Note 5  Investments
 
Investments as of August 31, 2008 and 2007 are as follows:
                 
    2008     2007  
    (Dollars in thousands)  
 
Cooperatives:
               
Land O’Lakes, Inc. 
  $ 40,542     $ 41,061  
Ag Processing Inc. 
    18,799       20,416  
CoBank, ACB (CoBank)
    13,851       12,659  
VeraSun Energy Corporation
    74,338       138,474  
CF Industries Holdings, Inc. 
            101,986  
Joint ventures:
               
Ventura Foods, LLC
    156,394       134,079  
United Country Brands, LLC (Agriliance LLC)
    147,449       182,834  
Horizon Milling, LLC
    66,529       36,092  
Multigrain AG
    65,573       23,082  
Cofina Financial, LLC
    41,378       39,805  
TEMCO, LLC
    26,969       11,957  
Horizon Milling G.P. 
    20,242       15,500  
Other
    112,452       122,647  
                 
    $ 784,516     $ 880,592  
                 
 
After a fiscal 2005 Initial Public Offering (IPO) transaction for CF Industries Inc., CHS held an ownership interest in CF Industries Holdings, Inc. (the post-IPO name) of approximately 3.9% or 2,150,396 shares. During the year ended August 31, 2007, CHS sold 540,000 shares of the stock for proceeds of $10.9 million, and recorded a pretax gain of $5.3 million, reducing its ownership interest in CF Industries Holdings, Inc. to approximately 2.9%. CHS accounted for this investment as an available for sale security, and


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
accordingly, it adjusted the carrying value of the shares to the $102.0 million market value on August 31, 2007. An unrealized pretax gain of $85.4 million related to this investment was included in accumulated other comprehensive income on August 31, 2007. During the year ended August 31, 2008, CHS sold all of its remaining 1,610,396 shares of stock for proceeds of $108.3 million and recorded a pretax gain of $91.7 million ($78.5 million net of taxes).
 
The Company purchased $70.0 million of common stock in US BioEnergy Corporation (US BioEnergy), an ethanol production company, during the year ended August 31, 2006. During the year ended August 31, 2007, the Company made additional investments of $45.4 million. In December 2006, US BioEnergy completed an IPO, and the effect of the issuance of additional shares of its stock was to dilute the Company’s ownership interest from approximately 25% to 21%. In addition, on August 29, 2007, US BioEnergy completed an acquisition with total aggregate net consideration comprised of the issuance of US BioEnergy common stock and cash. Due to US BioEnergy’s increase in equity, primarily from these two transactions, the Company recognized a non-cash net gain of $15.3 million on its investment during the year ended August 31, 2007, to reflect its proportionate share of the increase in the underlying equity of US BioEnergy. This gain is reflected in the Processing segment. During the first quarter of fiscal 2008, the Company purchased additional shares of US BioEnergy common stock for $6.5 million. Through March 31, 2008, the Company was recognizing its share of the earnings of US BioEnergy using the equity method of accounting. Effective April 1, 2008, US BioEnergy and VeraSun Energy Corporation (VeraSun) completed a merger, and the Company’s current ownership interest in the combined entity was reduced to approximately 8%, compared to an approximate 20% interest in US BioEnergy prior to the merger. As part of the merger transaction, the Company’s shares held in US BioEnergy were converted to shares held in the surviving company, VeraSun, at .810 per share. As a result of the Company’s change in ownership interest it no longer has significant influence, and effective April 1, 2008, accounts for VeraSun as an available-for-sale investment. Due to the continued decline of the ethanol industry and other considerations, the Company determined that an impairment of its VeraSun investment was necessary, and as a result, based on VeraSun’s market value of $5.76 per share on August 29, 2008, an impairment charge of $71.7 million ($55.3 million net of taxes) was recorded in gain on investments during the fourth quarter of the Company’s year ended August 31, 2008. Subsequent to August 31, 2008, the market value of VeraSun’s stock price continued to decline, and on October 31, 2008, Verasun filed for relief under chapter 11 of the U.S. Bankruptcy Code. The Company will be evaluating an additional impairment during its first quarter of fiscal 2009.
 
During the year ended August 31, 2007, the Company invested $22.2 million in Multigrain AG (Multigrain) for a 37.5% equity position in a Brazil-based grain handling and merchandising company, Multigrain S.A., an agricultural commodities business headquartered in Sao Paulo, Brazil. The venture includes grain storage and export facilities and builds on the Company’s South American soybean origination. During the year ended August 31, 2008, the Company increased its equity position through a purchase from an existing equity holder for $10.0 million, and also invested an additional $30.3 million which was used by Multigrain to invest in a joint venture that acquired production farmland and related operations. As of August 31, 2008, the Company had a 40.0% ownership interest in Multigrain, which is included in the Ag Business segment. During the first quarter of fiscal 2009, the Company and Mitsui & Co., Ltd. (Mitsui) invested an additional $200.0 million for Multigrain’s increased capital needs resulting from expansion of its operations. The Company’s share of the $200.0 million investment was $76.3 million, resulting in our current ownership interest of 39.35%, equal to Mitsui’s ownership interest.
 
During the year ended August 31, 2007, the Company invested $15.6 million in Horizon Milling G.P. (24% ownership), a joint venture included in the Processing segment, that acquired the Canadian grain-based foodservice and industrial businesses of Smucker Foods of Canada, whose operations include flour milling and dry baking mixing facilities in Canada. During the year ended August 31, 2008, the Company invested an additional $1.9 million in Horizon Milling G.P.
 
The Company has a 50% interest in Ventura Foods, LLC, (Ventura Foods), a joint venture which produces and distributes primarily vegetable oil-based products, and is included in the Company’s Processing segment.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
During the year ended August 31, 2008, the Company invested an additional $20.0 million in Ventura Foods. The Company accounts for Ventura Foods as an equity method investment, and as of August 31, 2008, its carrying value of Ventura Foods exceeded its share of their equity by $15.7 million, of which $2.8 million is being amortized with a remaining life of approximately four years. The remaining basis difference represents equity method goodwill.
 
Agriliance LLC (Agriliance) is owned and governed by United Country Brands, LLC (50%) and Land O’Lakes, Inc. (50%). United Country Brands, LLC is 100% owned by CHS. The Company accounts for its Agriliance investment using the equity method of accounting within the Ag Business segment. Prior to September 1, 2007, Agriliance was a wholesale and retail crop nutrients and crop protection products company. In September 2007, Agriliance distributed the assets of the crop nutrients business to the Company, and the assets of the crop protection business to Land O’Lakes. After the distributions, Agriliance continues to exist as a 50-50 joint venture and primarily operates an agronomy retail distribution business. During the year ended August 31, 2008, the Company’s net contribution to Agriliance was $235.0 million which supported their working capital requirements for ongoing operations, with Land O’Lakes making equal contributions to Agriliance.
 
Due to the Company’s 50% ownership interest in Agriliance and the 50% ownership interest of Land O’Lakes, each company was entitled to receive 50% of the distributions from Agriliance. Given the different preliminary values assigned to the assets of the crop nutrients and the crop protection businesses of Agriliance, at the closing of the distribution transactions Land O’Lakes owed the Company $133.5 million. Land O’Lakes paid the Company $32.6 million in cash, and in order to maintain equal capital accounts in Agriliance, they also paid down certain portions of Agriliance’s debt on the Company’s behalf in the amount of $100.9 million. Values of the distributed assets were determined after the closing and in October 2007, the Company made a true-up payment to Land O’Lakes in the amount of $45.7 million, plus interest. The final true-up is expected to occur during fiscal 2009.
 
The distribution of assets the Company received from Agriliance for the crop nutrients business had a book value of $248.2 million. The Company recorded 50% of the value of the net assets received at book value due to the Company’s ownership interest in those assets when they were held by Agriliance, and 50% of the value of the net assets at fair value using the purchase method of accounting. Values assigned to the net assets acquired were:
 
         
    (Dollars in thousands)  
 
Receivables
  $ 5,219  
Inventories
    174,620  
Other current assets
    256,390  
Investments
    6,096  
Property, plant and equipment
    29,682  
Other assets
    11,717  
Customer advance payments
    (206,252 )
Accounts payable
    (5,584 )
Accrued expenses
    (3,163 )
         
Total net assets received
  $ 268,725  
         
 
In March 2008, the Company learned that Agriliance would restate its financial statements because of what they considered to be a misapplication of Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor” (EITF 02-16). CHS has determined that the effects of Agriliance’s restatement on the Company’s consolidated financial statements for fiscal 2007 and 2006, were not material.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following provides summarized financial information as reported, excluding restatements, for Agriliance balance sheets as of August 31, 2008 and 2007, and statements of operations for the years ended August 31, 2008, 2007 and 2006:
 
                 
    2008     2007  
    (Dollars in thousands)  
 
Current assets
  $ 456,385     $ 1,534,432  
Non-current assets
    40,946       130,347  
Current liabilities
    119,780       1,214,019  
Non-current liabilities
    12,421       138,173  
 
                         
    2008     2007     2006  
    (Dollars in thousands)  
 
Net sales
  $ 1,070,892     $ 4,049,088     $ 3,739,632  
(Loss) earnings from operations
    (8,143 )     116,584       76,052  
Net (loss) income
    (15,903 )     58,701       52,268  
 
Cofina Financial, LLC (Cofina Financial), a joint venture finance company formed in fiscal 2005, makes seasonal and term loans to member cooperatives and businesses and to individual producers of agricultural products. Through August 31, 2008, the Company held a 49% ownership interest in Cofina Financial and accounted for the investment using the equity method of accounting included in Corporate and Other. On September 1, 2008, CHS purchased Cenex Finance Association’s remaining 51% ownership interest.
 
Various agreements with other owners of investee companies and a majority-owned subsidiary set out parameters whereby CHS may buy and sell additional interests in those companies, upon the occurrence of certain events, at fair values determinable as set forth in the specific agreements.
 
Note 6  Property, Plant and Equipment
 
A summary of property, plant and equipment as of August 31, 2008 and 2007 is as follows:
 
                 
    2008     2007  
    (Dollars in thousands)  
 
Land and land improvements
  $ 104,306     $ 90,263  
Buildings
    474,399       410,556  
Machinery and equipment
    2,763,288       2,258,108  
Office and other
    90,061       81,091  
Construction in progress
    89,795       320,101  
                 
      3,521,849       3,160,119  
Less accumulated depreciation and amortization
    1,573,544       1,431,948  
                 
    $ 1,948,305     $ 1,728,171  
                 
 
The Company is leasing certain of its wheat milling facilities and related equipment to Horizon Milling, LLC under an operating lease agreement. The net book value of the leased milling assets at August 31, 2008 and 2007 was $70.8 million and $76.4 million, respectively, net of accumulated depreciation of $59.6 million and $54.0 million, respectively.
 
For the years ended August 31, 2008, 2007 and 2006, the Company capitalized interest of $9.8 million, $11.7 million and $4.7 million, respectively, related to capitalized construction projects.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 7  Discontinued Operations
 
In May 2005, CHS sold the majority of its Mexican foods business. During 2006, the Company sold or disposed of the remaining assets. The operating results of the Mexican foods business are reported as discontinued operations.
 
Summarized results from discontinued operations for the year ended August 31, 2006 is as follows:
 
         
    2006
    (Dollars in thousands)
 
Marketing, general and administrative*
  $ (1,168 )
Interest, net
    145  
Income tax expense
    398  
         
Income from discontinued operations
  $ 625  
         
 
 
Includes a $1.6 million gain on disposition.
 
Note 8  Other Assets
 
Other assets as of August 31, 2008 and 2007 are as follows:
 
                 
    2008     2007  
    (Dollars in thousands)  
 
Goodwill
  $ 3,804     $ 3,804  
Customer lists, less accumulated amortization of $7,454 and $2,898, respectively
    20,216       13,894  
Non-compete covenants, less accumulated amortization of $2,668 and $1,826, respectively
    3,265       3,201  
Trademarks and other intangible assets, less accumulated amortization of $17,215 and $7,249, respectively
    25,918       15,823  
Prepaid pension and other benefits
    64,023       101,073  
Capitalized major maintenance
    53,303       60,787  
Notes receivable
    12,356       5,874  
Other
    7,073       4,296  
                 
    $ 189,958     $ 208,752  
                 
 
Intangible assets acquired as part of business acquisitions during the years ended August 31, 2008 and 2007 totaled $18.6 million and $6.5 million, respectively, and were for the purchase of a soy-based food ingredients business included in the Processing segment in fiscal 2008, and a distillers dried grain business included in the Ag Business segment acquired and paid for in fiscal 2008 and 2007. Various other cash acquisitions of intangibles totaled $3.4 million, $9.1 million and $2.9 million during the years ended August 31, 2008, 2007 and 2006, respectively.
 
Intangible assets amortization expense for the years ended August 31, 2008, 2007 and 2006, was $15.9 million, $3.2 million and $4.9 million, respectively. The estimated amortization expense related to intangible assets subject to amortization for the next five years will approximate $11.1 million for the first year, $7.4 million for the next three years, and $2.9 million for the following year.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Note 9  Notes Payable and Long-Term Debt
 
Notes payable and long-term debt as of August 31, 2008 and 2007 consisted of the following:
 
                     
    Interest Rates at
           
    August 31, 2008   2008     2007  
        (Dollars in thousands)  
 
Notes payable(a)(k)
  2.43% to 3.74%   $ 106,154     $ 672,571  
                     
Long-term debt:
                   
Revolving term loans from cooperative and other banks, payable in installments through 2009(b)(k)
  3.96% to 7.13%   $ 49,700     $ 80,594  
Revolving term loans from cooperative and other banks, payable in equal installments beginning in 2013 through 2018(c)(k)
  5.59%     150,000          
Private placement, payable in equal installments beginning in 2013 through 2017(d)(k)
  6.18%     400,000          
Private placement, payable in equal installments through 2013(e)(k)
  6.81%     187,500       225,000  
Private placement, payable in installments through 2018(f)(k)
  4.96% to 5.60%     139,615       157,308  
Private placement, payable in equal installments beginning in 2011 through 2015(g)(k)
  5.25%     125,000       125,000  
Private placement, payable in equal installments through 2011(h)(k)
  7.43% to 7.90%     34,286       45,714  
Private placement, payable in its entirety in 2010(i)(k)
  4.08%     15,000       15,000  
Private placement, payable in its entirety in 2011(i)(k)
  4.39%     15,000       15,000  
Private placement, payable in equal installments beginning in 2014 through 2018(i)(k)
  5.78%     50,000          
Industrial revenue bonds, payable in its entirety in 2011
  5.23%     3,925       3,925  
Other notes and contracts(j)
  1.89% to 12.17%     24,829       20,780  
                     
Total long-term debt
        1,194,855       688,321  
Less current portion
        118,636       98,977  
                     
Long-term portion
      $ 1,076,219     $ 589,344  
                     
 
                 
    2008     2007  
 
Weighted-average interest rates at August 31:
               
Short-term debt
    2.73%       6.50%  
Long-term debt
    5.90%       6.03%  
 
 
 
(a) The Company finances its working capital needs through short-term lines of credit with a syndication of domestic and international banks. One of these revolving lines of credit is a five-year $1.3 billion committed facility, with $75.0 million outstanding on August 31, 2008. During fiscal 2008, the Company increased its short-term borrowing capacity by establishing a 364-day $500.0 million committed revolving line of credit, with no amount outstanding on August 31, 2008. In addition to these short-term lines of


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Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
credit, the Company has a one-year committed credit facility dedicated to NCRA, with a syndication of banks in the amount of $15.0 million, with no amount outstanding on August 31, 2008. The Company also has a committed revolving line of credit dedicated to Provista in the amount of $25.0 million, with no amount outstanding on August 31, 2008. During fiscal 2008, our wholly-owned subsidiary, CHS Europe S.A., entered into uncommitted lines of credit to finance its normal trade grain transactions, of which $31.2 million was outstanding on August 31, 2008, and was collateralized by inventories and receivables. The Company has two commercial paper programs totaling up to $125.0 million with two banks participating in the five-year revolving credit facility. The commercial paper programs do not increase the committed borrowing capacity in that the Company is required to have at least an equal amount of undrawn capacity available on the five-year revolving facility as to the amount of commercial paper issued. On August 31, 2008, there was no commercial paper outstanding.
 
(b) The Company established a long-term credit agreement, which committed $200.0 million of long-term borrowing capacity to the Company through May 31, 1999, of which $164.0 million was drawn before the expiration date of that commitment. On August 31, 2008, $49.2 million was outstanding. NCRA term loans of $0.5 million are collateralized by NCRA’s investment in CoBank.
 
(c) In December 2007, the Company established a 10-year long-term credit agreement through a syndication of cooperative banks in the amount of $150.0 million.
 
(d) In October 2007, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $400.0 million.
 
(e) In June 1998, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $225.0 million.
 
(f) In October 2002, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $175.0 million.
 
(g) In September 2004, the Company entered into a private placement with several insurance companies for long-term debt in the amount of $125.0 million.
 
(h) In January 2001, the Company entered into a note purchase and private shelf agreement with Prudential Insurance Company. A long-term note was issued for $25.0 million and a subsequent note for $55.0 million was issued in March 2001.
 
(i) In March 2004, the Company entered into a note purchase and private shelf agreement with Prudential Capital Group. In April 2004, two long-term notes were issued for $15.0 million each. In April 2007, the agreement was amended with Prudential Investment Management, Inc. and several other participating insurance companies to expand the uncommitted facility from $70.0 million to $150.0 million. In February 2008, the Company borrowed $50.0 million under the shelf arrangement.
 
(j) Other notes and contracts payable of $11.6 million are collateralized by property, plant and equipment, with a cost of $23.5 million, less accumulated depreciation of $7.0 million on August 31, 2008.
 
(k) The debt is unsecured; however, restrictive covenants under various agreements have requirements for maintenance of minimum working capital levels and other financial ratios.
 
In December 2006, NCRA entered into an agreement with the City of McPherson, Kansas related to certain of its ultra-low sulfur fuel assets, with a cost of approximately $325.0 million. The City of McPherson issued $325.0 million of Industrial Revenue Bonds (IRBs) which were transferred to NCRA as consideration in a financing agreement between the City of McPherson and NCRA related to the ultra-low sulfur fuel assets. The term of the financing obligation is ten years, at which time NCRA has the option of extending the financing obligation or purchasing the assets for a nominal amount. NCRA has the right at anytime to offset the financing obligation to the City of McPherson against the IRBs. No cash was exchanged in the transaction and none is anticipated to be exchanged in the future. Due to the structure of the agreement, the financing obligation and the IRBs are shown net in the Company’s consolidated financial statements. On March 18, 2007, notification was sent to the bond trustees to pay the IRBs down by $324.0 million, at which time the


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
financing obligation to the City of McPherson was offset against the IRBs. The balance of $1.0 million will remain outstanding until its final ten-year maturity.
 
The fair value of long-term debt approximates book value as of August 31, 2008 and 2007.
 
The aggregate amount of long-term debt payable as of August 31, 2008 is as follows:
 
         
    (Dollars in thousands)  
 
2009
  $ 118,636  
2010
    83,386  
2011
    112,329  
2012
    95,102  
2013
    181,085  
Thereafter
    604,317  
         
    $ 1,194,855  
         
 
Interest, net for the years ended August 31, 2008, 2007 and 2006 is as follows:
 
 
                         
    2008     2007     2006  
    (Dollars in thousands)  
 
Interest expense
  $ 90,364     $ 51,811     $ 50,562  
Interest income
    13,904       20,713       9,257  
                         
Interest, net
  $ 76,460     $ 31,098     $ 41,305  
                         
 
Note 10  Income Taxes
 
The provision for income taxes for the years ended August 31, 2008, 2007 and 2006 is as follows:
 
                         
    2008     2007     2006  
    (Dollars in thousands)  
 
Continuing operations:
                       
Current
  $ 45,527     $ (10,200 )   $ (28,973 )
Deferred
    15,578       42,068       91,123  
Valuation allowance
    10,433       8,800       (2,800 )
                         
Income taxes from continuing operations
    71,538       40,668       59,350  
Income taxes from discontinued operations
                    398  
                         
Income taxes
  $ 71,538     $ 40,668     $ 59,748  
                         
 
The Company’s current tax provision is significantly impacted by the utilization of loss carryforwards and tax benefits passed to the Company from NCRA. The passthrough tax benefits are associated with refinery upgrades that enable NCRA to produce ultra-low sulfur fuels as mandated by the Environmental Protection Agency.
 
Deferred taxes are comprised of basis differences related to investments, accrued liabilities and certain federal and state tax credits. NCRA files separate tax returns and, as such, these items must be assessed independent of the Company’s deferred tax assets when determining recoverability.


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Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Deferred tax assets and liabilities as of August 31, 2008 and 2007 are as follows:
 
                 
    2008     2007  
    (Dollars in thousands)  
 
Deferred tax assets:
               
Accrued expenses
  $ 81,554     $ 81,653  
Postretirement health care and deferred compensation
    78,732       65,339  
Tax credit carryforwards
    51,306       50,402  
Loss carryforwards
    286       6,427  
Other
    15,095       15,169  
                 
Total deferred tax assets
    226,973       218,990  
                 
Deferred tax liabilities:
               
Pension
    22,774       25,645  
Investments
    17,722       133,018  
Major maintenance
    15,148       32,411  
Property, plant and equipment
    297,276       191,369  
Other
    10,725       7,893  
                 
Total deferred tax liabilities
    363,645       390,336  
                 
Deferred tax assets valuation reserve
    (19,808 )     (9,375 )
                 
Net deferred tax liabilities
  $ 156,480     $ 180,721  
                 
 
During fiscal year ended August 31, 2008, the Company provided a valuation allowance of $11.6 million related to the carryforward of certain capital losses. During the year ended August 31, 2007, NCRA provided a $9.4 million valuation allowance related to its carryforward of certain state tax credits. This allowance was decreased by $1.1 million during its year ended August 31, 2008, due to a change in the amount of credits that are estimated to be used. The remaining allowance is necessary due to the limited amount of taxable income generated by NCRA on an annual basis.
 
As of August 31, 2008, net deferred taxes of $49.4 million and $205.9 million are included in current assets and other liabilities, respectively ($5.5 million and $186.2 million in current assets and other liabilities, respectively, as of August 31, 2007).
 
The reconciliation of the statutory federal income tax rates to the effective tax rates for continuing operations for the years ended August 31, 2008, 2007 and 2006 is as follows:
 
                         
    2008     2007     2006  
 
Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
State and local income taxes, net of federal income tax benefit
    3.9       3.9       3.9  
Patronage earnings
    (29.2 )     (27.1 )     (26.2 )
Export activities at rates other than the U.S. statutory rate
    (0.1 )     (1.6 )     (0.8 )
Valuation allowance
    1.2       1.1       (0.5 )
Tax credits
    (2.3 )     (3.6 )     (1.7 )
Other
    (0.3 )     (2.6 )     0.8  
                         
Effective tax rate
    8.2 %     5.1 %     10.5 %
                         
 
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years ending on or before August 31, 2004.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on September 1, 2007. As a result of the implementation of Interpretation 48, no significant increase or decrease in the liability for unrecognized tax benefits was recorded. A reconciliation of the gross beginning and ending amount of unrecognized tax benefits is as follows:
 
         
    2008
    (Dollars in thousands)
 
Beginning balance
  $ 7,259  
Reductions for tax positions of prior years
    (1,419 )
         
Balance at August 31
  $ 5,840  
         
 
The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. During the year ended August 31, 2008, the Company recognized approximately $44 thousand in interest. The Company had approximately $0.3 million for the payment of interest accrued on August 31, 2008.
 
Note 11  Equities
 
In accordance with the by-laws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year, and are based on amounts using financial statement earnings. The cash portion of the patronage distribution is determined annually by the Board of Directors, with the balance issued in the form of capital equity certificates.
 
Annual net savings from sources other than patronage may be added to the unallocated capital reserve or, upon action by the Board of Directors, may be allocated to members in the form of nonpatronage equity certificates. Redemptions are at the discretion of the Board of Directors.
 
Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (primarily member cooperatives) who may participate in an annual pro-rata program for equities held by them, and another for individual members who are eligible for equity redemptions at age 70 or upon death. The amount that each non-individual member receives under the pro-rata program in any year will be determined by multiplying the dollars available for pro-rata redemptions, if any that year, as determined by the Board of Directors, by a fraction, the numerator of which is the amount of patronage certificates eligible for redemption held by them, and the denominator of which is the sum of the patronage certificates eligible for redemption held by all eligible holders of patronage certificates that are not individuals. In addition to the annual pro-rata program, the Board of Directors approved additional equity redemptions in prior years targeting older capital equity certificates which were redeemed in cash in fiscal 2008 and 2007. In accordance with authorization from the Board of Directors, the Company expects total redemptions related to the year ended August 31, 2008, that will be distributed in fiscal 2009, to be approximately $93.8 million. These expected distributions are classified as a current liability on the August 31, 2008 Consolidated Balance Sheet.
 
For the years ended August 31, 2008, 2007 and 2006, the Company redeemed in cash, equities in accordance with authorization from the Board of Directors, in the amounts of $81.8 million, $70.8 million and $55.9 million, respectively. An additional $46.4 million, $35.9 million and $23.8 million of capital equity certificates were redeemed in fiscal years 2008, 2007 and 2006, respectively, by issuance of shares of the Company’s 8% Cumulative Redeemable Preferred Stock (Preferred Stock). The amount of equities redeemed with each share of Preferred Stock issued was $25.65, $26.09 and $26.10, which was the closing price per share of the stock on the NASDAQ Global Select Market on February 11, 2008, February 8, 2007 and January 23, 2006, respectively.
 
The Preferred Stock is listed on the NASDAQ Global Select Market under the symbol CHSCP. On August 31, 2008, the Company had 9,047,780 shares of Preferred Stock outstanding with a total redemption


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
value of approximately $226.2 million, excluding accumulated dividends. The Preferred Stock accumulates dividends at a rate of 8% per year, which are payable quarterly, and is redeemable at the Company’s option. At this time, the Company has no current plan or intent to redeem any Preferred Stock.
 
Note 12  Benefit Plans
 
The Company has various pension and other defined benefit and defined contribution plans, in which substantially all employees may participate. The Company also has non-qualified supplemental executive and board retirement plans. As of August 31, 2008, NCRA’s measurement date was August 31, 2008, and the CHS measurement date was June 30, 2008.
 
Financial information on changes in benefit obligation and plan assets funded and balance sheets status as of August 31, 2008 and 2007 is as follows:
 
                                                 
    Qualified
    Non-Qualified
       
    Pension Benefits     Pension Benefits     Other Benefits  
    2008     2007     2008     2007     2008     2007  
    (Dollars in thousands)  
Change in benefit obligation:
                                               
Benefit obligation at beginning of period
  $ 346,319     $ 328,125     $ 35,644     $ 23,381     $ 28,001     $ 28,315  
Service cost
    15,387       14,360       1,246       1,023       1,175       957  
Interest cost
    21,266       19,259       2,190       1,480       1,814       1,668  
Plan amendments
            14,960               727                  
Actuarial loss (gain)
    3,493       (852 )     492       9,794       713       881  
Assumption change
    (9,196 )     (5,401 )     (756 )     (37 )     (61 )     (1,482 )
Special agreements
                    467               4,000          
Medicare D
                                    314       262  
Benefits paid
    (23,135 )     (24,132 )     (1,093 )     (724 )     (1,578 )     (2,600 )
                                                 
Benefit obligation at end of measurement date
  $ 354,134     $ 346,319     $ 38,190     $ 35,644     $ 34,378     $ 28,001  
                                                 
Change in plan assets:
                                               
Fair value of plan assets at beginning of period
  $ 382,431     $ 345,860                                  
Actual (loss) income on plan assets
    (18,045 )     45,826                                  
Company contributions
    25,299       14,877     $ 1,093     $ 724     $ 1,578     $ 2,600  
Benefits paid
    (23,135 )     (24,132 )     (1,093 )     (724 )     (1,578 )     (2,600 )
                                                 
Fair value of plan assets at end of measurement date
  $ 366,550     $ 382,431     $     $     $     $  
                                                 
Funded status at end of measurement date
  $ 12,416     $ 36,112     $ (38,190 )   $ (35,644 )   $ (34,378 )   $ (28,001 )
                                                 
Amounts recognized on balance sheet:
                                               
Non-current assets
  $ 13,234     $ 36,083                                  
Accrued benefit cost:
                                               
Current liabilities
                  $ (1,397 )   $ (1,862 )   $ (2,412 )   $ (1,911 )
Non-current liabilities
    (818 )             (35,443 )     (33,119 )     (31,777 )     (25,828 )
                                                 
Ending balance
  $ 12,416     $ 36,083     $ (36,840 )   $ (34,981 )   $ (34,189 )   $ (27,739 )
                                                 
Amounts recognized in accumulated other comprehensive income (pre-tax):
                                               
Net transition obligation
                                  $ 4,581     $ 5,516  
Prior service cost (credit)
  $ 17,444     $ 19,608     $ 1,697     $ 2,276       (724 )     (1,044 )
Net loss (gain)
    114,457       75,886       9,328       10,434       (786 )     (1,603 )
Minority interest
    (10,776 )     (7,191 )     (70 )     (53 )     (1,079 )     (1,226 )
                                                 
Ending balance
  $ 121,125     $ 88,303     $ 10,955     $ 12,657     $ 1,992     $ 1,643  
                                                 
 
The accumulated benefit obligation of the qualified pension plans was $331.4 million and $321.8 million at August 31, 2008 and 2007, respectively. The accumulated benefit obligation of the non-qualified pension plans was $27.4 million and $22.7 million at August 31, 2008 and 2007, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 2008. The rate was assumed to decrease gradually to 5.0% for 2015 and remain at that level thereafter. Components of net periodic benefit costs for the years ended August 31, 2008, 2007 and 2006 are as follows:
 
                                                                         
    Qualified
    Non-Qualified
       
    Pension Benefits     Pension Benefits     Other Benefits  
    2008     2007     2006     2008     2007     2006     2008     2007     2006  
    (Dollars in thousands)  
Components of net periodic benefit cost:
                                                                       
Service cost
  $ 15,387     $ 14,360     $ 14,892     $ 1,246     $ 1,023     $ 2,195     $ 1,175     $ 957     $ 1,024  
Interest cost
    21,266       19,259       17,037       2,190       1,480       1,368       1,814       1,668       1,568  
Expected return on assets
    (31,274 )     (29,171 )     (28,362 )                                                
Special agreements
                            467                       4,000                  
Prior service cost (credit) amortization
    2,164       867       855       579       494       516       (320 )     (319 )     (305 )
Actuarial loss (gain) amortization
    4,887       5,766       7,513       841       77       210       (165 )     (231 )     17  
Transition amount amortization
                                                    935       936       936  
                                                                         
Net periodic benefit cost
  $ 12,430     $ 11,081     $ 11,935     $ 5,323     $ 3,074     $ 4,289     $ 7,439     $ 3,011     $ 3,240  
                                                                         
Average assumptions:
                                                                       
Discount rate
    6.25%       6.25%       6.05%       6.25%       6.25%       6.05%       6.25%       6.25%       6.05%  
Expected return on plan assets
    8.75%       8.75%       8.80%       N/A       N/A       N/A       N/A       N/A       N/A  
Rate of compensation increase
    4.50%       4.50%       4.50%       4.50%       4.50%       4.50%       4.50%       4.50%       4.50%  
 
The estimated amortization in fiscal 2009 from accumulated other comprehensive income into net periodic benefit cost is as follows:
 
                         
    Qualified
  Non-Qualified
  Other
    Pension Benefits   Pension Benefits   Benefits
    (Dollars in thousands)
Amortization of transition obligation
  $       $       $ 936  
Amortization of prior service cost (benefit)
    2,115       546       (197 )
Amortization of net actuarial loss (gain)
    4,980       646       (166 )
Minority interest
    (618 )     (3 )     (82 )
 
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in the assumed health care cost trend rates would have the following effects:
 
                 
    1% Increase     1% Decrease  
    (Dollars in thousands)  
Effect on total of service and interest cost components
  $ 260     $ (250 )
Effect on postretirement benefit obligation
    2,200       (2,000 )
 
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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company has other contributory defined contribution plans covering substantially all employees. Total contributions by the Company to these plans were $12.2 million, $10.7 million and $9.7 million, for the years ended August 31, 2008, 2007 and 2006, respectively.
 
The Company contributed $25.3 million to qualified pension plans in fiscal year 2008. Based on the fully funded status of the qualified pension plans as of August 31, 2008, the Company does not expect to contribute to these plans in fiscal year 2009. The Company expects to pay $3.8 million to participants of the non-qualified pension and postretirement benefit plans during fiscal 2009.
 
The Company’s retiree benefit payments which reflect expected future service are anticipated to be paid as follows:
                                 
    Qualified
    Non-Qualified
    Other Benefits  
    Pension Benefits     Pension Benefits     Gross     Medicare D  
    (Dollars in thousands)  
2009
  $ 24,332     $ 1,397     $ 2,412     $ 200  
2010
    26,290       1,975       2,632       200  
2011
    27,412       9,483       2,845       200  
2012
    29,886       1,476       3,040       200  
2013
    32,332       5,235       3,192       200  
2014-2018
    191,460       15,682       16,673       1,000  
 
The Company has trusts that hold the assets for the defined benefit plans. The Company and NCRA have qualified plan committees that set investment guidelines with the assistance of external consultants. Investment objectives for the Company’s plan assets are to:
 
  •  optimize the long-term returns on plan assets at an acceptable level of risk, and
 
  •  maintain broad diversification across asset classes and among investment managers, and focus on long-term return objectives.
 
Asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the pension plans. An annual analysis on the risk versus the return of the investment portfolio is conducted to justify the expected long-term rate of return assumption. The Company generally uses long-term historical return information for the targeted asset mix identified in asset and liability studies. Adjustments are made to the expected long-term rate of return assumption, when deemed necessary, based upon revised expectations of future investment performance of the overall investment markets.
 
The discount rate reflects the rate at which the associated benefits could be effectively settled as of the measurement date. In estimating this rate, the Company looks at rates of return on fixed-income investments of similar duration to the liabilities in the plans that receive high, investment grade ratings by recognized ratings agencies.
 
The investment portfolio contains a diversified portfolio of investment categories, including domestic and international equities, fixed income securities and real estate. Securities are also diversified in terms of domestic and international securities, short and long-term securities, growth and value equities, large and small cap stocks, as well as active and passive management styles.
 
The committees believe that with prudent risk tolerance and asset diversification, the plans should be able to meet pension obligations in the future.


F-25


Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s pension plans’ average asset allocations by asset categories are as follows:
 
                 
    2008     2007  
Cash
    6.3 %     2.7 %
Debt
    29.6       29.7  
Equities
    57.8       62.0  
Real estate
    4.7       3.9  
Other
    1.6       1.7  
                 
Total
    100.0 %     100.0 %
                 
 
Effective August 31, 2007, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” This statement requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the balance sheet and to recognize changes in that funded status in comprehensive income in the year in which the changes occur.
 
The adoption of SFAS No. 158 on August 31, 2007, resulted in incremental adjustments to the following individual line items in the Consolidated Balance Sheet:
 
                         
    Pre-SFAS
             
    No. 158 with
    SFAS No. 158
    Post SFAS
 
    AML Adjustments     Adoption Adjustments     No. 158  
    (Dollars in thousands)  
Prepaid pension
  $ 131,322     $ (95,239 )   $ 36,083  
Accrued pension liability
    (47,663 )     (15,057 )     (62,720 )
Intangible asset
    291       (291 )        
Deferred tax asset
    189       39,699       39,888  
Minority interest
            8,469       8,469  
Accumulated other comprehensive income, net of tax
    296       62,419       62,715  
Accumulated other comprehensive income, pre-tax
    485       102,118       102,603  
 
Note 13  Segment Reporting
 
The Company aligned its business segments based on an assessment of how its businesses operate and the products and services it sells. As a result of this assessment, the Company has three chief operating officers to lead its three business segments: Energy, Ag Business and Processing.
 
The Energy segment derives its revenues through refining, wholesaling, marketing and retailing of petroleum products. The Ag Business segment derives its revenues through the sale of wholesale crop nutrients, the origination and marketing of grain, including service activities conducted at export terminals, through the retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies, and records equity income from investments in the Company’s agronomy joint ventures, grain export joint ventures and other investments. The Processing segment derives its revenues from the sales of soybean meal, soybean refined oil and soy-based food products, and records equity income from two wheat milling joint ventures, a vegetable oil-based food manufacturing and distribution joint venture, and an ethanol manufacturing company. The Company includes other business operations in Corporate and Other because of the nature of their products and services, as well as the relative revenue size of those businesses. These businesses primarily include the Company’s insurance, hedging and other service activities related to crop production.
 
Reconciling Amounts represent the elimination of revenues between segments. Such transactions are conducted at market prices to more accurately evaluate the profitability of the individual business segments.


F-26


Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company assigns certain corporate general and administrative expenses to its business segments based on use of such services and allocates other services based on factors or considerations relevant to the costs incurred.
 
Expenses that are incurred at the corporate level for the purpose of the general operation of the Company are allocated to the segments based upon factors which management considers non-symmetrical. Due to efficiencies in scale, cost allocations and intersegment activity, management does not represent that these segments, if operated independently, would report the income before income taxes and other financial information as presented.
 
Segment information for the years ended August 31, 2008, 2007 and 2006 is as follows:
 
                                                     
                      Corporate
    Reconciling
           
    Energy     Ag Business     Processing     and Other     Amounts     Total      
    (Dollars in thousands)
For the year ended August 31, 2008:
Revenues
  $ 11,499,814     $ 19,696,907     $ 1,299,209     $ 31,363     $ (359,832 )   $ 32,167,461      
Cost of goods sold
    11,027,459       19,088,079       1,240,944       (2,751 )     (359,832 )     30,993,899      
                                                     
Gross profit
    472,355       608,828       58,265       34,114             1,173,562      
Marketing, general and administrative
    111,121       160,364       26,089       32,391               329,965      
                                                     
Operating earnings
    361,234       448,464       32,176       1,723             843,597      
(Gain) loss on investments
    (35 )     (100,830 )     72,602       (930 )             (29,193 )    
Interest, net
    (5,227 )     63,665       21,995       (3,973 )             76,460      
Equity income from investments
    (5,054 )     (83,053 )     (56,615 )     (5,691 )             (150,413 )    
Minority interests
    71,805       355                               72,160      
                                                     
Income (loss) from continuing operations before income taxes
  $ 299,745     $ 568,327     $ (5,806 )   $ 12,317     $     $ 874,583      
                                                     
Intersegment revenues
  $ (322,522 )   $ (36,972 )   $ (338 )           $ 359,832     $      
                                                     
Goodwill
  $ 3,654     $ 150                             $ 3,804      
                                                     
Capital expenditures
  $ 251,401     $ 56,704     $ 5,994     $ 4,460             $ 318,559      
                                                     
Depreciation and amortization
  $ 107,949     $ 50,933     $ 15,902     $ 6,479             $ 181,263      
                                                     
Total identifiable assets at August 31, 2008
  $ 3,216,852     $ 4,172,950     $ 748,989     $ 633,187             $ 8,771,978      
                                                     
For the year ended August 31, 2007:
                                                   
Revenues
  $ 8,105,067     $ 8,575,389     $ 754,743     $ 28,465     $ (247,672 )   $ 17,215,992      
Cost of goods sold
    7,264,180       8,388,476       726,510       (2,261 )     (247,672 )     16,129,233      
                                                     
Gross profit
    840,887       186,913       28,233       30,726             1,086,759      
Marketing, general and administrative
    94,939       97,299       23,545       29,574               245,357      
                                                     
Operating earnings
    745,948       89,614       4,688       1,152             841,402      
Gain on investments
            (5,348 )     (15,268 )                     (20,616 )    
Interest, net
    (6,106 )     28,550       14,783       (6,129 )             31,098      
Equity income from investments
    (4,468 )     (51,830 )     (48,446 )     (4,941 )             (109,685 )    
Minority interests
    143,230       (16 )                             143,214      
                                                     
Income from continuing operations before income taxes
  $ 613,292     $ 118,258     $ 53,619     $ 12,222     $     $ 797,391      
                                                     
Intersegment revenues
  $ (228,930 )   $ (18,372 )   $ (370 )           $ 247,672     $      
                                                     
Goodwill
  $ 3,654     $ 150                             $ 3,804      
                                                     
Capital expenditures
  $ 313,246     $ 44,020     $ 12,092     $ 3,942             $ 373,300      
                                                     
Depreciation and amortization
  $ 86,558     $ 33,567     $ 15,116     $ 5,355             $ 140,596      
                                                     
Total identifiable assets at August 31, 2007
  $ 2,797,831     $ 2,846,950     $ 681,118     $ 428,474             $ 6,754,373      
                                                     


F-27


Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                                     
                      Corporate
    Reconciling
           
    Energy     Ag Business     Processing     and Other     Amounts     Total      
    (Dollars in thousands)
For the year ended August 31, 2006:
Revenues
  $ 7,414,361     $ 6,575,165     $ 614,471     $ 31,415     $ (251,577 )   $ 14,383,835      
Cost of goods sold
    6,804,454       6,401,527       588,732       (2,851 )     (251,577 )     13,540,285      
                                                     
Gross profit
    609,907       173,638       25,739       34,266             843,550      
Marketing, general and administrative
    82,867       99,777       21,645       26,949               231,238      
                                                     
Operating earnings
    527,040       73,861       4,094       7,317             612,312      
Interest, net
    6,534       23,559       11,096       116               41,305      
Equity income from investments
    (3,840 )     (40,902 )     (35,504 )     (3,942 )             (84,188 )    
Minority interests
    91,588       (509 )                             91,079      
                                                     
Income from continuing operations before income taxes
  $ 432,758     $ 91,713     $ 28,502     $ 11,143     $     $ 564,116      
                                                     
Intersegment revenues
  $ (242,430 )   $ (8,779 )   $ (368 )           $ 251,577     $      
                                                     
Capital expenditures
  $ 175,231     $ 44,542     $ 13,313     $ 1,906             $ 234,992      
                                                     
Depreciation and amortization
  $ 75,581     $ 31,471     $ 14,049     $ 5,676             $ 126,777      
                                                     
 
Note 14  Commitments and Contingencies
 
Environmental
 
The Company is required to comply with various environmental laws and regulations incidental to its normal business operations. In order to meet its compliance requirements, the Company establishes reserves for the probable future costs of remediation of identified issues, which are included in cost of goods sold and marketing, general and administrative expenses in the Consolidated Statements of Operations. The resolution of any such matters may affect consolidated net income for any fiscal period; however, management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company during any fiscal year.
 
The Company has completed certain refinery upgrades and enhancements in order to comply with existing environmental regulations, and has incurred capital expenditures from fiscal years 2003 through 2006 totaling $88.1 million for the Company’s Laurel, Montana refinery and $328.7 million for NCRA’s McPherson, Kansas refinery.
 
The Environmental Protection Agency has passed a regulation that requires the reduction of the benzene level in gasoline to be less than 0.62% volume by January 1, 2011. As a result of this regulation, the Company’s refineries will incur capital expenditures to reduce the current gasoline benzene levels to the regulated levels. The Company anticipates the combined capital expenditures for the Laurel and NCRA refineries to be approximately $130 million, for which $73 million is included in budgeted capital expenditures for fiscal 2009.
 
Other Litigation and Claims
 
The Company is involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of the Company’s business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on the consolidated financial position, results of operations or cash flows of the Company during any fiscal year.

F-28


Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Grain Storage
 
As of August 31, 2008 and 2007, the Company stored grain for third parties totaling $357.4 million and $184.1 million, respectively. Such stored commodities and products are not the property of the Company and therefore are not included in the Company’s inventories.
 
Guarantees
 
The Company is a guarantor for lines of credit for related companies. The Company’s bank covenants allow maximum guarantees of $500.0 million, of which $41.7 million was outstanding on August 31, 2008. All outstanding loans with respective creditors are current as of August 31, 2008.
 
Cofina Financial, in which the Company had a 49% ownership interest through August 31, 2008, makes seasonal and term loans to cooperatives and individual agricultural producers. The Company may, at its own discretion, choose to guarantee certain loans made by Cofina Financial. In addition, the Company also guarantees certain debt and obligations under contracts for its subsidiaries and members.


F-29


Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company’s obligations pursuant to its guarantees as of August 31, 2008 are as follows:
 
                                     
    Guarantee/
    Exposure on
                     
    Maximum
    August 31,
    Nature of
      Triggering
  Recourse
  Assets Held
Entities
 
Exposure
   
2008
   
Guarantee
 
Expiration Date
 
Event
 
Provisions
 
as Collateral
    (Dollars in thousands)                      
Mountain Country, LLC
  $ 150     $ 30     Obligations by Mountain Country , LLC under credit agreement   None stated, but may be terminated upon 90 days prior notice in regard to future obligations   Credit agreement default   Subrogation against Mountain Country, LLC   Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure
Morgan County Investors, LLC
  $ 394       394     Obligations by Morgan County Investors, LLC under credit agreement   When obligations are paid in full, scheduled for year 2018   Credit agreement default   Subrogation against Morgan County Investors, LLC   Some or all assets of borrower are held as collateral and should be sufficient to cover guarantee exposure
Horizon Milling, LLC
  $ 5,000             Indemnification and reimbursement of 24% of damages related to Horizon Milling, LLC’s performance under a flour sales agreement   None stated, but may be terminated by any party upon 90 days prior notice in regard to future obligations   Nonperformance under flour sales agreement   Subrogation against Horizon Milling, LLC   None
TEMCO, LLC
  $ 35,000             Obligations by TEMCO under credit agreement   None stated   Credit agreement default   Subrogation against TEMCO, LLC   None
TEMCO, LLC
  $ 1,000       1,000     Obligations by TEMCO under counterparty agreement   None stated, but may be terminated upon 5 days prior notice in regard to future obligations   Nonpayment   Subrogation against TEMCO, LLC   None
Third parties
    *     1,000     Surety for, or indemnification of surety for sales contracts between affiliates and sellers of grain under deferred payment contracts   Annual renewal on December 1 in regard to surety for one third party, otherwise none stated and may be terminated by the Company at any time in regard to future obligations   Nonpayment   Subrogation against affiliates   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Cofina Financial, LLC
  $ 17,502       14,861     Loans to our customers that are originated by Cofina and then sold to ProPartners, which is an affiliate of CoBank   None stated   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Cofina Financial, LLC
  $ 18,200       18,200     Loans made by Cofina to our customers   None stated   Credit agreement default   Subrogation against borrower   Some or all assets of borrower are held as collateral but might not be sufficient to cover guarantee exposure
Agriliance LLC
  $ 5,674       5,674     Outstanding letter of credit from CoBank to Agriliance LLC   None stated   Default under letter of credit reimbursement agreement   Subrogation against borrower   None
Agriliance LLC
  $ 500       500     Vehicle operating lease obligations of Agriliance LLC   None stated, but may be terminated upon 90 days prior notice in regard to future obligations   Lease agreement default   Subrogation against Agriliance LLC   None
Ag Business segment subsidiaries
  $ 5,295             Contribution obligations as a participating employer in the Co-op Retirement Plan   None stated   Nonpayment   None   None
                                     
            $ 41,659                      
                                     
 
 
* The maximum exposure on any give date is equal to the actual guarantees extended as of that date, not to exceed $1.0 million.


F-30


Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
Lease Commitments
 
The Company is committed under operating lease agreements for approximately 2,500 rail cars with remaining terms of one to ten years. In addition, the Company has commitments under other operating leases for various refinery, manufacturing and transportation equipment, vehicles and office space. Some leases include purchase options at not less than fair market value at the end of the lease terms.
 
Total rental expense for all operating leases, net of rail car mileage credits received from railroad and sublease income, was $58.3 million, $44.3 million and $38.5 million for the years ended August 31, 2008, 2007 and 2006, respectively. Mileage credits and sublease income totaled $3.8 million, $3.9 million and $3.2 million for the years ended August 31, 2008, 2007 and 2006, respectively.
 
Minimum future lease payments, required under noncancellable operating leases as of August 31, 2008 are as follows:
                                 
    Rail
          Equipment
       
    Cars     Vehicles     and Other     Total  
    (Dollars in thousands)  
2009
  $ 11,473     $ 20,581     $ 7,598     $ 39,652  
2010
    10,875       16,701       6,686       34,262  
2011
    9,373       9,646       6,295       25,314  
2012
    6,412       6,687       5,712       18,811  
2013
    4,276       3,145       3,835       11,256  
Thereafter
    10,685       559       11,789       23,033  
                                 
Total minimum future lease payments
  $ 53,094     $ 57,319     $ 41,915     $ 152,328  
                                 
 
Note 15  Supplemental Cash Flow and Other Information
 
Additional information concerning supplemental disclosures of cash flow activities for the years ended August 31, 2008, 2007 and 2006 is as follows:
 
                         
    2008     2007     2006  
    (Dollars in thousands)  
 
Net cash paid (received) during the period for:
                       
Interest
  $ 79,590     $ 52,323     $ 54,228  
Income taxes
    11,226       (20,274 )     (23,724 )
Other significant noncash investing and financing transactions:
                       
Capital equity certificates exchanged for preferred stock
    46,364       35,899       23,824  
Capital equity certificates issued in exchange for Ag Business properties
    4,680       10,132       11,064  
Accrual of dividends and equities payable
    (325,039 )     (374,294 )     (249,774 )
 
Note 16  Related Party Transactions
 
Related party transactions with equity investees as of August 31, 2008 and 2007 and for the years then ended are as follows:
 
                 
    2008     2007  
    (Dollars in thousands)  
 
Sales
  $ 3,451,365     $ 1,639,689  
Purchases
    1,248,436       1,176,462  
Receivables
    105,038       50,733  
Payables
    90,742       111,195  


F-31


Table of Contents

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
For fiscal year 2008, the related party transactions were primarily with TEMCO, LLC, Horizon Milling, LLC, United Harvest, LLC, Ventura Foods, LLC and Cofina Financial, LLC. For fiscal year 2007, the related party transactions were primarily with TEMCO, LLC, Horizon Milling, LLC, United Harvest, LLC, Ventura Foods, LLC, Agriliance LLC, and US BioEnergy Corporation.
 
Note 17  Comprehensive Income
 
The components of comprehensive income, net of taxes, for the years ended August 31, 2008, 2007 and 2006 are as follows:
                         
    2008     2007     2006  
    (Dollars in thousands)  
 
Net income
  $ 803,045     $ 756,723     $ 505,391  
                         
Pension and other postretirement, net of tax (benefit) expense of ($11,272), ($759) and $282 in 2008, 2007 and 2006, respectively
    (17,264 )     (1,193 )     444  
Unrealized net (loss) gain on available for sale investments, net of tax (benefit) expense of ($40,979), $41,722 and $1,138 in 2008, 2007 and 2006, respectively
    (64,366 )     65,533       1,787  
Interest rate hedges, net of tax expense (benefit) of $297, ($65) and $826 in 2008, 2007 and 2006, respectively
    465       (102 )     1,298  
Energy derivative instruments qualified for hedge accounting, net of tax (benefit) expense of ($1,787) and $1,787 in 2007 and 2006, respectively
            (2,806 )     2,806  
Foreign currency translation adjustment, net of tax expense of $56, $588 and $1,142 in 2008, 2007 and 2006, respectively
    87       921       1,796  
                         
Other comprehensive (loss) income
    (81,078 )     62,353       8,131  
                         
Total comprehensive income
  $ 721,967     $ 819,076     $ 513,522  
                         
 
The components of accumulated other comprehensive income, net of taxes, as of August 31, 2008 and 2007 are as follows:
 
                 
    2008     2007  
    (Dollars in thousands)  
 
Pension and other postretirement, net of tax benefit of $52,153 and $40,881 in 2008 and 2007, respectively
  $ (81,540 )   $ (64,276 )
Unrealized net gain on available for sale investments, net of tax expense of $7,368 and $48,347 in 2008 and 2007, respectively
    11,573       75,939  
Interest rate hedges, net of tax benefit of $1,101 and $1,397 in 2008 and 2007, respectively
    (1,729 )     (2,194 )
Foreign currency translation adjustment, net of tax expense of $2,327 and $2,271 in 2008 and 2007, respectively
    3,654       3,567  
                 
Accumulated other comprehensive (loss) income
  $ (68,042 )   $ 13,036  
                 


F-32

EX-10.3.D 2 c47494exv10w3wd.htm EX-10.3D EX-10.3(D)
Exhibit 10.3(d)
AMENDMENT NO. 7 TO THE
CHS INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
CHS Inc. (formerly known as Cenex Harvest States Cooperatives), pursuant to the power of amendment reserved to it in Section 8.1 of the CHS Inc. Supplemental Executive Retirement Plan (“Plan”), hereby amends the Plan in the manner set forth below effective as of September 1, 2008.
1. Section 4.5 of the Plan is amended by the addition of the following new paragraph (e):
     (e) Cofina Financial, LLC. In connection with CHS’ acquisition of one hundred percent (100%) of Cofina Financial, LLC, a Minnesota limited liability company (“Cofina”), CHS assumed all deferred compensation obligations under the Cofina Financial, LLC Supplemental Executive Retirement Plan (“Cofina SERP”). Prior to such acquisition, Cofina was (and continues to be) a participating employer in the CHS Inc. Pension Plan. The Cofina SERP is (like the CHS SERP) a nonqualified defined benefit pension plan that provides benefits that would be provided under the CHS Inc. Pension Plan but which are not provided thereunder because of the compensation limitations under Section 401(a)(17) (compensation limit) and Section 414 (exclusion of deferred compensation from pensionable earnings) of the Internal Revenue Code, as well as the annual addition limitations under and Section 415 of the Internal Revenue Code. The Cofina SERP is, in all material respects, identical to the CHS SERP. Accordingly, each Cofina SERP Participant’s Pension Plan Account under the Cofina Plan shall be merged with and into the CHS Plan, and such account shall become the Participant’s opening Pension Plan Account under the CHS Plan as of September 1, 2008 (the “Merger Date”). (No Cofina SERP Participants have accrued benefits determined under an alternative, traditional pension formula; rather, all benefits are determined under a “cash balance” formula.) Effective as of the Merger Date, Cofina shall become a participating employer in the CHS SERP. With respect to each eligible employee of Cofina who is selected to become an Active Participant in the CHS SERP, such Participant’s service and compensation earned with Cofina both before and after the Merger Date shall be taken into account for purposes of determining such Participant’s contribution credits and special career credits under the CHS SERP.
     IN WITNESS WHEREOF, CHS Inc. has caused its name to be hereunto subscribed on this 3rd day of September, 2008.
         
  CHS INC.
     
     
 By /s/ John D. Johnson
     
    John D. Johnson
    Its President and CEO

EX-10.10B 3 c47494exv10w10b.htm EX-10.10B exv10w10b
Exhibit 10.10B
SECOND AMENDMENT TO CREDIT AGREEMENT
Parties:
         
 
  “CoBank”:   CoBank, ACB
 
      5500 South Quebec Street
 
      Greenwood Village, Colorado 80111
 
       
 
  “Borrower”:   CHS Inc.
 
      5500 Cenex Drive
 
      Inver Grove Heights, Minnesota 55077
 
       
 
  “Syndication Parties”:   The entities named below on the signature pages
Execution Date: October 18, 2007
Recitals:
          A. CoBank, as Administrative Agent (in such capacity “Administrative Agent”) and as a Syndication Party, the Syndication Parties signatory thereto (collectively with any Persons who subsequently become Syndication Parties “Syndication Parties”), and Borrower, entered into that certain 2006 Amended and Restated Credit Agreement (Revolving Loan) dated as of May 18, 2006, and that certain First Amendment to Credit Agreement dated May 8, 2007 (as so amended, and as further amended, restated or replaced from time to time, the “Credit Agreement”), pursuant to which the Syndication Parties agreed to make certain loans to Borrower and to issue Letters of Credit for the account of Borrower (collectively “Facilities”) under the terms and conditions set forth in the Credit Agreement.
          B. Borrower has requested that the Agent and the present Syndication Parties make certain modifications to the Credit Agreement with respect to Borrower’s rights to effect a Commitment Increase, which the Agent and the Syndication Parties are willing to do under the terms and conditions as set forth in this Second Amendment to Credit Agreement (“Second Amendment”).

 


 

Agreement:
          Now, therefore, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Amendments to Credit Agreement. The Credit Agreement is amended as of the Effective Date as follows:
     1.1 Subsection 2.10 is hereby amended to read as set forth below:
          2.10 Increase of 5-Year Commitment. Borrower shall have the right to increase the 5-Year Commitment (“Commitment Increase”) from time to time by an amount of up to $400,000,000.00 in the aggregate; provided that each of the following conditions has been satisfied: (a) no Event of Default or Potential Default has occurred (or if a Potential Default or an Event of Default has occurred, it has been waived in writing by the Administrative Agent pursuant to the provisions of Section 15.10 hereof); (b) Borrower has submitted to the Administrative Agent a written request for such Commitment Increase, specifying (i) the aggregate dollar amount thereof, which shall be a minimum of $50,000,000.00 and in increments of $1,000,000.00, (ii) the name of one or more financial institutions or Farm Credit System Institutions (which, in any case, may be an existing Syndication Party hereunder) that has committed to provide funding of the Commitment Increase pursuant to the terms of, and as a Syndication Party under, this Agreement (each a “Funding Source”), and (iii) the amount of the Commitment Increase which each such Funding Source has committed to provide, which must be a minimum of $10,000,000.00 and in increments of $1,000,000.00; (c) each Funding Source has, unless it is at such time a Syndication Party hereunder, executed an agreement in the form of Exhibit 2.10 hereto (“Adoption Agreement”); (d) the Administrative Agent has approved each Funding Source as a Syndication Party hereunder (unless such Funding Source is already a Syndication Party), which approval shall not be unreasonably withheld; (e) each Funding Source has remitted to the Administrative Agent, by wire transfer in accordance with the Wire Instructions, the amount directed by the Administrative Agent so that such Funding Source will have funded its share (based on such Funding Source’s Individual 5-Year Pro Rata Share as recalculated as provided in clause (w) below in this Section) of all outstanding Advances other than Bid Advances and Overnight Advances, to the extent not previously funded by such Funding Source; and (f) Borrower has, if requested by such Funding Source(s), executed such additional 5-Year Facility Notes payable to such Funding Source(s) and in such amounts, as the Administrative Agent shall require to reflect the Commitment Increase. Upon the satisfaction of each of the foregoing conditions, (v) the 5-Year Commitment shall be automatically increased by the amount of the Commitment Increase; (w) the Individual 5-Year Pro Rata Share of each of the Syndication Parties, including the Funding Source(s), shall be recalculated by the Administrative Agent to reflect the amount of the Commitment Increase which each such Funding Source has committed to provide, and the amount of the Commitment Increase; (x) the Funding Source(s) shall be allocated a share of all existing 5-Year Advances, other than Bid Advances and Overnight Advances, and any such amounts remitted pursuant to clause (e) above shall be allocated among, and paid over to, those Persons who were Syndication Parties prior to the Commitment Increase, based on their Individual 5-Year Pro Rata Shares as they existed prior to the Commitment Increase, to reflect a reduction in their share of outstanding 5-Year Advances (other than Bid Advances and Overnight Advances); (y) to the extent that any Syndication Party is entitled to recover Funding Losses on

2


 

account of having been allocated any portion of the amounts remitted pursuant to clause (e) above, Borrower shall pay to the Administrative Agent the amount of such Funding Losses which the Administrative Agent shall then forward to such Syndication Party; and (z) the Administrative Agent shall revise Schedule 1 to reflect the Commitment Increase.
2. Conditions to Effectiveness of this Second Amendment. This Second Amendment shall become effective on the date, not sooner than the Execution Date, on which Borrower has satisfied, to the Administrative Agent’s sole discretion, each of the following conditions precedent (“Effective Date”):
     2.1 Representations and Warranties. The representations and warranties of Borrower shall be true and correct in all material respects on and as of the Execution Date as though made on and as of such date.
          2.2 Execution of Loan Documents. The Administrative Agent shall have received this Second Amendment executed by Borrower.
     2.3 Approval of Syndication Parties and Voting Participants. The Administrative Agent shall have received the approval of this Second Amendment by each of the Syndication Parties and Voting Participants as required under the Credit Agreement.
     2.4 Payment of Fees and Expenses. Borrower shall have paid the Administrative Agent, by wire transfer of immediately available federal funds all fees required under the Credit Agreement, and all costs and expenses, including legal fees, incurred by the Administrative Agent in connection with the preparation, negotiation, and execution of this Second Amendment and the other documents required in connection with this Second Amendment.
     2.5 No Event of Default. No Event of Default shall have occurred and be continuing under the Credit Agreement as of the Execution Date of this Second Amendment.
3. General Provisions.
     3.1 No Other Modifications. The Credit Agreement, as expressly modified herein, shall continue in full force and effect and be binding upon the parties thereto.
     3.2 Successors and Assigns. This Second Amendment shall be binding upon and inure to the benefit of Borrower, the Administrative Agent, and the Syndication Parties, and their respective successors and assigns, except that Borrower may not assign or transfer its rights or obligations hereunder.
     3.3 Definitions. Capitalized terms used, but not defined, in this Second Amendment shall have the meaning set forth in the Credit Agreement.
     3.4 Severability. Should any provision of this Second Amendment be deemed unlawful or unenforceable, said provision shall be deemed several and apart from all other provisions of this Second Amendment and all remaining provision of this Second Amendment shall be fully enforceable.

3


 

     3.5 Governing Law. To the extent not governed by federal law, this Second Amendment and the rights and obligations of the parties hereto shall be governed by, interpreted and enforced in accordance with the laws of the State of Colorado.
     3.6 Headings. The captions or headings in this Second Amendment are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Second Amendment.
     3.7 Counterparts. This Second Amendment may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. Copies of documents or signature pages bearing original signatures, and executed documents or signature pages delivered by a party by telefax, facsimile, or e-mail transmission of an Adobe® file format document (also known as a PDF file) shall, in each such instance, be deemed to be, and shall constitute and be treated as, an original signed document or counterpart, as applicable. Any party delivering an executed counterpart of this Second Amendment by telefax, facsimile, or e-mail transmission of an Adobe® file format document also shall deliver an original executed counterpart of this Second Amendment, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Second Amendment.
[SIGNATURES APPEAR ON THE NEXT PAGE]

4


 

          IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed as of the Effective Date.
         
    ADMINISTRATIVE AGENT:
 
       
    CoBank, ACB
 
       
 
  By:    
 
       
 
  Name:    
 
       
 
  Title:    
 
       
 
       
    BORROWER:
 
       
    CHS Inc. a cooperative corporation formed under the laws of the State of Minnesota
 
       
 
  By:    
 
       
 
  Name:   John Schmitz
 
  Title:   Executive Vice President and Chief Financial Officer
 
       
    SYNDICATION PARTIES:
 
       
    CoBank, ACB
 
       
 
  By:    
 
       
 
  Name:   Michael Tousignant
 
  Title:   Vice President
 
       
    The Bank of Tokyo-Mitsubishi UFJ, Ltd., Chicago Branch
 
       
 
  By:    
 
       
 
  Name:   Mr. Tsuguyuki Umene
 
  Title:   Deputy General Manager
 
       
    SunTrust Bank
 
       
 
  By:    
 
       
 
  Name:   Michel Odermatt
 
  Title:   Managing Director

5


 

         
 
       
    Bank of America, N.A.
 
       
 
  By:    
 
       
 
  Name:   Daniel R. Petrik
 
  Title:   Senior Vice President
 
       
    Wells Fargo Bank, National Association
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    
 
       
    BNP Paribas
 
       
 
  By:    
 
       
 
  Name:   Marcie Weiss
 
  Title:   Managing Director
 
       
    Harris N. A.
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    
 
       
    Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank International” New York Branch
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    

6


 

         
    Deere Credit, Inc.
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    
 
       
    U.S. Bank National Association
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    
 
       
    Natexis Banques Populaires
 
       
 
  By:    
 
       
 
  Name:   Stephen Jendras
 
  Title:   Vice President
 
       
    Fortis Capital Corp.
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    
 
       
    The Bank of Nova Scotia
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    
 
       
    Calyon New York Branch
 
       
 
  By:    
 
       
 
  Name:   Lee E. Greve
 
  Title:   Managing Director, Deputy Manager

7


 

         
    National City Bank of Indiana
 
       
 
  By:    
 
       
 
  Name:   Christopher A. Susott
 
  Title:   Vice President
 
       
    M&I Marshall & Ilsley Bank
 
       
 
  By:    
 
       
 
  Name:   Gary Sloan
 
  Title:   Vice President
 
       
    Farm Credit Services of America, PCA
 
       
 
  By:    
 
       
 
  Name:   Steven L. Moore
 
  Title:   Vice President
 
       
    ING Capital LLC
 
       
 
  By:    
 
       
 
  Name:    
 
  Title:    
 
       
    Comerica Bank
 
       
 
  By:    
 
       
 
  Name:   Timothy O’Rourke
 
  Title:   Vice President

8


 

         
    AgStar Financial Services, PCA
 
       
 
  By:    
 
       
 
  Name:   Troy Mostaert
 
  Title:   Vice President
 
       
    HSH Nordbank AG New York Branch
 
       
 
  By:    
 
       
 
  Name:   David Lopez Menendez
 
  Title:   Senior Vice President
 
       
    LaSalle Bank National Association
 
       
 
  By:    
 
       
 
  Name:   Jeffery Ware
 
  Title:   Vice President
 
       
    Société Générale
 
       
 
  By:    
 
       
 
  Name:   Milissa Goeden
 
  Title:   Vice President
 
       
    Wachovia Bank, National Association
 
       
 
  By:    
 
       
 
  Name:   Clint Bryant
 
  Title:   Vice President
 
       
    AgFirst Farm Credit Bank
 
       
 
  By:    
 
       
 
  Name:   Bruce Fortner
 
  Title:   Vice President

9


 

         
    U.S. AgBank
 
       
 
  By:    
 
       
 
  Name:   Travis W. Ball
 
  Title:   Vice President

10

EX-10.18.D 4 c47494exv10w18wd.htm EX-10.18D EX-10.18(D)
Exhibit 10.18(d)
CHS Inc.
Deferred Compensation Plan
Master Plan Document
 
 
FOURTH AMENDMENT
OF
CHS INC.
DEFERRED COMPENSATION PLAN
     WHEREAS, CHS Inc. (the “Company”) has heretofore established and maintains a nonqualified deferred compensation plan which is embodied in a document effective December 30, 2004 and entitled “CHS Inc. Deferred Compensation Plan, Master Plan Document, as amended by three amendments (collectively, the “Plan document”);
     WHEREAS, the Company has reserved to itself the power to make further amendments of the Plan document;
     NOW, THEREFORE, the Plan document is hereby amended as follows:
1. AUTHORITY TO APPROVE PARTICIPATING EMPLOYERS. Effective September 1, 2008, Section 1.29 of the Plan document (the definition of “Employer(s)”) is amended by replacing the term “Board” with “Committee”.
2. AUTHORITY TO TERMINATE PLAN. Effective September 1, 2008, the second sentence in Section 12.1 of the Plan document is deleted and replaced with the following sentence:
     Accordingly, the board of directors of any Employer reserves the right to Terminate the Plan (as defined in Section 1.39) as to that Employer, and the Board of Directors of the Company reserves the right to Terminate the Plan in its entirety as to the Company and all Employers.
3. AUTHORITY TO AMEND. Effective September 1, 2008, the first sentence in Section 12.2(a) of the Plan document is deleted and replaced with the following two sentences:
     The Board may, at any time, amend or modify the Plan in whole or in part. In addition, the Committee may, at any time, amend or modify the Plan in whole or in part, so long as such amendment does not materially increase the cost of the Plan.
4. AUTHORITY TO AMEND. Effective September 1, 2008, Section 12.2(b) of the Plan document is amended by replacing the term “ Company” with “Committee”.
5. DEFERRED COMPENSATION COMMITTEE. Effective September 1, 2008, the first sentence of Section 13.1 of the Plan document is deleted and replaced with the following sentence:
Except as otherwise provided in this Article 13, this Plan shall be administered by the Deferred Compensation Committee (hereinafter, the “Committee”), which shall consist of the Chief Executive Officer of the Company, or such committee as the Chief Executive Officer of the Company shall appoint. Members of the Committee may be Participants under this Plan.


 

CHS Inc.
Deferred Compensation Plan
Master Plan Document
 
 
6. APPENDIX D — AGRILIANCE ACCOUNTS. Effective September 1, 2008, the Plan document is amended by the addition of the Appendix D attached hereto.
7. APPENDIX E — COFINA ACCOUNTS. Effective September 1, 2008, the Plan document is amended by the addition of the Appendix E attached hereto.
IN WITNESS WHEREOF, CHS Inc. has caused its name to be hereunto subscribed on this 3rd day of September, 2008.
         
  CHS INC.
     
     
 By /s/ John D. Johnson
     
    John D. Johnson
    Its President and CEO

-2-


 

CHS Inc.
Deferred Compensation Plan
Master Plan Document
 
 
CHS INC.
DEFERRED COMPENSATION PLAN
APPENDIX D
Agriliance LLC Deferred Compensation Plan Accounts
    Except where expressly defined in this Appendix, the capitalized terms used herein shall have the same meanings as the same terms in the Plan document.
     
1.1   History. In connection with the Company’s purchase of certain assets of Agriliance LLC (“Agriliance”), the Company assumed deferred compensation obligations under the Agriliance LLC Deferred Compensation Plan (“Agriliance Plan”) for those Participants who transferred employment to the Company as part of the asset purchase.
1.2   Transfer of Account Balances. For those Participants who transferred employment to the Company as part of the asset purchase, all voluntary deferrals previously deferred pursuant to the terms of the Agriliance Plan shall become part of the Participant’s Deferral Account balance under this Plan. Following the conversion, the Participant’s Agriliance Plan account shall no longer be credited with earnings, gains or losses under the terms of the Agriliance Plan, but shall instead be credited or debited with earnings, gains or losses under one or more Measurement Funds elected by the Participant, in accordance with Section 3.9 of the Plan.
1.3   Payment Elections. With respect to each Participant in the Agriliance Plan who becomes a Participant in this Plan, such Participant must upon commencement of participation complete a Beneficiary Designation Form, a Retirement Benefit election in accordance with Article 6 and a Disability Benefit election in accordance with Article 8. Such elections and Beneficiary designations shall apply both to deferrals previously made under the Agriliance Plan and to new deferrals, if any, made under this Plan. Such Participant may also (but need not) irrevocably elect to receive a single lump sum Change in Control Benefit upon the occurrence of a Change in Control in accordance with Article 5 of the Plan. All of the foregoing elections must be made on or before December 31, 2008 and must comply in all other respects with special transition rules issued by the IRS and the U.S. Department of Treasury in connection with the implementation of Section 409A of the Code.

D-1


 

CHS Inc.
Deferred Compensation Plan
Master Plan Document
 
 
CHS INC.
DEFERRED COMPENSATION PLAN
APPENDIX E
Cofina Deferred Compensation Plan Accounts
    Except where expressly defined in this Appendix, the capitalized terms used herein shall have the same meanings as the same terms in the Plan document.
     
1.1   History. In connection with the Company’s acquisition of one hundred percent (100%) of Cofina Financial, LLC, a Minnesota limited liability company (“Cofina”), the Company assumed all deferred compensation obligations under the Cofina Financial, LLC Deferred Compensation Plan (“Cofina Plan”).
1.2   Transfer of Account Balances. All deferrals previously deferred pursuant to the terms of the Cofina Plan shall become part of the Participant’s Deferral Account balance under this Plan. Following the conversion, the Participant’s Cofina Plan account shall no longer be credited with earnings, gains or losses under the terms of the Cofina Plan, but shall instead be credited or debited with earnings, gains or losses under one or more Measurement Funds elected by the Participant, in accordance with Section 3.9 of the Plan.
1.3   Payment Elections. The Cofina Plan is maintained under a document entitled “Cofina Financial, LLC Deferred Compensation Plan, Master Plan Document”, as amended by two amendments. The terms of the Cofina Plan are, in all material respects, identical to this Plan. Accordingly, with respect to each Participant in the Cofina Plan, such Participant’s Beneficiary Designation Form, Retirement Benefit election, Disability Benefit election and Change in Control benefit election (if any) made in accordance with Articles 5, 6 and 8 of the Cofina Plan shall continue in effect, both with respect to deferrals previously made under the Cofina Plan and new deferrals, if any, made under this Plan. In addition, if the Participant has a Scheduled Distribution election in effect with respect to any Annual Deferral Amount under the Cofina Plan, such election shall remain in effect following transfer to this Plan.

E-1

EX-10.35 5 c47494exv10w35.htm EX-10.35 EX-10.35
Exhibit 10.35
July 17th, 2008
CHS EUROPE SA
12, avenue des Morgines
1213 PETIT LANCY-GENEVE
SUISSE
Attn: Mr Jean-Claude FAVRE
Re: USD 70 Million uncommitted transactional Facility
Dear Mr Favre,
The purpose of this letter is to outline the parameters of the uncommitted guidance facility available from BNP Paribas (Suisse) SA (the “Bank”) for CHS EUROPE SA, a company organized under the laws of Switzerland (the “Obligor”), for the financing of its grains trading operations.
An “uncommitted guidance facility” means that the Bank shall have no obligation to issue or grant any Accommodation. Each request made by the Obligor for an Accommodation shall be reviewed by the Bank on a case by case basis and the decision to grant any such Accommodation shall be made by the Bank in its absolute and sole discretion and irrespective of whether or not the Obligor is in compliance with any of the guidelines set forth below. The Bank also reserves the right to summarily refuse any request for an Accommodation without any review as contemplated by the preceding sentence. Accordingly, the Bank has no commitment to make any Accommodation available.
Amount of this uncommitted guidance facility: USD 70’000’000.
Maturity of the Facility: July 31st 2009
The parameters of utilisation for the USD 70’000’000 limit are outlined below:
Transactional secured line: USD 70’000’000
           
 
 
    This limit is aimed at financing transactions where goods are floating, or for which receivables are being cashed  
 
Margin:
    N/A  
 
Tenor:
    90 days  
 
Documentation:
    Before each drawing, client has to submit:
 - Copy of purchase invoice and contract
 - Sale contract if available
 - Full set BLs to the Bank’s order or to order and blank endorsed
 
 
Within the USD 70’000’000 limit, USD 60’000’000 are available for stock financing as per the following parameters:
Stock financing at loading port: USD 60’000’000
           
 
Margin:
    10% if unsold  
 
Tenor:
    45 days  
 
Documentation:
    Before each drawing, client has to submit:
 - Copy of a warehouse receipt to the order of the Bank
 - Copy of purchase contract and invoice
 - Copy of sales contract if applicable
 
 


 

Inland stock financing: USD 50’000’000
               
 
Margin:
    10%      
 
Tenor:
    90 days  
 
Documentation:
    Before each drawing, client has to submit:
 - Copy of Form 13 to the supplier’s order
 - Copy of the assignment from the supplier to CHS Europe of its rights on the goods.
 - Copy of purchase contract and invoice
 
 
 
  Within this USD 50’000’000 limit,
 - Maximum exposure for stocks up to 120 days is USD 15’000’000.
 - Maximum exposure on goods in transit is USD 10’000’000: in this case, copy of Rail Way Bills have to be provided to the Bank.
 
 
     Within the USD 70’000’000 limit, the bank also provides the following possibilities to the Obligor:
Payments against copies of documents: USD 20’000’000
           
 
 
    This sublimit is aimed at financing the same transactions as in the global limit, but against copies of documents or incomplete sets of BLs.  
 
Margin:
    N/A  
 
Tenor:
    90 days  
 
Documentation:
    Before each drawing, client has to submit:
 - Copy of purchase invoice and contract
 - Sale contract if available
 - 2/3 BLs or copy of BLs to the Bank’s order or to order and blank endorsed
 
 
Advances to Agrico Trade and finance against Russian VAT receivables: USD 10’000’000
           
 
Margin:
    N/A  
 
Tenor:
    270 days  
 
Documentation:
    Before each drawing, client has to submit:
 - Copy of the loan agreement between CHS Europe and Agrico Trade and Finance and its assignment to the Bank
 
 
Issuance of bid / performance bonds: USD 3’000’000
           
 
Margin:
    N/A  
 
Tenor:
    360 days  
 
Documentation:
    Before each drawing, client has to submit:
 - Copy of tender
 
 
FX operations covering currency risk on operations financed by the Bank
Notional amount: USD 50’000’000
Tenor: 7 months
           
 
Margin:
    N/A  
 
Tenor:
    210 days  
 
Documentation:
     - Before any drawing under this limit, client has to sign the FX agreement  
 


 

Total outstandings under the various limits and sublimits shall not exceed the Facility amount of USD 70’000’000.
In addition to the specific documentation mentioned above, client has to present the following documents before any drawing under the Facility:
a) Loss payee endorsements in favour of the Bank with respect to Obligor’s product insurance policy
and other insurance as may be requested from time to time by the Bank;
b) Copy of the loan subordination Agreement between CHS Europe SA and CHS Inc.
c) Confirmation that a USD 10’000’000 payment minimum has been made by CHS Inc under its
subordination loan agreement with the Obligor in a form acceptable to the Bank.
d) Undertaking by the Obligor to have at least USD 10’000’000 outstanding under the above loan at
any time when there are outstanding under this Facility.
e) Copy of commercial contract with Agrico and its assignment to the Bank
f) Copy of the loan agreement between Agrico Trade and Finance and the Obligor, and its assignment
to the Bank.
g) First demand guarantee from CHS Inc for a minimum amount of USD 15’000’000.
h) Letter of comfort from CHS Inc for the portion of the Facility not covered by the above
guarantee
i) Form of Pledge for own account — included in the account opening documentation
j) Assignment of Claims — included in the account opening documentation
k) Standard footnote
l) Such other documentation as the Bank may request from time to time.
Pricing indications:
The prices indicated below are uncommitted, and might change at the Bank sole discretion.
Documentary commissions:
-   Issuance of import LCs: 1pmil per quarter / USD 5’000 max
 
-   Negotiation of import / export LC: USD 750
 
-   Notification of export LC: USD 500 flat
 
-   Import or export documentary collection: USD 750
Margin on fixed term advances / Overdrafts:
-   Inland stock financing and Russian VAT receivables financing: Libor* + 1.5%pa / Bank Base rate + 1.5%pa
 
-   Port stock financing: Libor* + 1%pa / Bank Base rate + 1%pa
 
-   Other utilisation under the facility: Libor* + 0.75%pa + Bank Base rate + 0.75%pa
* LIBOR rate is determined as the LIBOR rate offered by the Bank’s treasury for tenors close to the tenors of each advance provided by the bank.
Notifications:
Notification of the Bank’s security interest in and assignment of the right to receive payment of all amounts due or to become due (including the proceeds) under all sales contracts shall be accomplished by the inclusion, on each financed invoice of the following text:
“Proceeds of this invoice have been assigned to BNP Paribas Suisse SA, Geneva in line with the usual trade financing arrangements. Therefore any payment must be made exclusively to the named bank.”
Confidentiality:
The terms and provisions of this Uncommitted Facility Letter and the other Security Documents are confidential and may not be disclosed by the Obligor to any other person (except as required by


 

applicable law, regulation or judicial process) other than the Obligor’s accountants, attorneys and other advisors and only in connection with the transactions contemplated by this Uncommitted Facility Letter and on a confidential basis unless specifically approved by the Bank.
We kindly ask you to acknowledge receipt of the present letter and your agreement with the terms and conditions of the Facility by signing and returning to us the enclosed copy, in original.
We look forward to developing a mutual beneficial relationship with CHS Europe SA, and we are available for any further information that you may need.
Best regards.
BNP PARIBAS (SUISSE) SA
         
 
  Valérie GRATADOUX   Daniel RENAUD
We agree to the foregoing, for and on behalf of CHS EUROPE SA:
 
Name:
Title:
Date and Place:

EX-10.36 6 c47494exv10w36.htm EX-10.36 EX-10.36
Exhibit 10.36
 
CHS INC.
$50,000,000 PRIVATE SHELF FACILITY
PRIVATE SHELF AGREEMENT
August 11, 2008
 

 


 

TABLE OF CONTENTS
                 
            Page
 
               
1.    AUTHORIZATION OF ISSUE OF NOTES     1  
 
               
2.    PURCHASE AND SALE OF NOTES     1  
 
               
 
  2.1    Facility     1  
 
  2.2    Issuance Period     2  
 
  2.3    Request for Purchase     2  
 
  2.4    Rate Quotes     2  
 
  2.5    Acceptance     3  
 
  2.6    Market Disruption     3  
 
  2.7    Facility Closings     3  
 
  2.8    Issuance Fee     4  
 
  2.9    Breakage Fees     4  
 
               
3.    CONDITIONS OF CLOSING     4  
 
               
 
  3.1    Conditions to Effectiveness of Agreement     4  
 
  3.2    Conditions to Each Closing     5  
 
               
4.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY     6  
 
               
 
  4.1    Organization; Power and Authority     6  
 
  4.2    Authorization, etc     6  
 
  4.3    Disclosure     7  
 
  4.4    Organization and Ownership of Shares of Subsidiaries; Affiliates     7  
 
  4.5    Financial Statements; Material Liabilities     8  
 
  4.6    Compliance with Laws, Other Instruments, etc     8  
 
  4.7    Governmental Authorizations, etc     8  
 
  4.8    Litigation; Observance of Agreements, Statutes and Orders     9  
 
  4.9    Taxes     9  
 
  4.10    Title to Property; Leases     9  
 
  4.11    Permits and Other Operating Rights     10  
 
  4.12    Intellectual Property     10  
 
  4.13    Compliance with ERISA     10  
 
  4.14    Private Offering by the Company     11  
 
  4.15    Use of Proceeds; Margin Regulations     11  
 
  4.16    Existing Debt; Future Liens     12  
 
  4.17    Foreign Assets Control Regulations, etc     12  
 
  4.18    Status Under Certain Statutes     12  
 
  4.19    Environmental Matters     13  
 
  4.20    Solvency     13  
 
  4.21    Hostile Tender Offers     13  
 
  4.22    Ranking of Notes     13  
 
               

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TABLE OF CONTENTS
(continued)
                 
            Page
 
               
5.    REPRESENTATIONS OF THE PURCHASER     14  
 
               
 
  5.1    Purchase for Investment     14  
 
  5.2    Source of Funds     14  
 
               
6.    INFORMATION AS TO COMPANY     15  
 
               
 
  6.1    Financial and Business Information     15  
 
  6.2    Officer's Certificate     18  
 
  6.3    Inspection     18  
 
               
7.    INTEREST; PAYMENT OF THE NOTES     19  
 
               
 
  7.1    Interest Payments     19  
 
  7.2    Required Principal Payments     19  
 
  7.3    Optional Prepayments with Make-Whole Amount     20  
 
  7.4    Allocation of Partial Prepayments     20  
 
  7.5    Maturity; Surrender, etc     21  
 
  7.6    Purchase of Notes     21  
 
  7.7    Make-Whole Amount     21  
 
               
8.    AFFIRMATIVE COVENANTS     22  
 
               
 
  8.1    Compliance with Law     22  
 
  8.2    Insurance     23  
 
  8.3    Maintenance of Properties     23  
 
  8.4    Payment of Taxes and Claims     23  
 
  8.5    Corporate Existence, etc     23  
 
  8.6    Pari Passu     24  
 
               
9.    NEGATIVE COVENANTS     24  
 
               
 
  9.1    Transactions with Affiliates     24  
 
  9.2    Merger, Consolidation, etc     24  
 
  9.3    Consolidated Funded Debt to Consolidated Cash Flow     25  
 
  9.4    Adjusted Consolidated Funded Debt to Consolidated Members' and Patrons' Equity     25  
 
  9.5    Priority Debt     25  
 
  9.6    Working Capital     25  
 
  9.7    Liens     25  
 
  9.8    Sale of Assets     28  
 
  9.9    Line of Business     31  
 
  9.10    Subsidiary Distribution Restrictions     31  
 
  9.11    Subsidiary Preferred Stock     31  
 
  9.12    Issuance of Stock by Subsidiaries     31  
 
  9.13    Terrorism Sanctions Regulations     31  
 
               

ii


 

TABLE OF CONTENTS
(continued)
                 
            Page
 
               
10.    EVENTS OF DEFAULT     32  
 
               
11.    REMEDIES ON DEFAULT, ETC     34  
 
               
 
  11.1    Acceleration     34  
 
  11.2    Other Remedies     34  
 
  11.3    Rescission     34  
 
  11.4    No Waivers or Election of Remedies, Expenses, etc     35  
 
               
12.    REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES     35  
 
               
 
  12.1    Registration of Notes     35  
 
  12.2    Transfer and Exchange of Notes     35  
 
  12.3    Replacement of Notes     36  
 
               
13.    PAYMENTS ON NOTES     36  
 
               
14.    EXPENSES, ETC     36  
 
               
 
  14.1    Transaction Expenses     36  
 
  14.2    Survival     37  
 
               
15.    SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT     37  
 
               
16.    AMENDMENT AND WAIVER     37  
 
               
 
  16.1    Requirements     37  
 
  16.2    Solicitation of Holders of Notes     38  
 
  16.3    Binding Effect, etc     38  
 
  16.4    Notes Held by Company, etc     38  
 
               
17.    NOTICES     39  
 
               
18.    REPRODUCTION OF DOCUMENTS     39  
 
               
19.    CONFIDENTIAL INFORMATION     39  
 
               
20.    SUBSTITUTION OF PURCHASER     40  
 
               
21.    MISCELLANEOUS     41  
 
               
 
  21.1    Successors and Assigns     41  
 
  21.2    Payments Due on Non-Business Days     41  
 
  21.3    Accounting Terms     41  
 
  21.4    Severability     41  
 
  21.5    Construction     41  

iii


 

TABLE OF CONTENTS
(continued)
                 
            Page
 
               
 
  21.6    Severability of Obligations     41  
 
  21.7    Binding Agreement     42  
 
  21.8    Counterparts     42  
 
  21.9    Governing Law     42  
 
  21.10    Jurisdiction and Process; Waiver of Jury Trial     42  

iv


 

EXHIBITS AND SCHEDULES
Information Schedule
Schedule of Defined Terms
         
Exhibit A
  -   Form of Private Shelf Note
Exhibit B
  -   Form of Request for Purchase
Exhibit C
  -   Form of Confirmation of Acceptance
Exhibit D
  -   Form of Opinion of General Counsel for the Company
Exhibit E
  -   Form of Opinion of Special Counsel for Hancock
 
       
Schedule 4.3
  -   Disclosure Materials
Schedule 4.4
  -   Subsidiaries of the Company and Ownership of Subsidiary Stock
 
       
Schedule 4.5
  -   Financial Statements
Schedule 4.12
  -   Intellectual Property
Schedule 4.16
  -   Existing Debt

v


 

CHS INC.
5500 Cenex Drive
Inver Grove Heights, MN 55077
August 11, 2008
John Hancock Life Insurance Company (“Hancock”)
Each Hancock Affiliate (as hereinafter
defined) which becomes bound by certain
provisions of this Agreement as hereinafter
provided (together with Hancock, the “Purchasers”)
c/o John Hancock Life Insurance Company
197 Clarendon Street
Boston, MA 02116
Ladies and Gentlemen:
     The undersigned, CHS Inc., a nonstock agricultural cooperative corporation organized under the laws of Minnesota formerly known as Cenex Harvest States Cooperatives (herein called the “Company”), hereby agrees with you as set forth below.
1. AUTHORIZATION OF ISSUE OF NOTES.
     The Company has authorized the issue of its Senior Unsecured Notes (the “Notes”) in the aggregate principal amount of $50,000,000, to be dated the date of issue thereof, to mature, in the case of each Note so issued, no more than 10 years after the date of original issuance thereof, to have an average life, in the case of each Note so issued, of no more than eight years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, payable quarterly in arrears, and to have such other particular terms, as shall be set forth, in the case of each Note so issued, in the Confirmation of Acceptance with respect to such Note delivered pursuant to Section 2.5, and to be substantially in the form of Exhibit A attached hereto. The terms “Note” and “Notes” as used herein shall include each Note delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, (v) the same interest payment periods and (vi) the same date of issuance (which, in the case of a Note issued in exchange for another Note, shall be deemed for these purposes the date on which such Note’s ultimate predecessor Note was issued), are herein called a “Series” of Notes.
2. PURCHASE AND SALE OF NOTES.
     2.1 Facility. Hancock is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Hancock and/or Hancock Affiliates from time to time, the purchase of Notes pursuant to this Agreement. The willingness of Hancock to consider such purchase of Notes is herein called the “Facility.” At any time, the aggregate principal amount of

1


 

Notes stated in Section 1, minus the aggregate principal amount of Notes purchased and sold pursuant to this Agreement prior to such time, minus the aggregate principal amount of Accepted Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time, is herein called the “Available Facility Amount” at such time. NOTWITHSTANDING THE WILLINGNESS OF HANCOCK TO CONSIDER PURCHASES OF NOTES BY HANCOCK AFFILIATES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER HANCOCK NOR ANY HANCOCK AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY HANCOCK OR ANY HANCOCK AFFILIATE.
     2.2 Issuance Period. Notes may be issued and sold pursuant to this Agreement until the earlier of (i) August 31, 2010 (or if such date is not a Business Day, the Business Day next preceding such anniversary), (ii) the 30th day after Hancock shall have given to the Company, or the Company shall have given to Hancock, a written notice stating that it elects to terminate the issuance and sale of Notes pursuant to this Agreement (or if such 30th day is not a Business Day, the Business Day next preceding such 30th day), (iii) the last Closing Day after which there is no Available Facility Amount, (iv) the termination of the Facility under Section 11 of this Agreement, and (v) the acceleration of any Note under Section 11 of this Agreement. The period during which Notes may be issued and sold pursuant to this Agreement is herein called the “Issuance Period.”
     2.3 Request for Purchase. The Company may from time to time during the Issuance Period make requests for purchases of Notes (each such request being herein called a “Request for Purchase”). Each Request for Purchase shall be made to Hancock by telecopier or overnight delivery service, and shall (i) specify the aggregate principal amount of Notes covered thereby, which shall not be less than $10,000,000 and not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the principal amounts, final maturities (which shall be no more than 10 years from the date of issuance), average life (which shall be no more than 8 years from the date of issuance), and principal prepayment dates (if any) and amounts of the Notes covered thereby (interest on all Notes shall be payable quarterly in arrears), (iii) specify the use of proceeds of such Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Notes (the “Closing Day”), which shall be a Business Day during the Issuance Period not less than 20 days and not more than 50 days after the making of such Request for Purchase, (v) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Notes are to be transferred on the Closing Day for such purchase and sale, (vi) certify that the representations and warranties contained in Section 4 are true on and as of the date of such Request for Purchase and that there exists on the date of such Request for Purchase no Event of Default or Default, and (vii) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Hancock.
     2.4 Rate Quotes. Not later than five Business Days after the Company shall have given Hancock a Request for Purchase pursuant to Section 2.3, Hancock may, but shall be under no obligation to, provide to the Company by telephone or telecopier, in each case between 9:30 A.M. and 1:30 P.M. New York City local time (or such later time as Hancock may elect) interest

2


 

rate quotes for the several principal amounts, maturities and principal prepayment schedules of the Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Notes at which Hancock or one or more Hancock Affiliates would be willing to purchase such Notes at 100% of the principal amount thereof.
     2.5 Acceptance. Within two Business Days after Hancock shall have provided any interest rate quotes pursuant to Section 2.4 (the “Acceptance Window”), the Company may, subject to Section 2.6, elect to accept such interest rate quotes as to not less than $10,000,000 aggregate principal amount of the Notes specified in the related Request for Purchase. Such election shall be made by an Authorized Officer of the Company notifying Hancock by telephone or telecopier within the Acceptance Window that the Company elects to accept such interest rate quotes, specifying the Notes (each such Note being herein called an “Accepted Note”) as to which such acceptance (herein called an “Acceptance”) relates. The day the Company notifies Hancock of an Acceptance with respect to any Accepted Notes is herein called the “Acceptance Day” for such Accepted Notes. Any interest rate quotes as to which Hancock does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. Subject to Section 2.6 and the other terms and conditions hereof, the Company agrees to sell to Hancock and/or a Hancock Affiliate or Affiliates, and Hancock agrees to cause the purchase by Hancock and/or a Hancock Affiliate or Affiliates of, the Accepted Notes at 100% of the principal amount of such Notes. As soon as practicable following the Acceptance Day, the Company and Hancock and/or each Hancock Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (herein called a “Confirmation of Acceptance”). If the Company should fail to execute and return to Hancock within three Business Days following the Company’s receipt thereof a Confirmation of Acceptance with respect to any Accepted Notes, Hancock or any Hancock Affiliate may at its election at any time prior to Hancock’s receipt thereof cancel the closing with respect to such Accepted Notes by so notifying the Company in writing.
     2.6 Market Disruption. Notwithstanding the provisions of Section 2.5, if Hancock shall have provided interest rate quotes pursuant to Section 2.4 and thereafter prior to the time an Acceptance with respect to such quotes shall have been notified to Hancock in accordance with Section 2.5 the domestic market for U.S. Treasury securities or other financial instruments shall have closed or there shall have occurred a general suspension, material limitation, or significant disruption of trading in securities generally on the New York Stock Exchange or in the domestic market for U.S. Treasury securities or other financial instruments, then such interest rate quotes shall expire, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Hancock of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Hancock shall promptly notify the Company that the provisions of this Section 2.6 are applicable with respect to such Acceptance.
     2.7 Facility Closings. Not later than 11:00 A.M. (New York City local time) on the Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of Hancock’s special counsel, or to such other address as the parties may agree, the Accepted Notes to be purchased by such

3


 

Purchaser in the form of one or more Notes in authorized denominations as such Purchaser may request for each Series of Accepted Notes to be purchased on the Closing Day, dated the Closing Day and registered in such Purchaser’s name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company’s account specified in the Request for Purchase of such Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Closing Day for such Accepted Notes as provided above in this Section 2.7, or any of the conditions specified in Section 3 shall not have been fulfilled by the time required on such scheduled Closing Day, Hancock (on behalf of each Purchaser) may, at its election, at any time thereafter on such scheduled Closing Day notify the Company in writing that such closing is canceled.
     2.8 Issuance Fee. The Company will pay to each Purchaser in immediately available funds a fee (herein called the “Issuance Fee”) on each Closing Day in an amount equal to 0.10% of the aggregate principal amount of Notes sold to such Purchaser on such Closing Day.
     2.9 Breakage Fees. If (a) the Company fails to return a Confirmation of Acceptance within the time provided in Section 2.5, (b) the Company shall refuse to accept the purchase price of any Notes on a Closing Day, or (c) Hancock shall terminate a purchase of Notes on any Closing Day pursuant to Section 2.7, then upon demand of any prospective purchaser of the applicable Notes the Company shall promptly compensate such purchaser for and hold such purchaser harmless from and against any loss, cost or expense incurred by such purchaser as a result thereof, including any loss or expense arising from the liquidation or reemployment of funds obtained by it to fund such Notes or from fees payable to terminate the deposits from which such funds were obtained (all such losses, costs and expenses are herein collectively called “Breakage Fees”).
3. CONDITIONS OF CLOSING.
     The effectiveness of this Agreement, and the obligation of any Purchaser to purchase and pay for any Notes, is subject in each case to the satisfaction, on or before the applicable Closing Day, of the following conditions:
     3.1 Conditions to Effectiveness of Agreement.
          (a) Hancock shall have received the following:
               (i) this Agreement;
               (ii) certified copies of the resolutions of the board of directors of the Company authorizing the execution and delivery of this Agreement and the issuance of the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes;
               (iii) a certificate of the secretary or assistant secretary and one other officer of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder and to execute any Request for Purchase and Confirmation of Acceptance.

4


 

               (iv) certified copies of the articles of incorporation and by-laws of the Company, dated as of a recent date.
               (v) a favorable opinion of (A) David A. Kastelic, Esq., general counsel to the Company (or such other counsel designated by the Company and acceptable to Hancock), substantially in the form of Exhibit D attached hereto, and covering such other matters incident to the transactions contemplated hereby as Hancock or its counsel may reasonably request (and the Company hereby instruct its counsel to deliver such opinion to Hancock); and (B) Farella Braun + Martel LLP, special counsel to Hancock in connection with the Agreement, in the form of Exhibit E attached hereto and covering such other matters incident to the transactions contemplated hereby as Hancock may reasonably request; and
               (vi) a good standing certificate for the Company from the Secretary of State of the State of Minnesota, dated as of a recent date, and such other evidence of the status of the Company as Hancock reasonably may request.
          (b) The Company shall have paid to Hancock’s special counsel its reasonable fees and expenses then owing in connection with the transactions contemplated by this Agreement.
     3.2 Conditions to Each Closing.
          (a) Such Purchaser shall have received the following, each dated the date of the applicable Closing Day:
               (i) the Note(s) to be purchased by such Purchaser;
               (ii) certified copies of the resolutions of the board of directors of the Company authorizing the execution and delivery and the issuance of the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the Notes;
               (iii) a certificate of the secretary or assistant secretary and one other officer of the Company certifying the names and true signatures of the officers of the Company authorized to sign the Notes and the other documents to be delivered hereunder;
               (iv) certified copies of the articles of incorporation and by-laws of the Company;
               (v) a good standing certificate for the Company from the Secretary of State of the State of Minnesota, dated as of a recent date, and such other evidence of the status of the Company as such Purchaser reasonably may request;
               (vi) certified copies of Requests for Information or Copies (Form UCC-11) or equivalent reports listing all effective financing statements which name the Company or any Subsidiary (under its present name and previous names) as debtor, together with copies of such financing statements; and

5


 

               (vii) additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as may reasonably be requested by such Purchaser.
          (b) The representations and warranties contained in Section 4 hereof shall be true on and as of the applicable Closing Day; there shall exist on the applicable Closing Day (before and after giving effect to the funding of the Accepted Notes on such Closing Day) no Default or Event of Default; and the Company shall have delivered to such Purchaser an Officer’s Certificate, dated the applicable Closing Day, to both such effects.
          (c) On or before each Closing Day, the Company shall have paid any fees due hereunder.
          (d) The purchase of and payment for the Notes to be purchased by such Purchaser on the terms and conditions herein provided, and the use of the proceeds of such Notes by the Company, shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation T, U or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as it may request to establish compliance with this condition.
          (e) A Private Placement Number (or Numbers) issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for the Notes.
          (f) All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to such Purchaser and its special counsel, and such Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser or such special counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
     The Company represents and warrants to Hancock, each Hancock Affiliate and each Purchaser that:
     4.1 Organization; Power and Authority. The Company is a nonstock agricultural cooperative corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof.
     4.2 Authorization, etc. The Company has all requisite corporate power to own and operate its respective properties and to conduct its business as currently conducted and as

6


 

currently proposed to be conducted. The Company has all requisite corporate power to execute, deliver and perform its obligations under this Agreement and the Notes. The Company has taken all necessary corporate action to authorize the execution and delivery of, and the performance of its obligations under, this Agreement and the Notes, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except, in each case, as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
     4.3 Disclosure. The Annual Report on Form 10-K of the Company for the fiscal year ended August 31, 2007, along with the Quarterly Reports on Form 10-Q of the Company for the quarters ended November 30, 2007, February 29, 2008 and May 31, 2008 and any Current Reports on Form 8-K filed since August 31, 2007, fairly describe, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries as of the date hereof. Except as disclosed in Schedule 4.3, this Agreement, the foregoing SEC reports and the documents, certificates or other writings delivered to Hancock by or on behalf of the Company in connection with the transactions contemplated hereby and identified in Schedule 4.3, and the financial statements listed in Schedule 4.5 (this Agreement, such SEC Reports and such documents, certificates or other writings and such financial statements being referred to, collectively, as the “Disclosure Documents”), taken as a whole, do not as of the date hereof contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Disclosure Documents, since August 31, 2007, there has been no change in the financial condition, operations, business or properties of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
     4.4 Organization and Ownership of Shares of Subsidiaries; Affiliates.
          (a) Schedule 4.4 contains (except as noted therein) complete and correct lists as of the date hereof of (i) the Company’s Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) the Company’s Affiliates, other than Subsidiaries, and (iii) the Company’s directors and senior officers.
          (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 4.4 as being owned by the Company or its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 4.4).
          (c) Each Subsidiary identified in Schedule 4.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of

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organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact.
          (d) No Subsidiary is a party to, or otherwise subject to any legal, regulatory, contractual or other restriction (other than this Agreement, the agreements listed on Schedule 4.4 and customary limitations imposed by corporate law or similar statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary.
     4.5 Financial Statements; Material Liabilities. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 4.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). The Company and its Subsidiaries do not have any Material liabilities as of the date hereof that are not disclosed on such financial statements or otherwise disclosed in the Disclosure Documents.
     4.6 Compliance with Laws, Other Instruments, etc. The execution, delivery and performance by the Company of this Agreement and the Notes will not (a) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (c) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. The Company is not a party to any contract or agreement or subject to any charter or other corporate restrictions which materially and adversely affects its business, property, assets, financial condition or results of operations. The provisions of this Agreement and the Notes do not contravene any contract or agreement evidencing Debt to which the Company is a party or by which it is bound.
     4.7 Governmental Authorizations, etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes.

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     4.8 Litigation; Observance of Agreements, Statutes and Orders.
          (a) There are no actions, suits, investigations or proceedings pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any Subsidiary or any properties or rights of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
          (b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including, without limitation, Environmental Laws or the USA Patriot Act) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
     4.9 Taxes. The Company and its Subsidiaries have filed all Federal, state and, to the knowledge of the officers of the Company, other tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (a) the amount of which is not individually or in the aggregate Material or (b) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended August 31, 2004. The Company is a cooperative association taxed under the provisions of “subchapter T” of the Code and the Company does not presently intend to alter its status as a subchapter T cooperative association for Federal income tax purposes.
     4.10 Title to Property; Leases. Except for minor defects in title which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, the Company has and each of its Subsidiaries has good and indefeasible title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets that individually or in the aggregate are Material, including all such properties reflected in the balance sheet (whether audited or unaudited) most recently delivered pursuant to this Agreement or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects.

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     4.11 Permits and Other Operating Rights. The Company and each Subsidiary of the Company has all such valid and sufficient certificates of convenience and necessity, franchises, licenses, permits, operating rights and other authorizations from all Governmental Authorities having jurisdiction over the Company or any Subsidiary or any of its properties, as are necessary for the ownership, operation and maintenance of its businesses and properties, as presently conducted and as proposed to be conducted while the Notes are outstanding, subject to exceptions and deficiencies which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect, and such certificates of convenience and necessity, franchises, licenses, permits, operating rights and other authorizations from all Governmental Authorities or any of its properties are free from restrictions or conditions which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.
     4.12 Intellectual Property. Except as disclosed in Schedule 4.12,
          (a) the Company and its Subsidiaries own or possess all patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others;
          (b) to the best knowledge of the Company, no product or practice of the Company or any Subsidiary infringes in any material respect any license, permit, franchise, authorization, patent, copyright, proprietary software, service mark, trademark, trade name or other right owned by any other Person; and
          (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, proprietary software, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries.
     4.13 Compliance with ERISA.
          (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA (aside from ordinary claims for benefits under the Plans) or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to section 401(a)(29) or 412 of the Code or section 4068 of ERISA, other than such liabilities or Liens as would not be individually or in the aggregate Material.
          (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report, did not exceed the aggregate current value of the

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assets of such Plan allocable to such benefit liabilities by more than $15,000,000 for any single Plan or by more than $20,000,000, in the aggregate, for all such Plans. The term “benefit liabilities” has the meaning specified in section 4001 of ERISA and the terms “current value” and “present value” have the meaning specified in section 3 of ERISA.
          (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material.
          (d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material.
          (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company to each Purchaser in the first sentence of this Section 4.13(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 5.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by such Purchaser.
     4.14 Private Offering by the Company. Since January 18, 2008, neither the Company nor anyone acting on its behalf has, directly or indirectly, offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any Person other than Hancock and not more than five other Institutional Investors (as defined in clause (c) of the definition of such term), each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act or to the registration requirements of any securities or “blue sky” laws of any applicable jurisdiction.
     4.15 Use of Proceeds; Margin Regulations. The Company will apply the proceeds of the sale of the Notes for working and general capital requirements to pay off/refinance other Debt. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 5% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 5% of the value of such assets. As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in said Regulation U.

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     4.16 Existing Debt; Future Liens.
          (a) Except as described therein, Schedule 4.16 sets forth a complete and correct list of all outstanding Debt of the Company and its Subsidiaries in excess of $10,000,000, or having commitments in excess thereof, as of the date hereof. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Debt of the Company or such Subsidiary and no event or condition exists with respect to any Debt of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Debt to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
          (b) The aggregate amount of all outstanding Debt of the Company and its Subsidiaries not set forth on Schedule 4.16 does not as of the date hereof exceed $5,000,000.
          (c) Except as disclosed in Schedule 4.16, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 9.7.
          (d) As of the date hereof, neither the Company nor any Subsidiary is a party to, or otherwise subject to any provision contained in, any instrument evidencing Debt of the Company or such Subsidiary, any agreement relating thereto or any other agreement (including, but not limited to, its charter or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company, except as specifically indicated in Schedule 4.16.
     4.17 Foreign Assets Control Regulations, etc.
          (a) Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
          (b) Neither the Company nor any Subsidiary (i) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti Terrorism Order or (ii) knowingly engages in any dealings or transactions with any such Person. The Company and its Subsidiaries are in compliance, in all material respects, with the USA Patriot Act.
          (c) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977.
     4.18 Status Under Certain Statutes. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility

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Holding Company Act of 2005, as amended, the ICC Termination Act of 1995, as amended, or the Federal Power Act, as amended.
     4.19 Environmental Matters.
          (a) Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
          (b) Neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
          (c) Neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect.
          (d) All buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.
     4.20 Solvency. The Company, after giving effect to the transactions contemplated by this Agreement and the Notes, will not be engaged in any business or transaction, or about to engage in any business or transaction, for which the Company has unreasonably small assets or capital (within the meaning of the Uniform Fraudulent Transfer Act, the Uniform Fraudulent Conveyance Act and Section 548 of Title 11 of the United States Code), and the Company does not have any intent to hinder, delay or defraud any Person to which it is, or will become, on or after the date of Closing, indebted to or to incur debts that would be beyond its ability to pay as they mature.
     4.21 Hostile Tender Offers. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer.
     4.22 Ranking of Notes. The Company’s obligations under the Notes and this Agreement will, upon issuance of the Notes, rank at least pari passu, without preference or priority, with all of its other outstanding unsecured and unsubordinated obligations, except for those obligations that are, or are liable to be, mandatorily preferred by law.

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5. REPRESENTATIONS OF THE PURCHASER.
     5.1 Purchase for Investment. Each Purchaser severally represents that, on any and each date it purchases any Note or Notes, it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s or their property shall at all times be within such Purchaser’s or their control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes.
     5.2 Source of Funds. Each Purchaser severally represents that, on any and each date it purchases any Note or Notes, at least one of the following statements is an accurate representation as to each source of funds (a “Source”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
          (a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“PTE”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the “NAIC Annual Statement”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
          (b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
          (c) the Source is either (i) an insurance company pooled separate account, within the meaning of PTE 90-1 or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
          (d) the Source constitutes assets of an “investment fund” (within the meaning of Part V of PTE 84-14 (the “QPAM Exemption”)) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of

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all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (d); or
          (e) the Source constitutes assets of a “plan(s)” (within the meaning of Section IV of PTE 96-23 (the “INHAM Exemption”)) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of “control” in Section IV(d) of the INHAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such INHAM and (ii) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (e); or
          (f) the Source is a governmental plan; or
          (g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (g); or
          (h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
As used in this Section 5.2, the terms “employee benefit plan”, “governmental plan” and “separate account” shall have the respective meanings assigned to such terms in section 3 of ERISA.
6. INFORMATION AS TO COMPANY.
     6.1 Financial and Business Information. During the Issuance Period and thereafter as long as any Notes are outstanding, the Company shall deliver to each holder of Notes that is an Institutional Investor:
          (a) Quarterly Statements — within 45 days (or such shorter period as is 15 days greater than the period applicable to the filing of the Company’s Quarterly Report on Form 10-Q (the “Form 10-Q”) with the SEC regardless of whether the Company is subject to the filing requirements thereof) after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of,
          (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and

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          (ii) consolidated statements of income, changes in members’ equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,
setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company’s Form 10-Q prepared in compliance with the requirements therefor and filed with the SEC shall be deemed to satisfy the requirements of this Section 6.1(a), provided, further, that the Company shall be deemed to have made such delivery of such Form 10-Q if it shall have timely made such Form 10-Q available on “EDGAR” and on its home page on the worldwide web (at the date of this Agreement located at: http//www.chsinc.com) and shall have given each holder of Notes prior notice of such availability on EDGAR and on its home page in connection with each delivery (such availability and notice thereof being referred to as “Electronic Delivery”);
          (b) Annual Statements — within 90 days (or such shorter period as is 15 days greater than the period applicable to the filing of the Company’s Annual Report on Form 10-K (the “Form 10-K”) with the SEC regardless of whether the Company is subject to the filing requirements thereof) after the end of each fiscal year of the Company, duplicate copies of,
          (i) consolidated and consolidating balance sheets of the Company and its Subsidiaries, as at the end of such year, and
          (ii) consolidated and consolidating statements of income and cash flows and a consolidated statement of members’ equity of the Company and its Subsidiaries, for such year,
setting forth in each case, in comparative form, the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances; provided that the delivery within the time period specified above of the Company’s Form 10-K for such fiscal year (together with the Company’s annual report to members, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the SEC shall be deemed to satisfy the requirements of this Section 6.1(b), provided, further, that the Company shall be deemed to have made such delivery of such Form 10-K if it shall have timely made Electronic Delivery thereof;

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          (c) SEC and Other Reports — promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to its public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the SEC and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material;
          (d) Notice of Default or Event of Default — promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 10(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;
          (e) ERISA Matters — promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:
          (i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or
          (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or
          (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;
          (f) Notices from Governmental Authority — promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and
          (g) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or

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properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes.
     6.2 Officer’s Certificate. Each set of financial statements delivered to a holder of Notes pursuant to Section 6.1(a) or Section 6.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth (which, in the case of Electronic Delivery of any such financial statements, shall be by separate concurrent delivery of such certificate to each holder of Notes):
          (a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Sections 9.3 through and including 9.6 and Section 9.8 hereof, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and
          (b) Event of Default — a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.
     6.3 Inspection. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor:
          (a) No Default — if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company or any Subsidiary, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company’s officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and
          (b) Default — if a Default or Event of Default then exists, at the expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the

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Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested.
7. INTEREST; PAYMENT OF THE NOTES.
     7.1 Interest Payments. Interest on the Notes shall accrue on the unpaid principal balance of the Notes at the rates, and shall be computed on the basis, as described in the Notes. Interest shall be due and payable quarterly in arrears as provided in the Notes.
     7.2 Required Principal Payments.
          (a) Required Principal Payments. Each Series of Notes shall be subject to required payments of principal set forth in the Notes of such Series.
          (b) Offer to Pay Notes Upon Change in Control.
               (i) Notice and Offer. The Company will not take any action that consummates or finalizes a Change in Control unless at least thirty (30) days prior to such action it shall have given to each holder of the Notes written notice of such impending Change in Control. The Company will, within five (5) Business Days after any Responsible Officer has knowledge of the occurrence of any Change in Control, give written notice of such Change in Control to each holder of Notes in the manner set forth in Section 17. If a Change in Control has occurred, such written notice shall contain, and shall constitute an irrevocable offer to prepay all or (at such holder’s option) any portion of the Notes held by such holder on a date specified in such notice (the “Proposed Prepayment Date”) that is not less than thirty (30) days and not more than sixty (60) days after the date of such notice. If the Proposed Prepayment Date shall not be specified in such notice, the Proposed Prepayment Date shall be the 30th day after the date such notice shall have been sent by the Company. In no event will the Company take any action to consummate or finalize a Change in Control unless the Company has given the notice required by this Section 7.2(b)(i) and, contemporaneously with such action, the Company prepays all Notes required to be prepaid in accordance with Section 7.2(b)(ii) hereof.
               (ii) Acceptance and Payment. A holder of Notes may accept the offer to prepay made pursuant to Section 7.2(b)(i) by causing a notice of acceptance of such offered prepayment (specifying in such notice the amount of Notes with respect to which such acceptance applies) to be delivered to the Company prior to the Proposed Prepayment Date (it being understood that the failure by a holder to respond to such written offer of prepayment prior to the Proposed Prepayment Date shall be deemed to constitute a rejection of such offer with respect to all Notes held by such holder). If so accepted, such offered prepayment shall be due and payable on the Proposed Prepayment Date. Such offered prepayment shall be made at 100% of the principal amount of such Notes so prepaid, plus interest on all such Notes accrued to the Proposed Prepayment Date. If the Company shall at any time receive an acceptance of an offer to prepay Notes pursuant to this Section 7.2(b)(ii) from some, but not all of, the holders of the Notes, then the Company will, within two Business Days after the receipt of such acceptance, give written notice of such acceptance to each other holder of the Notes.

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               (iii) Officer’s Certificate. Each offer to prepay the Notes pursuant to Section 7.2(b) shall be accompanied by a certificate, executed by a Responsible Officer of the Company and dated the date of such offer, specifying:
          (A) the Proposed Prepayment Date;
          (B) that such payment is to be made pursuant to the provisions of Section 7.2(b) of this Agreement;
          (C) the outstanding principal amount as of the Proposed Prepayment Date of each Note offered to be prepaid;
          (D) the unpaid interest that would be due on each such Note offered to be prepaid, accrued to the date fixed for payment;
          (E) that the conditions of Section 7.2(b) have been fulfilled; and
          (F) in reasonable detail, the nature and date or proposed date of the Change in Control.
     7.3 Optional Prepayments with Make-Whole Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes of any Series, in integral multiples of $1,000,000 and in a minimum amount of $5,000,000, at 100% of the principal amount so prepaid, plus interest thereon to the prepayment date and the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of the Series of Notes to be prepaid written notice of each optional prepayment under this Section 7.3 not less than ten (10) Business Days and not more than sixty (60) days prior to the date fixed for such prepayment. Each such notice shall specify such prepayment date (which shall be a Business Day), the aggregate principal amount of the Series of Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 7.4), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two (2) Business Days prior to such prepayment, the Company shall deliver to each holder of such Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. Any partial prepayment of the Notes pursuant to this Section 7.3 shall be applied in satisfaction of required payments of principal in inverse order of their scheduled due dates.
     7.4 Allocation of Partial Prepayments. In the case of each partial prepayment of any Series of Notes pursuant to Section 7.3, the principal amount of such Notes to be prepaid shall be allocated among all of such Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.

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     7.5 Maturity; Surrender, etc. In the case of each prepayment of any Notes pursuant to this Section 7, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and, in the case of any such prepayment pursuant to Section 7.3, the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
     7.6 Purchase of Notes. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
     7.7 Make-Whole Amount. The term “Make-Whole Amount” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:
     “Called Principal” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 7.3 or has become or is declared to be immediately due and payable pursuant to Section 11.1, as the context requires.
     “Discounted Value” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
     “Reinvestment Yield” means, with respect to the Called Principal of any Note, 0.50% plus the yield to maturity calculated by using (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date on screen “PX 1” on the Bloomberg Financial Market Service (or such other display on the Bloomberg Financial Market Service as may be agreed upon by the Company and Hancock having the same information if “PX-1” is replaced by Bloomberg Financial Market Service) for the most recently issued, actively traded, on-the-run benchmark U.S. Treasury securities, having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, (including by way of interpolation), the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the

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Settlement Date, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. In either case, the yield will be determined using the applicable screen or report as determined above, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly on a straight line basis between (1) the applicable U.S. Treasury security with the maturity closest to and greater than the Remaining Average Life and (2) the applicable U.S. Treasury security with the maturity closest to and less than the Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
     “Remaining Average Life” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (a) such Called Principal into (b) the sum of the products obtained by multiplying (i) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (ii) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
     “Remaining Scheduled Payments” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 7.3 or 11.1.
     “Settlement Date” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 7.3 or has become or is declared to be immediately due and payable pursuant to Section 11.1, as the context requires.
8. AFFIRMATIVE COVENANTS.
     The Company covenants that during the Issuance Period and thereafter so long as any of the Notes are outstanding:
     8.1 Compliance with Law. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, ERISA, the USA Patriot Act and Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other

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governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
     8.2 Insurance. The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated; provided, however, the Company may, to the extent permitted by law, provide for appropriate self-insurance with respect to workers’ compensation.
     8.3 Maintenance of Properties. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
     8.4 Payment of Taxes and Claims. The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, and to pay and discharge all amounts payable for work, labor and materials, in each case to the extent such taxes, assessments, charges, levies and amounts have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax, assessment, charge, levy or amount payable if (a) the amount, applicability or validity thereof is being actively contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (b) the nonpayment of all such taxes, assessments, charges, levies and amounts payable in the aggregate could not reasonably be expected to have a Material Adverse Effect.
     8.5 Corporate Existence, etc. Subject to Section 9.2, the Company will at all times preserve and keep in full force and effect its corporate existence and will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries, except to the extent that, with respect to Subsidiaries, in the good faith judgment of the Company, the failure to do so could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. The Company will at all times preserve and keep in full force and effect all certificates of convenience and necessity, rights and franchises, licenses, permits, operating rights and other authorization from any Governmental Authorities as are necessary for the ownership, operation and maintenance of its and its Subsidiaries’ respective businesses and properties, unless the termination of or failure to preserve and keep in full force and effect such

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right, certificate or franchise, license, permit, operating right or other authorization would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.
     8.6 Pari Passu. The Company covenants that all Debt owing under the Notes and under this Agreement will rank at least pari passu with all its other present and future unsecured Senior Debt.
9. NEGATIVE COVENANTS.
     The Company covenants that during the Issuance Period and thereafter so long as any of the Notes are outstanding:
     9.1 Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, enter into directly or indirectly any transaction or Material group of related transactions (including, without limitation, the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate, except in the ordinary course and pursuant to the reasonable requirements of the Company’s or such Subsidiary’s business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm’s-length transaction with a Person not an Affiliate.
     9.2 Merger, Consolidation, etc. The Company will not, and will not permit any Subsidiary to, directly or indirectly, consolidate with, or merge into, any other Person or permit any other Person to consolidate with, or merge into, it, or convey, transfer or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, except that
          (a) any Subsidiary may consolidate with, or merge into, the Company or any Wholly-Owned Subsidiary if the Company or such Wholly-Owned Subsidiary is the surviving corporation; and
          (b) the Company may consolidate with, or merge into, any other Person, or permit any other Person to consolidate with, or merge into, it, if
          (i) the successor formed by such consolidation or the survivor of such merger (the “Surviving Corporation”), is a solvent corporation organized under the laws of the United States of America or any State thereof (including the District of Columbia),
          (ii) if the Company is not the Surviving Corporation, (A) the Surviving Corporation shall have executed and delivered to each holder of the Notes its written assumption of the due and punctual performance and payment of each covenant and condition of the Company in this Agreement and the Notes, which assumption shall be in form and substance approved in writing by the Required Holders, and (B) the Company shall have caused to be delivered to each holder of the Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof, and

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          (iii) immediately after giving effect to such transaction,
          (A) no Default or Event of Default shall exist, and
          (B) the Surviving Corporation and its Subsidiaries are permitted to incur at least $1.00 of additional Priority Debt under the provisions of Section 9.5.
No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation, limited liability company or other entity that shall theretofore have become such in the manner prescribed in this Section 9.2 from its liability under this Agreement or the Notes.
     9.3 Consolidated Funded Debt to Consolidated Cash Flow. The Company will not permit the ratio of (i) Consolidated Funded Debt to (ii) Consolidated Cash Flow determined as of the end of the four fiscal quarter period then most recently ended, to exceed 3.00 to 1.00 at any time.
     9.4 Adjusted Consolidated Funded Debt to Consolidated Members’ and Patrons’ Equity. The Company shall not permit the ratio of Adjusted Consolidated Funded Debt to Consolidated Members’ and Patrons’ Equity to exceed .80 to 1.00 at any time.
     9.5 Priority Debt. The Company covenants that it will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, issue, incur or assume any Priority Debt if after giving effect thereto the aggregate outstanding principal amount of all Priority Debt would exceed 20% of Consolidated Net Worth at the time of such creation, issuance, incurrence or assumption.
     9.6 Working Capital. The Company covenants that it will not permit Working Capital at any time to be less than the minimum level of Working Capital (or comparable term) that the Company is then required to maintain under the Company’s Primary Bank Facility without causing a default or event of default thereunder. As used herein, the term “Working Capital” means Consolidated Current Assets minus Consolidated Current Liabilities.
     9.7 Liens. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly create, incur, assume or suffer to be created, incurred or assumed or to exist (upon the happening of a contingency or otherwise), any Lien on or with respect to any property of the Company or any such Subsidiary, whether now owned or held or hereafter acquired (unless provision is made whereby the Notes will be equally and ratably secured with any and all other obligations thereby secured as provided in the last paragraph of this Section 9.7), except:
          (a) Liens for taxes, assessments or other governmental charges or levies securing obligations not overdue, or if overdue, being actively contested in good faith by appropriate proceedings that will prevent the forfeiture or sale of any property, provided that adequate reserves are established in accordance on the books of the Company or a Subsidiary of the Company in accordance with GAAP;

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          (b) attachment, judgment and other similar Liens arising in connection with court proceedings, provided the execution or other enforcement of such Lien(s) is effectively stayed and the claims secured thereby are being actively contested in good faith in such manner that the property subject to such Lien(s) is not subject to forfeiture or sale, and further provided that adequate reserves are established on the books of the Company or a Subsidiary of the Company in accordance with GAAP;
          (c) Liens incidental to the normal conduct of the business of the Company or a Subsidiary of the Company or to the ownership by the Company or a Subsidiary of its property which were not incurred in connection with the borrowing of money or the obtaining of credit or advances and which do not in the aggregate materially detract from the value of the property of the Company or any Subsidiary of the Company for the purpose of such business or materially impair the use thereof in the operation of the business of the Company or any Subsidiary of the Company, including, without limitation, Liens
          (i) in connection with workers’ compensation, unemployment insurance, social security and other like laws,
          (ii) to secure (or to obtain letters of credit that secure) the performance of tenders, statutory obligations, surety and performance bonds (of a type other than set forth in Section 9.7(b)), bids, leases (other than Capital Leases), purchase, construction or sales contracts and other similar obligations, in each case not incurred or made in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property,
          (iii) to secure the claims or demands of materialmen, mechanics, carriers, warehousemen, vendors, repairmen, landlords, lessors and other like Persons, arising in the ordinary course of business, and
          (iv) in the nature of reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other similar title exceptions or encumbrances affecting real property;
provided that any amounts secured by such Liens are not yet due and payable.
          (d) Liens existing as of the date of this Agreement securing Debt and set forth on Schedule 4.16 hereto;
          (e) any Lien renewing, extending or refunding any Lien permitted by clause (d) of this Section 9.7, provided that (a) the principal amount of the Debt secured by such Lien immediately prior to such extension, renewal or refunding is not increased or the maturity thereof reduced, (b) such Lien is not extended to any other property, and (c) immediately after such extension, renewal or refunding no Default or Event of Default would exist;
          (f) Liens on property of the Company or any of its Subsidiaries securing Debt owing to the Company or to any of its Wholly-Owned Subsidiaries;

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          (g) any Lien created to secure all or any part of the purchase price or cost of construction, or to secure Debt incurred or assumed to pay all or a part of the purchase price or cost of construction, of any property (or any improvement thereon) acquired or constructed by the Company or a Subsidiary of the Company after the date of the Closing, provided that
          (i) no such Lien shall extend to or cover any property other than the property (or improvement thereon) being acquired or constructed or rights relating solely to such item or items of property (or improvement thereon),
          (ii) the principal amount of Debt secured by any such Lien shall at no time exceed an amount equal to the lesser of (A) the cost to the Company or such Subsidiary of the property (or improvement thereon) being acquired or constructed or (B) the Fair Market Value (as determined in good faith by the Company) of such property, determined at the time of such acquisition or at the time of substantial completion of such construction, and
          (iii) such Lien shall be created contemporaneously with, or within 180 days after, the acquisition or completion of construction of such property (or improvement thereon);
          (h) any Lien existing on property acquired by the Company or any Subsidiary of the Company at the time such property is so acquired (whether or not the Debt secured thereby is assumed by the Company or such Subsidiary) or any Lien existing on property of a Person immediately prior to the time such Person is merged into or consolidated with the Company or any Subsidiary of the Company, provided that
          (i) no such Lien shall have been created or assumed in contemplation of such acquisition of property or such consolidation or merger,
          (ii) such Lien shall extend only to the property acquired or the property of such Person merged into or consolidated with the Company or Subsidiary which was subject to such Lien as of the time of such consolidation or merger, and
          (iii) the principal amount of the Debt secured by any such Lien shall at no time exceed an amount equal to 100% of the Fair Market Value (as determined in good faith by the board of directors of the Company or such Subsidiary) of the property subject thereto at the time of the acquisition thereof or at the time of such merger or consolidation;
          (i) Liens to CoBank and other cooperatives with respect to equity held by the Company in such banks or other cooperatives securing Debt, provided that the aggregate Fair Market Value of such equity securing Debt shall not exceed $50,000,000 at any one time; and
          (j) other Liens not otherwise permitted under clause (a) through (i) of this Section 9.7 securing Debt, provided that the existence, creation, issuance, incurrence or assumption of such Debt is permitted under Sections 9.3, 9.4, 9.5 and 9.6 hereof.

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If, notwithstanding the prohibition contained herein, the Company shall, or shall permit any of its Subsidiaries to, directly or indirectly create, incur, assume or permit to exist any Lien, other than those Liens permitted by the provisions of paragraphs (a) through (j) of this Section 9.7 (but including any Liens in respect of the Primary Bank Facility whether or not permitted by paragraphs (a) — (j) of this Section 9.7), it will make or cause to be made effective provision whereby the Notes will be secured equally and ratably with any and all other obligations thereby secured, such security to be pursuant to agreements reasonably satisfactory to the Required Holders (including intercreditor arrangements providing for the pari passu treatment of the Notes and all such secured Debt) and, in any such case, the Notes shall have the benefit, to the fullest extent that, and with such priority as, the holders of the Notes may be entitled under applicable law, of an equitable Lien on such property. For the avoidance of doubt, the Company acknowledges that it will not, and will not permit any Subsidiary to, secure or grant any Liens in respect of the Primary Bank Facility, unless an equal and ratable Lien is granted in respect of the Notes.
     9.8 Sale of Assets.
          (a) Sale of Assets. The Company will not, and will not permit any of its Subsidiaries to, make any Transfer, provided that the foregoing restriction does not apply to a Transfer if:
          (i) the property that is the subject of such Transfer constitutes either (A) inventory held for sale, or (B) equipment, fixtures, supplies or materials no longer required, in the opinion of the Company or such Subsidiary, in the operation of the business of the Company or such Subsidiary or that is obsolete, and, in the case of any Transfer described in clause (A) or clause (B), such Transfer is in the ordinary course of business (an “Ordinary Course Transfer”);
          (ii) such Transfer is from a Subsidiary to the Company or a Wholly-Owned Subsidiary, so long as immediately before and immediately after the consummation of such transaction, and after giving effect thereto, no Default or Event of Default exists or would exist (each such Transfer, collectively with any Ordinary Course Transfers, “Excluded Transfers”); or
          (iii) such Transfer is a lease of the assets of the Company or any Subsidiary of the Company to any joint venture entity, of which the Company or any Subsidiary of the Company holds an ownership interest and shares in the earnings; provided that the terms of any such lease and the division of the joint venture’s earnings, when viewed as a whole, can be reasonably expected to generate the same or greater book earnings and cash flow for the Company or Subsidiary of the Company as would be generated absent such lease.
          (b) Debt Prepayment Applications and Reinvested Transfers.
          (i) Notwithstanding the provisions of Section 9.8(a), the Company or any Subsidiary may Transfer any of its properties at the Fair Market Value thereof; provided that

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          (A) either (1) such Transfer is not an Excluded Transfer and does not involve a Substantial Portion of the property of the Company and its Subsidiaries, or (2) the Net Proceeds Amount with respect to such Transfer (the “Designated Portion”) is either (x) applied to the acquisition by the Company or the Subsidiary making such Transfer of assets of a nature similar to, and of at least an equivalent value of, the assets which were the subject of such Transfer (a “Reinvested Transfer”), or (y) applied to a Debt Prepayment Application, in either case, within one year of the consummation of such Transfer, as specified in an Officer’s Certificate delivered to each holder of Notes prior to, or contemporaneously with, the consummation of such Transfer; and
          (B) immediately after giving effect to such Transfer (1) no Default or Event of Default shall exist and (2) the Company is able to incur at least $1.00 of additional Priority Debt under the provisions of Section 9.5 hereof.
          (ii) If, notwithstanding the certificate referred to in the foregoing clause 9.8(b)(i)(A), the Company shall fail to apply the entire amount of the Designated Portion as specified in such certificate within the period stated in Section 9.8(b)(i), an Event of Default shall be deemed to have existed as of the expiration of such period and shall be deemed to be continuing.
          (c) Certain Definitions. The following terms have the following meanings:
          (i) “Debt Prepayment Application” means, with respect to any Transfer by the Company or any Subsidiary, the application by the Company or such Subsidiary of cash in an amount equal to the Net Proceeds Amount with respect to such Transfer to pay the outstanding principal of all Funded Debt of the Company or such Subsidiary (other than Funded Debt owing to any of the Subsidiaries or any Affiliate and Funded Debt in respect of any revolving credit or similar facility providing the Company or such Subsidiary with the right to obtain loans or other extensions of credit from time to time, except to the extent that in connection with such payment of Funded Debt, the availability of loans or other extensions of credit under such credit facility is permanently reduced by an amount not less than the amount of such proceeds applied to the payment of such Funded Debt), provided that in the course of making such application the Company shall offer to prepay each outstanding Note in a principal amount that equals the Ratable Portion for such Note plus interest on all such Notes accrued to the date of such payment. The Company will give each holder of Notes written notice of such offered prepayment not less than ten (10) Business Days and not more than sixty (60) days prior to the date fixed for such prepayment, specifying such prepayment date, the aggregate principal amount of the Notes to be prepaid on such date and the Ratable Portion payable with respect to each such Note. A holder of Notes may accept or reject such offer to prepay by causing a notice of such acceptance or rejection to be delivered to the Company at least two (2) Business Days prior to the prepayment date specified by the Company in such offer. If a holder of Notes has not responded to such offer by a date which is at least two (2) Business Days prior to such specified prepayment date, such holder shall be deemed to have rejected such offer of prepayment. If any holder of a Note rejects or is deemed to have rejected such offer of prepayment, then, for purposes of

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determining the extent to which any Net Proceeds Amount has been applied to a Debt Prepayment Application, the Company nevertheless will be deemed to have paid Funded Debt in an amount equal to the Ratable Portion for such Note.
As used in this definition,
          (i) “Ratable Portion” means, for any Note, an amount equal to the product of
          (a) the Net Proceeds Amount (or any portion thereof) being so offered to be applied to the payment of Funded Debt, multiplied by
          (b) a fraction the numerator of which is the outstanding principal amount of such Note and the denominator of which is the aggregate outstanding principal amount of Funded Debt of the Company and its Subsidiaries, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP.
          (ii) “Disposition Value” means, at any time, with respect to any Transfer,
          (A) in the case of property that does not constitute capital stock of or other ownership interests in any Subsidiary of the Company, the book value thereof, valued at the time of such Transfer in good faith by the board of directors of the Company, and
          (B) in the case of property that constitutes capital stock of or other ownership interests in any Subsidiary of the Company, an amount equal to that percentage of the book value of the assets of the Subsidiary that issued such capital stock or other ownership interests as is equal to the percentage that the book value that such capital stock or other ownership interests represents of the book value of all of the outstanding capital stock of or other ownership interests in such Subsidiary (assuming, in making such calculations, that all securities convertible into such capital stock or other ownership interests are so converted and giving full effect to all transactions that would occur or be required in connection with such conversion), determined as of time of such Transfer in good faith by the board of directors of the Company.
          (iii) “Net Proceeds Amount” means, with respect to any Transfer of any property by any Person, an amount equal to the difference of
          (A) the aggregate amount of the consideration (valued at the Fair Market Value of such consideration at the time of the consummation of such Transfer) received by such Person in respect of such Transfer, minus

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          (B) all ordinary and reasonable out of pocket costs and expenses actually incurred by such Person in connection with such Transfer and any income taxes fairly attributable to such Transfer.
          (iv) “Substantial Portion” means, at any time, any property subject to a Transfer if the Disposition Value of such property, when added to the Disposition Value of all other property of the Company and its Subsidiaries that shall have been the subject of a Transfer (other than an Excluded Transfer and Transfers of such other property to the extent the Net Proceeds Amount arising therefrom has been applied to a Reinvested Transfer or a Debt Prepayment Application) during the then current fiscal year of the Company, exceeds an amount equal to 25% of Consolidated Total Assets as of the end of the fiscal year of the Company then most recently ended.
          (v) “Transfer” means, with respect to any Person, any transaction in which such Person sells, conveys, transfers or leases (as lessor) any of its property, including, without limitation, capital stock of or other ownership interests in, any other Person.
     9.9 Line of Business. The Company will not, and will not permit any Subsidiary to, engage to any Material extent in any business activity or operations other than operations or activities (a) in or reasonably related to the agriculture industry, (b) in the food industry or (c) in which the Company and its Subsidiaries are otherwise engaged on the date hereof as described in the Disclosure Documents or businesses reasonably related thereto or in furtherance thereof.
     9.10 Subsidiary Distribution Restrictions. The Company covenants that it will not, and will not permit any Subsidiary (other than NCRA) of the Company to, enter into, or be otherwise subject to, any contract or agreement (including its certificate of incorporation) which limits the amount of, or otherwise imposes restrictions on the payment of, Distributions by any Subsidiary of the Company.
     9.11 Subsidiary Preferred Stock. The Company covenants that it will not permit any Subsidiary of the Company to issue or permit to be outstanding any class of capital stock which has priority over any other class of capital stock of such Subsidiary as to Distributions or in liquidation.
     9.12 Issuance of Stock by Subsidiaries. The Company covenants that it will not permit any Subsidiary of the Company to issue, sell or otherwise dispose of any shares of any class of its stock (either directly or indirectly by the issuance of rights or options for, or securities convertible into, such shares) except to the Company or another Subsidiary of the Company.
     9.13 Terrorism Sanctions Regulations. The Company will not and will not permit any Subsidiary to (a) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti Terrorism Order or (b) knowingly engage in any dealings or transactions with any such Person.

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10. EVENTS OF DEFAULT.
     An “Event of Default” shall exist if any of the following conditions or events shall occur and be continuing:
          (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
          (b) the Company defaults in the payment of any interest on any Note for more than five (5) Business Days after the same becomes due and payable; or
          (c) the Company defaults in the performance of or compliance with any term contained in any of Section 6.1(d), Section 7.2 (other than any payment default occurring under Sections 10(a) and/or 10(b)) or Section 9 (other than Section 9.8) hereof; or
          (d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in clauses (a), (b) and (c) of this Section 10) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this clause (d) of Section 10); or
          (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or
          (f) (i) the Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Debt that is outstanding in an aggregate principal amount of at least $10,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Subsidiary is in default in the performance of or compliance with any agreement, term or condition contained in any instrument or agreement evidencing any Debt in an aggregate outstanding principal amount of at least $10,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Debt has become, or has been declared (or one or more Persons are entitled to declare such Debt to be) due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Debt to convert such Debt into equity interests), (x) the Company or any Subsidiary has become obligated to purchase or repay Debt before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $10,000,000, or (y) one or more Persons have the right to require the Company or any Subsidiary so to purchase or repay such Debt; or
          (g) the Company or any Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or

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otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or
          (h) a court or Governmental Authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or any such petition shall be filed against the Company or any of its Subsidiaries and such petition shall not be dismissed within 60 days; or
          (i) a final judgment or judgments for the payment of money aggregating in excess of $5,000,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 45 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 45 days after the expiration of such stay; or
          (j) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate “amount of unfunded benefit liabilities” (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed five percent (5%) of Consolidated Net Worth for any period of ten (10) consecutive calendar days or more, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. As used in this Section 10(j), the terms “employee benefit plan” and “employee welfare benefit plan” shall have the respective meanings assigned to such terms in section 3 of ERISA.

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11. REMEDIES ON DEFAULT, ETC.
     11.1 Acceleration.
          (a) If an Event of Default with respect to the Company described in clause (g) or (h) of Section 10 (other than an Event of Default described in subclause (i) of clause (g) or described in subclause (vi) of clause (g) by virtue of the fact that such clause encompasses subclause (i) of clause (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
          (b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 66-2/3% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.
          (c) If any Event of Default described in clause (a) or (b) of Section 10 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.
     Upon any Notes becoming due and payable under this Section 11.1, whether automatically or by declaration, (A) such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon (including, but not limited to, interest accrued thereon at the Default Rate) and (y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived, and (B) the Facility shall automatically be terminated. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
     11.2 Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 11.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
     11.3 Rescission. At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 11.1, the Required Holders may, by written notice to the Company, rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all

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interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 16, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 11.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
     11.4 No Waivers or Election of Remedies, Expenses, etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or any Note upon any holder of any Note shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 14, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 11, including, without limitation, reasonable attorneys’ fees, expenses and disbursements.
12. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
     12.1 Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes.
     12.2 Transfer and Exchange of Notes. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit A. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $500,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $500,000. Any transferee, by

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its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 5.2.
     12.3 Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
          (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, an original Purchaser or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
          (b) in the case of mutilation, upon surrender and cancellation thereof,
the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
13. PAYMENTS ON NOTES.
     The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on, and any Make-Whole Amount payable with respect to, such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit (not later than 11:00 a.m. Chicago local time, on the date due) to (i) the account or accounts of such Purchaser specified in the Confirmation of Acceptance with respect to such Note or (ii) such other account or accounts in the United States of America as such Purchaser may from time to time designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this Section 13 to any transferee of the Notes that is an Institutional Investor.
14. EXPENSES, ETC.
     14.1 Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of a special counsel and, if reasonably required, local or other counsel) incurred by the Purchasers and each other holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the

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insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save each Purchaser and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those, if any, retained by a Purchaser or other holder in connection with its purchase of the Notes).
     14.2 Survival. The obligations of the Company under this Section 14 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
     All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between each Purchaser and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.
16. AMENDMENT AND WAIVER.
     16.1 Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively) if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holders of the Notes except that, (a) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, to change or affect the rate or time of payment or method of computation of interest on or any Make-Whole Amount payable with respect to the Notes of such Series, (b) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of Sections 7, 10(a), 10(b), 11, 16 or 19 of this Agreement, (c) no amendment or waiver of any of the provisions of Sections 1, 2, 3, 4, 5 or 20 hereof, or any defined term (as it is used herein), will be effective as to any Purchaser unless consented to by such Purchaser in writing, (d) with the written consent of Hancock (and not without the written consent of Hancock) the provisions of Section 2 may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver), and (iv) with the written consent of Purchasers which shall have become obligated to purchase a majority of the Accepted Notes of any Series (and not without the written consent of such Purchasers), any of the provisions of Sections 2 and 3 may be

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amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes.
     16.2 Solicitation of Holders of Notes.
          (a) Solicitation. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 16 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes.
          (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any holder of Notes (or Notes of any Series, as applicable) as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted or other credit support is concurrently provided, on the same terms, ratably to each holder of Notes (or Notes of any Series, as applicable) then outstanding even if such holder did not consent to such waiver or amendment.
     16.3 Binding Effect, etc. Any amendment or waiver consented to as provided in this Section 16 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term “this Agreement” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
     16.4 Notes Held by Company, etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.

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17. NOTICES.
     All written communications provided for hereunder (other than communications provided for under Section 2) shall be sent by hand delivery or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, addressed as specified for such communications in the Purchaser Schedule attached to the applicable Confirmation of Acceptance or at such other address as any such Purchaser shall have specified to the Company in writing, (ii) if to any other holder of any Note, addressed to it at such address as it shall have specified in writing to the Company or, if any such holder shall not have so specified an address, then addressed to such holder in care of the last holder of such Note which shall have so specified an address to the Company, and (iii) if to the Company, addressed to it at its address set forth at the beginning hereof to the attention of John Schmitz, Executive Vice President and Chief Financial Officer, or such other address as the Company shall have provided to the holder of each Note in writing. Any communication pursuant to Section 2 shall be made by the method specified for such communication in Section 2, and shall be effective to create any rights or obligations under this Agreement only if, in the case of a facsimile communication, the communication is signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the facsimile terminal the number of which is listed for the party receiving the communication in the Information Schedule or at such other facsimile terminal as the party receiving the information shall have specified in writing to the party sending such information.
18. REPRODUCTION OF DOCUMENTS.
     This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, microfilm, microcard, miniature photographic, electronic or digital, or other similar process and such Purchaser may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 18 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
19. CONFIDENTIAL INFORMATION.
     For the purposes of this Section 19, “Confidential Information” means information delivered to Hancock or any Purchaser by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by Hancock or such Purchaser as being confidential information of the Company

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or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to Hancock or such Purchaser prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by Hancock or such Purchaser or any person acting on behalf of Hancock or such Purchaser, (c) otherwise becomes known to Hancock or such Purchaser other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to Hancock or such Purchaser under Section 6.1 that are otherwise publicly available. Hancock and each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by it in good faith to protect confidential information of third parties delivered to it, provided that Hancock or such Purchaser may deliver or disclose Confidential Information to (i) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (ii) its financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 19, (iii) any other holder of any Note, (iv) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 19), (v) any Person from which it offers to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 19), (vi) any Federal or state regulatory authority having jurisdiction over it, (vii) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about its investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to Hancock or such Purchaser, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which Hancock or such Purchaser is a party or (z) if an Event of Default has occurred and is continuing, to the extent Hancock or such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of its rights and remedies under such Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 19 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 19.
20. SUBSTITUTION OF PURCHASER.
     Each Purchaser shall have the right to substitute any one of its Affiliates as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both such Purchaser and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 5. Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 20), shall be deemed to refer to such Affiliate in lieu of such original Purchaser. In the event that such Affiliate is so substituted as a Purchaser hereunder and such Affiliate thereafter transfers to such original Purchaser all of the Notes then held by such Affiliate, upon receipt by the Company of

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notice of such transfer, any reference to such Affiliate as a “Purchaser” in this Agreement (other than in this Section 20), shall no longer be deemed to refer to such Affiliate, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original holder of the Notes under this Agreement.
21. MISCELLANEOUS.
     21.1 Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not.
     21.2 Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding (but without limiting the requirement in Section 7.3 that the notice of any optional prepayment specify a Business Day as the date fixed for such prepayment), any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any Notes is a date other than a Business Day, the payment otherwise due on such maturity date shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
     21.3 Accounting Terms. All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (i) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (ii) all financial statements shall be prepared in accordance with GAAP.
     21.4 Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
     21.5 Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.
     21.6 Severability of Obligations. The sales of Notes to the Purchasers are to be several sales, and the obligations of Hancock and the Purchasers under this Agreement are several obligations. No failure by Hancock or any Purchaser to perform its obligations under this Agreement shall relieve any other Purchaser or the Company of any of its obligations hereunder,

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and neither Hancock nor any Purchaser shall be responsible for the obligations of, or any action taken or omitted by, any other such Person hereunder.
     21.7 Binding Agreement. When this Agreement is executed and delivered by the Company and Hancock, it shall become a binding agreement between the Company and Hancock. This Agreement shall also inure to the benefit of each Purchaser which shall have executed and delivered a Confirmation of Acceptance, and each such Purchaser shall be bound by this Agreement to the extent provided in such Confirmation of Acceptance.
     21.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
     21.9 Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice of law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
     21.10 Jurisdiction and Process; Waiver of Jury Trial.
          (a) The Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, the Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
          (b) The Company consents to process being served by or on behalf of any holder of Notes in any suit, action or proceeding of the nature referred to in Section 21.10(a) by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, return receipt requested, to it at its address specified in Section 17 or at such other address of which such holder shall then have been notified pursuant to said Section. The Company agrees that such service upon receipt (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
          (c) Nothing in this Section 21.10 shall affect the right of any holder of a Note to serve process in any manner permitted by law, or limit any right that the holders of any of the Notes may have to bring proceedings against the Company in the courts of any appropriate

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jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
          (d) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
         
  CHS INC.
 
 
  By:      
    Name:   John Schmitz   
    Title:   Executive Vice President and Chief Financial Officer   
 
The foregoing Agreement is
hereby accepted as of the
date first above written.
John Hancock Life Insurance Company
         
     
By:        
  Title: Director     
       
 

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INFORMATION SCHEDULE
Authorized Officers for Company
     
John Johnson
  John Schmitz
President and Chief Executive Officer
  Executive Vice President and Chief Financial Officer
CHS Inc.
  CHS Inc.
5500 Cenex Drive
  5500 Cenex Drive
Inver Grove Heights, MB 55077
  Inver Grove Heights, MB 55077
Telephone: 651-355-3764
  Telephone: 651-355-3778
Facsimile: 651-355-6417
  Facsimile: 651-355-3743

 


 

SCHEDULE
OF
DEFINED TERMS
     As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
     “Acceptance” is defined in Section 2.5.
     “Acceptance Day” is defined in Section 2.5.
     “Acceptance Window” is defined in Section 2.5.
     “Accepted Note” is defined in Section 2.5.
     “Adjusted Consolidated Funded Debt” means Consolidated Funded Debt, plus the net present value of all rentals payable under operating leases of the Company and its Subsidiaries as discounted by a rate of 10% per annum.
     “Affiliate” means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any Person of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Interests, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.
     “Agreement, this” is defined in Section 16.3.
     “Anti-Terrorism Order” means Executive Order No. 13,224 of September 23, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49079 (2001), as amended.
     “Authorized Officer” shall mean in the case of the Company, its chief executive officer, its chief financial officer, its treasurer, any vice president of the Company designated as an “Authorized Officer” of the Company in the Information Schedule attached hereto or any vice president of the Company designated as an “Authorized Officer” of the Company for the purpose of this Agreement in an Officer’s Certificate executed by one of its Authorized Officers and delivered to Hancock. The Company may, by written notice to the other given by an Authorized Officer, de-designate any person as one of its Authorized Officers hereunder. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company, and whom Hancock in good faith believes to be an Authorized Officer of the Company, at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company.

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     “Available Facility Amount” is defined in Section 2.1.
     “Breakage Fee” is defined in Section 2.9.
     “Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York are required or authorized to be closed.
     “Capital Lease” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.
     “Capitalized Lease Obligation” means with respect to any Person and a Capital Lease, the amount of the obligation of such Person as the lessee under such Capital Lease (net of interest expenses) which would, in accordance with GAAP, appear as a liability on a balance sheet of such Person.
     “Change in Control” means any Person or Persons acting in concert, together with the Affiliates thereof, directly or indirectly controlling or owning (beneficially or otherwise) in the aggregate more than 50% of the aggregate voting power of the issued and outstanding Voting Interests of the Company.
     “Closing” is defined in Section 3.
     “Closing Day” is defined in Section 2.3.
     “CoBank” means Co-Bank, ACB, a United States Agricultural Credit Bank.
     “Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.
     “Company” is defined in the introductory paragraph hereof.
     “Confidential Information” is defined in Section 19.
     “Confirmation of Acceptance” is defined in Section 2.5.
     “Consolidated Cash Flow” means for any period the sum of (a) earnings before income taxes of the Company and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, plus (b) the amounts that have been deducted in the determination of such earnings before income taxes for such period for (i) interest expense for such period, (ii) depreciation for such period, (iii) amortization for such period and (iv) extraordinary non-cash losses for such period, minus (c) the amounts that have been included in the determination of such earnings before income taxes for such period for (i) one-time gains, (ii) extraordinary income, (iii) non-cash patronage income, and (iv) non-cash equity earnings in joint ventures.
     “Consolidated Current Assets” means total current assets of the Company and its Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles.

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     “Consolidated Current Liabilities” means total current liabilities of the Company and its Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles.
     “Consolidated Funded Debt” means as of any date of determination, the total of all Funded Debt of the Company and its Subsidiaries outstanding on such date, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP.
     “Consolidated Members’ and Patrons’ Equity” means, with respect to the Company and its Subsidiaries, the amount of equity accounts, plus (or minus in the case of a deficit) the amount of surplus and retained earnings accounts of the Company and its Subsidiaries, plus (or minus in the case of a deficit), to the extent not included in such equity accounts, the minority interests in Subsidiaries; provided that the total amount of intangible assets of the Company and its Subsidiaries (including, without limitation, unamortized debt discount and expense, deferred charges and goodwill) included therein shall not exceed $30,000,000 (and to the extent such intangible assets exceed $30,000,000, they will not be included in the calculation of Consolidated Members’ and Patrons’ Equity); all as determined on a consolidated basis in accordance with GAAP consistently applied.
     “Consolidated Net Worth” means as of any date, total equity of the Company and its Subsidiaries as of such date, determined on a consolidated basis in accordance with GAAP.
     “Consolidated Total Assets” means at any time, the total assets of the Company and its Subsidiaries that would be shown on a consolidated balance sheet of the Company and its Subsidiaries at such time prepared in accordance with GAAP.
     “Debt” means with respect to any Person
     (a) all obligations of such Person for borrowed money (including all obligations for borrowed money secured by any Lien with respect to any property owned by such Person whether or not such Person has assumed or otherwise become liable for such obligations),
     (b) all obligations of such Person for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to such property),
     (c) all Capitalized Lease Obligations of such Person and
     (d) all Guaranties of such Person with respect to liabilities of the type described in clause (a), (b) or (c) of any other Person,
provided that (i) Debt of a Subsidiary of the Company shall exclude such obligations and Guaranties of such Subsidiary if owed or guaranteed by such Subsidiary to the Company or a Wholly-Owned Subsidiary of the Company, (ii) Debt of the Company shall exclude such

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obligations and Guaranties if owed or guaranteed by the Company to a Wholly-Owned Subsidiary of the Company and (iii) Debt of the Company shall exclude any unfunded obligations which may exist now and in the future in the Company’s pension plans.
     “Debt Prepayment Application” is defined in Section 9.8.
     “Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
     “Default Rate” means that rate of interest that is the greater of (a) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes or (b) 2% over the rate of interest publicly announced by The Bank of New York in New York, New York as its “base” or “prime” rate, but in any event not greater than the highest rate permitted by applicable law.
     “Designated Portion” is defined in Section 9.8.
     “Disclosure Documents” is defined in Section 4.3.
     “Disposition Value” is defined in Section 9.8.
     “Distribution” means, in respect of any corporation, association or other business entity:
     (a) dividends or other distributions or payments on capital stock or other equity interests of such corporation, association or other business entity (except distributions in such stock or other equity interest); and
     (b) the redemption or acquisition of such stock or other equity interests or of warrants, rights or other options to purchase such stock or other equity interests (except when solely in exchange for such stock or other equity interests) unless made, contemporaneously, from the net proceeds of a sale of such stock or other equity interests.
     “Electronic Delivery” is defined in Section 6.1(a).
     “Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.
     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
     “ERISA Affiliate” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.
     “Event of Default” is defined in Section 10.

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     “Exchange Act” means the Securities Exchange Act of 1934, as amended.
     “Excluded Transfers” is defined in Section 9.8.
     “Facility” is defined in Section 2.1.
     “Fair Market Value” means, at any time and with respect to any property, the sale value of such property that would be realized in an arm’s-length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell, respectively).
     Form 10-Qis defined in Section 6.1(a).
     Form 10-Kis defined in Section 6.1(b).
     “Funded Debt” means with respect to any Person, all Debt which would, in accordance with GAAP, be required to be classified as a long term liability on the books of such Person, and shall include, without limitation (i) any Debt which by its terms or by the terms of any instrument or agreement relating thereto matures, or which is otherwise payable or unpaid, more than one year from the date of creation thereof, (ii) any Debt outstanding under a revolving credit or similar agreement providing for borrowings (and renewals and extensions thereof) which would, in accordance with GAAP, be required to be classified as a long term liability of such Person, (iii) any Capitalized Lease Obligation of such Person, and (iv) any Guaranty of such Person with respect to Funded Debt of another Person. Notwithstanding anything to the contrary contained herein, any Debt outstanding under a revolving credit or similar agreement providing for borrowings where no amount of such Debt is outstanding for a period of 30 consecutive days during each 12 month period (and which has not been refinanced with other Debt which does not constitute Funded Debt) will not be deemed to constitute Funded Debt.
     “GAAP” means generally accepted accounting principles as in effect from time to time in the United States of America.
     “Governmental Authority” means
     (a) the government of
     (i) the United States of America or any State or other political subdivision thereof, or
     (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or
     (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government.
     “Guaranty” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person

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guaranteeing or in effect guaranteeing any Debt, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:
     (a) to purchase such Debt or obligation or any property constituting security therefor;
     (b) to advance or supply funds (i) for the purchase or payment of such Debt or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such Debt or obligation;
     (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such Debt or obligation of the ability of any other Person to make payment of the Debt or obligation; or
     (d) otherwise to assure the owner of such Debt or obligation against loss in respect thereof.
     In any computation of the Debt or other liabilities of the obligor under any Guaranty, the Debt or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.
     “Hancock” shall have the meaning specified in the introductory paragraph hereof.
     “Hancock Affiliate” shall mean (i) any corporation or other entity controlling, controlled by, or under common control with, Hancock and (ii) any managed account or investment fund which is managed by Hancock or a Hancock Affiliate described in clause (i) of this definition. For purposes of this definition the terms “control”, “controlling” and “controlled” shall mean the ownership, directly or through subsidiaries, of a majority of a corporation’s or other Person’s voting stock or equivalent voting securities or interests.
     “Hazardous Material” means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls).
     “Hedge Treasury Note(s)” means, with respect to any Accepted Note, the United States Treasury Note or Notes whose duration (as determined by Hancock) most closely matches the duration of such Accepted Note.
     “holder” means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 12.1.
     “Hostile Tender Offer” means, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in

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any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date of the Closing.
     INHAM Exemption” is defined in Section 5.2(e).
     “Institutional Investor” means (a) any original purchaser of a Note, (b) any holder of a Note holding more than 5% of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form.
     “Issuance Period” is defined in Section 2.2.
     “Lien” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).
     “Make-Whole Amount” is defined in Section 7.7.
     “Material” means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole.
     “Material Adverse Effect” means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes.
     “Multiemployer Plan” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
     “NAIC” means the National Association of Insurance Commissioners or any successor thereto.
     “NAIC Annual Statement” is defined in Section 5.2(a).
     “NCRA” means National Cooperative Refinery Association, a Kansas cooperative association.
     “Net Proceeds Amount” is defined in Section 9.8.

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     “Notes” is defined in Section 1.
     “Officer’s Certificate” means a certificate of a Responsible Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.
     “Ordinary Course Transfer” is defined in Section 9.8.
     “PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.
     “Person” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof.
     “Plan” means an “employee benefit plan” (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.
     “Primary Bank Facility” means an agreement, guaranty or other instrument (or agreements, guaranties or other instruments to the extent such agreements, guaranties or other instruments were entered into in concert in one or a series of transactions): (i) entered into by the Company in connection with the provision of recourse credit in the form of revolving loans, term loans, letters of credit or other extensions of credit commonly provided under syndicated bank credit agreements to the Company or any of its Subsidiaries and (ii) under which the aggregate amount of credit extended (whether in the form of loans or commitments) to the Company or for which the Company is obligated as a guarantor or otherwise is $150,000,000 or more.
     “Priority Debt” means, at any time, without duplication, the sum of
     (a) all then outstanding Debt of the Company or any Subsidiary secured by any Lien on any property of the Company or any Subsidiary (other than Debt secured only by Liens permitted under paragraphs (a) through (i) of Section 9.7), plus
     (b) all Funded Debt of Subsidiaries of the Company.
     “property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
     “Proposed Prepayment Date” is defined in Section 7.2(b)(i).
     “PTE” is defined in Section 5.2(a).
     “Purchaser” means Hancock or any Hancock Affiliate purchasing any Accepted Note.
     “QPAM Exemption” means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor.

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     “Qualified Institutional Buyer” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
     “Ratable Portion” is defined in Section 9.8.
     “Reinvested Transfer” is defined in Section 9.8.
     “Request for Purchase” is defined in Section 2.3.
     “Required Holders” means, at any time, the holders of a majority in aggregate principal amount of the Notes or any Series of Notes, as the context may require, at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates) and, if no Notes are outstanding, means Hancock.
     “Required Principal Payment” is defined in Section 7.2(a).
     “Responsible Officer” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this Agreement.
     “SEC” shall mean the Securities and Exchange Commission of the United States, or any successor thereto.
     “Securities Act” means the Securities Act of 1933, as amended from time to time.
     “Senior Debt” means the Notes and any Debt of the Company or its Subsidiaries that by its terms is not in any manner subordinated in right of payment to any other unsecured Debt of the Company or any Subsidiary.
     “Senior Financial Officer” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company.
     “Source” is defined in Section 5.2.
     “Subsidiary” shall mean, with respect to any Person, any other Person greater than 50% of the total combined voting power of all classes of Voting Interests of which shall, at the time as of which any determination is being made, be owned by such first Person either directly or through other Subsidiaries of such first Person.
     “Substantial Portion” is defined in Section 9.8.
     “Surviving Corporation” is defined in Section 9.2.
     “SVO” means the Securities Valuation Office of the NAIC or any successor to such Office.
     “Transfer” is defined in Section 9.8.

9


 

     “USA Patriot Act” means United States Public Law 107-56, United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001.
     “Voting Interests” shall mean (a) with respect to any stock corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation or persons performing similar functions (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency), and (b) with respect to the Company or any other entity, membership or other ownership interests in the Company or such other entity whose holders are entitled under ordinary circumstances to vote for the election of the directors of the Company or such other entity or persons performing similar functions (irrespective of whether at the time membership or other ownership interests of any other class or classes shall have or might have voting power by reasoning of the happening of any contingency).
     “Wholly-Owned Subsidiary” means, at any time, any Subsidiary one hundred percent (100%) of all of the equity interests (except directors’ qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.

10


 

     THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
EXHIBIT A
[FORM OF PRIVATE SHELF NOTE]
CHS INC.
SENIOR UNSECURED NOTE
     
Series __________
  [Date]          
No. ____________
   
ORIGINAL PRINCIPAL AMOUNT:
   
ORIGINAL ISSUE DATE:
   
INTEREST RATE:
   
FINAL MATURITY DATE:
   
     FOR VALUE RECEIVED, the undersigned, CHS INC. (the “Company”), a nonstock agricultural cooperative corporation organized and existing under the laws of the State of Minnesota, hereby promises to pay to [____________], or registered assigns, the principal sum of ____________DOLLARS on the Final Maturity Date specified above, payable on the Principal Prepayment Dates and in the amounts specified on the Schedule attached hereto, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof, with interest (computed on the basis of a 360-day year, 30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified on the Schedule attached hereto and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest, and any overdue payment of any Make-Whole Amount, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand) at a rate per annum from time to time equal to the greater of (i) *% or (ii) 2% over the rate of interest publicly announced by The Bank of New York from time to time in New York City as its base rate, but in any event such rate under clauses (i) or (ii) not to be greater than the highest rate permitted by applicable law.
 
*   2% over the stated coupon

A-1


 

     Payments of principal of, interest on and any Make-Whole Amount payable with respect to this Note are to be made at such place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America.
     This Note is one of the senior unsecured notes (herein called the “Notes”) issued pursuant to a Private Shelf Agreement, dated as of August ___, 2008 (the “Agreement”), between the Company, on the one hand, and the other Persons named as parties thereto, on the other, and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement.
     This Note is a registered Note and, as provided in and subject to the terms of the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder’s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary.
     In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement.
     This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the internal laws of the State of New York without giving effect to principles of conflicts of laws.
         
  CHS INC.
 
 
 
 
  By:      
       
  Its:  
 
         
     
  By:      
       
  Its:  
 

A-2


 

EXHIBIT B
[FORM OF REQUEST FOR PURCHASE]
CHS INC.
     Reference is made to the Private Shelf Agreement (the “Agreement”), dated as of August ___, 2008, between CHS Inc. (the “Company”), on the one hand, and John Hancock Life Insurance Company and certain other Persons that may become bound by certain provisions thereof, on the other hand. All terms herein that are defined in the Agreement have the respective meanings specified in the Agreement. Pursuant to Section 2.3 of the Agreement, the Company hereby makes the following Request for Purchase:
1.   Aggregate principal amount of the Notes covered hereby (the “Notes”) $
2.   Individual specifications of the Notes:
         
        Principal
    Final   Prepayment
Principal Amount   Maturity Date   Dates and Amounts
*
  **   ***
3.   Use of proceeds of the Notes:
4.   Proposed day for the closing of the purchase and sale of the Notes:
5.   The aggregate purchase price of the Notes is to be transferred to:
         
Name, Address and ABA Routing       Name & Telephone
Number of Bank   Number of Account   No. of Bank Officer
 
       
6.   The Company certifies that (a) the representations and warranties contained in Section 4 of the Agreement are true on and as of the date of this Request for Purchase and (b) there exists on the date of this Request for Purchase no Event of Default or Default.
7.   The Issuance Fee to be paid pursuant to the Agreement will be paid by the Company on the closing date.
         
      CHS INC.
Dated:
    By:    
 
       
 
      Authorized Officer
 
*   Minimum of $5,000,000
 
**   Not later than August 31, 2018.
 
***   Average life of not more than eight years.

B-1


 

EXHIBIT C
[FORM OF CONFIRMATION OF ACCEPTANCE]
CHS INC.
     Reference is made to the Private Shelf Agreement (the “Agreement”), dated as of August ___, 2008, between CHS Inc. (the “Company”), on the one hand, and John Hancock Life Insurance Company and certain other Persons that may become bound by certain provisions thereof, on the other hand. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement.
     Each Person named below as a Purchaser of Notes hereby confirms the representations as to such Notes set forth in Section 5 of the Agreement, and agrees to be bound by the provisions of Sections 2.5 and 2.7 of the Agreement.
     Pursuant to Section 2.5 of the Agreement, an Acceptance with respect to the following Accepted Shelf Notes is hereby confirmed:
I.   Accepted Shelf Notes: Aggregate principal amount $___.
         
(A)
  (a)   Name of Purchaser:
 
  (b)   Principal amount:
 
  (c)   Final maturity date:
 
  (d)   Principal prepayment dates and amounts:
 
  (e)   Interest rate:
 
  (f)   Interest payment period: quarterly
 
  (g)   Payment and notice instructions: As set forth on attached Purchaser Schedule.
 
(B)
  (a)   Name of Purchaser:
 
  (b)   Principal amount:
 
  (c)   Final maturity date:
 
  (d)   Principal prepayment dates and amounts:
 
  (e)   Interest rate:
 
  (f)   Interest payment period: quarterly
 
  (g)   Payment and notice instructions: As set forth on attached Purchaser Schedule.
[(C), (D) . . . same information as above.]
II.   Closing Day:


 

           
Dated:
    CHS INC.
 
 
 
    By:    
 
       
       
 
    Title:    
 
         
 
         
 
         
  JOHN HANCOCK LIFE INSURANCE COMPANY
 
         
  By:    
       
  Title:      
 
 
         
  [HANCOCK AFFILIATE]
 
  By:    
       
  Title:      
 

 

EX-21.1 7 c47494exv21w1.htm EX-21.1 EX-21.1
Exhibit 21.1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
     
    STATE OF
    INCORPORATION/
SUBSIDIARY   ORGANIZATION
 
   
ADM/CHS, LLC
  Delaware
Ag States Agency, LLC
  Minnesota
Impact Risk Solutions, LLC, a subsidiary of Ag States Agency, LLC
  Minnesota
Ag States Agency of Montana, Inc.
  Montana
Agronomy Company of Canada, Ltd.
  Nova Scotia
Land O’Lakes Canada Ltd., a sub of Agronomy Company of Canada, Ltd.
  Nova Scotia
Allied Agronomy, LLC
  North Dakota
Battle Creek/CHS, LLC
  Delaware
Cenex Ag, Inc.
  Delaware
Cenex Petroleum, Inc.
  Minnesota
Cenex Pipeline, LLC
  Minnesota
Central Montana Propane, LLC
  Montana
Central Plains Ag Services LLC
  Minnesota
CHS Canada, Inc.
  Ontario, Canada
CHS do Brasil Ltda.
  Brazil
CHS Energy Canada, Inc.
  Alberta
CHS Holdings, Inc.
  Minnesota
CHS Hong Kong, LLC
  Minnesota
CHS Inc. de Mexico
  Mexico
CHSIH SA
  Zug, Switzerland
CHS Europe SA, a subsidiary of CHSIH SA
  Zug, Switzerland
CHS Ukraine, LLC, a subsidiary of CHS Europe SA and CHS Inc.
  Kyiv, Ukraine
CHS Vostok, LLC, a subsidiary of CHS Europe SA
  Russia
CHS Hong Kong Limited, a subsidiary of CHSIH SA
  Hong Kong
MCIC AG, a subsidiary of CHSIH SA
  Zug, Switzerland
Multigrain AG, a subsidiary of CHSIH SA and MCIC AG
  Zug, Switzerland
Xingu AG, a subsidiary of Multigrain AG
  Zug, Switzerland
CHS-Blackfoot, Inc.
  Idaho
CHS-Browns Valley
  Minnesota
CHS-Brush, Inc.
  Colorado
CHS China, LLC
  Minnesota
CHS-Chokio
  Minnesota
CHS-Clinton/Wilmot
  Minnesota
CHS-Corsica
  South Dakota
CHS-Dickinson
  North Dakota
CHS-Drayton
  North Dakota
CHS-Fairdale
  North Dakota
CHS-Farmco, Inc.
  North Dakota

 


 

     
    STATE OF
    INCORPORATION/
SUBSIDIARY   ORGANIZATION
 
   
CHS-FUCOC
  Minnesota
CHS-Hoffman
  Minnesota
CHS-M&M, Inc.
  Colorado
CHS-Mitchell
  South Dakota
CHS-Moscow, Inc.
  Idaho
CHS-Napoleon
  North Dakota
CHS-Starbuck
  Minnesota
CHS-SWMN
  Minnesota
CHS-Walla Walla, Inc.
  Kansas
CHS-Wallace County, Inc.
  Kansas
Circle Land Management, Inc.
  Minnesota
Classic Farms, LLC
  South Dakota
Cofina Financial, LLC
  Minnesota
Cofina Financial, Inc.
  Delaware
Cofina Funding, LLC
  Delaware
Colorado Retail Ventures Services, LLC
  Colorado
Cooperative Agronomy Services
  South Dakota
Cornerstone Ag, LLC
  Delaware
Country Hedging, Inc.
  Delaware
Dakota Agronomy Partners, LLC
  North Dakota
Dakota Quality Grain Cooperative LLC
  Minnesota
Energy Partners, LLC
  Montana
Erskine Grain Terminal, LLC
  Minnesota
Fin-Ag, Inc.
  South Dakota
Front Range Pipeline, LLC
  Minnesota
Genetic Marketing Group, LLC
  Washington
Green Bay Terminal Corporation
  Wisconsin
Harvest States Cooperatives Europe B.V.
  Netherlands
Horizon Milling, LLC
  Delaware
Horizon Milling L.P.
  Delaware
Horizon Milling G.P.
  Ontario, Canada
Imperial Valley Terminal, LLC
  Illinois
Loomis Crop Nutrients, LLC
  Nebraska
Montevideo Grain, LLC
  Delaware
Mountain Country, LLC
  Idaho
Mountain View of Montana, LLC
  Delaware
National Cooperative Refinery Association (NCRA)
  Kansas
Clear Creek Transportation, LLC, a subsidiary of NCRA
  Kansas
Jayhawk Pipeline, LLC, a subsidiary of NCRA
  Kansas
Kaw Pipe Line Company, a subsidiary of NCRA
  Delaware
McPherson Agricultural Products, LLC, a subsidiary of NCRA
  Kansas
Osage Pipe Line Company, a subsidiary of NCRA
  Delaware
Norick Risk Funding Concepts, LLC
  Minnesota
Northwest Iowa Agronomy, LLC
  Iowa
Partnered Beverages, LLC
  Minnesota
Beverage Franchise, LLC, a subsidiary of Partnered Beverages, LLC
  Montana

 


 

     
    STATE OF
    INCORPORATION/
SUBSIDIARY   ORGANIZATION
 
   
PGG/HSC Feed Company, LLC
  Oregon
Provista Renewable Fuels Marketing, LLC
  Kansas
Quality Farm and Ranch Center, LLC
  Colorado
Red Rock Cooperative Association
  South Dakota
Russell Consulting Group, LLC
  Nebraska
Safety Resource Alliance, LLC
  Kansas
Sparta Foods, Inc.
  Minnesota
Southwest Crop Nutrients, LLC
  Kansas
St. Paul Maritime Corporation
  Minnesota
TEMCO, LLC
  Delaware
Tillamook Valley Nutrition, LLC
  Oregon
United Country Brands LLC
  Delaware
Agriliance LLC, a subsidiary of United Country Brands LLC
  Delaware
United Harvest, LLC
  Delaware
Ventura Foods, LLC
  Delaware
Western Feed, LLC
  Minnesota
Whitman Terminal Association, LLC
  Delaware
WHYHAP Properties, LLC
  Colorado

 

EX-23.1 8 c47494exv23w1.htm EX-23.1 EX-23.1
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-154819 and 333-129464) of CHS Inc. and subsidiaries of our reports dated November 4, 2008 relating to the consolidated financial statements and financial statement schedule, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 19, 2008

EX-24.1 9 c47494exv24w1.htm EX-24.1 EX-24.1
Exhibit 24.1
POWER OF ATTORNEY
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John D. Johnson and John Schmitz, and each of them, his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign a Form 10-K under the Securities Act of 1933, as amended, of CHS Inc. and any and all amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or the substitutes for such attorneys-in-fact and agents, may lawfully do or cause to be done by virtue hereof.
         
Name   Title   Date
 
       
/s/ John D. Johnson
 
John D. Johnson
  Chief Executive Officer 
(principal executive officer)
  October 9, 2008
 
       
/s/ John Schmitz
 
John Schmitz
  Executive Vice President & 
Chief Financial Officer
(principal financial officer)
  October 9, 2008
 
       
/s/ Michael Toelle
 
Michael Toelle
  Chairman of the Board    October 8, 2008
 
       
/s/ Bruce Anderson
 
Bruce Anderson
  Director    October 8, 2008
 
       
/s/ Donald Anthony
 
Donald Anthony
  Director    October 8, 2008
 
       
/s/ Robert Bass
 
Robert Bass
  Director    October 8, 2008
 
       
/s/Dennis Carlson
 
Dennis Carlson
  Director    October 8, 2008
 
       
/s/ Curt Eischens
 
Curt Eischens
  Director    October 8, 2008
 
       
/s/ Steve Fritel
 
Steve Fritel
  Director    October 8, 2008


 

         
Name   Title   Date
 
       
/s/ Robert Grabarski
 
Robert Grabarski
  Director    October 8, 2008
 
       
/s/ Jerry Hasnedl
 
Jerry Hasnedl
  Director    October 8, 2008
 
       
/s/ David Kayser
 
David Kayser
  Director    October 8, 2008
 
       
/s/ James Kile
 
James Kile
  Director    October 8, 2008
 
       
/s/ Randy Knecht
 
Randy Knecht
  Director    October 8, 2008
 
       
/s/ Michael Mulcahey
 
Michael Mulcahey
  Director    October 8, 2008
 
       
/s/ Richard Owen
 
Richard Owen
  Director    October 8, 2008
 
       
/s/ Steve Riegel
 
Steve Riegel
  Director    October 8, 2008
 
       
/s/ Daniel Schurr
 
Daniel Schurr
  Director    October 8, 2008
 
       
/s/ Duane Stenzel
 
Duane Stenzel
  Director    October 8, 2008

2

EX-31.1 10 c47494exv31w1.htm EX-31.1 EX-31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
Exhibit 31.1
 
I, John D. Johnson, certify that:
 
  1.  I have reviewed this Annual Report on Form 10-K of CHS Inc.;
 
  2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
  a.  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
  5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
  a.  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/  John D. Johnson
John D. Johnson
President and Chief Executive Officer
 
Date: November 21, 2008

EX-31.2 11 c47494exv31w2.htm EX-31.2 EX-31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
 
Exhibit 31.2
 
I, John Schmitz, certify that:
 
  1.  I have reviewed this Annual Report on Form 10-K of CHS Inc.;
 
  2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.  The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
  a.  designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.  designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.  evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.  disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
  5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
  a.  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/  John Schmitz
John Schmitz
Executive Vice President and
Chief Financial Officer
 
Date: November 21, 2008

EX-32.1 12 c47494exv32w1.htm EX-32.1 EX-32.1
Exhibit 32.1
 
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
 
In connection with the Annual Report of CHS Inc. (the “Company”) on Form 10-K for the fiscal year ended August 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John D. Johnson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
  (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/  John D. Johnson
John D. Johnson
President and Chief Executive Officer
 
November 21, 2008

EX-32.2 13 c47494exv32w2.htm EX-32.2 EX-32.2
Exhibit 32.2
 
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
 
In connection with the Annual Report of CHS Inc. (the “Company”) on Form 10-K for the fiscal year ended August 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Schmitz, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
  (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/s/  John Schmitz
John Schmitz
Executive Vice President and Chief Financial Officer
 
November 21, 2008

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