e10vk
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, 2006
|
|
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
|
|
(651) 355-6000
|
Inver Grove Heights, Minnesota
55077
|
|
|
(Address of principal executive
office,
|
|
(Registrants Telephone
number,
|
including zip code)
|
|
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
(Title of Class)
Indicate by check mark whether the Registrant is a well-known
seasoned issuer (as defined in Rule 405 of the Exchange
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 registrants 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, or a non-accelerated
filer (as defined in
Rule 12b-2
of the Exchange Act).
Large accelerated
filer o
Accelerated
filer o Non-accelerated
filer þ
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 registrants most recently
completed second fiscal quarter:
The registrants 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
registrants classes of common stock, as of the latest
practicable date: The registrant has no common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
PART I.
THE
COMPANY
CHS Inc. (referred to herein as CHS, we
or us) is one of the nations leading
integrated agricultural companies. As a cooperative, we are
owned by farmers and ranchers and their local 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, which is
listed on the NASDAQ National Market under the symbol CHSCP. On
August 31, 2006, we had 5,864,238 shares of preferred
stock outstanding. We buy commodities from and provide products
and services to our members and other 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, 2006, our total revenues were $14.4 billion
and net income was $490.3 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. Our
Processing segment derives its revenues from the sales of
soybean meal and soybean refined oil, and records equity income
from two wheat milling joint ventures, a vegetable oil-based
food manufacturing and distribution joint venture, and an
ethanol manufacturing company. We include other business
operations in Corporate and Other because of the nature of their
products and services, as well as the relative revenue size of
those businesses. These businesses primarily include our
insurance, hedging and other service activities related to crop
production.
In May 2005, we sold the majority of our Mexican foods business
for proceeds of $38.3 million resulting in a loss on
disposition of $6.2 million. During the year ended
August 31, 2006, we sold all of the remaining assets for
proceeds of $4.2 million and a gain of $1.6 million.
The operating results of the Mexican foods business are reported
as discontinued operations for all periods presented.
Only producers of agricultural products and associations of
producers of agricultural products may be our members. Our
earnings derived from cooperative business are allocated to
patrons based on the volume of business they do with us. We
allocate these earnings to our members in the form of patronage
refunds (which are also called patronage dividends) in cash and
patrons 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 we qualify for patronage refunds from them.
Our origins date back to the early 1930s with the founding of
the predecessor companies of Cenex, Inc. and Harvest States
Cooperatives. CHS Inc. emerged as the result of the merger of
the two entities in 1998, and is headquartered in Inver Grove
Heights, Minnesota.
Our international sales information and segment information in
Notes 2 and 12 to the consolidated financial statements are
incorporated by reference into the following business segment
descriptions.
1
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 nations largest cooperative energy company
based on revenues and identifiable assets, with operations that
include petroleum refining and pipelines; the supply, marketing
(including ethanol and biodiesel) and distribution of refined
fuels (gasoline, diesel and other energy products); the
blending, sale and distribution of lubricants; and the wholesale
supply of propane. Our Energy segment processes crude oil into
refined petroleum products at refineries in Laurel, Montana
(wholly-owned) and McPherson, Kansas (an entity in which we have
an approximate 74.5% ownership interest) and sells those
products under the Cenex brand to member cooperatives and others
through a network of approximately 1,600 independent retail
sites, including approximately 850 that operate Cenex/Ampride
convenience stores.
Operations
Laurel Refinery. Our Laurel, Montana refinery
processes medium and high sulfur crude oil into refined
petroleum products that primarily include gasoline, diesel and
asphalt. Our Laurel refinery sources approximately 90% 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 39% gasoline, 31% diesel and other distillates,
and 30% asphalt and other residual products. During fiscal 2005,
the Board of Directors approved the installation of a coker unit
at Laurel, along with other refinery improvements, which will
allow us to extract a greater volume of high value gasoline and
diesel fuel from a barrel of crude oil and less relatively low
value asphalt. Total cost for this project is expected to be
approximately $325.0 million, of which $62.8 million
has been spent through August 31, 2006, with completion
planned during fiscal 2008. Refined fuels produced at Laurel,
Montana are available via the Yellowstone Pipeline to western
Montana terminals and to Spokane and Moses Lake, Washington,
south via common carrier pipelines to Wyoming terminals and
Denver, Colorado, and east via our wholly-owned Cenex Pipeline,
LLC to Glendive, Montana, and Minot and Fargo, North Dakota. Our
Board of Directors has approved a $30 million capital
expenditure to construct three product terminals tied into the
Yellowstone Pipeline that include rail capability. This
investment is being undertaken to preserve our long-term ability
to participate in western 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 low and medium sulfur crude oil
into gasoline, diesel and other distillates, propane and other
products. McPherson sources approximately 90% of its crude oil
from Kansas, Oklahoma and Texas through NCRA-owned and common
carrier pipelines.
The McPherson refinery processes approximately
85,000 barrels of crude oil per day to produce refined
products that consist of approximately 55% gasoline, 41% diesel
and other distillates, and 4% propane and other products.
Approximately 32% of the refined fuels are loaded into trucks at
the McPherson refinery and shipped via NCRAs 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. We
acquired a 50% ownership in an ethanol and biodiesel marketing
and distribution company, Provista Renewable Fuels Marketing,
LLC, (Provista) formally known as United Bio Energy Fuels, LLC.
U.S. BioEnegy Corporation (US BioEnergy), of which we
own approximately
2
25.6%, is the other 50% owner of Provista. Provista contracts
with ethanol and biodiesel production plants, including US
BioEnergy, to market and distribute their finished products.
From the April 1, 2006, acquisition date through
August 31, 2006, volume totaled 109.5 million gallons
of ethanol. Provista is consolidated within our financial
statements, and we guarantee Provistas $20.0 million
revolving credit facility. We are the operating manager of
Provista.
Other Energy Operations. We own and operate a
propane terminal, four asphalt terminals, five refined product
terminals and three lubricants blending and packaging
facilities. We also own and lease a fleet of liquid and pressure
trailers and tractors, which are used to transport refined
fuels, propane, anhydrous ammonia and other products.
Products
and Services
Our Energy segment produces and sells (primarily wholesale)
gasoline, diesel, propane, asphalt, lubricants and other related
products and provides transportation services. We obtain the
petroleum products that we sell from our Laurel and McPherson
refineries, and from third parties.
Sales and
Marketing; Customers
We make approximately 70% 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 1.4 billion gallons
of diesel fuel in fiscal year 2006. We also blend, package and
wholesale auto and farm machinery lubricants to both members and
non-members. In our fiscal year 2006, our lubricants operations
sold approximately 20.2 million gallons of lube oil. We are
one of the nations largest propane wholesalers based on
revenues. In our fiscal year 2006, our propane operations sold
approximately 716 million gallons of propane. Most of the
propane sold in rural areas is for heating and agricultural
usage. Annual sales volumes of propane vary greatly depending on
weather patterns and crop conditions.
Industry;
Competition
Regulation. Governmental regulations and
policies, particularly in the areas of taxation, energy and the
environment, have a significant impact on our Energy segment.
Our Energy segments operations are subject to laws and
related regulations and rules designed to protect the
environment that are administered by the Environmental
Protection Agency, the Department of Transportation and similar
government agencies. These laws, regulations and rules govern
the discharge of materials to the environment, air and water;
reporting storage of hazardous wastes; the transportation,
handling and disposition of wastes; and the labeling of
pesticides and similar substances. Failure to comply with these
laws, regulations and rules could subject us (and, in the case
of the McPherson refinery, NCRA) to administrative penalties,
injunctive relief, civil remedies and possible recalls of
products. We believe that we and NCRA are in compliance with
these laws, regulations and rules in all material respects and
do not expect continued compliance to have a material effect on
capital expenditures, earnings or competitive position of either
us or NCRA.
Like many other refineries, our Energy segments refineries
recently focused their capital spending on reducing pollution
and at the same time increasing production to pay for those
expenditures. In particular, our refineries have completed work
to comply with the Environmental Protection Agency low sulfur
fuel regulations required by 2006, which are intended to lower
the sulfur content of gasoline and diesel. We incurred capital
expenditures from fiscal year 2003 through 2006 related to this
compliance of $88.1 million for our Laurel, Montana
refinery and $328.7 million for NCRAs McPherson,
Kansas refinery.
The petroleum business is highly cyclical. Demand for crude oil
and energy products is driven by the condition of local and
worldwide economies, local and regional weather patterns and
taxation relative to other energy sources which can
significantly affect the price of refined fuels 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-
3
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.
The petroleum refining and wholesale fuels business is very
competitive. Among our competitors are some of the worlds
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.
Summary
Operating Results
Summary operating results and identifiable assets for our Energy
segment for the fiscal years ended August 31, 2006, 2005
and 2004 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
7,414,361
|
|
|
$
|
5,794,266
|
|
|
$
|
4,038,561
|
|
Cost of goods sold
|
|
|
6,834,676
|
|
|
|
5,487,813
|
|
|
|
3,780,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
579,685
|
|
|
|
306,453
|
|
|
|
257,835
|
|
Marketing, general and
administrative
|
|
|
82,867
|
|
|
|
69,951
|
|
|
|
72,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
496,818
|
|
|
|
236,502
|
|
|
|
184,959
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(862
|
)
|
|
|
(14,666
|
)
|
Interest, net
|
|
|
6,534
|
|
|
|
8,918
|
|
|
|
12,090
|
|
Equity income from investments
|
|
|
(3,840
|
)
|
|
|
(3,478
|
)
|
|
|
(1,399
|
)
|
Minority interests
|
|
|
86,483
|
|
|
|
46,741
|
|
|
|
32,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
407,641
|
|
|
$
|
185,183
|
|
|
$
|
156,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(242,430
|
)
|
|
$
|
(170,642
|
)
|
|
$
|
(121,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable
assets August 31
|
|
$
|
2,164,217
|
|
|
$
|
2,238,614
|
|
|
$
|
1,591,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AG
BUSINESS
Our Ag Business segment includes agronomy, country operations
and grain marketing.
Agronomy
Overview
We conduct our wholesale and some of our retail agronomy
operations through our 50% ownership interest in Agriliance LLC
(Agriliance). Land OLakes, Inc. (Land OLakes) holds
the other 50% ownership interest. Agriliance is one of North
Americas 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,
Agriliances revenues and expenses are not reflected in our
operating results. At August 31, 2006, our equity
investment in Agriliance was $175.3 million. Agriliance has
its own line of financing, without recourse to us.
In August 2005, we sold 81% of our 20% ownership interest in CF
Industries, Inc. (CF), a crop nutrients manufacturer and
distributor, in an initial public offering. After the initial
public offering, our ownership
4
interest in the company was reduced to approximately 3.9%.
Subsequent to our fiscal year ended August 31, 2006, we
sold 540,000 shares of our CF stock for proceeds of
$10.9 million, and recorded a gain of $5.3 million,
with a remaining ownership interest in CF of approximately 2.9%.
Prior to the initial public offering, Agriliance entered into a
multi-year supply contract with CF, and as a result, given our
small ownership interest in the company, we now consider the
relationship to be as a supplier rather than a strategic joint
venture.
There is significant seasonality in the sale of crop nutrients
and crop protection products and services, with peak activity
coinciding with the planting and input seasons.
Operations
Agriliance is one of the nations largest wholesale
distributors of crop nutrients (fertilizers) and crop protection
products (insecticides, fungicides and pesticides) based on
sales, accounting for an estimated 15% of the US market for crop
nutrients and approximately 23% of the US market for crop
protection products. As a wholesale distributor, Agriliance has
warehouse, distribution and service facilities located
throughout the country. Agriliance also owns and operates retail
agricultural units primarily in the southern United States. In
addition, Agriliance blends and packages crop protection
products under the Agri Solutions brand. Agriliance purchased
approximately 28% of its fertilizer from CF during fiscal year
2006, and its other suppliers include Mosaic, PCS, PIC and Koch.
Most of Agriliances crop protection products are purchased
from Monsanto, Syngenta, Dow, Bayer, Dupont and BASF.
Products
and Services
Agriliance sells nitrogen and potassium based crop nutrients
products as well as crop protection products that include
insecticides, fungicides and pesticides. In addition, Agriliance
blends and packages 9% of the products it sells under the
Agri Solutions brand. Agriliance also provides field and
technical services, including soil testing, adjuvant and
herbicide formulation, application and related services.
Sales
and Marketing; Customers
Agriliance distributes agronomy products through approximately
2,200 local cooperatives from Ohio to the West Coast and from
the Canadian border south to Kansas. Agriliance also provides
sales and services through more than 50 strategically located
Agriliance Service Centers as well as nearly
150 company-owned retail locations. Agriliances
largest customer is our country operations business, also
included in our Ag Business segment. In 2006, Agriliance
had total revenues of $3.7 billion, of which approximately
$1.8 billion was crop nutrient products and approximately
$1.9 billion was crop protection and other products.
Industry;
Competition
Regulation. The agronomy operations are
subject to laws and related regulations and rules designed to
protect the environment that are administered by the
Environmental Protection Agency, the Department of
Transportation and similar government agencies. These laws,
regulations and rules govern the discharge of materials to the
environment, air and water; reporting storage of hazardous
wastes; the transportation, handling and disposition of wastes;
and the labeling of pesticides and similar substances. Failure
to comply with these laws, regulations and rules could subject
Agriliance or us to administrative penalties, injunctive relief,
civil remedies and possible recalls of products. We believe that
Agriliance is 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.
The wholesale and retail distribution of agronomy products is
highly competitive and dependent upon relationships with
agricultural producers, local cooperatives and growers,
proximity to producers and local cooperatives and competitive
pricing. Moreover, the crop protection products industry is
mature with slow growth predicted for the future, which has led
distributors and suppliers to turn to consolidation and
strategic partnerships to benefit from economies of scale and
increased market share. Agriliance competes with other large
agronomy distributors, as well as other regional or local
distributors and retailers. Agriliance competes
5
on the strength of its relationships with CHS and Land
OLakes members, its purchasing power and competitive
pricing, and its attention to service in the field.
Major competitors of Agriliance in crop nutrient distribution
include Agrium, Mosaic, Koch, UAP and United Suppliers. Major
competitors of Agriliance in crop protection products
distribution include Helena, UAP, Tenkoz and numerous smaller
distribution companies.
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
325 locations, which includes 3 sunflower plants, dispersed
throughout Minnesota, North Dakota, South Dakota, Montana,
Nebraska, Kansas, Oklahoma, Colorado, Idaho, Washington and
Oregon. Most of these locations purchase grain from farmers and
sell agronomy products, energy products and feed to those same
producers and others, although not all locations provide every
product and service.
Products
and Services
Grain Purchasing. We are one of the largest
country elevator operators in North America based on revenues.
Through a majority of our elevator locations, the country
operations business purchases grain from member and non-member
producers and other elevators and grain dealers. Most of the
grain purchased is either sold through our grain marketing
operations or used for local feed and processing operations. For
the year ended August 31, 2006, country operations
purchased approximately 367 million bushels of grain,
primarily wheat (184 million bushels), corn
(98 million bushels) and soybeans (43 million
bushels). Of these bushels, 338 million were purchased from
members and 294 million were sold through our grain
marketing operations.
Other Products. Our country operations
business manufactures and sells other products, both directly
and through ownership interests in other entities. These include
seed, crop nutrients, crop protection products, energy products,
animal feed, animal health products and processed sunflowers. We
sell agronomy products at 178 locations, feed products at 130
locations and energy products at 120 locations.
Fin-Ag, Inc. In the past, through our
wholly-owned subsidiary Fin-Ag, Inc., we provided seasonal
cattle feeding and swine financing loans, facility financing
loans and crop production loans to our members. Most of these
loans were sold to ProPartners (an affiliate of CoBank) under a
financing program in which we guarantee a portion of the loans.
Financing activity through Fin-Ag, Inc. has decreased
substantially as most of the production loans were contributed
to Cofina Financial, LLC (Cofina), a 49% owned joint venture
that was formed during the fourth quarter of fiscal year 2005
(see Corporate and Other section below). The only
activity of Fin-Ag, Inc. is seasonal cattle feeding financing
and a small amount of crop loans not transferred to Cofina.
Industry;
Competition
Regulation. Our country operations business is
subject to laws and related regulations and rules designed to
protect the environment that are administered by the
Environmental Protection Agency, the Department of
Transportation and similar government agencies. These laws,
regulations and rules govern the discharge of materials to the
environment, air and water; reporting storage of hazardous
wastes; the transportation, handling and disposition of wastes;
and the labeling of pesticides and similar substances. Our
country operations business is also subject to laws and related
regulations and rules administered by the United States
Department of Agriculture, the Federal Food and Drug
Administration, and other federal, state, local and foreign
governmental agencies that govern the processing, packaging,
storage, distribution, advertising, labeling, quality and safety
of feed and grain products. Failure to comply with these laws,
regulations and rules could subject us to administrative
penalties, injunctive relief, civil remedies and possible
recalls of products. We
6
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. Competitors for the purchase of
grain include other elevators and large grain marketing
companies. Competitors for farm supply include a variety of
other cooperatives, privately held and large national companies.
We compete primarily on the basis of price, services and
patronage.
Grain
Marketing
Overview
We are the nations largest cooperative marketer of grain
and oilseed based on grain storage capacity and grain sales,
handling about 1.4 billion bushels annually. During fiscal
year 2006, we purchased approximately 64% 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.
We own and operate export terminals, river terminals and
elevators involved in the handling and transport of grain. Our
river terminals at Savage and Winona, Minnesota, and Davenport,
Iowa are used to load grains onto barges for shipment to both
domestic and export customers via the Mississippi River system.
Our export terminal at Superior, Wisconsin provides access to
the Great Lakes and St. Lawrence Seaway, and our export terminal
at Myrtle Grove, Louisiana serves the Gulf market. In the
Pacific Northwest, we conduct our grain marketing operations
through United Harvest, LLC (a 50% joint venture with United
Grain Corporation), and TEMCO, LLC (a 50% joint venture with
Cargill, Incorporated). United Harvest, LLC, operates grain
terminals in Vancouver and Kalama, Washington, and primarily
exports wheat. TEMCO, LLC operates an export terminal in Tacoma,
Washington, and primarily exports corn and soybeans. These
facilities serve the Pacific market, as well as domestic grain
customers in the western United States. We also own two 110-car
shuttle-receiving elevator facilities in Friona, Texas and
Collins, Mississippi that serve large-scale feeder cattle, dairy
and poultry producers in those regions. In 2003, we opened an
office in Sao Paulo, Brazil for the procurement of soybeans for
our grain marketing operations international customers.
Subsequent to the fiscal year ended August 31, 2006, we
invested approximately $30.0 million in a Brazil-based
grain handling and merchandising company named Multigrain S.A.,
that will be owned jointly (50/50) with Multigrain Comercio, an
agricultural commodities business headquartered in Sao Paulo,
Brazil. This venture which includes grain storage and export
facilities, builds on our South American soybean origination and
helps meet customer needs year-round. Our grain marketing
operations continue to explore other opportunities to establish
a presence in other emerging grain origination and export
markets.
7
Our grain marketing operations purchases most of its grain
during the summer and fall harvest period. Because of our
geographic location and the fact that we are further from our
export facilities, the grain that we handle tends to be sold
later after the harvest period than in other parts of the
country. However, as many producers have significant on-farm
storage capacity and in light of our own storage capacity, our
grain marketing operations buys and ships grain throughout the
year. Due to the amount of grain purchased and held in
inventory, our grain marketing operations has significant
working capital needs at various times of the year. The amount
of borrowings for this purpose, and the interest rate charged on
those borrowings, directly affects the profitability of our
grain marketing operations.
Products
and Services
The primary grains purchased by our grain marketing operations
for the year ended August 31, 2006 were corn
(491 million bushels), wheat (442 million bushels) and
soybeans (350 million bushels). Of the total grains
purchased by our grain marketing operations during the year
ended August 31, 2006, 561 million bushels were
purchased from our individual and cooperative association
members, 294 million bushels were purchased from our
country operations business, and the remainder was purchased
from third parties.
Sales
and Marketing; Customers
Purchasers of our grain and oilseed include domestic and foreign
millers, maltsters, feeders, crushers and other processors. To a
much lesser extent purchasers include intermediaries and
distributors. Our grain marketing operations are not dependent
on any one customer, and its supply relationships call for
delivery of grain at prevailing market prices.
Industry;
Competition
Regulation. Our grain marketing operations are
subject to laws and related regulations and rules designed to
protect the environment that are administered by the
Environmental Protection Agency, the Department of
Transportation and similar government agencies. These laws,
regulations and rules govern the discharge of materials to
environment, air and water; reporting storage of hazardous
wastes; and the transportation, handling and disposition of
wastes. Our grain marketing operations are also subject to laws
and related regulations and rules administered by the United
States Department of Agriculture, the Federal Food and Drug
Administration, and other federal, state, local and foreign
governmental agencies that govern the processing, packaging,
storage, distribution, advertising, labeling, quality and safety
of food and grain products. Failure to comply with these laws,
regulations and rules could subject us to administrative
penalties, injunctive relief, civil remedies and possible
recalls of products. We believe that we are in compliance with
these laws, regulations and rules in all material respects and
do not expect continued compliance to have a material effect on
our capital expenditures, earnings or competitive position.
Competition. Our grain marketing operations
compete for both the purchase and the sale of grain. Competition
is intense and margins are low. Some competitors are integrated
food producers, which may also be customers. A few major
competitors have substantially greater financial resources than
we have.
In the purchase of grain from producers, location of the
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 competes 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 competes
with numerous grain merchandisers, including major grain
merchandising companies such as Archer Daniels Midland (ADM),
Cargill, Incorporated (Cargill), ConAgra, Bunge and Louis
Dreyfus, each of which handle grain volumes of more than one
billion bushels annually.
8
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, by population growth, and by increased
or decreased per capita consumption of some products.
Summary
Operating Results
Summary operating results and identifiable assets for our Ag
Business segment for the fiscal years ended August 31,
2006, 2005 and 2004 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
6,575,165
|
|
|
$
|
5,670,644
|
|
|
$
|
6,306,530
|
|
Cost of goods sold
|
|
|
6,401,527
|
|
|
|
5,541,282
|
|
|
|
6,187,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
173,638
|
|
|
|
129,362
|
|
|
|
119,448
|
|
Marketing, general and
administrative
|
|
|
99,777
|
|
|
|
83,600
|
|
|
|
85,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
73,861
|
|
|
|
45,762
|
|
|
|
33,969
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(11,358
|
)
|
|
|
|
|
Gain on legal settlements
|
|
|
|
|
|
|
|
|
|
|
(692
|
)
|
Interest, net
|
|
|
23,559
|
|
|
|
20,535
|
|
|
|
18,932
|
|
Equity income from investments
|
|
|
(40,902
|
)
|
|
|
(55,473
|
)
|
|
|
(47,488
|
)
|
Minority interests
|
|
|
(509
|
)
|
|
|
(41
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
91,713
|
|
|
$
|
92,099
|
|
|
$
|
63,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(8,779
|
)
|
|
$
|
(9,640
|
)
|
|
$
|
(18,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable
assets August 31
|
|
$
|
1,806,243
|
|
|
$
|
1,604,571
|
|
|
$
|
1,590,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, wheat milling, foods and renewable
fuels.
Regulation. Our Processing segments
operations are subject to laws and related regulations and rules
designed to protect the environment that are administered by the
Environmental Protection Agency, the Department of
Transportation and similar government agencies. These laws,
regulations and rules govern the discharge of materials to
environment, air and water; reporting storage of hazardous
wastes; and the transportation, handling and disposition of
wastes. Our Processing segments operations are also
subject to laws and related regulations and rules administered
by the United States Department of Agriculture, the Federal Food
and Drug Administration, and other federal, state, local and
foreign governmental agencies that govern the processing,
packaging, storage, distribution, advertising, labeling, quality
and safety of food and grain products. Failure to comply with
these laws, regulations and rules could subject us, or our foods
partners, or our renewable fuels partners to administrative
penalties, injunctive relief, civil remedies and possible
recalls of products. We believe that we are in compliance with
these laws, regulations and rules in all material
9
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 39 million
bushels of soybeans on an annual basis, producing approximately
940,000 short tons of soybean meal and 460 million pounds
of crude soybean oil. The same facility is able to process
approximately 1 billion pounds of refined soybean oil
annually. Another crushing facility in Fairmont, Minnesota has a
crushing capacity of over 45 million bushels or soybeans on
an annual basis and became operational in the first quarter of
our fiscal year 2004.
Our oilseed processing operations produce three primary
products: refined oils, soybean meal and soyflour. Refined oils
are used in processed foods, such as margarine, shortening,
salad dressings and baked goods, as well as methyl
ester/biodiesel production, and to a lesser extent, for certain
industrial uses such as plastics, inks and paints. Soybean meal
has high protein content and is used for feeding livestock.
Soyflour is used in the baking industry, as a milk replacement
in animal feed and in industrial applications.
Our soy processing facilities are located in areas with a strong
production base of soybeans and end-user market for the meal and
soyflour. We purchase virtually all of our soybeans from
members. Our oilseed crushing operations currently produce
approximately 90% of the crude oil that we refine, and purchase
the balance from outside suppliers.
Our customers for refined oil are principally large food product
companies located throughout the United States. However,
over 50% of our customers are located in the Midwest due to
relatively lower freight costs and slightly higher profitability
potential. Our largest customer for refined oil products is
Ventura Foods, LLC (Ventura Foods), in which we hold a 50%
ownership interest and with which we have a long-term supply
agreement to supply minimum quantities of edible soybean oils as
long as we maintain a minimum 25.5% ownership interest and our
price is competitive with other suppliers of the product. Our
sales to Ventura Foods were $64.7 million in fiscal year
2006. We also sell soymeal to about 400 customers, primarily
feed lots and feed mills in southern Minnesota. In fiscal 2006,
Commodity Specialists Company accounted for 22% of soymeal sold
and Land OLakes/Purina Feed, LLC accounted for 15% 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 and have expanded existing plants, or have
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 approximately 4% of 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 US 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 our fiscal year 2006 were $251.5 million and
$5.6 million, respectively. Horizon Millings advance
payments on grain to us were $7.6 million on
August 31, 2006, and are included in Customer Advance
Payments on our Consolidated Balance Sheet. We account for
Horizon Milling using the equity method of accounting. At
August 31, 2006, our value of assets leased to Horizon
Milling was $82.0 million.
10
Subsequent to the fiscal year ended August 31, 2006, we
invested $15.6 million in a new Horizon Milling venture
(24% CHS ownership) that acquired the Canadian grain-based
foodservice and industrial businesses of Smucker Foods of
Canada, a wholly owned subsidiary of J.M. Smucker Company, which
includes three flour milling operations and two dry baking
mixing facilities in Canada.
Foods
Our primary focus in the foods area is Ventura Foods, which
produces and distributes vegetable oil-based products such as
margarine, salad dressing and other food products. Ventura Foods
was created in 1996, and is owned 50% by us and 50% by Wilsey
Foods, Inc., a majority owned subsidiary of Mitsui &
Co., Ltd. We account for our Ventura Foods investment under the
equity method of accounting, and at August 31, 2006, our
investment was $132.2 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 45% 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 US and is a major
producer of many other products.
Ventura Foods has 13 manufacturing and distribution locations
across the United States. It sources its raw materials, which
consist primarily of soybean oil, canola oil, cottonseed oil,
peanut oil and various other ingredients and supplies, from
various national suppliers, including our oilseed processing
operations. It sells the products it manufactures to third
parties as a contract manufacturer, as well as directly to
retailers, food distribution companies and large institutional
food service companies. Ventura Foods sales are approximately
60% in foodservice and the remainder split between retail and
industrial customers who use edible oil products as ingredients
in foods they manufacture for resale. During Ventura Foods
2006 fiscal year, Sysco accounted for 22% of its net sales.
During our fourth quarter of fiscal year 2005, Ventura Foods
purchased two Dean Foods businesses: Maries dressings and
Deans dips. The transaction included a license agreement
for Ventura Foods to use the Deans trademark on dips.
Ventura Foods competes with a variety of large companies in the
food manufacturing industry. Some of its major competitors are
ADM, Cargill, Bunge, Unilever, ConAgra, ACH Food Companies,
Smuckers, Kraft and CF Sauer, Kens, Marzetti and Nestle.
Renewable
Fuels
During 2006, we invested $70.0 million in US BioEnergy
Corporation (US BioEnergy), an ethanol manufacturing company,
representing an approximate 24% ownership on August 31,
2006. On September 1, 2006, we acquired additional shares
of Class A Common Stock for an aggregate purchase price of
$35.0 million. This brings our total investment in US
BioEnergy to $105.0 million, representing 25.57% of the
outstanding shares. We account for this investment using the
equity method of accounting.
US BioEnergy currently has two ethanol plants in operation, one
in Woodbury, Michigan and the other in Central City, Nebraska.
In addition, there are three ethanol plants under construction
in Albert City, Iowa, Ord, Nebraska and Hankinson, North Dakota
and an expansion project in progress at the plant in Central
City, Nebraska. US BioEnergy has also announced plans to build
additional ethanol plants in the Midwest.
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, but it has
not yet become effective.
11
Summary
Operating Results
Summary operating results and identifiable assets for our
Processing segment for the fiscal years ended August 31,
2006, 2005 and 2004 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
614,471
|
|
|
$
|
613,766
|
|
|
$
|
734,944
|
|
Cost of goods sold
|
|
|
588,732
|
|
|
|
604,198
|
|
|
|
703,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,739
|
|
|
|
9,568
|
|
|
|
31,815
|
|
Marketing, general and
administrative
|
|
|
21,645
|
|
|
|
20,750
|
|
|
|
20,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (losses)
|
|
|
4,094
|
|
|
|
(11,182
|
)
|
|
|
11,492
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(457
|
)
|
|
|
|
|
Interest, net
|
|
|
11,096
|
|
|
|
12,287
|
|
|
|
12,392
|
|
Equity income from investments
|
|
|
(35,504
|
)
|
|
|
(36,202
|
)
|
|
|
(29,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
28,502
|
|
|
$
|
13,190
|
|
|
$
|
29,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(368
|
)
|
|
$
|
(502
|
)
|
|
$
|
(1,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable
assets August 31
|
|
$
|
518,186
|
|
|
$
|
420,373
|
|
|
$
|
415,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CORPORATE
AND OTHER
Services
Financial Services. We have provided open
account financing to more than 130 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.
In the past, we have made seasonal and term loans to member
cooperatives. Some of these loans were sold to CoBank, and we
guarantee a portion of the loans sold. Currently, these loans
are made by Cofina, a joint venture finance company in which we
hold a 49% ownership interest.
During the fourth quarter of our fiscal year 2005, we
contributed certain assets related to our financial services
business and related to Fin-Ag Inc., along with cash, to
form Cofina. Cenex Finance Association, which prior to the
formation of Cofina operated as an independent finance company,
owns the other 51% of Cofina, however, the governance of this
joint venture is 50/50. We participated in the formation of
Cofina for the purpose of expanding the size of our financing
platform, to improve the scope of services offered to customers,
to gain efficiencies in sourcing funds, and to achieve some
synergistic savings through participation in larger
customer-financing programs. We account for our Cofina
investment using the equity method of accounting.
We may, at our own discretion, choose to guarantee certain loans
made by Cofina. On August 31, 2006, we had guarantees
related to Cofina loans totaling $31.3 million. Guarantees
for other loans that were not transferred to Cofina were $91
thousand on August 31, 2006.
Country Hedging, Inc. Our wholly-owned
subsidiary Country Hedging, Inc., which is a registered futures
commission merchant and a clearing member of both the
Minneapolis Grain Exchange and the Kansas City Board of Trade,
is a full-service commodity futures and options broker.
Ag States Agency, LLC. Ag States Agency, LLC,
is an independent insurance agency, and after the purchase of
the minority owners interest during our fiscal year 2005,
is now a wholly-owned subsidiary. It sells insurance, including
group benefits, property and casualty, and bonding programs. Its
approximately 1,800 customers are primarily agricultural
businesses, including local cooperatives and independent
elevators,
12
petroleum outlets, agronomy, feed and seed plants, implement
dealers, fruit and vegetable packers/warehouses, and food
processors.
PRICE
RISK AND HEDGING
When we enter into a commodity purchase commitment, we incur
risks of carrying inventory, including risks related to price
changes and performance (including delivery, quality, quantity
and shipment period). We are exposed to risk of loss in the
market value of positions held, consisting of inventory and
purchase contracts at a fixed or partially fixed price in the
event market prices decrease. We are also exposed to risk of
loss on our fixed price or partially fixed price sales contracts
in the event market prices increase.
To reduce the price change risks associated with holding fixed
price commitments, we generally take opposite and offsetting
positions by entering into commodity futures contracts (either a
straight futures contract or an options futures contract) on
regulated commodity futures exchanges for grain, and regulated
mercantile exchanges for refined products and crude oil. The
crude oil and most of the grain and oilseed volume we handle can
be hedged. Some grains cannot be hedged because there are no
futures for certain commodities. For those commodities, risk is
managed through the use of forward sales and various pricing
arrangements and to some extent cross-commodity futures hedging.
While hedging activities reduce the risk of loss from changing
market values of inventory, such activities also limit the gain
potential which otherwise could result from changes in market
prices of inventory. Our policy is to generally maintain hedged
positions in grain. Our profitability from operations is
primarily derived from margins on products sold and grain
merchandised, not from hedging transactions. Hedging
arrangements do not protect against nonperformance by
counterparties to contracts, and therefore, contract values are
reviewed and adjusted to reflect potential non-performance.
When a futures contract is entered into, an initial margin
deposit must be sent to the applicable exchange or broker. The
amount of the deposit is set by the exchange and varies by
commodity. If the market price of a short futures contract
increases, then an additional maintenance margin deposit would
be required. Similarly, if the price of a long futures contract
decreases, a maintenance margin deposit would be required and
sent to the applicable exchange. Subsequent price changes could
require additional maintenance margins or could result in the
return of maintenance margins.
At any one time, inventory and purchase contracts for delivery
to us may be substantial. We have risk management policies and
procedures that include net position limits. These limits are
defined for each commodity and include both trader and
management limits. This policy, and computerized procedures in
our grain marketing operations, requires a review by operations
management when any trader is outside of position limits and
also a review by our senior management if operating areas are
outside of position limits. A similar process is used in our
energy operations. The position limits are reviewed at least
annually with our management. We monitor current market
conditions and may expand or reduce our risk management policies
or procedures in response to changes in those conditions. In
addition, all purchase and sales contracts are subject to credit
approvals and appropriate terms and conditions.
EMPLOYEES
At August 31, 2006, we had approximately 6,540 full,
part-time, temporary and seasonal employees, which included
approximately 590 employees of NCRA. Of that total,
approximately 1,930 were employed in our Energy segment, 3,560
in our country operations business (including approximately
1,115 seasonal and temporary employees), 420 in our grain
marketing operations, 260 in our Processing segment and 370 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 are employed
in this manner.
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) (169 employees) and Oil Basin
Pipeliners Union (OBP) (17 employees), for which agreements are
in place through 2008 and 2007, respectively, in regards to
wages and benefits. The contracts covering the NCRA
13
McPherson, Kansas refinery (274 employees in the USWA union) are
also in place through 2009. There are approximately 160
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) (108 employees) and the
Pipefitters Union (2 employees) for which agreements are
in place through 2009. The BTWGM also represents 52 employees at
our Superior, WI grain export terminal with a contract expiring
in 2010. The USWA represents 48 employees at our Myrtle Grove,
LA grain export terminal with a contract expiring in 2009, the
Teamsters represent 8 employees at our Winona, MN export
terminal with a contract expiring in 2008, and the International
Longshoremens and Warehousemens Union (ILWU)
represents 19 employees at our Kalama, WA export terminal with
an expired contract since September 2006 that is currently being
negotiated with expectations of a positive outcome. Finally,
certain employees in our country operations business are
represented by collective bargaining agreements with two unions;
the BTWGM (26 employees), with contracts expiring in December
2008 and June 2010, and the United Food and Commercial Workers
(10 employees), with a contract expiring in July 2008.
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. We are subject to income
taxes on 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. Net income from non-patronage
business may be distributed to members or added to the
unallocated capital reserve, in whatever proportions the Board
of Directors deems appropriate.
These distributions, referred to as patronage
dividends, may be made in cash, patrons equities,
revolving fund certificates, our securities, securities of
others, or any combination designated by the Board of Directors.
Since 1998, the Board of Directors has distributed patronage
dividends in the form of 30% cash and 70% patrons equities
(see Patrons Equities below). For
fiscal year 2006, the Board of Directors has approved the
upcoming 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, 2006, 2005 and 2004 were $207.8 million
($62.5 million in cash), $171.3 million
($51.6 million in cash) and $95.2 million
($28.7 million in cash), respectively.
Patrons
Equities
Patrons equities are in the form of a book entry 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. A policy was adopted effective September 1, 2004,
whereby redemptions of capital equity certificates approved by
the Board of Directors are divided into two
14
pools, one for non-individuals (primarily member cooperatives)
who may participate in an annual pro-rata program for equities
older than 10 years, and another for individual members who
are eligible for equity redemptions at age 72 or upon
death. Effective September 1, 2006, the
10-year
aging factor on the retirement of equity on a pro-rata basis was
eliminated for equity redemptions to be paid in fiscal year
2007. 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 that member, and
the denominator, of which is the sum of the patronage
certificates eligible for redemption held by all eligible
non-individual members. In addition to the annual pro-rata
program, the Board of Directors has approved an additional
$50.0 million of redemptions to be paid in fiscal year
2007, targeting older capital equity certificates. Approximately
$40.2 million will be redeemed to active non-individual
members, of which the oldest outstanding equity certificates
will be redeemed through the year 1989. The balance will be
available for the redemption of capital equity certificates held
by individual members reaching the age of 72, or for the
redemption of capital equity certificates held by the estates of
deceased members.
Cash redemptions of patrons and other equities during the years
ended August 31, 2006, 2005 and 2004 were
$55.9 million, $23.7 million and $10.3 million,
respectively. An additional $23.8 million, $20.0 and
$13.0 million of equities were redeemed by issuance of
shares of our 8% Cumulative Redeemable Preferred Stock during
the years ended August 31, 2006, 2005 and 2004,
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 seven directors are
elected in any year, and after our 2006 elections, the maximum
number of directors elected in any year will be six. The Board
of Directors is currently comprised of 17 directors,
however, there are two vacancies on the Board which will be
filled at the 2006 annual meeting. 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 securities, 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, not because of
ownership of any equity or debt security. Members that are
cooperative associations are entitled to vote based upon a
formula that takes into account the equity held by the
cooperative in CHS and the average amount of business done with
us over the previous three years.
Members who are individuals are entitled to one vote each.
Individual members may exercise their voting power directly or
through a patrons association affiliated with a grain
elevator, feed mill, seed plant or any other of our facilities
(with certain historical exceptions) recognized by the Board of
Directors. The number of votes of patrons associations is
determined under the same formula as cooperative association
members.
15
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, 2006, our
outstanding capital included patrons equities (consisting
of capital equity certificates and non-patronage earnings
certificates), 8% Cumulative Redeemable Preferred Stock and
certain capital reserves.
Distribution
of Assets upon Dissolution; Merger and Consolidation
In the event of our dissolution, liquidation or winding up,
whether voluntary or involuntary, all of our debts and
liabilities would be paid first according to their respective
priorities. After such payment, the holders 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. The 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.
16
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, 2006, 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 and earnings are affected by market prices for
commodities such as crude oil, natural gas, grain, oilseeds,
flour, and crude and refined vegetable oil. Commodity prices
generally are affected by a wide range of factors beyond our
control, including weather, disease, insect damage, drought, the
availability and adequacy of supply, government regulation and
policies, and general political and economic conditions. We are
also exposed to fluctuating commodity prices as the result of
our inventories of commodities, typically grain and petroleum
products, and purchase and sale contracts at fixed or partially
fixed prices. At any time, our inventory levels and unfulfilled
fixed or partially fixed price contract obligations may be
substantial. Increases in market prices for commodities that we
purchase without a corresponding increase in the prices of our
products or our sales volume or a decrease in our other
operating expenses could reduce our revenues and net income.
In our energy operations, profitability depends largely on the
margin between the cost of crude oil that we refine and the
selling prices that we obtain for our refined products. Prices
for both crude oil and for gasoline, diesel fuel and other
refined petroleum products fluctuate widely. Factors influencing
these prices, many of which are beyond our control, include:
|
|
|
|
|
levels of worldwide and domestic supplies;
|
|
|
|
capacities of domestic and foreign refineries;
|
|
|
|
the ability of the members of OPEC to agree to and maintain oil
price and production controls, and the price and level of
foreign imports;
|
|
|
|
disruption in supply;
|
|
|
|
political instability or armed conflict in oil-producing regions;
|
17
|
|
|
|
|
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. 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 year 2006. We incurred capital expenditures from fiscal
year 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
Associations (NCRA) McPherson, Kansas refinery.
We establish reserves for the future cost of meeting known
compliance obligations, such as remediation of identified
environmental issues. However, these reserves may prove
inadequate to meet our actual liability. Moreover, amended, new
or more stringent requirements, stricter interpretations of
existing requirements or the future discovery of currently
unknown compliance issues may require us to make material
expenditures or subject us to liabilities that we currently do
not anticipate. Furthermore, our failure to comply with
applicable laws and regulations could subject us to
administrative penalties and injunctive relief, civil remedies
including fines and injunctions, and recalls of our products.
ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT OUR RESULTS
AND FINANCIAL CONDITION. Many of our current and
former facilities have been in operation for many years and,
over that time, we and other operators of those facilities have
generated, used, stored and disposed of substances or wastes
that are or might be considered hazardous under applicable
environmental laws, including chemicals
18
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.
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;
|
|
|
|
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 against many, but not all potential losses
or liabilities arising from these operating hazards, but
uninsured losses or losses above our coverage limits are
possible. Uninsured losses and liabilities arising from
operating hazards could have a material adverse effect on our
financial position or results of operations.
OUR COOPERATIVE STRUCTURE LIMITS OUR ABILITY TO ACCESS EQUITY
CAPITAL. As a cooperative, we may not sell common
equity in our company. In addition, existing laws and our
articles of incorporation and bylaws contain limitations on
dividends of 8% of any preferred stock that we may issue. These
limitations restrict our ability to raise equity capital and may
adversely affect our ability to compete with enterprises that do
not face similar restrictions.
CONSOLIDATION AMONG THE PRODUCERS OF PRODUCTS WE PURCHASE AND
CUSTOMERS FOR PRODUCTS WE SELL COULD ADVERSELY AFFECT OUR
REVENUES AND OPERATING RESULTS. Consolidation has occurred
among the producers of products we purchase, including crude oil
and grain, and it is likely to continue in the future.
Consolidation could increase the price of these products and
allow suppliers to negotiate pricing and other contract terms
that are less favorable to us. Consolidation also may
19
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.
IF OUR CUSTOMERS CHOSE ALTERNATIVES TO OUR REFINED PETROLEUM
PRODUCTS OUR REVENUES AND PROFITS MAY
DECLINE. Numerous alternative energy sources
currently under development could serve as alternatives to our
gasoline, diesel fuel and other refined petroleum products. If
any of these alternative products become more economically
viable or preferable to our products for environmental or other
reasons, demand for our energy products would decline. Demand
for our gasoline, diesel fuel and other refined petroleum
products also could be adversely affected by increased fuel
efficiencies.
OPERATING RESULTS FROM OUR AGRONOMY BUSINESS COULD BE
VOLATILE AND ARE DEPENDENT UPON CERTAIN FACTORS OUTSIDE OF OUR
CONTROL. Planted acreage, and consequently the
volume of fertilizer and crop protection products applied, is
partially dependent upon government programs and the perception
held by the producer of demand for production. Weather
conditions during the spring planting season and early summer
spraying season also affect agronomy product volumes and
profitability.
TECHNOLOGICAL IMPROVEMENTS IN AGRICULTURE COULD DECREASE THE
DEMAND FOR OUR AGRONOMY AND ENERGY
PRODUCTS. Technological advances in agriculture
could decrease the demand for crop nutrients, energy and other
crop input products and services that we provide. Genetically
engineered seeds that resist disease and insects, or that meet
certain nutritional requirements, could affect the demand for
our crop nutrients and crop protection products. Demand for fuel
that we sell could decline as technology allows for more
efficient usage of equipment.
WE OPERATE SOME OF OUR BUSINESS THROUGH JOINT VENTURES IN
WHICH OUR RIGHTS TO CONTROL BUSINESS DECISIONS ARE
LIMITED. Several parts of our business, including
in particular, our agronomy operations and portions of our grain
marketing, wheat milling, foods and renewable fuels operations,
are operated through joint ventures with third parties. By
operating a business through a joint venture, we have less
control over business decisions than we have in our wholly-owned
or majority-owned businesses. In particular, we generally cannot
act on major business initiatives in our joint ventures without
the consent of the other party or parties in those ventures.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
As of August 31, 2006, there were no unresolved comments
from the SEC staff regarding our periodic or current reports.
20
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 terminal
|
|
Glenwood, Minnesota
|
Transportation terminals/ repair
facilities
|
|
12 locations in Iowa, Kansas,
Minnesota, Montana, North Dakota, South Dakota, Texas,
Washington and Wisconsin, 3 of which are leased
|
Petroleum & asphalt
terminals/storage facilities
|
|
9 locations in Montana, North
Dakota and Wisconsin
|
Pump stations
|
|
11 locations in Montana and North
Dakota
|
Pipelines:
|
|
|
Cenex Pipeline, LLC
|
|
Laurel, Montana to Fargo, North
Dakota
|
Front Range Pipeline, LLC
|
|
Canadian border to Laurel, Montana
|
Convenience stores/gas stations
|
|
42 locations in Iowa, Minnesota,
Montana, North Dakota, South Dakota and Wyoming, 12 of which are
leased
|
Lubricant plants/warehouses
|
|
3 locations in Minnesota, Ohio and
Texas, 1 of which is leased
|
We have a 74.5% interest in NCRA, which owns and operates the
following facilities:
|
|
|
Refinery
|
|
McPherson, Kansas
|
Petroleum terminals/storage
|
|
2 locations in Iowa and Kansas
|
Pipeline
|
|
McPherson, Kansas to Council
Bluffs, Iowa
|
Jayhawk Pipeline, LLC
|
|
Throughout Kansas, with branches
in Oklahoma, Texas and Nebraska
|
Jayhawk stations
|
|
32 locations located in Kansas,
Oklahoma and Nebraska
|
Osage Pipeline (50% owned by NCRA)
|
|
Oklahoma to Kansas
|
Kaw Pipeline (66.7% owned by NCRA)
|
|
Throughout Kansas
|
Ag
Business
Within our Ag Business segment, we own or lease the following
facilities:
Country
Operations
In our country operations business, we own 315 agri-operations
locations (of which some of the facilities are on leased land),
7 feed manufacturing facilities and 3 sunflower plants located
in Minnesota, North Dakota, South Dakota, Montana, Nebraska,
Kansas, Oklahoma, Colorado, Idaho, Washington and Oregon.
21
Grain
Marketing
We use grain terminals in our grain marketing operations at the
following locations:
Collins, Mississippi (owned)
Davenport, Iowa (2 owned)
Friona, Texas (owned)
Kalama, Washington (leased)
Minneapolis, Minnesota (owned, idle)
Myrtle Grove, Louisiana (owned)
Savage, Minnesota (owned)
Spokane, Washington (owned)
Superior, Wisconsin (owned)
Winona, Minnesota (1 owned, 1 leased)
Processing
Within our Processing segment, we own and lease the following
facilities:
Oilseed
Processing
We own a campus in Mankato, Minnesota, comprised of a soybean
crushing plant, an oilseed refinery, a soyflour plant, a quality
control laboratory and an administration office. We also own a
crushing plant in Fairmont, Minnesota.
Wheat
Milling
We own five milling facilities at the following locations, all
of which are leased to Horizon Milling:
Rush City, Minnesota
Kenosha, Wisconsin
Houston, Texas
Mount Pocono, Pennsylvania
Fairmount, North Dakota
Corporate
Headquarters
We are headquartered in Inver Grove Heights, Minnesota. We own a
33-acre
campus consisting of one main building with approximately
320,000 square feet of office space and two smaller
buildings with approximately 13,400 and 9,000 square feet
of space.
Our internet address is www.chsinc.com.
|
|
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; 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
Montanas 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 NCRAs McPherson, Kansas
refineries. These settlements are part of a series of similar
settlements that the EPA has negotiated with major refiners
under the EPAs Petroleum Refinery Initiative. The
settlements, which resulted from nearly three years of
discussions, 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
22
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 the next several years. The consent
decrees also require us and NCRA to pay approximately
$0.5 million in aggregate civil cash penalties. As of
August 31, 2006, the aggregate capital expenditures for us
and NCRA related to these settlements was approximately
$12 million, and we anticipate spending an additional
$11 million over the next five 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 REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
We have approximately 56,000 members, of which approximately
1,600 are cooperative association members and approximately
54,400 are individual members. As a cooperative, we do not have
any common stock equity that is traded.
On August 31, 2006, we had 5,864,238 shares of 8%
Cumulative Redeemable Preferred Stock outstanding, which is
listed on the NASDAQ National Market under the symbol CHSCP.
We have not sold any equity securities during the three years
ended August 31, 2006 that were not registered under the
Securities Act of 1933, as amended.
23
|
|
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, 2006, 2005, and 2004 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.
Summary
Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars in thousands)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
14,383,835
|
|
|
$
|
11,926,962
|
|
|
$
|
10,969,081
|
|
|
$
|
9,314,116
|
|
|
$
|
7,187,578
|
|
Cost of goods sold
|
|
|
13,570,507
|
|
|
|
11,449,858
|
|
|
|
10,527,715
|
|
|
|
8,989,050
|
|
|
|
6,877,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
813,328
|
|
|
|
477,104
|
|
|
|
441,366
|
|
|
|
325,066
|
|
|
|
309,627
|
|
Marketing, general and
administrative
|
|
|
231,238
|
|
|
|
199,354
|
|
|
|
202,455
|
|
|
|
175,662
|
|
|
|
170,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
582,090
|
|
|
|
277,750
|
|
|
|
238,911
|
|
|
|
149,404
|
|
|
|
139,169
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(13,013
|
)
|
|
|
(14,666
|
)
|
|
|
|
|
|
|
|
|
Gain on legal settlements
|
|
|
|
|
|
|
|
|
|
|
(692
|
)
|
|
|
(10,867
|
)
|
|
|
(2,970
|
)
|
Interest, net
|
|
|
41,305
|
|
|
|
41,509
|
|
|
|
42,758
|
|
|
|
40,516
|
|
|
|
37,009
|
|
Equity income from investments
|
|
|
(84,188
|
)
|
|
|
(95,742
|
)
|
|
|
(79,022
|
)
|
|
|
(47,299
|
)
|
|
|
(58,133
|
)
|
Minority interests
|
|
|
85,974
|
|
|
|
47,736
|
|
|
|
33,830
|
|
|
|
21,950
|
|
|
|
15,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
538,999
|
|
|
|
297,260
|
|
|
|
256,703
|
|
|
|
145,104
|
|
|
|
147,873
|
|
Income taxes
|
|
|
49,327
|
|
|
|
30,434
|
|
|
|
29,462
|
|
|
|
16,031
|
|
|
|
19,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
489,672
|
|
|
|
266,826
|
|
|
|
227,241
|
|
|
|
129,073
|
|
|
|
127,992
|
|
(Income) loss on discontinued
operations, net of taxes
|
|
|
(625
|
)
|
|
|
16,810
|
|
|
|
5,909
|
|
|
|
5,232
|
|
|
|
1,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
490,297
|
|
|
$
|
250,016
|
|
|
$
|
221,332
|
|
|
$
|
123,841
|
|
|
$
|
126,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
(August 31):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
828,954
|
|
|
$
|
758,703
|
|
|
$
|
493,440
|
|
|
$
|
458,738
|
|
|
$
|
249,115
|
|
Net property, plant and equipment
|
|
|
1,476,239
|
|
|
|
1,359,535
|
|
|
|
1,249,655
|
|
|
|
1,122,982
|
|
|
|
1,057,421
|
|
Total assets
|
|
|
4,942,583
|
|
|
|
4,726,937
|
|
|
|
4,031,292
|
|
|
|
3,807,968
|
|
|
|
3,481,727
|
|
Long-term debt, including current
maturities
|
|
|
744,745
|
|
|
|
773,074
|
|
|
|
683,818
|
|
|
|
663,173
|
|
|
|
572,124
|
|
Total equities
|
|
|
2,017,391
|
|
|
|
1,757,897
|
|
|
|
1,628,086
|
|
|
|
1,481,711
|
|
|
|
1,289,638
|
|
24
The selected financial information below has been derived from
our three business segments, and Corporate and Other, for the
fiscal years ended August 31, 2006, 2005 and 2004. The
intercompany sales between segments were $253.3 million,
$182.4 million and $142.4 million for the fiscal years
ended August 31, 2006, 2005 and 2004, respectively.
Summary
Financial Data by Business Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
|
Ag Business
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
7,414,361
|
|
|
$
|
5,794,266
|
|
|
$
|
4,038,561
|
|
|
$
|
6,575,165
|
|
|
$
|
5,670,644
|
|
|
$
|
6,306,530
|
|
Cost of goods sold
|
|
|
6,834,676
|
|
|
|
5,487,813
|
|
|
|
3,780,726
|
|
|
|
6,401,527
|
|
|
|
5,541,282
|
|
|
|
6,187,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
579,685
|
|
|
|
306,453
|
|
|
|
257,835
|
|
|
|
173,638
|
|
|
|
129,362
|
|
|
|
119,448
|
|
Marketing, general and
administrative
|
|
|
82,867
|
|
|
|
69,951
|
|
|
|
72,876
|
|
|
|
99,777
|
|
|
|
83,600
|
|
|
|
85,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
496,818
|
|
|
|
236,502
|
|
|
|
184,959
|
|
|
|
73,861
|
|
|
|
45,762
|
|
|
|
33,969
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(862
|
)
|
|
|
(14,666
|
)
|
|
|
|
|
|
|
(11,358
|
)
|
|
|
|
|
Gain on legal settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(692
|
)
|
Interest, net
|
|
|
6,534
|
|
|
|
8,918
|
|
|
|
12,090
|
|
|
|
23,559
|
|
|
|
20,535
|
|
|
|
18,932
|
|
Equity income from investments
|
|
|
(3,840
|
)
|
|
|
(3,478
|
)
|
|
|
(1,399
|
)
|
|
|
(40,902
|
)
|
|
|
(55,473
|
)
|
|
|
(47,488
|
)
|
Minority interests
|
|
|
86,483
|
|
|
|
46,741
|
|
|
|
32,507
|
|
|
|
(509
|
)
|
|
|
(41
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
407,641
|
|
|
$
|
185,183
|
|
|
$
|
156,427
|
|
|
$
|
91,713
|
|
|
$
|
92,099
|
|
|
$
|
63,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(242,430
|
)
|
|
$
|
(170,642
|
)
|
|
$
|
(121,199
|
)
|
|
$
|
(8,779
|
)
|
|
$
|
(9,640
|
)
|
|
$
|
(18,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable
assets August 31
|
|
$
|
2,164,217
|
|
|
$
|
2,238,614
|
|
|
$
|
1,591,254
|
|
|
$
|
1,806,243
|
|
|
$
|
1,604,571
|
|
|
$
|
1,590,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processing
|
|
|
Corporate and Other
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
614,471
|
|
|
$
|
613,766
|
|
|
$
|
734,944
|
|
|
$
|
33,175
|
|
|
$
|
30,672
|
|
|
$
|
31,466
|
|
Cost of goods sold
|
|
|
588,732
|
|
|
|
604,198
|
|
|
|
703,129
|
|
|
|
(1,091
|
)
|
|
|
(1,049
|
)
|
|
|
(802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,739
|
|
|
|
9,568
|
|
|
|
31,815
|
|
|
|
34,266
|
|
|
|
31,721
|
|
|
|
32,268
|
|
Marketing, general and
administrative
|
|
|
21,645
|
|
|
|
20,750
|
|
|
|
20,323
|
|
|
|
26,949
|
|
|
|
25,053
|
|
|
|
23,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (losses)
|
|
|
4,094
|
|
|
|
(11,182
|
)
|
|
|
11,492
|
|
|
|
7,317
|
|
|
|
6,668
|
|
|
|
8,491
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
(336
|
)
|
|
|
|
|
Gain on legal settlements
Interest, net
|
|
|
11,096
|
|
|
|
12,287
|
|
|
|
12,392
|
|
|
|
116
|
|
|
|
(231
|
)
|
|
|
(656
|
)
|
Equity income from investments
|
|
|
(35,504
|
)
|
|
|
(36,202
|
)
|
|
|
(29,966
|
)
|
|
|
(3,942
|
)
|
|
|
(589
|
)
|
|
|
(169
|
)
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,036
|
|
|
|
1,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
28,502
|
|
|
$
|
13,190
|
|
|
$
|
29,066
|
|
|
$
|
11,143
|
|
|
$
|
6,788
|
|
|
$
|
7,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(368
|
)
|
|
$
|
(502
|
)
|
|
$
|
(1,363
|
)
|
|
$
|
(1,760
|
)
|
|
$
|
(1,602
|
)
|
|
$
|
(1,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable
assets August 31
|
|
$
|
518,186
|
|
|
$
|
420,373
|
|
|
$
|
415,761
|
|
|
$
|
453,937
|
|
|
$
|
463,379
|
|
|
$
|
433,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
ITEM 7.
|
MANAGEMENTS
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. As a cooperative, we are owned by farmers, ranchers
and their local cooperatives from the Great Lakes to the Pacific
Northwest and from the Canadian border to Texas. We also have
preferred stockholders that own shares of our 8% Cumulative
Redeemable Preferred Stock.
We provide a full range of production agricultural inputs such
as refined fuels, propane, farm supplies, animal nutrition and
agronomy products, as well as services, which include hedging,
financing and insurance services. We own and operate petroleum
refineries and pipelines and market and distribute refined fuels
and other energy products under the
Cenex®
brand through a network of member cooperatives and independent
retailers. We purchase grains and oilseeds directly and
indirectly from agricultural producers primarily in the
Midwestern and Western United States. These grains and oilseeds
are either sold to domestic and international customers, or
further processed into a variety of food products.
We 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 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, 2006, 2005 and 2004 is provided in
Item 6 Selected Financial Data. Except as
otherwise specified, references to years indicate our fiscal
year ended August 31, 2006 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, agronomy and country operations businesses
experience higher volumes and income during the spring planting
season and in the fall, which corresponds to harvest. Also in
our Ag Business segment, our grain marketing operations is
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 revenue can be significantly affected by global market
prices for commodities such as petroleum products, natural gas,
grains, oilseeds and flour. Changes in market prices for
commodities that we purchase without a corresponding change in
the selling prices of those products can affect revenues and
operating earnings. Commodity prices are affected by a wide
range of factors beyond our control, including the weather,
26
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) included in our
Ag Business segment; Ventura Foods, LLC (Ventura Foods), our 24%
ownership in Horizon Milling, LLC (Horizon Milling), and an
approximate 24% ownership in US BioEnergy Corporation (US
BioEnergy) included in our Processing segment; and our 49%
ownership in Cofina Financial, LLC (Cofina) included in
Corporate and Other.
Agriliance is owned and governed by United Country Brands, LLC
(50%) and Land OLakes, Inc. (50%). United Country Brands,
LLC, was initially owned and governed 50% by us and 50% by
Farmland Industries, Inc. (Farmland), and was formed solely to
hold a 50% interest in Agriliance. On April 30, 2004, we
purchased all of Farmlands remaining interest in
Agriliance for $27.5 million in cash. We now own 50% of the
economic and governance interests in Agriliance, held through
our 100% ownership interest in United Country Brands, LLC, and
continue to account for this investment using the equity method
of accounting.
In May 2005, we sold the majority of our Mexican foods business
for proceeds of $38.3 million resulting in a loss on
disposition of $6.2 million, with minor activity continuing
in 2006. During the year ended August 31, 2006, we sold all
of the remaining assets for proceeds of $4.2 million and a
gain of $1.6 million. The operating results of the Mexican
Foods business have been reclassified and reported as
discontinued operations for all periods presented.
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 years
amounts to conform to current year classifications. These
reclassifications had no effect on previously reported net
income, equities and comprehensive income, or total cash flows.
The Consolidated Statements of Cash Flows for the years ended
August 31, 2005 and 2004 were restated to correct an error
in the classification of our cash flows received from our
interest in joint ventures and distributions made to minority
owners. We determined that a portion of the cash flows from our
joint ventures should have been considered a return on our
investment and classified as an operating activity as
distributions from equity investments, instead of as an
investing activity. Additionally, we had previously reported
distributions to minority owners as investing activities when
they should have been classified as financing activities. The
restatements did not have any impact on our Consolidated
Statements of Operations, Consolidated Statements of
Shareholders Equities and Comprehensive Income, or total
change in cash and cash equivalents on our Consolidated
Statements of Cash Flows for the years ended August 31,
2005 and 2004. In addition, they did not have any impact on our
Consolidated Balance Sheets as of August 31, 2005 or 2004.
Recent
Events
Subsequent to our fiscal year ended August 31, 2006, we
made an additional investment of $35.0 million in US
BioEnergy, bringing our current ownership of the company to
approximately 25.6%, and also made investments in two new
ventures. We invested approximately $30.0 million in a
Brazil-based grain handling and merchandising company named
Multigrain S.A., which will be owned jointly (50/50) with
Multigrain Comercio, an agricultural commodities business
headquartered in Sao Paulo, Brazil and will be included in our
Ag Business segment. This venture which includes grain storage
and export facilities, builds on our South American soybean
origination and helps meet customer needs year-round. Our grain
marketing operations
27
continue to explore other opportunities to establish a presence
in other emerging grain origination and export markets. We have
also invested $15.6 million in a new Horizon Milling
venture (24% CHS ownership) that acquired the Canadian
grain-based foodservice and industrial businesses of Smucker
Foods of Canada, a wholly owned subsidiary of J.M. Smucker
Company, which includes three flour milling operations and two
dry baking mixing facilities in Canada.
Also subsequent to our fiscal year ended August 31, 2006,
we sold 540,000 shares of our CF Industries Holding, Inc.
(CFIH) stock for proceeds of $10.9 million, and recorded a
gain of $5.3 million, reducing our ownership interest in
CFIH to approximately 2.9%
Results
of Operations
Comparison
of the years ended August 31, 2006 and
2005
General. We recorded income from continuing
operations before income taxes of $539.0 million in fiscal
2006 compared to $297.3 million in fiscal 2005, an increase
of $241.7 million (81%). These results reflected increased
pretax earnings in our Energy and Processing segments, and
Corporate and Other, partially offset by slightly decreased
earnings in our Ag Business segment.
Our Energy segment generated income from continuing operations
before income taxes of $407.6 million for the year ended
August 31, 2006 compared to $185.2 million in the
prior year. This increase in earnings of $222.4 million
(120%) is primarily attributable to higher margins on refined
fuels, which resulted mainly from limited refining capacity and
increased global demand. With hurricane damage at the start of
the fiscal year, the energy industry faced supply restrictions
and distribution disruptions. Pipeline shutdowns later in the
year also limited crude oil volumes. Earnings in our propane and
transportation operations also improved compared to the previous
year. These improvements were partially offset by decreased
earnings in our lubricants and petroleum equipment businesses.
Our Ag Business segment generated income from continuing
operations before income taxes of $91.7 million for the
year ended August 31, 2006 compared to $92.1 million
in the prior year, a decrease in earnings of $0.4 million
(less than 1%). Strong domestic grain movement, much of it
driven by increased US ethanol production, contributed to record
performance by both country operations and grain marketing
businesses. Our country operations earnings increased
$14.3 million, primarily as a result of increased grain
volumes and overall improved product margins, including
historically high margins on grain and energy transactions.
Market expansion into Oklahoma and Kansas also increased country
operations volumes. Our grain marketing operations improved
earnings by $11.0 million in fiscal 2006 compared with
2005, primarily from increased grain volumes and improved
margins on those grains. Volatility in the grain markets creates
opportunities for increased grain margins, and additionally
during the current year, increased interest in renewable fuels,
and higher transportation costs shifted marketing patterns and
dynamics for our grain marketing business. These improvements in
earnings in our country operations and grain marketing
businesses were partially offset by reduced earnings generated
through our wholesale and retail agronomy ownership interests,
primarily Agriliance, net of allocated internal expenses, which
decreased $16.1 million, primarily in reduced crop nutrient
and crop protection margins. Weather-interrupted supply patterns
and resulting price fluctuations dramatically reduced crop
nutrient use and sales during the year. High natural gas prices,
increasing international demand for nitrogen, and hurricane
damage to warehouse facilities and the resulting transportation
grid led to price increases early in the year. Coupled with high
energy costs and low grain prices, many crop producers elected
to scale back nutrient applications for the 2006 growing year.
As a result, larger remaining inventories later in the year
drove significant devaluation and reduced revenues.
Also affecting the agronomy business of our Ag Business segment,
during the first quarter of fiscal 2005 we evaluated the
carrying value of our investment in CF Industries, Inc. (CF), a
domestic fertilizer manufacturer in which we held a minority
interest. Our carrying value at that time of $153.0 million
consisted primarily of non-cash patronage refunds received from
CF over the years. Based upon indicative values from potential
strategic buyers for the business and through other analyses, we
determined at that time that the carrying value of our CF
investment should be reduced by $35.0 million, resulting in
an impairment charge to
28
our first quarter in fiscal 2005. The net effect to first fiscal
quarter in 2005 income after taxes was approximately
$32.1 million.
In February 2005, after reviewing indicative values from
strategic buyers, the board of directors of CF determined that a
greater value could be derived for the business through an
initial public offering of stock in the company. The initial
public offering was completed in August 2005. Prior to the
initial public offering, we held an ownership interest of
approximately 20% in CF. Through the initial public offering, we
sold approximately 81% of our ownership interest for cash
proceeds of approximately $140.4 million. Our book basis in
the portion of our ownership interest sold through the initial
public offering, after the $35.0 million impairment charge
recognized in our first fiscal quarter results, was
$95.8 million. As a result, we recognized a pretax gain of
$44.6 million on the sale of that ownership interest during
the fourth quarter of fiscal 2005. This gain, net of the
impairment loss of $35.0 million recognized during the
first quarter of fiscal 2005, resulted in a $9.6 million
pretax gain recognized during fiscal 2005. The net effect to
fiscal 2005 income, after taxes, was approximately
$8.8 million.
Our Processing segment generated income from continuing
operations before income taxes of $28.5 million for the
year ended August 31, 2006 compared to $13.2 million
in the prior year, an increase in earnings of $15.3 million
(116%). Oilseed processing earnings increased
$13.8 million, which was primarily the result of improved
crushing margins, partially offset by slightly decreased oilseed
refining margins. Contrasting the two years, the soybean harvest
in the geographical area near our two crushing facilities was
greatly improved in the fall of 2005 (fiscal 2006) compared
with the fall of 2004 (fiscal 2005) harvest. During fiscal
2005, basis levels we paid for soybeans were higher than in most
of the other soybean producing areas of the country. The
improved 2005 fall harvest (fiscal 2006) normalized soybean
prices in our geographical area. These lower soybean prices
translated into lower raw material costs and higher volumes of
soybeans crushed at our two crushing facilities. Our share of
earnings from Horizon Milling, our wheat milling joint venture,
increased $1.9 million for the year ended August 31,
2006 compared to the prior year. In addition, we recorded a loss
of $2.4 million in fiscal 2005 on the disposition of wheat
milling equipment at a closed facility. Our share of earnings
from Ventura Foods, our packaged foods joint venture, decreased
$2.0 million compared to the prior year. During fiscal
2006, we invested $70.0 million in US BioEnergy, an ethanol
manufacturing company, in which we recorded a loss of
$0.7 million, including allocated interest and internal
expenses the pretax loss was $3.2 million.
Corporate and Other generated income from continuing operations
before income taxes of $11.1 million for the year ended
August 31, 2006 compared to $6.8 million in the prior
year, an increase in earnings of $4.3 million (64%). The
primary increase in earnings resulted from our business
solutions operations which reflected improved earnings of
$4.2 million, primarily as a result of improved hedging and
financial services income and reduced internal expenses.
Net Income. Consolidated net income for the
year ended August 31, 2006 was $490.3 million compared
to $250.0 million for the year ended August 31, 2005,
which represents a $240.3 million (96%) increase.
Revenues. Consolidated revenues of
$14.4 billion for the year ended August 31, 2006
compared to $11.9 billion for the year ended
August 31, 2005, which represents a $2,456.9 million
(21%) increase.
Total revenues include other revenues generated primarily within
our Ag Business segment and Corporate and Other. Our Ag Business
segments country operations elevator and agri-service
centers derives other revenues from activities related to
production agriculture, which include grain storage, grain
cleaning, fertilizer spreading, crop protection spraying and
other services of this nature, and our grain marketing
operations receives other revenues at our export terminals from
activities related to loading vessels.
Our Energy segment revenues, after elimination of intersegment
revenues, of $7.2 billion increased $1,548.3 million
(28%) during the year ended August 31, 2006 compared to the
year ended August 31, 2005. During the years ended
August 31, 2006 and 2005, our Energy segment recorded
revenues to our Ag Business segment of $242.4 million and
$170.6 million, respectively. The revenues increase of
$1,548.3 million is comprised of a net increase of
$1,490.1 million related to price appreciation on refined
fuels and propane products and $58.2 million related to a
net increase in sales volume. Refined fuels revenues increased
29
$1,186.1 million (28%), of which $1,452.4 million was
related to a net average selling price increase, partially
offset by $266.3 million, which was related to decreased
volumes, compared to the same period in the previous year. The
increased revenues also included $220.6 million from
ethanol marketing, which was partially offset by decreased
volumes of other refined fuels and propane products. The sales
price of refined fuels increased $0.53 per gallon (35%) and
volumes decreased 5% when comparing the year ended
August 31, 2006 with the same period a year ago. Higher
crude oil prices, strong global demand and limited refining
capacity contributed to the increase in refined fuels selling
prices. The decrease in refined fuels volumes reflects
intentional reduction of lower margin unbranded volumes. Propane
revenues increased by $57.8 million (9%), of which
$125.8 million was related to a net average selling price
increase, partially offset by $68.0 million which was
related to decreased volumes compared to the same period in the
previous year. Propane prices increased $0.17 per gallon
(19%) and sales volume decreased 9% in comparison to the same
period of the prior year. Propane prices tend to follow the
prices of crude oil and natural gas, both of which increased
during the year ended August 31, 2006 compared to the same
period in 2005. The decrease in propane volumes reflects a loss
of exclusive propane marketing rights at our former
suppliers proprietary terminals.
Our Ag Business segment revenues, after elimination of
intersegment revenues, of $6.6 billion increased
$905.4 million (16%) during the year ended August 31,
2006 compared to the year ended August 31, 2005. Grain
revenues in our Ag Business segment totaled
$5,337.2 million and $4,613.6 million during the years
ended August 31, 2006 and 2005, respectively. Of the grain
revenues increase of $723.6 million (16%),
$647.0 million is attributable to increased volumes and
$76.6 million due to increased average selling grain prices
during the year ended August 31, 2006 compared to the same
period last fiscal year. The average sales price of all grain
and oilseed commodities sold reflected an increase of
$0.07 per bushel (2%). Commodity prices in general
increased following a strong fall 2005 harvest that produced
good yields throughout most of the United States, with the
quality of most grains rated as excellent or good. The higher
average market price per bushel of spring wheat and corn were
approximately $0.74 and $0.15, respectively, partially offset by
lower average market price per bushel of soybeans of
approximately $0.15, as compared to the prices of those same
grains for the year ended August 31, 2005. Volumes
increased 14% during the year ended August 31, 2006
compared with the same period of a year ago. Corn, winter wheat
and soybeans reflect the largest volume increases compared to
the year ended August 31, 2005. While some areas of the US
experienced drought conditions it appears there will be a large
harvest in 2006, which is well underway in most of the
geographical areas covered by our country elevator system. Our
Ag Business segment non-grain revenues of $1.2 billion
increased by $181.8 million (17%) during the year ended
August 31, 2006 compared to the year ended August 31,
2005, primarily the result of increased revenues of energy, crop
nutrient, feed and crop protection products, in addition to seed
and processed sunflower revenues. The average selling price of
energy products increased due to overall market conditions while
volumes were fairly consistent to the year ended August 31,
2005.
Our Processing segment revenues, after elimination of
intersegment revenues, of $614.1 million increased
$0.8 million (less than 1%) during the year ended
August 31, 2006 compared to the year ended August 31,
2005. Because our wheat milling and packaged foods operations
are operated through non-consolidated joint ventures, revenues
reported in our Processing segment are entirely from our oilseed
processing operations. Processed soybean volumes increased 10%,
accounting for an increase in revenues of $22.6 million,
and were partially offset by lower average sales price of
processed oilseed and other revenues which reduced revenues by
$21.8 million. Oilseed refining revenues decreased
$14.3 million (5%), of which $9.3 million was due to
lower average sales price and $5.0 million was due to a 2%
net decrease in sales volume. The average selling price of
processed oilseed decreased $7 per ton and the average
selling price of refined oilseed products decreased
$0.01 per pound compared to the same period of the previous
year. These changes in the selling price of products are
primarily driven by the average price of soybeans.
Cost of Goods Sold. Cost of goods sold of
$13.6 billion increased $2.1 billion (19%) during the
year ended August 31, 2006 compared to the year ended
August 31, 2005.
Our Energy segment cost of goods sold, after elimination of
intersegment costs, of $6.6 billion increased by
$1,275.1 million (24%) during the year ended
August 31, 2006 compared to the same period of the prior
30
year, primarily due to increased average costs of refined fuels
and propane products. On a more product-specific basis, the
average cost of refined fuels increased by $0.49 (33%) per
gallon, which included an increased cost of $220.8 million from
ethanol marketing, and was partially offset by a 5% decrease in
volumes compared to the year ended August 31, 2005. We
process approximately 55,000 barrels of crude oil per day
at our Laurel, Montana refinery and 80,000 barrels of crude
oil per day at NCRAs McPherson, Kansas refinery. The
average cost increase on refined fuels is reflective of higher
input costs at our two crude oil refineries and higher average
prices on the refined products that we purchased for resale
compared to the year ended August 31, 2005. The average per
unit cost of crude oil purchased for the two refineries
increased 16% compared to the year ended August 31, 2005.
The average cost of propane increased $0.16 (19%) per gallon,
partially offset by a 9% decrease in volumes compared to the
year ended August 31, 2005. The average price of propane
increased due to higher procurement costs.
Our Ag Business segment cost of goods sold, after elimination of
intersegment costs, of $6.4 billion increased
$861.1 million (16%) during the year ended August 31,
2006 compared to the same period of the prior year. Grain cost
of goods sold in our Ag Business segment totaled
$5,265.3 million and $4,550.2 million during the years
ended August 31, 2006 and 2005, respectively. The cost of
grains and oilseed procured through our Ag Business segment
increased $715.1 million (16%) compared to the year ended
August 31, 2005. This is primarily the result of a 14%
increase in bushels along with an increase of $0.07 (2%) average
cost per bushel as compared to the prior year. Corn, winter
wheat and soybeans reflected the largest volume increases
compared to the year ended August 31, 2005. Commodity
prices on spring wheat and corn have increased, while soybeans
commodity prices showed an average decrease, compared to the
prices that were prevalent during the majority of fiscal 2005.
Our Ag Business segment cost of goods sold, excluding the cost
of grains procured through this segment, increased during the
year ended August 31, 2006 compared to the year ended
August 31, 2005, primarily due to energy, crop nutrient,
feed and crop protection products, in addition to seed and
processed sunflower products. The average cost of energy
products increased due to overall market conditions while
volumes stayed fairly consistent to the year ended
August 31, 2005.
Our Processing segment cost of goods sold, after elimination of
intersegment costs, of $588.4 million decreased
$15.3 million (3%) compared to the year ended
August 31, 2005, which was primarily due to decreased input
costs of soybeans processed at our two crushing plants,
partially offset by higher volumes of soybeans processed at
those plants.
Marketing, General and
Administrative. Marketing, general and
administrative expenses of $231.2 million for the year
ended August 31, 2006 increased by $31.9 million (16%)
compared to the year ended August 31, 2005. The net
increase of $31.9 million is primarily due to increased
performance-based incentive plan expense, in addition to other
compensation benefits, pension and general inflation.
Gain on Sale of Investments. During the fourth
quarter of fiscal 2005, we sold approximately 81% of our
investment in CF Industries, Inc. through an initial public
offering of our equity in that company. We received cash
proceeds of $140.4 million and recorded a gain of
$9.6 million, net of an impairment charge of
$35.0 million recognized during the first quarter of fiscal
2005. This gain is reflected within the results reported for our
Ag Business segment.
During the second quarter of fiscal 2005, we sold stock
representing a portion of our investment in a publicly-traded
company for cash proceeds of $7.4 million and recorded a
gain of $3.4 million.
Interest, net. Interest, net of
$41.3 million for the year ended August 31, 2006
decreased $0.2 million (less than 1%) compared to the year
ended August 31, 2005. Interest expense for the years ended
August 31, 2006 and 2005 was $50.6 million and
$51.5 million, respectively. Interest income, primarily
from marketable securities, for the years ended August 31,
2006 and 2005 was $9.3 million and $10.0 million,
respectively. The interest expense decrease of $0.9 million
(2%), includes a decrease of short-term borrowings primarily
related to reduced working capital, partially offset by an
increase in the average short-term interest rate and a reduction
in capitalized interest. For the fiscal years ended
August 31, 2006 and 2005, we capitalized interest of
$4.7 million and $6.8 million, respectively, related
to capitalized construction projects. The reduction in
capitalized interest relates to the interest on financing the
final stages of the ultra-low sulfur upgrades at our energy
refineries. The average level of short-term borrowings decreased
$143.4 million during fiscal 2006
31
compared to the year ended August 31, 2005, while the
average short-term interest rate increased 1.50%. The interest
income decrease of $0.7 million (8%) was primarily in our
Energy segment related to a decrease in interest income from
short term investments, primarily at NCRA.
Equity Income from Investments. Equity income
from investments of $84.2 million for the year ended
August 31, 2006 decreased $11.6 million (12%) compared
to the year ended August 31, 2005. We record equity income
or loss from the investments in which we have an ownership
interest of 50% or less and have significant influence, but not
control, for our proportionate share of income or loss reported
by the entity, without consolidating the revenues and expenses
of the entity in our Consolidated Statements of Operations. The
net decrease in equity income from investments was attributable
to reduced earnings from investments within our Ag Business and
Processing segments of $14.6 million and $0.7 million,
respectively and was partially offset by improved earnings
within our Energy segment and Corporate and Other of
$0.4 million and $3.3 million, respectively.
Our Ag Business segment generated reduced earnings of
$14.6 million from equity investments. Our investments in a
Canadian joint venture contributed reduced earnings of
$1.5 million. Our share of equity investment earnings in
Agriliance decreased $12.4 million and primarily relates to
reduced crop nutrient and crop protection margins.
Weather-interrupted supply patterns and resulting wide price
fluctuations dramatically reduced crop nutrient use and sales
during the year. High natural gas prices, increasing
international demand for nitrogen, and hurricane damage to
warehouse facilities and the related transportation grid led to
price increases early in the year. Coupled with high energy
costs and low grain prices, many crop producers elected to scale
back nutrient applications for the 2006 growing year. As a
result, larger remaining inventories later in the year drove
significant devaluation and reduced revenues. Our equity income
from our investment in TEMCO, a joint venture, which exports
primarily corn and soybeans, recorded reduced earnings primarily
on logistics of $4.2 million, while our wheat exporting
investment in United Harvest contributed improved earnings of
$2.4 million. Our country operations reported increases in
equity investments of $1.1 million.
Our Processing segment generated reduced earnings of
$0.7 million from equity investments. Ventura Foods, our
vegetable oil-based products and packaged foods joint venture,
recorded reduced earnings of $2.0 million, partially offset
by Horizon Milling, our wheat milling joint venture, which
recorded improved earnings of $1.9 million compared to the
same period in the previous year. During 2006, we invested
$70.0 million in US BioEnergy Corporation (US BioEnergy),
an ethanol manufacturing company, representing an approximate
24% ownership and recorded losses of $0.7 million. A
shifting demand balance for soybeans for both food and renewable
fuels meant addressing supply and price challenges for both CHS
and our joint venture with Ventura Foods. Ventura Foods also
completed integration of its dressing and dips acquisition, and
exited a large part of its nutritional products business, all of
which resulted in increased general expenses. Horizon
Millings results are primarily affected by US dietary
habits. Although the preference for a low carbohydrate diet
appears to have reached the bottom of its cycle, milling
capacity, which had been idled over the past few years because
of lack of demand for flour products, can easily be put back in
production as consumption of flour products increases, which
will continue to depress gross margins in the milling industry.
Our Energy segment generated improved earnings of
$0.4 million related to improved margins in an NCRA equity
investment, and Corporate and Other generated improved earnings
of $3.3 million from equity investments, primarily from
Cofina, our financial services equity investment, as compared to
the year ended August 31, 2005.
Minority Interests. Minority interests of
$86.0 million for the year ended August 31, 2006
increased by $38.2 million (80%) compared to the year ended
August 31, 2005. This net increase was a result of more
profitable operations within our majority-owned subsidiaries
compared to the prior year. Substantially all minority interests
relate to NCRA, an approximately 74.5% owned subsidiary, which
we consolidate in our Energy segment.
Income Taxes. Income tax expense, excluding
discontinued operations, of $49.3 million for the year
ended August 31, 2006 compares with $30.4 million for
the year ended August 31, 2005, resulting in effective tax
rates of 9.2% and 10.2%, respectively. The federal and state
statutory rate applied to nonpatronage business
32
activity was 38.9% for the years ended August 31, 2006 and
2005. The income taxes and effective tax rate vary each year
based upon profitability and nonpatronage business activity
during each of the comparable years.
Discontinued Operations. During the year ended
August, 31, 2005, we reclassified our Mexican foods
operations, previously reported in Corporate and Other, along
with gains and losses recognized on sales of assets, and
impairments on assets for sale, as discontinued operations that
were sold or have met required criteria for such classification.
In our Consolidated Statements of Operations, all of our Mexican
foods operations have been accounted for as discontinued
operations. The amounts recorded for the years ended
August 31, 2006 and 2005 were $1.0 million income
($0.6 million in income, net of taxes), primarily the
result of the sale of remaining assets, and $27.5 million
loss ($16.8 million loss, net of taxes), respectively.
Comparison
of the years ended August 31, 2005 and
2004
General. We recorded income from continuing
operations before income taxes of $297.3 million in fiscal
2005 compared to $256.7 million in fiscal 2004, an increase
of $40.6 million (16%). These results reflected increased
pretax earnings in our Ag Business and Energy segments,
partially offset by decreased earnings in our Processing
segment, and Corporate and Other.
Our Energy segment generated income from continuing operations
before income taxes of $185.2 million for the year ended
August 31, 2005 compared to $156.4 million in the
prior year. This increase in earnings of $28.8 million
(18%) was primarily attributable to higher margins on refined
fuels, which resulted mainly from limited refining capacity and
increased global demand. Earnings in our lubricants operations
also improved compared to the previous year. These improvements
were partially offset by decreased earnings in our propane and
transportation businesses.
Our Ag Business segment generated income from continuing
operations before income taxes of $92.1 million for the
year ended August 31, 2005 compared to $63.2 million
in the prior year, an increase in earnings of $28.9 million
(46%). All three operations that comprise this business segment
generated improved earnings in fiscal 2005 compared to fiscal
2004 results. Our grain marketing operations improved earnings
by $5.8 million in fiscal 2005 compared with fiscal 2004,
of which $11.3 million of the increase is attributable to a
situation in fiscal 2004 involving export contracts to China.
During fiscal 2004, we, along with several other international
grain marketing companies, experienced contract issues with
Chinese customers for soybeans. Because the market value of
soybeans had declined between the date of the contracts and the
delivery date, certain Chinese customers indicated their intent
of nonperformance on these contracts. At that time, based upon
our assessment of the impact of default, we valued those
contracts at $18.5 million less than current market value,
which was recorded as an addition to cost of goods sold in 2004.
Our country operations earnings increased $2.1 million,
primarily as a result of improved margins. Strong export demand
to Asia favored shuttle train movement to the west coast, and
many of our country elevators were positioned to take advantage
of that market. Our share of agronomy earnings generated through
our ownership interests, primarily Agriliance, net of certain
allocated internal expenses, increased $11.3 million.
Strong grain prices during 2004 encouraged producers to increase
planted acres and to purchase agronomy products to optimize
yields in 2005.
Also affecting the agronomy business of our Ag Business segment,
during the first quarter of fiscal 2005, we evaluated the
carrying value of our investment in CF Industries, Inc. (CF), a
domestic fertilizer manufacturer in which we held a minority
interest. Our carrying value at that time of $153.0 million
consisted primarily of non-cash patronage refunds received from
CF over the years. Based upon indicative values from potential
strategic buyers for the business and through other analyses, we
determined at that time that the carrying value of our CF
investment should be reduced by $35.0 million, resulting in
an impairment charge to our first quarter in fiscal 2005. The
net effect to first fiscal quarter in 2005 income after taxes
was approximately $32.1 million.
In February 2005, after reviewing indicative values from
strategic buyers, the board of directors of CF determined that a
greater value could be derived for the business through an
initial public offering of stock in the company. The initial
public offering was completed in August 2005. Prior to the
initial public offering, we held an ownership interest of
approximately 20% in CF. Through the initial public offering, we
sold
33
approximately 81% of our ownership interest for cash proceeds of
approximately $140.4 million. Our book basis in the portion
of our ownership interest sold through the initial public
offering, after the $35.0 million impairment charge
recognized in our first fiscal quarter results, was
$95.8 million. As a result, we recognized a pretax gain of
$44.6 million on the sale of that ownership interest during
the fourth quarter of fiscal 2005. This gain, net of the
impairment loss of $35.0 million recognized during the
first quarter of fiscal 2005, resulted in a $9.6 million
pretax gain recognized during fiscal 2005. The net effect to
fiscal 2005 income, after taxes, was approximately
$8.8 million.
Our Processing segment generated income from continuing
operations before income taxes of $13.2 million for the
year ended August 31, 2005 compared to $29.1 million
in the prior year, a decrease in earnings of $15.9 million
(55%). Oilseed processing earnings decreased $21.7 million,
which was primarily the result of lower crushing margins,
partially offset by improved oilseed refining margins. The lower
crushing margins were due to higher raw material costs and
crushing over-capacity in the geographical area around our
plants. Higher demand for soybeans in foreign markets had
increased the cost of soybeans used in our crushing operations,
and lower-cost soybeans from areas less affected by export
demand allowed soybean meal to be shipped into our trade area at
costs competitive with our own. This basis difference in the
price of soybeans in our geographical area compared to other
areas of the country also impaired our ability to ship soybean
meal to more distant markets with less local crushing capacity,
which resulted in poor margins on soybean meal. Refined soybean
oil, which has more of a national market, enjoyed improved
margins over those generated in the prior fiscal year. Our share
of earnings from Horizon Milling, our wheat milling joint
venture, decreased $2.4 million for the year ended
August 31, 2005 compared to the prior year. In addition, we
recorded a loss of $2.4 million in fiscal 2005 on the
disposition of wheat milling equipment at a closed facility.
Partially offsetting these decreases in earnings was our share
of earnings from Ventura Foods, our packaged foods joint
venture, which increased $8.5 million compared to the prior
year. Ventura Foods experienced rapidly increasing soybean oil
costs in fiscal 2004 which could not be passed on to customers
as quickly as the additional costs were incurred. During fiscal
2005, soybean oil costs were less volatile which allowed Ventura
Foods to adjust sales prices and even increase market share for
several categories of products.
Corporate and Other generated income from continuing operations
before income taxes of $6.8 million for the year ended
August 31, 2005 compared to $8.0 million in the prior
year, a decrease in earnings of $1.2 million (15%). The
primary decrease in earnings was in our business solutions
operations which reflected decreased earnings of
$1.1 million, primarily as a result of reduced hedging and
insurance income. Less volatility in grain prices affected
hedging commissions and lower insurance premiums, upon which we
are paid a commission, reduced insurance income.
Net Income. Consolidated net income for the
year ended August 31, 2005 was $250.0 million compared
to $221.3 million for the year ended August 31, 2004,
which represents a $28.7 million (13%) increase.
Revenues. Consolidated revenues of
$11.9 billion for the year ended August 31, 2005
compared to $11.0 billion for the year ended
August 31, 2004, which represents a $957.9 million
(9%) increase.
Total revenues include other revenues generated primarily within
our Ag Business segment and Corporate and Other. Our Ag Business
segments country operations elevator and agri-service
centers derives other revenues from activities related to
production agriculture, which include grain storage, grain
cleaning, fertilizer spreading, crop protection spraying and
other services of this nature, and our grain marketing
operations receives other revenues at our export terminals from
activities related to loading vessels.
Our Energy segment revenues, after elimination of intersegment
revenues, of $5.6 billion increased $1,706.3 million
(44%) during the year ended August 31, 2005 compared to the
year ended August 31, 2004. During the years ended
August 31, 2005 and 2004, our Energy segment recorded
revenues to our Ag Business segment of $170.6 million and
$121.2 million, respectively. The revenues increase of
$1,706.3 million was comprised of a net increase of
$1,549.8 million related to price appreciation on refined
fuels and propane products and $156.5 million related to a
net increase in sales volume. Refined fuels revenues increased
$1,360.6 million (48%), of which $1,112.5 million was
related to a net average selling price increase and
$248.1 million was related to increased volumes. The sales
price of refined fuels increased $0.43 per gallon (39%) and
volumes increased 6% when comparing the year ended
August 31, 2005 with the same period in
34
the prior year. Higher crude oil costs, strong global demand and
limited refining capacity contributed to the increase in refined
fuels selling prices. Propane revenues increased by
$154.7 million (30%), of which $140.3 million was
related to a net average selling price increase and
$14.4 million was due to increased volumes compared to the
same period in the previous year. Propane prices increased
$0.19 per gallon (28%) and sales volume increased 2% in
comparison to the same period of the prior year. Propane prices
tend to follow the prices of crude oil and natural gas, both of
which increased during the year ended August 31, 2005
compared to the same period in 2004.
Our Ag Business segment revenues, after elimination of
intersegment revenues, of $5.7 billion decreased
$627.2 million (10%) during the year ended August 31,
2005 compared to the year ended August 31, 2004. Grain
revenues in our Ag Business segment totaled
$4,613.6 million and $5,346.9 million during the years
ended August 31, 2005 and 2004, respectively. The grain
revenues decrease of $733.3 million (14%) was attributable
to decreased average selling grain prices of
$446.0 million, and $287.3 million was related to
decreased volumes during the year ended August 31, 2005
compared to the same period the prior fiscal year. The average
sales price of all grain and oilseed commodities sold reflected
a decrease of $0.38 per bushel (8%). Commodity prices in
general decreased following a strong fall 2004 harvest that
produced good yields throughout most of the United States, with
the quality of most grains rated as excellent or good. The large
harvest assured domestic end users of grain that there would
likely be adequate supply throughout the year, which had the
effect of reducing nearby purchases and hence, our sales volume.
The average market price per bushel of soybeans, spring wheat
and corn were approximately $1.84, $0.50 and $0.70,
respectively, less than the prices on those same grains as
compared to the year ended August 31, 2004. Volumes
decreased 6% during the year ended August 31, 2005 compared
with the same period in 2004. Corn and winter wheat reflected
the largest volume decreases compared to the year ended
August 31, 2004. Our Ag Business segment non-grain revenues
of $1.0 billion increased by $106.1 million (11%)
during the year ended August 31, 2005 compared to the year
ended August 31, 2004, primarily the result of increased
revenues of energy and crop nutrient products, partially offset
by decreased feed and processed sunflower sales. The average
selling price of energy products increased due to overall market
conditions while volumes were fairly consistent to the year
ended August 31, 2004.
Our Processing segment revenues, after elimination of
intersegment revenues, of $613.3 million decreased
$120.3 million (16%) during the year ended August 31,
2005 compared to the year ended August 31, 2004. Because
our wheat milling and packaged foods operations are operated
through non-consolidated joint ventures, revenues reported in
our Processing segment are entirely from our oilseed processing
operations. A lower average sales price reduced processed
oilseed sales dollars by $118.9 million, and an 11%
increase in volumes partially offset that variance by
$29.3 million. Oilseed refining revenues decreased
$42.9 million (12%), of which $37.6 million was due to
lower average sales price and $5.3 million was due to a 2%
net decrease in sales volume. The average selling price of
processed oilseed decreased $68 per ton and the average
selling price of refined oilseed products decreased $0.03 per
pound compared to the same period of the previous year. These
changes in the selling price of products are primarily driven by
the price of soybeans. In 2004, the US experienced a short
soybean crop and strong export demand. That combination drove
soybean prices to near record high levels. Soybean prices
throughout most of fiscal 2005 were at more normal levels.
Cost of Goods Sold. Cost of goods sold of
$11.4 billion increased $922.1 million (9%) during the
year ended August 31, 2005 compared to the year ended
August 31, 2004.
Our Energy segment cost of goods sold, after elimination of
intersegment costs, of $5.3 billion increased by
$1,657.6 million (45%) during the year ended
August 31, 2005 compared to the same period of the prior
year, primarily due to increased average costs of refined fuels
and propane products. On a more product-specific basis, the
average cost of refined fuels increased by $0.43 (40%) per
gallon and volumes increased 6% compared to the year ended
August 31, 2004. 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
NCRAs McPherson, Kansas refinery. The average cost
increase on refined fuels is reflective of higher input costs at
our two crude oil refineries and higher average prices on the
refined products that we purchased for resale compared to the
year ended August 31, 2004. The average per unit cost of
crude oil purchased for the two refineries increased 42%
compared to the year ended August 31, 2004. The average
cost of propane increased $0.20 (29%) per gallon
35
and volumes increased by 2% compared to the year ended
August 31, 2004. The average price of propane increased due
to higher procurement costs.
Our Ag Business segment cost of goods sold, after elimination of
intersegment costs, of $5.5 billion decreased
$637.1 million (10%) during the year ended August 31,
2005 compared to the same period of the prior year. Grain cost
of goods sold in our Ag Business segment totaled
$4,550.2 million and $5,279.4 million during the years
ended August 31, 2005 and 2004, respectively. The cost of
grains and oilseed procured through our Ag Business segment
decreased $729.2 million (14%) compared to the year ended
August 31, 2004, primarily the result of a $0.37 (8%)
average cost per bushel decrease and a 6% decrease in volumes as
compared to the prior year. Corn and winter wheat reflected the
largest volume decreases compared to the year ended
August 31, 2004. Commodity prices on soybeans, spring wheat
and corn have decreased compared to the high prices that were
prevalent during the majority of fiscal 2004. Our Ag Business
segment cost of goods sold, excluding the cost of grains
procured through this segment, increased during the year ended
August 31, 2005 compared to the year ended August 31,
2004, primarily due to energy and crop nutrient products,
partially offset by decreased cost of feed and processed
sunflower products. The average cost of energy products
increased due to overall market condition while volumes stayed
fairly consistent to the year ended August 31, 2004.
Our Processing segment cost of goods sold, after elimination of
intersegment costs, of $603.7 million decreased
$98.1 million (14%) compared to the year ended
August 31, 2004, which was primarily due to decreased input
costs of soybeans processed at our two crushing plants.
Marketing, General and
Administrative. Marketing, general and
administrative expenses of $199.4 million for the year
ended August 31, 2005 decreased by $3.1 million (2%)
compared to the year ended August 31, 2004. The decrease
primarily related to reduced bad debt and technology expenses as
compared to the prior year, mostly in our Energy segment.
Gain on Sale of Investments. During the fourth
quarter of fiscal 2005, we sold approximately 81% of our
investment in CF Industries, Inc. through an initial public
offering of our equity in that company. We received cash
proceeds of $140.4 million and recorded a gain of
$9.6 million, net of an impairment charge of
$35.0 million recognized during the first quarter of fiscal
2005. This gain is reflected within the results reported for our
Ag Business segment.
During the second quarter of fiscal 2005, we sold stock
representing a portion of our investment in a publicly-traded
company for cash proceeds of $7.4 million and recorded a
gain of $3.4 million.
During the third quarter of fiscal 2004, we recorded a gain of
$14.7 million within our Energy segment for the sale of a
portion of a petroleum crude oil pipeline held by our 74.5%
owned subsidiary, NCRA. NCRA exercised its right of first
refusal to purchase a partial interest in this pipeline, and
subsequently sold a 50% interest to another third party for cash
proceeds of $25.0 million.
Gain on Legal Settlements. Our Ag Business
segment received cash of $0.7 million during the year ended
August 31, 2004 from the settlement of a class action
lawsuit alleging illegal price fixing against various feed
vitamin product suppliers.
Interest, net. Interest, net of
$41.5 million for the year ended August 31, 2005
decreased $1.2 million (3%) compared to the year ended
August 31, 2004. Interest expense for the years ended
August 31, 2005 and 2004 was $51.5 million and
$48.7 million, respectively. Interest income, primarily
from marketable securities, for the years ended August 31,
2005 and 2004 was $10.0 million and $6.0 million,
respectively. The interest expense increase of $2.8 million
(6%) was primarily related to an increase in long-term
borrowings, partially offset by a decrease in short-term
borrowings and an increase in capitalized interest. In September
2004, we increased our long-term debt by entering into a private
placement with several insurance companies in the amount of
$125.0 million, for the purpose of financing the final
stages of our ultra-low sulfur upgrades at our energy
refineries. For the fiscal years ended August 31, 2005 and
2004, we capitalized interest of $6.8 million and
$2.8 million, respectively, related to capitalized
construction projects. The increase in capitalized interest
relates to the interest on financing the developing stages of
the ultra-low sulfur upgrades at our energy refineries. The
average level of short-term borrowings decreased
$211.7 million during fiscal 2005 compared
36
to the year ended August 31, 2004, while the average
short-term interest rate increased 1.50%. The interest income
increase of $4.0 million (68%) was primarily in our Energy
segment related to an increase in interest income from short
term investments, primarily NCRA.
Equity Income from Investments. Equity income
from investments of $95.7 million for the year ended
August 31, 2005 favorably changed by $16.7 million
(21%) compared to the year ended August 31, 2004. 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 within our Ag Business, Processing and Energy
segments and Corporate and Other of $8.0 million,
$6.2 million, $2.1 million and $0.4 million,
respectively.
Our Ag Business segment generated improved earnings of
$8.0 million from equity investments. Our investments in a
Canadian joint venture contributed improved earnings primarily
from their joint ventures of $2.9 million. Our share of
equity investment in Agriliance increased $3.8 million and
primarily related to improved margins in crop protection
products, partially offset by reduced margins in retail
operations. Our equity income from our investment in TEMCO, a
joint venture, which exports primarily corn and soybeans
contributed improved earnings of $0.3 million, and our
wheat exporting investment in United Harvest contributed
improved earnings of $0.3 million. Our country operations
also had increases in equity investments of $0.6 million.
Our Processing segment generated improved earnings of
$6.2 million from equity investments. Ventura Foods, our
vegetable oil-based products and packaged foods joint venture,
recorded increased earnings of $8.5 million, partially
offset by Horizon Milling, our wheat milling joint venture,
which recorded decreased earnings of $2.4 million compared
to the same period in the previous year. During fiscal 2004,
Ventura Foods faced rapidly increasing costs for soybean oil
which it was unable to pass through in the form of price
increases to customers. During 2005, soybean prices were far
less volatile so a more normal gross margin was maintained.
Horizon Millings results are primarily affected by US
dietary habits. Although the preference for a low carbohydrate
diet appears to have reached the bottom of its cycle, milling
capacity which had been idled over the past few years because of
lack of demand for flour products can easily be put back in
production as consumption of flour products increases, which
will continue to depress gross margins in the milling industry.
Our Energy segment generated improved earnings of
$2.1 million related to improved margins in an NCRA equity
investment, and Corporate and Other generated improved earnings
of $0.4 million from equity investments as compared to the
year ended August 31, 2004.
Minority Interests. Minority interests of
$47.7 million for the year ended August 31, 2005
increased by $13.9 million (41%) compared to the year ended
August 31, 2004. This net increase was a result of more
profitable operations within our majority-owned subsidiaries
compared to the prior year. Substantially all minority interests
relate to NCRA, an approximately 74.5% owned subsidiary, which
we consolidate in our Energy segment.
Income Taxes. Income tax expense, excluding
discontinued operations, of $30.4 million for the year
ended August 31, 2005 compares with $29.5 million for
the year ended August 31, 2004, resulting in effective tax
rates of 10.2% and 11.5%, respectively. The federal and state
statutory rate applied to nonpatronage business activity was
38.9% for the years ended August 31, 2005 and 2004. The
income taxes and effective tax rate vary each year based upon
profitability and nonpatronage business activity during each of
the comparable years.
Discontinued Operations. During the year ended
August, 31, 2005, we reclassified our Mexican foods
operations, previously reported in Corporate and Other, along
with gains and losses recognized on sales of assets, and
impairments on assets for sale, as discontinued operations that
were sold or have met required criteria for such classification.
In our Consolidated Statements of Operations, all of our Mexican
foods operations have been accounted for as discontinued
operations. Accordingly, operating results had been reclassified
to report those operations as discontinued. The loss amounts
recorded for the years ended
37
August 31, 2005 and 2004 were $27.5 million
($16.8 million, net of taxes) and $9.7 million
($5.9 million, net of taxes), respectively.
Liquidity
and Capital Resources
On August 31, 2006, we had working capital, defined as
current assets less current liabilities, of $829.0 million
and a current ratio, defined as current assets divided by
current liabilities of 1.5 to 1.0, compared to working capital
of $758.7 million and a current ratio of 1.4 to 1.0 on
August 31, 2005. Working capital increased during fiscal
2006 by $70.3 million when compared to 2005, despite
capital expenditures of $235.0 million, primarily because
of strong earnings. We anticipate that working capital will be
drawn down to a level that is more consistent with historical
levels through capital expenditures related to the coker unit
project at our Laurel, Montana refinery, as described below in
Cash Flows from Investing Activities.
During May 2006, we renewed and expanded our committed lines of
revolving credit pursuant to a 2006 Amended and Restated
Revolving Credit Agreement. The previously established credit
lines consisted of a $700 million
364-day
revolver and a $300 million five-year revolver. The current
committed credit facility consists of a five-year revolver in
the amount of $1.1 billion, with a $200 million
potential addition for future expansion. The other terms of the
current credit facility are the same as the terms of the credit
facilities that it replaced in all material respects. These
credit facilities are established with a syndicate of domestic
and international banks, and the inventories and receivables
financed with these loans are highly liquid. On August 31,
2006, we had no amounts outstanding on these lines of credit
compared with $60.0 million on August 31, 2005. Late
summer and early fall are typically our lowest points of
seasonal borrowings. In September 2004, we borrowed
$125.0 million from a group of insurance companies on a
long-term basis and used the proceeds to pay down the revolving
lines of credit. We believe that we have adequate liquidity to
cover any increase in net operating assets and liabilities in
the foreseeable future.
As noted in the Overview at the beginning of
Item 7, certain cash flow items have been restated to
classify them differently.
Cash
Flows from Operations
Cash flows from operations are generally affected by commodity
prices and the seasonality of our businesses. These commodity
prices are affected by a wide range of factors beyond our
control, including weather, crop conditions, drought, the
availability and the adequacy of supply and transportation,
government regulations and policies, world events, and general
political and economic conditions. These factors are described
in the cautionary 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
$454.9 million, $276.5 million and $394.3 million
for the years ended August 31, 2006, 2005 and 2004,
respectively. Volatility in cash flows from operations between
fiscal 2006 and 2005 is primarily the result of greater net
income during fiscal 2006. Volatility in cash flows from
operations between fiscal 2005 and 2004 is primarily the result
of an increase in net operating assets and liabilities as a
result of increased crude and refined oil prices and an increase
in grain and oilseed inventory quantities.
Our operating activities provided net cash of
$454.9 million during the year ended August 31, 2006.
Net income of $490.3 million and net non-cash expenses and
cash distributions from equity investments of
$255.3 million were partially offset by an increase in net
operating assets and liabilities of $290.7 million. The
primary components of net non-cash expenses and cash
distributions from equity investments included depreciation and
amortization of $126.8 million, minority interests of
$86.0 million and deferred tax expense of
$78.3 million, which were partially offset by income from
equity investments net of distributions of $25.9 million.
The increase in net operating assets and liabilities was caused
primarily by an increase in inventories and a decrease in
payables on August 31, 2006 when compared to
August 31, 2005. The increase in inventories was primarily
due to an increase in grain prices and grain inventory
quantities in our Ag Business segment. On August 31, 2006,
the market prices of two of our primary grain commodities,
spring wheat and corn, increased by $1.04 per bushel (29%)
and $0.31 per bushel (15%), respectively, and soybeans,
38
another high volume commodity, saw a decline in price of $0.45
per bushel (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.
Our operating activities provided net cash of
$276.5 million during the year ended August 31, 2005.
Net income of $250.0 million and net non-cash expenses and
cash distributions from equity investments of
$137.3 million were partially offset by an increase in net
operating assets and liabilities of $110.8 million. The
primary components of net non-cash expenses and cash
distributions from equity investments included depreciation and
amortization of $110.3 million, minority interests of
$47.7 million and deferred tax expense of
$26.4 million, which were partially offset by income from
equity investments net of distributions of $30.9 million,
and a pretax gain on the sale of investments of
$13.0 million. The increase in net operating assets and
liabilities was caused primarily by an increase in crude oil
prices of $26.82 per barrel (64%) on August 31, 2005 when
compared to August 31, 2004, and an increase in grain and
oilseed inventories in our Ag Business segment of
36.1 million bushels (64%) when comparing those same fiscal
year-end dates.
Our operating activities provided net cash of
$394.3 million during the year ended August 31, 2004.
Net income of $221.3 million, net non-cash expenses and
cash distributions from equity investments of
$112.7 million, and a decrease in net operating assets and
liabilities of $60.3 million provided this net cash from
operating activities. The primary components of net non-cash
expenses and cash distributions from equity investments included
depreciation and amortization of $108.4 million and
minority interests of $33.8 million, which were partially
offset by income from equity investments net of distributions of
$20.3 million and a pretax gain on the sale of an
investment of $14.7 million. The decrease in net operating
assets and liabilities was caused primarily by a decrease in
grain and oilseed inventories of 20.4 million bushels (26%)
in our Ag Business segment.
Crude oil prices are expected to be volatile in the foreseeable
future, but related inventories and receivables are turned in a
relatively short period, thus somewhat mitigating the effect on
operating assets and liabilities. Grain prices are influenced
significantly by global projections of grain stocks available
until the next harvest. We anticipate that demand for corn for
ethanol production will likely create relatively high prices and
price volatility for that commodity in fiscal 2007. With higher
corn prices, we also anticipate an increase in corn acres
planted in 2007, with some of those acres displacing acres
previously planted for soybeans and wheat. That trend is also
likely to increase the prices for those commodities as supply is
decreased.
Cash
Flows from Investing Activities
For the years ended August 31, 2006, 2005 and 2004, the net
cash flows used in our investing activities totaled
$265.3 million, $91.9 million and $224.1 million,
respectively.
The acquisition of property, plant and equipment comprised the
primary use of cash totaling $235.0 million,
$257.5 million and $245.1 million for the years ended
August 31, 2006, 2005 and 2004, respectively. Capital
expenditures primarily related to the U.S. Environmental
Protection Agency (EPA) low sulfur fuel regulations required by
2006 are complete at our Laurel, Montana refinery and
NCRAs McPherson, Kansas refinery. We incurred capital
expenditures from fiscal year 2003 through 2006 related to these
projects of $88.1 million for our Laurel, Montana refinery
and $328.7 million for NCRAs McPherson, Kansas
refinery. Expenditures for the projects at the two refineries in
total during the years ended August 31, 2006, 2005 and
2004, were $71.5 million, $165.1 million and
$135.0 million, respectively.
For the year ending August 31, 2007, we expect to spend
approximately $391.0 million for the acquisition of
property, plant and equipment. Included in our projected capital
spending through fiscal year 2008 is the installation of a coker
unit at our Laurel, Montana refinery, along with other refinery
improvements, which will allow us to extract a greater volume of
high value gasoline and diesel fuel from a barrel of crude oil
and
39
less relatively low value asphalt, that is expected to increase
yields by 14 percent. The total cost for this project is
expected to be approximately $325.0 million, with
completion planned during fiscal 2008. We anticipate funding the
project with cash flows from operations. Total expenditures for
this project as of August 31, 2006, were
$62.8 million, all of which were incurred during the year
then ended.
In October 2003, we and NCRA reached agreements with the EPA and
the State of Montanas 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 NCRAs McPherson,
Kansas refineries. These settlements are part of a series of
similar settlements that the EPA has negotiated with major
refiners under the EPAs Petroleum Refinery Initiative. The
settlements, which resulted from nearly three years of
discussions, 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 the next several years. The consent
decrees also require us, and NCRA, to pay approximately
$0.5 million in aggregate civil cash penalties. As of
August 31, 2006, the aggregate capital expenditures for us
and NCRA related to these settlements was approximately
$12 million, and we anticipate spending an additional
$11 million over the next five 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, 2006,
2005 and 2004 totaled $73.0 million, $25.9 million and
$49.8 million, respectively. During the year ended
August 31, 2006, we made investments of $70.0 million
in US BioEnergy for shares of Class A Common Stock. 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, but it has
not yet become effective. During the year ended August 31,
2005, we contributed $19.6 million in cash (plus an
additional $18.5 million in net assets, primarily loans) to
Cofina for a 49% equity interest. Cofina was formed by us and
Cenex Finance Association to provide financing for agricultural
cooperatives and businesses, and to producers of agricultural
products. During the year ended August 31, 2004 we
purchased all of Farmlands interest in Agriliance for a
cash payment of $27.5 million, as previously discussed.
Also during the year ended August 31, 2004, NCRA exercised
its right of first refusal to purchase a partial interest in a
crude oil pipeline for $16.0 million.
Subsequent to our fiscal year ended August 31, 2006, we
made an additional investment of $35.0 million in US
BioEnergy, bringing our current ownership of the company to
approximately 25.6%, and also made investments in two other
ventures. We invested approximately $30.0 million in a
Brazil-based grain handling and merchandising company named
Multigrain S.A., which will be owned jointly (50/50) with
Multigrain Comercio, an agricultural commodities business
headquartered in Sao Paulo, Brazil and will be included in our
Ag Business segment. This venture which includes grain
storage and export facilities, builds on our South American
soybean origination and helps meet customer needs year-round.
Our grain marketing operations continue to explore other
opportunities to establish a presence in other emerging grain
origination and export markets. We have also invested
$15.6 million in a new Horizon Milling venture (24% CHS
ownership) that acquired the Canadian grain-based foodservice
and industrial businesses of Smucker Foods of Canada, a wholly
owned subsidiary of J.M. Smucker Company, which includes three
flour milling operations and two dry baking mixing facilities in
Canada.
During the year ended August 31, 2006, changes in notes
receivable resulted in an increase in cash flows of
$21.0 million, and during the years ended August 31,
2005 and 2004, resulted in decreases in cash flows of
$23.8 million and $6.9 million, respectively,
primarily from related party notes receivables at NCRA from its
minority owners, Growmark, Inc. and MFA Oil Company.
Partially offsetting our cash outlays for investing activities
were proceeds from the disposition of property, plant and
equipment of $13.9 million, $21.1 million and
$34.5 million for the years ended August 31, 2006,
2005 and 2004, respectively, and during the year ended
August 31, 2005, we sold the majority of our Mexican foods
business for proceeds of $38.3 million. The proceeds from
the sale of our Mexican foods business includes
$13.8 million received for equipment that was used to buy
out operating leases during the same period. During the year
ended August 31, 2004, proceeds of $19.8 million were
from a sale-leaseback
40
transaction for equipment at our oilseed processing facility in
Fairmont, Minnesota. Also partially offsetting cash usages were
investments redeemed totaling $7.3 million,
$13.5 million and $15.9 million for the years ended
August 31, 2006, 2005 and 2004, respectively. During the
years ended August 31, 2005 and 2004, we also received
proceeds of $147.8 million and $25.0 million,
respectively, from the sale of investments. During the year
ended August 31, 2005, we received proceeds of
$140.4 million from the sale of our CF Industries, Inc.
investment ($9.6 million pretax gain) in our Ag Business
segment, and proceeds of $7.4 million ($3.4 million
pretax gain) from another investment. During the year ended
August 31, 2004, NCRA exercised its right of first refusal
to purchase a partial interest in a crude oil pipeline as
previously discussed, and subsequently sold a 50% interest in
the same pipeline to another third party for proceeds of
$25.0 million, and recorded a pretax gain on the sale of
$14.7 million.
Subsequent to our fiscal year ended August 31, 2006, we
sold 540,000 shares of our CF Industries Holding, Inc.
(CFIH) stock for proceeds of $10.9 million, and recorded a
gain of $5.3 million, reducing our ownership interest in
CFIH to approximately 2.9%
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. The previously established credit lines
consisted of a $700.0 million
364-day
revolver and a $300.0 million five-year revolver. The new
committed credit facility consists of a five-year revolver in
the amount of $1.1 billion, with a $200 million
potential addition for future expansion. The other terms of the
current credit facility are the same as the terms of the credit
facilities it replaced in all material respects. In addition to
these lines of credit, we have a two-year revolving credit
facility dedicated to NCRA, with a syndication of banks in the
amount of $15.0 million committed. In December 2005, the
line of credit dedicated to NCRA was renewed for one year with
no material changes to the terms of the credit facility. We also
have a committed revolving line of credit dedicated to Provista
Renewable Fuels Marketing, LLC (Provista), through LaSalle Bank
National Association which expires in November 2007, in the
amount of $20.0 million, with $12.5 million
outstanding on August 31, 2006. On August 31, 2006 and
2005, we had total short-term indebtedness outstanding on these
various facilities and other miscellaneous short-term notes
payable totaling $22.0 million and $61.1 million,
respectively. On August 31, 2006, interest rates for
amounts outstanding on the Provista credit facility and other
miscellaneous short-term notes payable ranged from 7.25% to
8.80%. In September 2004, we received $125.0 million from
private placement proceeds that were used to pay down our
364-day
credit facilities.
We finance our long-term capital needs, primarily for the
acquisition of property, plant and equipment, with long-term
agreements with various insurance companies and banks. In June
1998, we established a long-term credit agreement through the
cooperative banks. This facility committed $200.0 million
of long-term borrowing capacity to us, with repayments through
fiscal year 2009. The amount outstanding on this credit facility
was $98.4 million and $114.8 million on
August 31, 2006 and 2005, respectively. Interest rates on
August 31, 2006 ranged from 6.30% to 7.13%. Repayments of
$16.4 million, $16.4 million and $6.6 million
were made on this facility during the three years ended
August 31, 2006, 2005 and 2004, respectively.
Also in June 1998, we completed a private placement offering
with several insurance companies for long-term debt in the
amount of $225.0 million with an interest rate of 6.81%.
Repayments are due in equal annual installments of
$37.5 million each in the years 2008 through 2013.
In January 2001, we entered into a note purchase and private
shelf agreement with Prudential Insurance Company. The long-term
note in the amount of $25.0 million has an interest rate of
7.9% and is due in equal annual installments of approximately
$3.6 million, in the years 2005 through 2011. A subsequent
note for $55.0 million was issued in March 2001, related to
the private shelf facility. The $55.0 million note has an
interest rate 7.43% and is due in equal annual installments of
approximately $7.9 million, in the years 2005 through 2011.
During each of the years ended August 31, 2006 and 2005,
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
41
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 fiscal
years 2012 through 2018.
In March 2004, we entered into a note purchase and private shelf
agreement with Prudential Capital Group, primarily for the
purpose of financing the purchase of Farmlands interest in
Agriliance, as previously discussed. 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 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
the fiscal years 2011 through 2015.
We, through NCRA, had revolving term loans outstanding of
$6.0 million and $9.0 million for the years ended
August 31, 2006 and 2005, respectively. Interest rates on
August 31, 2006 ranged from 6.48% to 6.99%. Repayments of
$3.0 million were made during each of the three years ended
August 31, 2006, 2005 and 2004.
On August 31, 2006, we had total long-term debt outstanding
of $744.7 million, of which $110.5 million was bank
financing, $612.1 million was private placement debt and
$22.1 million was industrial development revenue bonds and
other notes and contracts payable. On August 31, 2005, we
had long-term debt outstanding of $773.1 million. Our
long-term debt is unsecured except for other notes and contracts
in the amount of $8.9 million; however, restrictive
covenants under various agreements have requirements for
maintenance of minimum working capital levels and other
financial ratios. In addition, NCRA term loans of
$6.0 million are collateralized by NCRAs investment
in CoBank. We were in compliance with all debt covenants and
restrictions as of August 31, 2006. The aggregate amount of
long-term debt payable as of August 31, 2006 was as follows
(dollars in thousands):
|
|
|
|
|
2007
|
|
$
|
60,748
|
|
2008
|
|
|
98,957
|
|
2009
|
|
|
117,734
|
|
2010
|
|
|
82,617
|
|
2011
|
|
|
111,609
|
|
Thereafter
|
|
|
273,080
|
|
|
|
|
|
|
|
|
$
|
744,745
|
|
|
|
|
|
|
During the years ended August 31, 2005 and 2004, we
borrowed on a long-term basis, $125.0 million and
$35.5 million, respectively. There were no long-term
borrowings during the year ended August 31, 2006. During
the years ended August 31, 2006, 2005 and 2004, we repaid
long-term debt of $36.7 million, $36.0 million and
$15.3 million, respectively.
Distributions to minority owners for the years ended
August 31, 2006, 2005 and 2004 were $80.5 million,
$29.9 million and $15.9 million, respectively, and
were primarily related to NCRA. NCRAs cash distributions
to members were lower as a percent of earnings in 2005 and 2004
when compared to other years, due to the funding requirements
for environmental capital expenditures previously discussed.
In accordance with the bylaws and by action of the Board of
Directors, annual net earnings from patronage sources are
distributed to consenting patrons following the close of each
fiscal year. Patronage refunds are calculated based on amounts
using financial statement earnings. The cash portion of the
patronage distribution is determined annually by the Board of
Directors, with the balance issued in the form of capital equity
certificates. The patronage earnings from the fiscal year ended
August 31, 2005, were primarily distributed during the
second fiscal quarter of the year ended August 31, 2006.
The cash portion of this distribution deemed by the Board of
Directors to be 30% was $62.5 million. During the years
ended August 31, 2005 and 2004, we distributed cash
patronage of $51.6 million and $28.7 million,
respectively.
42
Cash patronage for the year ended August 31, 2006,
determined by the Board of Directors to be 35% and to be
distributed in fiscal year 2007, is expected to be approximately
$130.9 million and is classified as a current liability on
the August 31, 2006 Consolidated Balance Sheet in dividends
and equities payable.
Effective September 1, 2004, redemptions of capital equity
certificates approved by the Board of Directors are divided into
two pools, one for non-individuals (primarily member
cooperatives) who participate in an annual pro-rata program for
equities older than 10 years, and another for individual
members who are eligible for equity redemptions at age 72
or upon death. Effective September 1, 2006, the
10-year
aging factor on the retirement of equity on a pro-rata basis was
eliminated for equity redemptions to be paid in fiscal year
2007. The amount that each non-individual member receives under
the pro-rata program in any year is determined by multiplying
the dollars available for pro-rata redemptions 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 that member, and the denominator
of which is the sum of the patronage certificates eligible for
redemption held by all eligible non-individual members. In
addition to the annual pro-rata program, the Board of Directors
has approved an additional $50.0 million of redemptions to
be paid in fiscal year 2007, targeting older capital equity
certificates. Approximately $40.2 million will be redeemed
to active non-individual members, of which the oldest
outstanding capital equity certificates will be redeemed through
the year 1989. The balance will be available for the redemption
of capital equity certificates held by individual members
reaching the age of 72, or for the redemption of capital equity
certificates held by the estates of deceased members.
For the years ended August 31, 2006, 2005 and 2004, we
redeemed in cash, equities in accordance with authorization from
the Board of Directors in the amounts of $55.9 million,
$23.7 million and $10.3 million, respectively. An
additional $23.8 million, $20.0 million and
$13.0 million of capital equity certificates were redeemed
in fiscal years 2006, 2005 and 2004, 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 $26.10, $27.58 and $27.10,
which was the closing price per share of the stock on the NASDAQ
National Market on January 23, 2006, January 24, 2005
and March 2, 2004 respectively. On August 31, 2006, we
had 5,864,238 shares of Preferred Stock outstanding with a
total redemption value of approximately $146.6 million,
excluding accumulated dividends. The Preferred Stock is
redeemable at our option after February 1, 2008.
We expect redemptions related to the year ended August 31,
2006, that will be distributed in fiscal year 2007, to be
approximately $112.4 million. These expected distributions
are classified as a current liability on the August 31,
2006 Consolidated Balance Sheet.
The Preferred Stock is listed on the NASDAQ National Market
under the symbol CHSCP. The Preferred Stock accumulates
dividends at a rate of 8% per year, and dividends are
payable quarterly.
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, 2006, 2005 and 2004, was
$38.5 million, $31.0 million and $35.3 million,
respectively.
43
Minimum future lease payments required under noncancellable
operating leases as of August 31, 2006, were as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
2007
|
|
$
|
31.5
|
|
2008
|
|
|
27.6
|
|
2009
|
|
|
18.2
|
|
2010
|
|
|
14.9
|
|
2011
|
|
|
8.8
|
|
Thereafter
|
|
|
8.9
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
109.9
|
|
|
|
|
|
|
Guarantees:
We are a guarantor for lines of credit for related companies.
Our bank covenants allow maximum guarantees of
$150.0 million, of which $50.1 million was outstanding
on August 31, 2006. In addition, our bank covenants allow
for guarantees dedicated solely for NCRA in the amount of
$125.0 million. All outstanding loans with respective
creditors are current as of August 31, 2006.
Debt:
There is no material off balance sheet debt.
Contractual
Obligations
We had certain contractual obligations at August 31, 2006
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)
|
|
$
|
22,007
|
|
|
$
|
22,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(1)
|
|
|
744,745
|
|
|
|
60,748
|
|
|
$
|
216,691
|
|
|
$
|
194,226
|
|
|
$
|
273,080
|
|
Interest payments(2)
|
|
|
190,406
|
|
|
|
44,138
|
|
|
|
73,790
|
|
|
|
45,340
|
|
|
|
27,138
|
|
Operating leases
|
|
|
109,898
|
|
|
|
31,554
|
|
|
|
45,812
|
|
|
|
23,669
|
|
|
|
8,863
|
|
Purchase obligations(3)
|
|
|
1,999,543
|
|
|
|
1,593,760
|
|
|
|
397,796
|
|
|
|
1,749
|
|
|
|
6,238
|
|
Other liabilities(4)
|
|
|
199,310
|
|
|
|
|
|
|
|
42,303
|
|
|
|
38,657
|
|
|
|
118,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
3,265,909
|
|
|
$
|
1,752,207
|
|
|
$
|
776,392
|
|
|
$
|
303,641
|
|
|
$
|
433,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included on our Consolidated Balance Sheet. |
|
(2) |
|
Based on interest rates and long-term debt balances as of
August 31, 2006. |
|
(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,
$975.3 million is included in accounts payable and accrued
expenses on our Consolidated Balance Sheet. |
|
(4) |
|
Other liabilities includes the long-term portion of deferred
compensation, deferred income taxes, accrued turnaround and
contractual redemptions, and is included on our Consolidated
Balance Sheet. Of our total other liabilities on our
Consolidated Balance Sheet in the amount of $310.2 million,
the timing of the payments of $110.7 million of such
liabilities cannot be determined. |
44
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
managements 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 Resetrves
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
managements assumptions, then additional reserves or
write-downs of inventories may be required.
Derivative
Financial Instruments
We enter into exchange-traded commodity futures and options
contracts to hedge our exposure to price fluctuations on energy,
grain and oilseed transactions to the extent considered
practicable for minimizing risk. We do not use derivatives for
speculative purposes. Futures and options contracts used for
hedging are purchased and sold through regulated commodity
exchanges. Fluctuations in inventory valuations, however, may
not be completely hedged, due in part to the absence of
satisfactory hedging facilities for certain commodities and
geographical areas and in part to our assessment of our exposure
from expected price fluctuations. We also manage our risks by
entering into fixed-price purchase contracts with pre-approved
producers and establishing appropriate limits for individual
suppliers. Fixed-price sales contracts are entered into with
customers of acceptable creditworthiness, as internally
evaluated. The fair value of futures and options contracts, are
determined primarily from quotes listed on regulated commodity
exchanges. Fixed-price purchase and sales contracts are with
various counterparties, and the fair values of such contracts
are determined from the market price of the underlying product.
We are exposed to loss in the event of nonperformance by the
counterparties to the contracts, and therefore, contract values
are reviewed and adjusted to reflect potential nonperformance.
Pension
and Other Postretirement Benefits
Pension and other postretirement benefits costs and obligations
are dependent on assumptions used in calculating such amounts.
These assumptions include discount rates, health care cost trend
rates, benefits earned, interest costs, expected return on plan
assets, mortality rates and other factors. In accordance with
accounting principles generally accepted in the United States of
America, actual results that differ from the assumptions are
accumulated and amortized over future periods and, therefore,
generally affect recognized
45
expenses and the recorded obligations in future periods. While
our management believes that the assumptions used are
appropriate, differences in actual experience or changes in
assumptions may affect our pension and other postretirement
obligations and future expenses.
Deferred
Tax Assets
We assess whether a valuation allowance is necessary to reduce
our deferred tax assets to the amount that we believe is more
likely than not to be realized. While we have considered future
taxable income as well as other factors in assessing the need
for the valuation allowance, in the event that we were to
determine that we would not be able to realize all or part of
our net deferred tax assets in the future, an adjustment to our
deferred tax assets would be charged to income in the period
such determination was made. We are also significantly impacted
by the utilization of loss carryforwards and tax benefits
primarily passed to us from National Cooperative Refinery
Association (NCRA), which are associated with refinery upgrades
that enable NCRA to produce ultra-low sulfur fuels. Our net
operating loss carryforwards for tax purposes are available to
offset future taxable income. If our loss carryforwards are not
used, these loss carryforwards will expire.
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 managements estimates of expected useful
lives to differ from actual.
All long-lived assets, including property plant and equipment,
goodwill, investments in unconsolidated affiliates and other
identifiable intangibles, are evaluated for impairment on the
basis of undiscounted cash flows at least annually for goodwill,
and whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. An
impaired asset is written down to its estimated fair market
value based on the best information available. Estimated fair
market value is generally measured by discounting estimated
future cash flows. Considerable management judgment is necessary
to estimate discounted future cash flows and may differ from
actual.
Environmental
Liabilities
Liabilities, including legal costs, related to remediation of
contaminated properties are recognized when the related costs
are considered probable and can be reasonably estimated.
Estimates of these costs are based on current available facts,
existing technology, undiscounted site-specific costs and
currently enacted laws and regulations. Recoveries, if any, are
recorded in the period in which recovery is considered probable.
It is often difficult to estimate the cost of environmental
compliance, remediation and potential claims given the
uncertainties regarding the interpretation and enforcement of
applicable environmental laws and regulations, the extent of
environmental contamination and the existence of alternate
cleanup methods. All liabilities are monitored and adjusted as
new facts or changes in law or technology occur and management
believes adequate provisions have been made for environmental
liabilities. Changes in facts or circumstances may have an
adverse impact on our consolidated financial results.
Revenue
Recognition
We record revenue from grain and oilseed sales after the
commodity has been delivered to its destination and final
weights, grades and settlement prices have been agreed upon. All
other sales are recognized upon transfer of title, which could
occur upon either shipment or receipt by the customer, depending
upon the transaction. Amounts billed to a customer as part of a
sales transaction related to shipping and handling are included
in net sales. Service revenues are recorded only after such
services have been rendered, and are included in other revenues.
46
Effect of
Inflation and Foreign Currency Transactions
We believe that inflation and foreign currency fluctuations have
not had a significant effect on our operations since we conduct
essentially all of our business in US dollars.
Recent
Accounting Pronouncements
In March 2005, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47).
FIN 47 clarifies the term conditional asset
retirement obligation as used in Statement of Financial
Accounting Standards (SFAS) 143, Accounting for Asset
Retirement Obligations, which refers to a legal obligation
to perform an asset retirement activity in which the timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. However, the
obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing
and/or
method of settlement. FIN 47 requires that the uncertainty
about the timing
and/or
method of settlement of a conditional asset retirement
obligation be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies
when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. We
have legal asset retirement obligations for certain assets,
including our refineries, pipelines and terminals. At this time,
we are unable to measure this obligation because it is not
possible to estimate when the obligation will be settled.
FIN 47 became effective for us in fiscal year 2006 and it
did not have a material effect on our consolidated financial
statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for income
taxes recognized in an enterprises financial statements
and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods and disclosure. FIN 48 is effective for fiscal
years beginning after December 15, 2006, with early
adoption permitted. We are currently evaluating the impact of
this standard.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans (SFAS No. 158).
SFAS No. 158 requires that employers recognize on a
prospective basis the funded status of their defined benefit
pension and other postretirement plans on their consolidated
balance sheet and recognize as a component of other
comprehensive income, net of tax, the gains or losses and prior
service costs or credits that arise during the period but are
not recognized as components of net periodic benefit cost.
SFAS No. 158 also requires additional disclosures in
the notes to financial statements. SFAS No. 158 is
effective as of the end of fiscal years ending after
December 15, 2006. We are currently assessing the impact of
SFAS No. 158 on our consolidated financial statements.
Based on the funded status of our defined benefit pension and
postretirement medical plans as of the most recent measurement
dates, we would be required to increase its net liabilities for
pension and postretirement medical benefits, which would result
in a decrease to owners equity in our consolidated balance
sheet. The ultimate amounts recorded are highly dependent on a
number of assumptions, including the discount rates in effect in
2007, the actual rate of return on pension assets for 2007 and
the tax effects of the adjustment. Changes in these assumptions
since our last measurement date could increase or decrease the
expected impact of implementing SFAS No. 158 in our
consolidated financial statements at August 31, 2007.
In September 2006, the FASB issued FASB Staff Position (FSP) AUG
AIR-1, Accounting for Planned Major Maintenance
Activities, addressing the accounting for planned major
maintenance activities which includes refinery turnarounds. This
FSP prohibits the use of the
accrue-in-advance
method of accounting for planned major maintenance activities in
annual and interim financial reporting periods but allows the
alternative deferral method. The FSP shall be applied to the
first fiscal year beginning after December 15, 2006. We are
currently using the
accrue-in-advance
method of accounting, but have not yet determined the impact
this FSP will have on our consolidated financial statements.
47
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) to increase consistency and
comparability in fair value measurements by defining fair value,
establishing a framework for measuring fair value in generally
accepted accounting principles, and expanding disclosures about
fair value measurements. SFAS No. 157 emphasizes that
fair value is a market-based measurement, not an entity-specific
measurement. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. 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.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
COMMODITY
PRICE RISK
We are exposed to price fluctuations on energy, grain and
oilseed transactions due to fluctuations in the market value of
inventories and fixed or partially fixed purchase and sales
contracts. Our use of derivative instruments reduces the effects
of price volatility, thereby protecting against adverse
short-term price movements, while somewhat limiting the benefits
of short-term price movements. However, fluctuations in
inventory valuations may not be completely hedged, due in part
to the absence of satisfactory hedging facilities for certain
commodities and geographical areas and in part to our assessment
of our exposure from expected price fluctuations.
We generally enter into opposite and offsetting positions using
futures contracts or options to the extent practical, in order
to arrive at a net commodity position within the formal position
limits we have established and deemed prudent for each of those
commodities. These contracts are purchased and sold through
regulated commodity exchanges. The contracts are economic hedges
of price risk, but are not designated as or accounted for as,
hedging instruments for accounting purposes in any of our
operations, with the exception of some contracts included in our
Energy segment operations discussed below. These contracts are
recorded on the balance sheet at fair value based on quotes
listed on regulated commodity exchanges. Unrealized gains and
losses on these contracts are recognized in cost of goods sold
for financial reporting using market-based prices.
We also manage our risks by entering into fixed-price purchase
and sales contracts with pre-approved producers and by
establishing appropriate limits for individual suppliers.
Fixed-price contracts are entered into with customers of
acceptable creditworthiness, as internally evaluated. We are
also exposed to loss in the event of nonperformance by the
counterparties to the contracts and, therefore, contract values
are reviewed and adjusted to reflect potential nonperformance.
These contracts are recorded on the balance sheet at fair value
based on the market price 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 using market-based prices.
Changes in the fair values of derivative instruments described
above are recognized in earnings in our Consolidated Statements
of Operations in the period such changes occur for all
operations with the exception of some derivative instruments
included in our Energy segment. Included in other current assets
on August 31, 2006 and 2005 are derivative assets of
$74.3 million and $102.7 million, respectively.
Included in accrued expenses on August 31, 2006 and 2005
are derivative liabilities of $97.8 million and
$152.8 million, respectively.
In our Energy segment, certain financial contracts entered into
for the spread between crude oil purchase value and distillate
selling price have been designated and accounted for as hedging
instruments (cash flow hedges). The unrealized gains or losses
of these contracts are deferred to accumulated other
comprehensive income in the equity section of our Consolidated
Balance Sheet for the fiscal year ended August 31, 2006,
and will be included in earnings upon settlement. A gain of
$2.8 million, net of taxes, was recorded in accumulated
other comprehensive income for the year ended August 31,
2006, for the change in the fair value of cash flow hedges
related to these derivatives. No gains or losses were recorded
in the income statement during the year
48
ended August 31, 2006, since there were no settlements. The
contracts expire in fiscal 2008, and we expect
$1.9 million, net of taxes, to be included in earnings
during the next 12 months.
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, 2006 was approximately 6.1%.
We entered into interest rate treasury lock instruments to fix
interest rates related to a portion of our private placement
debts. These instruments were designated and are effective as
cash flow hedges for accounting purposes and, accordingly,
changes in fair value of $2.1 million, net of taxes, are
included in accumulated other comprehensive income. Interest
expense for each of the years ended August 31, 2006, 2005
and 2004 includes $0.9 million which relates to the
interest rate derivatives. The additional interest expense is an
offset to the lower actual interest paid on the outstanding debt
instruments.
FOREIGN
CURRENCY RISK
We conduct essentially all of our business in US dollars, except
for grain marketing operations in Brazil and purchases of
products from Canada, and had minimal risk regarding foreign
currency fluctuations during 2006 or in recent years. Foreign
currency fluctuations do, however, impact the ability of foreign
buyers to purchase US agricultural products and the
competitiveness of US agricultural products compared to the same
products offered by alternative sources of world supply.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements listed in 15(a)(1) are set forth
beginning on
page F-1.
Financial statement schedules are included in Schedule II
in 15(a)(2). Supplementary financial information required by
Item 302 of
Regulation S-K
for each quarter during the years ended August 31, 2006 and
2005 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
2006
|
|
|
|
2005
|
|
|
February 28
|
|
|
May 31
|
|
|
August 31
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
$
|
3,453,549
|
|
|
$
|
3,156,834
|
|
|
$
|
3,743,021
|
|
|
$
|
4,030,431
|
|
Gross profit
|
|
|
254,481
|
|
|
|
114,668
|
|
|
|
218,528
|
|
|
|
225,651
|
|
Income from continuing operations
|
|
|
154,026
|
|
|
|
40,247
|
|
|
|
136,563
|
|
|
|
158,836
|
|
Net income
|
|
|
154,234
|
|
|
|
40,148
|
|
|
|
136,593
|
|
|
|
159,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
2005
|
|
|
|
2004
|
|
|
February 28
|
|
|
May 31
|
|
|
August 31
|
|
|
Revenues
|
|
$
|
2,962,923
|
|
|
$
|
2,425,199
|
|
|
$
|
3,133,597
|
|
|
$
|
3,405,243
|
|
Gross profit
|
|
|
108,450
|
|
|
|
88,108
|
|
|
|
151,348
|
|
|
|
129,198
|
|
Income from continuing operations
|
|
|
20,341
|
|
|
|
19,718
|
|
|
|
109,861
|
|
|
|
116,906
|
|
Net income
|
|
|
17,996
|
|
|
|
8,723
|
|
|
|
106,946
|
|
|
|
116,351
|
|
49
Restatement
of previously issued quarterly financial statements:
Our Consolidated Statements of Cash Flows previously included in
our Quarterly Reports on
Form 10-Q
during fiscal years 2006 and 2005 are restated below to correct
an error in the classification of our cash flows received from
our interest in joint ventures and distributions made to
minority owners. We have determined that a portion of the cash
flows from our joint ventures should have been considered a
return on our investment and classified as an operating activity
as distributions from equity investments, instead of as an
investing activity. Additionally, we have previously reported
distributions to minority owners as investing activities when
they should have been classified as financing activities.
The restatements do not have an impact on our Consolidated
Statements of Operations, Consolidated Statements of
Shareholders Equities and Comprehensive Income, or total
change in cash and cash equivalents on our Consolidated
Statements of Cash Flows for any of the quarterly periods. In
addition, they did not have an impact on our Consolidated
Balance Sheets as of those quarterly periods.
Summarized results of previously reported and restated
Consolidated Statements of Cash Flows for the three months ended
November 30, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
|
(Unaudited)
|
|
|
|
Dollars in thousands
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from equity
investments
|
|
|
|
|
|
$
|
3,532
|
|
|
|
|
|
|
$
|
15,348
|
|
Net cash provided by operating
activities
|
|
$
|
160,154
|
|
|
|
163,686
|
|
|
$
|
78,408
|
|
|
|
93,756
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments redeemed
|
|
|
3,532
|
|
|
|
|
|
|
|
22,520
|
|
|
|
|
|
Investments redeemed
|
|
|
1,175
|
|
|
|
1,175
|
|
|
|
983
|
|
|
|
8,155
|
|
Distributions to minority owners
|
|
|
(11,677
|
)
|
|
|
|
|
|
|
(3,060
|
)
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(94,297
|
)
|
|
|
(86,152
|
)
|
|
|
(35,776
|
)
|
|
|
(48,064
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to minority owners
|
|
|
|
|
|
|
(11,677
|
)
|
|
|
|
|
|
|
(3,060
|
)
|
Net cash used in financing
activities
|
|
|
(62,119
|
)
|
|
|
(73,796
|
)
|
|
|
(12,276
|
)
|
|
|
(15,336
|
)
|
Net increase in cash and cash
equivalents
|
|
|
3,738
|
|
|
|
3,738
|
|
|
|
30,356
|
|
|
|
30,356
|
|
Cash and cash equivalents at
beginning of period
|
|
|
241,018
|
|
|
|
241,018
|
|
|
|
136,491
|
|
|
|
136,491
|
|
Cash and cash equivalents at end
of period
|
|
|
244,756
|
|
|
|
244,756
|
|
|
|
166,847
|
|
|
|
166,847
|
|
50
Summarized results of previously reported and restated
Consolidated Statements of Cash Flows for the six months ended
February 28, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
|
(Unaudited)
|
|
|
|
Dollars in thousands
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from equity
investments
|
|
|
|
|
|
$
|
38,673
|
|
|
|
|
|
|
$
|
27,583
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
27,175
|
|
|
|
65,848
|
|
|
$
|
(144,837
|
)
|
|
|
(117,254
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments redeemed
|
|
|
40,846
|
|
|
|
|
|
|
|
36,945
|
|
|
|
|
|
Investments redeemed
|
|
|
3,218
|
|
|
|
5,391
|
|
|
|
2,093
|
|
|
|
11,455
|
|
Net cash used in investing
activities
|
|
|
(51,615
|
)
|
|
|
(90,288
|
)
|
|
|
(60,195
|
)
|
|
|
(87,778
|
)
|
Net cash (used in) provided by
financing activities
|
|
|
(136,835
|
)
|
|
|
(136,835
|
)
|
|
|
262,074
|
|
|
|
262,074
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(161,275
|
)
|
|
|
(161,275
|
)
|
|
|
57,042
|
|
|
|
57,042
|
|
Cash and cash equivalents at
beginning of period
|
|
|
241,018
|
|
|
|
241,018
|
|
|
|
136,491
|
|
|
|
136,491
|
|
Cash and cash equivalents at end
of period
|
|
|
79,743
|
|
|
|
79,743
|
|
|
|
193,533
|
|
|
|
193,533
|
|
Summarized results of previously reported and restated
Consolidated Statements of Cash Flows for the nine months ended
May 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
|
(Unaudited)
|
|
|
|
Dollars in thousands
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from equity
investments
|
|
|
|
|
|
$
|
51,167
|
|
|
|
|
|
|
$
|
43,240
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
227,026
|
|
|
|
278,193
|
|
|
$
|
(95,495
|
)
|
|
|
(52,255
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments redeemed
|
|
|
53,340
|
|
|
|
|
|
|
|
52,602
|
|
|
|
|
|
Investments redeemed
|
|
|
4,155
|
|
|
|
6,328
|
|
|
|
3,114
|
|
|
|
12,476
|
|
Net cash used in investing
activities
|
|
|
(174,995
|
)
|
|
|
(226,162
|
)
|
|
|
(110,167
|
)
|
|
|
(153,407
|
)
|
Net cash (used in) provided by
financing activities
|
|
|
(156,122
|
)
|
|
|
(156,122
|
)
|
|
|
303,640
|
|
|
|
303,640
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(104,091
|
)
|
|
|
(104,091
|
)
|
|
|
97,978
|
|
|
|
97,978
|
|
Cash and cash equivalents at
beginning of period
|
|
|
241,018
|
|
|
|
241,018
|
|
|
|
136,491
|
|
|
|
136,491
|
|
Cash and cash equivalents at end
of period
|
|
|
136,927
|
|
|
|
136,927
|
|
|
|
234,469
|
|
|
|
234,469
|
|
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
51
|
|
ITEM 9A.
|
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 and 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 and Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported, within the time
periods specified by the Securities and Exchange
Commissions 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, 2006. 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, 2006, the end of the period covered in this
annual report on
Form 10-K.
In coming to the conclusion that our disclosure controls and
procedures were effective as of August 31, 2006, we
considered, among other things, the change in internal control
over financial reporting in the fourth quarter of fiscal 2006
related to the preparation, review and presentation and
disclosure of our Consolidated Statements of Cash Flows in
accordance with generally accepted account principles as
described below, which resulted in the need to restate our
previously issued consolidated financial statements included in
this
Form 10-K.
Accordingly, our management has concluded that the financial
statements included in this report fairly present in all
material respects our financial position, results of operations
and cash flows for the periods presented in conformity with
generally accepted accounting principles.
Change in Internal Control over Financial Reporting:
A material weakness is a control deficiency or a combination of
control deficiencies that result in more than a remote
likelihood that a material misstatement of the annual or interim
consolidated financial statements will not be prevented or
detected. Our management has concluded that, prior to the fourth
quarter of fiscal 2006, we did not maintain effective controls
over the accuracy of the classification of cash flows received
from our interest in joint ventures and distributions made to
minority interest holders as components of operating activities
and financing activities, respectively, in our Consolidated
Statements of Cash Flows, in accordance with generally accepted
accounting principles. This control deficiency resulted in the
restatement of our consolidated financial statements for fiscal
years ended August 31, 2005 and 2004 and each of the
quarters of fiscal 2006 and 2005. This control deficiency could
result in the misstatement of the classifications of our
operating, investing and financing cash flows and could result
in a material misstatement of the annual or interim financial
statements that would not be prevented or detected. Accordingly,
management has determined that the control deficiency
constituted a material weakness.
During the fourth quarter of fiscal 2006, we expanded our
disclosure controls and procedures to include a thorough review
of the classification requirements of each component line item
and the individual elements that comprise each line item of the
consolidated statements of cash flows in accordance with
generally accepted accounting principles. We believe the
additional control procedures were designed, and implemented,
and fully remediate the aforementioned matter related to our
disclosure controls and procedures as of August 31, 2006.
52
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
On August 31, 2006, Provista, a 50% owned joint venture
that we consolidate into our financial statements, established a
committed revolving line of credit with LaSalle Bank National
Association in the amount of $20.0 million, with
$12.5 million outstanding on August 31, 2006. We are a
guarantor for the line of credit. The amended and restated loan
and security agreement is attached as Exhibit 10.28 to this
Annual Report on
Form 10-K.
PART III.
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
BOARD OF
DIRECTORS
The table below lists our directors of as of August 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
Name and Address
|
|
Age
|
|
|
District
|
|
|
Since
|
|
|
Bruce Anderson
|
|
|
54
|
|
|
|
3
|
|
|
|
1995
|
|
13500 42nd St
NE
Glenburn, ND
58740-9564
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Bass
|
|
|
52
|
|
|
|
5
|
|
|
|
1994
|
|
E 6391 Bass Road
Reedsburg, WI 53959
|
|
|
|
|
|
|
|
|
|
|
|
|
David Bielenberg
|
|
|
57
|
|
|
|
6
|
|
|
|
2002
|
|
16425 Herigstad Road NE
Silverton, Oregon 97381
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis Carlson
|
|
|
45
|
|
|
|
3
|
|
|
|
2001
|
|
3255
50th Street
Mandan, ND 58554
|
|
|
|
|
|
|
|
|
|
|
|
|
Curt Eischens
|
|
|
54
|
|
|
|
1
|
|
|
|
1990
|
|
2153 330th St
North
Minneota, MN
56264-1880
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Fritel
|
|
|
51
|
|
|
|
3
|
|
|
|
2003
|
|
2851 77th Street NE
Barton, ND 58384
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Grabarski
|
|
|
57
|
|
|
|
5
|
|
|
|
1999
|
|
1770 Highway 21
Arkdale, WI 54613
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerry Hasnedl
|
|
|
60
|
|
|
|
1
|
|
|
|
1995
|
|
12276
150th Avenue SE
St. Hilaire, MN 56754 -9776
|
|
|
|
|
|
|
|
|
|
|
|
|
James Kile
|
|
|
58
|
|
|
|
6
|
|
|
|
1992
|
|
508 W. Bell Lane
St. John, WA 99171
|
|
|
|
|
|
|
|
|
|
|
|
|
Randy Knecht
|
|
|
56
|
|
|
|
4
|
|
|
|
2001
|
|
40193
112th Street
Houghton, SD 57449
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Mulcahey
|
|
|
58
|
|
|
|
1
|
|
|
|
2003
|
|
8109 360th Avenue
Waseca, MN 56093
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard Owen
|
|
|
52
|
|
|
|
2
|
|
|
|
1999
|
|
PO Box 129
Geraldine, MT 59446
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
|
Name and Address
|
|
Age
|
|
|
District
|
|
|
Since
|
|
|
Duane Stenzel
|
|
|
60
|
|
|
|
1
|
|
|
|
1993
|
|
62904
295th Street
Wells, MN 56097
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Toelle
|
|
|
44
|
|
|
|
1
|
|
|
|
1992
|
|
5085 St. Anthony Drive
Browns Valley, MN 56219
|
|
|
|
|
|
|
|
|
|
|
|
|
Merlin Van Walleghen
|
|
|
70
|
|
|
|
4
|
|
|
|
1993
|
|
24106
408th Avenue
Letcher, SD
57359-6021
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce Anderson, assistant secretary-treasurer
(1995): Chairman of the Governance Committee and
serves on the Government Relations Committee. Vice chairman of
the North Dakota Agricultural Products Utilization Commission
and past secretary of the board for North Dakota Farmers Union
and Farmers Union Mutual Insurance Company. Served two two-year
terms in the North Dakota House of Representatives. Raises small
grains near Glenburn, N.D. Mr. Andersons principal
occupation has been farming for the last five years or longer.
Robert Bass, first vice chairman
(1994): Chairman of Audit Committee. Member, CHS
Foundation Finance and Investment Committee. Director and
officer for Co-op Country Partners Cooperative and its
predecessors for 15 years. Vice chairman for the Wisconsin
Federation of Cooperatives. Holds a bachelors of science
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.
David Bielenberg (2002): Serves on Audit
Committee and CHS Foundation Finance and Investment Committee.
Director and former board president of Wilco Farmers
Cooperative, Mt. Angel, Ore. Chair of the East Valley Water
District. Holds a bachelors of science degree in
agricultural engineering from Oregon State University, is a
graduate of the Texas A&M University executive program for
agricultural producers and has achieved accreditation from the
National Association of Corporate Directors. Operates a diverse
agricultural business near Silverton, Ore., which includes seed
crops, vegetables, greenhouse plant production and timberland.
Mr. Bielenbergs principal occupation has been farming
for the last five years or longer.
Dennis Carlson (2001): Serves on Audit
Committee and CHS Foundation Finance and Investment Committee.
Director and past chairman of Farmers Union Oil Co.,
Bismarck/Mandan, N.D. and active in a number of agricultural and
cooperative organizations. Operates a diverse grain and
livestock operation near Mandan, N.D. Mr. Carlsons
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 Capital
Committee. Director for Rugby (N.D.) Farmers Union Oil Co.,
former director and chairman for Rugby Farmers Union Elevator,
and 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 bachelors degree from
North Dakota State College of Science, Wahpeton. Raises small
grains, corn, soybeans and sunflowers near Barton, N.D.
Mr. Fritels principal occupation has been farming for
the last five years or longer.
Robert Grabarski (1999): Chairman of the
Government Relations Committee and serves on Capital Committee.
Director and first vice-chairman of the Alto Dairy Cooperative
Board of Directors and former interim president. Chairman of
Wisconsin River Cooperative. Holds a certificate in production
agriculture from
54
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. Grabarskis principal occupation has been farming
for the last five years or longer.
Jerry Hasnedl (1995): Serves on Capital and
Government Relations committee. Chairman of the former CHS Wheat
Milling Defined Member Board. Former director and secretary for
St. Hilaire Cooperative Elevator and Northwest Grain. Member of
American Coalition for Ethanol and the Minnesota Association of
Cooperatives. Earned associates of arts 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, corn, soybeans, sunflowers, malting
barley, canola and alfalfa. Mr. Hasnedls principal
occupation has been farming for the last five years or longer.
James Kile, second vice chairman
(1992): Chairman of Capital Committee; member of
the Government Relations Committee. Served nearly two decades as
a director and chairman of St. John 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 bachelors degree in
agricultural economics from Washington State University.
Employed in banking before returning to St. John to operate a
dryland wheat farm. Mr. Kiles principal occupation
has been farming for the last five years or longer.
Randy Knecht (2001): Serves on Governance and
Government Relations committees. President of Four Seasons
Cooperative, 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 a wide range of agricultural and cooperative
associations, including the American Coalition for Ethanol.
Holds a bachelors of science degree in agriculture from
South Dakota State University. Operates a diversified crop farm
and cattle ranch near Houghton, S.D. Mr. Knechts
principal occupation has been farming for the last five years or
longer.
Michael Mulcahey (2003): Serves on Corporate
Responsibility Committee. Served for three decades as a director
and officer for Crystal Valley Co-op and its predecessor
organizations, has served as a director and chairman for South
Central Federated Feeds and is active in numerous agricultural,
cooperative and civic organizations. Attended Minnesota State
University-Mankato and the University of Minnesota-Waseca.
Operates a grain farm and raises beef near Waseca, Minn.
Mr. Mulcaheys principal occupation has been farming
for the last five years or longer.
Richard Owen (1999): Serves on the Corporate
Responsibility and Government Relations committees. Director of
Mountain View, LLC, president of the Montana Cooperative
Development Center and president of ArmorAuto, LLC. Previously
served as a director and officer of Central Montana Cooperative
and its predecessor organization. Holds a bachelors of
science degree in agricultural economics from Montana State
University. Raises small grains and specialty crops near
Geraldine, Mont. Mr. Owens principal occupation has
been farming for the last five years or longer.
Duane Stenzel (1993): Serves on Governance
Committee and CHS Foundation Finance and Investment Committee.
Chairman of the former CHS Oilseed Processing and Refining
Defined Member 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. Stenzels principal occupation has been farming
for the last five years or longer.
Michael Toelle, chairman (elected in 1992; chairman since
2002): Chairman, CHS Foundation. Served more than 15 years
as a 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, has served as a director and chairman with the
Agriculture Council of America, and is active in a variety of
cooperative and commodity organizations. Holds a bachelors
of science degree in industrial technology from Moorhead (Minn.)
State University. Operates a grain, hog and beef farm near
Browns Valley, Minn. Mr. Toelles principal occupation
has been farming for the last five years or longer.
Merlin Van Walleghen, secretary-treasurer
(1993): Chairman of the CHS Foundation Finance
and Investment Committee and member of Corporate Responsibility
Committee. Served 20 years as a director and
55
officer of the Farmers Cooperative Elevator Association of
Mitchell, S.D., and served as a member and president of the
South Dakota Association of Cooperatives board. Advisory
director for Fulton State Bank. Holds a bachelors of
science degree from South Dakota State University. Operates a
corn and soybean operation near Letcher, S.D. Mr. Van
Walleghens principal occupation has been farming for the
last five years or longer.
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
elected at the 2006 Annual Meeting of Members:
|
|
|
Region
|
|
Current Incumbent
|
|
Region 1 (Minnesota)
|
|
Duane Stenzel
Michael Mulcahey
|
Region 3 (North Dakota)
|
|
Steve Fritel
|
Region 4 (South Dakota)
|
|
open seat
|
Region 6 (Alaska, Arizona,
California, Idaho, Oregon, Washington, Utah)
|
|
Jim Kile *
David Bielenberg *
|
Region 7 (Alabama, Arkansas,
Florida, Iowa, Louisiana, Missouri, Mississippi)
|
|
open seat
|
Region 8 (Colorado, Nebraska,
Kansas, New Mexico, Oklahoma, Texas)
|
|
open seat
open seat
|
|
|
|
|
|
The number of directors from Region 6 will be reduced to one
director at the 2006 Annual Meeting.
|
56
EXECUTIVE
OFFICERS
The table below lists our executive officers as of
August 31, 2006. Officers are appointed by the Board of
Directors.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John D. Johnson
|
|
|
58
|
|
|
President and Chief Executive
Officer
|
Jay Debertin
|
|
|
46
|
|
|
Executive Vice President and Chief
Operating Officer, Processing
|
Patrick Kluempke
|
|
|
58
|
|
|
Executive Vice
President Corporate Administration
|
Thomas D. Larson
|
|
|
58
|
|
|
Executive Vice
President Business Solutions
|
Mark Palmquist
|
|
|
49
|
|
|
Executive Vice President and Chief
Operating Officer, Ag Business
|
John Schmitz
|
|
|
56
|
|
|
Executive Vice President and Chief
Financial Officer
|
Leon E. Westbrock
|
|
|
59
|
|
|
Executive Vice President and Chief
Operating Officer, Energy
|
John D. Johnson, President and Chief Executive Officer,
began his career with the former Harvest States in 1976 as a
feed consultant in the GTA Feeds Division, later becoming
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 in 1992 and president
and CEO of Harvest States 1995. Selected president and general
manager of CHS upon its creation in 1998 and assumed the
position of president and CEO in 2000. Serves on the boards of
Goldkist, Inc., 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 the former
Cenex in 1984 in its petroleum division and held a variety of
positions in energy marketing operations. Named vice president,
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 and is responsible for oilseed
processing operations, as well as 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 fuels. Serves on the boards of
directors of the National Cooperative Refinery Association,
Horizon Milling, LLC and Ventura Foods, LLC. Earned a
bachelors degree in economics from the University of North
Dakota in 1982 and a masters of business administration
degree from the University of Wisconsin Madison in
1984.
Patrick Kluempke, Executive Vice President
Corporate Administration, is responsible for human resources,
information technology, business risk control, and building and
office services, along with 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 the former Harvest States in 1983,
has held various positions within CHS in both the operations and
corporate level, and was named to his current position in 2000.
Serves on the board of Ventura Foods, LLC. Graduated with honors
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 in 1978 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. Serves on the board of
Cofina Financial, LLC. Holds a bachelors degree in
agricultural education from South Dakota State University.
57
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 director of grain
marketing in 1990 and senior vice president in 1993. Assumed his
current responsibilities for grain, agronomic and country
operations businesses in 2005. Serves on the boards of
Agriliance, LLC, Horizon Milling, LLC, InTrade/ACTI, National
Cooperative Refinery Association and Schnitzer Steel Industries,
Inc. 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, joined the former Harvest States in 1974 and
has held a number of accounting and finance positions within
CHS. Named vice president and controller of Harvest States in
1986 and had served in that position up to the time of the
merger with Cenex in 1998, when he became vice president,
finance. Appointed to the position of Chief Financial Officer in
1999. Serves as a director on the boards of National Cooperative
Refinery Association, Ventura Foods, LLC and Cofina Financial,
LLC. Earned a bachelors of science degree in accounting
from St. Cloud (Minn.) State University, and is a member of the
American Institute of Certified Public Accountants, the
Minnesota Society of CPAs and the National Society of
Accountants for Cooperatives.
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 since 1987, executive vice president of energy for what is
now CHS. Appointed to his current position in 2000. Serves as
chairman of National Cooperative Refinery Association. Holds a
bachelors degree from St. Cloud (Minn.) State University.
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, 2006, and
based further upon written representations received by us with
respect to the need to file reports on Form 5, there were
no late filings of the reports required by Section 16(a) of
the Exchange Act.
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
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. Bielenberg and Mr. Carlson, each of
whom is an
58
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.
59
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Summary Compensation. The following table sets
forth the cash and noncash compensation earned by our President
and Chief Executive Officer and each of our executive officers
whose total salary and bonus or similar incentive payment earned
during the year ended August 31, 2006, exceeded $100,000
(the Named Executive Officers):
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Compensation
|
|
|
Long-Term-
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual
|
|
|
All Other
|
|
|
Compensation
|
|
|
|
|
|
|
Salary
|
|
|
Bonus
|
|
|
Compensation
|
|
|
Compensation
|
|
|
LTIP Payouts
|
|
Name and Principal Position
|
|
Year Ended
|
|
|
(1)
|
|
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(1)
|
|
|
John. D. Johnson
|
|
|
8/31/06
|
|
|
$
|
900,000
|
|
|
$
|
1,800,000
|
|
|
$
|
25,800
|
|
|
$
|
141,621
|
|
|
$
|
1,733,333
|
|
President and Chief
|
|
|
8/31/05
|
|
|
|
850,000
|
|
|
|
850,000
|
|
|
|
25,800
|
|
|
|
141,126
|
|
|
|
467,500
|
|
Executive Officer
|
|
|
8/31/04
|
|
|
|
850,000
|
|
|
|
800,530
|
|
|
|
25,800
|
|
|
|
97,714
|
|
|
|
969,646
|
|
Jay Debertin
|
|
|
8/31/06
|
|
|
|
394,200
|
|
|
|
551,880
|
|
|
|
15,120
|
|
|
|
60,246
|
|
|
|
456,480
|
|
Executive Vice President
|
|
|
8/31/05
|
|
|
|
379,000
|
|
|
|
284,250
|
|
|
|
15,120
|
|
|
|
48,879
|
|
|
|
127,053
|
|
and Chief Operating
|
|
|
8/31/04
|
|
|
|
300,000
|
|
|
|
186,662
|
|
|
|
15,120
|
|
|
|
31,820
|
|
|
|
230,175
|
|
Officer Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Kluempke
|
|
|
8/31/06
|
|
|
|
339,500
|
|
|
|
475,300
|
|
|
|
15,120
|
|
|
|
53,793
|
|
|
|
444,967
|
|
Executive Vice President
|
|
|
8/31/05
|
|
|
|
326,400
|
|
|
|
269,800
|
|
|
|
15,120
|
|
|
|
48,747
|
|
|
|
115,088
|
|
Corporate Administration
|
|
|
8/31/04
|
|
|
|
287,600
|
|
|
|
212,680
|
|
|
|
15,120
|
|
|
|
29,805
|
|
|
|
211,562
|
|
Thomas D. Larson
|
|
|
8/31/06
|
|
|
|
339,500
|
|
|
|
475,300
|
|
|
|
15,120
|
|
|
|
51,085
|
|
|
|
429,007
|
|
Executive Vice President
|
|
|
8/31/05
|
|
|
|
326,400
|
|
|
|
229,525
|
|
|
|
15,120
|
|
|
|
44,416
|
|
|
|
112,723
|
|
Business Solutions
|
|
|
8/31/04
|
|
|
|
253,400
|
|
|
|
185,489
|
|
|
|
15,120
|
|
|
|
29,100
|
|
|
|
208,647
|
|
Mark Palmquist
|
|
|
8/31/06
|
|
|
|
522,300
|
|
|
|
731,220
|
|
|
|
15,120
|
|
|
|
79,454
|
|
|
|
716,287
|
|
Executive Vice President
|
|
|
8/31/05
|
|
|
|
522,300
|
|
|
|
391,725
|
|
|
|
15,120
|
|
|
|
75,877
|
|
|
|
205,563
|
|
and Chief Operating
|
|
|
8/31/04
|
|
|
|
490,000
|
|
|
|
342,143
|
|
|
|
15,120
|
|
|
|
44,336
|
|
|
|
412,301
|
|
Officer Ag Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Schmitz
|
|
|
8/31/06
|
|
|
|
483,200
|
|
|
|
676,480
|
|
|
|
15,120
|
|
|
|
71,802
|
|
|
|
652,307
|
|
Executive Vice President
|
|
|
8/31/05
|
|
|
|
464,622
|
|
|
|
384,450
|
|
|
|
15,120
|
|
|
|
71,047
|
|
|
|
182,229
|
|
and Chief Financial
|
|
|
8/31/04
|
|
|
|
450,000
|
|
|
|
332,775
|
|
|
|
15,120
|
|
|
|
46,226
|
|
|
|
366,907
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leon E. Westbrock
|
|
|
8/31/06
|
|
|
|
543,200
|
|
|
|
760,480
|
|
|
|
15,120
|
|
|
|
80,131
|
|
|
|
726,040
|
|
Executive Vice President
|
|
|
8/31/05
|
|
|
|
522,300
|
|
|
|
391,725
|
|
|
|
15,120
|
|
|
|
77,242
|
|
|
|
205,563
|
|
and Chief Operating
|
|
|
8/31/04
|
|
|
|
490,000
|
|
|
|
359,783
|
|
|
|
15,120
|
|
|
|
54,159
|
|
|
|
412,301
|
|
Officer Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes amounts of salary and bonus deferred pursuant to
deferred compensation plans. |
|
(2) |
|
Amounts shown include personal use of a company vehicle or
vehicle allowance. |
|
(3) |
|
Other compensation includes our matching contributions under our
401(k) Plan, our nonqualified 401(k) match makeup contribution,
our profit sharing contribution, and the portion of long-term
disability premiums paid by us. |
Report on
Executive Compensation
The Corporate Responsibility Committee of the Board of
Directors, subject to the approval of the Board of Directors,
makes recommendations for the compensation of our chief
executive officer and oversees the administration of the
executive compensation programs.
Corporate Responsibility Committee Members,
|
|
|
Curt Eischens
|
|
Michael Mulcahey
|
Richard Owen
|
|
Merlin Van Walleghen
|
60
Executive
Compensation Policies and Programs
Our executive compensation programs are designed to attract and
retain highly qualified executives and to motivate them to
optimize member owner returns by achieving aggressive goals. The
compensation program links executive compensation directly to
our financial performance. A significant portion of each
executives compensation is dependent upon value-added
operations and meeting financial goals and other individual
performance objectives.
Each year, the Corporate Responsibility Committee 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 Committee, with input from a third
party consultant if necessary, determines what, if any, changes
are appropriate to our executive compensation programs. The
Committee recommends to the Board of Directors, salary actions
relative to our chief executive officer and determines the
amount of annual variable pay and the amount of long-term
incentive awards based on goal attainment.
We intend, to the extent possible, 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. Accordingly, compensation paid under our share
option, deferred compensation and incentive compensation plans
is generally deductible.
Components
of Compensation
There are three basic components to our executive compensation
plan: base pay; annual variable pay; and long-term incentive pay
(awarded in the deferred compensation plan). 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 industry and industry
specific markets and other companies that compete with us for
executive talent.
Base Pay: Base pay is designed to be
competitive at the 50th percentile of other large companies
for equivalent positions. The executives actual salary
relative to this competitive benchmark varies based on
individual performance and the individuals skills,
experience and background.
Annual Variable Pay: Award levels, like the
base pay levels, are set with reference to competitive
conditions and are intended to motivate our executives by
providing substantial incentive payments for the achievement of
aggressive goals. The actual amounts paid for our fiscal year
2006 were determined based on two factors: first, profitability
and financial performance of CHS and the executives
business unit; and second, the individual executives
performance against other specific management objectives such as
value added performance or talent development. Financial
objectives are generally given greater weight than individual
performance objectives in determining individual awards. The
types and relative importance of specific financial and other
business objectives varied among executives depending upon their
positions and the particular business unit for which they were
responsible.
Long-Term Incentive Plan: The main purpose of
the Long-Term Incentive Plan is to encourage our executives to
provide competitive returns to our shareholders equity
over the long term. The long-term incentive component of the
compensation program (through extended vesting) is also designed
to create an incentive for executives to remain with us.
The Long-Term Incentive Plan consists of awards to the deferred
compensation plan sponsored by us. These awards vest over a
multi-year period. Like annual variable pay, award levels are
set with regard to competitive considerations and each
individuals actual award is based on our financial
performance, collectively.
61
Compensation
of the Chief Executive Officer
In determining the compensation of our chief executive officer,
the Committee considers three factors: the absolute and relative
performance of our business, particularly as it relates to
variable pay; the market for such positions; and our
compensation strategy in determining the mix of base, annual,
and long-term variable pay.
In general, our strategy is to distribute pay for the chief
executive officer among the three basic components so that it
effectively reflects the competitive market with major
consideration for achievement of individual performance
objectives.
Mr. Johnsons actual base salary for our fiscal year
2006 was $900,000. Based on our financial performance in terms
of profitability and other individual goals related to achieving
communications objectives, business partner accountability and
other strategic objectives, Mr. Johnson received an annual
variable pay award of $1,800,000 and will receive a long-term
incentive award of $1,733,333 for our fiscal year 2006. These
incentive payments were consistent with his achievement of
performance standards set by the Board of Directors.
The following summarizes certain benefits in effect as of
August 31, 2006 to the Named Executive Officers.
Employment
Agreement with John D. Johnson
Our executive officers are employed on an at-will basis and,
except as provided below, none of our executive officers has a
written employment agreement. On November 6, 2003, we
entered into an employment agreement with John D. Johnson, the
President and Chief Executive Officer. The employment agreement
provides for a rolling three-year period of employment effective
September 1, 2003 at an initial base salary of at least
$850,000, subject to annual review. Mr. Johnsons base
salary was increased to $900,000 in 2006. Either party, subject
to the rights and obligations set forth in the employment
agreement, may terminate Mr. Johnsons employment at
any time. We are obligated to pay Mr. Johnson a severance
allowance of 2.99 times his base salary and target bonus in the
event Mr. Johnsons employment is terminated for any
reason other than for cause (as such term is defined in the
employment agreement), death, disability or voluntary
termination, and in the event of the consolidation of our
business with the business of any other entity, if
Mr. Johnson is not offered the position of Chief Executive
Officer of the combined entity. The contract provides for a
gross-up for
any possible excise tax. Mr. Johnson has also agreed to a
non-compete clause of two years, in the event of his termination.
Annual
Variable Pay Plan
Each Named Executive Officer is eligible to participate in our
Annual Variable Pay Plan (the Incentive Program) for
our fiscal year ended August 31, 2006. Our Incentive
Program is based on CHS, group or division performance and
individual performance and such amounts will be paid after
August 31, 2006. The target incentive is 70% of salary
range midpoint except for our President and Chief Executive
Officer, where target incentive is 100% of salary range midpoint.
Long
Term Incentive Plan
Each Named Executive Officer is eligible to participate in our
Long Term Incentive Plan. This plan consists of a
three-year performance period. Award opportunities are expressed
as a percentage of a participating employees average
salary range mid-point for the three year performance period.
Our financial performance must meet a minimum level of return on
equity for the three year period before any awards are made from
this plan. Awards from this plan are contributed to our Deferred
Compensation Plan after the end of each plan period.
62
Long-Term
Incentive Plans Awards in Last Fiscal
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Award
|
|
|
Maturation of
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
2004-2006
|
|
|
Award
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
John. D. Johnson
|
|
$
|
1,733,333
|
|
|
|
2004-2006
|
|
|
$
|
173,333
|
|
|
$
|
866,667
|
|
|
$
|
1,733,333
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jay Debertin
|
|
|
456,480
|
|
|
|
2004-2006
|
|
|
|
45,648
|
|
|
|
228,240
|
|
|
|
456,480
|
|
Executive Vice President and
Chief Operating Officer Processing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick Kluempke
|
|
|
444,967
|
|
|
|
2004-2006
|
|
|
|
44,497
|
|
|
|
222,484
|
|
|
|
444,967
|
|
Executive Vice
President Corporate Administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas D. Larson
|
|
|
429,007
|
|
|
|
2004-2006
|
|
|
|
42,901
|
|
|
|
214,504
|
|
|
|
429,007
|
|
Executive Vice
President Business Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Palmquist
|
|
|
716,287
|
|
|
|
2004-2006
|
|
|
|
71,629
|
|
|
|
358,144
|
|
|
|
716,287
|
|
Executive Vice President and Chief
Operating Officer Ag Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Schmitz
|
|
|
652,307
|
|
|
|
2004-2006
|
|
|
|
65,231
|
|
|
|
326,154
|
|
|
|
652,307
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leon E. Westbrock
|
|
|
726,040
|
|
|
|
2004-2006
|
|
|
|
72,604
|
|
|
|
363,020
|
|
|
|
726,040
|
|
Executive Vice President and Chief
Operating Officer Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Plan
Each of the Named Executive Officers is entitled to receive
benefits under our Cash Balance Retirement Plan (the Retirement
Plan). An employees benefit under the Retirement Plan
depends on credits to the employees account, which are
based on the employees total salary and annual variable
pay each year the employee works for us, the length of service
with us and the rate of interest credited to the employees
account balance each year. Credits are made to the
employees account from pay credits, special career credits
and investment credits.
The amount of pay credits added to an employees account
each year is a percentage of the employees gross salary,
including overtime pay, commissions, bonuses, any compensation
reduction pursuant to 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 a sickness or injury. The pay credits percentage
received is determined on a yearly basis, based on the years of
Benefit Service completed as of January 1 of each year. An
employee receives one year of benefit service for every calendar
year of employment in which the employee completed at least
1,000 hours of service.
Effective January 1, 2006, pay credits are earned according
to the following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay Below Social Security
|
|
|
Pay Above Social Security
|
|
Years of Benefit Service
|
|
|
|
|
Taxable Wage Base
|
|
|
Taxable Wage Base
|
|
|
1 to 3 years
|
|
|
|
|
|
|
3
|
%
|
|
|
6
|
%
|
4 to 7 years
|
|
|
|
|
|
|
4
|
%
|
|
|
8
|
%
|
8 to 11 years
|
|
|
|
|
|
|
5
|
%
|
|
|
10
|
%
|
12 to 15 years
|
|
|
|
|
|
|
6
|
%
|
|
|
12
|
%
|
16 years and more
|
|
|
|
|
|
|
7
|
%
|
|
|
14
|
%
|
63
We credit an employees 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 maximum investment credit may not exceed 12% for any
year.
As of December 31, 2005, the dollar value of the account
and years of service for each of the Named Executive Officers
was:
|
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
|
Years of Service
|
|
|
John D. Johnson
|
|
$
|
1,199,955
|
|
|
|
29
|
|
Jay Debertin
|
|
|
245,843
|
|
|
|
22
|
|
Patrick Kluempke
|
|
|
586,974
|
|
|
|
23
|
|
Thomas D. Larson
|
|
|
695,914
|
|
|
|
29
|
|
Mark Palmquist
|
|
|
663,503
|
|
|
|
26
|
|
John Schmitz
|
|
|
566,944
|
|
|
|
31
|
|
Leon E. Westbrock
|
|
|
1,272,975
|
|
|
|
25
|
|
Officers may participate in our Deferred Compensation and
Supplemental Retirement Plan (Supplemental Plan). Participants
in the Supplemental Plan are select management or highly
compensated employees who have been designated as eligible by
our President to participate. Compensation waived under the
Deferred Compensation Plan is not eligible for pay credits under
the Retirement Plan or matching contributions under the 401(k)
Plan. The Deferred Compensation Plan and the Supplemental Plan
are intended to replace the benefits lost under those plans due
to Section 415 of the Internal Revenue Code of 1986, as
amended (the Code) which cannot be considered for purposes of
benefits due to Section 401(a)(17) of the Code under the
qualified plans that we offer. Some of the Supplemental Plan
benefits are funded by a rabbi trust, with a balance at
August 31, 2006 of $6.8 million. No further
contributions are being made to the trust and the Supplemental
Plan, which is not being funded, and does not qualify for
special tax treatment under the Code.
Finally, our President and Chief Executive Officer is eligible
to participate in our Special Supplemental Executive Retirement
Plan (the Special Supplemental Plan). The Special Supplemental
Plan 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 Supplemental Plan.
The Special Supplemental Plan is not funded and does not qualify
for special tax treatment under the Code.
As of December 31, 2005, the dollar value of the accounts
of each of the Named Executive Officers was approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
Supplemental Plan
|
|
|
Supplemental Plan
|
|
|
John D. Johnson
|
|
$
|
2,678,161
|
|
|
$
|
1,104,544
|
|
Jay Debertin
|
|
|
301,476
|
|
|
|
N/A
|
|
Patrick Kluempke
|
|
|
228,226
|
|
|
|
N/A
|
|
Thomas D. Larson
|
|
|
1,038,566
|
|
|
|
N/A
|
|
Mark Palmquist
|
|
|
523,539
|
|
|
|
N/A
|
|
John Schmitz
|
|
|
496,319
|
|
|
|
N/A
|
|
Leon E. Westbrock
|
|
|
3,271,814
|
|
|
|
N/A
|
|
401(k)
Plan
Each Named Executive Officer is eligible to participate in the
CHS Inc. Savings Plan (the 401(k) Plan). All benefit-eligible
employees of ours are eligible to participate in the 401(k)
Plan. Effective January 1, 2002, participants may
contribute between 1% and 50% (not to exceed the IRS limits on
benefits in the case of highly compensated
employees) of their pay on a pretax basis. Each of the Named
Executive Officers is a highly compensated employee.
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 our matching contributions made
on the participants behalf.
64
Nonqualified
Deferred Compensation Plans
In October 1997, we adopted a plan entitled the Share Option
Plan. Participants in the Share Option Plan include directors,
officers and other employees who have been designated as
provided in the Share Option Plan.
In October 2004, Congress enacted the American Jobs Creation Act
of 2004. This legislation required significant changes to the
Share Option Plan. As a result of this legislation, we adopted a
new non-qualified deferred compensation plan that is intended to
be compliant with the new regulations and have suspended
contributions to the Share Option Plan. Effective
November 4, 2005, we have adopted amendments to the terms
of the outstanding options under the Share Option Plan and to
the Deferred Compensation Plan. Under the terms of the
amendments, each participant in the Share Option Plan had the
right to exercise all or any portion of that participants
vested options under the Share Option Plan by December 9,
2005, and effective December 10, 2005, options under the
Share Option Plan which were not exercised on or prior to
December 9, 2005, were converted into account balances
under the Deferred Compensation Plan. As a result of these
amendments, from and after December 10, 2005, we no longer
have any obligation under the Share Option Plan.
Each time an option was granted under the Share Option Plan, we
contributed an amount sufficient to purchase the investment or
investments selected by the optionee in the relevant private
investment company or companies. Our obligations with respect to
options granted under the Share Option Plan are unsecured
obligations of ours that rank equally with our other unsecured
and unsubordinated obligations.
Effective December 31, 2006, the new deferred compensation
plan allows eligible executives to defer receipt of up to 30% of
their base salary and up to 100% of their annual variable
compensation. This must be done prior to the beginning of the
calendar year in which the compensation will be earned. During
the fiscal year ended August 31, 2006, all of the Named
Executive Officers participated in the non-elective deferral
plan and the following Named Executive Officers participated in
the elective deferral portion of the plan: Mr. Debertin.
With respect to options granted as awards, we have made all
awards under our
2003-2006
Long-Term Incentive Plan to the new deferred compensation plan.
Some of the new deferred compensation plan benefits are funded
by a rabbi trust, with a balance at August 31, 2006 of
$57.4 million, with no further contributions to the trust
are planned.
Change of
Control Arrangements
The Deferred Compensation Plan provides that the plan committee
may at its sole discretion allow participants the ability to
elect, at the time they commence participation in the plan, to:
|
|
|
|
|
receive payment of their accrued benefit under the plan at time
of change of control;
|
|
|
|
allow their accrued benefit to remain in the plan and have the
payment made in accordance with the terms and conditions of the
plan.
|
Under the Deferred Compensation Plan, change in
control, except as otherwise provided in a written
agreement executed by the participants and us prior to the
change in control, is defined in accordance with Treasury
Regulations promulgated pursuant to Code Section 409A,
including such regulations as may be issued after the effective
date of the plan.
In addition, our employment agreement with John D. Johnson
contains provisions that may be triggered in the case of a
consolidation of our business with the business of another
entity. See preceding section Employment
Agreement with John D. Johnson above.
Directors
Compensation
The Board of Directors met monthly during the year ended
August 31, 2006. Through August 31, 2006, we provided
each director with annual compensation of $42,000, paid in
twelve monthly payments, with the Chairman of the Board
receiving an additional annual compensation of $12,000, the
First Vice Chairman receiving an additional annual compensation
of $3,600, and the Secretary-Treasurer receiving an additional
65
annual compensation of $1,800. Effective September 1, 2006,
the director compensation was changed to provide each director
with annual compensation of $48,000, paid in twelve monthly
payments, with the Chairman of the Board receiving an additional
annual compensation of $18,000, the First Vice Chairman and
Secretary-Treasurer receiving an additional annual compensation
of $3,600. Each director receives a per diem of $300 plus actual
expenses and travel allowance for each day spent on our meetings
(other than regular Board meetings and the Annual Meeting), life
insurance and health and dental insurance. 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.
Also effective September 1, 2006, the director retirement
benefit increased $25 per month, from $175 to $200 per
month, per year of service, with a maximum benefit of
$3,000 per month, for life, with a guarantee of
120 months (paid to beneficiary in the event of death).
This benefit commences at age 60, or retirement, whichever
is later. This retirement benefit may be converted to a lump
sum. Some of the retirement benefits are funded by a rabbi
trust, with a balance at August 31, 2006 of
$0.8 million. The retired directors may also continue
health benefits until eligible for Medicare and thereafter pay
at their own expense for a Medicare supplemental policy.
Effective July, 2006, the directors of CHS in place as of
September 1, 2005, and their eligible dependents, were
eligible to participate in the medical, dental, vision and
hearing plans. We will pay 100% of the premium for the director
and eligible dependents, until the director is eligible for
Medicare. In the event of a directors coverage ends due to
death or Medicare eligibility, we will pay 100% of the premium
for the eligible spouse and eligible dependents until the spouse
reaches Medicare age or upon death, if earlier. Also, we will
not pay the additional premium to extend the benefit age, and
current and retired directors will take possession of their life
insurance policies by December 31, 2008. For directors
whose policies are not yet paid up, they will have
30 months from the date the last premium is paid to take
possession of the policy. Additionally, we will discontinue
offering life insurance to new directors coming on after
September 1, 2006; however, those directors would have the
ability to purchase the term insurance that is offered to our
active employees at their own expense.
Directors are eligible to participate in the new nonqualified
deferred compensation plan and were previously eligible to
participate in the Share Option Plan described above under
Nonqualified Deferred Compensation
Plans. Each participating director may elect to defer up
to 100% of his or her monthly director fee into the Deferred
Compensation Plan; this must be done prior to the beginning of
the fiscal year in which the fees will be earned. Electing to
receive an option in exchange for future fees has the effect of
deferring receipt of the amount of the fees exchanged.
Committees
of the Board of Directors
The Board of Directors appoints ad hoc committees from time to
time to review certain matters and make reports and
recommendations to the full Board of Directors for action. The
entire Board of Directors determines the salaries and incentive
compensation for the President and Chief Executive Officer using
industry and compensation studies. The Board of Directors has a
standing Audit Committee to review the results and scope of the
annual audit and other services provided by our independent
auditors, and another standing committee to review the equity
redemption policy and its application to situations believed by
the equity holder or patrons equity department to be
unusual.
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 of the President and Chief
Executive Officer 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.
66
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Beneficial ownership of equity securities as of August 31,
2006 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount and
|
|
|
|
|
|
|
|
|
Nature of
|
|
|
|
|
|
|
|
|
Beneficial
|
|
|
|
|
Title of Class
|
|
Name of Beneficial Owner
|
|
Ownership
|
|
|
% of Class
|
|
|
8% Cumulative Redeemable Preferred
Stock
|
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
Michael Toelle
|
|
|
420 shares
|
(1)
|
|
|
*
|
|
|
|
Bruce Anderson
|
|
|
40 shares
|
|
|
|
*
|
|
|
|
Robert Bass
|
|
|
120 shares
|
|
|
|
*
|
|
|
|
David Bielenberg
|
|
|
1,730 shares
|
|
|
|
*
|
|
|
|
Dennis Carlson
|
|
|
710 shares
|
(1)
|
|
|
*
|
|
|
|
Curt Eischens
|
|
|
120 shares
|
|
|
|
*
|
|
|
|
Steve Fritel
|
|
|
880 shares
|
|
|
|
*
|
|
|
|
Robert Grabarski
|
|
|
6,580 shares
|
(1)
|
|
|
*
|
|
|
|
Jerry Hasnedl
|
|
|
200 shares
|
|
|
|
*
|
|
|
|
James Kile
|
|
|
250 shares
|
(1)
|
|
|
*
|
|
|
|
Randy Knecht
|
|
|
313 shares
|
(1)
|
|
|
*
|
|
|
|
Michael Mulcahey
|
|
|
0 shares
|
|
|
|
*
|
|
|
|
Richard Owen
|
|
|
240 shares
|
|
|
|
*
|
|
|
|
Duane Stenzel
|
|
|
600 shares
|
|
|
|
*
|
|
|
|
Merlin Van Walleghen
|
|
|
1,600 shares
|
|
|
|
*
|
|
|
|
Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
John D. Johnson
|
|
|
4,820 shares
|
|
|
|
*
|
|
|
|
Jay Debertin
|
|
|
400 shares
|
|
|
|
*
|
|
|
|
Patrick Kluempke
|
|
|
1,000 shares
|
|
|
|
*
|
|
|
|
Thomas D. Larson
|
|
|
400 shares
|
|
|
|
*
|
|
|
|
Mark Palmquist
|
|
|
400 shares
|
|
|
|
*
|
|
|
|
John Schmitz
|
|
|
1,400 shares
|
|
|
|
*
|
|
|
|
Leon E. Westbrock
|
|
|
800 shares
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive officers
as a group
|
|
|
23,023 shares
|
|
|
|
*
|
|
|
|
|
(1) |
|
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.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
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 period indicated, the
value of those transactions between a particular director (and
members of such directors immediate family, which includes
such directors spouse; parents; children;
67
siblings; mothers and
fathers-in-law;
sons and
daughters-in-law;
and brothers and
sisters-in-law)
and us in which the amount involved exceeded $60,000 are shown
below.
|
|
|
|
|
|
|
Year Ended
|
|
Name
|
|
August 31, 2006
|
|
|
Bruce Anderson
|
|
$
|
141,707
|
|
Curt Eischens
|
|
|
230,651
|
|
Steve Fritel
|
|
|
94,492
|
|
Jerry Hasnedl
|
|
|
843,611
|
|
Michael Mulcahey
|
|
|
146,096
|
|
Richard Owen
|
|
|
73,844
|
|
Michael Toelle
|
|
|
492,390
|
|
Merlin Van Walleghen
|
|
|
313,580
|
|
|
|
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, 2006 and 2005:
|
|
|
|
|
|
|
|
|
Description of Fees
|
|
2006
|
|
|
2005
|
|
|
Audit Fees(1)
|
|
$
|
1,308,490
|
|
|
$
|
1,058,078
|
|
Audit Related Fees(2)
|
|
|
95,165
|
|
|
|
102,659
|
|
Tax Fees(3)
|
|
|
257,480
|
|
|
|
29,911
|
|
All Other Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,661,135
|
|
|
$
|
1,190,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 our CHS Inc. Audit Committee Charter, on
October 4, 2004, 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.
68
PART IV.
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENTS
|
(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.
|
|
|
|
|
Consolidated Balance Sheets as of
August 31, 2006 and 2005
|
|
|
F-1
|
|
Consolidated Statements of
Operations for the years ended August 31, 2006, 2005 and
2004
|
|
|
F-2
|
|
Consolidated Statements of
Equities and Comprehensive Income for the years ended
|
|
|
|
|
August 31, 2006, 2005 and 2004
|
|
|
F-3
|
|
Consolidated Statements of Cash
Flows for the years ended August 31, 2006, 2005 and 2004
|
|
|
F-4
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-5
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
F-30
|
|
(a)(2) FINANCIAL STATEMENT SCHEDULES
SCHEDULE II
VALUATION AND QUALIFYING ACOUNTS 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
60,041
|
|
|
$
|
11,414
|
|
|
|
|
|
|
$
|
(17,557
|
)
|
|
$
|
53,898
|
|
2005
|
|
|
55,809
|
|
|
|
12,962
|
|
|
|
|
|
|
|
(8,730
|
)
|
|
|
60,041
|
|
2004
|
|
|
31,618
|
|
|
|
32,254
|
|
|
|
|
|
|
|
(8,063
|
)
|
|
|
55,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Additions:
|
|
|
Additions:
|
|
|
Deductions:
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Charged to Costs
|
|
|
Charged to
|
|
|
Expenditures
|
|
|
End
|
|
|
|
of Year
|
|
|
and Expenses
|
|
|
Other Accounts
|
|
|
for Maintenance
|
|
|
of Year
|
|
|
|
(Dollars in thousands)
|
|
|
Accrued Turnaround(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
19,035
|
|
|
$
|
43,234
|
|
|
|
|
|
|
$
|
(42,879
|
)
|
|
$
|
19,390
|
|
2005
|
|
|
12,949
|
|
|
|
21,558
|
|
|
|
|
|
|
|
(15,472
|
)
|
|
|
19,035
|
|
2004
|
|
|
13,980
|
|
|
|
11,298
|
|
|
|
|
|
|
|
(12,329
|
)
|
|
|
12,949
|
|
|
|
|
(1) |
|
Accruals for planned major maintenance activities at our energy
refineries |
69
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 9, 2006 appearing on
page F-30
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.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 9, 2006
70
(a)(3) EXHIBITS
|
|
|
|
|
|
3
|
.1
|
|
Articles of Incorporation of CHS
Inc., as amended. (Incorporated by reference to our
form 10-K
for the year ended August 31, 2005, filed on
November 18, 2005).
|
|
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
|
|
Lease between the Port of Kalama
and North Pacific Grain Growers, Inc., dated November 22,
1960. (Incorporated by reference to our Registration Statement
on
Form S-1
(File
No. 333-17865),
filed December 13, 1996).
|
|
10
|
.2
|
|
Limited Liability Company
Agreement for the Wilsey-Holsum Foods, LLC dated July 24,
1996. (Incorporated by reference to our Registration Statement
on
Form S-1
(File
No. 333-17865),
filed December 13, 1996).
|
|
10
|
.3
|
|
Long Term Supply Agreement between
Wilsey-Holsum Foods, LLC and Harvest States Cooperatives dated
August 30, 1996. (Incorporated by reference to our
Registration Statement on
Form S-1/A
(File
No. 333-17865),
filed January 24, 1997).(*)
|
|
10
|
.4
|
|
TEMCO, LLC Limited Liability
Company Agreement between Cargill, Incorporated and Cenex
Harvest States Cooperatives dated as of August 26, 2002.
(Incorporated by reference to our
Form 10-K
for the year ended August 31, 2002, filed November 25,
2002).
|
|
10
|
.5
|
|
Cenex Harvest States Cooperatives
Supplemental Savings Plan. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2000, filed November 22,
2000).
|
|
10
|
.5A
|
|
Amendment No. 3 to the CHS
Inc. Supplemental Savings Plan. (Incorporated by reference to
our
Form 10-Q
for the quarterly period ended May 31, 2006, filed
July 12, 2006).
|
|
10
|
.6
|
|
Cenex Harvest States Cooperatives
Supplemental Executive Retirement Plan. (Incorporated by
reference to our
Form 10-K
for the year ended August 31, 2000, filed November 22,
2000).
|
|
10
|
.6A
|
|
Amendment No. 4 to the CHS
Inc. Supplemental Executive Retirement Plan. (Incorporated by
reference to our
Form 10-Q
for the quarterly period ended May 31, 2006, filed
July 12, 2006).
|
|
10
|
.7
|
|
Cenex Harvest States Cooperatives
Senior Management Compensation Plan. (Incorporated by reference
to our
Form 10-K
for the year ended August 31, 2000, filed November 22,
2000).
|
|
10
|
.8
|
|
Cenex Harvest States Cooperatives
Executive Long-Term Variable Compensation Plan. (Incorporated by
reference to our
Form 10-K
for the year ended August 31, 2000, filed November 22,
2000).
|
|
10
|
.9
|
|
Cenex Harvest States Cooperatives
Share Option Plan. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
|
10
|
.9A
|
|
Amendment to Cenex Harvest States
Share Option Plan, dated June 28, 2001. (Incorporated by
reference to our Registration Statement on
Form S-2
(File
No. 333-65364),
filed July 18, 2001).
|
|
10
|
.9B
|
|
Amendment No. 2 to Cenex
Harvest States Share Option Plan, dated May 2, 2001.
(Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
|
10
|
.9C
|
|
Amendment No. 3 to Cenex
Harvest States Share Option Plan, dated June 4, 2002.
(Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
71
|
|
|
|
|
|
10
|
.9D
|
|
Amendment No. 4 to Cenex
Harvest States Share Option Plan, dated April 6, 2004.
(Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
|
10
|
.10
|
|
CHS Inc. Share Option Plan Option
Agreement. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
|
10
|
.11
|
|
CHS Inc. Share Option Plan
Trust Agreement. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
|
10
|
.11A
|
|
Amendment No. 1 to the
Trust Agreement. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
|
10
|
.12
|
|
$225,000,000 Note Agreement
(Private Placement Agreement) dated as of June 19, 1998
among Cenex Harvest States Cooperatives and each of the
Purchasers of the Notes. (Incorporated by Reference to our
Form 10-Q
Transition Report for the period June 1, 1998 to
August 31, 1998, filed October 14, 1998).
|
|
10
|
.12A
|
|
First Amendment to
Note Agreement ($225,000,000 Private Placement), effective
September 10, 2003, among CHS Inc. and each of the
Purchasers of the notes. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2003, filed November 21,
2003).
|
|
10
|
.13
|
|
2006 Amended and Restated Credit
Agreement (Revolving Loan) by and between CHS Inc. and the
Syndication Parties dated as of May 18, 2006. (Incorporated
by reference to our
Form 10-Q
for the quarterly period ended May 31, 2006, filed
July 12, 2006).
|
|
10
|
.14
|
|
$200 Million Term
Loan Credit Agreement dated as of June 1, 1998 among
Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul
Bank for Cooperatives, including Exhibit 2.4 (form of
$200 Million Promissory Note). (Incorporated by Reference
to our
Form 10-Q
Transition Report for the period June 1, 1998 to
August 31, 1998, filed October 14, 1998).
|
|
10
|
.14A
|
|
First Amendment to Credit
Agreement (Term Loan), effective as of May 31, 1999 among
Cenex Harvest States Cooperatives, CoBank, ACB, and St. Paul
Bank for Cooperatives. (Incorporated by reference to our
Form 10-Q
for the quarterly period ended May 31, 1999, filed
July 13, 1999).
|
|
10
|
.14B
|
|
Second Amendment to Credit
Agreement (Term Loan) dated May 23, 2000 by and among Cenex
Harvest States Cooperatives, CoBank, ACB, St. Paul Bank for
Cooperatives and the Syndication Parties. (Incorporated by
reference to our
Form 10-Q
for the quarterly period ended May 31, 2000, filed
July 10, 2000).
|
|
10
|
.14C
|
|
Third Amendment to Credit
Agreement (Term Loan) dated May 23, 2001 among Cenex
Harvest States Cooperatives, CoBank, ACB, and the Syndication
Parties. (Incorporated by reference to our
Form 10-Q
for the quarterly period ended May 31, 2001, filed
July 3, 2001).
|
|
10
|
.14D
|
|
Fourth Amendment to Credit
Agreement (Term Loan) dated May 22, 2002 among Cenex
Harvest States Cooperatives, CoBank, ACB and the Syndication
Parties. (Incorporated by reference to our
Form 10-Q
for the quarterly period ended May 31, 2002, filed
July 3, 2002).
|
|
10
|
.14E
|
|
Fifth Amendment to Credit
Agreement (Term Loan) dated May 21, 2003 by and among Cenex
Harvest States Cooperatives, CoBank, ACB and the Syndication
Parties. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2004, filed November 18,
2004).
|
|
10
|
.14F
|
|
Sixth Amendment to Credit
Agreement (Term Loan) dated as of May 20, 2004 by and among
CHS Inc., CoBank, ACB, and the Syndication Parties.
(Incorporated by reference to our
Form 10-Q
for the quarterly period ended May 31, 2004, filed
July 12, 2004).
|
|
10
|
.14G
|
|
Seventh Amendment to Credit
Agreement (Term Loan) dated as of May 19, 2005 by and among
CHS Inc., CoBank, ACB, and the Syndication Parties.
(Incorporated by reference to our
form 10-K
for the year ended August 31, 2005, filed on
November 18, 2005).
|
|
10
|
.14H
|
|
Eighth Amendment to Credit
Agreement (Term Loan) dated as of November 18, 2005 by and
among CHS Inc., CoBank, ACB, and the Syndication Parties. (
Incorporated by reference to our
form 10-K
for the year ended August 31, 2005, filed on
November 18, 2005).
|
|
10
|
.14I
|
|
Ninth Amendment to Credit
Agreement (Term Loan) dated as of May 18, 2006 by and among
CHS Inc., CoBank, ACB and the Syndication Parties. (Incorporated
by reference to our
Form 10-Q
for the quarterly period ended May 31, 2006).
|
|
10
|
.15
|
|
Limited Liability Agreement of
United Harvest, LLC dated November 9, 1998 between United
Grain Corporation and Cenex Harvest States Cooperatives.
(Incorporated by reference to our
Form 10-Q
for the quarterly period ended November 30, 1998, filed
January 13, 1999).
|
72
|
|
|
|
|
|
10
|
.16
|
|
Joint Venture Agreement for
Agriliance LLC, dated as of January 1, 2000 among Farmland
Industries, Inc., Cenex Harvest States Cooperatives, United
Country Brands, LLC and Land O Lakes, Inc. (Incorporated
by reference to our
Form 10-Q
for the quarterly period ended February 29, 2000, filed
April 11, 2000).
|
|
10
|
.17
|
|
Employment Agreement dated
November 6, 2003 by and between John D. Johnson and CHS
Inc. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2003, filed November 21,
2003).
|
|
10
|
.18
|
|
CHS Inc. Special Supplemental
Executive Retirement Plan. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2003, filed November 21,
2003).
|
|
10
|
.19
|
|
Note purchase and Private Shelf
Agreement dated as of January 10, 2001 between Cenex
Harvest States Cooperatives and The Prudential Insurance Company
of America. (Incorporated by reference to our
Form 10-Q
for the quarterly period ended February 28, 2001, filed
April 10, 2001).
|
|
10
|
.19A
|
|
Amendment No. 1 to
Note Purchase and Private Shelf Agreement, dated as of
March 2, 2001. (Incorporated by reference to our
Form 10-Q
for the quarterly period ended February 28, 2001, filed
April 10, 2001).
|
|
10
|
.20
|
|
Note Purchase Agreement and
Series D & E Senior Notes dated October 18,
2002. (Incorporated by reference to our
Form 10-K
for the year ended August 31, 2002, filed November 25,
2002).
|
|
10
|
.21
|
|
2003 Amended and Restated Credit
Agreement ($15 million, 2 Year Facility) dated
December 16, 2003 between CoBank, ACB, U.S. AgBank,
FCB and the National Cooperative Refinery Association, Inc.
(Incorporated by reference to our
Form 10-Q
for the quarterly period ended February 29, 2004, filed
April 7, 2004).
|
|
10
|
.21A
|
|
First Amendment to the 2003
Amended and Restated Credit Agreement between the National
Cooperative Refinery Association and the Syndication Parties.
(Incorporated by reference to our Current Report on
Form 8-K
filed December 20, 2005).
|
|
10
|
.22
|
|
Note Purchase and Private
Shelf Agreement between CHS Inc. and Prudential Capital Group
dated as of April 13, 2004. (Incorporated by reference to
our
Form 10-Q
for the quarterly period ended May 31, 2004, filed
July 12, 2004).
|
|
10
|
.23
|
|
Note Purchase Agreement for
Series H Senior Notes dated September 21, 2004.
(Incorporated by reference to our Current Report on
Form 8-K
filed September 22, 2004).
|
|
10
|
.24
|
|
Deferred Compensation Plan.
(Incorporated by reference to our Registration Statement on
Form S-8
(File
No. 333-121161),
filed December 10, 2004).
|
|
10
|
.24A
|
|
First Amendment to CHS Inc.
Deferred Compensation Plan. (Incorporated by reference to our
Registration Statement on
Form S-8
(File
No. 333-129464),
filed November 4, 2005).
|
|
10
|
.24B
|
|
Second Amendment to the CHS Inc.
Deferred Compensation Plan. (Incorporated by reference to our
Form 10-Q
for the quarterly period ended May 31, 2006, filed
July 12, 2006).
|
|
10
|
.25
|
|
New Plan Participants 2005 Plan
Agreement and Election Form for the CHS Inc. Deferred
Compensation Plan. (Incorporated by reference to our
Registration Statement on
Form S-8
(File
No. 333-121161),
filed December 10, 2004).
|
|
10
|
.26
|
|
Beneficiary Designation Form for
the CHS Inc. Deferred Compensation Plan. (Incorporated by
reference to our Registration Statement on
Form S-8
(File
No. 333-121161),
filed December 10, 2004).
|
|
10
|
.27
|
|
Share Option Plan Participants
2005 Plan Agreement and Election Form. (Incorporated by
reference to our Registration Statement on
Form S-8
(File
No. 333-129464),
filed November 4, 2005).
|
|
10
|
.28
|
|
Amended and Restated Loan and
Security Agreement dated August 31, 2006, by and between
Provista Renewable Fuels Marketing, LLC and LaSalle Bank
National Association.(**)
|
|
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.(**)
|
|
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. (**)
|
73
|
|
|
|
|
|
32
|
.2
|
|
Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (**)
|
|
|
|
(*) |
|
Pursuant to Rule 406 of the Securities Act of 1933, as
amended, confidential portions of Exhibit 10.3 have been
deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment. |
|
(**) |
|
Filed herewith. |
(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.
74
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 22,
2006.
CHS INC.
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 22, 2006:
|
|
|
|
|
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)
|
|
|
|
|
|
Chairman of the Board of Directors
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
75
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
Director
|
|
|
|
|
|
*By
|
|
/s/ John
D. Johnson
John
D. Johnson
Attorney-in-fact
|
|
|
76
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
August 31
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
112,525
|
|
|
$
|
241,018
|
|
Receivables
|
|
|
1,076,602
|
|
|
|
1,093,986
|
|
Inventories
|
|
|
1,130,824
|
|
|
|
914,182
|
|
Other current assets
|
|
|
298,666
|
|
|
|
367,306
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,618,617
|
|
|
|
2,616,492
|
|
Investments
|
|
|
624,253
|
|
|
|
520,970
|
|
Property, plant and equipment
|
|
|
1,476,239
|
|
|
|
1,359,535
|
|
Other assets
|
|
|
223,474
|
|
|
|
229,940
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,942,583
|
|
|
$
|
4,726,937
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
22,007
|
|
|
$
|
61,147
|
|
Current portion of long-term debt
|
|
|
60,748
|
|
|
|
35,340
|
|
Customer credit balances
|
|
|
66,468
|
|
|
|
91,902
|
|
Customer advance payments
|
|
|
82,362
|
|
|
|
126,815
|
|
Checks and drafts outstanding
|
|
|
57,083
|
|
|
|
67,398
|
|
Accounts payable
|
|
|
904,143
|
|
|
|
945,737
|
|
Accrued expenses
|
|
|
347,078
|
|
|
|
397,044
|
|
Dividends and equities payable
|
|
|
249,774
|
|
|
|
132,406
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,789,663
|
|
|
|
1,857,789
|
|
Long-term debt
|
|
|
683,997
|
|
|
|
737,734
|
|
Other liabilities
|
|
|
310,157
|
|
|
|
229,322
|
|
Minority interests in subsidiaries
|
|
|
141,375
|
|
|
|
144,195
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equities
|
|
|
2,017,391
|
|
|
|
1,757,897
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equities
|
|
$
|
4,942,583
|
|
|
$
|
4,726,937
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-1
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended August 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Revenues
|
|
$
|
14,383,835
|
|
|
$
|
11,926,962
|
|
|
$
|
10,969,081
|
|
Cost of goods sold
|
|
|
13,570,507
|
|
|
|
11,449,858
|
|
|
|
10,527,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
813,328
|
|
|
|
477,104
|
|
|
|
441,366
|
|
Marketing, general and
administrative
|
|
|
231,238
|
|
|
|
199,354
|
|
|
|
202,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
582,090
|
|
|
|
277,750
|
|
|
|
238,911
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(13,013
|
)
|
|
|
(14,666
|
)
|
Gain on legal settlements
|
|
|
|
|
|
|
|
|
|
|
(692
|
)
|
Interest, net
|
|
|
41,305
|
|
|
|
41,509
|
|
|
|
42,758
|
|
Equity income from investments
|
|
|
(84,188
|
)
|
|
|
(95,742
|
)
|
|
|
(79,022
|
)
|
Minority interests
|
|
|
85,974
|
|
|
|
47,736
|
|
|
|
33,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
538,999
|
|
|
|
297,260
|
|
|
|
256,703
|
|
Income taxes
|
|
|
49,327
|
|
|
|
30,434
|
|
|
|
29,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
489,672
|
|
|
|
266,826
|
|
|
|
227,241
|
|
(Income) loss from discontinued
operations, net of taxes
|
|
|
(625
|
)
|
|
|
16,810
|
|
|
|
5,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
490,297
|
|
|
$
|
250,016
|
|
|
$
|
221,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patronage refunds
|
|
$
|
374,000
|
|
|
$
|
203,000
|
|
|
$
|
166,850
|
|
Unallocated capital reserve
|
|
|
116,297
|
|
|
|
47,016
|
|
|
|
54,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
490,297
|
|
|
$
|
250,016
|
|
|
$
|
221,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
CONSOLIDATED
STATEMENTS OF EQUITIES AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended August 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2003
|
|
$
|
1,087,037
|
|
|
$
|
27,718
|
|
|
$
|
93,702
|
|
|
$
|
63,000
|
|
|
$
|
220,517
|
|
|
$
|
(18,313
|
)
|
|
$
|
8,050
|
|
|
$
|
1,481,711
|
|
Dividends and equity retirement
determination
|
|
|
10,800
|
|
|
|
|
|
|
|
|
|
|
|
27,000
|
|
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
39,049
|
|
Patronage distribution
|
|
|
66,500
|
|
|
|
|
|
|
|
|
|
|
|
(90,000
|
)
|
|
|
(5,222
|
)
|
|
|
|
|
|
|
|
|
|
|
(28,722
|
)
|
Equities retired
|
|
|
(10,292
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,339
|
)
|
Capital equity certificates
exchanged for preferred stock
|
|
|
(12,990
|
)
|
|
|
|
|
|
|
12,990
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
Equities issued
|
|
|
13,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,355
|
|
Preferred stock redeemed, treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,975
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,975
|
)
|
Other, net
|
|
|
(7,669
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,784
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,850
|
|
|
|
54,482
|
|
|
|
|
|
|
|
|
|
|
|
221,332
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,178
|
|
|
|
|
|
|
|
11,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and equities payable
|
|
|
(32,100
|
)
|
|
|
|
|
|
|
|
|
|
|
(50,060
|
)
|
|
|
(1,409
|
)
|
|
|
|
|
|
|
|
|
|
|
(83,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, August 31, 2004
|
|
|
1,114,641
|
|
|
|
27,586
|
|
|
|
106,692
|
|
|
|
116,790
|
|
|
|
261,462
|
|
|
|
(7,135
|
)
|
|
|
8,050
|
|
|
|
1,628,086
|
|
Dividends and equity retirement
determination
|
|
|
32,100
|
|
|
|
|
|
|
|
|
|
|
|
50,060
|
|
|
|
1,409
|
|
|
|
|
|
|
|
|
|
|
|
83,569
|
|
Patronage distribution
|
|
|
119,736
|
|
|
|
|
|
|
|
|
|
|
|
(166,850
|
)
|
|
|
(4,464
|
)
|
|
|
|
|
|
|
|
|
|
|
(51,578
|
)
|
Equities retired
|
|
|
(23,625
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,673
|
)
|
Capital equity certificates
exchanged for preferred stock
|
|
|
(19,996
|
)
|
|
|
|
|
|
|
19,996
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
Equities issued
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,375
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,178
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,178
|
)
|
Other, net
|
|
|
(666
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
(333
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,000
|
|
|
|
47,016
|
|
|
|
|
|
|
|
|
|
|
|
250,016
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,106
|
|
|
|
|
|
|
|
12,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and equities payable
|
|
|
(69,856
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,900
|
)
|
|
|
(1,650
|
)
|
|
|
|
|
|
|
|
|
|
|
(132,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, August 31, 2005
|
|
|
1,153,709
|
|
|
|
27,467
|
|
|
|
126,688
|
|
|
|
142,100
|
|
|
|
294,912
|
|
|
|
4,971
|
|
|
|
8,050
|
|
|
|
1,757,897
|
|
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
|
|
|
|
116,297
|
|
|
|
|
|
|
|
|
|
|
|
490,297
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,131
|
|
|
|
|
|
|
|
8,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
395,371
|
|
|
$
|
13,102
|
|
|
$
|
8,050
|
|
|
$
|
2,017,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended August 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
As restated
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$490,297
|
|
|
|
$250,016
|
|
|
|
$221,332
|
|
Depreciation and amortization
|
|
|
126,777
|
|
|
|
110,332
|
|
|
|
108,399
|
|
Income from equity investments
|
|
|
(84,188
|
)
|
|
|
(95,742
|
)
|
|
|
(79,022
|
)
|
Distributions from equity
investments
|
|
|
58,240
|
|
|
|
64,869
|
|
|
|
58,702
|
|
Minority interests
|
|
|
85,974
|
|
|
|
47,736
|
|
|
|
33,830
|
|
Noncash portion of patronage
dividends received
|
|
|
(4,969
|
)
|
|
|
(3,060
|
)
|
|
|
(4,986
|
)
|
(Gain) loss on sale of property,
plant and equipment
|
|
|
(5,232
|
)
|
|
|
(7,370
|
)
|
|
|
775
|
|
Loss on sale of business
|
|
|
|
|
|
|
6,163
|
|
|
|
|
|
Gain on sale of investments
|
|
|
|
|
|
|
(13,013
|
)
|
|
|
(14,666
|
)
|
Deferred taxes
|
|
|
78,300
|
|
|
|
26,400
|
|
|
|
8,500
|
|
Other, net
|
|
|
460
|
|
|
|
1,027
|
|
|
|
1,150
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
44,650
|
|
|
|
(250,202
|
)
|
|
|
(59,039
|
)
|
Inventories
|
|
|
(198,501
|
)
|
|
|
(190,081
|
)
|
|
|
88,261
|
|
Other current assets and other
assets
|
|
|
64,677
|
|
|
|
(74,911
|
)
|
|
|
(86,883
|
)
|
Customer credit balances
|
|
|
(25,915
|
)
|
|
|
3,216
|
|
|
|
27,639
|
|
Customer advance payments
|
|
|
(48,062
|
)
|
|
|
62,773
|
|
|
|
(59,354
|
)
|
Accounts payable and accrued
expenses
|
|
|
(142,934
|
)
|
|
|
328,961
|
|
|
|
121,647
|
|
Other liabilities
|
|
|
15,368
|
|
|
|
9,417
|
|
|
|
28,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
454,942
|
|
|
|
276,531
|
|
|
|
394,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and
equipment
|
|
|
(234,992
|
)
|
|
|
(257,470
|
)
|
|
|
(245,148
|
)
|
Proceeds from disposition of
property, plant and equipment
|
|
|
13,911
|
|
|
|
21,109
|
|
|
|
34,530
|
|
Proceeds from sale of business
|
|
|
|
|
|
|
38,286
|
|
|
|
|
|
Investments
|
|
|
(72,989
|
)
|
|
|
(25,938
|
)
|
|
|
(49,757
|
)
|
Investments redeemed
|
|
|
7,283
|
|
|
|
13,514
|
|
|
|
15,937
|
|
Proceeds from sale of investments
|
|
|
|
|
|
|
147,801
|
|
|
|
25,000
|
|
Changes in notes receivable
|
|
|
20,955
|
|
|
|
(23,770
|
)
|
|
|
(6,888
|
)
|
Other investing activities, net
|
|
|
484
|
|
|
|
(5,434
|
)
|
|
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(265,348
|
)
|
|
|
(91,902
|
)
|
|
|
(224,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in notes payable
|
|
|
(59,025
|
)
|
|
|
(54,968
|
)
|
|
|
(135,016
|
)
|
Borrowings on long-term debt
|
|
|
|
|
|
|
125,000
|
|
|
|
35,457
|
|
Principal payments on long-term
debt
|
|
|
(36,669
|
)
|
|
|
(36,033
|
)
|
|
|
(15,299
|
)
|
Payments on derivative financial
instruments, net
|
|
|
|
|
|
|
|
|
|
|
(287
|
)
|
Payments for bank fees on debt
|
|
|
(1,997
|
)
|
|
|
(2,474
|
)
|
|
|
(2,354
|
)
|
Changes in checks and drafts
outstanding
|
|
|
(10,513
|
)
|
|
|
2,814
|
|
|
|
(21,431
|
)
|
Distributions to minority owners
|
|
|
(80,529
|
)
|
|
|
(29,925
|
)
|
|
|
(15,908
|
)
|
Costs incurred capital
equity certificates redeemed
|
|
|
(88
|
)
|
|
|
(87
|
)
|
|
|
(151
|
)
|
Preferred stock dividends paid
|
|
|
(10,816
|
)
|
|
|
(9,178
|
)
|
|
|
(7,975
|
)
|
Retirements of equities
|
|
|
(55,933
|
)
|
|
|
(23,673
|
)
|
|
|
(10,339
|
)
|
Cash patronage dividends paid
|
|
|
(62,517
|
)
|
|
|
(51,578
|
)
|
|
|
(28,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(318,087
|
)
|
|
|
(80,102
|
)
|
|
|
(202,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(128,493
|
)
|
|
|
104,527
|
|
|
|
(31,758
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
241,018
|
|
|
|
136,491
|
|
|
|
168,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
112,525
|
|
|
$
|
241,018
|
|
|
$
|
136,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. Summary
of Significant Accounting Policies
Organization
CHS Inc. (CHS or the Company) is an agricultural supply, energy
and grain-based foods cooperative company organized for the
mutual benefit of its members. Members of the cooperative are
located throughout the United States. The Company provides a
wide variety of products and services, from initial agricultural
inputs such as fuels, farm supplies and agronomy products, to
agricultural outputs that include grains and oilseeds, grain and
oilseed processing and food products. Revenues are both domestic
and international.
The consolidated financial statements include the accounts of
CHS and all of its wholly-owned and majority-owned subsidiaries
and limited liability companies, including National Cooperative
Refinery Association (NCRA), included in our Energy segment. The
effects of all significant intercompany transactions have been
eliminated.
The Company had various immaterial acquisitions, during the
three years ended August 31, 2006, 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 price over the estimated fair values of the net
assets acquired has been reported as identifiable intangible
assets. During 2006, our investment in Provista Renewable Fuels
Marketing, LLC (Provista) resulted in financial statement
consolidation.
Cash equivalents include short-term, highly liquid investments
with original maturities of three months or less at the date of
acquisition.
Grain, processed grain, oilseed and processed oilseed are stated
at net realizable values which approximates market values. All
other inventories are stated at the lower of cost or market.
Costs for inventories produced or modified by the Company
through a manufacturing process include fixed and variable
production and raw material costs, and in-bound freight costs
for raw materials over the amount charged to cost of goods sold.
Costs for inventories purchased for resale include the cost of
products and freight incurred to place the products at the
Companys points of sales. The cost of certain energy
inventories (wholesale refined products, crude oil and asphalt)
is determined on the
last-in,
first-out (LIFO) method; all other inventories of non-grain
products purchased for resale are valued on the
first-in,
first-out (FIFO) and average cost methods.
|
|
|
Derivative
Financial Instruments
|
Commodity
Price Risk
The Company is exposed to price fluctuations on energy, grain
and oilseed transactions due to fluctuations in the market value
of inventories and fixed or partially fixed purchase and sales
contracts. The Companys 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 Companys assessment of its exposure from
expected price fluctuations.
F-5
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 of those commodities. These contracts are purchased and
sold through regulated commodity exchanges. The contracts are
economic hedges of price risk, but are not designated as or
accounted for as, hedging instruments for accounting purposes in
any operations, with the exception of some contracts included in
the Energy segment discussed below. These contracts are recorded
on the balance sheet at fair value based on quotes listed on
regulated commodity exchanges. Unrealized gains and losses on
these contracts are recognized in cost of goods sold for
financial reporting using market-based prices.
The Company also manages its risks by entering into fixed-price
purchase and sales contracts with pre-approved producers and by
establishing appropriate limits for individual suppliers.
Fixed-price contracts are entered into with customers of
acceptable creditworthiness,as internally evaluated. The Company
is also exposed to loss in the event of nonperformance by the
counterparties to the contracts and therefore, contract values
are reviewed and adjusted to reflect potential nonperformance.
These contracts are recorded on the balance sheet at fair value
based on the market price of the underlying products listed on
regulated commodity exchanges, except for certain fixed-price
contracts related to propane in the Energy segment. The propane
contracts within the Energy segment meet the normal purchase and
sales exemption, and thus are not required to be marked to fair
value. Unrealized gains and losses on fixed-price contracts are
recognized in cost of goods sold using market-based prices.
Changes in the fair values of derivative instruments described
above are recognized in earnings in the Consolidated Statements
of Operations in the period such changes occur for all
operations with the exception of some derivative instruments
included in the Energy segment. Included in other current assets
on August 31, 2006 and 2005 are derivative assets of
$74.3 million and $102.7 million, respectively.
Included in accrued expenses on August 31, 2006 and 2005
are derivative liabilities of $97.8 million and
$152.8 million, respectively.
In the Energy segment, certain financial contracts entered into
for the spread between crude oil purchase value and distillate
selling price have been designated and accounted for as hedging
instruments (cash flow hedges). The unrealized gains or losses
of these contracts are deferred to accumulated other
comprehensive income in the equity section of the Consolidated
Balance Sheet for the fiscal year ended August 31, 2006,
and will be included in earnings upon settlement. A gain of
$2.8 million, net of taxes, was recorded in accumulated
other comprehensive income for the year ended August 31,
2006, for the change in the fair value of cash flow hedges
related to these derivatives. No gains or losses were recorded
in the income statement during the year ended August 31,
2006, since there were no settlements. The contracts expire in
fiscal 2008, and the Company expects $1.9 million, net of
taxes, to be included in earnings during the next 12 months.
Interest
Rate Risk
The Company uses fixed and floating rate debt to lessen the
effects of interest rate fluctuations on interest expense.
Short-term debt used to finance inventories and receivables is
represented by notes payable with maturities of 30 days or
less so that the blended interest rate to the Company for all
such notes approximates current market rates. Long-term debt
used to finance non-current assets carries various fixed
interest rates and is payable at various dates to minimize the
effect of market interest rate changes. The effective interest
rate to the Company on fixed rate debt outstanding on
August 31, 2006 was approximately 6.1%.
The Company enters into interest rate treasury lock instruments
to fix interest rates related to a portion of its private
placement debts. These instruments were designated and are
effective as cash flow hedges for accounting purposes and,
accordingly, changes in fair value of $2.1 million, net of
taxes, are included in accumulated other comprehensive income.
Interest expense for each of the years ended August 31,
2006, 2005 and 2004 includes $0.9 million which relates to
the interest rate derivatives. The additional interest expense
is an offset to the lower actual interest paid on the
outstanding debt instruments.
F-6
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency Risk
The Company conducts essentially all of its business in US
dollars, except for grain marketing operations in Brazil and
purchases of products from Canada, and had minimal risk
regarding foreign currency fluctuations during 2006 or in recent
years. Foreign currency fluctuations do, however, impact the
ability of foreign buyers to purchase US agricultural products
and the competitiveness of US agricultural products compared to
the same products offered by alternative sources of world supply.
Investments in other cooperatives are stated at cost, plus
patronage dividends received in the form of capital stock and
other equities. Patronage dividends are recorded in cost of
goods sold at the time qualified written notices of allocation
are received. Joint ventures and other investments, in which the
Company has significant ownership and influence, but not
control, are accounted for in the consolidated financial
statements under the equity method of accounting. Investments in
other debt and equity securities are considered available for
sale financial instruments and are stated at fair value, with
unrealized amounts included as a component of accumulated other
comprehensive income (loss).
Disclosure of the fair value of financial instruments to which
the Company is a party includes estimates and assumptions which
may be subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be
determined with precision. Financial 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.
|
|
|
Goodwill
and Other Intangible Assets
|
Goodwill represents the excess of the purchase price of an
acquired entity over the amounts assigned to assets acquired and
liabilities assumed. Goodwill and other intangible assets are
reviewed for impairment annually or more frequently if certain
impairment conditions arise. Goodwill that is impaired is
written down to fair value. Other intangible assets consist
primarily of trademarks, customer lists and agreements not to
compete. Intangible assets subject to amortization are expensed
over their respective useful lives (ranging from 3 to
15 years). The Company has no intangible assets with
indefinite useful lives.
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
F-7
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
delivered to its destination and final weights, grades and
settlement prices have been agreed upon. All other sales are
recognized upon transfer of title, which could occur upon either
shipment or receipt by the customer, depending upon the
transaction. Amounts billed to a customer as part of a sales
transaction related to shipping and handling are included in
revenues. Service revenues are recorded only after such services
have been rendered.
|
|
|
Environmental
Expenditures
|
Liabilities, including legal costs, related to remediation of
contaminated properties are recognized when the related costs
are considered probable and can be reasonably estimated.
Estimates of environmental costs are based on current available
facts, existing technology, undiscounted site-specific costs and
currently enacted laws and regulations. Recoveries, if any, are
recorded in the period in which recovery is considered probable.
Liabilities are monitored and adjusted as new facts or changes
in law or technology occur. Environmental expenditures are
capitalized when such costs provide future economic benefits.
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 primarily includes net income, unrealized
net gains or losses on available for sale investments and energy
derivatives, and the effects of minimum pension liability
adjustments. Total comprehensive income is reflected in the
Consolidated Statements of Equities and Comprehensive Income.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
|
|
|
Recent
Accounting Pronouncements
|
In March 2005, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations
(FIN 47). FIN 47 clarifies that the term
conditional asset retirement obligation as used in
Statement of Financial Accounting Standards (SFAS) 143,
Accounting for Asset Retirement Obligations, which
refers to a legal obligation to perform an asset retirement
activity in which the timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. However, the
obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing
and/or
method of settlement. FIN 47 requires that the uncertainty
about the timing
and/or
method of settlement of a conditional asset retirement
obligation be factored into the measurement of the liability
when sufficient information exists. FIN 47 also clarifies
when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement
F-8
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligation. The Company has legal asset retirement obligations
for certain assets, including our refineries, pipelines and
terminals. At this time, the Company is unable to measure this
obligation because it is not possible to estimate when the
obligation will be settled. FIN 47 became effective for the
Company in fiscal year 2006 and did not have a material effect
on the Companys consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for income
taxes recognized in an enterprises financial statements
and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods and disclosure. FIN 48 is effective for fiscal
years beginning after December 15, 2006, with early
adoption permitted. The Company is currently evaluating the
impact of this standard.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans (SFAS No. 158).
SFAS No. 158 requires that employers recognize on a
prospective basis the funded status of their defined benefit
pension and other postretirement plans on their consolidated
balance sheet and recognize as a component of other
comprehensive income, net of tax, the gains or losses and prior
service costs or credits that arise during the period but are
not recognized as components of net periodic benefit cost.
SFAS No. 158 also requires additional disclosures in
the notes to financial statements. SFAS No. 158 is
effective as of the end of fiscal years ending after
December 15, 2006. The Company is currently assessing the
impact of SFAS No. 158 on its consolidated financial
statements.
Based on the funded status of the Companys defined benefit
pension and postretirement medical plans as of the most recent
measurement dates, the Company would be required to increase its
net liabilities for pension and postretirement medical benefits,
which would result in a decrease to owners equity in the
Companys Consolidated Balance Sheet. The ultimate amounts
recorded are highly dependent on a number of assumptions,
including the discount rates in effect in 2007, the actual rate
of return on pension assets for 2007 and the tax effects of the
adjustment. Changes in these assumptions since the
Companys last measurement date could increase or decrease
the expected impact of implementing SFAS No. 158 in
the Companys consolidated financial statements at
August 31, 2007.
In September 2006, the FASB issued FASB Staff Position
(FSP) AUG AIR-1, Accounting for Planned Major
Maintenance Activities, addressing the accounting for
planned major maintenance activities which includes refinery
turnarounds. This FSP prohibits the use of the
accrue-in-advance
method of accounting for planned major maintenance activities in
annual and interim financial reporting periods but allows the
alternative deferral method. The FSP shall be applied to the
first fiscal year beginning after December 15, 2006. The
Company is currently using the
accrue-in-advance
method of accounting, but has not yet determined the impact this
FSP will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157) to
increase consistency and comparability in fair value
measurements by defining fair value, establishing a framework
for measuring fair value in generally accepted accounting
principles, and expanding disclosures about fair value
measurements. SFAS No. 157 emphasizes that fair value
is a market-based measurement, not an entity-specific
measurement. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The Company is in
the process of evaluating the effect that the adoption of
SFAS No. 157 will have on its consolidated results of
operations and financial condition.
Certain reclassifications have been made to prior years
amounts to conform to current year classifications. These
reclassifications had no effect on previously reported net
income, equities and comprehensive income, or cash flows.
F-9
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Receivables as of August 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Trade
|
|
$
|
1,056,514
|
|
|
$
|
1,069,020
|
|
Other
|
|
|
73,986
|
|
|
|
85,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,130,500
|
|
|
|
1,154,027
|
|
Less allowances for doubtful
accounts
|
|
|
53,898
|
|
|
|
60,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,076,602
|
|
|
$
|
1,093,986
|
|
|
|
|
|
|
|
|
|
|
All international sales are denominated in US dollars.
International sales for the years ended August 31, 2006,
2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Africa
|
|
$
|
119
|
|
|
$
|
83
|
|
|
$
|
112
|
|
Asia
|
|
|
904
|
|
|
|
880
|
|
|
|
1,104
|
|
Europe
|
|
|
183
|
|
|
|
129
|
|
|
|
158
|
|
North America, excluding US
|
|
|
717
|
|
|
|
605
|
|
|
|
456
|
|
South America
|
|
|
156
|
|
|
|
271
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,079
|
|
|
$
|
1,968
|
|
|
$
|
2,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company routinely enters into buy/sell contracts associated
with crude oil. These contracts are used to facilitate the
Companys crude oil purchasing activity and supply
requirements. Physical delivery occurs for each side of the
transaction, and the risk and reward of ownership are evidenced
by title transfer, assumption of environmental risk,
transportation scheduling, credit risk, and risk of
nonperformance by the counterparty. As a result, the Company
accounts for these buy/sell transactions, net, in cost of sales
in the Consolidated Statements of Operations.
Inventories as of August 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Grain and oilseed
|
|
$
|
511,413
|
|
|
$
|
387,820
|
|
Energy
|
|
|
447,664
|
|
|
|
377,076
|
|
Feed and farm supplies
|
|
|
137,978
|
|
|
|
121,721
|
|
Processed grain and oilseed
|
|
|
32,198
|
|
|
|
26,195
|
|
Other
|
|
|
1,571
|
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,130,824
|
|
|
$
|
914,182
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2006, the Company valued approximately 21%
of inventories, primarily related to energy, using the lower of
cost, determined on the LIFO method, or market (19% as of
August 31, 2005). If the FIFO method of accounting for
these inventories had been used, inventories would have been
higher than the reported amount by $370.5 million and
$305.4 million at August 31, 2006 and 2005,
respectively. During 2005, energy inventory quantities were
reduced, which resulted in liquidation of LIFO inventory
quantities carried at lower costs prevailing in prior years as
compared with the cost of 2005 purchases. The effect of the
liquidation decreased cost of goods sold by $15.8 million
during 2005.
F-10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments as of August 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
CF Industries Holdings, Inc.
|
|
$
|
34,105
|
|
|
$
|
36,105
|
|
Cooperatives:
|
|
|
|
|
|
|
|
|
Land OLakes, Inc.
|
|
|
38,929
|
|
|
|
32,874
|
|
Ag Processing Inc.
|
|
|
21,297
|
|
|
|
23,864
|
|
CoBank, ACB (CoBank)
|
|
|
11,956
|
|
|
|
11,041
|
|
Joint ventures:
|
|
|
|
|
|
|
|
|
United Country Brands, LLC
(Agriliance LLC)
|
|
|
175,306
|
|
|
|
177,870
|
|
Ventura Foods, LLC
|
|
|
132,222
|
|
|
|
117,622
|
|
US BioEnergy Corporation
|
|
|
69,264
|
|
|
|
|
|
Cofina Financial, LLC
|
|
|
38,752
|
|
|
|
38,297
|
|
Horizon Milling, LLC
|
|
|
30,753
|
|
|
|
23,174
|
|
TEMCO, LLC
|
|
|
3,486
|
|
|
|
4,450
|
|
Other
|
|
|
68,183
|
|
|
|
55,673
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
624,253
|
|
|
$
|
520,970
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2005, CHS evaluated the
carrying value of the investment in CF Industries, Inc.
(CF), a domestic fertilizer manufacturer in which CHS held a
minority interest. At that time, the Companys carrying
value of $153.0 million consisted primarily of noncash
patronage refunds received from CF over the years. Based upon
indicative values from potential strategic buyers for the
business and through other analyses, the Company determined at
that time that the carrying value of the CF investment should be
reduced by $35.0 million ($32.1 million net of taxes),
resulting in an impairment charge in the first quarter of fiscal
2005.
In February 2005, after reviewing indicative values from
strategic buyers, the board of directors of CF determined that a
greater value could be derived for the business through an
initial public offering of stock in the company. The initial
public offering was completed in August 2005. Prior to the
initial public offering, CHS held an ownership interest of
approximately 20% in CF. Through the initial public offering,
CHS sold approximately 81% of its ownership interest for cash
proceeds of $140.4 million. The book basis in the portion
of the ownership interest sold through the initial public
offering, after the $35.0 million impairment charge
recognized in the first fiscal quarter Ag Business segment, was
$95.8 million. As a result, the Company recognized a pretax
gain of $44.6 million ($40.9 million net of taxes) on
the sale of that ownership interest during the fourth quarter of
2005. This gain, net of the impairment loss of
$35.0 million, resulted in a $9.6 million pretax gain
($8.8 million net of taxes) recognized during 2005.
CHS retains an ownership interest in CF Industries Holdings,
Inc. (the post-initial public offering name) of approximately
3.9% or 2,150,396 shares, and accounts for this investment
as an available for sale security. The market value of the
shares on August 31, 2006 was $34.1 million, and
accordingly, CHS has adjusted the carrying value to reflect
market value. An unrealized gain of $11.9 million is
included in accumulated other comprehensive income.
F-11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006, CHS invested $70.0 million in
US BioEnergy Corporation (US BioEnergy), an ethanol
manufacturing company, representing an approximate 24% ownership
on August 31, 2006. On September 1, 2006, CHS acquired
additional shares of Class A Common Stock for an aggregate
purchase price of $35.0 million. This brings the
Companys total investment in US BioEnergy to
$105.0 million, representing 25.57% of the outstanding
shares. The Company accounts for this investment using the
equity method of accounting within the Processing segment. 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, but it
has not yet become effective.
As of August 31, 2006, the carrying value of our equity
method investees, Agriliance LLC (Agriliance) and Ventura Foods,
LLC, exceeds our share of their equity by $43.9 million, of
which $4.3 million is being amortized with a remaining life
of approximately six years. The remaining basis difference
represents equity method goodwill.
The Company has a 50% interest in Ventura Foods, LLC, a joint
venture entity, which produces and distributes vegetable
oil-based products. The following provides summarized unaudited
financial information for Ventura Foods, LLC balance sheets as
of August 31, 2006 and 2005, and statements of operations
for the twelve months ended August 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
237,117
|
|
|
$
|
198,576
|
|
Non-current assets
|
|
|
441,435
|
|
|
|
455,715
|
|
Current liabilities
|
|
|
141,080
|
|
|
|
146,035
|
|
Non-current liabilities
|
|
|
308,377
|
|
|
|
307,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
1,483,583
|
|
|
$
|
1,413,426
|
|
|
$
|
1,425,061
|
|
Gross profit
|
|
|
196,847
|
|
|
|
184,466
|
|
|
|
167,581
|
|
Net income
|
|
|
57,756
|
|
|
|
61,779
|
|
|
|
44,696
|
|
Agriliance is a wholesale and retail crop nutrients and crop
protections products company and is owned and governed by United
Country Brands, LLC (50%) and Land OLakes, Inc.
(50%). United Country Brands, LLC, was initially owned and
governed 50% by the Company and 50% by Farmland Industries, Inc.
(Farmland), and was formed solely to hold a 50% interest in
Agriliance. As of April 30, 2004, the Company had purchased
all of Farmlands remaining interest in Agriliance for
$27.5 million in cash. The Company now owns 50% of the
economic and governance interests in Agriliance, and continues
to account for this investment using the equity method of
accounting within the Ag Business segment.
The following provides summarized financial information for
Agriliance balance sheets as of August 31, 2006 and 2005,
and statements of operations for the years ended August 31,
2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
1,261,874
|
|
|
$
|
1,340,200
|
|
Non-current assets
|
|
|
166,365
|
|
|
|
148,611
|
|
Current liabilities
|
|
|
999,038
|
|
|
|
1,066,715
|
|
Non-current liabilities
|
|
|
132,071
|
|
|
|
119,794
|
|
F-12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
3,739,632
|
|
|
$
|
3,735,125
|
|
|
$
|
3,471,514
|
|
Earnings from operations
|
|
|
76,052
|
|
|
|
90,812
|
|
|
|
82,221
|
|
Net income
|
|
|
52,268
|
|
|
|
77,113
|
|
|
|
71,278
|
|
In August 2005, the Company contributed $19.6 million in
cash (plus an additional $18.5 million in net assets,
primarily loans) to Cofina Financial, LLC (Cofina), for a 49%
equity interest. Cofina was formed by the Company and Cenex
Finance Association to provide financing for agricultural
cooperatives and businesses and to producers of agricultural
products.
During the year ended August 31, 2004, NCRA exercised its
right of first refusal to purchase a partial interest in a crude
oil pipeline for $16.0 million, increasing their holding to
100%. NCRA subsequently sold a 50% interest in the same pipeline
to another third party for proceeds of $25.0 million and
recorded a pretax gain on the sale of $14.7 million.
Various agreements with other owners of investee companies and a
majority-owned subsidiary set out parameters whereby CHS may buy
and sell additional interests in those companies, upon the
occurrence of certain events, at fair values determinable as set
forth in the specific agreements.
|
|
5.
|
Property,
Plant and Equipment
|
A summary of property, plant and equipment as of August 31,
2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Land and land improvements
|
|
$
|
67,299
|
|
|
$
|
66,023
|
|
Buildings
|
|
|
439,559
|
|
|
|
420,851
|
|
Machinery and equipment
|
|
|
2,085,951
|
|
|
|
1,708,400
|
|
Office and other
|
|
|
75,836
|
|
|
|
76,320
|
|
Construction in progress
|
|
|
121,379
|
|
|
|
292,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,790,024
|
|
|
|
2,564,186
|
|
Less accumulated depreciation and
amortization
|
|
|
1,313,785
|
|
|
|
1,204,651
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,476,239
|
|
|
$
|
1,359,535
|
|
|
|
|
|
|
|
|
|
|
In January 2002, the Company formed a limited liability company
with Cargill, Incorporated, to engage in wheat flour milling and
processing. The Company holds a 24% interest in the entity,
which is known as Horizon Milling, LLC. The Company is leasing
certain of its wheat milling facilities and related equipment to
Horizon Milling, LLC under an operating lease agreement. The
book value of the leased milling assets at August 31, 2006
and 2005, was $82.0 million and $87.9 million,
respectively, net of accumulated depreciation of
$48.4 million and $42.8 million, respectively.
For the years ended August 31, 2006, 2005 and 2004, the
Company capitalized interest of $4.7 million,
$6.8 million and $2.8 million, respectively, related
to capitalized construction projects.
F-13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Discontinued
Operations
|
In May 2005, CHS sold the majority of its Mexican foods business
for proceeds of $38.3 million resulting in a loss on
disposition of $6.2 million. During 2006, the Company sold
or disposed of the remaining assets. The operating results of
the Mexican Foods business are reported as discontinued
operations.
Summarized results from discontinued operations for
August 31, 2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
|
|
|
|
$
|
43,556
|
|
|
$
|
70,929
|
|
Cost of goods sold
|
|
|
|
|
|
|
49,919
|
|
|
|
65,047
|
|
Marketing, general and
administrative*
|
|
$
|
(1,168
|
)
|
|
|
18,246
|
|
|
|
12,645
|
|
Interest, net
|
|
|
145
|
|
|
|
2,903
|
|
|
|
2,908
|
|
Income tax expense (benefit)
|
|
|
398
|
|
|
|
(10,702
|
)
|
|
|
(3,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
$
|
625
|
|
|
$
|
(16,810
|
)
|
|
$
|
(5,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
2006 and 2005 include a $1.6 million gain and a
$6.2 million loss on disposition, respectively.
|
Other assets as of August 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,904
|
|
|
$
|
3,291
|
|
|
|
|
|
|
|
|
|
|
Customer lists, less accumulated
amortization of $11,498 and $10,335, respectively
|
|
|
3,381
|
|
|
|
4,601
|
|
|
|
|
|
|
|
|
|
|
Non-compete covenants, less
accumulated amortization of $1,678 and $2,445, respectively
|
|
|
1,531
|
|
|
|
1,317
|
|
|
|
|
|
|
|
|
|
|
Trademarks and other intangible
assets, less accumulated amortization
of $5,379 and $4,141, respectively
|
|
|
12,838
|
|
|
|
12,384
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension and other benefits
|
|
|
192,180
|
|
|
|
200,600
|
|
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
3,859
|
|
|
|
3,654
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
5,781
|
|
|
|
4,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
223,474
|
|
|
$
|
229,940
|
|
|
|
|
|
|
|
|
|
|
The increase in goodwill during 2006 was due to the
consolidation of Provista which had $0.6 million of
goodwill on its balance sheet.
Intangible assets amortization expenses for the years ended
August 31, 2006, 2005 and 2004 were $4.9 million,
$4.2 million and $3.8 million, respectively. The
estimated amortization expense related to intangible assets
subject to amortization for the next five years will approximate
$2.4 million annually for the first year, $2.2 million
for each of the next two years, and $1.8 million for each
of the following two years.
F-14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Notes
Payable and Long-Term Debt
|
Notes payable and long-term debt as of August 31, 2006 and
2005 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates at
|
|
|
|
|
|
|
|
|
August 31, 2006
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Notes payable(a)(i)
|
|
7.25% to 8.80%
|
|
$
|
22,007
|
|
|
$
|
61,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
Revolving term loans from
cooperative and other banks, payable in installments through
2009, when the balance is due(b)(i)
|
|
6.30% to 13.00%
|
|
$
|
110,477
|
|
|
$
|
133,335
|
|
Private placement, payable in
equal installments beginning in 2008 through 2013(c)(i)
|
|
6.81%
|
|
|
225,000
|
|
|
|
225,000
|
|
Private placement, payable in
installments beginning in 2007 through 2018(d)(i)
|
|
4.96% to 5.60%
|
|
|
175,000
|
|
|
|
175,000
|
|
Private placement, payable in
equal installments beginning in 2011 through 2015(e)(i)
|
|
5.25%
|
|
|
125,000
|
|
|
|
125,000
|
|
Private placement, payable in
equal installments in 2005 through 2011(f)(i)
|
|
7.43% to 7.90%
|
|
|
57,143
|
|
|
|
68,571
|
|
Private placement, payable in its
entirety in 2010(g)(i)
|
|
4.08%
|
|
|
15,000
|
|
|
|
15,000
|
|
Private placement, payable in its
entirety in 2011(g)(i)
|
|
4.39%
|
|
|
15,000
|
|
|
|
15,000
|
|
Industrial revenue bonds, payable
in its entirety
in 2011
|
|
5.23%
|
|
|
3,925
|
|
|
|
3,925
|
|
Other notes and contracts(h)
|
|
1.89% to 12.17%
|
|
|
18,200
|
|
|
|
12,243
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
744,745
|
|
|
|
773,074
|
|
Less current portion
|
|
|
|
|
60,748
|
|
|
|
35,340
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
|
|
$
|
683,997
|
|
|
$
|
737,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Weighted-average interest rates at
August 31:
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
7.58%
|
|
|
|
3.90%
|
|
|
|
Long-term debt
|
|
|
6.09%
|
|
|
|
6.15%
|
|
|
|
|
|
|
(a) |
|
The Company finances its working capital needs through a
short-term line of credit with a syndication of domestic and
international banks. This revolving line of credit is a
five-year $1.1 billion committed facility. On
August 31, 2006, there was no amount outstanding on the
facility. In addition to this short-term line of credit, the
Company has a two-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,
2006. The Company also has a committed revolving line of credit
dedicated to Provista, through LaSalle Bank National
Association, in the amount of $20.0 million, with
$12.5 million outstanding on August 31, 2006. Other
miscellaneous notes payable totaled $9.5 million on
August 31, 2006. On August 31, 2005, there was
$60.0 million outstanding on a
364-day
revolving line of credit and $1.1 million of other
miscellaneous notes payable. |
|
(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 |
F-15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
expiration date of that commitment. On August 31, 2006,
$98.4 million was outstanding. NCRA term loans of
$6.0 million are collateralized by NCRAs investment
in CoBank. |
|
(c) |
|
In June 1998, the Company entered into a private placement with
several insurance companies for long-term debt in the amount of
$225.0 million. |
|
(d) |
|
In October 2002, the Company entered into a private placement
with several insurance companies for long-term debt in the
amount of $175.0 million. |
|
(e) |
|
In September 2004, the Company entered into a private placement
with several insurance companies for long-term debt in the
amount of $125.0 million. |
|
(f) |
|
In January 2001, the Company entered into a note purchase and
private shelf agreement with Prudential Insurance Company. A
long-term note was issued for $25.0 million and a
subsequent note for $55.0 million was issued in March 2001. |
|
(g) |
|
In March 2004, the Company entered into a note purchase and
private shelf agreement with Prudential Capital Group. In April
2004, two long-term notes were issued for $15.0 million
each. |
|
(h) |
|
Other notes and contracts payable of $8.9 million are
collateralized by property, plant and equipment, with a cost of
$16.9 million, less accumulated depreciation of
$3.8 million on August 31, 2006. |
|
(i) |
|
The debt is unsecured, however restrictive covenants under
various agreements have requirements for maintenance of minimum
working capital levels and other financial ratios. |
The fair value of long-term debt approximates book value as of
August 31, 2006 and 2005.
The aggregate amount of long-term debt payable as of
August 31, 2006 is as follows:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
$
|
60,748
|
|
2008
|
|
|
98,957
|
|
2009
|
|
|
117,734
|
|
2010
|
|
|
82,617
|
|
2011
|
|
|
111,609
|
|
Thereafter
|
|
|
273,080
|
|
|
|
|
|
|
|
|
$
|
744,745
|
|
|
|
|
|
|
Interest, net for the years ended August 31, 2006, 2005 and
2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Interest expense
|
|
$
|
50,562
|
|
|
$
|
51,531
|
|
|
$
|
48,717
|
|
Interest income
|
|
|
9,257
|
|
|
|
10,022
|
|
|
|
5,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
$
|
41,305
|
|
|
$
|
41,509
|
|
|
$
|
42,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The provision for income taxes for the years ended
August 31, 2006, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(28,973
|
)
|
|
$
|
4,034
|
|
|
$
|
20,962
|
|
Deferred
|
|
|
81,100
|
|
|
|
34,200
|
|
|
|
7,900
|
|
Valuation allowance
|
|
|
(2,800
|
)
|
|
|
(7,800
|
)
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes from continuing
operations
|
|
|
49,327
|
|
|
|
30,434
|
|
|
|
29,462
|
|
Income taxes from discontinued
operations
|
|
|
398
|
|
|
|
(10,702
|
)
|
|
|
(3,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
49,725
|
|
|
$
|
19,732
|
|
|
$
|
25,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys current tax provision is significantly
impacted by the utilization of loss carryforwards and tax
benefits passed to the Company from NCRA. The pass-through tax
benefits are associated with refinery upgrades that enable NCRA
to produce ultra low sulfur fuels as mandated by the
Environmental Protection Agency.
The tax effect of temporary differences of deferred tax assets
and liabilities as of August 31, 2006 and 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued expenses and valuation
reserves
|
|
$
|
76,582
|
|
|
$
|
63,964
|
|
Postretirement health care and
deferred compensation
|
|
|
49,652
|
|
|
|
42,248
|
|
Tax credits
|
|
|
16,763
|
|
|
|
1,936
|
|
Loss carryforward
|
|
|
25,027
|
|
|
|
37,931
|
|
Other
|
|
|
14,573
|
|
|
|
9,524
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
182,597
|
|
|
|
155,603
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Pension, including minimum
liability
|
|
|
52,715
|
|
|
|
53,094
|
|
Equity method investments
|
|
|
55,128
|
|
|
|
19,423
|
|
Property, plant and equipment
|
|
|
159,034
|
|
|
|
72,780
|
|
Other
|
|
|
12,960
|
|
|
|
7,785
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
279,837
|
|
|
|
153,082
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets valuation
reserve
|
|
|
(571
|
)
|
|
|
(3,392
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(97,811
|
)
|
|
$
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
For the year ended August 31, 2004, NCRA decreased its
valuation allowance by $5.0 million due to a reduction in
NCRAs deferred tax benefits. The Company recorded a
$4.4 million valuation allowance to offset deferred tax
benefits relating to a capital loss carryforward in that same
period. During its August 31, 2006 fiscal year, the Company
reduced its valuation allowance on that capital loss
carryforward due to capital gains generated during the year.
As of August 31, 2006, net deferred taxes of
$77.6 million and $175.4 million are included in
current assets and other liabilities, respectively
($62.3 million and $63.1 million in current assets and
other liabilities, respectively, as of August 31, 2005).
F-17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Companys
deferred tax assets when determining recoverability.
As of August 31, 2006, NCRA and the Company have net
operating loss carryforwards of $46.1 million and
$16.4 million, respectively, for tax purposes available to
offset future taxable income. If not used, these carryforwards
will expire in fiscal years beginning in 2023 through 2025.
The reconciliation of the statutory federal income tax rates to
the effective tax rates for continuing operations for the years
ended August 31, 2006, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net
of federal income tax benefit
|
|
|
3.9
|
|
|
|
3.9
|
|
|
|
3.9
|
|
Patronage earnings
|
|
|
(27.4
|
)
|
|
|
(26.9
|
)
|
|
|
(24.8
|
)
|
Export activities at rates other
than the US statutory rate
|
|
|
(0.8
|
)
|
|
|
(2.4
|
)
|
|
|
(4.4
|
)
|
Valuation allowance
|
|
|
(0.5
|
)
|
|
|
(2.6
|
)
|
|
|
0.2
|
|
Tax credits
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.8
|
|
|
|
3.2
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
9.2
|
%
|
|
|
10.2
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Effective September 1, 2004, 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 older than 10 years, and another for
individual members who are eligible for equity redemptions at
age 72 or upon death. Effective September 1, 2006, the
10-year
aging factor on the retirement of equity on a pro-rata basis was
eliminated for equity redemptions to be paid in fiscal year
2007. 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 that member, and
the denominator is the sum of the patronage certificates
eligible for redemption held by all eligible non-individuals
members. In addition to the annual pro-rata program, the Board
of Directors has approved an additional $50.0 million of
redemptions to be paid in fiscal year 2007, targeting older
capital equity certificates. Approximately $40.2 million
will be redeemed to active non-individual members and the
balance to active individual members, of which the oldest
outstanding capital equity certificates will be redeemed through
the year 1989.
For the years ended August 31, 2006, 2005 and 2004, the
Company redeemed in cash, equities in accordance with
authorization from the Board of Directors in the amounts of
$55.9 million, $23.7 million and $10.3 million,
respectively. An additional $23.8 million,
$20.0 million and $13.0 million of capital equity
certificates were redeemed in fiscal years 2006, 2005 and 2004,
respectively, by issuance of shares of the Companys 8%
Cumulative Redeemable Preferred Stock (Preferred Stock). The
amount of equities redeemed with each share of Preferred Stock
issued was $26.10, $27.58 and $27.10, which was the closing
price per
F-18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
share of the stock on the NASDAQ National Market on
January 23, 2006, January 24, 2005 and March 2,
2004, respectively. On August 31, 2006, the Company had
5,864,238 shares of Preferred Stock outstanding with a
total redemption value of approximately $146.6 million,
excluding accumulated dividends. The Preferred Stock is
redeemable at the Companys option beginning in 2008.
The Company expects cash redemptions related to the year ended
August 31, 2006, that will be distributed in fiscal year
2007, to be approximately $112.4 million. These expected
distributions are classified as a current liability on the
August 31, 2006 Consolidated Balance Sheet.
The Preferred Stock is listed on the NASDAQ National Market
under the symbol CHSCP. The Preferred Stock accumulates
dividends at a rate of 8% per year, and dividends are
payable quarterly.
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.
Financial information on changes in benefit obligation and plan
assets funded and balance sheets status as of August 31,
2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
Non-Qualified
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning
of period
|
|
$
|
330,037
|
|
|
$
|
300,436
|
|
|
$
|
27,440
|
|
|
$
|
20,998
|
|
|
$
|
29,845
|
|
|
$
|
28,327
|
|
Service cost
|
|
|
14,892
|
|
|
|
12,749
|
|
|
|
2,195
|
|
|
|
991
|
|
|
|
1,024
|
|
|
|
874
|
|
Interest cost
|
|
|
17,037
|
|
|
|
18,039
|
|
|
|
1,368
|
|
|
|
1,175
|
|
|
|
1,568
|
|
|
|
1,776
|
|
Plan amendments
|
|
|
430
|
|
|
|
|
|
|
|
345
|
|
|
|
61
|
|
|
|
|
|
|
|
(330
|
)
|
Transfers
|
|
|
|
|
|
|
|
|
|
|
(5,049
|
)
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
Actuarial (gain) loss
|
|
|
(8,813
|
)
|
|
|
(3,031
|
)
|
|
|
(885
|
)
|
|
|
2,530
|
|
|
|
(552
|
)
|
|
|
(1,136
|
)
|
Special agreement
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
Assumption change
|
|
|
(6,614
|
)
|
|
|
23,961
|
|
|
|
(1,333
|
)
|
|
|
2,137
|
|
|
|
(1,124
|
)
|
|
|
2,677
|
|
Benefits paid
|
|
|
(22,271
|
)
|
|
|
(22,117
|
)
|
|
|
(785
|
)
|
|
|
(583
|
)
|
|
|
(2,446
|
)
|
|
|
(2,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period
|
|
$
|
324,698
|
|
|
$
|
330,037
|
|
|
$
|
23,381
|
|
|
$
|
27,440
|
|
|
$
|
28,315
|
|
|
$
|
29,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of period
|
|
$
|
331,727
|
|
|
$
|
299,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income on plan assets
|
|
|
25,688
|
|
|
|
32,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
6,955
|
|
|
|
22,000
|
|
|
$
|
785
|
|
|
$
|
583
|
|
|
$
|
2,446
|
|
|
$
|
2,451
|
|
Participants contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330
|
)
|
Benefits paid
|
|
|
(22,271
|
)
|
|
|
(22,117
|
)
|
|
|
(785
|
)
|
|
|
(583
|
)
|
|
|
(2,446
|
)
|
|
|
(2,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of period
|
|
$
|
342,099
|
|
|
$
|
331,727
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
Non-Qualified
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Funded status
|
|
$
|
17,401
|
|
|
$
|
1,690
|
|
|
$
|
(23,381
|
)
|
|
$
|
(27,440
|
)
|
|
$
|
(28,315
|
)
|
|
$
|
(29,845
|
)
|
Employer contributions after
measurement date
|
|
|
|
|
|
|
|
|
|
|
328
|
|
|
|
|
|
|
|
205
|
|
|
|
220
|
|
Unrecognized actuarial loss (gain)
|
|
|
104,665
|
|
|
|
124,930
|
|
|
|
888
|
|
|
|
3,749
|
|
|
|
(1,181
|
)
|
|
|
362
|
|
Unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,452
|
|
|
|
7,389
|
|
Unrecognized prior service cost
|
|
|
5,513
|
|
|
|
5,939
|
|
|
|
2,009
|
|
|
|
2,526
|
|
|
|
(1,362
|
)
|
|
|
(1,669
|
)
|
Special agreement
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost (accrued)
|
|
$
|
127,579
|
|
|
$
|
132,559
|
|
|
$
|
(20,241
|
)
|
|
$
|
(21,296
|
)
|
|
$
|
(24,201
|
)
|
|
$
|
(23,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on balance
sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (accrued benefit
liability)
|
|
$
|
127,579
|
|
|
$
|
132,559
|
|
|
$
|
(21,396
|
)
|
|
$
|
(24,840
|
)
|
|
$
|
(24,201
|
)
|
|
$
|
(23,543
|
)
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
599
|
|
|
|
2,464
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
556
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized
|
|
$
|
127,579
|
|
|
$
|
132,559
|
|
|
$
|
(20,241
|
)
|
|
$
|
(21,296
|
)
|
|
$
|
(24,201
|
)
|
|
$
|
(23,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For measurement purposes, an 8.75% annual rate of increase in
the per capita cost of covered health care benefits was assumed
for the year ended August 31, 2006. The rate was assumed to
decrease gradually to 5.0% for 2013 and remain at that level
thereafter. Components of net periodic benefit costs for the
years ended August 31, 2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
Non-Qualified
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Components of net periodic benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
14,892
|
|
|
$
|
12,749
|
|
|
$
|
11,548
|
|
|
$
|
2,195
|
|
|
$
|
991
|
|
|
$
|
932
|
|
|
$
|
1,024
|
|
|
$
|
874
|
|
|
$
|
754
|
|
Interest cost
|
|
|
17,037
|
|
|
|
18,039
|
|
|
|
17,203
|
|
|
|
1,368
|
|
|
|
1,175
|
|
|
|
1,032
|
|
|
|
1,568
|
|
|
|
1,776
|
|
|
|
1,758
|
|
Expected return on assets
|
|
|
(28,362
|
)
|
|
|
(27,648
|
)
|
|
|
(27,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost amortization
|
|
|
855
|
|
|
|
792
|
|
|
|
843
|
|
|
|
516
|
|
|
|
519
|
|
|
|
863
|
|
|
|
(305
|
)
|
|
|
(294
|
)
|
|
|
(174
|
)
|
Actuarial loss amortization
|
|
|
7,513
|
|
|
|
5,759
|
|
|
|
4,149
|
|
|
|
210
|
|
|
|
124
|
|
|
|
103
|
|
|
|
17
|
|
|
|
43
|
|
|
|
108
|
|
Transition amount amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936
|
|
|
|
936
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
11,935
|
|
|
$
|
9,691
|
|
|
$
|
6,254
|
|
|
$
|
4,289
|
|
|
$
|
2,809
|
|
|
$
|
2,930
|
|
|
$
|
3,240
|
|
|
$
|
3,335
|
|
|
$
|
3,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.05%
|
|
|
|
5.25%
|
|
|
|
6.40%
|
|
|
|
6.05%
|
|
|
|
5.25%
|
|
|
|
6.25%
|
|
|
|
6.05%
|
|
|
|
5.25%
|
|
|
|
6.40%
|
|
Expected return on plan assets
|
|
|
8.80%
|
|
|
|
9.00%
|
|
|
|
9.00%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
4.50%
|
|
|
|
4.80%
|
|
|
|
4.30%
|
|
|
|
4.50%
|
|
|
|
4.50%
|
|
|
|
5.00%
|
|
|
|
4.50%
|
|
|
|
4.80%
|
|
|
|
4.30%
|
|
F-20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate projected benefit obligation, accumulated benefit
obligation and fair value of plan assets for non-qualified
pension benefits with accumulated benefit obligations in excess
of plan assets were as follows as of August 31, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified
|
|
|
|
Pension Benefits
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Projected benefit obligation
|
|
$
|
23,381
|
|
|
$
|
27,440
|
|
Accumulated benefit obligation
|
|
|
21,491
|
|
|
|
24,693
|
|
Fair value of plan assets
|
|
|
|
|
|
|
|
|
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
|
|
$
|
306
|
|
|
$
|
(271
|
)
|
Effect on postretirement benefit
obligation
|
|
|
2,516
|
|
|
|
(2,262
|
)
|
The Company provides defined life insurance and health care
benefits for certain retired employees and board of
directors participants. The plan is contributory based on
years of service and family status, with retiree contributions
adjusted annually.
The Company has other contributory defined contribution plans
covering substantially all employees. Total contributions by the
Company to these plans were $9.7 million, $9.5 million
and $8.6 million, for the years ended August 31, 2006,
2005 and 2004, respectively.
The Company contributed $7.0 million to qualified pension
plans in fiscal year 2006. Because the plans are fully funded,
the Company does not expect to contribute to the pension plans
in fiscal year 2007. The Company expects to pay
$2.3 million to participants of the non-qualified pension
and postretirement benefit plans during 2007.
The Companys retiree benefit payments which reflect
expected future service are anticipated to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits
|
|
|
|
Qualified
|
|
|
Non-Qualified
|
|
|
|
|
|
Part D
|
|
|
|
Pension Benefits
|
|
|
Pension Benefits
|
|
|
Gross
|
|
|
Reimbursement
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
$
|
25,389
|
|
|
$
|
636
|
|
|
$
|
1,684
|
|
|
$
|
200
|
|
2008
|
|
|
24,999
|
|
|
|
674
|
|
|
|
1,871
|
|
|
|
200
|
|
2009
|
|
|
26,249
|
|
|
|
689
|
|
|
|
2,039
|
|
|
|
200
|
|
2010
|
|
|
29,965
|
|
|
|
714
|
|
|
|
2,330
|
|
|
|
200
|
|
2011
|
|
|
27,445
|
|
|
|
673
|
|
|
|
2,657
|
|
|
|
200
|
|
2012-2016
|
|
|
168,955
|
|
|
|
4,447
|
|
|
|
16,345
|
|
|
|
900
|
|
F-21
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
Companys 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 plan should be able to meet its
pension obligations in the future.
The Companys pension plans average asset allocations
by asset categories are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Cash
|
|
|
0.0%
|
|
|
|
1.7%
|
|
Debt
|
|
|
31.3
|
|
|
|
27.8
|
|
Equities
|
|
|
63.7
|
|
|
|
64.5
|
|
Real estate
|
|
|
3.8
|
|
|
|
4.0
|
|
Other
|
|
|
1.2
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
The Company aligned its business segments based on an assessment
of how its businesses operate and the products and services it
sells. As a result of this assessment, the Company has three
chief operating officers to lead its three business segments;
Energy, Ag Business and Processing.
The Energy segment derives its revenues through refining,
wholesaling, marketing and retailing of petroleum products. The
Ag Business segment derives its revenues through the origination
and marketing of grain, including service activities conducted
at export terminals, through the retail sales of petroleum and
agronomy products, processed sunflowers, feed and farm supplies,
and records equity income from investments in the Companys
agronomy joint ventures, grain export joint ventures and other
investments. The Processing segment derives its revenues from
the sales of soybean meal and soybean refined oil, and records
equity income from two wheat milling joint ventures, a vegetable
oil-based food manufacturing and distribution joint venture, and
an ethanol manufacturing company. The Company includes other
business operations in Corporate
F-22
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Companys insurance,
hedging and other service activities related to crop production.
Reconciling Amounts represent the elimination of revenues
between segments. Such transactions are conducted at market
prices to more accurately evaluate the profitability of the
individual business segments.
The Company assigns certain corporate general and administrative
expenses to its business segments based on use of such services
and allocates other services based on factors or considerations
relevant to the costs incurred.
Expenses that are incurred at the corporate level for the
purpose of the general operation of the Company are allocated to
the segments based upon factors which management considers to be
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, 2006,
2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
33,175
|
|
|
$
|
(253,337
|
)
|
|
$
|
14,383,835
|
|
|
|
Cost of goods sold
|
|
|
6,834,676
|
|
|
|
6,401,527
|
|
|
|
588,732
|
|
|
|
(1,091
|
)
|
|
|
(253,337
|
)
|
|
|
13,570,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
579,685
|
|
|
|
173,638
|
|
|
|
25,739
|
|
|
|
34,266
|
|
|
|
|
|
|
|
813,328
|
|
|
|
Marketing, general and
administrative
|
|
|
82,867
|
|
|
|
99,777
|
|
|
|
21,645
|
|
|
|
26,949
|
|
|
|
|
|
|
|
231,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
496,818
|
|
|
|
73,861
|
|
|
|
4,094
|
|
|
|
7,317
|
|
|
|
|
|
|
|
582,090
|
|
|
|
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
|
|
|
86,483
|
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
407,641
|
|
|
$
|
91,713
|
|
|
$
|
28,502
|
|
|
$
|
11,143
|
|
|
$
|
|
|
|
$
|
538,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(242,430
|
)
|
|
$
|
(8,779
|
)
|
|
$
|
(368
|
)
|
|
$
|
(1,760
|
)
|
|
$
|
253,337
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,654
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
175,231
|
|
|
$
|
44,542
|
|
|
$
|
13,313
|
|
|
$
|
1,906
|
|
|
|
|
|
|
$
|
234,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
75,581
|
|
|
$
|
31,471
|
|
|
$
|
14,049
|
|
|
$
|
5,676
|
|
|
|
|
|
|
$
|
126,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets at
August 31, 2006
|
|
$
|
2,164,217
|
|
|
$
|
1,806,243
|
|
|
$
|
518,186
|
|
|
$
|
453,937
|
|
|
|
|
|
|
$
|
4,942,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Reconciling
|
|
|
|
|
|
|
|
|
Energy
|
|
|
Ag Business
|
|
|
Processing
|
|
|
and Other
|
|
|
Amounts
|
|
|
Total
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
For the year ended August 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,794,266
|
|
|
$
|
5,670,644
|
|
|
$
|
613,766
|
|
|
$
|
30,672
|
|
|
$
|
(182,386
|
)
|
|
$
|
11,926,962
|
|
|
|
Cost of goods sold
|
|
|
5,487,813
|
|
|
|
5,541,282
|
|
|
|
604,198
|
|
|
|
(1,049
|
)
|
|
|
(182,386
|
)
|
|
|
11,449,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
306,453
|
|
|
|
129,362
|
|
|
|
9,568
|
|
|
|
31,721
|
|
|
|
|
|
|
|
477,104
|
|
|
|
Marketing, general and
administrative
|
|
|
69,951
|
|
|
|
83,600
|
|
|
|
20,750
|
|
|
|
25,053
|
|
|
|
|
|
|
|
199,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (losses)
|
|
|
236,502
|
|
|
|
45,762
|
|
|
|
(11,182
|
)
|
|
|
6,668
|
|
|
|
|
|
|
|
277,750
|
|
|
|
Gain on sale of investments
|
|
|
(862
|
)
|
|
|
(11,358
|
)
|
|
|
(457
|
)
|
|
|
(336
|
)
|
|
|
|
|
|
|
(13,013
|
)
|
|
|
Interest, net
|
|
|
8,918
|
|
|
|
20,535
|
|
|
|
12,287
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
41,509
|
|
|
|
Equity income from investments
|
|
|
(3,478
|
)
|
|
|
(55,473
|
)
|
|
|
(36,202
|
)
|
|
|
(589
|
)
|
|
|
|
|
|
|
(95,742
|
)
|
|
|
Minority interests
|
|
|
46,741
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
1,036
|
|
|
|
|
|
|
|
47,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
185,183
|
|
|
$
|
92,099
|
|
|
$
|
13,190
|
|
|
$
|
6,788
|
|
|
$
|
|
|
|
$
|
297,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(170,642
|
)
|
|
$
|
(9,640
|
)
|
|
$
|
(502
|
)
|
|
$
|
(1,602
|
)
|
|
$
|
182,386
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
3,041
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
205,484
|
|
|
$
|
27,600
|
|
|
$
|
4,751
|
|
|
$
|
19,635
|
|
|
|
|
|
|
$
|
257,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
59,847
|
|
|
$
|
30,748
|
|
|
$
|
13,868
|
|
|
$
|
5,869
|
|
|
|
|
|
|
$
|
110,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets at
August 31, 2005
|
|
$
|
2,238,614
|
|
|
$
|
1,604,571
|
|
|
$
|
420,373
|
|
|
$
|
463,379
|
|
|
|
|
|
|
$
|
4,726,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended August 31,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,038,561
|
|
|
$
|
6,306,530
|
|
|
$
|
734,944
|
|
|
$
|
31,466
|
|
|
$
|
(142,420
|
)
|
|
$
|
10,969,081
|
|
|
|
Cost of goods sold
|
|
|
3,780,726
|
|
|
|
6,187,082
|
|
|
|
703,129
|
|
|
|
(802
|
)
|
|
|
(142,420
|
)
|
|
|
10,527,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
257,835
|
|
|
|
119,448
|
|
|
|
31,815
|
|
|
|
32,268
|
|
|
|
|
|
|
|
441,366
|
|
|
|
Marketing, general and
administrative
|
|
|
72,876
|
|
|
|
85,479
|
|
|
|
20,323
|
|
|
|
23,777
|
|
|
|
|
|
|
|
202,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
184,959
|
|
|
|
33,969
|
|
|
|
11,492
|
|
|
|
8,491
|
|
|
|
|
|
|
|
238,911
|
|
|
|
Gain on sale of investments
|
|
|
(14,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,666
|
)
|
|
|
Gain on legal settlements
|
|
|
|
|
|
|
(692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(692
|
)
|
|
|
Interest, net
|
|
|
12,090
|
|
|
|
18,932
|
|
|
|
12,392
|
|
|
|
(656
|
)
|
|
|
|
|
|
|
42,758
|
|
|
|
Equity income from investments
|
|
|
(1,399
|
)
|
|
|
(47,488
|
)
|
|
|
(29,966
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
(79,022
|
)
|
|
|
Minority interests
|
|
|
32,507
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
1,347
|
|
|
|
|
|
|
|
33,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
156,427
|
|
|
$
|
63,241
|
|
|
$
|
29,066
|
|
|
$
|
7,969
|
|
|
$
|
|
|
|
$
|
256,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
(121,199
|
)
|
|
$
|
(18,372
|
)
|
|
$
|
(1,363
|
)
|
|
$
|
(1,486
|
)
|
|
$
|
142,420
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
187,937
|
|
|
$
|
35,240
|
|
|
$
|
8,757
|
|
|
$
|
13,214
|
|
|
|
|
|
|
$
|
245,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
57,195
|
|
|
$
|
30,887
|
|
|
$
|
13,536
|
|
|
$
|
6,781
|
|
|
|
|
|
|
$
|
108,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended August 31, 2004, the Company received
cash proceeds and recorded gains of $0.7 million, related
to legal settlements from several vitamin product suppliers
against whom the Company alleged certain price-fixing claims.
F-24
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Commitments
and Contingencies
|
The Company is required to comply with various environmental
laws and regulations incidental to its normal business
operations. In order to meet its compliance requirements, the
Company establishes reserves for the probable future costs of
remediation of identified issues, which are included in cost of
goods sold and marketing, general and administrative expenses in
the Consolidated Statements of Operations. The resolution of any
such matters may affect consolidated net income for any fiscal
period; however, management believes any resulting liabilities,
individually or in the aggregate, will not have a material
effect on the consolidated financial position, results of
operations or cash flows of the Company during any fiscal year.
In connection with certain refinery upgrades and enhancements
now complete, in order to comply with existing environmental
regulations, the Company incurred capital expenditures from
fiscal year 2003 through 2006 totaling $88.1 million for
the Companys Laurel, Mont. refinery and
$328.7 million for NCRAs McPherson, Kan. refinery.
|
|
|
Other
Litigation and Claims
|
The Company is involved as a defendant in various lawsuits,
claims and disputes, which are in the normal course of the
Companys 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.
As of August 31, 2006 and 2005, the Company stored grain
and processed grain products for third parties totaling
$199.2 million and $170.4 million, respectively. Such
stored commodities and products are not the property of the
Company and therefore are not included in the Companys
inventories.
The Company is a guarantor for lines of credit for related
companies. The Companys bank covenants allow maximum
guarantees of $150.0 million, of which $50.1 million
was outstanding as of August 31, 2006. In addition, the
Companys bank covenants allow for guarantees dedicated
solely for NCRA in the amount of $125.0 million.
In the past, the Company made seasonal and term loans to member
cooperatives, and its wholly-owned subsidiary, Fin-Ag, Inc.,
made loans for agricultural purposes to individual producers.
Some of these loans were sold to CoBank, and the Company
guaranteed a portion of the loans sold, some of which are still
outstanding. Currently these loans are made by Cofina. The
Company may, at its own discretion, choose to guarantee certain
loans made by Cofina. In addition, the Company also guarantees
certain debt and obligations under contracts for its
subsidiaries and members.
F-25
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys obligations pursuant to its guarantees as of
August 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee/
|
|
|
Exposure on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
August 31,
|
|
|
Nature of
|
|
|
|
|
|
Triggering
|
|
|
Recourse
|
|
|
Assets Held
|
|
Entities
|
|
Exposure
|
|
|
2006
|
|
|
Guarantee
|
|
|
Expiration Date
|
|
|
Event
|
|
|
Provisions
|
|
|
as Collateral
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys financial
services cooperative loans sold to CoBank
|
|
|
*
|
|
|
$
|
91
|
|
|
|
10% of the
obligations of
borrowers (agricultural
cooperatives) under
credit agreements
for loans sold
|
|
|
|
None stated, but
may be terminated
by either party upon
60 days prior notice
in regard to future
obligations
|
|
|
|
Credit agreement
default
|
|
|
|
Subrogation against
borrower
|
|
|
|
Some or all assets of
borrower are held as
collateral and
should be sufficient
to cover guarantee
exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provista Renewable Fuels Marketing,
LLC
|
|
$
|
20,000
|
|
|
|
12,523
|
|
|
|
Obligations by
Provista under
credit agreement
|
|
|
|
None stated
|
|
|
|
Credit agreement
default
|
|
|
|
Subrogation against
Provista
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon Milling, LLC
|
|
$
|
5,000
|
|
|
|
|
|
|
|
Indemnification and
reimbursement of
24% of damages
related to Horizon
Milling, LLCs
performance under
a flour sales
agreement
|
|
|
|
None stated, but
may be terminated
by any party upon
90 days prior notice
in regard to future
obligations
|
|
|
|
Nonperformance
under flour sale
agreement
|
|
|
|
Subrogation against
Horizon Milling, LLC
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEMCO, LLC
|
|
$
|
25,000
|
|
|
|
4,500
|
|
|
|
Obligations by
TEMCO, LLC
under credit
agreement
|
|
|
|
None stated
|
|
|
|
Credit agreement
default
|
|
|
|
Subrogation against
TEMCO, LLC
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TEMCO, LLC
|
|
$
|
1,000
|
|
|
|
729
|
|
|
|
Obligations by
TEMCO, LLC
under counterparty
agreement
|
|
|
|
None stated, but
may be terminated
upon 5 days prior
notice in regard to
future obligations
|
|
|
|
Nonpayment
|
|
|
|
Subrogation against
TEMCO, LLC
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third parties
|
|
|
*
|
|
|
|
1,000
|
|
|
|
Surety for, or
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
|
|
$
|
30,834
|
|
|
|
27,361
|
|
|
|
Loans to our
customers that are
originated by
Cofina and then sold
to ProPartners,
which is an affiliate
of CoBank
|
|
|
|
None stated
|
|
|
|
Credit agreement
default
|
|
|
|
Subrogation against
borrower
|
|
|
|
Some or all assets of
borrower are held as
collateral but might
not be sufficient to
cover guarantee
exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cofina Financial, LLC
|
|
$
|
10,600
|
|
|
|
3,900
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Companys bank covenants allow for guarantees of up to
$150 million, but the Company is under no obligation to
extend these guarantees. The maximum exposure on any given date
is equal to the actual guarantees extended as of that date. |
F-26
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company leases approximately 2,100 rail cars with remaining
lease terms of one to 10 years. In addition, the Company
has commitments under other operating leases for various
refinery, manufacturing and transportation equipment, vehicles
and office space. Some leases include purchase options at not
less than fair market value at the end of the leases term.
Total rental expense for all operating leases, net of rail car
mileage credits received from railroad and sublease income, was
$38.5 million, $31.0 million and $35.3 million
for the years ended August 31, 2006, 2005 and 2004,
respectively. Mileage credits and sublease income totaled
$3.2 million, $8.6 million and $7.2 million for
the years ended August 31, 2006, 2005 and 2004,
respectively.
Minimum future lease payments, required under noncancellable
operating leases as of August 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rail
|
|
|
|
|
|
Equipment
|
|
|
|
|
|
|
Cars
|
|
|
Vehicles
|
|
|
and Other
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
$
|
12,667
|
|
|
$
|
16,337
|
|
|
$
|
2,550
|
|
|
$
|
31,554
|
|
2008
|
|
|
12,408
|
|
|
|
13,409
|
|
|
|
1,803
|
|
|
|
27,620
|
|
2009
|
|
|
6,500
|
|
|
|
10,235
|
|
|
|
1,457
|
|
|
|
18,192
|
|
2010
|
|
|
5,726
|
|
|
|
7,913
|
|
|
|
1,273
|
|
|
|
14,912
|
|
2011
|
|
|
4,911
|
|
|
|
2,673
|
|
|
|
1,173
|
|
|
|
8,757
|
|
Thereafter
|
|
|
7,350
|
|
|
|
651
|
|
|
|
862
|
|
|
|
8,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
49,562
|
|
|
$
|
51,218
|
|
|
$
|
9,118
|
|
|
$
|
109,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Supplemental
Cash Flow and Other Information
|
Additional information concerning supplemental disclosures of
cash flow activities for the years ended August 31, 2006,
2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Net cash paid
(received) during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
54,228
|
|
|
$
|
57,569
|
|
|
$
|
52,004
|
|
Income taxes
|
|
|
(23,724
|
)
|
|
|
(8,804
|
)
|
|
|
27,997
|
|
Other significant noncash
investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital equity certificates
exchanged for preferred stock
|
|
|
23,824
|
|
|
|
19,996
|
|
|
|
12,990
|
|
Capital equity certificates issued
in exchange for elevator properties
|
|
|
11,064
|
|
|
|
1,375
|
|
|
|
13,355
|
|
Accrual of dividends and equities
payable
|
|
|
(249,774
|
)
|
|
|
(132,406
|
)
|
|
|
(83,569
|
)
|
F-27
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Related
Party Transactions
|
Related party transactions with equity and cooperative investees
as of August 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Sales
|
|
$
|
1,475,478
|
|
|
$
|
1,066,604
|
|
Purchases
|
|
|
468,286
|
|
|
|
642,840
|
|
Receivables
|
|
|
27,208
|
|
|
|
37,713
|
|
Payables
|
|
|
50,105
|
|
|
|
25,576
|
|
These related party transactions were primarily with TEMCO, LLC,
CF Industries, Inc., Agriliance LLC, Horizon Milling, LLC,
United Harvest, LLC, US BioEnergy Corporation and Ventura Foods,
LLC.
The components of comprehensive income, net of taxes, for the
years ended August 31, 2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Net income
|
|
$
|
490,297
|
|
|
$
|
250,016
|
|
|
$
|
221,332
|
|
|
|
|
|
Additional minimum pension
liability, net of tax expense of $282, $1,854 and $5,432 in
2006, 2005 and 2004, respectively
|
|
|
444
|
|
|
|
2,822
|
|
|
|
10,016
|
|
|
|
|
|
Unrealized net gains on available
for sale investments, net of tax expense of $1,138, $5,147 and
$340 in 2006, 2005 and 2004, respectively
|
|
|
1,787
|
|
|
|
8,085
|
|
|
|
698
|
|
|
|
|
|
Interest rate hedges, net of tax
expense of $826, $279 and $226 in 2006, 2005 and 2004,
respectively
|
|
|
1,298
|
|
|
|
439
|
|
|
|
356
|
|
|
|
|
|
Energy derivative instruments
qualified for hedge accounting, net of tax expense of $1,787 in
2006
|
|
|
2,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment, net of tax expense of $1,142, $484 and $57 in 2006,
2005 and 2004, respectively
|
|
|
1,796
|
|
|
|
760
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
498,428
|
|
|
$
|
262,122
|
|
|
$
|
232,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income, net of
taxes, as of August 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Additional minimum pension
liability, net of tax benefit of $423 and $705 in 2006 and 2005,
respectively
|
|
$
|
(664
|
)
|
|
$
|
(1,108
|
)
|
Unrealized net gains on available
for sale investments, net of tax expense of $6,625 and $5,487 in
2006 and 2005, respectively
|
|
|
10,406
|
|
|
|
8,619
|
|
Interest rate hedges, net of tax
benefit of $1,332 and $2,159 in 2006 and 2005, respectively
|
|
|
(2,092
|
)
|
|
|
(3,390
|
)
|
Energy derivative instruments
qualified for hedge accounting, net of tax expense of $1,787 in
2006
|
|
|
2,806
|
|
|
|
|
|
Foreign currency translation
adjustment, net of tax expense of $1,683 and $541 in 2006 and
2005, respectively
|
|
|
2,646
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
$
|
13,102
|
|
|
$
|
4,971
|
|
|
|
|
|
|
|
|
|
|
F-28
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Consolidated Statements of Cash Flows for the years ended
August 31, 2005 and 2004 have been restated to correct an
error in the classification of the Companys cash flows
received from its interest in joint ventures and distributions
made to minority owners. The Company has determined that a
portion of the cash flows from its joint ventures should have
been considered a return on its investment and classified as an
operating activity as distributions from equity investments,
instead of as an investing activity. Additionally, the Company
had previously reported distributions to minority owners as
investing activities when they should be classified as financing
activities.
The restatements do not have an impact on the Companys
Consolidated Statements of Operations, Consolidated Statements
of Shareholders Equities and Comprehensive Income, or
total change in cash and cash equivalents on the Consolidated
Statements of Cash Flows for the years ended August 31,
2005 and 2004. In addition, they did not have an impact on the
Consolidated Balance Sheets as of August 31, 2005 and 2004.
Summarized results of previously reported and restated
Consolidated Statements of Cash Flows for the years ended
August 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Previously
|
|
|
As
|
|
|
Previously
|
|
|
As
|
|
|
|
Reported
|
|
|
Restated
|
|
|
Reported
|
|
|
Restated
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from equity
investments
|
|
|
|
|
|
$
|
64,869
|
|
|
|
|
|
|
$
|
58,702
|
|
Net cash provided by operating
activities
|
|
$
|
209,188
|
|
|
|
276,531
|
|
|
$
|
333,289
|
|
|
|
394,345
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investments redeemed
|
|
|
74,231
|
|
|
|
|
|
|
|
65,158
|
|
|
|
|
|
Investments redeemed
|
|
|
4,152
|
|
|
|
13,514
|
|
|
|
9,481
|
|
|
|
15,937
|
|
Distributions to minority owners
|
|
|
(29,925
|
)
|
|
|
|
|
|
|
(15,908
|
)
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(56,958
|
)
|
|
|
(91,902
|
)
|
|
|
(181,284
|
)
|
|
|
(224,078
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to minority owners
|
|
|
|
|
|
|
(29,925
|
)
|
|
|
|
|
|
|
(15,908
|
)
|
Net cash used in financing
activities
|
|
|
(47,703
|
)
|
|
|
(80,102
|
)
|
|
|
(183,763
|
)
|
|
|
(202,025
|
)
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
104,527
|
|
|
|
104,527
|
|
|
|
(31,758
|
)
|
|
|
(31,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
beginning of period
|
|
|
136,491
|
|
|
|
136,491
|
|
|
|
168,249
|
|
|
|
168,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
241,018
|
|
|
$
|
241,018
|
|
|
$
|
136,491
|
|
|
$
|
136,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members and Patrons of CHS Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of equities
and comprehensive income and of cash flows present fairly, in
all material respects, the financial position of CHS Inc. and
subsidiaries at August 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three
years in the period ended August 31, 2006, in conformity
with accounting principles generally accepted in the United
States of America. These financial statements are the
responsibility of the Companys 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 17 to the consolidated financial
statements, the Company has restated its 2005 and 2004
consolidated financial statements.
November 9, 2006
Minneapolis, Minnesota
F-30