PART I.
ITEM 1. BUSINESS
THE COMPANY
CHS Inc. (referred to herein as “CHS,” “we” or “us”) is one of the nation’s leading integrated agricultural companies. As a cooperative, we are owned by farmers and ranchers and their member cooperatives (referred to herein as “members”) across the United States. We also have preferred stockholders that own shares of our 8% Cumulative Redeemable Preferred Stock, which is listed on the NASDAQ Stock Market LLC under the symbol CHSCP. On August 31, 2012, we had 12,272,003 shares of preferred stock outstanding. We buy commodities from and provide products and services to patrons (including our members and other non-member customers), both domestic and international. We provide a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those entities is included as a component in our net income under the equity method of accounting. For the fiscal year ended August 31, 2012, our total revenues were $40.6 billion and income attributable to CHS Inc. was $1.3 billion.
We have aligned our segments based on an assessment of how our businesses operate and the products and services they sell.
Our Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. Our Ag segment derives its revenues through the origination and marketing of grain, including service activities conducted at export terminals, through the wholesale sales of crop nutrients, from the sales of soybean meal and soybean refined oil and through the retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies, and records equity income from investments in our grain export joint venture and other investments. We include other business operations in Corporate and Other because of the nature of their products and services, as well as the relative revenues of those businesses. These businesses primarily include our financing, insurance, hedging and other service activities related to crop production. In addition, our wheat milling and packaged food operations are included in Corporate and Other, as those businesses are conducted through non-consolidated joint ventures.
Many of our business activities are highly seasonal and operating results vary throughout the year. Our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. For example, in our Ag segment, our crop nutrients and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Our grain marketing operations are also subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.
Membership in CHS is restricted to certain producers of agricultural products and to associations of producers of agricultural products that are organized and operating so as to adhere to the provisions of the Agricultural Marketing Act and the Capper-Volstead Act, as amended. Our Board of Directors may establish other qualifications for membership from time to time as it may deem advisable.
Our earnings from cooperative business are allocated to members (and to a limited extent, to non-members with which we have agreed to do business on a patronage basis) based on the volume of business they do with us. We allocate these earnings to our patrons in the form of patronage refunds (which are also called patronage dividends) in cash and patrons’ equities (capital equity certificates), which may be redeemed over time solely at the discretion of our Board of Directors. Earnings derived from non-members, which are not allocated patronage, are taxed at federal and state statutory corporate rates and are retained by us as unallocated capital reserve. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and if we qualify for patronage refunds from them.
Our origins date back to the early 1930s with the founding of the predecessor companies of Cenex, Inc. and Harvest States Cooperatives. CHS Inc. emerged as the result of the merger of those two entities in 1998, and is headquartered in Inver Grove Heights, Minnesota.
The following table presents a summary of our primary subsidiary holdings and equity investments for each of our
business segments at August 31, 2012:
Business Segment
Entity Name
Business Activity
CHS
Ownership%
Income
Recognition
Energy
National Cooperative Refinery Association
Petroleum refining
74.5
%
Consolidated
Front Range Pipeline, LLC
Crude oil transportation
100
Cenex Pipeline, LLC
Finished product transportation
Ag
CHS do Brasil Ltda.
Grain procurement and merchandising in Brazil
TEMCO, LLC
Grain exporter
50
Equity Method
CHS Europe S.A.
Grain merchandising in Europe
CHS Ukraine, LLC
Grain procurement and merchandising in Ukraine
ACG Trade S.A.
Grain procurement and merchandising in Russia
CHSINC Iberica S.L.
Grain merchandising in Spain
CHS de Argentina S.A.
Grain merchandising in Argentina
CHS Argritrade Bulgaria LTD
Grain procurement and merchandising in Bulgaria
CHS Argritrade Hungary LTD
Grain procurement and merchandising in Hungary
CHS Argritrade Romania S.R.L.
Grain procurement and merchandising in Romania
CHS Serbia D.O.O. Novi Sad
Grain procurement and merchandising in Serbia
Agromarket, LLC
S.C. Silotrans S.R.L.
Romanian grain terminal port facility
96
CZL LTD
Grain procurement and merchandising in Japan
51
CHS Singapore Trading Company PTE. LTD.
Grain procurement and merchandising in Asia Pacific region
CHS (Shanghai) Trading Co., Ltd.
Grain merchandising in China
CHS Israel Protein Foods LTD
Israeli soybean processing and textured soy production facilities
S.P.E. CHS Plant Extracts LTD
Israeli textured soy production facility
Solbar Ningbo Food, Ltd.
Chinese textured soy production facility
Corporate and Other
Ventura Foods, LLC
Food manufacturing and distributing
Horizon Milling, LLC
Wheat milling in U.S.
24
Horizon Milling General Partnership
Wheat milling in Canada
CHS Hedging Inc.
Risk management products broker
Ag States Agency, LLC
Insurance agency
CHS Capital, LLC
Finance company