CHS INC - Quarter Report: 2006 February (Form 10-Q)

e10vq

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		for the quarterly period ended February 28, 2006.

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 incorporation or organization)		(I.R.S. Employer Identification Number)

5500 Cenex Drive Inver Grove Heights, MN 55077 (Address of principal executive offices, including zip code)		(651) 355-6000 (Registrant’s telephone number, including area code)

Include 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 whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Number of Shares Outstanding
Class		at February 28, 2006

NONE		NONE

INDEX


		Page No.

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		3
	Consolidated Balance Sheets as of February 28, 2006, August 31, 2005 and February 28, 2005		3
	Consolidated Statements of Operations for the three months and six months ended February 28, 2006 and 2005		4
	Consolidated Statements of Cash Flows for the three months and six months ended February 28, 2006 and 2005		5
	Notes to Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		37
Item 4.	Controls and Procedures		37

PART II. OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders		38
Item 6.	Exhibits and Reports on Form 8-K		38
SIGNATURE PAGE			39
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

PART I. FINANCIAL INFORMATION

SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company’s actual results to differ materially from the results discussed in the forward-looking statements. These factors include those set forth in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Cautionary Statement Regarding Forward-Looking Statements” to this Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2006.


Item 1.	*Financial Statements*

CHS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	February 28,		August 31,		February 28,
	2006		2005		2005
	(dollars in thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	79,743	$	241,018	$	193,533
Receivables		797,573		1,093,986		740,389
Inventories		1,021,369		914,182		935,788
Other current assets		353,762		367,306		316,753

Total current assets		2,252,447		2,616,492		2,186,463
Investments		532,270		520,970		516,785
Property, plant and equipment		1,418,657		1,359,535		1,310,581
Other assets		223,171		229,940		233,419

Total assets	$	4,426,545	$	4,726,937	$	4,247,248


LIABILITIES AND EQUITIES
Current liabilities:
Notes payable	$	114,735	$	61,147	$	354,116
Current portion of long-term debt		38,685		35,340		34,704
Customer credit balances		48,048		91,902		115,045
Customer advance payments		169,266		126,815		79,319
Checks and drafts outstanding		55,040		67,398		67,918
Accounts payable		609,970		945,737		597,443
Accrued expenses		322,918		397,044		302,642
Dividends and equities payable		117,334		132,406		30,165

Total current liabilities		1,475,996		1,857,789		1,581,352
Long-term debt		719,861		737,734		750,123
Other liabilities		227,804		229,322		139,703
Minority interests in subsidiaries		141,577		144,195		139,838
Commitments and contingencies
Equities		1,861,307		1,757,897		1,636,232

Total liabilities and equities	$	4,426,545	$	4,726,937	$	4,247,248

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

CHS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	February 28,						February 28,
	2006			2005			2006			2005
	(dollars in thousands)

Revenues:
Net sales	$	3,118,745		$	2,392,442		$	6,531,763		$	5,312,333
Other revenues		42,372			34,748			87,495			79,265

		3,161,117			2,427,190			6,619,258			5,391,598
Cost of goods sold		3,043,450			2,338,432			6,244,083			5,194,104
Marketing, general and administrative		55,468			54,988			103,770			99,615

Operating earnings		62,199			33,770			271,405			97,879
Gain on sale of investment					(3,448	)					(3,448	)
Interest		13,693			12,220			25,411			22,962
Equity (income) loss from investments		(5,185	)		154			(14,362	)		(16,529	)
Loss on impairment of investment											35,000
Minority interests		9,206			4,726			41,367			12,915

Income from continuing operations before income taxes		44,485			20,118			218,989			46,979
Income taxes		4,238			400			24,716			6,920

Income from continuing operations		40,247			19,718			194,273			40,059
Loss (income) on discontinued operations, net of taxes		99			10,995			(109	)		13,340

Net income	$	40,148		$	8,723		$	194,382		$	26,719

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

CHS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Three Months Ended						For the Six Months Ended
	February 28,						February 28,
	2006			2005			2006			2005
	(dollars in thousands)

Cash flows from operating activities:
Net income	$	40,148		$	8,723		$	194,382		$	26,719
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		30,908			27,326			58,892			54,444
Noncash (income) loss from equity investments		(5,185	)		154			(14,362	)		(16,529	)
Noncash loss on impairment of assets					13,397						48,397
Minority interests		9,206			4,726			41,367			12,915
Noncash patronage dividends received		(529	)		(216	)		(780	)		(437	)
Gain on sale of property, plant and equipment		(451	)		(1,027	)		(157	)		(2,236	)
Gain on sale of investment					(3,448	)					(3,448	)
Deferred tax expense		7,335						44,847
Other, net		(213	)		265			15			555
Changes in operating assets and liabilities:
Receivables		107,645			99,852			259,138			84,614
Inventories		(11,495	)		(94,307	)		(101,776	)		(211,687	)
Other current assets and other assets		(65,936	)		(56,532	)		(8,768	)		(46,866	)
Customer credit balances		(23,398	)		21,950			(44,336	)		26,359
Customer advance payments		65,631			(33,238	)		41,818			15,277
Accounts payable and accrued expenses		(293,119	)		(201,765	)		(434,797	)		(124,666	)
Other liabilities		6,474			(9,105	)		(8,308	)		(8,248	)

Net cash (used in) provided by operating activities		(132,979	)		(223,245	)		27,175			(144,837	)

Cash flows from investing activities:
Acquisition of property, plant and equipment		(49,397	)		(59,007	)		(113,921	)		(122,863	)
Proceeds from disposition of property, plant and equipment		1,093			2,082			6,524			7,953
Investments					(2,184	)		(37,015	)		(2,230	)
Equity investments redeemed		37,314			14,425			40,846			36,945
Investments redeemed		2,043			1,110			3,218			2,093
Proceeds from sale of investment					7,420						7,420
Changes in notes receivable		39,332			8,498			48,158			9,116
Other investing activities, net		620			177			575			1,371

Net cash provided by (used in) investing activities		31,005			(27,479	)		(51,615	)		(60,195	)

Cash flows from financing activities:
Changes in notes payable		93,587			353,033			53,587			238,001
Borrowings on long-term debt											125,000
Principal payments on long-term debt		(8,893	)		(17,647	)		(15,669	)		(24,195	)
Changes in checks and drafts outstanding		(5,974	)		16,690			(12,556	)		3,334
Distribution to minority owners		(31,304	)		(1,906	)		(42,981	)		(4,966	)
Expenses incurred — capital equity certificates redeemed		(86	)		(78	)		(86	)		(78	)
Preferred stock dividends paid		(2,476	)		(2,113	)		(4,952	)		(4,226	)
Retirements of equities		(45,391	)		(19,058	)		(51,676	)		(19,285	)
Cash patronage dividends paid		(62,502	)		(51,511	)		(62,502	)		(51,511	)

Net cash (used in) provided by financing activities		(63,039	)		277,410			(136,835	)		262,074

Net (decrease) increase in cash and cash equivalents		(165,013	)		26,686			(161,275	)		57,042
Cash and cash equivalents at beginning of period		244,756			166,847			241,018			136,491

Cash and cash equivalents at end of period	$	79,743		$	193,533		$	79,743		$	193,533

The accompanying notes are an integral part of the consolidated financial statements (unaudited).

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands)


Note 1.	Accounting Policies

The unaudited consolidated balance sheets as of February 28, 2006 and 2005, and the statements of operations and cash flows for the three and six months ended February 28, 2006 and 2005 reflect, in the opinion of our management, all normal recurring adjustments necessary for a fair statement of the financial position and results of operations and cash flows for the interim periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full fiscal year because of, among other things, the seasonal nature of our businesses. The consolidated balance sheet data as of August 31, 2005 has been derived from our audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The consolidated financial statements include our accounts and the accounts of all of our wholly-owned and majority-owned subsidiaries and limited liability companies. The effects of all significant intercompany accounts and transactions have been eliminated.

These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2005, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

Goodwill and Other Intangible Assets

Goodwill was $3.3 million, $3.3 million and $18.5 million on February 28, 2006, August 31, 2005 and February 28, 2005, respectively, and is included in other assets in the consolidated balance sheets. During fiscal year 2005, we disposed $23.6 million of goodwill related to our Mexican foods businesses as a result of our sale of those businesses as further discussed in Note 6, of which $8.4 million was impaired during the three months ended February 28, 2005.

Intangible assets subject to amortization primarily include trademarks, customer lists and agreements not to compete, and are amortized over the number of years that approximate their respective useful lives (ranging from 3 to 15 years). The gross carrying amount of these intangible assets was $35.6 million with total accumulated amortization of $17.1 million as of February 28, 2006. Intangible assets of $3.9 million and $10 thousand were acquired during the six months ended February 28, 2006 and 2005, respectively. Total amortization expense for intangible assets during the three-month and six-month periods ended February 28, 2006 and 2005, was $3.0 million and $0.8 million, respectively, and $3.6 million and $1.6 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years will approximate $2.5 million annually for the first year, and $2.0 million for each of the next four years.

Recent Accounting Pronouncements

We are required to apply Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations.” This statement requires recognition of a liability for costs that an entity is legally obligated to incur associated with the retirement of fixed assets. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the fixed asset and depreciated over its estimated useful life. We have legal asset retirement obligations for certain assets, including our refineries, pipelines and terminals. We are unable to measure this obligation because it’s not possible to estimate when the obligation will be settled. In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB No. 143” (FIN 47). FIN 47 clarifies that SFAS No. 143 requires that an entity recognize a liability for the fair value of a conditional asset retirement

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We have not yet determined the impact that the adoption of this interpretation will have on our consolidated financial statements.

Reclassifications

Certain reclassifications have been made to prior period’s amounts to conform to current period classifications, primarily discontinued operations discussed in Note 6. In addition, we have revised the classification of distributions to minority owners in our consolidated statements of cash flows, from investing to financing activities. Such amounts totaled $1.9 million and $5.0 million for the three months and six month ended February 28, 2005, respectively. These reclassifications had no effect on previously reported net income, equities or total cash flows.


Note 2.	Receivables


	February 28,		August 31,		February 28,
	2006		2005		2005

Trade	$	824,590	$	1,069,020	$	754,251
Other		35,817		85,007		42,384

		860,407		1,154,027		796,635
Less allowances for doubtful accounts		62,834		60,041		56,246

	$	797,573	$	1,093,986	$	740,389


Note 3.	Inventories


	February 28,		August 31,		February 28,
	2006		2005		2005

Grain and oilseed	$	433,403	$	387,820	$	416,141
Energy		360,250		377,076		302,643
Feed and farm supplies		205,241		121,721		183,606
Processed grain and oilseed		21,000		26,195		32,084
Other		1,475		1,370		1,314

	$	1,021,369	$	914,182	$	935,788


Note 4.	Derivative Assets and Liabilities

Included in other current assets on February 28, 2006, August 31, 2005 and February 28, 2005 are derivative assets of $79.0 million, $102.7 million and $63.7 million, respectively. Included in accrued expenses on February 28, 2006, August 31, 2005 and February 28, 2005 are derivative liabilities of $68.7 million, $152.8 million and $81.7 million, respectively.


Note 5.	Investments

During the three months ended November 30, 2005, we made a $35.0 million investment in US BioEnergy Corporation (US BioEnergy) for an approximate 28% interest in the company. On March 31, 2006, we acquired an additional 17.5 million shares of Class A Common Stock of US BioEnergy at a purchase price of $2.00 per share for a total purchase price of $35.0 million. This investment increased our holdings of US BioEnergy to 52.5 million shares of Class A Common Stock with a total investment of $70.0 million. Our holdings represent approximately 30% of the outstanding shares of US BioEnergy, however, our percentage ownership could be reduced to approximately 23% if US BioEnergy consummates certain pending transactions.

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

US BioEnergy is an ethanol production and marketing firm which currently has two ethanol plants under construction in Albert City, Iowa and Lake Odessa, Michigan. US BioEnergy has also announced plans to build ethanol plants near Hankinson, North Dakota and Janesville, Minnesota.

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. At that time, our 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, we 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 to the first fiscal quarter income, which we recorded in our Ag Business segment.

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 $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 of 2005, was $95.8 million. As a result, we 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 fiscal 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.

We retain an ownership interest in CF Industries Holdings, Inc. (the post-initial public offering name of the company) of approximately 3.9% or 2,150,396 shares. We have agreed through a Lock-up Agreement not to sell any shares, without the written consent of the underwriters, for a period of one year. The market value of the shares on February 28, 2006 was $37.9 million, and accordingly, we have adjusted the carrying value to reflect market value, with the unrealized gain recorded in other comprehensive income.

Agriliance, LLC (Agriliance) is a wholesale and retail crop nutrients and crop protections products company and is owned and governed 50% by us through United Country Brands, LLC (100% owned subsidiary) and 50% by Land O’Lakes, Inc. We also own a 50% interest in Ventura Foods, LLC, (Ventura Foods) a joint venture which produces and distributes vegetable oil-based products.

As of February 28, 2006, the carrying value of our equity method investees, Agriliance and Ventura Foods, exceeds our share of their equity by $44.2 million. Of this basis difference, $4.6 million is being amortized over the remaining life of the corresponding assets, which is approximately six years. The balance of the basis difference represents equity method goodwill.

The following provides summarized unaudited financial information for our unconsolidated significant equity investments in Ventura Foods and Agriliance, for the balance sheets as of February 28, 2006, August 31, 2005 and February 28, 2005 and statements of operations for the three-month and six-month periods as indicated below.

Ventura Foods, LLC


	For the Three Months Ended				For the Six Months Ended
	February 28,				February 28,
	2006		2005		2006		2005

Net sales	$	343,404	$	327,042	$	730,765	$	712,221
Gross profit		51,514		41,991		103,192		89,957
Net income		15,574		10,246		32,247		30,092

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


	February 28,		August 31,		February 28,
	2006		2005		2005

Current assets	$	221,052	$	198,576	$	307,389
Non-current assets		435,973		455,715		258,370
Current liabilities		134,001		146,035		156,879
Non-current liabilities		305,521		307,027		199,711

Agriliance, LLC


	For the Three Months Ended						For the Six Months Ended
	February 28,						February 28,
	2006			2005			2006			2005

Net sales	$	497,536		$	507,851		$	1,189,997		$	1,106,013
Gross profit		52,637			41,662			110,202			99,280
Net loss		(16,894	)		(21,421	)		(32,602	)		(26,639	)


	February 28,		August 31,		February 28,
	2006		2005		2005

Current assets	$	1,682,837	$	1,337,908	$	1,652,420
Non-current assets		156,650		148,611		127,045
Current liabilities		1,508,632		1,064,423		1,462,742
Non-current liabilities		118,955		119,794		128,325


Note 6.	Discontinued Operations

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. Assets of $0.3 million and $4.6 million (primarily property, plant and equipment) were held for sale at February 28, 2006 and August 31, 2005, respectively. During our first fiscal quarter ended November 30, 2005, we sold a facility in Newton, North Carolina for cash proceeds of $4.8 million. The operating results of the Mexican Foods business have been reclassified and reported as discontinued operations for all periods presented.

Summarized results from discontinued operations for the three and six months ended February 28, 2006 and 2005 are as follows:


	For the Three Months Ended						For the Six Months Ended
	February 28,						February 28,
	2006			2005			2006			2005

Sales				$	15,374					$	32,738
Cost of goods sold					15,845						32,906
Marketing, general and administrative*	$	176			3,305		$	(323	)		6,594
Interest		(13	)		822			145			1,674
Loss on impairment of assets					13,397						13,397
Income tax (benefit) expense		(64	)		(7,000	)		69			(8,493	)

(Loss) income from discontinued operations	$	(99	)	$	(10,995	)	$	109		$	(13,340	)


*		The six months ended February 28, 2006 includes a gain of $0.8 million on the sale of a facility during our first fiscal quarter ended November 30, 2005.

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Note 7.	Equities

Changes in equity for the six-month periods are as follows:


	February 28,			February 28,
	2006			2005

Balances, September 1, 2005 and 2004	$	1,757,897		$	1,628,086
Net income		194,382			26,719
Other comprehensive income		9,626			1,162
Patronage distribution		(207,803	)		(169,437	)
Patronage accrued		203,000			166,850
Equities retired		(51,676	)		(19,285	)
Equity retirements accrued		51,676			19,285
Equities issued in exchange for elevator properties		6,342			1,375
Preferred stock dividends		(4,952	)		(4,226	)
Preferred stock dividends accrued		1,650			1,409
Accrued dividends and equities payable		(99,155	)		(17,350	)
Other, net		320			1,644

Balances, February 28, 2006 and 2005	$	1,861,307		$	1,636,232

During the three months ended February 28, 2006 and 2005, we redeemed $23.8 million and $20.0 million, respectively, of our capital equity certificates by issuing shares of our 8% Cumulative Redeemable Preferred Stock.


Note 8.	Comprehensive Income

Total comprehensive income primarily consists of net income, additional minimum pension liability, unrealized gains and losses on available for sale investments and interest rate hedges. For the three months ended February 28, 2006 and 2005, total comprehensive income amounted to $47.5 million and $7.2 million, respectively. For the six months ended February 28, 2006 and 2005, total comprehensive income amounted to $204.0 million and $27.9 million, respectively. Accumulated other comprehensive income on February 28, 2006 and August 31, 2005 was $14.6 million and $5.0 million, and accumulated other comprehensive loss on February 28, 2005 was $6.0 million.

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Note 9.	Employee Benefit Plans

Employee benefit information for the three and six months ended February 28, 2006 and 2005 is as follows:


	Qualified						Non-Qualified
	Pension Benefits						Pension Benefits				Other Benefits
	2006			2005			2006		2005		2006			2005

Components of net periodic benefit cost for the three months ended February 28:
Service cost	$	3,689		$	3,187		$	543	$	247	$	263		$	219
Interest cost		4,275			4,510			337		294		392			444
Return on plan assets		(7,093	)		(6,912	)
Prior service cost amortization		214			198			129		130		(77	)		(74	)
Actuarial loss (gain) amortization		1,912			1,440			45		31		(6	)		11
Transition amount amortization												234			234

Net periodic benefit cost	$	2,997		$	2,423		$	1,054	$	702	$	806		$	834

Components of net periodic benefit cost for the six months ended February 28:
Service cost	$	7,379		$	6,374		$	1,087	$	496	$	525		$	437
Interest cost		8,549			9,020			673		587		784			888
Return on plan assets		(14,185	)		(13,824	)
Prior service cost amortization		428			396			258		260		(153	)		(147	)
Actuarial loss (gain) amortization		3,823			2,880			90		62		(12	)		22
Transition amount amortization												468			468

Net periodic benefit cost	$	5,994		$	4,846		$	2,108	$	1,405	$	1,612		$	1,668

Employer Contributions:

As of February 28, 2006, National Cooperative Refinery Association (NCRA), of which we own approximately 74.5%, may contribute $5.9 million to its pension plan in fiscal 2006.


Note 10.	Segment Reporting

We operate three business segments, which are based on products and services: Energy, Ag Business and Processing. Together, our three business segments create vertical integration to link producers with consumers. Our Energy segment produces and provides for the wholesale distribution of petroleum products and transportation. Our Ag Business segment purchases and resells grains and oilseeds originated by our country operations, 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.

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.

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, agronomy and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and 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, 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 sales and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of 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 or loss 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, TEMCO, LLC (TEMCO) and United Harvest, LLC (United Harvest) included in our Ag Business segment; Ventura Foods, our 24% ownership in Horizon Milling, LLC (Horizon Milling) and our 30% interest in US BioEnergy Corporation included in our Processing segment; and our 49% ownership in Cofina Financial, LLC (Cofina) included in Corporate and Other.

The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries, including NCRA, which is in our Energy segment. All significant intercompany accounts and transactions have been eliminated.

Reconciling Amounts represent the elimination of sales between segments. Such transactions are conducted at market prices to more accurately evaluate the profitability of the individual business segments.

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Segment information for the three and six months ended February 28, 2006 and 2005 is as follows:


				Ag						Corporate			Reconciling
	Energy			Business			Processing			and Other			Amounts			Total

For the Three Months Ended February 28, 2006
Net sales	$	1,596,376		$	1,424,844		$	148,090					$	(50,565	)	$	3,118,745
Other revenues		2,706			27,047			917		$	11,702						42,372

		1,599,082			1,451,891			149,007			11,702			(50,565	)		3,161,117
Cost of goods sold		1,534,847			1,417,676			141,492						(50,565	)		3,043,450
Marketing, general and administrative		17,775			24,681			5,688			7,324						55,468

Operating earnings		46,460			9,534			1,827			4,378			—			62,199
Interest		3,578			3,729			2,689			3,697						13,693
Equity (income) loss from investments		(1,098	)		4,989			(8,229	)		(847	)					(5,185	)
Minority interests		9,158			48												9,206

Income from continuing operations before income taxes	$	34,822		$	768		$	7,367		$	1,528		$	—		$	44,485

Intersegment sales	$	(48,094	)	$	(2,406	)	$	(65	)				$	50,565		$	—

Capital expenditures	$	38,924		$	7,780		$	2,257		$	436					$	49,397

Depreciation and amortization	$	18,174		$	7,974		$	3,459		$	1,301					$	30,908

For the Three Months Ended February 28, 2005
Net sales	$	1,161,979		$	1,135,715		$	132,542					$	(37,794	)	$	2,392,442
Other revenues		1,936			23,323			903		$	8,586						34,748

		1,163,915			1,159,038			133,445			8,586			(37,794	)		2,427,190
Cost of goods sold		1,121,460			1,123,747			131,019						(37,794	)		2,338,432
Marketing, general and administrative		16,425			25,618			5,555			7,390						54,988

Operating earnings (losses)		26,030			9,673			(3,129	)		1,196			—			33,770
Gain on sale of investment											(3,448	)					(3,448	)
Interest		3,199			4,649			3,234			1,138						12,220
Equity (income) loss from investments		(739	)		6,858			(5,922	)		(43	)					154
Minority interests		4,517			(24	)					233						4,726

Income (loss) from continuing operations before income taxes	$	19,053		$	(1,810	)	$	(441	)	$	3,316		$	—		$	20,118

Intersegment sales	$	(34,484	)	$	(3,035	)	$	(275	)				$	37,794		$	—

Capital expenditures	$	51,652		$	4,189		$	1,388		$	1,778					$	59,007

Depreciation and amortization	$	14,779		$	7,513		$	3,489		$	1,545					$	27,326

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


				Ag						Corporate			Reconciling
	Energy			Business			Processing			and Other			Amounts			Total

For the Six Months Ended February 28, 2006
Net sales	$	3,454,627		$	2,885,559		$	300,141					$	(108,564	)	$	6,531,763
Other revenues		7,288			57,594			1,844		$	20,769						87,495

		3,461,915			2,943,153			301,985			20,769			(108,564	)		6,619,258
Cost of goods sold		3,200,815			2,865,030			286,802						(108,564	)		6,244,083
Marketing, general and administrative		33,633			46,097			10,646			13,394						103,770

Operating earnings		227,467			32,026			4,537			7,375			—			271,405
Interest		7,345			7,234			5,112			5,720						25,411
Equity (income) loss from investments		(1,936	)		7,250			(17,820	)		(1,856	)					(14,362	)
Minority interests		41,285			82												41,367

Income from continuing operations before income taxes	$	180,773		$	17,460		$	17,245		$	3,511		$	—		$	218,989

Intersegment sales	$	(103,657	)	$	(4,733	)	$	(174	)				$	108,564		$	—

Goodwill	$	3,041		$	250											$	3,291

Capital expenditures	$	89,452		$	19,877		$	3,764		$	828					$	113,921

Depreciation and amortization	$	33,911		$	15,515		$	6,940		$	2,526					$	58,892

Total identifiable assets at February 28, 2006	$	1,837,558		$	1,726,997		$	467,721		$	394,269					$	4,426,545

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


				Ag						Corporate			Reconciling
	Energy			Business			Processing			and Other			Amounts			Total

For the Six Months Ended February 28, 2005
Net sales	$	2,579,144		$	2,541,468		$	274,918					$	(83,197	)	$	5,312,333
Other revenues		4,625			57,194			1,815		$	15,631						79,265

		2,583,769			2,598,662			276,733			15,631			(83,197	)		5,391,598
Cost of goods sold		2,477,836			2,528,414			271,051						(83,197	)		5,194,104
Marketing, general and administrative		30,403			46,105			9,673			13,434						99,615

Operating earnings (losses)		75,530			24,143			(3,991	)		2,197			—			97,879
Gain on sale of investment											(3,448	)					(3,448	)
Interest		6,371			8,882			6,266			1,443						22,962
Equity (income) loss from investments		(1,468	)		2,873			(17,436	)		(498	)					(16,529	)
Loss on impairment of investment					35,000												35,000
Minority interests		12,462			(24	)					477						12,915

Income (loss) from continuing operations before income taxes	$	58,165		$	(22,588	)	$	7,179		$	4,223		$	—		$	46,979

Intersegment sales	$	(79,551	)	$	(3,305	)	$	(341	)				$	83,197		$	—

Goodwill	$	3,041		$	250					$	15,169					$	18,460

Capital expenditures	$	105,129		$	12,573		$	2,320		$	2,841					$	122,863

Depreciation and amortization	$	29,516		$	14,813		$	6,919		$	3,196					$	54,444

Total identifiable assets at February 28, 2005	$	1,741,443		$	1,673,294		$	418,371		$	414,140					$	4,247,248


Note 11.	Commitments and Contingencies

Environmental

We have incurred capital expenditures related to actions taken to comply with the Environmental Protection Agency low sulfur fuel regulations required by 2006. These expenditures at our Laurel, Montana refinery and NCRA’s McPherson, Kansas refinery are now essentially complete. Total expenditures for these projects as of February 28, 2006, include $86.8 million that has been spent at our Laurel refinery and $308.7 million that has been spent by NCRA at the McPherson refinery.

Guarantees

We are a guarantor for lines of credit for related companies, of which $57.1 million was outstanding as of February 28, 2006. Our bank covenants allow maximum guarantees of $150.0 million. In addition, our bank covenants allow for guarantees dedicated solely for NCRA in the amount of $125.0 million.

We apply FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which requires disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The interpretation also clarified the requirements related to the recognition of a liability by a guarantor at the inception of the guarantee for obligations the guarantor has undertaken in issuing the guarantee.

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

We make seasonal and term loans to member cooperatives, and our wholly-owned subsidiary, Fin-Ag, Inc., makes loans for agricultural purposes to individual producers. Some of these loans are sold to CoBank, and we guarantee a portion of the loans sold. In addition, we guarantee certain debt and obligations under contracts for our subsidiaries and members.

Our obligations pursuant to our guarantees as of February 28, 2006 are as follows:

Guarantee/

Exposure on

Maximum

February 28,

Expiration

Triggering

Recourse

Assets Held

Entities

Exposure

2006

Nature of Guarantee

Date

Event

Provisions

as Collateral

The Company’s financial services cooperative loans sold to CoBank

11,787

10% of the obligations of borrowers (agri- cultural 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

Fin-Ag, Inc. agricultural loans sold to CoBank

17,708

15% of the obligations of borrowers under credit agreements for some of the loans sold, 50% of the obligations of borrowers for other loans sold, and 100% of the obligations of borrowers for the remaining loans sold

None stated, but may be terminated by either party upon 90 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

Horizon Milling, LLC

5,000

—

Indemnification and reimbursement of 24% of damages related to Horizon Milling, LLC’s performance under a flour sales agreement

None stated, but may be terminated by any party upon 90 days prior notice in regard to future obligations

Non-performance under flour sale agreement

Subrogation against Horizon Milling, LLC

None

TEMCO, LLC

25,000

10,400

Obligations by TEMCO, LLC under credit agreement

None stated

Credit agreement default

Subrogation against TEMCO, LLC

None

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Guarantee/

Exposure on

Maximum

February 28,

Expiration

Triggering

Recourse

Assets Held

Entities

Exposure

2006

Nature of Guarantee

Date

Event

Provisions

as Collateral

Third parties

958

Surety for, or indemnificaton 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

20,561

16,242

Guaranteed loans which were made by the Company under financing programs and contributed by the Company to Cofina

Loans contributed mature at various times. Guarantee of a particular loan terminates on maturity date

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

57,095


*		The Company’s bank covenants allow for guarantees of up to $150.0 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.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Cautionary Statement Regarding Forward-Looking Statements

The information in this Quarterly Report on Form 10-Q for the quarter ended February 28, 2006, includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company. In addition, the Company 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 and flour. 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;

	•	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, are essentially complete at our Laurel, Montana refinery and at the National Cooperative Refinery Association’s (NCRA) McPherson, Kansas refinery. Total expenditures for these projects as of February 28, 2006, include $86.8 million that has been spent at our Laurel refinery and $308.7 million that has been spent by NCRA at the McPherson 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 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; and

	•	the significant inventories that we carry or the facilities we own could be damaged or destroyed by catastrophic events, extreme weather conditions or contamination.

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 increase the competition among consumers of these products which may require us 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 and processing 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.

General

The following discussions of financial condition and results of operations should be read in conjunction with the unaudited interim financial statements and notes to such statements and the cautionary statement regarding forward-looking statements found at the beginning of Part I, Item 1, of this Form 10-Q, as well as the consolidated financial statements and notes thereto for the year ended August 31, 2005, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission. This discussion contains forward-looking statements based on current expectations, assumptions, estimates and projections of management. Actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described in the cautionary statement and elsewhere in this Form 10-Q.

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.

operations, 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.

Corporate administrative expenses are allocated to all three business segments, and Corporate and Other, based on either direct usage for services that can be tracked, such as information technology and legal, and other factors or considerations relevant to the costs incurred.

Many of our business activities are highly seasonal and operating results will vary throughout the year. Overall, our income is generally lowest during the second fiscal quarter and highest during the third fiscal quarter. Our business segments are subject to varying seasonal fluctuations. For example, in our Ag Business segment, our agronomy and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Also in our Ag Business segment, our grain marketing operations are subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons.

While our sales and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of 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 or loss 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 our 30% interest 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.

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.

Results of Operations

Comparison of the three months ended February 28, 2006 and 2005

General. We recorded income from continuing operations before income taxes of $44.5 million during the three months ended February 28, 2006 compared to $20.1 million for the three months ended February 28, 2005, an increase of $24.4 million (121%).

Our Energy segment generated income from continuing operations before income taxes of $34.8 million for the three months ended February 28, 2006 compared with $19.1 million for the three months ended February 28, 2005. This increase in earnings of $15.7 million (83%) is primarily attributable to improved profitability of $16.0 million on refined fuels operations.

Our Ag Business segment generated income from continuing operations before income taxes of $0.8 million for the three months ended February 28, 2006 compared to a loss of $1.8 million for the three months ended February 28, 2005. This increase in earnings of $2.6 million is primarily related to decreased losses of $1.9 million in our agronomy operations and improved earnings of $1.6 million in our country operations. These improved earnings and losses were partially offset by decreased earnings of $0.9 million in our grain marketing operations.

Our Processing segment generated income from continuing operations before income taxes of $7.4 million for the three months ended February 28, 2006 compared to a loss of $0.4 million for the three months ended February 28, 2005, an increase in earnings of $7.8 million. Our oilseed processing earnings improved $5.5 million, of which $4.6 million was related to margins from increased soybean crushing and the remainder was primarily improved oilseed refining margins. Our share of earnings from Ventura Foods, a packaged foods joint venture, increased $2.8 million compared to the prior year and is primarily related to improved mark to market margins. Our shares of earnings from the wheat milling joint ventures also improved $0.3 million compared to the same three-month period from the prior year. Our share of the US BioEnergy investment showed a slight loss of $0.2 million for the period ended February 28, 2006, in addition to $0.5 million of allocated interest.

Corporate and Other generated income from continuing operations before income taxes of $1.5 million for the three months ended February 28, 2006 compared to $3.3 million for the three months ended February 28, 2005, a decrease in earnings of $1.8 million (54%). During the three months ended February 28, 2005 we sold an investment held in our Corporate and Other section for proceeds of $7.4 million and recorded a gain of $3.4 million. Partially offsetting the investment gain during fiscal 2005 was improved earnings of $1.7 million in our business solutions operations.

Net Income. Consolidated net income for the three months ended February 28, 2006 was $40.1 million compared to $8.7 million for the three months ended February 28, 2005, which represents a $31.4 million increase in earnings.

Net Sales. Consolidated net sales were $3.1 billion for the three months ended February 28, 2006 compared to $2.4 billion for the three months ended February 28, 2005, which represents a $726.3 million (30%) increase.

Our Energy segment net sales, after elimination of intersegment sales, of $1.5 billion increased $420.8 million (37%) during the three months ended February 28, 2006 compared to the three months ended February 28, 2005. During the three months ended February 28, 2006 and 2005, our Energy segment recorded sales to our Ag Business segment of $48.1 million and $34.5 million, respectively. Intersegment sales are eliminated in deriving consolidated sales but are included for segment reporting purposes. The net sales increase of $420.8 million is comprised of an increase of $321.0 million primarily related to price appreciation on refined fuels and propane products and $99.8 million due to increased sales, mainly volume increases of refined fuels and propane products. On a more product-specific basis, we own and operate two crude oil refineries where we produce approximately 60% of the refined fuels that we sell and we purchase the balance from other United States refiners and distributors. Refined fuels net sales increased $305.1 million (42%), of which $245.4 million was related to a net average selling price increase and $59.7 million related to increased volumes. The sales price of refined fuels increased $0.44 per gallon (34%) and volumes increased 6% when comparing the three months ended February 28, 2006 with the same period a year ago. Higher crude oil costs and global supply and demand contributed to the increase in refined fuels selling prices. Propane net sales increased by $86.8 million (36%), of which $54.0 million was related to a net average selling price increase and $32.8 million due to increased volumes compared to the same three-month period in the previous year. Propane prices increased $0.19 per gallon (22%) and sales volume increased 11% in comparison to the same period of the prior year. Higher propane prices are reflective of the crude oil price increases during the three

months ended February 28, 2006 compared to the same period in 2005. The improved propane volume primarily relates to a colder winter home heating season as compared to the previous year.

Our Ag Business segment net sales, after elimination of intersegment sales, of $1.4 billion increased $289.8 million (26%) during the three months ended February 28, 2006 compared to the three months ended February 28, 2005. Grain net sales in our Ag Business segment totaled $1,261.5 million and $995.8 million during the three months ended February 28, 2006 and 2005, respectively. The grain net sales increase of $265.7 million (27%) is primarily attributable to increased volumes accounting for $193.0 million of this variance and $72.7 million related to a net increase in the average selling grain prices during the three months ended February 28, 2006 compared to the same period last fiscal year. In general, commodity prices showed slight increases with the average market price of spring wheat, soybeans and corn approximately $0.55, $0.33 and $0.15 per bushel higher, respectively, than the prices on those same grains during the prior three-month period. Volumes increased 18%, primarily wheat and soybeans during the three months ended February 28, 2006 compared with the same period of a year ago. The average sales price of all grain and oilseed commodities sold reflected an increase of $0.29 per bushel (7%). Our Ag Business segment non-grain net sales of $161.0 million increased by $24.1 million (18%) during the three months ended February 28, 2006 compared to the same period in 2005, primarily the result of increased sales of energy, feed and seed products, partially offset by decreased sales of sunflower products, crop nutrients and crop protection products. The average selling price of energy products increased due to overall market conditions while volumes were fairly consistent to the three months ended February 28, 2005.

Our Processing segment net sales, after elimination of intersegment sales, of $148.0 million increased $15.8 million (12%) during the three months ended February 28, 2006 compared to the three months ended February 28, 2005. Sales in processing consist entirely of our oilseed products. The oilseed processing increase of $19.0 million (32%) includes $12.7 million due to a 19% increase in sales volumes and $6.3 million related to an increase in the average sales price during the three months ended February 28, 2006 compared to the same period last fiscal year. Refined oil sales decreased $3.4 million (5%), of which $3.2 million was due to a 5% decrease in sales volume and $0.2 million was due to a lower average sales price. The average selling price of processed oilseed increased $15 per ton and the average selling price of refined oilseed products was relatively flat compared to the same three-month period of the previous year. The change in price is primarily related to overall global market conditions for soybean meal and oil.

Other Revenues. Other revenues of $42.4 million increased $7.6 million (22%) during the three months ended February 28, 2006 compared to the three months ended February 28, 2005. The majority of other revenues are generated within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevator and agri-service centers generally receives other revenues from activities related to production agriculture which include; grain storage, grain cleaning, fertilizer spreading, crop protection product 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. Other revenues within Corporate and Other increased $3.1 million (36%), which includes increased revenues from our commodity hedging and other services. Our Energy segment other revenues of $2.7 million increased $0.8 million (40%). Our Ag Business segment other revenues of $27.0 million, increased $3.7 million (16%), primarily related to insurance claim recoveries of facility income lost during the first fiscal quarter due to hurricane business interruption at our Myrtle Grove, Louisiana export terminal, as compared to the same period ended in 2005.

Cost of Goods Sold. Cost of goods sold of $3.0 billion increased $705.0 million (30%) during the three months ended February 28, 2006 compared to the three months ended February 28, 2005.

Our Energy segment cost of goods sold, after elimination of intersegment costs, of $1.5 billion increased $399.8 million (37%) during the three months ended February 28, 2006 compared to the same period of the prior year, primarily due to increased average cost of refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased by $0.43 (34%) per gallon and volumes increased 6% compared to the three months ended February 28, 2005. 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 three months ended February 28, 2005. The average per unit cost

of crude oil purchased for the two refineries increased 32% compared to the three months ended February 28, 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 NCRA’s McPherson, Kansas refinery. The average cost of propane increased $0.19 (22%) per gallon and volumes increased 11% compared to the three months ended February 28, 2005. The average price of propane increased due to higher input costs and relates to global demand compared to the same period in the previous year. The propane volume increase primarily relates to a colder winter home heating season as compared to the previous year.

Our Ag Business cost of goods sold, after elimination of intersegment costs, of $1.4 billion increased $294.6 million (26%) during the three months ended February 28, 2006 compared to the same period of the prior year. Grain cost of goods sold in our Ag Business segment totaled $1,244.9 million and $977.1 million during the three months ended February 28, 2006 and 2005, respectively. The cost of grains and oilseeds procured through our Ag Business segment increased 27% compared to the three months ended February 28, 2005, primarily the result of increased volumes of 18% and an average cost per bushel increase of $0.31 (8%) compared to the three months ended February 28, 2005. In addition to the increased volumes during the three months ended February 28, 2006, commodity prices on soybeans, spring wheat and corn were higher compared to the prices that were prevalent during the three months ended February 28, 2005. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased primarily due to increases in the average selling price of energy products due to overall market conditions, and volume increases in feed and seed products as compared to the three months ended February 28, 2005.

Our Processing segment cost of goods sold, after elimination of intersegment costs of $141.4 million, increased $10.7 million (8%) compared to the three months ended February 28, 2005, which was primarily due to a 14% net volume increase in the soybeans processed at our two crushing plants.

Marketing, General and Administrative. Marketing, general and administrative expenses of $55.5 million for the three months ended February 28, 2006 increased by $0.5 million (1%) compared to the three months ended February 28, 2005 for our business segments and Corporate and Other and includes higher accruals for incentive programs and pension cost.

Gain on Sale of Investment. During our second quarter of fiscal 2005, included in Corporate and Other, we sold stock in an investment and received cash of $7.4 million from the sale and recorded a gain of $3.4 million.

Interest. Interest expense of $13.7 million for the three months ended February 28, 2006 increased $1.5 million (12%) compared to the three months ended February 28, 2005. The net variance includes decreased capitalized interest of $0.6 million, primarily related to the completion in fiscal year 2005 of the sulfur project at our refinery in Laurel, Montana. In addition, the average short-term interest rate increased 1.91%. These increases in interest expense were partially offset by a decrease in the average level of short-term borrowings of $44.6 million, during the three months ended February 28, 2006 compared to the same period in 2005.

Equity Income from Investments. Equity income from investments of $5.2 million for the three months ended February 28, 2006 improved $5.3 million compared to the three months ended February 28, 2005. We record equity income or loss from the investments that we own 50% or less of 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 change in equity income from investments was attributable to increased earnings from investments within our Processing, Ag Business and Energy segments of $2.3 million, $1.9 million and $0.3 million, respectively, and $0.8 million within Corporate and Other, when compared to the prior year three-month period.

The equity investments in our Energy segment had increased earnings of $0.3 million, when compared to the prior year three-month period, related to improved margins in an NCRA equity investment.

Our Ag Business segment generated improved earnings of $1.9 million from equity investments when compared to the prior year three-month period. Our share of losses in our equity investment in Agriliance decreased $2.3 million and is primarily attributable to decreased losses in their retail south operations and crop

nutrients of $3.0 million and $1.5 million respectively, partially offset by reduced margins on their wholesale crop protection products and retail north operations of $1.5 and $0.7 million, respectively. Crop protection products primarily consist of the wholesale distribution and, to a lesser degree, the blending and packaging of herbicide and pesticide products. Crop protection earnings declined compared to the same period in 2005 as a result of reduced chemical rebates. Crop nutrient volumes, which consist primarily of fertilizers and micronutrients, were down 21% over the three-months ended February 28, 2005, however crop nutrient margins for Agriliance continue to improve. Our share of the agronomy Canadian joint venture had increased earnings of $0.2 million as compared to the three months ended February 28, 2005. Partially offsetting these improved earnings were other Ag Business segment joint ventures whose combined earnings decreased $0.6 million compared to the same three-month period in the previous year.

Our Processing segment generated improved earnings of $2.3 million from equity investments. For our share of Ventura Foods, our oilseed-based products and packaged foods joint venture, we recorded increased earnings of $2.7 million, partially offset by decreased earnings for our share of Horizon Milling, our wheat milling joint venture, where we recorded decreased earnings of $0.2 million and US BioEnergy, with recorded losses of $0.2 million compared to the same three months in the previous year.

Corporate and Other reflects improved earnings of $0.8 million, when compared to the prior year three-month period, primarily related to Cofina, a joint venture finance company in which we own a 49% interest, and which began operations in the fourth quarter of fiscal 2005.

Minority Interests. Minority interests of $9.2 million for the three months ended February 28, 2006 increased by $4.5 million (95%) compared to the three months ended February 28, 2005, primarily related to improved refining margins. This increase was primarily a result of more profitable operations within our majority-owned subsidiaries compared to the three months ended February 28, 2005. 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 $4.2 million for the three months ended February 28, 2006 compares with $0.4 million for the three months ended February 28, 2005. The resulting effective tax rates for the three months ended February 28, 2006 and 2005 were 9.5% and 2.0%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the periods ended February 28, 2006 and 2005. The income taxes and effective tax rate vary each period based upon profitability and nonpatronage business activity during each of the comparable periods.

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, prior operating results have been reclassified to report those operations as discontinued. The slight loss recorded for the three months ended February 28, 2006 was $0.2 million ($0.1 million, net of taxes) and compares to a net loss of $18.0 million ($11.0 million, net of taxes), respectively. During our second fiscal quarter of 2005, we recorded impairments totaling $13.4 million to reduce the carrying value of our Newton, North Carolina Mexican foods facility and intangible assets related to our frozen prepared Mexican foods operations in Fort Worth, Texas in addition to other repositioning costs.

Comparison of the six months ended February 28, 2006 and 2005

General. We recorded income from continuing operations before income taxes of $219.0 million during the six months ended February 28, 2006 compared to $47.0 million for the six months ended February 28, 2005, an increase of $172.0 million.

Our Energy segment generated income from continuing operations before income taxes of $180.8 million for the six months ended February 28, 2006 compared with $58.2 million for the six months ended February 28, 2005. This increase in earnings of $122.6 million (211%) is primarily attributable to improved

profitability of $125.4 million on refined fuels, partially offset by decreased earnings of $2.8 million in our other energy operations.

Our Ag Business segment generated income from continuing operations before income taxes of $17.5 million for the six months ended February 28, 2006 compared to a loss of $22.6 million for the six months ended February 28, 2005. This increase in earnings of $40.1 million is primarily related to improved earnings of $35.0 million included in our agronomy operations. 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 our first fiscal quarter 2005 income after taxes was $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 $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 of 2005, 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 our fiscal 2005 income, after taxes, was $8.8 million.

Also included in our Ag Business segment are country operations and grain marketing operations, which recorded improved earnings of $8.1 million and $2.1 million, respectively, primarily from increases of grain volumes and margins, and country operations volumes and margins on grain and improved margins primarily on agronomy and energy products. These improvements in earnings were partially offset by increases in losses of $5.1 million from our other agronomy related joint ventures, mostly due to depressed earnings in Agriliance retail operations and reduced wholesale crop protection products margins, which were partially offset by improved earnings in Agriliance crop nutrient operations.

Our Processing segment generated income from continuing operations before income taxes of $17.2 million for the six months ended February 28, 2006 compared to $7.2 million for the six months ended February 28, 2005, an increase in earnings of $10.0 million (140%). Our oilseed processing earnings improved $9.5 million, primarily related to margins from increased soybean crushing volumes and improved crushing margins. Our share of earnings from Ventura Foods, our packaged foods joint venture, increased $1.2 million compared to the prior year and is primarily related to improved oil mark to market margins. Our shares of earnings from our wheat milling joint ventures were relatively flat compared to the prior six-month period. Our US BioEnergy Corporation investment showed a slight loss for the period ended February 28, 2006 in addition to allocated interest on that investment.

Corporate and Other generated income from continuing operations before income taxes of $3.5 million for the six months ended February 28, 2006 compared to $4.2 million for the six months ended February 28, 2005, a decrease in earnings of $0.7 million (17%) and reflects reduced earnings primarily in our business solutions insurance operations.

Net Income. Consolidated net income for the six months ended February 28, 2006 was $194.4 million compared to $26.7 million for the six months ended February 28, 2005, which represents a $167.7 million increase in earnings.

Net Sales. Consolidated net sales were $6.5 billion for the six months ended February 28, 2006 compared to $5.3 billion for the six months ended February 28, 2005, which represents a $1,219.4 million (23%) increase.

Our Energy segment net sales, after elimination of intersegment sales, of $3.4 billion increased $851.4 million (34%) during the six months ended February 28, 2006 compared to the six months ended February 28, 2005. During the six months ended February 28, 2006 and 2005, our Energy segment recorded sales to our Ag Business segment of $103.7 million and $79.6 million, respectively. Intersegment sales are eliminated in deriving consolidated sales but are included for segment reporting purposes. The net sales increase of $851.4 million is comprised of an increase of $786.6 million primarily related to price appreciation on refined fuels and propane products and $64.8 million due to increased sales volume mainly of refined fuels and propane products. On a more product-specific basis, we own and operate two crude oil refineries where we produce approximately 60% of the refined fuels that we sell and we purchase the balance from other United States refiners and distributors. Refined fuels net sales increased $686.8 million (40%), of which $669.6 million was related to a net average selling price increase, and $17.2 million related to increased volumes. The sales price of refined fuels increased $0.53 per gallon (39%) and volumes increased 1% when comparing the six months ended February 28, 2006 with the same period a year ago. Higher crude oil costs and global supply and demand contributed to the increase in refined fuels selling prices. Propane net sales increased by $91.9 million (20%), of which $90.6 million was related to a net average selling price increase and $1.3 million due to increased volumes compared to the same six-month period in the previous year. Propane prices increased $0.18 per gallon (20%) and sales volume increased slightly in comparison to the same period of the prior year. Higher propane prices are reflective of the crude oil price increases during the six months ended February 28, 2006 compared to the same period in 2005.

Our Ag Business segment net sales, after elimination of intersegment sales, of $2.9 billion increased $342.7 million (14%) during the six months ended February 28, 2006 compared to the six months ended February 28, 2005. Grain net sales in our Ag Business segment totaled $2,493.9 million and $2,198.2 million during the six months ended February 28, 2006 and 2005, respectively. The net sales increase of $295.7 million (14%) is primarily attributable to a 7% increase in volume accounting for $167.0 million of the favorable change, and $128.7 million related to a net increase in the average selling grain prices during the six months ended February 28, 2006 compared to the same period last fiscal year. In general, commodity prices showed slight increases with the average market price of spring wheat, soybeans and corn approximately $0.40, $0.34 and $0.06 per bushel higher, respectively, than the prices on those same grains during the prior six-months as compared to the six months ended February 28, 2005. The average sales price of all grain and oilseed commodities sold reflected an increase of $0.24 per bushel (6%). Our Ag Business segment non-grain net sales of $386.9 million increased by $47.0 million (14%) during the six months ended February 28, 2006 compared to the same period in 2005, primarily the result of increased sales of energy, feed, seed and crop nutrient products, partially offset by decreased sunflower, crop protection products and other merchandise. The average selling price of energy products increased due to overall market conditions while volumes were fairly consistent to the six months ended February 28, 2005.

Our Processing segment net sales, after elimination of intersegment sales, of $300.0 million increased $25.4 million (9%) during the six months ended February 28, 2006 compared to the six months ended February 28, 2005. Sales in processing consist entirely of our oilseed products. The oilseed processing increase of $34.0 million (29%) includes $31.3 million due to a 26% increase in sales volumes and $2.7 million due to higher average sales price. Refined oil sales decreased $8.7 million (6%), of which $9.0 million was due to lower average sales price, partially offset by $0.3 million due to a slight increase in sales volume. The average selling price of processed oilseed increased $3.60 per ton and the average selling price of refined oilseed products decreased $0.02 per pound compared to the same six-month period of the previous year. The change in price is primarily related to overall global market conditions for soybean meal and oil.

Other Revenues. Other revenues of $87.5 million increased $8.2 million (10%) during the six months ended February 28, 2006 compared to the six months ended February 28, 2005. The majority of other revenues are generated within our Ag Business segment and Corporate and Other. Our Ag Business segment’s country operations elevator and agri-service centers receives other revenues from activities related to production agriculture which include; grain storage, grain cleaning, fertilizer spreading, crop protection product 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. Other revenues within Corporate and Other increased

$5.1 million (33%), which includes increased revenues from our commodity hedging and other services. Our Energy segment other revenues of $7.3 million increased $2.7 million (58%) and primarily relate to NCRA other revenue. Our Ag Business segment other revenues increased $0.4 million (1%).

Cost of Goods Sold. Cost of goods sold of $6.2 billion increased $1,050.0 million (20%) during the six months ended February 28, 2006 compared to the six months ended February 28, 2005.

Our Energy segment cost of goods sold, after elimination of intersegment costs, of $3.1 billion increased $698.9 million (29%) during the six months ended February 28, 2006 compared to the same period of the prior year, primarily due to increased average cost of refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased by $0.50 (37%) per gallon and volumes increased 1% compared to the six months ended February 28, 2005. 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 six months ended February 28, 2005. The average per unit cost of crude oil purchased for the two refineries increased 32% compared to the six months ended February 28, 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 NCRA’s McPherson, Kansas refinery. The average cost of propane increased $0.17 (20%) per gallon while volumes showed a slight increase compared to the six months ended February 28, 2005. The average price of propane increased due to higher input costs and relates to global demand compared to the same period in the previous year.

Our Ag Business cost of goods sold, after elimination of intersegment costs, of $2.9 billion increased $335.2 million (13%) during the six months ended February 28, 2006 compared to the same period of the prior year. Grain cost of goods sold in our Ag Business segment totaled $2,449.6 million and $2,163.5 million during the six months ended February 28, 2006 and 2005, respectively. Grains and oilseeds procured through our Ag Business segment increased $286.1 million (13%) compared to the six months ended February 28, 2005, primarily the result of a 7% increase in volumes and a $0.23 (6%) average cost per bushel increase compared to the prior year. During the six months ended February 28, 2006, commodity prices on spring wheat, soybeans and corn were slightly higher compared to the prices that were prevalent during the six months ended February 28, 2005. Our Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment, increased primarily due to increases in the average selling price of energy products due to overall market conditions, and volume increases due to earlier spring placement of agronomy and seed products, as compared to the six months ended February 28, 2005.

Our Processing segment cost of goods sold, after elimination of intersegment costs, of $286.6 million increased $15.9 million (6%) compared to the six months ended February 28, 2005, which was primarily due to a 21% net volume increase in the soybeans processed at our two crushing plants.

Marketing, General and Administrative. Marketing, general and administrative expenses of $103.8 million for the six months ended February 28, 2006 increased by $4.2 million (4%) compared to the six months ended February 28, 2005, and is reflective of normal inflation and higher accruals for incentive programs and pension cost.

Interest. Interest expense of $25.4 million for the six months ended February 28, 2006 increased $2.4 million (11%) compared to the six months ended February 28, 2005. The net variance includes decreased capitalized interest of $1.2 million, primarily related to the completion in our fiscal year 2005, of the sulfur project at our refinery in Laurel, Montana. The average short-term interest rate increased 1.70%, partially offset by a decrease of $15.1 million in the average level of short-term borrowings during the six months ended February 28, 2006 compared to the same period in 2005.

Equity Income from Investments. Equity income from investments of $14.4 million for the six months ended February 28, 2006 changed unfavorably by $2.2 million (13%) compared to the six months ended February 28, 2005. We record equity income or loss from the investments that we own 50% or less of 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 change in equity income from investments was primarily attributable to increased losses from investments within our Ag Business segment of $4.4 million when compared to the prior year six-month period and were partially offset by improved equity income and losses from investments net earnings within Corporate and Other and our Energy and Processing segments of $1.4 million, $0.4 million and $0.4 million, respectively.

Our Energy segment generated improved earnings from equity investments of $0.4 million, when compared to the prior year six-month period, related to improved margins in an NCRA equity investment.

Our Ag Business segment generated increased losses of $4.4 million from equity investments when compared to the prior year six-month period. Losses in our equity investment in Agriliance increased $3.0 million and are primarily attributable to increased losses in their retail operations and reduced margins on their wholesale crop protection products, partially offset by improved crop nutrient earnings. Hurricane Katrina unfavorably affected sales and margins in the Agriliance southern retail region. Crop protection products primarily consist of the wholesale distribution and, to a lesser degree, the blending and packaging of herbicide and pesticide products. Crop protection earnings declined compared to the same period in 2005 as a result of higher costs of inputs, including reduced chemical rebates and changes in accruals of other promotional programs. The prices and margins of these products continue to decline as many come off patent and are replaced by cheaper generic brands. Crop nutrient volumes, which consist primarily of fertilizers and micronutrients, were down 16% over last year, however crop nutrient margins continue to improve, and there was a gain on the sale of a crop nutrient facility. We also recorded for our share of the agronomy Canadian joint venture decreased earnings of $1.3 million as compared to the six months ended February 28, 2005. Partially offsetting these decreases were other Ag Business segment joint ventures whose combined earnings decreased $0.1 million compared to the same six-month period in the previous year.

Our Processing segment generated improved earnings of $0.4 million from equity investments when compared to the prior year six-month period. Ventura Foods, our oilseed-based products and packaged foods joint venture, showed increased earnings of $1.1 million, primarily due to improved margins in oil mark to market. We also recorded reduced earnings of $0.5 million for Horizon Milling, our wheat milling joint venture and $0.2 million of losses from our investment in US BioEnergy.

Corporate and Other reflects improved earnings of $1.4 million, when compared to the prior year six-month period, primarily related to Cofina which began operations in the fourth quarter of fiscal 2005.

Loss on Impairment of Investment. As previously discussed, during the first quarter of fiscal 2005 we evaluated the $153.0 million carrying value of our investment in CF. The carrying value of our CF investment was reduced by $35.0 million, resulting in an impairment charge to our first quarter in fiscal 2005. The net effect to first fiscal quarter 2005 income after taxes was $32.1 million.

Minority Interests. Minority interests of $41.4 million for the six months ended February 28, 2006 increased by $28.5 million compared to the six months ended February 28, 2005 and relates to improved refining margins. This increase was primarily a result of more profitable operations within our majority-owned subsidiaries compared to the six months ended February 28, 2005. Substantially all minority interests relate to NCRA.

Income Taxes. Income tax expense, excluding discontinued operations, of $24.7 million for the six months ended February 28, 2006 compares with $6.9 million for the six months ended February 28, 2005. The resulting effective tax rates for the six months ended February 28, 2006 and 2005 were 11.3% and 14.7%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the periods ended February 28, 2006 and 2005. The income taxes and effective tax rate vary each period based upon profitability and nonpatronage business activity during each of the comparable periods.

operations have been accounted for as discontinued operations. Accordingly, prior operating results have been reclassified to report those operations as discontinued. The gain recorded for the six months ended February 28, 2006 was $0.2 million ($0.1 million, net of taxes) and compares to a net loss of $21.8 million ($13.3 million, net of taxes), respectively. During our second fiscal quarter of 2005, we recorded impairments totaling $13.4 million to reduce the carrying value of our Newton, North Carolina Mexican foods facility and intangible assets related to our frozen prepared Mexican foods operations in Fort Worth, Texas in addition to other repositioning costs. During our first fiscal quarter of 2006, we sold the facility in Newton, North Carolina and recorded a gain of $0.8 million from the sale of the asset.

Liquidity and Capital Resources

On February 28, 2006, we had working capital, defined as current assets less current liabilities, of $776.5 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. On February 28, 2005, we had working capital of $605.1 million, and a current ratio of 1.4 to 1.0 compared to working capital of $493.4 million, and a current ratio of 1.3 to 1.0 on August 31, 2004. The increase in working capital between August 31, 2004 and February 28, 2005 is primarily due to the addition of $125.0 million in long-term debt and earnings during this period. During fiscal 2005, the CHS Board of Directors approved 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 less relatively low value asphalt. The total cost for this project is expected to be approximately $325.0 million, with completion planned for fiscal year 2008. We anticipate that working capital will be drawn down to a level that is more consistent with historical levels through capital expenditures, primarily the coker unit project at our Laurel, Montana refinery.

We have committed lines of revolving credit which are used primarily to finance inventories and receivables consisting of a $700.0 million 364-day revolver and a $300.0 million five-year revolver. 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 February 28, 2006, we had $113.5 million outstanding on these lines of credit compared with $353.0 million on February 28, 2005. We believe that we have adequate liquidity to cover any increase in net operating assets and liabilities in the foreseeable future.

Cash Flows from Operations

Cash flows from operations are generally affected by commodity prices and the seasonality of our businesses. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions. These factors are described in the preceding cautionary statements, and may affect net operating assets and liabilities, and liquidity.

Cash flows provided by operating activities were $27.2 million for the six months ended February 28, 2006, compared to cash flows used in operating activities of $144.8 million for the six months ended February 28, 2005. Volatility in cash flows from operations for these periods is primarily the result of greater net income during the current six-month period compared to the prior year.

Our operating activities provided net cash of $27.2 million during the six months ended February 28, 2006. Net income of $194.4 million and net non-cash expenses of $129.8 million were partially offset by an increase in net operating assets and liabilities of $297.0 million. The primary components of net non-cash expenses included depreciation and amortization of $58.9 million, deferred tax expense of $44.8 million and minority interests of $41.4 million, partially offset by income from equity investments of $14.4 million. The increase in net operating assets and liabilities was comprised of several components. One of the primary components included an increase in inventories largely due to an increase in feed and farm supplies inventories as well as increases in grain quantities and appreciated grain prices. On February 28, 2006, the market prices of two of our primary grain commodities, spring wheat and corn, increased by $0.73 per bushel (21%) and

$0.27 per bushel (13%), respectively, and soybeans, another high volume commodity, saw only a slight decline in price of $0.07 per bushel (1%) when compared to August 31, 2005. Our grain inventory quantities increased 21.9 million bushels (24%) during the same period. Our feed and farm supplies inventories increased significantly as well during the period, as we began building fertilizer inventories at our country operations retail locations in anticipation of spring planting. Another primary factor affecting operating assets and liabilities was a decrease in crude oil prices on February 28, 2006 compared to August 31, 2005, which had offsetting impacts of decreasing receivables, accounts payable and derivative liabilities in our Energy segment. In general, crude oil prices decreased $7.53 per barrel (11%) on February 28, 2006 compared to August 31, 2005.

Our operating activities used net cash of $144.8 million during the six months ended February 28, 2005. Net income of $26.7 million and net non-cash expenses of $93.7 million were exceeded by an increase in net operating assets and liabilities of $265.2 million. The primary components of net non-cash expenses included depreciation and amortization of $54.4 million, loss on impairment of assets of $48.4 million and minority interests of $12.9 million, partially offset by income from equity investments of $16.5 million. The increase in net operating assets and liabilities was caused primarily by increases in inventory quantities in our Ag Business segment, as well as an increase in crude oil prices in our Energy segment. Our grain inventory quantities increased 38.4 million bushels (68%) during the period between August 31, 2004 and February 28, 2005, as the market prices of grain declined or had only slight increases during that period. Our feed and farm supplies inventories increased significantly as well during the same period, as we began building fertilizer inventories at our country operations retail locations in anticipation of spring planting. In general, crude oil prices increased $9.63 per barrel (23%) on February 28, 2005 when compared to August 31, 2004.

Cash flows used in operating activities were $133.0 million for the three months ended February 28, 2006 compared to $223.2 million for the three months ended February 28, 2005. Volatility in cash flows from operations for these periods is primarily the result of greater net income during the current three-month period compared to the prior year in addition to a smaller increase in net operating assets and liabilities in the current three-month period compared to the prior year.

Our operating activities used net cash of $133.0 million during the three months ended February 28, 2006. Net income of $40.1 million and net non-cash expenses of $41.1 million were exceeded by an increase in net operating assets and liabilities of $214.2 million. The primary components of net non-cash expenses included depreciation and amortization of $30.9 million, minority interests of $9.2 million and deferred tax expense of $7.3 million, partially offset by income from equity investments of $5.2 million. The increase in net operating assets and liabilities was caused primarily by a decrease in accounts payable as we paid producers for grain on deferred payment contracts.

Our operating activities used net cash of $223.2 million during the three months ended February 28, 2005. Net income of $8.7 million and net non-cash expenses of $41.2 million were partially offset by an increase in net operating assets and liabilities of $273.1 million. The primary components of net non-cash expenses included depreciation and amortization of $27.3 million, loss on impairment of assets of $13.4 million and minority interests of $4.7 million, partially offset by a gain on sale of investments of $3.4 million. The increase in net operating assets and liabilities was caused primarily by an increase in inventories as discussed earlier, and because of a decrease in accounts payable as we paid producers for grain on deferred payment contracts.

Cash usage is usually greatest during the second quarter of our fiscal year as we build inventories at our retail operations in our Ag Business segment and make payments on deferred payment contracts which have accumulated over the course of the prior calendar year. Our net income has historically been the lowest during the second fiscal quarter and highest during the third fiscal quarter.

Cash Flows from Investing Activities

For the six months ended February 28, 2006 and 2005, the net cash flows used in our investing activities totaled $51.6 million and $60.2 million, respectively.

The acquisition of property, plant and equipment comprised the primary use of cash totaling $113.9 million and $122.9 million for the six months ended February 28, 2006 and 2005, respectively. Capital expenditures primarily related to the U.S. Environmental Protection Agency (EPA) low sulfur fuel regulations required by 2006 are essentially complete at our Laurel, Montana refinery and at NCRA’s McPherson, Kansas refinery. Total expenditures for these projects as of February 28, 2006 include $86.8 million that has been spent at our Laurel refinery and $308.7 million that has been spent by NCRA at the McPherson refinery. Expenditures for the projects during the six months ended February 28, 2006, were $50.2 million in total, compared to $88.7 million during the same period a year ago.

For the year ending August 31, 2006, we expect to spend approximately $243.3 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 less relatively low value asphalt. The total cost for this project is expected to be approximately $325.0 million, with completion planned for fiscal 2008. We anticipate funding the project with a combination of cash flows from operations and debt proceeds. Total expenditures for this project as of February 28, 2006, were $13.1 million, all of which were incurred during the three months then ended.

In October 2003, we and NCRA reached agreements with the EPA and the State of Montana’s Department of Environmental Quality and the State of Kansas Department of Health and Environment regarding the terms of settlements with respect to reducing air emissions at our Laurel, Montana and NCRA’s McPherson, Kansas refineries. These settlements are part of a series of similar settlements that the EPA has negotiated with major refiners under the EPA’s Petroleum Refinery Initiative. The settlements, 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 specific 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. We anticipate that the aggregate capital expenditures for us and NCRA related to these settlements will total approximately $20.0 million to $25.0 million over the next six years. We do not believe that the settlements will have a material adverse effect on us, or NCRA.

Investments made during the six months ended February 28, 2006 and 2005 totaled $37.0 million and $2.2 million, respectively. During the six months ended February 28, 2006, we made a $35.0 million investment in US BioEnergy for an approximate 28% interest in the company. On March 31, 2006, we acquired an additional 17.5 million shares of Class A Common Stock of US BioEnergy at a purchase price of $2.00 per share for a total purchase price of $35.0 million. This investment increased our holdings of US BioEnergy to 52.5 million shares of Class A Common Stock with a total investment of $70.0 million. Our holdings represent approximately 30% of the outstanding shares of US BioEnergy, however, our percentage ownership could be reduced to approximately 23% if US BioEnergy consummates certain pending transactions. US BioEnergy is an ethanol production and marketing firm which currently has two ethanol plants under construction in Albert City, Iowa and Lake Odessa, Michigan. US BioEnergy has also announced plans to build ethanol plants near Hankinson, ND and Janesville, MN.

Partially offsetting cash outlays in investing activities were proceeds from the disposition of property, plant and equipment of $6.5 million and $8.0 million for the six months ended February 28, 2006 and 2005, respectively. Also partially offsetting cash usages were distributions received from joint ventures and other investments totaling $44.1 million and $39.0 million for the six months ended February 28, 2006 and 2005, respectively, as well as an increase in cash flows of $48.2 million and $9.1 million related to changes in notes receivable for the same respective periods. The changes in notes receivable are primarily from related parties notes receivable at NCRA with its minority owners. In addition, during the six months ended February 28, 2005, we sold an investment held in Corporate and Other for proceeds of $7.4 million and recorded a gain of $3.4 million.

For the three months ended February 28, 2006, the net cash flows provided by our investing activities totaled $31.0 million and during the three months ended February 28, 2005, the net cash flows used in our investing activities was $27.5 million.

The acquisition of property, plant and equipment comprised the primary use of cash totaling $49.4 million and $59.0 million for the three months ended February 28, 2006 and 2005, respectively.

Investments made during the three months ended February 2005 totaled $2.2 million.

Partially offsetting cash outlays in investing activities were proceeds from the disposition of property, plant and equipment of $1.1 million and $2.1 million for the three months ended February 28, 2006 and 2005, respectively. Also partially offsetting cash usages were distributions received from joint ventures and other investments totaling $39.4 million and $15.5 million for the three months ended February 28, 2006 and 2005, respectively, as well as an increase in cash flows of $39.3 million and $8.5 million related to changes in notes receivable for the same respective periods. The changes in notes receivable are primarily from related parties notes receivable at NCRA with its minority owners. In addition, during the three months ended February 28, 2005, we sold an investment held in Corporate and Other for proceeds of $7.4 million and recorded a gain of $3.4 million.

Cash Flows from Financing Activities

We finance our working capital needs through short-term lines of credit with a syndicate of domestic and international banks. In May 2005, we renewed and expanded our committed lines of revolving credit. The previously established credit lines consisted of a $750.0 million 364-day revolver and a $150.0 million three-year revolver. The current committed credit facilities consist of a $700.0 million 364-day revolver and a $300.0 million five-year revolver. The terms of the current credit facilities are the same as the terms of the credit facilities they replaced in all material respects, except interest rate spreads over the LIBOR rate are reduced under the current credit facilities. 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. On February 28, 2006, August 31, 2005 and February 28, 2005, we had total short-term indebtedness outstanding on these various facilities and other short-term notes payable totaling $114.7 million, $61.1 million and $354.1 million, respectively. On February 28, 2006, the interest rates for debt outstanding on these facilities ranged from 4.72% to 4.94%. In September 2004, the $125.0 million we received from private placement debt proceeds was used to pay down our 364-day credit facility. We are currently in the process of renewing our revolving credit lines for a five-year revolver totaling approximately $1.0 billion.

In November 2005, we requested amendments to our 364-day and five-year revolving loan credit agreement, dated May 19, 2005, and to our term loan credit agreement, dated June 1, 1998, to allow for the expansion of our investment limit from $110.0 million to $175.0 million. The requested amendments were approved by the respective bank groups.

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 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 $106.6 million, $114.8 million and $123.0 million on February 28, 2006, August 31, 2005 and February 28, 2005, respectively. Interest rates on February 28, 2006 ranged from 5.82% to 7.13%. Repayments of $4.1 million were made on this facility during each quarter of the six months ended February 28, 2006 and 2005.

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, and has an interest rate of 7.43%. Repayments are due in equal annual installments of approximately $7.9 million, in the years 2005 through 2011. During the six months ended February 28, 2006 and 2005, repayments on these notes totaled $3.6 million and $11.4 million, respectively.

In October 2002, we completed a private placement with several insurance companies for long-term debt in the amount of $175.0 million, which was layered into two series. The first series of $115.0 million has an interest rate of 4.96% and is due in equal semi-annual installments of approximately $8.8 million during the years 2007 through 2013. The second series of $60.0 million has an interest rate of 5.60% and is due in equal semi-annual installments of approximately $4.6 million during fiscal years 2012 through 2018.

In March 2004, we entered into a note purchase and private shelf agreement with Prudential Capital Group. 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 nine-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.

Through NCRA, we had revolving term loans outstanding of $7.5 million, $9.0 million and $10.5 million for the periods ended February 28, 2006, August 31, 2005 and February 28, 2005, respectively. Interest rates on February 28, 2006 ranged from 6.48% to 6.99%. Repayments of $0.8 million were made during each quarter of the six months ended February 28, 2006 and 2005.

On February 28, 2006, we had total long-term debt outstanding of $758.5 million, of which $114.4 million was bank financing, $620.0 million was private placement debt and $24.1 million was industrial development revenue bonds and other notes and contracts payable. The aggregate amount of long-term debt payable presented in the Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2005 has not materially changed during the six months ended February 28, 2006. On February 28, 2005, we had total long-term debt outstanding of $784.8 million. Our long-term debt is unsecured except for other notes and contracts in the amount of $9.2 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 $7.5 million are collateralized by NCRA’s investment in CoBank. We were in compliance with all debt covenants and restrictions as of February 28, 2006.

During the six months ended February 28, 2006 and 2005, we borrowed on a long-term basis no dollars and $125.0 million, respectively, and during the same periods repaid long-term debt of $15.7 million and $24.2 million, respectively.

During the three months ended February 28, 2006 and 2005, we had no additional long-term borrowings, and during the same periods we repaid long-term debt of $8.9 million and $17.6 million, respectively.

NCRA distributions to minority owners for the six months ended February 28, 2006 and 2005 were $43.0 million and $5.0 million, respectively, and for the three months ended February 28, 2006 and 2005, were $31.3 million and $1.9 million, respectively.

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 distributed during the three months ended February 28, 2006. The cash portion of this distribution, deemed by the Board of

Directors to be 30%, was $62.5 million. During the three months ended February 28, 2005, we distributed cash patronage of $51.5 million from the patronage earnings of the fiscal year ended August 31, 2004.

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. 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 older than 10 years held by that member, and the denominator of which is the sum of the patronage certificates older than 10 years held by all eligible non-individual members. In accordance with authorization from the Board of Directors, total cash redemptions related to the year ended August 31, 2005, to be distributed in fiscal year 2006, are expected to be approximately $64.1 million, of which $45.4 million was redeemed during the three months ended February 28, 2006, compared to $19.1 million during the three months ended February 28, 2005 and $51.7 million was redeemed during the six months ended February 28, 2006, compared to $19.3 million during the six months ended February 28, 2005.

We also redeemed an additional $23.8 million of capital equity certificates during the three months ended February 28, 2006, by issuing shares of our 8% Cumulative Redeemable Preferred Stock (Preferred Stock) pursuant to a registration statement filed with the Securities and Exchange Commission. During the three months ended February 28, 2005, we redeemed $20.0 million of capital equity certificates by issuing shares of our Preferred Stock.

On February 28, 2006, we had 5,864,238 shares of Preferred Stock outstanding with a total redemption value of $146.6 million, excluding accumulated dividends. The Preferred Stock accumulates dividends at a rate of 8% per year (dividends are payable quarterly), and is redeemable at our option beginning in 2008.

Off Balance Sheet Financing Arrangements

Lease Commitments:

Our lease commitments presented in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2005 have not materially changed during the six months ended February 28, 2006.

Guarantees:

We are a guarantor for lines of credit for related companies, of which $57.1 million was outstanding on February 28, 2006. Our bank covenants allow maximum guarantees of $150.0 million. 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 February 28, 2006.

Debt:

We have no material off balance sheet debt.

Contractual Obligations

Our contractual obligations are presented in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2005. Other than the balance sheet changes in payables and long-term debt, the total obligations have not materially changed during the six months ended February 28, 2006.

Critical Accounting Policies

Our Critical Accounting Policies are presented in our Annual Report on Form 10-K for the year ended August 31, 2005. There have been no changes to these policies during the six months ended February 28, 2006.

Effect of Inflation and Foreign Currency Transactions

Inflation and foreign currency fluctuations have not had a significant effect on our operations. During fiscal 2003, we opened a grain marketing office in Brazil that impacts our exposure to foreign currency fluctuations, but to date, there has been no material effect.

Recent Accounting Pronouncements

We are required to apply Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations”. This statement requires recognition of a liability for costs that an entity is legally obligated to incur associated with the retirement of fixed assets. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the fixed asset and depreciated over its estimated useful life. We have legal asset retirement obligations for certain assets, including our refineries, pipelines and terminals. We are unable to measure this obligation because it is not possible to estimate when the obligation will be settled. In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB No. 143” (FIN 47). FIN 47 clarifies that SFAS No. 143 requires that an entity recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We have not yet determined the impact that the adoption of this interpretation will have on our consolidated financial statements.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

We did not experience any material changes in market risk exposures for the period ended February 28, 2006, that affect the quantitative and qualitative disclosures presented in our Annual Report on Form 10-K for the year ended August 31, 2005.


Item 4.	*Controls and Procedures*

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of February 28, 2006. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of that date, our disclosure controls and procedures were effective.

During the second fiscal quarter ended February 28, 2006, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	*Not applicable*


Item 1A.	*Not applicable*


Item 2.	*Not applicable*


Item 3.	*Not applicable*


Item 4.	*Submission of Matters to a Vote of Security Holders*

We held our Annual Meeting December 1-2, 2005, and the following directors were re-elected to our Board of Directors for a three-year term: Bruce Anderson, David Bielenberg, Curt Eischens, Robert Grabarski, Jerry Hasnedl, Glen Keppy and Richard Owen. The following directors’ terms of office continued after the meeting: Robert Bass, Dennis Carlson, Rober Elliott, Steve Fritel, James Kile, Randy Knecht, Michael Mulcahey, Duane Stenzel, Michael Toelle and Merlin Van Walleghen.

Our members adopted a resolution to amend our Bylaws during our Annual Meeting held December 1-2, 2005, to reflect a change in member representation. The amendment eliminates one director position from Region 6 (Alaska, Arizona, California, Idaho, Oregon, Washington, Utah) and adds one director position to Region 8 (Nebraska, Kansas, Oklahoma, Texas, Colorado, New Mexico). The shift in director representation was based upon recent business volume generated and equity held by our members in those respective regions, and will be effective for elections held as of our 2006 Annual meeting. The total number of directors positions remains at seventeen.


Item 5.	*Not applicable*


Item 6.	*Exhibits*


Exhibit		Description

10.1		First Amendment to the 2003 Amended and Restated Credit Agreement between the National Cooperative Refinery Association and the Syndication Parties (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed December 20, 2005)


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


32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CHS Inc.

(Registrant)

/s/ John Schmitz

John Schmitz

Executive Vice President and

Chief Financial Officer

April 13, 2006

(Date)

CHS INC - Quarter Report: 2006 February (Form 10-Q)

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