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EX-32.1 - EXHIBIT 32.1 - CHS INCex-321053115.htm
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EX-10.1 - EXHIBIT 10.1 - CHS INCex-101fy15dcp.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
Form 10-Q
________________________________________
þ
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended May 31, 2015.
or
o
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission file number: 001-36079
________________________________________
CHS Inc.
(Exact name of registrant as specified in its charter)
Minnesota
 (State or other jurisdiction of
incorporation or organization)
 
41-0251095
 (I.R.S. Employer
Identification Number)
 
 
 
5500 Cenex Drive Inver Grove Heights, Minnesota 55077
 (Address of principal executive office,
including zip code)
 
(651) 355-6000
 (Registrant’s telephone number,
including area code)
________________________________________


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
YES þ NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: The Registrant has no common stock outstanding.

 



INDEX
 
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 



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 our 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 Statements for Purposes of the Safe Harbor Provisions of the Securities Litigation Reform Act,” to this Quarterly Report on Form 10-Q for the quarterly period ended May 31, 2015.


1


ITEM 1.     FINANCIAL STATEMENTS

CHS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
May 31,
2015
 
August 31,
2014
 
(Dollars in thousands)
ASSETS
 
 
 
Current assets:
 

 


Cash and cash equivalents
$
1,101,872

 
$
2,133,207

Receivables
3,073,731

 
2,988,563

Inventories
3,118,838

 
2,760,253

Derivative assets
605,024

 
603,933

Margin deposits
266,151

 
301,045

Supplier advance payments
514,203

 
331,345

Other current assets
420,310

 
279,304

Total current assets
9,100,129

 
9,397,650

Investments
998,671

 
923,227

Property, plant and equipment
4,648,282

 
4,031,023

Other assets
972,177

 
795,079

Total assets
$
15,719,259

 
$
15,146,979

LIABILITIES AND EQUITIES
 
 
 
Current liabilities:
 

 
 

Notes payable
$
1,272,048

 
$
1,159,473

Current portion of long-term debt
150,079

 
156,836

Current portion of mandatorily redeemable noncontrolling interest
151,627

 
65,981

Customer margin deposits and credit balances
185,690

 
265,556

Customer advance payments
609,075

 
602,374

Checks and drafts outstanding
107,599

 
167,846

Accounts payable
1,917,428

 
2,208,211

Derivative liabilities
529,172

 
599,990

Accrued expenses
547,130

 
547,781

Dividends and equities payable
301,577

 
409,961

Total current liabilities
5,771,425

 
6,184,009

Long-term debt
1,171,604

 
1,299,664

Mandatorily redeemable noncontrolling interest

 
148,756

Long-term deferred tax liabilities
595,004

 
566,647

Other liabilities
459,806

 
481,059

Commitments and contingencies


 


Equities:
 

 
 

Preferred stock
2,167,540

 
1,190,177

Equity certificates
3,742,389

 
3,816,428

Accumulated other comprehensive loss
(160,267
)
 
(156,757
)
Capital reserves
1,960,533

 
1,598,660

Total CHS Inc. equities
7,710,195

 
6,448,508

Noncontrolling interests
11,225

 
18,336

Total equities
7,721,420

 
6,466,844

Total liabilities and equities
$
15,719,259

 
$
15,146,979


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

2



CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
For the Three Months Ended
May 31,
 
For the Nine Months Ended
May 31,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Revenues
$
8,740,905

 
$
11,967,398

 
$
26,596,101

 
$
32,673,793

Cost of goods sold
8,430,249

 
11,460,774

 
25,450,359

 
31,324,819

Gross profit
310,656

 
506,624

 
1,145,742

 
1,348,974

Marketing, general and administrative
165,341

 
158,859

 
498,084

 
447,771

Operating earnings
145,315

 
347,765

 
647,658

 
901,203

(Gain) loss on investments

 
(108,792
)
 
(5,074
)
 
(111,401
)
Interest, net
9,557

 
42,489

 
39,648

 
102,263

Equity (income) loss from investments
(34,750
)
 
(25,522
)
 
(83,548
)
 
(89,249
)
Income before income taxes
170,508

 
439,590

 
696,632

 
999,590

Income taxes
(7,327
)
 
59,717

 
47,569

 
116,068

Net income
177,835

 
379,873

 
649,063

 
883,522

Net income (loss) attributable to noncontrolling interests
(215
)
 
418

 
(504
)
 
1,812

Net income attributable to CHS Inc. 
$
178,050

 
$
379,455

 
$
649,567

 
$
881,710


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


3



CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
For the Three Months Ended
May 31,
 
For the Nine Months Ended
May 31,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Net income
$
177,835

 
$
379,873

 
$
649,063

 
$
883,522

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
     Postretirement benefit plan activity, net of tax expense (benefit) of $2,024, $2,770, $6,391 and $7,145, respectively
3,258

 
4,385

 
10,262

 
11,480

     Unrealized net gain (loss) on available for sale investments, net of tax expense (benefit) of $(125), $20, $351 and $937, respectively
(202
)
 
32

 
570

 
1,520

     Cash flow hedges, net of tax expense (benefit) of $223, $81, $(1,262) and $(8,961), respectively
362

 
131

 
(2,047
)
 
(14,535
)
     Foreign currency translation adjustment, net of tax expense (benefit) of $(796), $1,017, $(7,581) and $(514), respectively
(1,290
)
 
1,650

 
(12,295
)
 
(833
)
Other comprehensive income (loss), net of tax
2,128

 
6,198

 
(3,510
)
 
(2,368
)
Comprehensive income
179,963

 
386,071

 
645,553

 
881,154

     Less: comprehensive income (loss) attributable to noncontrolling interests
(215
)
 
418

 
(504
)
 
1,812

Comprehensive income attributable to CHS Inc. 
$
180,178

 
$
385,653

 
$
646,057

 
$
879,342


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



4


CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the Nine Months Ended May 31,
 
2015
 
2014
 
(Dollars in thousands)
Cash flows from operating activities:
 

 
 

Net income
$
649,063

 
$
883,522

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
227,323

 
193,161

Amortization of deferred major repair costs
30,022

 
37,411

(Income) loss from equity investments
(83,548
)
 
(89,249
)
Distributions from equity investments
62,449

 
62,019

Noncash patronage dividends received
(4,882
)
 
(5,058
)
(Gain) loss on disposition of property, plant and equipment
(3,897
)
 
1,473

(Gain) loss on investments
(5,074
)
 
(111,401
)
Unrealized (gain) loss on crack spread contingent liability
(5,697
)
 
(3,975
)
Deferred taxes
29,836

 
99,574

Other, net
3,071

 
16,463

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Receivables
(9,607
)
 
(242,348
)
Inventories
(332,906
)
 
(150,039
)
Derivative assets
7,799

 
(67,986
)
Margin deposits
35,075

 
(41,111
)
Supplier advance payments
(182,858
)
 
(241,495
)
Other current assets and other assets
20,960

 
(10,223
)
Customer margin deposits and credit balances
(109,116
)
 
(48,474
)
Customer advance payments
5,305

 
448,920

Accounts payable and accrued expenses
(301,956
)
 
(211,126
)
Derivative liabilities
(74,725
)
 
(52,595
)
Other liabilities
(27,923
)
 
4,847

Net cash provided by (used in) operating activities
(71,286
)
 
472,310

Cash flows from investing activities:
 

 
 

Acquisition of property, plant and equipment
(827,228
)
 
(656,288
)
Proceeds from disposition of property, plant and equipment
8,348

 
4,373

Expenditures for major repairs
(145,550
)
 

Short-term investments, net
(170,000
)
 

Investments in joint ventures and other
(57,595
)
 
(67,457
)
Investments redeemed
11,281

 
130,445

Proceeds from sale of investments
8,284

 
2,725

Changes in notes receivable, net
(116,556
)
 
(321,376
)
Business acquisitions, net of cash acquired
(8,929
)
 
(114,438
)
Other investing activities, net
(5,343
)
 
(3,558
)
Net cash provided by (used in) investing activities
(1,303,288
)
 
(1,025,574
)
Cash flows from financing activities:
 

 
 

Changes in notes payable
128,356

 
241,070

Long-term debt borrowings
3,546

 
1,426

Principal payments on long-term debt
(155,302
)
 
(141,760
)
Mandatorily redeemable noncontrolling interest payments
(65,981
)
 
(65,981
)
Payments on crack spread contingent liability

 
(8,670
)
Changes in checks and drafts outstanding
(58,962
)
 
(4,328
)
Preferred stock issued
1,010,000

 
702,979

Preferred stock issuance costs
(32,637
)
 
(23,134
)
Preferred stock dividends paid
(93,211
)
 
(29,860
)
Distributions to noncontrolling interests
(430
)
 
(575
)
Retirements of equities
(114,048
)
 
(87,666
)
Cash patronage dividends paid
(277,020
)
 
(286,718
)
Other financing activities, net
581

 
(1,635
)
Net cash provided by (used in) financing activities
344,892

 
295,148

Effect of exchange rate changes on cash and cash equivalents
(1,653
)
 
(918
)
Net increase (decrease) in cash and cash equivalents
(1,031,335
)
 
(259,034
)
Cash and cash equivalents at beginning of period
2,133,207

 
1,808,532

Cash and cash equivalents at end of period
$
1,101,872

 
$
1,549,498

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

5


CHS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1        Summary of Significant Accounting Policies

Basis of Presentation

The unaudited Consolidated Balance Sheet as of May 31, 2015, the Consolidated Statements of Operations for the three and nine months ended May 31, 2015 and 2014, the Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2015 and 2014, and the Consolidated Statements of Cash Flows for the nine months ended May 31, 2015 and 2014, reflect in the opinion of our management, all normal recurring adjustments necessary for a fair statement of the financial position, 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. Our Consolidated Balance Sheet data as of August 31, 2014, 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 (GAAP).

The notes to our consolidated financial statements make reference to our Energy and Ag reportable segments, as well as our Corporate and Other category, which represents an aggregation of individually immaterial operating segments. See Note 11, Segment Reporting for more information.

Our consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability companies, including National Cooperative Refinery Association (NCRA) in our Energy segment. The effects of all significant intercompany 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, 2014, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

Derivative Financial Instruments and Hedging Activities

Our derivative instruments primarily consist of commodity and freight futures and forward contracts and, to a lesser degree, may include foreign currency and interest rate swap contracts. These contracts are economic hedges of price risk, but are not designated or accounted for as hedging instruments for accounting purposes, with the exception of certain interest rate swap contracts which are accounted for as cash flow hedges or fair value hedges. Derivative instruments are recorded on our Consolidated Balance Sheets at fair value. See Note 12, Derivative Financial Instruments and Hedging Activities and Note 13, Fair Value Measurements for additional information.

Even though we have netting arrangements for our exchange-traded futures and options contracts and certain over-the-counter (OTC) contracts, we report our derivatives on a gross basis on our Consolidated Balance Sheets. Our associated margin deposits are also reported on a gross basis.

Major Maintenance Activities

In our Energy segment, major maintenance activities (turnarounds) at our two refineries are accounted for under the deferral method. Turnarounds are the scheduled and required shutdowns of refinery processing units. The costs related to the significant overhaul and refurbishment activities include materials and direct labor costs. The costs of turnarounds are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs, which is generally 2 to 4 years. The amortization expense related to turnaround costs is included in cost of goods sold in our Consolidated Statements of Operations. The selection of the deferral method, as opposed to expensing the turnaround costs when incurred, results in deferring recognition of the turnaround expenditures. The deferral method also results in the classification of the related cash outflows as investing activities in our Consolidated Statements of Cash Flows, whereas expensing these costs as incurred would result in classifying the cash outflows as operating activities.    

For the three and nine months ended May 31, 2015, major repairs turnaround expenditures were $137.3 million and $145.6 million, respectively. There were no turnaround expenditures for the nine months ended May 31, 2014.


6


Recent Accounting Pronouncements

In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." The update provides guidance on the disclosures for investments in certain entities that calculate net asset value (NAV) per share (or its equivalent). The amendments remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share (or its equivalent) as a practical expedient. ASU No. 2015-07 is to be applied retrospectively and is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years, with early application permitted. We do not expect the standard to have a material impact on our consolidated financial statements in fiscal 2016.
    
In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis." ASU No. 2015-02 amended the process that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU No. 2015-02 is effective for the annual period ending after December 15, 2015, and for annual periods and interim periods thereafter. Early application is permitted. We are currently evaluating the impact the adoption will have on our consolidated financial statements in fiscal 2017.

In November 2014, the FASB issued ASU No. 2014-16, "Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity." The amendments in this ASU do not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2014-16 is not expected to have a material effect on our consolidated financial statements in fiscal 2016.
    
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers." ASU No. 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. The guidance also requires an entity to disclose sufficient qualitative and quantitative information surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts from customers. This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. The amendments in this standard are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, although the FASB has issued an exposure draft proposing to delay the effective date by one year (though early adoption would be allowed). The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and we are currently evaluating the impact the adoption will have on our consolidated financial statements.

Note 2        Receivables
 
May 31, 2015
 
August 31, 2014
 
(Dollars in thousands)
Trade accounts receivable
$
2,049,338

 
$
2,153,929

CHS Capital notes receivable
754,091

 
633,475

Other
376,949

 
304,798

 
3,180,378

 
3,092,202

Less allowances and reserves
106,647

 
103,639

Total receivables
$
3,073,731

 
$
2,988,563


Trade accounts receivable are initially recorded at a selling price, which approximates fair value, upon the sale of goods or services to customers. Subsequently, trade accounts receivable are carried at net realizable value, which includes an allowance for estimated uncollectible amounts. We calculate this allowance based on our history of write-offs, level of past due accounts, and our relationships with, and the economics status of, our customers.


7


CHS Capital, LLC (CHS Capital), our wholly-owned subsidiary, has notes receivable from commercial borrowers and producer borrowings. The short-term notes receivable generally have terms of 12-14 months and are reported at their outstanding principle balances as CHS Capital has the ability and intent to hold these notes to maturity. The carrying value of CHS Capital notes receivable approximates fair value, given their short duration and the use of market pricing adjusted for risk. The notes receivable from commercial borrowers are collateralized by various combinations of mortgages, personal property, accounts and notes receivable, inventories and assignments of certain regional cooperatives' capital stock. These loans are primarily originated in the states of Minnesota, Wisconsin, North Dakota and Michigan. CHS Capital also has loans receivable from producer borrowers which are collateralized by various combinations of growing crops, livestock, inventories, accounts receivable, personal property and supplemental mortgages. In addition to the short-term amounts included in the table above, CHS Capital had long-term notes receivable with durations of not more than 10 years of $157.1 million and $159.7 million at May 31, 2015 and August 31, 2014, respectively. The long-term notes receivable are included in other assets on our Consolidated Balance Sheets. As of May 31, 2015 and August 31, 2014 the commercial notes represented 45% and 46%, respectively, and the producer notes represented 55% and 54%, respectively, of the total CHS Capital notes receivable.

CHS Capital evaluates the collectability of both commercial and producer notes on a specific identification basis, based on the amount and quality of the collateral obtained, and records specific loan loss reserves when appropriate. A general reserve is also maintained based on historical loss experience and various qualitative factors. In total, our specific and general loan loss reserves related to CHS Capital are not material to our consolidated financial statements, nor are the historical write-offs. The accrual of interest income is discontinued at the time the loan is 90 days past due unless the credit is well-collateralized and in process of collection. The amount of CHS Capital notes that were past due was not material at any reporting date presented.

CHS Capital has commitments to extend credit to a customer as long as there is no violation of any condition established in the contract. As of May 31, 2015, customers of CHS Capital have additional available credit of approximately $1.0 billion.

Note 3        Inventories        
 
May 31, 2015
 
August 31, 2014
 
(Dollars in thousands)
Grain and oilseed
$
1,288,769

 
$
961,327

Energy
864,370

 
875,719

Crop nutrients
298,933

 
374,023

Feed and farm supplies
582,900

 
448,454

Processed grain and oilseed
73,381

 
84,498

Other
10,485

 
16,232

Total inventories
$
3,118,838

 
$
2,760,253


As of May 31, 2015, we valued approximately 18% of inventories, primarily related to Energy, using the lower of cost, determined on the LIFO method, or market (16% as of August 31, 2014). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $194.9 million and $538.7 million at May 31, 2015 and August 31, 2014, respectively. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.


8


Note 4        Investments

As of August 31, 2014, we owned 84.0% of NCRA and with the closings in September 2014, our ownership increased to 88.9%. In fiscal 2012, we entered into an agreement to purchase the remaining shares of NCRA from Growmark Inc. and MFA Oil Company in separate closings to be held annually thereafter, with the final closing occurring on September 1, 2015. Pursuant to this agreement, we made payments during the nine months ended May 31, 2015 and 2014 of $66.0 million and $66.0 million, respectively. The present value of the remaining payments is included as mandatorily redeemable noncontrolling interest on our Consolidated Balance Sheets. In addition to these payments, we paid $16.5 million during the nine months ended May 31, 2014 related to the associated crack spread contingent liability. The fair value of the remaining contingent liability was $109.2 million as of May 31, 2015.

Equity Method Investments

Joint ventures and other investments, in which we have significant ownership and influence, but not control, are accounted for in our consolidated financial statements using the equity method of accounting. Our significant equity method investments are summarized below.

We have a 50% interest in Ventura Foods, LLC (Ventura Foods), a joint venture which produces and distributes primarily vegetable oil-based products, and is included in Corporate and Other. We account for Ventura Foods as an equity method investment, and as of May 31, 2015, our carrying value of Ventura Foods exceeded our share of their equity by $12.9 million, which represents equity method goodwill. As of May 31, 2015, the carrying value of our investment in Ventura Foods was $341.5 million.

In fiscal 2014, we formed Ardent Mills, LLC (Ardent Mills), a joint venture with Cargill Incorporated (Cargill) and ConAgra Foods, Inc., which combines the North American flour milling operations of the three parent companies, giving CHS a 12% interest in Ardent Mills. Prior to closing, we contributed $32.8 million to Horizon Milling, LLC to pay off existing debt as a pre-condition to close. Upon closing, Ardent Mills was financed with funds from third-party borrowings, which did not require credit support from the owners. We received $121.2 million of cash proceeds distributed to us in proportion to our ownership interest, adjusted for deviations in specified working capital target amounts, and recognized a total gain of $109.2 million associated with this transaction. In connection with the closing, the parties also entered into various ancillary and non-compete agreements including, among other things, an agreement for us to supply Ardent Mills with certain wheat products. As we hold one of the five board seats, we account for Ardent Mills as an equity method investment included in Corporate and Other. As of May 31, 2015, the carrying value of our investment in Ardent Mills was $195.2 million.

TEMCO, LLC (TEMCO) is owned and governed by Cargill (50%) and CHS (50%). Both owners have committed to sell all of their feedgrains, wheat, oilseeds and by-product origination that are tributary to the Pacific Northwest, United States (Pacific Northwest) to TEMCO and to use TEMCO as their exclusive export-marketing vehicle for such grains exported through the Pacific Northwest through January 2037. We account for TEMCO as an equity method investment included in our Ag segment. As of May 31, 2015, the carrying value of our investment in TEMCO was $60.0 million.

Other Short-Term Investments

In the first quarter of fiscal 2015, we invested $315.0 million of the proceeds from the September 2014 Class B Series 3 Preferred Stock issuance (see Note 9, Equities for additional information) in time deposits with original maturities of six and nine months with select highly-rated financial institution counterparties. As of May 31, 2015, $145.0 million of these short-term investments had matured and were reconverted into cash and cash equivalents. The remaining $170.0 million of short-term investments are included in other current assets on our Consolidated Balance Sheet.

Note 5        Property, Plant and Equipment

As of May 31, 2015 and August 31, 2014, total property, plant and equipment, net of accumulated depreciation and amortization, was $4.6 billion and $4.0 billion, respectively. The increase in fiscal 2015 is driven by an increase in construction in progress of $540.5 million related primarily to capital projects at our refineries and the fertilizer plant project described below.

In September 2014, our Board of Directors approved plans to begin construction of a nitrogen fertilizer plant located in Spiritwood, North Dakota. We currently estimate the construction costs to be more than $3.0 billion, with the plant anticipated to be operational during calendar year 2018. For additional information about this project, see "Liquidity and Capital Resources." As of May 31, 2015, we have included in construction-in-process approximately $74.4 million related to

9


this project. As required by GAAP, we review long-lived assets for impairment when events or changes in circumstances, including significant changes in actual or expected operating results, indicate that the asset’s carrying value may not be recoverable.

Depreciation expense during the three and nine months ended May 31, 2015 was $75.8 million and $219.0 million, respectively. Depreciation expense during the three and nine months ended May 31, 2014 was $62.4 million and $182.5 million, respectively.

Note 6        Goodwill and Other Intangible Assets

Goodwill of $156.5 million and $158.7 million on May 31, 2015 and August 31, 2014, respectively, is included in other assets on our Consolidated Balance Sheets. Changes in the net carrying amount of goodwill for the nine months ended May 31, 2015, by segment, are as follows:
 
Energy
 
Ag
 
Corporate
and Other
 
Total
 
(Dollars in thousands)
Balances, August 31, 2014
$
552

 
$
151,246

 
$
6,898

 
$
158,696

Goodwill acquired during the period

 
1,213

 

 
1,213

Effect of foreign currency translation adjustments

 
(3,459
)
 

 
(3,459
)
Balances, May 31, 2015
$
552

 
$
149,000

 
$
6,898

 
$
156,450


Intangible assets subject to amortization primarily include customer lists, trademarks and agreements not to compete, and are amortized over their respective useful lives (ranging from 2 to 30 years). Information regarding intangible assets included in other assets on our Consolidated Balance Sheets is as follows:
 
May 31,
2015
 
August 31,
2014
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
(Dollars in thousands)
Customer lists
$
71,244

 
$
(29,658
)
 
$
41,586

 
$
69,862

 
$
(26,114
)
 
$
43,748

Trademarks and other intangible assets
42,409

 
(31,482
)
 
10,927

 
41,293

 
(29,587
)
 
11,706

Total intangible assets
$
113,653

 
$
(61,140
)
 
$
52,513

 
$
111,155

 
$
(55,701
)
 
$
55,454


Total amortization expense for intangible assets during the three and nine months ended May 31, 2015 was $1.8 million and $5.4 million, respectively. Total amortization expense for intangible assets during the three and nine months ended May 31, 2014 was $2.4 million and $7.3 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows:
 
(Dollars in thousands)
Year 1
$
7,195

Year 2
5,996

Year 3
4,712

Year 4
3,767

Year 5
3,543



10


Note 7        Notes Payable and Long-Term Debt

Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with our debt covenants as of May 31, 2015.


May 31, 2015

August 31, 2014

(Dollars in thousands)
Notes payable
$
912,905


$
840,699

CHS Capital notes payable
359,143


318,774

Total notes payable
$
1,272,048


$
1,159,473


On May 31, 2015, our primary line of credit was a five-year revolving facility with a committed amount of $2.5 billion. We had no amounts outstanding as of May 31, 2015 and August 31, 2014.
    
Interest, net for the three and nine months ended May 31, 2015 and 2014 is as follows:
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in thousands)
Interest expense
$
24,365

 
$
23,397

 
$
64,975

 
$
57,823

Interest-purchase of NCRA noncontrolling interests
4,844

 
23,862

 
23,772

 
56,258

Capitalized interest
(17,104
)
 
(2,641
)
 
(41,715
)
 
(6,503
)
Interest income
(2,548
)
 
(2,129
)
 
(7,384
)
 
(5,315
)
Interest, net
$
9,557

 
$
42,489

 
$
39,648

 
$
102,263


In February 2014, we terminated interest rate swaps and recorded a resulting $13.5 million gain as a reduction to interest expense in our Consolidated Statement of Operations for the nine months ended May 31, 2014. See Note 12, Derivative Financial Instruments and Hedging Activities for additional information.

Note 8        Income Taxes

During the three months ended May 31, 2015, our Board of Directors adopted a resolution to treat non-qualified equity certificates issued in fiscal 2014 and fiscal 2013 in the same manner as qualified equity certificates under the “Eligible Producer Member Equity” provision of the Policy for the Redemption of CHS Inc. Equities. Previously we had not established an intent of non-qualified equity certificates revolvement to eligible producer members, thus the tax benefit associated with redemption would have been recognized in future periods as those redemptions occur. As a result of the new resolution, we recorded a $30.7 million deferred tax benefit during the third quarter of fiscal 2015 related to the future redemption, at the discretion of our Board of Directors, of non-qualified equity certificates to eligible producer members.

Note 9        Equities

Preferred Stock

In June 2014, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (SEC). Under the shelf registration, which has been declared effective by the SEC, we may offer and sell, from time to time, up to $2.0 billion of our Class B cumulative redeemable preferred stock over a three-year period.

In September 2014, we issued 19,700,000 shares of Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 (Class B Series 3 Preferred Stock) with a total redemption value of $492.5 million, excluding accumulated dividends. Net proceeds from the sale of our Class B Series 3 Preferred Stock, after deducting the underwriting discount and offering expenses payable by us, were approximately $476.7 million. The Class B Series 3 Preferred Stock is listed on the NASDAQ Stock Market LLC under the symbol CHSCM and accumulates dividends at a rate of 6.75% per year to, but excluding, September 30, 2024, and at a rate equal to the three-month LIBOR plus 4.155%, not to exceed 8.00% per annum thereafter, which are payable quarterly. Our Class B Series 3 Preferred Stock may be redeemed at our option beginning September 30, 2024.

11



In January 2015, we issued 20,700,000 shares of Class B Cumulative Redeemable Preferred Stock, Series 4 (Class B Series 4 Preferred Stock) with a total redemption value of $517.5 million, excluding accumulated dividends. Net proceeds from the sale of our Class B Series 4 Preferred Stock, after deducting the underwriting discount and offering expenses payable by us, were approximately $501.0 million. The Class B Series 4 Preferred Stock is listed on the NASDAQ Stock Market LLC under the symbol CHSCL and accumulates dividends at a rate of 7.50% per year, which are payable quarterly. Our Class B Series 4 Preferred Stock may be redeemed at our option beginning January 21, 2025.
    
Changes in Equities

Changes in equities for the nine months ended May 31, 2015 are as follows:

 
Equity Certificates
 
 
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
 
 
Capital
Equity
Certificates
 
Nonpatronage
Equity
Certificates
 
Nonqualified Equity Certificates
 
Preferred
Stock
 
 
Capital
Reserves
 
Noncontrolling
Interests
 
Total
Equities
 
(Dollars in thousands)
Balances, August 31, 2014
$
3,508,473

 
$
23,256

 
$
284,699

 
$
1,190,177

 
$
(156,757
)
 
$
1,598,660

 
$
18,336

 
$
6,466,844

Reversal of prior year patronage and redemption estimates
(276,966
)
 

 
(148,579
)
 

 

 
810,641

 

 
385,096

Distribution of 2014 patronage refunds
396,443

 

 
147,715

 

 

 
(821,178
)
 

 
(277,020
)
Redemptions of equities
(113,484
)
 
(131
)
 
(453
)
 

 

 
20

 

 
(114,048
)
Equities issued, net
12,365

 

 

 
977,363

 

 

 

 
989,728

Preferred stock dividends

 

 

 

 

 
(105,223
)
 

 
(105,223
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(430
)
 
(430
)
Other, net
(243
)
 

 
(606
)
 

 

 
2,646

 
(6,177
)
 
(4,380
)
Net income

 

 

 

 

 
649,567

 
(504
)
 
649,063

Other comprehensive income (loss), net of tax

 

 

 

 
(3,510
)
 

 

 
(3,510
)
Estimated 2015 cash patronage refunds

 

 

 

 

 
(174,600
)
 

 
(174,600
)
Estimated 2015 equity redemptions
(90,100
)
 

 

 

 

 

 

 
(90,100
)
Balances, May 31, 2015
$
3,436,488

 
$
23,125

 
$
282,776

 
$
2,167,540

 
$
(160,267
)
 
$
1,960,533

 
$
11,225

 
$
7,721,420

    
Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows for the nine months ended May 31, 2015:
 
Pension and Other Postretirement Benefits
 
Unrealized Net Gain on Available for Sale Investments
 
Cash Flow Hedges
 
Foreign Currency Translation Adjustment
 
Total
 
(Dollars in thousands)
Balance as of August 31, 2014
$
(151,852
)
 
$
4,398

 
$
(2,722
)
 
$
(6,581
)
 
$
(156,757
)
Current period other comprehensive income (loss), net of tax
236

 
570

 
(2,418
)
 
(12,295
)
 
(13,907
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
10,026

 

 
371

 

 
10,397

Net other comprehensive income (loss), net of tax
10,262

 
570

 
(2,047
)
 
(12,295
)
 
(3,510
)
Balance as of May 31, 2015
$
(141,590
)
 
$
4,968

 
$
(4,769
)
 
$
(18,876
)
 
$
(160,267
)
    
Amounts reclassified from accumulated other comprehensive income (loss) were primarily related to pension and other postretirement benefits and were recorded to net income. Pension and other postretirement reclassifications include amortization of net actuarial loss, prior service credit and transition amounts as disclosed in Note 10, Benefit Plans.


12


Note 10        Benefit Plans

We have various pension and other defined benefit and defined contribution plans, in which substantially all employees may participate. We also have non-qualified supplemental executive and Board retirement plans.

Components of net periodic benefit costs for the three and nine months ended May 31, 2015 and 2014 are as follows:
 
Qualified
Pension Benefits
 
Non-Qualified
Pension Benefits
 
Other Benefits
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Components of net periodic benefit costs for the three months ended May 31 are as follows:
 (Dollars in thousands)
  Service cost
$
8,889

 
$
7,543

 
$
206

 
$
219

 
$
188

 
$
339

  Interest cost
7,003

 
7,495

 
357

 
423

 
288

 
418

  Expected return on assets
(12,431
)
 
(11,910
)
 

 

 

 

  Prior service cost (credit) amortization
407

 
398

 
57

 
57

 
(30
)
 
(30
)
  Actuarial (gain) loss amortization
4,916

 
4,566

 
272

 
250

 
(342
)
 
(228
)
Net periodic benefit cost
$
8,784

 
$
8,092

 
$
892

 
$
949

 
$
104

 
$
499

Components of net periodic benefit costs for the nine months ended May 31 are as follows:
 

 
 

 
 

 
 

 
 

 
 

  Service cost
$
27,005

 
$
22,812

 
$
656

 
$
646

 
$
1,134

 
$
1,297

  Interest cost
21,019

 
22,433

 
1,061

 
1,245

 
1,118

 
1,439

  Expected return on assets
(37,305
)
 
(35,726
)
 

 

 

 

  Prior service cost (credit) amortization
1,223

 
1,195

 
171

 
171

 
(90
)
 
(90
)
  Actuarial (gain) loss amortization
14,724

 
13,655

 
794

 
718

 
(553
)
 
(415
)
Net periodic benefit cost
$
26,666

 
$
24,369

 
$
2,682

 
$
2,780

 
$
1,609

 
$
2,231


Employer Contributions

Total contributions to be made during fiscal 2015, including the NCRA plan, will depend primarily on market returns on the pension plan assets and minimum funding level requirements. During the nine months ended May 31, 2015, CHS made a voluntary contribution of $29.1 million to the pension plans. At this time, we do not anticipate having to make a required contribution for our benefit plans in fiscal 2015.

Note 11        Segment Reporting

We have aligned our segments based on an assessment of how our businesses are operated and the products and services they sell.

Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag segment purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties, and also serves as a wholesaler and retailer of crop inputs. Corporate and Other primarily represents our non-consolidated wheat milling and packaged food joint ventures, as well as our business solutions operations, which consist of commodities hedging, insurance and financial services related to crop production.

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

Prior to fiscal 2015, our renewable fuels marketing business was included in our Energy segment and our renewable fuels production business was included in our Ag segment. Effective in the first quarter of fiscal 2015, we reorganized certain parts of our business to better align our ethanol supply chain. As a result, our renewable fuels marketing business is now managed together with our renewable fuels production business within our Ag segment. In accordance with ASC Topic 280, Segment Reporting, we have identified our operating segments to reflect the manner in which our chief operating decision maker evaluates performance and manages the business, and we have aggregated those operating segments into our reportable

13


Energy and Ag segments. Prior period segment information below has been revised to reflect this change to ensure comparability.

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

Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds, crop nutrients and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can 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, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.

While our revenues and operating results are derived from businesses and operations which are wholly-owned and majority-owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. In our Ag segment, this principally includes our 50% ownership in TEMCO. In Corporate and Other, these investments principally include our 50% ownership in Ventura Foods and our 12% ownership in Ardent Mills.

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

Segment information for the three and nine months ended May 31, 2015 and 2014 is as follows:

Energy

Ag

Corporate
and Other

Reconciling
Amounts

Total
For the Three Months Ended May 31, 2015:
(Dollars in thousands)
Revenues
$
1,732,192


$
7,088,072


$
17,750


$
(97,109
)

$
8,740,905

Cost of goods sold
1,618,937


6,908,435


(14
)

(97,109
)

8,430,249

Gross profit
113,255


179,637


17,764




310,656

Marketing, general and administrative
37,956


111,438


15,947




165,341

Operating earnings (losses)
75,299


68,199


1,817




145,315

(Gain) loss on investments









Interest, net
(7,678
)

14,478


2,757




9,557

Equity (income) loss from investments
(364
)

(7,964
)

(26,422
)



(34,750
)
Income before income taxes
$
83,341


$
61,685


$
25,482


$


$
170,508

Intersegment revenues
$
(94,092
)

$
(3,017
)

$


$
97,109


$

 
 
 
 
 
 
 
 
 
 

14


 
Energy
 
Ag
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Three Months Ended May 31, 2014:
 
Revenues
$
2,862,239

 
$
9,236,768

 
$
18,195

 
$
(149,804
)
 
$
11,967,398

Cost of goods sold
2,603,480

 
9,007,141

 
(43
)
 
(149,804
)
 
11,460,774

Gross profit
258,759

 
229,627

 
18,238

 

 
506,624

Marketing, general and administrative
37,915

 
102,224

 
18,720

 

 
158,859

Operating earnings (losses)
220,844

 
127,403

 
(482
)
 

 
347,765

(Gain) loss on investments

 

 
(108,792
)
 

 
(108,792
)
Interest, net
23,952

 
15,449

 
3,088

 

 
42,489

Equity (income) loss from investments
(780
)
 
(5,216
)
 
(19,526
)
 

 
(25,522
)
Income before income taxes
$
197,672

 
$
117,170

 
$
124,748

 
$

 
$
439,590

Intersegment revenues
$
(141,501
)
 
$
(8,303
)
 
$

 
$
149,804

 
$

 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Nine Months Ended May 31, 2015:
 

 
 

 
 

 
 

 
 

Revenues
$
6,697,942

 
$
20,231,391

 
$
53,546

 
$
(386,778
)
 
$
26,596,101

Cost of goods sold
6,217,789

 
19,619,374

 
(26
)
 
(386,778
)
 
25,450,359

Gross profit
480,153

 
612,017

 
53,572

 

 
1,145,742

Marketing, general and administrative
118,082

 
321,986

 
58,016

 

 
498,084

Operating earnings (losses)
362,071

 
290,031

 
(4,444
)
 

 
647,658

(Gain) loss on investments

 
(2,875
)
 
(2,199
)
 

 
(5,074
)
Interest, net
(11,121
)
 
43,284

 
7,485

 

 
39,648

Equity (income) loss from investments
(1,440
)
 
(12,427
)
 
(69,681
)
 

 
(83,548
)
Income before income taxes
$
374,632

 
$
262,049

 
$
59,951

 
$

 
$
696,632

Intersegment revenues
$
(374,612
)
 
$
(12,166
)
 
$

 
$
386,778

 
$

Capital expenditures
$
467,700

 
$
305,136

 
$
54,392

 
$

 
$
827,228

Depreciation and amortization
$
104,984

 
$
112,252

 
$
10,087

 
$

 
$
227,323

Total assets at May 31, 2015
$
4,600,786

 
$
8,033,290

 
$
3,085,183

 
$

 
$
15,719,259

 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Nine Months Ended May 31, 2014:
 

 
 

 
 

 
 

 
 

Revenues
$
9,064,748

 
$
24,001,467

 
$
52,403

 
$
(444,825
)
 
$
32,673,793

Cost of goods sold
8,351,509

 
23,418,189

 
(54
)
 
(444,825
)
 
31,324,819

Gross profit
713,239

 
583,278

 
52,457

 

 
1,348,974

Marketing, general and administrative
108,012

 
288,992

 
50,767

 

 
447,771

Operating earnings (losses)
605,227

 
294,286

 
1,690

 

 
901,203

(Gain) loss on investments

 
116

 
(111,517
)
 

 
(111,401
)
Interest, net
54,974

 
39,736

 
7,553

 

 
102,263

Equity (income) loss from investments
(2,937
)
 
(19,906
)
 
(66,406
)
 

 
(89,249
)
Income before income taxes
$
553,190

 
$
274,340

 
$
172,060

 
$

 
$
999,590

Intersegment revenues
$
(436,522
)
 
$
(8,303
)
 
$

 
$
444,825

 
$

Capital expenditures
$
367,044

 
$
250,607

 
$
38,637

 
$

 
$
656,288

Depreciation and amortization
$
99,546

 
$
85,315

 
$
8,300

 
$

 
$
193,161

Total assets at May 31, 2014
$
4,203,832

 
$
7,370,032

 
$
3,371,083

 
$

 
$
14,944,947


Note 12        Derivative Financial Instruments and Hedging Activities

Our derivative instruments primarily consist of commodity and freight futures and forward contracts and, to a minor degree, may include foreign currency and interest rate swap contracts. These contracts are economic hedges of price risk, but are not designated or accounted for as hedging instruments for accounting purposes, with the exception of certain interest rate

15


swap contracts which are accounted for as cash flow or fair value hedges. Derivative instruments are recorded on our Consolidated Balance Sheets at fair value as described in Note 13, Fair Value Measurements.

The following tables present the gross fair values of derivative assets, derivative liabilities, and margin deposits (cash collateral) recorded on the Consolidated Balance Sheets along with the related amounts permitted to be offset in accordance with GAAP. We have elected not to offset derivative assets and liabilities when we have the right of offset under ASC Topic 210-20, Balance Sheet - Offsetting; or when the instruments are subject to master netting arrangements under ASC Topic 815-10-45, Derivatives and Hedging - Overall.
 
May 31, 2015
 
 
 
Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
 
 
 
Gross Amounts Recognized
 
Cash Collateral
 
Derivative Instruments
 
Net Amounts
 
(Dollars in thousands)
Derivative Assets:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
573,592

 
$

 
$
79,969

 
$
493,623

Foreign exchange derivatives
16,783

 

 
7,156

 
9,627

Interest rate derivatives - hedge
14,649

 

 

 
14,649

Total
$
605,024

 
$

 
$
87,125

 
$
517,899

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
500,137

 
$
16,829

 
$
79,969

 
$
403,339

Foreign exchange derivatives
22,887

 

 
7,156

 
15,731

Interest rate derivatives - hedge
6,064

 

 

 
6,064

Interest rate derivatives - non-hedge
84

 

 

 
84

Total
$
529,172

 
$
16,829

 
$
87,125

 
$
425,218


 
August 31, 2014
 
 
 
Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
 
 
 
Gross Amounts Recognized
 
Cash Collateral
 
Derivative Instruments
 
Net Amounts
 
(Dollars in thousands)
Derivative Assets:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
597,210

 
$

 
$
42,229

 
$
554,981

Foreign exchange derivatives
2,523

 

 
1,174

 
1,349

Interest rate derivatives - hedge
4,200

 

 

 
4,200

Total
$
603,933

 
$

 
$
43,403

 
$
560,530

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
597,612

 
$
2,504

 
$
42,229

 
$
552,879

Foreign exchange derivatives
2,248

 

 
1,174

 
1,074

Interest rate derivatives - non-hedge
130

 

 

 
130

Total
$
599,990

 
$
2,504

 
$
43,403

 
$
554,083


16



Derivatives Not Designated as Hedging Instruments

The majority of our derivative instruments have not been designated as hedging instruments. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Consolidated Statements of Operations for the three and nine months ended May 31, 2015 and 2014. We have revised the information that we have historically included in this table below to correct for errors in the previously disclosed amounts. Although such gains and losses have been and continue to be appropriately recorded in the Consolidated Statements of Operations, the previous disclosures did not accurately reflect the derivative gains and losses in each period. These revisions did not materially impact our consolidated financial statements.

 
 
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
Location of
Gain (Loss)
 
2015
 
2014
 
2015
 
2014
 
 
 
(Dollars in thousands)
Commodity and freight derivatives
Cost of goods sold
 
$
113,554

 
$
28,051

 
$
327,745

 
$
178,278

Foreign exchange derivatives
Cost of goods sold
 
4,211

 
(6,487
)
 
12,401

 
(6,681
)
Interest rate derivatives
Interest, net
 
10

 
24

 
84

 
75

Total
 
$
117,775

 
$
21,588

 
$
340,230

 
$
171,672


Commodity and Freight Contracts:
    
As of May 31, 2015 and August 31, 2014, we had outstanding commodity and freight futures that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity and freight contracts accounted for as derivative instruments. We have made revisions to the information that we have historically included in this table below to correct for errors in the previously disclosed amounts. We previously disclosed volume information for physically-settled forward purchase and sale contracts, including some contracts not accounted for as derivatives. As a result, we have corrected the derivative volume disclosure presented below to include information on the notional amounts for contracts accounted for as derivatives in accordance with ASC Topic 815, Derivatives and Hedging. These revisions did not materially impact our previously issued consolidated financial statements.
 
May 31, 2015
 
August 31, 2014
 
Long
 
Short
 
Long
 
Short
 
(Units in thousands)
Grain and oilseed - bushels
614,214

 
819,346
 
655,799

 
802,479
Energy products - barrels
21,777

 
15,569
 
20,191

 
16,431
Processed grain and oilseed- tons
906

 
3,939
 
749

 
3,047
Crop nutrients - tons
84

 
191
 
59

 
126
Ocean and barge freight - metric tons
5,643

 
1,829
 
5,727

 
4,250
Rail freight - rail cars
354

 
175
 
364

 
186
Livestock - pounds
13,800

 
35,680
 
11,960

 
46,520

Foreign Exchange Contracts:

We conduct a substantial portion of our business in U.S. dollars, but we are exposed to some risk relating to foreign currency fluctuations primarily due to grain marketing transactions in South America and Europe and purchases of products from Canada. We use foreign currency derivative instruments to mitigate the impact of exchange rate fluctuations. Although our overall risk relating to foreign currency transactions is not significant, exchange rate fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. The notional amounts of our foreign exchange derivative contracts were $912.4 million and $784.4 million as of May 31, 2015 and August 31, 2014, respectively.


17


Interest Rate Contracts:

CHS Capital, our wholly-owned finance subsidiary, has interest rate swaps that lock the interest rates of underlying loans with a combined notional amount of $3.4 million expiring at various times through fiscal 2018, with $0.1 million of the notional amount expiring during fiscal 2015. None of CHS Capital’s interest rate swaps qualify for hedge accounting, and as a result, changes in fair value are recorded in earnings within interest, net in our Consolidated Statements of Operations.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of May 31, 2015 and August 31, 2014, we had certain derivatives designated as cash flow and fair value hedges.

Interest Rate Contracts:

We have outstanding interest rate swaps with an aggregate notional amount of $420.0 million designated as fair value hedges of portions of our fixed-rate debt. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the 3-month U.S. dollar LIBOR interest rate, in essence converting the fixed-rate debt to variable-rate debt. Offsetting changes in the fair values of both the swap instruments and the hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. During the nine months ended May 31, 2015, we recorded offsetting fair value adjustments of $8.3 million, with no ineffectiveness recorded in earnings.

During the nine months ended May 31, 2015, we entered into interest rate swaps with an aggregate notional amount of $300.0 million designated as cash flow hedges of the expected variability of future interest payments on our anticipated issuance of fixed-rate debt. The swaps expire in fiscal 2016 with no amounts expected to be included in earnings during the next 12 months.

In fiscal 2013, we entered into interest rate swaps designated as cash flow hedges of the expected variability of future interest payments on the forecasted issuance of fixed-rate debt. Gains and losses related to these swaps were initially recorded in accumulated other comprehensive income. In February 2014, the swaps were terminated as the issuance of the underlying debt was no longer probable and, as a result, a $13.5 million pre-tax gain was reclassified into net income in that period.

The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the three and nine months ended May 31, 2015 and 2014.
 
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in thousands)
Interest rate derivatives
 
$
389

 
$

 
$
(3,907
)
 
$
(10,580
)

The following table presents the pretax gains (losses) relating to cash flow hedges that were reclassified from accumulated other comprehensive loss into income for the three and nine months ended May 31, 2015 and 2014.
 
 
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
Location of
Gain (Loss)
 
2015
 
2014
 
2015
 
2014
 
 
 
(Dollars in thousands)
Interest rate derivatives
Interest income (expense)
 
$
(197
)
 
$
(210
)
 
$
(598
)
 
$
12,933


Note 13        Fair Value Measurements

The following tables present assets and liabilities, included on our Consolidated Balance Sheets, that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair values. Assets and liabilities are classified, in their entirety, based on the lowest level of input that is a significant component of the fair value measurement. The lowest level of input is considered Level 3. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.


18


Recurring fair value measurements at May 31, 2015 and August 31, 2014 are as follows:
 
May 31, 2015
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets:
 

 
 

 
 

 
 

Readily marketable inventories
$

 
$
1,227,368

 
$

 
$
1,227,368

Commodity and freight derivatives
72,412

 
501,180

 

 
573,592

Foreign currency derivatives

 
16,783

 

 
16,783

Interest rate swap derivatives

 
14,649

 

 
14,649

Deferred compensation assets
75,723

 

 

 
75,723

Other assets
11,150

 

 

 
11,150

Total
$
159,285

 
$
1,759,980

 
$

 
$
1,919,265

Liabilities:
 

 
 

 
 
 
 

Commodity and freight derivatives
$
131,312

 
$
368,825

 
$

 
$
500,137

Interest rate swap derivatives

 
6,148

 

 
6,148

Foreign currency derivatives

 
22,887

 

 
22,887

Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests

 

 
109,220

 
109,220

Total
$
131,312

 
$
397,860

 
$
109,220

 
$
638,392


 
August 31, 2014
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets:
 
 
 
 
 
 
 
Readily marketable inventories
$

 
$
921,554

 
$

 
$
921,554

Commodity and freight derivatives
78,590

 
518,620

 

 
597,210

Interest rate swap derivatives

 
4,200

 

 
4,200

Foreign currency derivatives
2,523

 

 

 
2,523