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EX-10.1 - EXHIBIT 10.1 - CHS INCex-101employmentagreement.htm
EX-10.2 - EXHIBIT 10.2 - CHS INCex-102changeincontrolagree.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 February 29, 2016.
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.
 
 
 
 
 
 
 
 
 
 



Unless the context otherwise requires, for purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company” and “CHS” refer to CHS Inc., a Minnesota cooperative corporation, and its subsidiaries as of February 29, 2016.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains and our other publicly available documents may contain, and our officers, directors and other representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our businesses, financial condition and results of operations, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements are discussed or identified in our public filings made with the U.S. Securities and Exchange Commission ("SEC"), including in the "Risk Factors" discussion in Item 1A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2015. Any forward-looking statements made by us in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date on which the statement is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by applicable law.

1


PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

CHS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
February 29,
2016
 
August 31,
2015
 
(Dollars in thousands)
ASSETS
 
 
 
Current assets:
 

 


Cash and cash equivalents
$
339,537

 
$
953,813

Receivables
2,470,006

 
2,818,110

Inventories
2,999,703

 
2,652,344

Derivative assets
431,851

 
513,441

Margin deposits
196,763

 
273,118

Supplier advance payments
849,079

 
391,504

Other current assets
365,476

 
406,479

Total current assets
7,652,415

 
8,008,809

Investments
3,799,381

 
1,002,092

Property, plant and equipment
5,402,079

 
5,192,927

Other assets
971,133

 
1,024,484

Total assets
$
17,825,008

 
$
15,228,312

LIABILITIES AND EQUITIES
 
 
 
Current liabilities:
 

 
 

Notes payable
$
2,797,758

 
$
1,165,378

Current portion of long-term debt
201,763

 
170,309

Current portion of mandatorily redeemable noncontrolling interest

 
152,607

Customer margin deposits and credit balances
145,339

 
188,149

Customer advance payments
767,174

 
398,341

Checks and drafts outstanding
134,554

 
123,208

Accounts payable
1,718,001

 
1,690,094

Derivative liabilities
287,488

 
470,769

Accrued expenses
467,607

 
513,578

Dividends and equities payable
241,934

 
384,427

Total current liabilities
6,761,618

 
5,256,860

Long-term debt
2,435,191

 
1,260,808

Long-term deferred tax liabilities
551,179

 
580,835

Other liabilities
374,591

 
460,398

Commitments and contingencies


 


Equities:
 

 
 

Preferred stock
2,167,467

 
2,167,540

Equity certificates
4,052,162

 
4,099,882

Accumulated other comprehensive loss
(228,707
)
 
(214,207
)
Capital reserves
1,696,199

 
1,604,670

Total CHS Inc. equities
7,687,121

 
7,657,885

Noncontrolling interests
15,308

 
11,526

Total equities
7,702,429

 
7,669,411

Total liabilities and equities
$
17,825,008

 
$
15,228,312


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
 
For the Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
 
(Dollars in thousands)
Revenues
$
6,639,330

 
$
8,355,728

 
$
14,368,122

 
$
17,855,196

Cost of goods sold
6,550,326

 
8,110,084

 
13,867,300

 
17,017,524

Gross profit
89,004

 
245,644

 
500,822

 
837,672

Marketing, general and administrative
180,807

 
170,775

 
332,811

 
332,743

Operating earnings (loss)
(91,803
)
 
74,869

 
168,011

 
504,929

(Gain) loss on investments
(3,050
)
 
(2,199
)
 
(8,722
)
 
(5,074
)
Interest expense, net
15,713

 
10,771

 
22,706

 
32,677

Equity (income) loss from investments
(28,004
)
 
(24,169
)
 
(59,366
)
 
(48,798
)
Income (loss) before income taxes
(76,462
)
 
90,466

 
213,393

 
526,124

Income tax (benefit) expense
(46,280
)
 
(2,431
)
 
(22,599
)
 
54,896

Net income (loss)
(30,182
)
 
92,897

 
235,992

 
471,228

Net income (loss) attributable to noncontrolling interests
797

 
83

 
496

 
(289
)
Net income (loss) attributable to CHS Inc. 
$
(30,979
)
 
$
92,814

 
$
235,496

 
$
471,517


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
 
For the Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
 
(Dollars in thousands)
Net income (loss)
$
(30,182
)
 
$
92,897

 
$
235,992

 
$
471,228

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
     Postretirement benefit plan activity, net of tax expense (benefit) of $2,028, $2,042, $3,789 and $4,366, respectively
3,227

 
3,275

 
6,429

 
7,006

     Unrealized net gain (loss) on available for sale investments, net of tax expense (benefit) of $(805), $88, $(441) and $476, respectively
(1,298
)
 
143

 
(739
)
 
773

     Cash flow hedges, net of tax expense (benefit) of $(1,354), $(1,336), $(4,050) and $(1,485), respectively
(2,185
)
 
(2,167
)
 
(6,520
)
 
(2,409
)
     Foreign currency translation adjustment
(10,691
)
 
(5,802
)
 
(13,670
)
 
(11,008
)
Other comprehensive income (loss), net of tax
(10,947
)
 
(4,551
)
 
(14,500
)
 
(5,638
)
Comprehensive income (loss)
(41,129
)
 
88,346

 
221,492

 
465,590

     Less: comprehensive income (loss) attributable to noncontrolling interests
797

 
83

 
496

 
(289
)
Comprehensive income (loss) attributable to CHS Inc. 
$
(41,926
)
 
$
88,263

 
$
220,996

 
$
465,879


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 Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
(Dollars in thousands)
Cash flows from operating activities:
 

 
 

Net income
$
235,992

 
$
471,228

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

 
 

Depreciation and amortization
207,302

 
168,306

Amortization of deferred major repair costs
36,302

 
20,442

(Income) loss from equity investments
(59,366
)
 
(48,798
)
Distributions from equity investments
54,682

 
34,761

Noncash patronage dividends received
(4,773
)
 
(3,999
)
(Gain) loss on disposition of property, plant and equipment
(2,462
)
 
(1,520
)
(Gain) loss on investments
(8,722
)
 
(5,074
)
Unrealized (gain) loss on crack spread contingent liability
(51,827
)
 
6,153

Long-lived asset impairment
8,893

 

Deferred taxes
(32,979
)
 
49,723

Other, net
25,191

 
20,483

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Receivables
358,689

 
438,607

Inventories
(338,016
)
 
(913,037
)
Derivative assets
93,329

 
(1,479
)
Margin deposits
76,397

 
11,565

Supplier advance payments
(457,432
)
 
(509,994
)
Other current assets and other assets
68,811

 
33,814

Customer margin deposits and credit balances
(42,809
)
 
(74,746
)
Customer advance payments
368,834

 
595,106

Accounts payable and accrued expenses
24,729

 
(629,850
)
Derivative liabilities
(193,545
)
 
(121,696
)
Other liabilities
(48,137
)
 
(42,171
)
Net cash provided by (used in) operating activities
319,083

 
(502,176
)
Cash flows from investing activities:
 

 
 

Acquisition of property, plant and equipment
(428,290
)
 
(549,930
)
Proceeds from disposition of property, plant and equipment
5,107

 
4,142

Expenditures for major repairs
(19,090
)
 
(7,505
)
Short-term investments, net

 
(315,000
)
Investments in joint ventures and other
(2,814,031
)
 
(57,418
)
Proceeds from sale of investments
21,016

 
8,284

Changes in notes receivable, net
4,428

 
14,363

Business acquisitions, net of cash acquired
(10,154
)
 
(2,371
)
Other investing activities, net
(4,068
)
 
(1,365
)
Net cash provided by (used in) investing activities
(3,245,082
)
 
(906,800
)
Cash flows from financing activities:
 

 
 

Proceeds from lines of credit and long-term borrowings
11,138,485

 
4,124,817

Payments on lines of credit, long term-debt and capital lease obligations
(8,339,531
)
 
(4,090,546
)
Mandatorily redeemable noncontrolling interest payments
(153,022
)
 
(65,981
)
Payments on crack spread contingent liability
(2,625
)
 

Changes in checks and drafts outstanding
6,802

 
28,715

Preferred stock issued

 
1,010,000

Preferred stock issuance costs

 
(32,602
)
Preferred stock dividends paid
(80,999
)
 
(54,759
)
Retirements of equities
(10,443
)
 
(108,723
)
Cash patronage dividends paid
(251,535
)
 
(275,553
)
Other financing activities, net
3,148

 
20

Net cash provided by (used in) financing activities
2,310,280

 
535,388

Effect of exchange rate changes on cash and cash equivalents
1,443

 
2,741

Net increase (decrease) in cash and cash equivalents
(614,276
)
 
(870,847
)
Cash and cash equivalents at beginning of period
953,813

 
2,133,207

Cash and cash equivalents at end of period
$
339,537

 
$
1,262,360


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        Organization, Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The unaudited Consolidated Balance Sheet as of February 29, 2016, the Consolidated Statements of Operations for the three and six months ended February 29, 2016 and February 28, 2015, the Consolidated Statements of Comprehensive Income for the three and six months ended February 29, 2016 and February 28, 2015, and the Consolidated Statements of Cash Flows for the six months ended February 29, 2016 and February 28, 2015, 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, 2015, 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, Ag and Nitrogen Production reportable segments, as well as our Corporate and Other category, which represents an aggregation of individually immaterial operating segments. The Nitrogen Production reportable segment is a new segment resulting from our investment in CF Industries Nitrogen, LLC ("CF Nitrogen") in February 2016. See Note 9, 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. The effects of all significant intercompany transactions have been eliminated.
As of August 31, 2015, we owned approximately 88.9% of National Cooperative Refinery Association ("NCRA"), which operated our McPherson, Kansas refinery and was fully consolidated within our financial statements. In September 2015, our ownership increased to 100% when we purchased the remaining noncontrolling interests in the entity upon the final closing pursuant to the November 2011 agreement described in Note 4, Investments. The entity is now known as CHS McPherson Refinery Inc. ("CHS McPherson").

These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2015, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

Revisions
    
In preparing our consolidated financial statements for the year ended August 31, 2015, we identified immaterial errors that impacted our previously issued consolidated financial statements. The primary errors related to: 1) incorrect application of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 840, Leases to our lease arrangements and 2) inaccurate presentation of non-cash acquisitions of property, plant and equipment and expenditures for major repairs on our Consolidated Statements of Cash Flows. Prior period amounts presented in our consolidated financial statements and the related notes have been revised accordingly, and those revisions are noted where they appear. See Note 13, Correction of Immaterial Errors for a more detailed description of the revisions and for comparisons of amounts previously reported to the revised amounts.

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 10, Derivative Financial Instruments and Hedging Activities and Note 11, 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.


6


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 six months ended February 29, 2016, turnaround expenditures were $0.2 million and $19.1 million, respectively. For the three and six months ended February 28, 2015, turnaround expenditures were $6.2 million and $7.5 million, respectively.

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which replaces the existing guidance in ASC 840 – Leases. This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. This ASU is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. We are currently evaluating the impact the adoption will have on our consolidated financial statements in fiscal 2020.
    
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 clarifies and simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets to be classified as non-current in a classified statement of financial position. The ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early application is permitted. We are currently evaluating the possibility of early adoption, along with the impact the adoption will have on our consolidated financial statements.

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 fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. 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 2017.
    
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 goods 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. In August 2015, the FASB issued ASU 2015-14 delaying the effective date for adoption. This update is now effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application as of the original date is permitted. This update permits the use of either the

7


full or modified retrospective method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.


Note 2        Receivables
 
February 29, 2016
 
August 31, 2015
 
(Dollars in thousands)
Trade accounts receivable
$
1,467,313

 
$
1,793,147

CHS Capital notes receivable
770,906

 
791,413

Other
345,292

 
339,995

 
2,583,511

 
2,924,555

Less allowances and reserves
113,505

 
106,445

Total receivables
$
2,470,006

 
$
2,818,110


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.

CHS Capital, LLC ("CHS Capital"), our wholly owned subsidiary, has notes receivable from commercial and producer borrowers. The short-term notes receivable generally have terms of 12-14 months and are reported at their outstanding principal 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 $178.7 million and $190.4 million at February 29, 2016 and August 31, 2015, respectively. The long-term notes receivable are included in other assets on our Consolidated Balance Sheets. As of February 29, 2016 and August 31, 2015 the commercial notes represented 42% and 34%, respectively, and the producer notes represented 58% and 66%, 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. As of February 29, 2016, a single borrower accounted for 18% of the total outstanding CHS Capital notes receivable. No other individual third party borrower accounted for more than 10% of the total.

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 February 29, 2016, customers of CHS Capital had additional available credit of approximately $995.4 million.



8


Note 3        Inventories        
 
February 29, 2016
 
August 31, 2015
 
(Dollars in thousands)
Grain and oilseed
$
1,035,399

 
$
966,923

Energy
681,554

 
785,116

Crop nutrients
360,869

 
369,105

Feed and farm supplies
841,505

 
465,744

Processed grain and oilseed
61,619

 
48,078

Other
18,757

 
17,378

Total inventories
$
2,999,703

 
$
2,652,344


As of February 29, 2016, we valued approximately 15% of inventories, primarily related to our Energy segment, using the lower of cost, determined on the LIFO method, or market (18% as of August 31, 2015). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $0.4 million and $68.1 million at February 29, 2016 and August 31, 2015, 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. During the six months ended February 29, 2016, we recorded lower of cost or market valuation adjustments of $80.2 million to cost of goods sold to reduce the carrying value of our energy inventory.


Note 4        Investments

As of August 31, 2015, we owned 88.9% of NCRA and with the final closing in September 2015, our ownership increased to 100%. NCRA is now known as CHS McPherson. 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 six months ended February 29, 2016 and February 28, 2015 of $153.0 million and $66.0 million, respectively. In addition to these payments, we paid $2.6 million during the first quarter of fiscal 2016 related to the associated crack spread contingent liability. The fair value of the remaining contingent liability was $24.2 million as of February 29, 2016.

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 primary equity method investments are described below. None of these investments are individually significant such that disclosure of summarized income statement information would be required under Article 10 of Regulation S-X.

On February 1, 2016, we invested $2.8 billion in CF Nitrogen, commencing our strategic venture with CF Industries Holdings, Inc. The investment consists of an 11.4% membership interest (based on product tons) in CF Nitrogen. We also entered into an 80-year supply agreement that entitles us to purchase up to 1.1 million tons of granular urea and 580,000 tons of urea ammonium nitrate ("UAN") annually from CF Nitrogen for ratable delivery. Our purchases under the supply agreement will be based on prevailing market prices and we will subsequently receive semi-annual cash distributions (in January and June of each year) from CF Nitrogen via our membership interest. These distributions will be based on actual volumes purchased from CF Nitrogen under the strategic venture and will have the effect of reducing our investment to zero over 80 years on a straight-line basis. We account for this investment using the hypothetical liquidation at book value method, recognizing our share of the earnings and losses of CF Nitrogen based upon our contractual claims on the entity's net assets pursuant to the liquidation provisions of the LLC Agreement, adjusted for the semi-annual cash distributions. For each of the three and six months ended February 29, 2016, these amounts were $11.9 million and are included as equity income from investments in our Nitrogen Production segment. As of February 29, 2016, the carrying value of our investment in CF Nitrogen was $2.8 billion.

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 February 29, 2016, our carrying value of Ventura Foods exceeded our share of its equity by $12.9

9


million, which represents equity method goodwill. As of February 29, 2016, the carrying value of our investment in Ventura Foods was $355.8 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. 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 February 29, 2016, the carrying value of our investment in Ardent Mills was $190.8 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 February 29, 2016, the carrying value of our investment in TEMCO was $53.5 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 Reset Rate Cumulative Redeemable Preferred Stock, Series 3 ("Class B Series 3 Preferred Stock") issuance (see Note 7, Equities for additional information) in time deposits with original maturities of six and nine months with select highly-rated financial institution counterparties. These investments matured in fiscal 2015 and as of February 29, 2016 and August 31, 2015 we had no outstanding short-term investments.


Note 5        Goodwill and Other Intangible Assets

Goodwill of $154.2 million and $150.1 million on February 29, 2016 and August 31, 2015, respectively, is included in other assets on our Consolidated Balance Sheets. Changes in the net carrying amount of goodwill for the six months ended February 29, 2016, by segment, are as follows:
 
Energy
 
Ag
 
Corporate
and Other
 
Total
 
(Dollars in thousands)
Balances, August 31, 2015
$
552

 
$
142,665

 
$
6,898

 
$
150,115

Goodwill acquired during the period

 
5,667

 

 
5,667

Effect of foreign currency translation adjustments

 
(760
)
 

 
(760
)
Other

 
(782
)
 

 
(782
)
Balances, February 29, 2016
$
552

 
$
146,790

 
$
6,898

 
$
154,240


No goodwill has been allocated to our Nitrogen Production segment, which consists of a single investment accounted for under the equity method.
    
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:
 
February 29,
2016
 
August 31,
2015
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
(Dollars in thousands)
Customer lists
$
63,355

 
$
(28,420
)
 
$
34,935

 
$
70,925

 
$
(30,831
)
 
$
40,094

Trademarks and other intangible assets
40,771

 
(31,789
)
 
8,982

 
42,688

 
(32,134
)
 
10,554

Total intangible assets
$
104,126

 
$
(60,209
)
 
$
43,917

 
$
113,613

 
$
(62,965
)
 
$
50,648


Total amortization expense for intangible assets during the three and six months ended February 29, 2016 was $2.1 million and $3.8 million, respectively. Total amortization expense for intangible assets during the three and six months ended

10


February 28, 2015 was $1.8 million and $3.6 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
$
4,903

Year 2
3,812

Year 3
3,810

Year 4
3,670

Year 5
3,383



Note 6        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 February 29, 2016.


February 29, 2016

August 31, 2015

(Dollars in thousands)
Notes payable
$
2,202,848


$
813,717

CHS Capital notes payable
594,910


351,661

Total notes payable
$
2,797,758


$
1,165,378


In September 2015, we amended and restated our primary line of credit, which is a five-year, unsecured revolving credit facility to, among other things, provide for a committed amount of $3.0 billion that expires in September 2020. The outstanding balance on this facility was $600.0 million as of February 29, 2016; and there was no outstanding balance on the predecessor facility as of August 31, 2015.

In December 2015, we entered into three bilateral, uncommitted revolving credit facilities with an aggregate capacity of $1.3 billion. Amounts borrowed under these short-term lines are used to fund our working capital and bear interest at base rates (or LIBOR rates) plus applicable margins ranging from 0.25% to 1.00%. As of February 29, 2016, outstanding borrowings under these facilities were $667.6 million.

Long-Term Debt

In September 2015, we entered into a ten-year term loan with a syndication of lenders. The agreement provides for committed term loans in an amount up to $600.0 million. Amounts drawn under this agreement that are subsequently repaid or prepaid may not be reborrowed. Principal on the term loans is payable in full on September 4, 2025. Borrowings under the agreement bear interest at a base rate (or a London Interbank Offered Rate ("LIBOR")) plus an applicable margin, or at a fixed rate of interest determined and quoted by the administrative agent under the agreement in its sole and absolute discretion from time to time. The applicable margin is based on our leverage ratio and ranges between 1.50% and 2.00% for LIBOR loans and between 0.50% and 1.00% for base rate loans. As of February 29, 2016, outstanding borrowings under this agreement were $600.0 million.

In January 2016, we consummated a private placement of long-term notes in the aggregate principal amount of $680.0 million with certain accredited investors, which long-term notes are layered into six series. The first series of $152.0 million has an interest rate of 4.39% and is due in January 2023. The second series of $150.0 million has an interest rate of 4.58% and is due in January 2025. The third series of $58.0 million has an interest rate of 4.69% and is due in January 2027. The fourth series of $95.0 million has an interest rate of 4.74% and is due in January 2028. The fifth series of $100.0 million has an interest rate of 4.89% and is due in January 2031. The sixth series of $125.0 million has an interest rate of 5.40% and is due in January 2036.


11


Interest
    
The following table presents the components of interest expense, net for the three and six months ended February 29, 2016 and February 28, 2015. We have revised prior period amounts in this table to include interest expense related to capital lease obligations that were previously accounted for as operating leases. See Note 13, Correction of Immaterial Errors for more information on the nature and amounts of these revisions.
 
For the Three Months Ended
 
For the Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
 
(Dollars in thousands)
Interest expense
$
32,197

 
$
20,855

 
$
54,907

 
$
43,196

Interest-purchase of CHS McPherson noncontrolling interests

 
4,860

 

 
18,928

Capitalized interest
(7,161
)
 
(12,706
)
 
(20,820
)
 
(24,611
)
Interest income
(9,323
)
 
(2,238
)
 
(11,381
)
 
(4,836
)
Interest expense, net
$
15,713

 
$
10,771

 
$
22,706

 
$
32,677



Note 7        Equities

Preferred Stock

In June 2014, we filed a shelf registration statement on Form S-3 with the 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 from the time of effectiveness. As of February 29, 2016, $990.0 million of our Class B Cumulative Redeemable Preferred Stock remained available for issuance under the shelf registration statement.

In September 2014, we issued 19,700,000 shares of 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.

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.
    
In March 2016, we redeemed approximately $76.8 million of patrons' equities by issuing 2,693,195 shares of Class B Cumulative Redeemable Preferred Stock, Series 1 ("Class B Series 1 Preferred Stock"), with a total redemption value of $67.3 million, excluding accumulated dividends. Each share of Class B Series 1 Preferred Stock was issued in redemption of $28.50 of patrons' equities in the form of members' equity certificates. The Class B Series 1 Preferred Stock is listed on the NASDAQ Stock Market LLC under the symbol CHSCO and accumulates dividends at a rate of 7.785% per year, which are payable quarterly. Our Class B Series 1 Preferred Stock may be redeemed at our option beginning September 26, 2023.


12


Changes in Equities

Changes in equities for the six months ended February 29, 2016 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)
Balance, August 31, 2015
$
3,793,897

 
$
23,057

 
$
282,928

 
$
2,167,540

 
$
(214,207
)
 
$
1,604,670

 
$
11,526

 
$
7,669,411

Reversal of prior year patronage and redemption estimates
(364,824
)
 

 

 

 

 
625,444

 

 
260,620

Distribution of 2015 patronage refunds
375,330

 

 

 

 

 
(626,865
)
 

 
(251,535
)
Redemptions of equities
(10,136
)
 
(50
)
 
(257
)
 

 

 

 

 
(10,443
)
Equities issued, net
16,565

 

 

 

 

 

 

 
16,565

Preferred stock dividends

 

 

 

 

 
(80,999
)
 

 
(80,999
)
Other, net
665

 
(20
)
 
(313
)
 
(73
)
 

 
(8,101
)
 
3,286

 
(4,556
)
Net income

 

 

 

 

 
235,496

 
496

 
235,992

Other comprehensive income (loss), net of tax

 

 

 

 
(14,500
)
 

 

 
(14,500
)
Estimated 2016 cash patronage refunds

 

 

 

 

 
(53,446
)
 

 
(53,446
)
Estimated 2016 equity redemptions
(64,680
)
 

 

 

 

 

 

 
(64,680
)
Balance, February 29, 2016
$
3,746,817

 
$
22,987

 
$
282,358

 
$
2,167,467

 
$
(228,707
)
 
$
1,696,199

 
$
15,308

 
$
7,702,429

    
Accumulated Other Comprehensive Loss        

Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows for the six months ended February 29, 2016 and February 28, 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, 2015
$
(171,729
)
 
$
4,156

 
$
(5,324
)
 
$
(41,310
)
 
$
(214,207
)
Current period other comprehensive income (loss), net of tax
12,877

 
(739
)
 
(6,233
)
 
(13,670
)
 
(7,765
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
(6,448
)
 

 
(287
)
 

 
(6,735
)
Net other comprehensive income (loss), net of tax
6,429

 
(739
)
 
(6,520
)
 
(13,670
)
 
(14,500
)
Balance as of February 29, 2016
$
(165,300
)
 
$
3,417

 
$
(11,844
)
 
$
(54,980
)
 
$
(228,707
)

 
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

 
773

 
(2,658
)
 
(11,008
)
 
(12,657
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
6,770

 

 
249

 

 
7,019

Net other comprehensive income (loss), net of tax
7,006

 
773

 
(2,409
)
 
(11,008
)
 
(5,638
)
Balance as of February 28, 2015
$
(144,846
)
 
$
5,171

 
$
(5,131
)
 
$
(17,589
)
 
$
(162,395
)

13


    
Amounts reclassified from accumulated other comprehensive income (loss) were primarily related to pension and other postretirement benefits. Pension and other postretirement reclassifications include amortization of net actuarial loss, prior service credit and transition amounts and are recorded as marketing, general and administrative expenses (see Note 8, Benefit Plans for further information).


Note 8        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 six months ended February 29, 2016 and February 28, 2015 are as follows:
 
Qualified
Pension Benefits
 
Non-Qualified
Pension Benefits
 
Other Benefits
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Components of net periodic benefit costs for the three months ended February 29, 2016 and February 28, 2015 are as follows:
 (Dollars in thousands)
  Service cost
$
9,383

 
$
9,058

 
$
259

 
$
225

 
$
353

 
$
474

  Interest cost
7,691

 
7,002

 
351

 
352

 
428

 
415

  Expected return on assets
(12,013
)
 
(12,436
)
 

 

 

 

  Prior service cost (credit) amortization
401

 
409

 
57

 
57

 
(30
)
 
(30
)
  Actuarial (gain) loss amortization
4,775

 
4,907

 
173

 
261

 
(116
)
 
(106
)
Net periodic benefit cost
$
10,237

 
$
8,940

 
$
840

 
$
895

 
$
635

 
$
753

Components of net periodic benefit costs for the six months ended February 29, 2016 and February 28, 2015 are as follows:
 

 
 

 
 

 
 

 
 

 
 

  Service cost
$
18,766

 
$
18,116

 
$
518

 
$
450

 
$
706

 
$
946

  Interest cost
15,384

 
14,016

 
703

 
704

 
855

 
830

  Expected return on assets
(24,027
)
 
(24,874
)
 

 

 

 

  Prior service cost (credit) amortization
803

 
816

 
114

 
114

 
(60
)
 
(60
)
  Actuarial (gain) loss amortization
9,529

 
9,808

 
346

 
522

 
(232
)
 
(211
)
Net periodic benefit cost
$
20,455

 
$
17,882

 
$
1,681

 
$
1,790

 
$
1,269

 
$
1,505


Employer Contributions

Total contributions to be made during fiscal 2016, will depend primarily on market returns on the pension plan assets and minimum funding level requirements. During the six months ended February 29, 2016, we made no contributions to the pension plans. At this time, we do not anticipate having to make a required contribution for our benefit plans in fiscal 2016, but we may make a voluntary contribution during the fourth quarter of fiscal 2016.


Note 9        Segment Reporting

We have aligned our segments in accordance with ASC Topic 280, Segment Reporting, and have identified our operating segments to reflect the manner in which our chief operating decision maker, our Chief Executive Officer, evaluates performance and manages the business. We have aggregated those operating segments into our reportable Energy, Ag and Nitrogen Production segments.

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, serves as a wholesaler and retailer of crop inputs and produces and markets ethanol. Our Nitrogen Production segment consists of our recently completed equity method

14


investment in CF Nitrogen which entitles us to purchase granular urea and UAN annually from CF Nitrogen on a ratable basis. There were no changes to the composition of our Energy and Ag segments as a result of this investment, and there were no impacts to historically reported segment results and balances. 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.

Corporate administrative expenses and interest are allocated to each business segment, and Corporate and Other, based on direct usage for services that can be tracked, 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. 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, ethanol, 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, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.

While our revenues and operating results are derived from businesses and operations which are wholly owned and majority owned, a portion of our business operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. See Note 4, Investments for more information on these entities.

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 six months ended February 29, 2016 and February 28, 2015 is presented in the tables below. We have revised prior period amounts in these tables to include activity and amounts related to capital leases that were previously accounted for as operating leases. See Note 13, Correction of Immaterial Errors for more information on the nature and amounts of these revisions.

Energy
 
Ag
 
Nitrogen Production
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Three Months Ended February 29, 2016:
(Dollars in thousands)
Revenues
$
1,134,148


$
5,580,450


$

 
$
23,201


$
(98,469
)

$
6,639,330

Operating earnings (loss)
(69,299
)

(21,818
)

(5,759
)
 
5,073




(91,803
)
(Gain) loss on investments


(42
)


 
(3,008
)



(3,050
)
Interest (income) expense, net
(4,808
)

7,992


4,737

 
7,792




15,713

Equity (income) loss from investments
(1,364
)

1,355


(11,855
)
 
(16,140
)



(28,004
)
Income (loss) before income taxes
$
(63,127
)

$
(31,123
)

$
1,359

 
$
16,429


$


$
(76,462
)
Intersegment revenues
$
(67,208
)

$
(29,963
)

$

 
$
(1,298
)

$
98,469


$

 
 
 
 
 
 
 
 
 
 
 
 

15


 
Energy
 
Ag
 
Nitrogen Production
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Three Months Ended February 28, 2015:
(Dollars in thousands)
Revenues
$
1,947,297

 
$
6,503,348

 
$

 
$
15,813

 
$
(110,730
)
 
$
8,355,728

Operating earnings (loss)
4,244

 
72,143

 

 
(1,518
)
 


 
74,869

(Gain) loss on investments

 

 

 
(2,199
)
 

 
(2,199
)
Interest (income) expense, net
(7,075
)
 
15,485

 

 
2,361

 

 
10,771

Equity (income) loss from investments
(736
)
 
(4,443
)
 

 
(18,990
)
 

 
(24,169
)
Income (loss) before income taxes
$
12,055

 
$
61,101

 
$

 
$
17,310

 
$

 
$
90,466

Intersegment revenues
$
(101,581
)
 
$
(9,149
)
 
$

 
$

 
$
110,730

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Nitrogen Production
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Six Months Ended February 29, 2016:
(Dollars in thousands)
Revenues
$
2,840,061

 
$
11,694,706

 
$

 
$
43,096

 
$
(209,741
)
 
$
14,368,122

Operating earnings (loss)
111,213

 
53,173

 
(5,759
)
 
9,384

 

 
168,011

(Gain) loss on investments

 
(5,714
)
 

 
(3,008
)
 

 
(8,722
)
Interest (income) expense, net
(16,410
)
 
22,962

 
4,737

 
11,417

 

 
22,706

Equity (income) loss from investments
(2,187
)
 
(2,221
)
 
(11,855
)
 
(43,103
)
 

 
(59,366
)
Income (loss) before income taxes
$
129,810

 
$
38,146

 
$
1,359

 
$
44,078

 
$

 
$
213,393

Intersegment revenues
$
(174,311
)
 
$
(33,016
)
 
$

 
$
(2,414
)
 
$
209,741

 
$

Capital expenditures
$
228,351

 
$
160,031

 
$

 
$
39,908

 
$

 
$
428,290

Depreciation and amortization
$
86,512

 
$
111,040

 
$

 
$
9,750

 
$

 
$
207,302

Total assets at February 29, 2016
$
4,404,693

 
$
7,710,441

 
$
2,812,849

 
$
2,897,025

 
$

 
$
17,825,008

 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Nitrogen Production
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Six Months Ended February 28, 2015:
(Dollars in thousands)
Revenues
$
4,965,750

 
$
13,143,319

 
$

 
$
35,796

 
$
(289,669
)
 
$
17,855,196

Operating earnings (loss)
287,147

 
224,031

 

 
(6,249
)
 

 
504,929

(Gain) loss on investments

 
(2,875
)
 

 
(2,199
)
 

 
(5,074
)
Interest (income) expense, net
(3,068
)
 
31,005

 

 
4,740

 

 
32,677

Equity (income) loss from investments
(1,076
)
 
(4,463
)
 

 
(43,259
)
 

 
(48,798
)
Income (loss) before income taxes
$
291,291

 
$
200,364

 
$

 
$
34,469

 
$

 
$
526,124

Intersegment revenues
$
(280,520
)
 
$
(9,149
)
 
$

 
$

 
$
289,669

 
$

Capital expenditures
$
307,028

 
$
216,418

 
$

 
$
26,484

 
$

 
$
549,930

Depreciation and amortization
$
71,112

 
$
90,714

 
$

 
$
6,480

 
$

 
$
168,306

Total assets at February 28, 2015
$
4,347,109

 
$
8,354,500

 
$

 
$
3,413,015

 
$

 
$
16,114,624



Note 10        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 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 11, Fair Value Measurements.


16


The following tables present the gross fair values of derivative assets, derivative liabilities, and margin deposits (cash collateral) recorded on our 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.
 
February 29, 2016
 
 
 
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
$
384,185

 
$

 
$
29,619

 
$
354,566

Foreign exchange derivatives
23,971

 

 
12,668

 
11,303

Interest rate derivatives - hedge
23,695

 

 

 
23,695

Total
$
431,851

 
$

 
$
42,287

 
$
389,564

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
261,710

 
$
17,589

 
$
29,619

 
$
214,502

Foreign exchange derivatives
22,041

 

 
12,668

 
9,373

Interest rate derivatives - hedge
3,718

 

 

 
3,718

Interest rate derivatives - non-hedge
19

 

 

 
19

Total
$
287,488

 
$
17,589

 
$
42,287

 
$
227,612


 
August 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
$
476,071

 
$

 
$
58,401

 
$
417,670

Foreign exchange derivatives
23,154

 

 
11,682

 
11,472

Interest rate derivatives - hedge
14,216

 

 

 
14,216

Total
$
513,441

 
$

 
$
70,083

 
$
443,358

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
427,052

 
$
11,482

 
$
58,401

 
$
357,169

Foreign exchange derivatives
37,598

 

 
11,682

 
25,916

Interest rate derivatives - hedge
6,058

 

 

 
6,058

Interest rate derivatives - non-hedge
61

 

 

 
61

Total
$
470,769

 
$
11,482

 
$
70,083

 
$
389,204


17



Derivatives Not Designated as Hedging Instruments

The majority of our derivative instruments have not been designated as hedging instruments for accounting purposes. 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 six months ended February 29, 2016 and February 28, 2015. We have revised the information that we have historically included in this table below to correct for immaterial 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 disclosure revisions did not materially impact our consolidated financial statements.

 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
Location of
Gain (Loss)
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
 
 
 
(Dollars in thousands)
Commodity and freight derivatives
Cost of goods sold
 
$
54,971

 
$
38,861

 
$
90,017

 
$
112,544

Foreign exchange derivatives
Cost of goods sold
 
(10,481
)
 
6,118

 
(9,798
)
 
16,442

Foreign exchange derivatives
Marketing, general and administrative
 
7,605

 
(271
)
 
15,128

 
(8,252
)
Interest rate derivatives
Interest, net
 
(500
)
 
45

 
(1,203
)
 
74

Total
 
$
51,595

 
$
44,753

 
$
94,144

 
$
120,808


Commodity and Freight Contracts:
    
As of February 29, 2016 and August 31, 2015, we had outstanding commodity futures, options and freight contracts 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.
 
February 29, 2016
 
August 31, 2015
 
Long
 
Short
 
Long
 
Short
 
(Units in thousands)
Grain and oilseed - bushels
572,707

 
773,130

 
711,066

 
895,326

Energy products - barrels
15,990

 
8,665

 
17,238

 
11,676

Processed grain and oilseed - tons
725

 
1,995

 
706

 
2,741

Crop nutrients - tons
24

 
12

 
48

 
116

Ocean and barge freight - metric tons
3,687

 
2,159

 
5,916

 
1,962

Rail freight - rail cars
193

 
78

 
297

 
122

Natural gas - MMBtu
6,740

 

 

 


Foreign Exchange Contracts:

We conduct a substantial portion of our business in U.S. dollars, but we are exposed to immaterial risks 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 $711.2 million and $1.3 billion as of February 29, 2016 and August 31, 2015, respectively.



18


Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of February 29, 2016 and August 31, 2015, 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 six months ended February 29, 2016 and February 28, 2015, we recorded offsetting fair value adjustments of $11.5 million and $8.2 million, respectively, with no ineffectiveness recorded in earnings.

In fiscal 2015, we entered into forward-starting 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. During the first quarter of fiscal 2016, we determined that certain of the anticipated debt issuances would be delayed; and we consequently recorded an immaterial amount of losses on the ineffective portion of the related swaps in earnings. Additionally, we paid $6.4 million in cash to settle two of the interest rate swaps upon their scheduled termination dates. During the second quarter of fiscal 2016, we settled an additional two interest rate swaps, paying $5.3 million in cash upon their scheduled termination. In January 2016, we issued the fixed-rate debt associated with these swaps and will amortize the amounts which were previously deferred to other comprehensive income into earnings over the life of the debt. The amounts to be included in earnings are not expected to be material during any 12-month period. As of February 29, 2016, we had two remaining interest rate swaps with an aggregate notional amount of $100.0 million. Based on new developments in March 2016, we have re-evaluated the likelihood of the associated forecasted debt issuance from "probable" to "reasonably possible." Consequently, we will discontinue the application of cash flow hedge accounting on a prospective basis and future changes in the fair values of the derivatives will be recorded in earnings. Because the issuance of the debt remains likely to occur, amounts previously deferred will remain in accumulated other comprehensive income until the debt issuance occurs or becomes probable not to occur. The remaining swaps expire in fiscal 2016 with immaterial amounts expected to be included in earnings during the next 12 months.

The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the three and six months ended February 29, 2016 and February 28, 2015.
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
 
 
(Dollars in thousands)
Interest rate derivatives
 
$
(3,252
)
 
$
(3,702
)
 
$
(10,070
)
 
$
(4,296
)

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 six months ended February 29, 2016 and February 28, 2015.
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
Location of
Gain (Loss)
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
 
 
 
(Dollars in thousands)
Interest rate derivatives
Interest income (expense)
 
$
(275
)
 
$
(199
)
 
$
(465
)
 
$
(402
)



19


Note 11        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.

Recurring fair value measurements at February 29, 2016 and August 31, 2015 are as follows:
 
February 29, 2016
 
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:
 

 
 

 
 

 
 

Commodity and freight derivatives
$
25,609

 
$
358,576

 
$

 
$
384,185

Foreign currency derivatives

 
23,971

 

 
23,971

Interest rate swap derivatives

 
23,695

 

 
23,695

Deferred compensation assets
70,710

 

 

 
70,710

Other assets
10,579

 

 

 
10,579

Total
$
106,898

 
$
406,242

 
$

 
$
513,140

Liabilities:
 

 
 

 
 
 
 

Commodity and freight derivatives
$
43,705

 
$
218,005

 
$

 
$
261,710

Foreign currency derivatives

 
22,041

 

 
22,041

Interest rate swap derivatives

 
3,737

 

 
3,737

Crack spread contingent consideration liability

 

 
24,155

 
24,155

Total
$
43,705

 
$
243,783