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EX-32.2 - EXHIBIT 32.2 - CHS INCex-322022817.htm
EX-32.1 - EXHIBIT 32.1 - CHS INCex-321022817.htm
EX-31.2 - EXHIBIT 31.2 - CHS INCex-312022817.htm
EX-31.1 - EXHIBIT 31.1 - CHS INCex-311022817.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 28, 2017.
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 offices,
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 28, 2017.

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 year ended August 31, 2016. 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 28,
2017
 
August 31,
2016
 
(Dollars in thousands)
ASSETS
 
 
 
Current assets:
 

 


Cash and cash equivalents
$
249,801

 
$
279,313

Receivables
2,697,699

 
2,880,763

Inventories
3,752,218

 
2,370,699

Derivative assets
386,613

 
543,821

Margin deposits
290,291

 
310,276

Supplier advance payments
701,705

 
347,600

Other current assets
200,288

 
202,708

Total current assets
8,278,615

 
6,935,180

Investments
3,802,379

 
3,795,976

Property, plant and equipment
5,404,347

 
5,488,323

Other assets
1,072,824

 
1,092,656

Total assets
$
18,558,165

 
$
17,312,135

LIABILITIES AND EQUITIES
 
 
 
Current liabilities:
 

 
 

Notes payable
$
3,867,438

 
$
2,731,479

Current portion of long-term debt
205,136

 
214,329

Customer margin deposits and credit balances
149,625

 
208,991

Customer advance payments
871,370

 
412,823

Accounts payable
1,877,040

 
1,819,049

Derivative liabilities
275,484

 
513,599

Accrued expenses
378,318

 
422,494

Dividends and equities payable
131,380

 
198,031

Total current liabilities
7,755,791

 
6,520,795

Long-term debt
2,051,567

 
2,082,876

Long-term deferred tax liabilities
516,681

 
487,762

Other liabilities
272,532

 
354,452

Commitments and contingencies


 


Equities:
 

 
 

Preferred stock
2,244,114

 
2,244,132

Equity certificates
4,201,803

 
4,237,174

Accumulated other comprehensive loss
(211,442
)
 
(211,726
)
Capital reserves
1,713,784

 
1,582,380

Total CHS Inc. equities
7,948,259

 
7,851,960

Noncontrolling interests
13,335

 
14,290

Total equities
7,961,594

 
7,866,250

Total liabilities and equities
$
18,558,165

 
$
17,312,135


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 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
 
(Dollars in thousands)
Revenues
$
7,320,406

 
$
6,639,330

 
$
15,368,656

 
$
14,368,122

Cost of goods sold
7,079,664

 
6,550,326

 
14,775,217

 
13,867,300

Gross profit
240,742

 
89,004

 
593,439

 
500,822

Marketing, general and administrative
230,235

 
180,807

 
396,441

 
332,811

Operating earnings (loss)
10,507

 
(91,803
)
 
196,998

 
168,011

(Gain) loss on investments
(2,782
)
 
(3,050
)
 
4,619

 
(8,722
)
Interest expense
39,945

 
25,036

 
78,210

 
34,087

Other income
(14,453
)
 
(9,323
)
 
(58,854
)
 
(11,381
)
Equity (income) loss from investments
(35,800
)
 
(28,004
)
 
(76,128
)
 
(59,366
)
Income (loss) before income taxes
23,597

 
(76,462
)
 
249,151

 
213,393

Income tax expense (benefit)
8,624

 
(46,280
)
 
25,236

 
(22,599
)
Net income (loss)
14,973

 
(30,182
)
 
223,915

 
235,992

Net income (loss) attributable to noncontrolling interests
406

 
797

 
198

 
496

Net income (loss) attributable to CHS Inc. 
$
14,567

 
$
(30,979
)
 
$
223,717

 
$
235,496


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 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
 
(Dollars in thousands)
Net income (loss)
$
14,973

 
$
(30,182
)
 
$
223,915

 
$
235,992

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
     Postretirement benefit plan activity, net of tax expense (benefit) of $2,312, $2,028, $4,323 and $3,789, respectively
3,724

 
3,227

 
6,963

 
6,429

     Unrealized net gain (loss) on available for sale investments, net of tax expense (benefit) of $600, $(805), $1,083 and $(441), respectively
968

 
(1,298
)
 
1,744

 
(739
)
     Cash flow hedges, net of tax expense (benefit) of $598, $(1,354), $1,005 and $(4,050), respectively
963

 
(2,185
)
 
1,618

 
(6,520
)
     Foreign currency translation adjustment, net of tax expense (benefit) of $(204), $0, $5 and $0, respectively
9,123

 
(10,691
)
 
(10,041
)
 
(13,670
)
Other comprehensive income (loss), net of tax
14,778

 
(10,947
)
 
284

 
(14,500
)
Comprehensive income (loss)
29,751

 
(41,129
)
 
224,199

 
221,492

     Less: comprehensive income (loss) attributable to noncontrolling interests
406

 
797

 
198

 
496

Comprehensive income (loss) attributable to CHS Inc. 
$
29,345

 
$
(41,926
)
 
$
224,001

 
$
220,996


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 28, 2017
 
February 29, 2016
 
(Dollars in thousands)
Cash flows from operating activities:
 

 
 

Net income
$
223,915

 
$
235,992

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

 
 

Depreciation and amortization
241,730

 
207,302

Amortization of deferred major repair costs
36,431

 
36,302

(Income) loss from equity investments
(76,128
)
 
(59,366
)
Provision for doubtful accounts
97,113

 
7,060

Distributions from equity investments
86,096

 
54,682

Unrealized (gain) loss on crack spread contingent liability
(12,879
)
 
(51,827
)
Long-lived asset impairment
623

 
8,893

Deferred taxes
22,366

 
(32,979
)
Other, net
24,300

 
9,234

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Receivables
152,926

 
351,629

Inventories
(1,389,281
)
 
(338,016
)
Derivative assets
120,346

 
93,329

Margin deposits
19,985

 
76,397

Supplier advance payments
(354,105
)
 
(457,432
)
Other current assets and other assets
(3,401
)
 
68,811

Customer margin deposits and credit balances
(59,284
)
 
(42,809
)
Customer advance payments
457,095

 
368,834

Accounts payable and accrued expenses
58,427

 
24,729

Derivative liabilities
(239,894
)
 
(193,545
)
Other liabilities
(49,555
)
 
(48,137
)
Net cash provided by (used in) operating activities
(643,174
)
 
319,083

Cash flows from investing activities:
 

 
 

Acquisition of property, plant and equipment
(207,877
)
 
(428,290
)
Proceeds from disposition of property, plant and equipment
6,794

 
5,107

Expenditures for major repairs
(687
)
 
(19,090
)
Investments in joint ventures and other
(5,628
)
 
(2,814,031
)
Proceeds from sale of investments
6,041

 
21,016

Changes in notes receivable, net
(88,629
)
 
4,428

Business acquisitions, net of cash acquired
1,279

 
(10,154
)
Other investing activities, net
3,563

 
(4,068
)
Net cash provided by (used in) investing activities
(285,144
)
 
(3,245,082
)
Cash flows from financing activities:
 

 
 

Proceeds from lines of credit and long-term borrowings
21,159,218

 
11,138,485

Payments on lines of credit, long term-debt and capital lease obligations
(20,062,366
)
 
(8,339,531
)
Mandatorily redeemable noncontrolling interest payments

 
(153,022
)
Payments on crack spread contingent liability

 
(2,625
)
Changes in checks and drafts outstanding
1,388

 
6,802

Preferred stock dividends paid
(83,650
)
 
(80,999
)
Retirements of equities
(13,670
)
 
(10,443
)
Cash patronage dividends paid
(103,879
)
 
(251,535
)
Other financing activities, net
2,551

 
3,148

Net cash provided by (used in) financing activities
899,592

 
2,310,280

Effect of exchange rate changes on cash and cash equivalents
(786
)
 
1,443

Net increase (decrease) in cash and cash equivalents
(29,512
)
 
(614,276
)
Cash and cash equivalents at beginning of period
279,313

 
953,813

Cash and cash equivalents at end of period
$
249,801

 
$
339,537


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 28, 2017, the Consolidated Statements of Operations for the three and six months ended February 28, 2017, and February 29, 2016, the Consolidated Statements of Comprehensive Income for the three and six months ended February 28, 2017, and February 29, 2016, and the Consolidated Statements of Cash Flows for the six months ended February 28, 2017, and February 29, 2016, 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, 2016, 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, Nitrogen Production and Foods reportable segments, as well as our Corporate and Other category, which represents an aggregation of individually immaterial operating segments. The Nitrogen Production reportable segment resulted from our investment in CF Industries Nitrogen, LLC ("CF Nitrogen") in February 2016. The Foods segment resulted from our investment in Ventura Foods, LLC ("Ventura Foods") becoming a significant operating segment in fiscal 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. The effects of all significant intercompany transactions have been eliminated.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 2016, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the "SEC").

Recent Accounting Pronouncements

Adopted

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. The amendments within this ASU eliminate Step 2 of the goodwill impairment test, which currently requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under the amended standard, goodwill impairment will instead be measured using Step 1 of the goodwill impairment test with goodwill impairment being equal to the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU was scheduled to be effective for us beginning September 1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. Early adoption is permitted for any goodwill impairment test performed on testing dates after January 1, 2017. As the amendments within ASU No. 2017-04 are meant to reduce the cost and complexity of evaluating goodwill for impairment, we do not expect the adoption of this ASU to have a material impact on our consolidated financial statements. We have elected to early adopt ASU No. 2017-04 and the amendments described therein will be applied prospectively to all future goodwill impairment tests performed on an interim or annual basis.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which simplifies the presentation of debt issuance costs. This ASU requires the presentation of debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred financing cost. This ASU was effective for us beginning September 1, 2016, for our fiscal year 2017 and for interim periods within that fiscal year. As a result, $5.6 million of deferred issuance costs related to private placement debt and bank financing have been reclassified from other assets to long-term debt as of August 31, 2016.

In August 2015, the FASB issued ASU No. 2015-15, Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which codifies an SEC staff announcement that entities are permitted to defer and present debt issuance costs related to line of credit arrangements as assets. ASU No. 2015-15 was effective immediately. At August 31, 2016, we had unamortized deferred financing costs related

6


to our line of credit arrangements, and we will continue to present debt issuance costs related to line of credit arrangements as an asset in our Consolidated Balance Sheets.

Not Yet Adopted

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Postretirement Benefit Cost. This ASU is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted as of the beginning of an annual period for which interim financial statements have not been issued or made available for issuance. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
    
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The amendments within this ASU narrow the existing definition of a business and provide a more robust framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The definition of a business impacts various areas of accounting, including acquisitions, disposals and goodwill. Under the new guidance, fewer acquisitions are expected to be considered businesses. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted and the guidance should be applied prospectively to transactions following the adoption date. We are currently evaluating the impact the adoption will have on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and presentation of changes in restricted cash on the statement of cash flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted, including in an interim period. The amendments in this ASU should be applied retrospectively to all periods presented. We are currently evaluating the impact the adoption will have on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This ASU is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. We are currently evaluating the impact the adoption will have on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to reduce existing diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted, including in an interim period. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
    
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU introduce a new approach, based on expected losses, to estimate credit losses on certain types of financial instruments. This ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses associated with most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September 1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which replaces the existing guidance in Accounting Standards Codification ("ASC") 840 - Leases. The amendments within this ASU introduce a lessee model requiring entities to recognize assets and liabilities for most leases, but continue recognizing the associated expenses in a manner similar to existing accounting guidance. This ASU does not make fundamental changes to existing lessor accounting; however, it does modify what constitutes a sales-type or direct financing lease and the related accounting, and aligns a number of the underlying principles with those of the new revenue standard, ASU No. 2014-09. The guidance also eliminates existing real estate-specific

7


provisions and requires expanded qualitative and quantitative disclosures. Entities are required to apply the standard’s provisions using a modified retrospective approach at the beginning of the earliest comparative period presented in the year of adoption. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
        
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The amendments within this ASU provide a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU includes a five step model for the recognition of revenue, including (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when (or as) an entity satisfies a performance obligation. This ASU also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14 delaying the effective date of adoption for CHS to September 1, 2018. The FASB issued four subsequent ASUs in 2016 containing implementation guidance related to ASU No. 2014-09, including: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain provision and practical expedients in response to identified implementation issues; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which contains certain corrections and clarifications to increase stakeholders’ awareness of the proposals and to expedite improvements. ASU No. 2014-09 permits the use of either a full or modified retrospective method upon adoption. Although early application as of the original date is permitted, we expect to adopt ASU No. 2014-09 and the related ASUs on September 1, 2018, in the first quarter of fiscal 2019. We are continuing to evaluate the effect this guidance will have on our consolidated financial statements, including potential impacts on the timing of revenue recognition and additional information that may be necessary for expanded disclosures regarding revenue. We have completed an initial assessment of our revenue streams and are currently evaluating the quantitative and qualitative impacts of the new standard on our businesses. We expect to complete our evaluation by the end of fiscal 2017, which will allow us to select an adoption method and determine the impact that the new standard will have on our businesses.

Note 2        Receivables
 
February 28, 2017
 
August 31, 2016
 
(Dollars in thousands)
Trade accounts receivable
$
1,485,693

 
$
1,804,646

CHS Capital notes receivable
957,986

 
858,805

Other
514,777

 
380,956

 
2,958,456

 
3,044,407

Less allowances and reserves
260,757

 
163,644

Total receivables
$
2,697,699

 
$
2,880,763


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 economic status of, our customers. The carrying value of CHS Capital, LLC ("CHS Capital") short-term notes receivable approximates fair value, given the notes' short duration and the use of market pricing adjusted for risk. Other receivables is comprised of certain other amounts recorded in the normal course of business, including receivables related to valued added taxes and production cost financing.

CHS Capital 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 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

8


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 balances included in the table above, CHS Capital had long-term notes receivable with durations of generally not more than 10 years of $315.3 million and $322.4 million at February 28, 2017, and August 31, 2016, respectively. The long-term notes receivable are included in other assets on our Consolidated Balance Sheets. As of February 28, 2017, and August 31, 2016, the commercial notes represented 48% and 26%, respectively, and the producer notes represented 52% and 74%, respectively, of the total CHS Capital notes receivable. As of February 28, 2017, and August 31, 2016, a single producer borrower accounted for 20% of the total outstanding CHS Capital notes receivable. These notes were originated in the midwestern region of the United States and are collateralized by inventories (typically crops), personal property and mortgages which we have access to inspect. No other third party borrower accounted for more than 10% of the total outstanding 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. Further, 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. Past due amounts were approximately 12.1% and 2.5% of the total CHS Capital notes outstanding as of February 28, 2017, and August 31, 2016, respectively.

Specific and general loan loss reserves related to CHS Capital totaled $133.5 million and $45.8 million at February 28, 2017, and August 31, 2016, respectively. Nearly all of the reserve increase was due to an increased reserve associated with the single producer borrower discussed above. In determining the amount of reserve necessary for this producer borrower, we used a probability-weighted model incorporating various assumptions primarily related to the valuation of inventory, personal property and mortgages used as collateral. The reserve represents our best estimate based upon current facts and circumstances. Future market conditions for commodity prices, real estate, and agricultural yields are uncertain and future developments in those market conditions or changes to the assumptions used in the reserve analysis may cause us to record adjustments to the amount of the reserve for this borrower, which adjustments may be material.
CHS Capital has commitments to extend credit to customers as long as there are no violations of any contractually established conditions. As of February 28, 2017, customers of CHS Capital had additional available credit of approximately $806.9 million.


Note 3        Inventories        
 
February 28, 2017
 
August 31, 2016
 
(Dollars in thousands)
Grain and oilseed
$
1,646,960

 
$
937,258

Energy
842,258

 
729,695

Crop nutrients
353,651

 
217,521

Feed and farm supplies
822,975

 
417,431

Processed grain and oilseed
61,732

 
48,930

Other
24,642

 
19,864

Total inventories
$
3,752,218

 
$
2,370,699


As of February 28, 2017, we valued approximately 16% of inventories, primarily related to our Energy segment, using the lower of cost, determined on the LIFO method, or market (19% as of August 31, 2016). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $170.3 million and $93.9 million at February 28, 2017, and August 31, 2016, 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 are subject to the final year-end LIFO inventory valuation.


9


Note 4        Investments
 
2017
 
2016
 
(Dollars in thousands)
Equity method investments:
 
 
 
CF Industries Nitrogen, LLC
$
2,784,459

 
$
2,796,323

Ventura Foods, LLC
370,089

 
369,487

Ardent Mills, LLC
202,671

 
194,986

TEMCO, LLC
41,472

 
44,578

Other equity method investments
273,540

 
263,025

Cost method investments
130,148

 
127,577

Total investments
$
3,802,379

 
$
3,795,976


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. ("CF Industries"). 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 are based on prevailing market prices and we receive semi-annual cash distributions (in January and July of each year) from CF Nitrogen via our membership interest. These distributions are 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 CF Nitrogen's limited liability company agreement, adjusted for the semi-annual cash distributions. For the three months ended February 28, 2017, and February 29, 2016, this amount was $21.6 million and $11.9 million, respectively. For the six months ended February 28, 2017, and February 29, 2016, this amount was $36.3 million and $11.9 million, respectively. These amounts are included as equity income from investments in our Nitrogen Production segment.

We have a 50% interest in Ventura Foods, a joint venture which produces and distributes primarily vegetable oil-based products, and which constitutes our Foods segment. We account for Ventura Foods as an equity method investment, and as of February 28, 2017, our carrying value of Ventura Foods exceeded our share of its equity by $12.9 million, which represents equity method goodwill. The earnings are reported as equity income from investments in our Foods segment.

We have a 12% interest in 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. We account for Ardent Mills as an equity method investment included in Corporate and Other.

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.


10


Note 5        Goodwill and Other Intangible Assets

Goodwill of $159.8 million and $160.4 million on February 28, 2017, and August 31, 2016, 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 28, 2017, by segment, are as follows:
 
Energy
 
Ag
 
Corporate
and Other
 
Total
 
(Dollars in thousands)
Balances, August 31, 2016
$
552

 
$
148,916

 
$
10,946

 
$
160,414

Effect of foreign currency translation adjustments

 
(284
)
 

 
(284
)
Other

 

 
(372
)
 
(372
)
Balances, February 28, 2017
$
552

 
$
148,632

 
$
10,574

 
$
159,758


No goodwill has been allocated to our Nitrogen Production or Foods segments, which consist of investments accounted for under the equity method.
    
Intangible assets subject to amortization primarily include customer lists, trademarks and non-compete agreements, and are amortized over their respective useful lives (ranging from 2 to 30 years). Information regarding intangible assets that are included in other assets on our Consolidated Balance Sheets is as follows:
 
February 28,
2017
 
August 31,
2016
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
(Dollars in thousands)
Customer lists
$
49,379

 
$
(13,899
)
 
$
35,480

 
$
51,554

 
$
(15,550
)
 
$
36,004

Trademarks and other intangible assets
31,569

 
(24,015
)
 
7,554

 
35,015

 
(26,253
)
 
8,762

Total intangible assets
$
80,948

 
$
(37,914
)
 
$
43,034

 
$
86,569

 
$
(41,803
)
 
$
44,766


Total amortization expense for intangible assets during the three and six months ended February 28, 2017, was $1.0 million and $2.3 million, respectively. 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. 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
$
3,991

Year 2
3,989

Year 3
3,810

Year 4
3,526

Year 5
3,423



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 28, 2017.


February 28, 2017

August 31, 2016

(Dollars in thousands)
Notes payable
$
2,983,033


$
1,803,174

CHS Capital notes payable
884,405


928,305

Total notes payable
$
3,867,438


$
2,731,479



11


On February 28, 2017, our primary line of credit was a five-year, unsecured revolving credit facility with a committed amount of $3.0 billion which expires in September 2020. The outstanding balance on this facility was $1.4 billion and $700.0 million as of February 28, 2017 and August 31, 2016, respectively.

During the six months ended February 28, 2017, we re-advanced $130.0 million under the revolving provision of our ten-year term loan with a syndication of banks that was originally arranged in September 2015. The terms of the re-advance are the same as the terms of the original term loan, with principal due on September 4, 2025, and interest calculated at a LIBOR plus an applicable margin ranging between 1.50% and 2.00%.
    
Interest expense for the three months ended February 28, 2017, and February 29, 2016, was $39.9 million and $25.0 million respectively, net of capitalized interest of $1.5 million and $7.2 million, respectively. Interest expense for the six months ended February 28, 2017, and February 29, 2016, was $78.2 million and $34.1 million respectively, net of capitalized interest of $3.1 million and $20.8 million, respectively.

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 28, 2017, $990.0 million of our Class B Cumulative Redeemable Preferred Stock remained available for issuance under the shelf registration statement. We are currently assessing the potential to extend the shelf registration, and will take appropriate action to do so as warranted.

Changes in Equities

Changes in equities for the six months ended February 28, 2017, 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, 2016
$
3,932,513

 
$
22,894

 
$
281,767

 
$
2,244,132

 
$
(211,726
)
 
$
1,582,380

 
$
14,290

 
$
7,866,250

Reversal of prior year redemption estimate
(153,711
)
 

 

 

 

 
278,968

 

 
125,257

Distribution of 2016 patronage refunds
153,589

 

 

 

 

 
(257,468
)
 

 
(103,879
)
Redemptions of equities
(12,792
)
 
(82
)
 
(796
)
 

 

 

 

 
(13,670
)
Equities issued, net
3,123

 

 

 

 

 

 

 
3,123

Preferred stock dividends

 

 

 

 

 
(55,767
)
 

 
(55,767
)
Other, net
(105
)
 
(64
)
 
(26
)
 
(18
)
 

 
3,936

 
(1,153
)
 
2,570

Net income

 

 

 

 

 
223,717

 
198

 
223,915

Other comprehensive income (loss), net of tax

 

 

 

 
284

 

 

 
284

Estimated 2017 cash patronage refunds

 

 

 

 

 
(61,982
)
 

 
(61,982
)
Estimated 2017 equity redemptions
(24,507
)
 

 

 

 

 

 

 
(24,507
)
Balance, February 28, 2017
$
3,898,110

 
$
22,748

 
$
280,945

 
$
2,244,114

 
$
(211,442
)
 
$
1,713,784

 
$
13,335

 
$
7,961,594

    

12


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 28, 2017, and February 29, 2016:
 
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, 2016
$
(165,146
)
 
$
5,656

 
$
(9,196
)
 
$
(43,040
)
 
$
(211,726
)
Current period other comprehensive income (loss), net of tax
(309
)
 
1,744

 
1,077

 
(10,056
)
 
(7,544
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
7,272

 

 
541

 
15

 
7,828

Net other comprehensive income (loss), net of tax
6,963

 
1,744

 
1,618

 
(10,041
)
 
284

Balance as of February 28, 2017
$
(158,183
)
 
$
7,400

 
$
(7,578
)
 
$
(53,081
)
 
$
(211,442
)

 
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
)
    
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).


13


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 28, 2017, and February 29, 2016, are as follows:
 
Qualified
Pension Benefits
 
Non-Qualified
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Components of net periodic benefit costs for the three months ended February 28, 2017, and February 29, 2016, are as follows:
 (Dollars in thousands)
  Service cost
$
11,692

 
$
9,383

 
$
344

 
$
259

 
$
227

 
$
353

  Interest cost
3,812

 
7,691

 
70

 
351

 
39

 
428

  Expected return on assets
(12,101
)
 
(12,013
)
 

 

 

 

  Prior service cost (credit) amortization
368

 
401

 
(47
)
 
57

 
(253
)
 
(30
)
  Actuarial (gain) loss amortization
6,650

 
4,775

 
100

 
173

 
(283
)
 
(116
)
Net periodic benefit cost
$
10,421

 
$
10,237

 
$
467

 
$
840

 
$
(270
)
 
$
635

Components of net periodic benefit costs for the six months ended February 28, 2017, and February 29, 2016, are as follows:
 

 
 

 
 

 
 

 
 

 
 

  Service cost
$
21,075

 
$
18,766

 
$
603

 
$
518

 
$
580

 
$
706

  Interest cost
11,504

 
15,384

 
422

 
703

 
466

 
855

  Expected return on assets
(24,115
)
 
(24,027
)
 

 

 

 

  Prior service cost (credit) amortization
770

 
803

 
10

 
114

 
(283
)
 
(60
)
  Actuarial (gain) loss amortization
11,415

 
9,529

 
273

 
346

 
(399
)
 
(232
)
Net periodic benefit cost
$
20,649

 
$
20,455

 
$
1,308

 
$
1,681

 
$
364

 
$
1,269


Employer Contributions

Total contributions to be made during fiscal 2017 will depend primarily on market returns on the pension plan assets and minimum funding level requirements. During the six months ended February 28, 2017, 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 2017, but we may make a voluntary contribution during the fourth quarter of fiscal 2017.

Note 9        Segment Reporting

We define our operating segments in accordance with ASC Topic 280, Segment Reporting, to reflect the manner in which our chief operating decision maker, our Chief Executive Officer, evaluates performance and allocates resources in managing our business. We have aggregated those operating segments into four reportable segments: Energy, Ag, Nitrogen Production and Foods.

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 solely of our equity method investment in CF Nitrogen, which was completed in February 2016 and which entitles us, pursuant to a supply agreement that we entered into with CF Nitrogen, to purchase granular urea and UAN annually from CF Nitrogen to a specified annual quantity. The addition of our Nitrogen Production segment had no impact on historically reported segment results and balances as this segment came into existence in fiscal 2016. Our Foods segment consists solely of our equity method investment in Ventura Foods. In prior periods, Ventura Foods was reported as a component of Corporate and Other because it was an insignificant operating segment. Historically reported segment results and balances have been revised to reflect the addition of our Foods segment. There were no changes to the composition of our Energy or Ag segments as a result of the addition of our Nitrogen Production and Foods segments. Corporate and Other primarily represents our non-consolidated wheat milling operations, as well as our business

14


solutions operations, which primarily consists of commodities hedging, insurance and financial services related to crop production.

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, such as information technology and legal, and other factors or considerations relevant to the costs incurred.

Many of our business activities are highly seasonal and operating results vary throughout the year. For example, in our Ag segment, our crop nutrients and country operations businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. Our grain marketing operations are also subject to fluctuations in volume and earnings based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and profitability in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and fall 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 and interest 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 28, 2017, and February 29, 2016, is presented in the tables below.

Energy
 
Ag
 
Nitrogen Production
 
Foods
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Three Months Ended February 28, 2017:
(Dollars in thousands)
Revenues
$
1,529,034


$
5,855,331


$

 
$

 
$
31,430


$
(95,389
)

$
7,320,406

Operating earnings (loss)
19,506


(14,291
)

(4,385
)
 
(2,472
)
 
12,149




10,507

(Gain) loss on investments


(690
)


 

 
(2,092
)



(2,782
)
Interest expense
3,565


16,850


12,182

 

 
11,411


(4,063
)

39,945

Other income
(187
)
 
(17,686
)
 
(464
)
 

 
(179
)
 
4,063

 
(14,453
)
Equity (income) loss from investments
(486
)

(3,455
)

(21,557
)
 
(5,561
)
 
(4,741
)



(35,800
)
Income (loss) before income taxes
$
16,614


$
(9,310
)

$
5,454

 
$
3,089

 
$
7,750


$


$
23,597

Intersegment revenues
$
(89,094
)

$
(4,758
)

$

 
$

 
$
(1,537
)

$
95,389


$

 
 
 
 
 
 
 
 
 
 
 
 
 
 

15


 
Energy
 
Ag
 
Nitrogen Production
 
Foods
 
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
)
 
(2,125
)
 
7,198

 

 
(91,803
)
(Gain) loss on investments

 
(42
)
 

 

 
(3,008
)
 

 
(3,050
)
Interest expense
(4,854
)
 
16,485

 
4,737

 
779

 
7,280

 
609

 
25,036

Other income
46

 
(8,493
)
 

 

 
(267
)
 
(609
)
 
(9,323
)
Equity (income) loss from investments
(1,364
)
 
1,355

 
(11,855
)
 
(14,450
)
 
(1,690
)
 

 
(28,004
)
Income (loss) before income taxes
$
(63,127
)
 
$
(31,123
)
 
$
1,359

 
$
11,546

 
$
4,883

 
$

 
$
(76,462
)
Intersegment revenues
$
(67,208
)
 
$
(29,963
)
 
$

 
$

 
$
(1,298
)
 
$
98,469

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Nitrogen Production
 
Foods
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Six Months Ended February 28, 2017:
(Dollars in thousands)
Revenues
$
3,229,214

 
$
12,291,325

 
$

 
$

 
$
58,871

 
$
(210,754
)
 
$
15,368,656

Operating earnings (loss)
92,286

 
95,306

 
(8,414
)
 
(5,269
)
 
23,089

 

 
196,998

(Gain) loss on investments

 
6,695

 

 

 
(2,076
)
 

 
4,619

Interest expense
7,833

 
33,189

 
24,918

 

 
19,385

 
(7,115
)
 
78,210

Other income
(496
)
 
(35,609
)
 
(29,570
)
 

 
(294
)
 
7,115

 
(58,854
)
Equity (income) loss from investments
(1,648
)
 
(8,872
)
 
(36,253
)
 
(18,930
)
 
(10,425
)
 

 
(76,128
)
Income (loss) before income taxes
$
86,597

 
$
99,903

 
$
32,491

 
$
13,661

 
$
16,499

 
$

 
$
249,151

Intersegment revenues
$
(199,181
)
 
$
(8,523
)
 
$

 
$

 
$
(3,050
)
 
$
210,754

 
$

Total assets at February 28, 2017
$
4,388,668

 
$
8,093,289

 
$
2,809,029

 
$
370,089

 
$
2,897,090

 
$

 
$
18,558,165

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Nitrogen Production
 
Foods
 
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
)
 
(4,076
)
 
13,460

 

 
168,011

(Gain) loss on investments

 
(5,714
)
 

 

 
(3,008
)
 

 
(8,722
)
Interest expense
(16,453
)
 
33,267

 
4,737

 
1,601

 
10,935

 

 
34,087

Other income
43

 
(10,305
)
 

 

 
(1,119
)
 

 
(11,381
)
Equity (income) loss from investments
(2,187
)
 
(2,221
)
 
(11,855
)
 
(35,527
)
 
(7,576
)
 

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

 
$
38,146

 
$
1,359

 
$
29,850

 
$
14,228

 
$

 
$
213,393

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

 
$

 
$
(2,414
)
 
$
209,741

 
$



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 we do not apply hedge accounting under ASC Topic 815, Derivatives and Hedging, except with respect to 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 28, 2017
 
 
 
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
$
348,144

 
$

 
$
19,843

 
$
328,301

Foreign exchange derivatives
27,548

 

 
10,317

 
17,231

Interest rate derivatives - hedge
6,892

 

 

 
6,892

Embedded derivative asset - current
4,029

 

 

 
4,029

Total current derivatives
$
386,613

 
$

 
$
30,160

 
$
356,453

Embedded derivative asset - long term
20,540

 

 

 
20,540

Total
$
407,153

 
$

 
$
30,160

 
$
376,993

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
254,618

 
$
80

 
$
19,843

 
$
234,695

Foreign exchange derivatives
18,537

 

 
10,317

 
8,220

Interest rate derivatives - hedge
2,327

 

 

 
2,327

Interest rate derivatives - non-hedge
2

 

 

 
2

Total
$
275,484

 
$
80

 
$
30,160

 
$
245,244


 
August 31, 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
$
500,192

 
$

 
$
23,689

 
$
476,503

Foreign exchange derivatives
21,551

 

 
9,187

 
12,364

Interest rate derivatives - hedge
22,078

 

 

 
22,078

Total
$
543,821

 
$

 
$
32,876

 
$
510,945

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
491,302

 
$
811

 
$
23,689

 
$
466,802

Foreign exchange derivatives
22,289

 

 
9,187

 
13,102

Interest rate derivatives - non-hedge
8

 

 

 
8

Total
$
513,599

 
$
811

 
$
32,876

 
$
479,912


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 28, 2017, and February 29, 2016.

 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
Location of
Gain (Loss)
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
 
 
 
(Dollars in thousands)
Commodity and freight derivatives
Cost of goods sold
 
$
56,896

 
$
54,971

 
$
75,305

 
$
90,017

Foreign exchange derivatives
Cost of goods sold
 
(3,429
)
 
(10,481
)
 
2,595

 
(9,798
)
Foreign exchange derivatives
Marketing, general and administrative
 
(951
)
 
7,605

 
(806
)
 
15,128

Interest rate derivatives
Interest expense
 
1

 
(500
)
 
4

 
(1,203
)
Embedded derivative
Other Income
 
468

 

 
29,574

 

Total
 
$
52,985

 
$
51,595

 
$
106,672

 
$
94,144


Commodity and Freight Contracts:
    
As of February 28, 2017, and August 31, 2016, 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 28, 2017
 
August 31, 2016
 
Long
 
Short
 
Long
 
Short
 
(Units in thousands)
Grain and oilseed - bushels
635,896

 
1,001,200

 
774,279

 
995,396

Energy products - barrels
10,493

 
6,732

 
14,740

 
6,470

Processed grain and oilseed - tons
365

 
2,344

 
541

 
2,060

Crop nutrients - tons
160

 
225

 
108

 
135

Ocean and barge freight - metric tons
5,365

 
727

 
4,406

 
877

Rail freight - rail cars
165

 
51

 
205

 
79

Natural gas - MMBtu
2,467

 

 
3,550

 
300


Foreign Exchange Contracts:

We are exposed to risk regarding foreign currency fluctuations even though a substantial amount of international sales are denominated in U.S. dollars. In addition to specific transactional exposure, foreign currency fluctuations can 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. From time to time, we enter into foreign currency hedge contracts to minimize the impact of currency fluctuations on our transactional exposures. The notional amounts of our foreign exchange derivative contracts were $903.4 million and $802.2 million as of February 28, 2017, and August 31, 2016, respectively.


18


Embedded Derivative Asset:

Under the terms of our strategic investment in CF Nitrogen, if CF Industries' credit rating is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a non-refundable annual payment of $5.0 million from CF Industries. The payment would continue on an annual basis until the date that CF Industries' credit rating is upgraded to or above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier.
During the three months ended November 30, 2016, CF Industries' credit rating was reduced below the specified levels and we recorded a gain of $29.1 million in other income in our Consolidated Statement of Operations. During November 2016 we received a $5.0 million payment from CF Industries, which reduced the fair value of the associated embedded derivative asset to $24.1 million as of November 30, 2016. In addition, during the three months ended February 28, 2017, we recorded adjustments of $0.5 million in other income in our Consolidated Statement of Operations to reflect the $24.6 million fair value of the embedded derivative asset on our Consolidated Balance Sheet as of February 28, 2017. The current and long-term portions of the embedded derivative asset are included in derivative assets and other assets on our Consolidated Balance Sheet, respectively. See Note 11, Fair Value Measurements for more information on the valuation of the embedded derivative.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of February 28, 2017, and August 31, 2016, 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 $495.0 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 28, 2017, and February 29, 2016, we recorded offsetting fair value adjustments of $17.5 million and $11.5 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 the 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. During the third quarter of fiscal 2016, we settled the remaining two interest rate swaps, paying $5.1 million in cash upon their scheduled termination. We did not issue additional fixed-rate debt as previously planned, and we reclassified all amounts previously recorded to other comprehensive income into earnings. As of February 28, 2017, we had no outstanding cash flow hedges.

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 28, 2017, and February 29, 2016.
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
 
 
(Dollars in thousands)
Interest rate derivatives
 
$

 
$
(3,252
)
 
$

 
$
(10,070
)


19


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 28, 2017, and February 29, 2016.
 
 
 
For the Three Months Ended
 
For the Six Months Ended
 
Location of
Gain (Loss)
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
 
 
 
(Dollars in thousands)
Interest rate derivatives
Interest expense
 
$
(436
)
 
$
(275
)
 
$
(877
)
 
$
(465
)


Note 11        Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs or market data that a market participant would obtain from sources independent of the Company to value the asset or liability. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The fair value hierarchy consists of three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Recurring fair value measurements at February 28, 2017, and August 31, 2016, are as follows:
 
February 28, 2017
 
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
$
28,220

 
$
319,924

 
$

 
$
348,144

Foreign currency derivatives

 
27,548

 

 
27,548

Interest rate swap derivatives

 
6,892

 

 
6,892

Deferred compensation assets
50,599

 

 

 
50,599

Embedded derivative asset

 
24,569

 

 
24,569

Other assets
14,133

 

 

 
14,133

Total
$
92,952

 
$
378,933

 
$

 
$
471,885

Liabilities:
 

 
 

 
 
 
 

Commodity and freight derivatives
$
17,960

 
$
236,658

 
$

 
$
254,618

Foreign currency derivatives

 
18,537

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