Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - CHS INCex-32283117.htm
EX-32.1 - EXHIBIT 32.1 - CHS INCex-32183117.htm
EX-31.2 - EXHIBIT 31.2 - CHS INCex-31283117.htm
EX-31.1 - EXHIBIT 31.1 - CHS INCex-31183117.htm
EX-24.1 - EXHIBIT 24.1 - CHS INCex-24183117.htm
EX-23.1 - EXHIBIT 23.1 - CHS INCex-23183117.htm
EX-21.1 - EXHIBIT 21.1 - CHS INCex-21183117.htm
EX-10.37 - EXHIBIT 10.37 - CHS INCex-1037reaffirmationperforma.htm
EX-10.35A - EXHIBIT 10.35A - CHS INCex-1035aamendedandrestated.htm
EX-10.33B - EXHIBIT 10.34B - CHS INCex-1034bamendmentno2salean.htm
EX-10.16 - EXHIBIT 10.16 - CHS INCex-1016chsincsltretentiona.htm
EX-10.13B - EXHIBIT 10.13B - CHS INCex-1013bdeferredcompensation.htm
EX-10.5G - EXHIBIT 10.5G - CHS INCex-105gltiplan2018x2020.htm
EX-10.5F - EXHIBIT 10.5F - CHS INCex-105ftiplan2017x2019app.htm
EX-10.5E - EXHIBIT 10.5E - CHS INCex-105eltiplan2016x2018app.htm
EX-10.5D - EXHIBIT 10.5D - CHS INCex-105dltimasterplandoc2018.htm
EX-10.5C - EXHIBIT 10.5C - CHS INCex-105cltiplan2015x2017app.htm
EX-10.5B - EXHIBIT 10.5B - CHS INCex-105b2017ltimasterplandoc.htm
EX-10.5A - EXHIBIT 10.5A - CHS INCex-105altiplan2014x2016app.htm
EX-10.5 - EXHIBIT 10.5 - CHS INCex-105chslti2016mpd.htm
EX-10.4B - EXHIBIT 10.4B - CHS INCex-104bavpappendixb.htm
EX-10.4A - EXHIBIT 10.4A - CHS INCex-104aavpappendixa.htm
EX-10.4 - EXHIBIT 10.4 - CHS INCex-1042017avpmpd.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
Form 10-K
________________________________________
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended
August 31, 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 office,
including zip code)
 
(651) 355-6000
 (Registrant’s telephone number,
including area code)
________________________________________

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
8% Cumulative Redeemable Preferred Stock
 
The NASDAQ Stock Market LLC
Class B Cumulative Redeemable Preferred Stock, Series 1
 
The NASDAQ Stock Market LLC
Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2
 
The NASDAQ Stock Market LLC
Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3
 
The NASDAQ Stock Market LLC
Class B Cumulative Redeemable Preferred Stock, Series 4
 
The NASDAQ Stock Market LLC
(Title of Class)
 
(Name of Each Exchange on Which Registered)
________________________________________

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO þ

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o NO þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: þ

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

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter:

The Registrant has no voting or non-voting common equity (the Registrant is a member cooperative).

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.

DOCUMENTS INCORPORATED BY REFERENCE
None.
 



INDEX
 
 
Page
No.
 
 
 
 
 
 
 
 
 



PART I.

ITEM 1.    BUSINESS

THE COMPANY

CHS Inc. (referred to herein as “CHS,” “we” or “us”) is the nation’s leading integrated agricultural cooperative, providing grain, foods and energy resources to businesses and consumers on a global basis. As a cooperative, we are owned by farmers and ranchers and their member cooperatives (referred to herein as “members”) across the United States. We also have preferred shareholders that own shares of our five series of preferred stock, which are each listed and traded on the NASDAQ Global Select Market. We buy commodities from and provide products and services to individual agricultural producers, local cooperatives and other companies (including our members and other non-member customers), both domestically and internationally. We provide a wide variety of products and services, from initial agricultural inputs such as fuels, farm supplies, crop nutrients and crop protection products, to agricultural outputs that include grains and oilseeds, grain and oilseed processing, renewable fuels and food products. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consolidated with our results; rather, a proportionate share of the income or loss from those equity investments and joint ventures is included as a component in our net income under the equity method of accounting. For the year ended August 31, 2017, our total revenues were $31.9 billion and net income attributable to CHS Inc. was $127.9 million.

We have aligned our segments based on an assessment of how our businesses operate and the products and services they sell. Our Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. Our Ag segment derives its revenues through the origination and marketing of grain, including: service activities conducted at export terminals; through wholesale sales of crop nutrients; from sales of soybean meal, soybean refined oil and soyflour products; through the production and marketing of renewable fuels; and through retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies. Our Ag segment also records equity income from our grain export joint venture and other investments. Our Nitrogen Production segment consists solely of, and came into existence upon, our equity method investment in CF Industries Nitrogen, LLC (“CF Nitrogen”), which was completed in February 2016. The addition of our Nitrogen Production segment did not have any impact on historically reported segment results and balances. Our Foods segment consists solely of our equity method investment in Ventura Foods, LLC (“Ventura Foods”). Prior to August 31, 2016, our equity method investment in Ventura Foods was reported as a component of Corporate and Other and, accordingly, reported segment results and balances prior to that time have been revised to reflect the addition of our Foods segment. We include our other business operations in Corporate and Other because of the nature of their products and services, as well as the relative revenues of those businesses. These businesses primarily include our financing, insurance, hedging and other service activities related to crop production. In addition, our wheat milling operations, which are conducted through non-consolidated joint ventures, are included in Corporate and Other.

Our earnings from cooperative business are allocated to members (and to a limited extent, to non-members with which we have agreed to do business on a patronage basis) based on the volume of business they do with us. We allocate these earnings to our patrons in the form of patronage refunds (which are also called patronage dividends), which may be in cash, patrons’ equities (in the form of capital equity certificates), or both. Patrons' equities may be redeemed over time solely at the discretion of our Board of Directors. Earnings derived from non-members, which are not treated as patronage, are taxed at federal and state statutory corporate rates and are retained by us as unallocated capital reserve. We also receive patronage refunds from the cooperatives in which we are a member, if those cooperatives have earnings to distribute and if we qualify for patronage refunds from them.

Our origins date back to the early 1930s with the founding of our predecessor companies, Cenex, Inc. and Harvest States Cooperatives. CHS Inc. emerged as the result of the merger of those two entities in 1998, and is headquartered in Inver Grove Heights, Minnesota.

Our segment and international sales information in Note 11, Segment Reporting, of notes to consolidated financial statements that are included in this Annual Report on Form 10-K are incorporated by reference into the following segment descriptions.

Our internet address is www.chsinc.com. The information contained on our website is not part of, and is not incorporated in, this Annual Report on Form 10-K or any other report we file with or furnish to the Securities and Exchange Commission ("SEC").


1


ENERGY
Overview

We are the nation’s largest cooperative energy company based on revenues and identifiable assets, with operations that include: petroleum refining and pipelines; the supply, marketing and distribution of refined fuels (gasoline, diesel fuel and other energy products); the blending, sale and distribution of lubricants; and the wholesale supply of propane and other natural gas liquids. Our Energy segment processes crude oil into refined petroleum products at our refineries in Laurel, Montana and McPherson, Kansas and sells those products under the Cenex® brand to member cooperatives and other independent retailers through a network of nearly 1,500 sites, the majority of which are convenience stores marketing Cenex® branded fuels. For fiscal 2017, our Energy revenues, after elimination of intersegment revenues, were $6.3 billion and were primarily from gasoline and diesel fuel.

Operations

Laurel Refinery.  Our Laurel, Montana refinery processes medium and high sulfur crude oil into refined petroleum products that primarily include gasoline, diesel fuel, petroleum coke and asphalt. Our Laurel, Montana refinery sources approximately 93% of its crude oil supply from Canada, with the balance obtained from domestic sources, and we have access to Canadian and northwest Montana crude oil through our wholly-owned Front Range Pipeline, LLC and other common carrier pipelines. Our Laurel, Montana refinery also has access to Wyoming crude oil via common carrier pipelines from the south.

Our Laurel, Montana facility processes approximately 55,000 barrels of crude oil per day to produce refined products that consist of approximately 43% gasoline, 41% diesel fuel and other distillates, 8% asphalt and 7% petroleum coke and other products. Refined fuels produced at our Laurel, Montana refinery are available: via rail cars and via the Yellowstone Pipeline to western Montana terminals and to Spokane, Washington; south via common carrier pipelines to Wyoming terminals and Denver, Colorado; and east via our wholly-owned Cenex Pipeline, LLC to Glendive, Montana and Minot and Fargo, North Dakota.

McPherson Refinery.   Our McPherson, Kansas refinery processes approximately 59% low and medium sulfur crude oil and approximately 41% heavy sulfur crude oil into gasoline, diesel fuel and other distillates, propane and other products. The refinery sources its crude oil through its own pipelines as well as common carrier pipelines. The low and medium sulfur crude oil is sourced from Kansas, North Dakota, Oklahoma and Texas, and the heavy sulfur crude oil is sourced from Canada.

Our McPherson, Kansas refinery processes approximately 100,000 barrels of crude oil per day to produce refined products that consist of approximately 55% gasoline, 38% diesel fuel and other distillates and 3% propane and other products. Approximately 22% of the refined fuels are either loaded into trucks at the McPherson, Kansas refinery or shipped via its proprietary products pipeline to our terminal in Council Bluffs, Iowa. The remaining refined fuel products are shipped to other markets via common carrier pipelines.

Our McPherson, Kansas refinery was previously owned and operated by National Cooperative Refinery Association ("NCRA"). On September 1, 2015, we became the sole owner of the McPherson, Kansas refinery upon the final closing under our November 2011 agreement to purchase all of the noncontrolling interests in NCRA, which is now known as CHS McPherson Refinery Inc. ("CHS McPherson"). See Note 17, Acquisitions, of the notes to consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.

Other Energy Operations.  We own six propane terminals, four asphalt terminals, seven refined product terminals and three lubricants blending and packaging facilities. We also own and lease a fleet of liquid and pressure trailers and tractors, which are used to transport refined fuels, propane, anhydrous ammonia and other products.

Products and Services

Our Energy segment produces and sells (primarily wholesale) gasoline, diesel fuel, propane, asphalt, lubricants and other related products and also provides transportation services. In addition to selling the products refined at our Laurel, Montana, and McPherson, Kansas refineries, we purchase refined petroleum products from third parties. For fiscal 2017, we obtained approximately 68% of the refined petroleum products we sold from our Laurel, Montana and McPherson, Kansas refineries, and approximately 32% from third parties.



2


Sales and Marketing; Customers

We market approximately 80% of our refined fuel products to members, with the balance sold to non-members. Sales are made wholesale to member cooperatives and through a network of independent retailers that operate convenience stores under the Cenex® trade name. We sold approximately 1.6 billion gallons of gasoline and approximately 1.8 billion gallons of diesel fuel in fiscal 2017. We also blend, package and wholesale auto and farm machinery lubricants to both members and non-members. We are one of the nation’s largest propane wholesalers based on revenues. Most of the propane sold in rural areas is for heating and agricultural usage. Annual sales volumes of propane vary greatly depending on weather patterns and crop conditions.

Industry; Competition

The petroleum business is highly cyclical. Demand for crude oil and energy products is driven by the condition of local and worldwide economies, local and regional weather patterns and taxation relative to other energy sources, which can significantly affect the price of refined fuel products. 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 by our agricultural customers is highest and is subject to domestic supply and demand forces. Other energy products, such as propane, may experience higher volumes and profitability during the winter heating and crop drying seasons. More fuel-efficient equipment, reduced crop tillage, depressed prices for crops, weather conditions and government programs which encourage idle acres may all reduce demand for our energy products.

Regulation.  Governmental regulations and policies, particularly in the areas of taxation, energy and the environment, have a significant impact on our Energy segment. Our Energy segment’s operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the Environmental Protection Agency (the “EPA”), the Department of Transportation (the “DOT”) and similar government agencies. These laws, regulations and rules govern: the discharge of materials into the environment, air and water; reporting storage of hazardous wastes and other hazardous materials; the transportation, handling and disposal of wastes and other materials; the labeling of pesticides and similar substances; and investigation and remediation of releases of hazardous materials. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. Our hedging transactions and activities are subject to the rules and regulations of the exchanges we use, including the Chicago Mercantile Exchange (the “CME”), as well as the U.S. Commodity Futures Trading Commission (the “CFTC”).

Competition.  The petroleum refining and wholesale fuels business is very competitive. Among our competitors are some of the world’s largest integrated petroleum companies, which have their own crude oil supplies, distribution and marketing systems. We also compete with smaller domestic refiners and marketers in the midwestern and northwestern United States, with foreign refiners who import products into the United States and with producers and marketers in other industries supplying other forms of energy and fuels to consumers. Given the commodity nature of the end products, profitability in the industry depends largely on margins, as well as operating efficiency, product mix and costs of product distribution and transportation. The retail gasoline market is highly competitive, with competitors that are much larger than us and that have greater brand recognition and distribution outlets throughout the country and the world than we do. Our owned and non-owned retail outlets are located primarily in the northwestern, midwestern and southern United States.

We market refined fuel products in five principal geographic areas. The first area includes the Midwest and northern plains. Competition at the wholesale level in this area includes major oil companies as well as independent refiners and wholesale brokers/suppliers. This area has a robust spot market and is influenced by the large refinery center along the gulf coast.

To the east of the Midwest and northern plains is another unique marketing area. This area centers near Chicago, Illinois and includes eastern Wisconsin, Illinois and Indiana. In this area, we principally compete with the major oil companies as well as independent refineries and wholesale brokers/suppliers.

Another market area is located south of Chicago, Illinois. Most of this area includes Arkansas, Missouri and the northern part of Texas. Competition in this area includes the major oil companies and independent refiners. This area is principally supplied from the Gulf Coast refinery center and is also driven by a strong spot market that reacts quickly to changes in the international and national supply balance.

Another geographic area includes Montana, western North Dakota, Wyoming, Utah, Idaho, Colorado and western South Dakota. Competition at the wholesale level in this area includes the major oil companies and independent refineries.


3


The last area includes much of Washington and Oregon. We compete with the major oil companies in this area. This area is known for volatile prices and an active spot market.

AG

Overview

Our Ag segment includes our grain marketing, country operations, crop nutrients, processing and food ingredients and renewable fuels businesses. These businesses work together to facilitate the production, purchase, sale and eventual use of grain and other agricultural products within the United States, as well as internationally. In fiscal 2017, revenues in our Ag segment were $25.6 billion after elimination of intersegment revenues, consisting principally of grain sales.

Operations

Grain Marketing. We are the nation’s largest cooperative marketer of grain and oilseed based on grain storage capacity and grain sales. Our grain marketing operations purchase grain directly from agricultural producers and elevator operators primarily in the midwestern and western United States and indirectly through our country operations business. The purchased grain is typically contracted for sale for future delivery at a specified location, and we are responsible for handling the grain and arranging for its transportation to that location. We own and operate export terminals, river terminals and elevators throughout the United States to handle and transport grain and grain products. We also maintain locations in Europe, the Middle East, the Pacific Rim and South America for the marketing, merchandising and sourcing of grains. We primarily conduct our grain marketing operations directly, but do conduct some of our operations through joint ventures, including TEMCO, LLC ("TEMCO"), a 50% joint venture with Cargill, Incorporated ("Cargill") focused on exports.

Country Operations. Our country operations business operates 482 agri-operations locations through 48 business units dispersed throughout the midwestern and western United States and Canada. Most of these locations purchase grain from farmers and sell agronomy, energy, feed and seed products to those same producers and others, although not all locations provide every product and service. We also manufacture animal feed through eight owned plants and four limited liability companies and process sunflowers for human food and other uses.

Crop Nutrients. Our wholesale crop nutrients business delivers products directly to our customers and our country operations business from the manufacturer or through our twenty-one inland and river warehouse terminals and other non-owned storage facilities located throughout the United States. To supplement what is purchased domestically, our Galveston, Texas deep water port and terminal receives fertilizer by vessel from origins such as Asia and the Caribbean basin where significant volumes of urea are produced. The fertilizer is then shipped by rail to destinations within crop producing regions of the United States.

Processing and Food Ingredients. Our processing and food ingredients operations are conducted at facilities that can crush approximately 127 million bushels of oilseeds on an annual basis, producing approximately 2.8 million short tons of meal/flour and 1.6 billion pounds of edible oil annually. We also have operations where we further process soyflour for use in the food/snack industry. We purchase our oilseeds from members, other CHS businesses and third parties that have tightly integrated connections with our grain marketing operations and country operations business. 

Renewable fuels. Our renewable fuels business produces 260 million gallons of fuel grade ethanol and 700 thousand tons of dried distillers grains with solubles (“DDGS”) annually. We also market over 580 million gallons of ethanol and 4.5 million tons of DDGS annually under marketing agreements for other production plants.

Products and Services

Our Ag segment provides local cooperatives and farmers with the inputs and services they need to produce grain and raise livestock. These include seed, crop nutrients, crop protection products, animal feed, animal health products, refined fuels and propane. We also buy and merchandise grain in both domestic and international markets. With a portion of the grain we purchase we produce renewable fuels, including ethanol and DDGS. We also produce refined oils, meal and soyflour at our processing facilities.


4


Sales and Marketing; Customers

Our Ag segment provides products and services to a wide range of customers, primarily in the United States. These customers include member and non-member producers, local cooperatives, elevators, grain dealers, grain processors and crop nutrient retailers. We sell our edible oils and soyflour to food companies. The meal we produce is sold to integrated livestock producers and feed mills. The ethanol and DDGS we produce are sold throughout the United States and into various international locations.

Industry; Competition

Many of the business activities in our Ag segment are highly seasonal and, consequently, the operating results for our Ag segment will typically vary throughout the year. For example, our country operations and crop nutrients businesses generally experience higher volumes and income during the spring planting season and in the fall, which corresponds to harvest. In addition, our Ag segment operations may be adversely affected by relative levels of supply and demand, both domestic and international, commodity price levels and transportation costs and conditions. Supply is affected by weather conditions, disease, insect damage, acreage planted and government regulations and policies. Demand may be affected by foreign governments and their programs, relationships of foreign countries with the United States, the affluence of foreign countries, acts of war, currency exchange fluctuations and substitution of commodities. Demand may also be affected by changes in eating habits, population growth, the level of per capita consumption of some products and the level of renewable fuels production.

Regulation. Our Ag operations are subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA, the DOT and similar government agencies. These laws, regulations and rules govern: the discharge of materials into the environment, air and water; reporting storage of hazardous wastes and other hazardous materials; the transportation, handling and disposal of wastes and other materials; the labeling of pesticides and similar substances; and the investigation and remediation of releases of hazardous materials. In addition, environmental laws impose a liability on owners and operators for investigation and remediation of contaminated property, and a party who sends hazardous materials to those contaminated properties for treatment, storage, disposal or recycling. In some instances, that liability exists regardless of fault. Our grain marketing operations, country operations business, processing and food ingredient operations and renewable fuel operations are also subject to laws and related regulations and rules administered by the United States Department of Agriculture (the ”USDA”), the United States Food and Drug Administration (the “FDA”) and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of feed and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products. The hedging transactions and activities of our grain marketing, country operations, processing and food ingredient and renewable fuels businesses are subject to the rules and regulations of the exchanges we use, including the CME, as well as the CFTC.

Competition. In our Ag segment, we have significant competition in the businesses in which we operate based principally on price, services, quality, patronage and alternative products. Our businesses are dependent upon relationships with local cooperatives and private retailers, proximity to the customers and producers and competitive pricing. We compete with other large distributors of agricultural products, as well as other regional or local distributors, local cooperatives, retailers and manufacturers.
                                                                                                                                                                                                                        
NITROGEN PRODUCTION

Overview
    
Our Nitrogen Production segment consists solely of our 11.4% membership interest (based on product tons) in CF Nitrogen, our strategic venture with CF Industries Holdings, Inc. ("CF Industries"). In February 2016, in connection with our investment in CF Nitrogen, we entered into an 80-year supply agreement with CF Nitrogen that entitles us to purchase up to 1.1 million tons of granular urea and 580,000 tons of urea ammonium nitrate (“UAN”) annually for ratable delivery. We account for our CF Nitrogen investment using the hypothetical liquidation at book value method, and on August 31, 2017, our investment was approximately $2.8 billion.

Our investment in CF Nitrogen positions us and our members for long-term dependable fertilizer supply, supply chain efficiency and production economics. In addition, the ability to source product from CF Nitrogen production facilities under our supply agreement benefits our members and customers through strategically positioned access to essential fertilizer products.

5


Operations

CF Nitrogen has four production facilities located in: Donaldsonville, Louisiana; Port Neal, Iowa; Yazoo City, Mississippi; and Woodward, Oklahoma. Natural gas is the principal raw material and primary fuel source used in the ammonia production process. CF Nitrogen has access to competitively-priced natural gas through a reliable network of pipelines that are connected to major natural gas trading hubs near its production facilities.
Products and Services

CF Nitrogen produces nitrogen-based products including, methanol, UAN and urea and related products.

Sales and Marketing; Customers

CF Nitrogen has three customers including us and two consolidated subsidiaries of CF Industries.

Industry; Competition

Regulation. CF Nitrogen is subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA and similar government agencies. These laws, regulations and rules govern: the discharge of materials into the environment, air and water; reporting storage of hazardous wastes and other hazardous materials; the handling and disposal of wastes and other materials; and the investigation and remediation of releases of hazardous materials. In addition, environmental laws impose a liability on owners and operators for investigation and remediation of contaminated property, and a party who sends hazardous materials to those contaminated properties for treatment, storage, disposal or recycling. In some instances, that liability exists regardless of fault.

Competition. CF Nitrogen competes primarily on delivered price and, to a lesser extent, on customer service and product quality. CF Nitrogen competes domestically with a variety of large companies in the fertilizer industry. There is also significant competition from products sourced from other regions of the world.


FOODS

Overview
    
Our Foods segment consists solely of our equity method investment in Ventura Foods, which produces vegetable oil-based products such as packaged frying oils, margarine, mayonnaise, salad dressings and other food products. Ventura Foods was formed in 1996, and is owned 50% by us and 50% by Wilsey Foods, Inc., a majority-owned subsidiary of MBK USA Holdings, Inc. We account for our Ventura Foods investment under the equity method of accounting, and on August 31, 2017, our investment was $347.0 million.

Operations

Ventura Foods currently has 16 manufacturing and distribution locations across the United States and Canada. Ventura Foods sources its raw materials, which consist primarily of soybean oil, canola oil, palm/coconut oil, peanut oil and other ingredients and supplies, from various national and overseas suppliers, including our oilseed processing operations.

Products and Services

Ventura Foods manufactures, packages and distributes frying oils, margarine, mayonnaise, salad dressings, sauces and other food products, many of which utilize soybean oil as a primary ingredient. Approximately 35% of Ventura Foods’ sales comes from products for which Ventura Foods owns the brand, and the remainder comes from non-branded items and products it produces for third parties. A variety of Ventura Foods’ product formulations and processes are proprietary to Ventura Foods or its customers.


6


Sales and Marketing; Customers

Ventura Foods sells the products it manufactures to foodservice distribution companies, large national foodservice operators and food manufacturers. Ventura Foods also manufactures a number of products for third parties as a contract manufacturer. Ventura Foods sales are approximately 60% in foodservice and the remainder is split between retail and industrial customers who use edible oils as ingredients in products they manufacture for resale.

Industry; Competition

Regulation. Ventura Foods is subject to laws and related regulations and rules designed to protect the environment that are administered by the EPA, the DOT and similar government agencies. These laws, regulations and rules govern: the discharge of materials into the environment, air and water; reporting storage of hazardous wastes and other hazardous materials; the transportation, handling and disposal of wastes and other materials; and the investigation and remediation of releases of hazardous materials. In addition, environmental laws impose a liability on owners and operators for investigation and remediation of contaminated property, and a party who sends hazardous materials to those contaminated properties for treatment, storage, disposal or recycling. In some instances, that liability exists regardless of fault. Ventura Foods is also subject to laws and related regulations and rules administered by the USDA, the FDA and other federal, state, local and foreign governmental agencies that govern the processing, packaging, storage, distribution, advertising, labeling, quality and safety of food products. Failure to comply with these laws, regulations and rules could subject Ventura Foods to administrative penalties, injunctive relief, civil remedies and possible recalls of products.

Competition. Ventura Foods competes with a variety of companies in the food manufacturing industry. Competitors in the frying oils segment of the business include multi-national oilseed processing companies as well as smaller oil packaging firms. Ventura Foods also competes with large consumer packaged goods companies and smaller regional manufacturers that produce dressings, sauces, margarine and mayonnaise for the foodservice, retail and industrial sectors. Competitive dynamics vary by product category. In commodity categories such as frying oils, price and service are significant factors in customer decisions. For value added products, such as dressings and sauces, service and culinary capabilities play a larger role in securing new business and maintaining customer relationships.

CORPORATE AND OTHER

Business Solutions

CHS Capital.  Our wholly-owned finance company subsidiary, CHS Capital, LLC (“CHS Capital”), provides cooperative associations with a variety of loans that meet commercial agriculture needs, including operating, term, revolving and other short and long-term options. It also provides loans to individual producers, including crop inputs, feed, term and margin calls. In addition, CHS Capital provides open account financing to our cooperative association members, through arrangements that involve the discretionary extension of credit in the form of a clearing account for settlement of grain purchases and as a cash management tool. During the third quarter of fiscal 2017 it was determined CHS Capital would no longer make new term loans to producers. Subsequently, we also determined that beginning in fiscal 2018, CHS Capital would no longer make new operating loans to producers, but would continue to make loans to producers to finance crop inputs only.

CHS Hedging.  Our wholly-owned commodity brokerage subsidiary, CHS Hedging, LLC (“CHS Hedging”), is a registered Futures Commission Merchant and a clearing member of both the Chicago Board of Trade and the Minneapolis Grain Exchange. CHS Hedging provides full-service commodity risk management services primarily to agricultural producers and commercial agribusinesses in the areas of agriculture and energy.

CHS Insurance.  Our wholly-owned subsidiary, CHS Insurance Services, LLC (“CHS Insurance”), is a full-service independent agency that offers property and casualty insurance, surety bonds, safety resources, employment services and group benefits. The customer base consists primarily of participants in the agribusiness, construction, energy and processing industries. Impact Risk Funding, Inc. PCC, a wholly-owned subsidiary of CHS Insurance, is a protected cell captive insurance entity used to provide alternative risk financing options for customers.

Wheat Milling

In January 2002, we formed a joint venture with Cargill named Horizon Milling, LLC (“Horizon Milling”), in which we held an ownership interest of 24%, with Cargill owning the remaining 76%. Horizon Milling was the largest U.S. wheat miller based on output volume, and we owned five mills that we leased to Horizon Milling. During fiscal 2007, we expanded this operation with the formation of Horizon Milling G.P. (24% CHS ownership with Cargill owning the remaining 76%), a

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joint venture that acquired a Canadian grain-based foodservice and industrial business, which included two flour milling operations and two dry baking mixing facilities in Canada.

In fiscal 2014, we formed Ardent Mills, LLC (“Ardent Mills”), the largest flour miller in the United States, as a joint venture with Cargill and ConAgra Foods, Inc., which combined the North American flour milling operations of the three parent companies, including assets from our existing joint venture milling operations Horizon Milling and Horizon Milling, ULC and CHS-owned mills, with CHS holding a 12% interest in Ardent Mills. In connection with the formation of Ardent Mills, the joint-venture parties also entered into various ancillary and non-compete agreements including, among other things, an agreement for us to supply Ardent Mills with certain wheat and durum products. We account for our investment in Ardent Mills as an equity method investment due to our ability to exercise significant influence through our ability to appoint a member of the Board of Shareholders and Board of Managers. On August 31, 2017, our investment in Ardent Mills was $206.5 million.

EMPLOYEES

On August 31, 2017, we had 11,626 full, part-time, temporary and seasonal employees. Of that total, 2,891 were employed in our Energy segment, 8,013 were employed in our Ag segment and 722 were employed in Corporate and Other. In addition to those individuals directly employed by us, many individuals work for joint ventures in which we have a 50% or less ownership interest, including employees of CF Nitrogen and Ventura Foods in our Nitrogen Production and Foods segments, respectively, and are not included in these totals.

Labor Relations
As of August 31, 2017, we had 12 collective bargaining agreements with unions covering approximately 8.5% of our employees in the United States and Canada. These collective bargaining agreements expire on various dates from December 31, 2017, to June 30, 2021, except that one collective bargaining agreement covering 20 pipeline employees renews automatically every September 1, unless 60 days’ notice of termination is given.

CHS AUTHORIZED CAPITAL

We are an agricultural membership cooperative organized under Minnesota cooperative law to do business with member and non-member patrons.

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ITEM 1A.    RISK FACTORS

CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K 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 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, including in this “Risk Factors” discussion. Any forward-looking statements made by us in this Annual Report on Form 10-K 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.

Reference to this Cautionary Statement in the context of a forward-looking statement shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those indicated in the forward-looking statement.

The following risk factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any particular forward-looking statement. The following risk factors should not be construed as exhaustive.

Our revenues, results of operations and cash flows could be materially and adversely affected by changes in commodity prices.

Our revenues, results of operations and cash flows are affected by market prices for commodities such as crude oil, natural gas, ethanol, fertilizer, grain, oilseed, flour and crude and refined vegetable oils. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, disease, insect damage, drought, the availability and adequacy of supply, government regulation and policies and general political and economic conditions. We are also exposed to fluctuating commodity prices as the result of our inventories of commodities, typically grain, fertilizer and petroleum products, and purchase and sale contracts at fixed or partially fixed prices. At any time, our inventory levels and unfulfilled fixed or partially fixed price contract obligations may be substantial. We have processes in place to monitor exposures to these risks and engage in strategies to manage these risks. If these controls and strategies are not successful in mitigating our exposure to these fluctuations, we could be materially and adversely affected. Increases in market prices for commodities that we purchase without a corresponding increase in the price of our products or our sales volume or a decrease in our other operating expenses could reduce our revenues and net income.

For example, in our energy operations, profitability depends largely on the margin between the cost of crude oil that we refine and the selling prices that we obtain for our refined products. The prices for both crude oil and for gasoline, diesel fuel and other refined petroleum products fluctuate widely. Factors influencing these prices, many of which are beyond our control, include:

levels of worldwide and domestic supplies;

capacities of domestic and foreign refineries;

the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to agree to and maintain oil price and production controls, and the price and level of imports;

disruption in supply;


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political instability or armed conflict in oil-producing regions;

the level of demand from consumers, agricultural producers and other customers;

the price and availability of alternative fuels;

the availability of pipeline capacity; and

domestic and foreign governmental regulations and taxes.

The long-term effects of these and other conditions on the prices of crude oil and refined petroleum products are uncertain and ever-changing. Increases in crude oil prices without a corresponding increase in the prices of our refined petroleum products, and decreases in crude oil prices with larger corresponding decreases in the prices of our refined petroleum products, would reduce our net income. Accordingly, we expect our margins on, and the profitability of our energy business to fluctuate, possibly significantly, over time.

Our revenues, results of operations and cash flows could be materially and adversely affected by global and domestic economic conditions, downturns and risks.

The level of demand for our products is affected by global and regional demographics and macroeconomic conditions, including population growth rates and changes in standards of living. A significant downturn in global economic growth or recessionary conditions in major geographic regions may lead to a reduced demand for agricultural commodities, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. Additionally, weak global economic conditions and adverse conditions in financial and capital markets may adversely impact the financial condition and liquidity of some of our customers, suppliers and other counterparties, which could have a material adverse effect on our customers' ability to pay for our products and on our business, financial condition, liquidity, results of operations and prospects.

Our revenues originated outside of the United States were approximately 23% of consolidated net sales in fiscal 2017. As a result, we are exposed to risks associated with having global operations, including currency, economic or political instability in the international markets in which we do business, including Brazil, the southern cone of South America, Europe, the Middle East and the Asia Pacific region.

Also, a significant portion of our business activities are conducted in Canada, Mexico and China. At this time, it is unclear what changes, if any, will be made to existing international trade agreements that are relevant for purposes of our business activities, including the North American Free Trade Agreement. Any U.S. withdrawal from, or material modification to, a relevant international trade agreement could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Our revenues, margins, results of operations and cash flows could be materially and adversely affected if our members were to do business with others rather than with us.

We do not have an exclusive relationship with our members and our members are not obligated to supply us with their products or purchase products from us. Our members often have a variety of distribution outlets and product sources available to them. If our members were to sell their products to other purchasers or purchase products from other sellers, our revenues and margins would decline and our results of operations and cash flows could be materially and adversely affected.

We are exposed to the risk of nonperformance and nonpayment by counterparties.

We are exposed to the risk of nonperformance and nonpayment by counterparties, whether pursuant to contracts or otherwise. Risk of nonperformance and nonpayment by counterparties includes the inability or refusal of a counterparty to pay us, the inability or refusal to perform because of a counterparty’s financial condition and liquidity, or for any other reason, and also the risk that the counterparty will refuse to perform a contract during a period of price fluctuations where contract prices are significantly different than the then current market prices. In the event that we experience significant nonperformance or nonpayment by counterparties, our financial condition, results of operations and cash flows could be materially and adversely affected. For example, we store inventory in third-party warehouses, and the operators of these warehouses may not adequately store or secure our inventory, or they may improperly sell that inventory to someone else, which could expose us to a loss of the value of that inventory. In the event that we experience any such nonperformance by a third-party warehouse operator, our financial condition, results of operations and cash flows could be materially and adversely affected.

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We participate in highly competitive business markets and we may not be able to continue to compete successfully, which could have a material adverse effect on us.

We operate in several highly competitive business segments and our competitors may succeed in developing new or enhanced products that are better than ours, may be more successful in marketing and selling their products than we are, or may have more effective supply chain capability than we have. Competitive factors include price, service level, proximity to markets, access to transportation, product quality and marketing. In our business segments, we compete with certain companies that are larger and better known than we are and that have greater marketing, financial, personnel and other resources than we do. As a result, we may not be able to continue to compete successfully with our competitors, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Our business, profitability and liquidity may be adversely affected by the deterioration in the credit quality of, or defaults by, third parties who owe us money.

We extend credit to, make loans to and engage in other financing arrangements with individual producers, local cooperatives and other third parties around the world. When we do so, we incur credit risk and the risk of losses if our borrowers and others to which we extend credit do not repay their loans or perform their obligations to pay us the money they owe. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or for other reasons. If these counterparties do not pay us back, such that we experience significant defaults on their payment obligations to us, our financial condition, results of operations or cash flows could be materially and adversely affected.

We are also subject to the risk that our rights against borrowers and other third parties that owe us money may not be enforceable in all circumstances, for example if a borrower or third party declares bankruptcy. In addition, the credit quality of borrowers and other third parties whose obligations we hold could deteriorate, including a deterioration in the value of collateral posted by those parties to secure their obligations to us pursuant to purchase contracts, loan agreements or other contracts. If that deterioration occurs, the material adverse effects of third parties not performing their repayment obligations may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount owed to us. For example, certain loans and other financing arrangements we undertake with agricultural producers are typically secured by the counterparty’s crops that are planted in the current year. There is a risk that the value of the crop will not be sufficient to satisfy the counterparty’s repayment obligations under the financing arrangement as a result of weather, crop growing conditions, other factors that influence the price, supply and demand for agricultural commodities or for other reasons.

In addition, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of our rights. Default rates, downgrades and disputes with counterparties as to the valuation of collateral increase significantly in times of market stress and illiquidity.

In respect of our lending activity, we evaluate the collectability of both commercial and producer loans on a specific identification basis, based on the amount and quality of the collateral obtained, and record specific loan loss reserves when appropriate. Consistent with accounting principles generally accepted in the United States ("U.S. GAAP"), a general reserve is also maintained based on historical loss experience and various qualitative factors. For other forms of credit, we establish reserves as appropriate and consistent with U.S. GAAP. The reserves represent our best estimate based upon current facts and circumstances. Future developments or changes in assumptions may cause us to record adjustments to the reserves which could materially and adversely affect our results of operations.

Changes in federal income tax laws or in our tax status could increase our tax liability and reduce our net income significantly.

At this time, it is unclear what changes, if any, will be made to current federal income tax laws, regulations and interpretations regarding the taxation of cooperatives, which allow us to exclude income generated through business with or for a member (patronage income) from our taxable income. If any changes are made to such federal income tax laws, regulations or interpretations, or if in the future we were not eligible to be taxed as a cooperative, our tax liability would significantly increase and our net income would significantly decrease.








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We incur significant costs in complying with applicable laws and regulations. Any failure to comply with these laws and regulations, or make the capital or other investments necessary to comply with these laws and regulations, could expose us to unanticipated expenditures and liabilities.

We are subject to numerous federal, state and local provisions regulating our business and operations. We incur and expect to incur significant capital and operating expenses to comply with these laws and regulations. We may be unable to pass on those expenses to customers without experiencing volume and margin losses. For example, the compliance burden and impact on our operations and profitability as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and related regulations continue to evolve, as federal agencies have implemented and continue to implement its many provisions through regulation. These efforts to change the regulation of financial markets subject users of derivatives, such as CHS, to extensive oversight and regulation by the CFTC. Such initiatives have imposed, and may continue to impose, additional costs on us, including operating and compliance costs, and could materially affect the availability, as well as the cost and terms, of certain transactions. Certain federal regulations, studies and reports addressing Dodd-Frank, including the regulation of swaps and derivatives, are still being implemented and others are being finalized. We will continue to monitor these developments. Any of these matters could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

We establish reserves for the future cost of known compliance obligations, such as remediation of identified environmental issues. However, these reserves may prove inadequate to meet our actual liability. Moreover, amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of currently unknown compliance issues may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. Furthermore, our failure to comply with applicable laws and regulations could subject us to administrative penalties and injunctive relief, civil remedies, including fines and injunctions, and recalls of our products. For example, we regularly maintain hedges to manage the price risks associated with our commercial operations. These transactions typically take place on exchanges such as the CME. Our hedging transactions and activities are subject to the rules and regulations of the exchanges we use, including the CME, as well as the CFTC. All exchanges have broad powers to review required records, investigate and enforce compliance and to punish noncompliance by entities subject to their jurisdiction. The failure to comply with such rules and regulations could lead to restrictions on our trading activities or subject us to enforcement action by the CFTC or a disciplinary action by the exchanges, which could lead to substantial sanctions. In addition, any investigation or proceeding by an exchange or the CFTC, whether successful or unsuccessful, could result in substantial costs, the diversion of resources, including management time, and potential harm to our reputation, all of which, could have a material adverse effect on our business financial condition, liquidity, results of operations and prospects.

We are subject to the Foreign Corrupt Practices Act of 1977 and other similar anti-corruption, anti-bribery and anti-kickback laws and regulations, and any noncompliance with those laws and regulations by us or others acting on our behalf could have a material adverse effect on our business, financial condition and results of operations.

We operate on a global basis and are subject to anti-corruption, anti-bribery and anti-kickback laws and regulations, including the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”). The FCPA and other similar anti-corruption, anti-bribery and anti-kickback laws and regulations in other jurisdictions generally prohibit companies and their intermediaries or agents from making improper payments to government officials or any other persons for the purpose of obtaining or retaining business. We operate and sell our products in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-corruption, anti-bribery and anti-kickback laws and regulations may conflict with local customs and practices. In addition, in certain countries, we engage third-party agents or intermediaries to act on our behalf. If these third parties violate applicable anti-corruption, anti-bribery or anti-kickback laws or regulations, we may be liable for those violations. We have policies in place prohibiting employees from making or authorizing improper payments, we train our employees regarding compliance with anti-corruption, anti-bribery and anti-kickback laws and regulations and we utilize procedures to identify and mitigate risks of such misconduct by our employees and third-party agents and intermediaries. However, we cannot provide assurances that our employees or third-party agents or intermediaries will comply with those policies, laws and regulations. If we are found liable for violations of the FCPA, or other similar anti-corruption, anti-bribery or anti-kickback laws or regulations, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil fines or penalties or other repercussions, including reputational harm, which could have a material adverse effect on our business, financial condition and results of operations.

Environmental and energy laws and regulations may result in increased operating costs and capital expenditures and may have a material and adverse effect on us.

New and current environmental and energy laws and regulations, including regulations relating to alternative energy sources and the risk of global climate change, new interpretations of existing environmental and energy laws and regulations,

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increased governmental enforcement of environmental and energy laws and regulations or other developments in these areas could require us to make additional unforeseen expenditures or to make unforeseen changes to our operations, either of which could adversely affect us. For example, it is possible that some form of regulation will be forthcoming at the federal level in the United States with respect to emissions of greenhouse gases (“GHGs”), such as carbon dioxide, methane and nitrous oxides. New federal legislation or regulatory programs that restrict emissions of GHGs, or comparable new state legislation or programs, or customer requirements, in areas where we or our customers conduct business could adversely affect our operations and the demand for our energy products, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. In addition, new legislation or regulatory programs could require substantial expenditures for the installation and operation of systems and equipment that we do not currently possess or for substantial modifications to existing equipment. The actual effects of climate change on our businesses are, however, unknown and indeterminable at this time.

Also, pursuant to the Energy Independence and Security Act of 2007, the EPA has promulgated the Renewable Fuel Standard (“RFS”), which requires refiners to blend renewable fuels, such as ethanol and biodiesel, with their petroleum fuels or purchase renewable energy credits, known as RINs, in lieu of blending. The EPA generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. We generate RINs in our marketing operations under the RFS, however it is not enough to meet the needs of our refining capacity and RINs must be purchased on the open market. In recent years the price of RINs has been extremely volatile. As a result, the purchase of RINs could have a negative impact on our future refined fuels margins, the impact of which we are not able to estimate at this time.

Environmental liabilities could have a material adverse effect on us.

Many of our current and former facilities have been in operation for many years and, over that time, we and other operators of those facilities have generated, used, stored and disposed of substances or wastes that are or might be considered hazardous under applicable environmental laws, including liquid fertilizers, chemicals and fuels stored in underground and above-ground tanks. Any past or future actions in violation of applicable environmental laws could subject us to administrative penalties, fines, other costs, such as capital expenditures, and injunctions. In addition, an owner or operator of contaminated property, and a party who sends hazardous materials to such site for treatment, storage, disposal or recycling, can be liable for the cost of investigation and remediation under environmental laws. In some instances, such liability exists regardless of fault. Moreover, future or unknown past releases of hazardous substances could subject us to private lawsuits claiming damages, including for bodily injury or property damage, and to adverse publicity, which could have a material adverse effect on us. Liabilities, including legal costs, related to remediation of contaminated properties are not recognized by us until the related costs are considered probable and can be reasonably estimated.

Actual or perceived quality, safety or health risks associated with our products could subject us to significant liability and damage our business and reputation.

If any of our food or animal feed products became adulterated or misbranded, we may need to recall those items and could experience product liability claims if consumers or customers’ livestock were injured, or were claimed to be injured, as a result. A widespread product recall or a significant product liability judgment could cause our products to be unavailable for a period of time or could cause a loss of consumer or customer confidence in our products. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our business and reputation with existing and potential consumers and customers and our corporate and brand image. Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. In addition, general public perceptions regarding the quality, safety or health risks associated with particular food or animal feed products, such as concerns regarding genetically modified crops, could reduce demand and prices for some of the products associated with our businesses. To the extent that consumer preferences evolve away from products that our members or we produce for health or other reasons, such as the growing demand for organic food products, and we are unable to develop or procure products that satisfy new consumer preferences, there will be a decreased demand for our products, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.


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Our financial results are susceptible to seasonality.

Many of our business activities are highly seasonal and operating results vary throughout the year. Our revenue and income are generally lowest during the second and fourth fiscal quarters and highest during the first and third fiscal quarters. 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 during the fall harvest season. Our grain marketing operations are also subject to fluctuations in volume and income based on producer harvests, world grain prices and demand. Our Energy segment generally experiences higher volumes and income in certain operating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage by our customers and members is highest and is subject to global supply and demand forces. Other energy products, such as propane, may experience higher volumes and income during the winter heating and crop drying seasons.

Our operations are subject to business interruptions and casualty losses; we do not insure against all potential losses and could be seriously harmed by unanticipated liabilities.

Our operations are subject to business interruptions due to unanticipated events such as explosions, fires, pipeline interruptions, transportation delays, equipment failures, crude oil or refined product spills, inclement weather and labor disputes. For example:

our oil refineries and other facilities are potential targets for terrorist attacks that could halt or discontinue production;

our inability to negotiate acceptable contracts with unionized workers in our operations could result in strikes or work stoppages;

our corporate headquarters, the facilities we own or the significant inventories that we carry could be damaged or destroyed by catastrophic events, extreme weather conditions or contamination;

someone may accidentally or intentionally introduce a computer virus to our information technology systems or breach our computer systems or other cyber resources; and

an occurrence of a pandemic flu or other disease affecting a substantial part of our workforce or our customers could cause an interruption in our business operations.

The effects of any of these events could be significant. We maintain insurance coverage against many, but not all potential losses or liabilities arising from these operating hazards, but uninsured losses or losses above our coverage limits are possible. Uninsured losses and liabilities arising from operating hazards could have a material adverse effect on us.

Our risk management strategies may not be effective.

Our business is affected by fluctuations in commodity prices, transportation costs, energy prices, foreign currency exchange rates and interest rates. We monitor position limits and account receivables exposures, and engage in other strategies and controls to manage these risks. Our monitoring efforts may not be successful at detecting a significant risk exposure and our controls and strategies may not be effective in adequately managing against the occurrence of a loss relating to a risk exposure. If our controls and strategies are not successful in mitigating our financial exposure to losses due to the fluctuations mentioned above, it could significantly and adversely affect our operating results.

Our business is capital-intensive in nature and we rely on cash generated from our operations and external financing to fund our strategies and ongoing capital needs.

We require significant capital, including access to credit markets from time to time, to operate our business and fund our strategies. Our working capital requirements are directly affected by the price of commodities, which may fluctuate significantly and change quickly. We also require substantial capital to maintain and upgrade our extensive network of facilities to keep pace with competitive developments, technological advances, regulations and changing safety standards. In addition, the expansion of our business and pursuit of acquisitions or other business opportunities has required, and may require, significant amounts of capital. If we are unable to generate sufficient cash flow or maintain access to adequate external financing, including as a result of significant disruptions in the global credit markets, it could restrict our current operations and our growth opportunities, which could adversely affect our operating results, and restrict our ability to repay our existing indebtedness.


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Our cooperative structure limits our ability to access equity capital.

As a cooperative, we may not sell common stock in our company. In addition, existing laws and our articles of incorporation and bylaws limit dividends on any preferred stock we may issue to 8% per annum. These limitations may restrict our ability to raise equity capital and may adversely affect our ability to compete with enterprises that do not face similar restrictions.

Consolidation among the producers of products we purchase and customers for products we sell could materially and adversely affect our revenues, results of operations and cash flows.

Consolidation has occurred among the individual producers of products we sell and purchase, including crude oil, fertilizer and grain, and it is likely to continue in the future. Consolidation could allow producers to negotiate pricing, supply availability and other contract terms that are less favorable to us. Consolidation also may increase the competition among consumers of these products to enter into supply relationships with a smaller number of producers, resulting in potentially higher prices for the products we purchase.

Consolidation has occurred among cooperative associations that are wholesale customers of our products, which has resulted in a smaller wholesale and retail customer base for our products and has intensified the competition for these customers, and this consolidation is likely to continue in the future. For example, ongoing consolidation among distributors and brokers of food products and food retailers has altered the buying patterns of these businesses, as they have increasingly elected to work with product suppliers who can meet their needs nationwide rather than just regionally or locally. If these cooperatives, distributors, brokers and retailers elect not to purchase our products, our revenues, results of operations and cash flows could be materially and adversely affected.

In addition, in the fertilizer market, consolidation at both the producer and wholesale customer level increases the potential for direct sales from the fertilizer manufacturer to the cooperative customers and/or the individual agricultural producer, which would remove us from the supply chain and could have a material and adverse effect on our revenues, results of operations and cash flows.

If our customers choose alternatives to our refined petroleum products, our revenues, results of operations and cash flows could be materially and adversely affected.

Numerous alternative energy sources currently under development could serve as alternatives to our gasoline, diesel fuel and other refined petroleum products. If any of these alternative products become more economically viable or preferable to our products for environmental or other reasons, demand for our energy products would decline. Declining demand for our energy products, particularly diesel fuel sold for farming applications, could materially and adversely affect our revenues, results of operations and cash flows.

The results of our agronomy business are highly dependent upon certain factors outside of our control.

Planted acreage, and consequently the volume of fertilizer and crop protection products applied, is partially dependent upon government programs, grain prices and the perception held by the producer of demand for production, all of which are outside of our control. In addition, weather conditions during the spring planting season and early summer spraying season also affect agronomy product volumes and profitability. Emerging sustainability and other environmental concerns that are outside of our control could also affect the future demand for agronomy products applied to crops and the volume of any such application. Accordingly, factors outside of our control could materially and adversely affect the revenues, results of operations and cash flows of our agronomy business.

Technological improvements could decrease the demand for our agronomy and energy products.

Technological advances in agriculture could decrease the demand for crop nutrients, energy and other crop input products and services that we provide. Genetically engineered seeds that resist disease and insects, or that meet certain nutritional requirements, could affect the demand for our crop nutrients and crop protection products. Demand for fuel that we sell could decline as technology allows for more efficient usage of equipment. Declining demand for our products could materially and adversely affect our revenues, results of operations and cash flows.





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Acquisitions, strategic alliances, joint ventures, divestitures and other non-ordinary course of business events resulting from portfolio management actions and other evolving business strategies could affect future results.

We monitor our business portfolio and organizational structure and have made and may continue to make acquisitions, strategic alliances, joint ventures, divestitures and changes to our organizational structure. With respect to acquisitions, future results will be affected by our ability to identify suitable acquisition candidates, to adequately finance any acquisitions and to integrate acquired businesses quickly and obtain the anticipated financial returns, including synergies. Our ability to successfully complete a divestiture will depend on, among other things, our ability to identify buyers that are prepared to acquire such assets or businesses on acceptable terms and to adjust and optimize our retained businesses following the divestiture. Additionally, we may fail to consummate proposed acquisitions, divestitures, joint ventures or strategic alliances after incurring expenses and devoting substantial resources, including management time, to such transactions.

Several parts of our business, including in particular our nitrogen production business, our foods business and portions of our grain marketing and wheat milling operations, are operated through joint ventures with third parties where we do not have majority control of the venture. By operating a business through a joint venture, we have less control over business decisions than we have in our wholly-owned or majority-owned businesses. In particular, we generally cannot act on major business initiatives in our joint ventures without the consent of the other party or parties in those ventures. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that co-venturers might become bankrupt or fail to fund their share of required capital contributions, in which case the joint venture may be unable to access needed growth capital (if the co-venturer is solely responsible for capital contributions) or we and any other remaining co-venturers would generally be liable for the joint venture’s liabilities. Co-venturers may have economic, tax or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Our co-venturers may take actions that are not within our control. Joint venture investments may also lead to impasses. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our day-to-day business. In addition, we may in certain circumstances be liable for the actions of our co-venturers. Each of these matters could have a material adverse effect on us.

We made certain assumptions and projections regarding the future of the markets served by our joint venture investments which included projected market pricing and demand for their products. These assumptions were an integral part of the economics used to evaluate these joint venture investment opportunities prior to consummation. To the extent that actual market performance varies from our models, our ability to achieve the projected returns on our joint venture investments may be impacted in a material adverse manner.
    
We utilize information technology systems to support our business. An ongoing multi-year implementation of an enterprise-wide resource planning system, security breaches or other disruptions to our information technology systems or assets could interfere with our operations, compromise security of our customers’ or suppliers’ information and expose us to liability which could adversely impact our business and reputation.

Our operations rely on certain key information technology (“IT”) systems, some of which are dependent upon third-party services, to provide critical connections of data, information and services for internal and external users. Over the next several years, we expect to continue implementing a new enterprise resource planning system (“ERP”), which has and will continue to require significant capital and human resources to deploy. There can be no assurance that the actual costs for the ERP will not exceed our current estimates or that the ERP will not take longer to implement than we currently expect. In addition, potential flaws in implementing the ERP may pose risks to our ability to operate successfully and efficiently. There may be other challenges and risks to our IT systems over time due to any number of causes, such as catastrophic events, power outages, security breaches or cyber-based attacks, and as we upgrade and standardize our ERP system on a worldwide basis. These challenges and risks could result in legal claims or proceedings, liability or penalties, disruption in operations, loss of valuable data and damage to our reputation, all of which could adversely affect our business.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

As of the date hereof, there were no unresolved comments from the Securities and Exchange Commission staff regarding our periodic or current reports.


16


ITEM 2.    PROPERTIES

We own or lease energy, agronomy, grain handling and processing facilities and other real estate throughout the United States and internationally. Below is a summary of these locations.

Energy

Facilities in our Energy segment include the following, all of which are owned except where indicated as leased:
Refineries
Laurel, Montana and McPherson, Kansas
Propane terminals
Biddeford, Maine; Glenwood, Minnesota; Rockville, Minnesota; Hannaford, North Dakota; Ross, North Dakota; Black Creek, Wisconsin; Hixton, Wisconsin
Transportation terminals/repair facilities
12 locations in Iowa, Kansas, Minnesota, Montana, North Dakota, South Dakota, Washington and Wisconsin, two of which are leased
Petroleum and asphalt terminals/storage facilities
11 locations in Montana, North Dakota and Wisconsin
Pipelines:
 
Cenex Pipeline, LLC
Laurel, Montana to Fargo, North Dakota
Front Range Pipeline, LLC
Canadian border to Laurel, Montana
Jayhawk Pipeline, LLC
Throughout Kansas, with branches in Nebraska, Oklahoma and Texas
Council Bluffs Pipeline
McPherson, Kansas to Council Bluffs, Iowa
Conway Pipeline
McPherson, Kansas to Conway, Kansas
Osage Pipe Line Company, LLC (50% owned by CHS McPherson)
Oklahoma to Kansas
Kaw Pipe Line Company (67% owned by CHS McPherson)
Locations throughout Kansas
Convenience stores/gas stations
69 locations in Idaho, Minnesota, Montana, North Dakota, South Dakota, Washington and Wyoming, 19 of which are leased
Lubricant plants/warehouses
Three locations in Minnesota, Ohio and Texas, one of which is leased

Ag

Within our Ag segment, we own or lease the following facilities:

Grain Marketing

We own 17 grain terminals, which are used in our grain marketing operations, in: Pekin, Illinois; Davenport, Iowa; Myrtle Grove, Louisiana; Savage and Winona, Minnesota; Collins, Mississippi; Friona, Texas; Superior, Wisconsin; Argentina; Brazil; Hungary; and Romania. We also own one fertilizer terminal in Argentina. In addition to office space at our corporate headquarters, we have 31 grain marketing offices in: Davenport, Iowa; Winona, Minnesota; Lincoln, Nebraska; Argentina; Brazil; Bulgaria; Canada; China; Hungary; Jordan; Paraguay; Romania; Russia; Serbia; Singapore; South Korea; Spain; Switzerland; Taiwan; Ukraine; and Uruguay. We lease all of these grain marketing offices, other than the grain marketing offices in Davenport, Iowa and Winona, Minnesota, which we own.

Country Operations

In our country operations business, we own agri-operations facilities in 482 communities (of which some of the facilities are on leased land), four sunflower plants and eight feed manufacturing facilities. These operations are located in Colorado, Idaho, Illinois, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Washington, Wisconsin and Canada.


17


Crop Nutrients

We own one deep water port in Galveston, Texas and 21 terminals in: Little Rock, Arkansas; Post Falls, Idaho; Peru, Illinois; Muscatine, Iowa; Melbourne and Owensboro, Kentucky; Alexandria, Lake Providence, Lettsworth, Mermentau, Tallulah and Vidalia, Louisiana; St. Paul and Winona (two terminals), Minnesota; Greenville, Mississippi; Grand Forks, North Dakota; Watertown, South Dakota; Memphis, Tennessee; and Friona and Texarkana, Texas. The facilities located in Little Rock, Arkansas, Owensboro, Kentucky and Galveston, Texas are on leased land.

Processing and Food Ingredients

We own oilseed processing facilities and/or textured soy protein production facilities in: Creston, Iowa; Hutchinson, Kansas; Hallock, Fairmont and Mankato, Minnesota; and South Sioux City, Nebraska. In addition, we own a grain storage facility in Joliette, North Dakota.

Renewable Fuels

We own ethanol plants located in Rochelle and Annawan, Illinois.

Corporate and Other

Business Solutions

In addition to office space at our corporate headquarters, we lease five offices in: Brownsburg and Indianapolis, Indiana; Kansas City, Missouri; Huron, South Dakota; and The Woodlands, Texas. We own approximately 14,000 acres of agricultural land and related improvements in central Michigan.

Corporate Headquarters

We are headquartered in Inver Grove Heights, Minnesota. We own a 33-acre campus consisting of one main building with approximately 320,000 square feet of office space and two smaller buildings with approximately 13,400 and 9,000 square feet of space. We also have offices in Eagan, Minnesota and Washington, D.C., which are leased.

ITEM 3.    LEGAL PROCEEDINGS

We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, our management believes any resulting liabilities, individually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year.

Laurel

On May 17, 2016, and October 12, 2016, the Montana Department of Environmental Quality (“MDEQ”) issued violation letters to us, alleging that certain specified air emissions at our Laurel, Montana refinery exceeded amounts allowable under the refinery’s permits and applicable law. On June 1, 2016, and November 3, 2016, we responded to MDEQ and described the actions that we had taken in connection with those allegations. On August 30, 2017, MDEQ sent us a letter requesting that we execute an administrative order on consent, and pay an administrative penalty of $184,550. On September 27, 2017, we sent MDEQ a letter providing additional information and requesting that MDEQ reconsider the alleged violations and reduce the proposed penalty with respect to four of the alleged violations described in the violation letters. We also requested changes to the administrative order on consent to remove references to the Administrative Rules of the State of Montana. We are currently awaiting MDEQ’s response to the September 2017 letter.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.


18


PART II.

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As a cooperative, we do not have any common stock that is traded or otherwise. We have not sold any equity securities during the three years ended August 31, 2017, that were not registered under the Securities Act of 1933.



19


ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial information for each of the five periods indicated. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K and with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The selected financial information as of and for the years ended August 31, 2017, 2016, 2015, 2014, and 2013 is derived from our audited consolidated financial statements and related notes. Certain prior period amounts have been revised as follows:
For periods prior to fiscal 2015, certain amounts have been revised to include activity and amounts related to capital leases that were previously incorrectly accounted for as operating leases.
For all prior periods, Long-term debt, including current maturities, has been revised to reflect the adoption of Accounting Standards Updated ("ASU") No. 2015-03, Interest-Imputation of Interest (Subtopic 35-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires the presentation of debt issuance costs on the balance sheet as a reduction from the carrying amount of the related debt liability instead of a deferred financing cost.
For all prior periods, Marketing, general and administrative amounts have been revised to reflect fiscal 2017 presentation, which breaks out impairment and reserve charges due to the materiality of these charges incurred during fiscal 2017.
For all prior periods, Other income (loss), which includes interest income, has been identified separately from Interest expense to conform with fiscal 2017 presentation.

Selected Consolidated Financial Data
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in thousands)
Income Statement Data:
 

 
 

 
 

 
 

 
 

Revenues
$
31,934,751

 
$
30,347,203

 
$
34,582,442

 
$
42,664,033

 
$
44,479,857

Cost of goods sold
30,985,510

 
29,387,910

 
33,091,676

 
41,011,487

 
42,701,073

Gross profit
949,241

 
959,293

 
1,490,766

 
1,652,546

 
1,778,784

Marketing, general and administrative
604,359

 
601,261

 
642,309

 
598,965

 
553,482

Reserve and impairment charges
456,679

 
47,836

 
133,045

 
3,633

 
141

Operating earnings (loss)
(111,797
)
 
310,196

 
715,412

 
1,049,948

 
1,225,161

(Gain) loss on investments
4,569

 
(9,252
)
 
(5,239
)
 
(114,162
)
 
(182
)
Interest expense
171,239

 
113,704

 
70,659

 
147,240

 
242,911

Other (income) loss
(95,415
)
 
(38,357
)
 
(10,326
)
 
(6,987
)
 
(6,212
)
Equity (income) loss from investments
(137,338
)
 
(175,777
)
 
(107,850
)
 
(107,446
)
 
(97,350
)
Income (loss) before income taxes
(54,852
)
 
419,878

 
768,168

 
1,131,303

 
1,085,994

Income tax expense (benefit)
(182,075
)
 
(4,091
)
 
(12,165
)
 
48,296

 
89,666

Net income (loss)
127,223

 
423,969

 
780,333

 
1,083,007

 
996,328

Net income (loss) attributable to noncontrolling interests
(634
)
 
(223
)
 
(712
)
 
1,572

 
3,942

Net income (loss) attributable to CHS Inc. 
$
127,857

 
$
424,192

 
$
781,045

 
$
1,081,435

 
$
992,386

Balance Sheet Data (as of August 31):
 

 
 

 
 

 
 

 
 

Working capital
$
181,932

 
$
414,385

 
$
2,751,949

 
$
3,168,512

 
$
3,084,228

Net property, plant and equipment
5,356,434

 
5,488,323

 
5,192,927

 
4,180,148

 
3,311,088

Total assets
15,973,756

 
17,312,135

 
15,226,125

 
15,293,506

 
13,640,928

Long-term debt, including current maturities
2,179,793

 
2,297,205

 
1,428,930

 
1,603,027

 
1,743,690

Total equities
7,905,825

 
7,866,250

 
7,669,411

 
6,466,844

 
5,152,747



20


ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition and results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:

Overview
Business Strategy
Fiscal 2017 Highlights
Fiscal 2018 Priorities
Fiscal 2018 Trends
Results of Operations
Liquidity and Capital Resources
Off Balance Sheet Financing Arrangements
Contractual Obligations
Critical Accounting Estimates
New Accounting Pronouncements    

Our MD&A should be read in conjunction with the accompanying audited financial statements and notes to those financial statements and the cautionary statement regarding forward-looking statements found in Part I, Item 1A of this Annual Report on Form 10-K.

Overview

CHS Inc. is a diversified company that provides grain, foods and energy resources to businesses and consumers on a global scale. As a cooperative, we are owned by farmers, ranchers and member cooperatives across the United States. We also have preferred shareholders that own our five series of preferred stock, all of which are listed and traded on the NASDAQ Global Select Market. We operate in the following four reportable segments:

Energy Segment - produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products.
Ag Segment - purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties and also serves as a wholesaler and retailer of crop inputs.
Nitrogen Production Segment - consists solely of our equity method investment in CF Nitrogen and produces and distributes nitrogen fertilizer, a commodity chemical.
Foods Segment - consists solely of our equity method investment in Ventura Foods and is a processor and distributor of edible oils used in food preparation and a packager of food products.

In addition, other operating activities, primarily our non-consolidated wheat milling joint venture, as well as our business solutions operations that consist of commodities hedging, insurance and financial services related to crop production, have been aggregated within Corporate and Other.
    
The 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.

Corporate administrative expenses and interest are allocated to each reporting segment, along with 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.

Management's Focus. When evaluating our operating performance, management focuses on gross profit and income before income taxes. As a company that operates heavily in commodities, there is significant unpredictability and volatility in pricing and costs. As such, we focus on managing the margin we can receive and the resulting income before income taxes. Management also focuses on ensuring the strength of the balance sheet through the appropriate management of liquidity, working capital, capital deployment, capital resources and overall leverage.

Seasonality. Many of our business activities are highly seasonal and our operating results vary throughout the year. Our revenues and income are generally lowest during the second and fourth fiscal quarters and highest during the first and third

21


fiscal quarters. 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 by our agricultural producers 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. The graphs below depict the seasonality inherent in our business. It should be noted the third quarter of fiscal 2017 was impacted by significant charges that caused income (loss) before income taxes for that period to deviate from historical trends. The nature of these charges is further discussed in the "Reserve and Impairment Charges" area of the Results of Operations section that follows.
revenuechart.jpg
ibitchart.jpg

Pricing. Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseed products and crop nutrients. 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, availability/adequacy of supply of the related commodity, government regulations/policies, world events and general political/economic conditions.

Business Strategy

Our business strategy is to help our owners grow by maximizing the return on our assets and rationalizing our various operations to ensure that our core businesses are strategically positioned today and for future growth. Specifically, we are

22


improving efficiency and, when necessary, disposing of assets that that are not strategic and/or do not meet our internal measurement expectations. We also continue to focus on maintaining a strong balance sheet and are prepared to optimize our financial results throughout the agriculture and energy economic cycles.

Fiscal 2017 Highlights

Solid business fundamentals as we realized volume increases in both our Ag and Energy segments.
Margins continued to be challenged compared to historical results; however, we did see improvements in our Ag business.
Significant specific losses associated with a single producer loan loss and a key partner in Brazil both had a material impact to earnings.
Management completed a full asset portfolio review resulting in impairments and the movement of certain assets to held for sale classification.
Began initiative to restore financial flexibility by actively managing expenses, reducing debt balances, and optimizing working capital and our asset portfolio.

Fiscal 2018 Priorities

Strengthening our relationships with all key stakeholders including owners, customers, suppliers and employees.
Sharpening our operational excellence with a focus on our risk management practices, safety, the implementation of an enterprise resource planning system and leveraging the enterprise through centers of excellence.
Continue initiative to restore financial flexibility as discussed above.

Fiscal 2018 Trends

Our business is cyclical and the Ag and Energy industries are currently in an environment characterized by reduced commodity prices, lower margins, reduced liquidity and increased leverage. We are unable to predict how long this current environment will last or how severe it will ultimately be; however, at this time, we do not foresee significant changes to this environment during fiscal 2018. During this period, we expect our revenues, margins and cash flows to continue to be under pressure.


23


Results of Operations

Consolidated Statements of Operations
 
For the Years Ended August 31
 
2017
 
2016
 
2015
 
(Dollars in thousands)

Revenues
$
31,934,751

 
$
30,347,203

 
$
34,582,442

Cost of goods sold
30,985,510

 
29,387,910

 
33,091,676

Gross profit
949,241

 
959,293

 
1,490,766

Marketing, general and administrative
604,359

 
601,261

 
642,309

Reserve and impairment charges
456,679

 
47,836

 
133,045

Operating earnings (loss)
(111,797
)
 
310,196

 
715,412

(Gain) loss on investments
4,569

 
(9,252
)
 
(5,239
)
Interest expense
171,239

 
113,704

 
70,659

Other (income) loss
(95,415
)
 
(38,357
)
 
(10,326
)
Equity (income) loss from investments
(137,338
)
 
(175,777
)
 
(107,850
)
Income (loss) before income taxes
(54,852
)
 
419,878

 
768,168

Income tax expense (benefit)
(182,075
)
 
(4,091
)
 
(12,165
)
Net income (loss)
127,223

 
423,969

 
780,333

Net income (loss) attributable to noncontrolling interests
(634
)
 
(223
)
 
(712
)
Net income (loss) attributable to CHS Inc. 
$
127,857

 
$
424,192

 
$
781,045


The charts below detail fiscal 2017 revenues and income (loss) before income taxes by reportable segment. Our Nitrogen Production and Foods reportable segments represent equity methods investments, and as such record earnings and allocated expenses but not revenue.
segmentrevenuechart.jpg
segmentibit.jpg
* Includes $441.3 million of charges discussed in the "Reserve and Impairment Charges" area of this Results of Operations.


24



Income (Loss) Before Income Taxes by Segment

Energy
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Income (loss) before income taxes
$
76,872

 
$
275,443

 
$
538,131

 
$
(198,571
)
 
(72.1
)%
 
$
(262,688
)
 
(48.8
)%

The following table and commentary present the primary reasons for the changes in income (loss) before income taxes ("IBIT") for the Energy segment for each of the years ended August 31, 2017, and 2016, compared to the prior year:
 
 
2017 vs. 2016
 
2016 vs. 2015
 
 
(Dollars in millions)
Volume
 
$
16

 
$
(40
)
Price
 
(125
)
 
(241
)
Other*
 
(29
)
 
(3
)
Impairment charges+
 
(33
)
 

Non-gross profit related activity+
 
(28
)
 
21

Total change in Energy IBIT
 
$
(199
)
 
$
(263
)
* Other includes retail and non-commodity type activities.
+ See commentary related to these changes in the marketing, general and administrative expenses, reserve and impairment charges, (gain) loss on investments, interest expense, other income (loss) and equity (income) loss from investments sections of this Results of Operations.

Comparison of Energy segment IBIT for the years ended August 31, 2017, and 2016

The $198.6 million decrease in the Energy segment IBIT for fiscal 2017 reflects the following:
Significantly reduced margins within refined fuels, caused by the continued down cycle in the energy industry, driving prices lower, partially offset by increases in propane margins driven by certain manufacturing changes.
These decreases were partially offset by higher demand for energy products, which caused volumes to increase (most significantly in refined fuels).
A $32.7 million impairment charge associated with the cancellation of a capital project during fiscal 2017.
We are subject to the RFS, which requires refiners to blend renewable fuels (e.g., ethanol, biodiesel) into their finished transportation fuels or purchase renewable energy credits, known as Renewable Identification Numbers ("RINs"), in lieu of blending. The EPA generally establishes new annual renewable fuel percentage standards for each compliance year in the preceding year. We generate RINs under the RFS in our renewable fuels operations and through our blending activities at our terminals. however, we cannot generate enough RINs to meet the needs of our refining capacity and RINs must be purchased on the open market. The price of RINs can be volatile. On November 23, 2016, the EPA released the final mandate for year 2017, and as a result the market price for RINs increased in our first fiscal quarter. Subsequent changes in the price of RINs had no material impact on our financial results.

Comparison of Energy segment IBIT for the years ended August 31, 2016, and 2015

The $262.7 million decrease in the Energy segment IBIT for fiscal 2016 reflects the following:
Significantly reduced margins within refined fuels, caused by the down cycle in the energy industry.
Reduced demand for energy products that caused volumes to decrease (most significantly in refined fuels).
On November 30, 2015, the EPA released the final renewable fuel percentage standards mandate for years 2016 and 2015 resulting in an increase to the price of RINs. This price increase did not have a material impact on our financial results during fiscal 2016 or 2015 as it related to our purchases of RINs.








25


Ag
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Income (loss) before income taxes
$
(230,853
)
 
$
30,936

 
$
149,648

 
$
(261,789
)
 
(846.2
)%
 
$
(118,712
)
 
(79.3
)%

The following table and commentary present the primary reasons for the changes in IBIT for the Ag segment for each of the years ended August 31, 2017, and 2016, compared to the prior year:
 
 
2017 vs. 2016
 
2016 vs. 2015
 
 
(Dollars in millions)
Volume
 
$
13

 
$
116

Price
 
447

 
(464
)
Other*
 
(359
)
 
110

Impairment charges+
 
(441
)
 
90

Non-gross profit related activity+
 
78

 
29

Total change in Ag IBIT
 
$
(262
)
 
$
(119
)
* Other includes retail and non-commodity type activities.
+ See commentary related to these changes in the marketing, general and administrative expenses, reserve and impairment charges, (gain) loss on investments, interest expense, other income (loss) and equity (income) loss from investments sections of this Results of Operations.

Comparison of Ag segment IBIT for the years ended August 31, 2017, and 2016

The $261.8 million decrease in Ag segment IBIT for fiscal 2017 reflects the following:
Our grain marketing IBIT decreased primarily due to charges of $229.4 million associated with a trading partner in our Brazilian operations entering bankruptcy-like proceedings under Brazilian law. Grain marketing also experienced impairments within certain international investments of $20.2 million due to persistent underperformance, partially offset by higher grain volumes and associated margins.
Country operations IBIT decreased primarily due to changes in reserves related to a single producer borrower of $81.0 million along with $30.4 million of long-lived asset impairments, which were significantly offset by higher grain margins and volumes.
A decrease in processing and food ingredients IBIT primarily caused by long-lived asset impairment charges of $80.1 million that exceeded the prior year's non-recurring bad debt charge related to a specific customer. Higher margins offset this decrease.
Crop nutrients IBIT increased, driven by higher volumes and associated margins.
Increased IBIT in renewable fuels marketing and production operations primarily resulting from higher margins.

Comparison of Ag segment IBIT for the years ended August 31, 2016, and 2015

The $118.7 million decrease in Ag segment IBIT for fiscal 2016 reflects the following:
Country operations IBIT decreased, driven primarily by significantly lower grain margins, which were partially offset by increased grain volumes.
Crop nutrients IBIT increased, driven primarily by a $116.5 million impairment related to our decision to cease development of a nitrogen fertilizer plant in Spiritwood, North Dakota, which took place in fiscal 2015 and did not reoccur in fiscal 2016, partially offset by decreased margins in fiscal 2016.
Our grain marketing IBIT decreased primarily as a result of lower margins, partially offset by increased volumes.
Our processing and food ingredients business experienced a decrease in IBIT primarily due to charges associated with the disposal and impairment of assets as well as a charge associated with a specific customer receivable, and to a lesser extent, lower margins in our soybean crushing business.
Our renewable fuels marketing and production operations IBIT decreased primarily due to lower market prices for ethanol and was partially offset by increased volumes.
The lower margins referenced above result from the previously discussed Ag economy down cycle, which reduced commodity prices and decreased margins across the globe.




26



All Other Segments
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Nitrogen Production IBIT
$
29,741

 
$
34,070

 
$

 
$
(4,329
)
 
(12.7
)%
 
$
34,070

 
NM

Foods IBIT
$
25,967

 
$
64,764

 
$
62,647

 
$
(38,797
)
 
(59.9
)%
 
$
2,117

 
3.4
 %
Corporate and Other IBIT
$
43,421

 
$
14,665

 
$
17,742

 
$
28,756

 
196.1
 %
 
$
(3,077
)
 
(17.3
)%
NM - Not meaningful

Comparison of All Other Segments IBIT for the years ended August 31, 2017, and 2016

Our Nitrogen Production segment IBIT decreased overall as a result of lower equity method income caused by downward pressures on the pricing of urea and UAN, which are produced and sold by CF Nitrogen. This was partially offset by a gain of $30.5 million in fiscal 2017 associated with an embedded derivative asset inherent in the agreement relating to our investment in CF Nitrogen for which there was no comparable gain in the prior fiscal year. See Note 4, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information. Our Foods segment IBIT decreased in fiscal 2017 due to lower margins as customers put pressure on pricing. Corporate and Other IBIT increased primarily due to improved earnings from our wheat milling joint venture.

Comparison of All Other Segments IBIT for the years ended August 31, 2016, and 2015

Our Nitrogen Production segment was created as a result of our equity method investment in CF Nitrogen, which was consummated February 1, 2016. See Note 4, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information. As fiscal 2016 represented our initial year of investment, there is no comparable income in the prior year. Our Foods segment and Corporate and Other did not experience a significant change in IBIT in fiscal 2016 when compared to fiscal 2015.

Revenues by Segment

Energy
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Revenue
$
6,265,197

 
$
5,447,542

 
$
8,210,337

 
$
817,655

 
15.0
%
 
$
(2,762,795
)
 
(33.7
)%

The following table and commentary present the primary reasons for the changes in revenue for the Energy segment for each of the years ended August 31, 2017, and 2016, compared to the prior year:
 
 
2017 vs. 2016
 
2016 vs. 2015
 
 
(Dollars in millions)
Volume
 
$
237

 
$
(596
)
Price
 
568

 
(2,142
)
Other*
 
13

 
(25
)
Total change in Energy revenue
 
$
818

 
$
(2,763
)
* Other includes retail and non-commodity type activities.



27


Comparison of Energy segment revenue for the years ended August 31, 2017, and 2016

The $817.7 million increase in Energy revenue for fiscal 2017 reflects the following:
Refined fuels revenues rose $678.3 million (15%), of which approximately $456.0 million related to an increase in the net average selling price and $222.3 million related to higher sales volumes, compared to the prior year. The selling price of refined fuels products increased an average of $0.16 (10%) per gallon, and sales volumes increased 5%, compared to the previous year.
Propane revenues increased $109.5 million (22%), of which $100.1 million was attributable to a rise in the net average selling price and $9.4 million was attributable to higher volumes. Propane sales volume increased 2% and the average selling price of propane increased $0.13 (20%) per gallon, when compared to the previous year.

Comparison of Energy segment revenue for the years ended August 31, 2016, and 2015

The $2.8 billion decrease in Energy revenue for fiscal 2016 reflects the following:
Refined fuels revenues decreased $2.5 billion (35%), of which approximately $2.0 billion related to a decline in the net average selling price and $480.1 million related to lower sales volumes, compared to the prior year. The selling price of refined fuels products decreased an average of $0.74 (30%) per gallon and sales volumes decreased 7%, compared to the previous year.
Propane revenues decreased $396.4 million (43%), of which $252.2 million was attributable to a lower net average selling price and $144.2 million was attributable to a decline in volumes. Propane sales volume decreased 16% due to warmer temperatures in fiscal 2016 compared to fiscal 2015 and the average selling price of propane decreased $0.34 (32%) per gallon, when compared to the previous year.

Ag
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Revenue
$
25,578,393

 
$
24,809,298

 
$
26,299,947

 
$
769,095

 
3.1
%
 
$
(1,490,649
)
 
(5.7
)%

The following table and commentary present the primary reasons for the changes in revenue for the Ag segment for each of the years ended August 31, 2017, and 2016, compared to the prior year:
 
 
2017 vs. 2016
 
2016 vs. 2015
 
 
(Dollars in millions)
Volume
 
$
804

 
$
4,079

Price
 
(37
)
 
(5,541
)
Other*
 
2

 
(29
)
Total change in Ag revenue
 
$
769

 
$
(1,491
)
* Other includes retail and non-commodity type activities.

Comparison of Ag segment revenue for the years ended August 31, 2017, and 2016

The $769.1 million increase in Ag segment revenue for fiscal 2017 reflects the following:
Grain and oilseed revenues attributable to country operations and grain marketing totaled $18.0 billion and $16.8 billion during the years ended August 31, 2017, and 2016, respectively. The grain and oilseed revenue increase of $1.2 billion (7%) was attributable to $396.4 million in higher average grain selling prices and a rise in volumes of $815.0 million. The average sales price of all grain and oilseed commodities sold reflected an increase of 2%. Wheat, corn and soybean volumes increased by approximately 4% compared to the prior year. The increase in volumes was due to the large U.S. crop production, while the rise in pricing was primarily due to higher spring wheat and soybean prices.
Our processing and food ingredients revenue decreased $205.7 million, primarily due to a $181.1 million decline resulting from the prior-year sale of an international location, along with a decline in volumes of $274.7 million (17%). An average sales price increase of $0.70 (5%) related to our oilseed commodities helped to partially offset the decreases by $250.1 million.

28


Wholesale crop nutrient revenues attributable to crop nutrients and grain marketing decreased $54.3 million due to lower average fertilizer selling prices of $330.7 million, partially offset by higher volumes of $276.4 million. Our wholesale crop nutrient volumes increased 14% and the average sales price of all fertilizers sold reflected a decrease of $44.11 (14%) per ton compared to the prior year. The increase in volumes was due to improved market conditions from the prior year as well as supply chain management improvements.
Our renewable fuels revenue from our marketing and production operations decreased $7.2 million primarily as the result of 4% lower volumes, partially offset by a higher average sales price of $0.06 (4%) per gallon. Market supply and demand forces increased average sales prices. The decrease in volumes was due to lower exports.
The remaining Ag segment product revenues related primarily to feed and farm supplies decreased $176.9 million mainly due to reduced country operations retail sales and a falloff in plant food and sunflower pricing. The decreases were partially offset by increases in diesel sold as a result of higher grain movement and a rise in propane sold for home heating.
Total Ag revenues include "Other" revenues, which are generated from our country operations elevators and agri-service centers that derive revenues from activities related to production agriculture. These revenue generating activities include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other associated services of this nature. In addition, our grain marketing operations receive "Other" revenues at our export terminals from activities related to loading vessels.

Comparison of Ag segment revenue for the years ended August 31, 2016, and 2015

The $1.5 billion decrease in Ag segment revenue for fiscal 2016 reflects the following:
Grain and oilseed revenues attributable to country operations and grain marketing totaled $16.8 billion and $17.2 billion during the years ended August 31, 2016, and 2015, respectively. The grain and oilseed revenue decrease of $479.2 million (3%) was attributable to $3.4 billion in lower average grain selling prices, partially offset by an increase in volumes of $3.0 billion. The average sales price of all grain and oilseed commodities sold reflected a decrease of 17%.
Our processing and food ingredients revenues were essentially flat with higher volumes offsetting lower average selling prices on our oilseed products. Typically, changes in average selling prices of oilseed products are primarily driven by the average market prices of soybeans. The increase in volumes sold is mostly due to the acquisition of a plant late in the fourth quarter of fiscal 2015.
Wholesale crop nutrient revenues attributable to crop nutrients and grain marketing decreased due to lower average fertilizer selling prices of $480.2 million and $8.7 million related to lower volumes. Our wholesale crop nutrient volumes decreased less than 1% and the average sales price of all fertilizers sold reflected a decline of $72.86 (19%) per ton.
Our renewable fuels revenue from our marketing and production operations decreased primarily as the result of a lower average sales price of $0.21 (12%) per gallon. Market supply and demand forces, as well as the decline in traditional fuel prices, drove prices lower year over year. The impact of lower prices was partially offset by higher volumes.
The remaining Ag segment product revenues related primarily to feed and farm supplies decreased mainly due to reduced country operations retail sales and the price of energy-related products.
Total Ag revenues include "Other" revenues which are generated from our country operations elevators and agri-service centers that derive revenues from activities related to production agriculture. These revenue generating activities include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other associated services of this nature. In addition, our grain marketing operations receive "Other" revenues at our export terminals from activities related to loading vessels.








29


All Other Segments
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Corporate and Other revenue
$
91,161

 
$
90,363

 
$
72,158

 
$
798

 
0.9
%
 
$
18,205

 
25.2
%


Comparison of All Other Segments revenue for the years ended August 31, 2017, and 2016

There were no significant changes to revenue for all other segments for fiscal 2017. Our Nitrogen Production and Foods reportable segments represent equity method investments, and as such record earnings and allocated expenses but not revenue. Our Nitrogen Production segment did not exist prior to fiscal 2016.

Comparison of All Other Segments revenue for the years ended August 31, 2016, and 2015

Corporate and Other revenue for fiscal 2016 increased due to additional interest revenue within business solutions.

Cost of Goods Sold by Segment

Energy
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Cost of goods sold
$
5,998,958

 
$
5,043,676

 
$
7,522,319

 
$
955,282

 
18.9
%
 
$
(2,478,643
)
 
(33.0
)%

The following table and commentary present the primary reasons for the changes in cost of goods sold ("COGS") for the Energy segment for each of the years ended August 31, 2017, and 2016, compared to the prior year:
 
 
2017 vs. 2016
 
2016 vs. 2015
 
 
(Dollars in millions)
Volume
 
$
221

 
$
(556
)
Price
 
692

 
(1,901
)
Other*
 
42

 
(22
)
Total change in Energy cost of goods sold
 
$
955

 
$
(2,479
)
* Other includes retail and non-commodity type activities.

Comparison of Energy segment COGS for the years ended August 31, 2017, and 2016

The $1.0 billion increase in Energy segment COGS for fiscal 2017 reflects the following:
Refined fuels cost of goods sold increased $806.9 million (20%), which reflects a $0.21 (14%) per gallon rise in the average cost of refined fuels and a 5% volume increase.
The increase in propane cost of goods sold of $95.9 million was attributable to a 2% rise in volumes and an increase in average cost of $0.17 (28%) per gallon, these increases were partially offset by certain manufacturing changes that reduced costs of goods sold by $46.0 million.

Comparison of Energy segment COGS for the years ended August 31, 2016, and 2015

The $2.5 billion decrease in Energy segment COGS for fiscal 2016 reflects the following:
Refined fuels cost of goods sold decreased $1.8 billion (30%), which reflects a $0.52 (24%) per gallon reduction in the average cost of refined fuels and a 7% decrease in volumes.
The propane cost of goods sold decreased $432.3 million (47%), primarily from an average cost decline of $0.38 (37%) per gallon and a 16% decrease in volumes.


30


Ag
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Cost of goods sold
$
24,982,729

 
$
24,341,576

 
$
25,567,530

 
$
641,153

 
2.6
%
 
$
(1,225,954
)
 
(4.8
)%

The following table and commentary present the primary reasons for the changes in COGS for the Ag segment for each of the years ended August 31, 2017, and 2016, compared to the prior year:
 
 
2017 vs. 2016
 
2016 vs. 2015
 
 
(Dollars in millions)
Volume
 
$
791

 
$
3,963

Price
 
(484
)
 
(5,077
)
Other*
 
334

 
(112
)
Total change in Ag cost of goods sold
 
$
641

 
$
(1,226
)
* Other includes retail and non-commodity type activities.

Comparison of Ag segment COGS for the years ended August 31, 2017, and 2016

The $641.2 million increase in Ag segment COGS for fiscal 2017 reflects the following:
Grain and oilseed cost of goods sold attributable to country operations and grain marketing totaled $17.7 billion and $16.6 billion during the years ended August 31, 2017, and 2016, respectively. The costs of grains and oilseed procured through our Ag segment increased $1.1 billion. The majority of the addition was driven by a higher average cost per bushel of $0.89 (2%), which accounted for $299.8 million of the increase and a 5% elevation in volumes of $806.0 million. The average month-end market price per bushel of soybeans and spring wheat increased, while corn decreased slightly compared to the prior year. The increase in volumes was due to a large U.S. crop production.
Processing and food ingredients cost of goods sold decreased $205.9 million (13%) and is comprised of a $178.5 million decline due to the sale of an international location in the prior year, plus $268.9 million in lower volumes, partially offset by $268.8 million from a lower average cost of oilseeds purchased for further processing. Changes in cost are typically driven by the market price of soybeans purchased.
Wholesale crop nutrients cost of goods sold attributable to crop nutrients and grain marketing decreased by $93.1 million (5%), caused primarily by a decline of 16%, or $366.0 million, in average cost per ton of product. The drop was partially offset by an increase of 14%, or $272.9 million, in tons sold. The increase in volumes and decrease in the prices paid for goods were due to better market conditions compared to the prior year, as well as beneficial changes in supply chain management.
Renewable fuels cost of goods sold decreased $9.8 million (less than 1%) resulting from a volume decline of 4%, which was partially offset by an increase in the average cost per gallon of $0.06 (4%).
The remaining Ag segment product cost of goods sold, primarily feed and farm supplies, decreased $516.9 million due to a reduction in country operations retail sales and the purchase price of plant food and sunflower.
Total Ag cost of goods sold include "Other" cost of goods sold, which are generated from our country operations elevators and agri-service centers that incur costs from activities related to production agriculture. These cost of goods sold activities include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other associated services of this nature. In addition, our grain marketing operations incur "Other" costs at our export terminals from activities related to loading vessels.

Comparison of Ag segment COGS for the years ended August 31, 2016, and 2015

The $1.2 billion decrease in Ag segment COGS for fiscal 2016 reflects the following:
Grain and oilseed cost of goods sold attributable to country operations and grain marketing totaled $16.6 billion and $16.8 billion during the years ended August 31, 2016 and 2015, respectively. The costs of grains and oilseed procured decreased $269.5 million. The majority of the decrease was driven by a lower average cost per bushel of $0.98 (16%), which accounted for $3.2 billion of the decrease, partially offset by a 17% increase in volumes of $2.9 billion.
Processing and food ingredients cost of goods sold increased $36.9 million (2%) and is comprised of $879.2 million in higher volumes, partially offset by $815.0 million from a lower average cost of oilseeds purchased for further processing. Changes in cost are typically driven by the market price of soybeans purchased.

31


Wholesale crop nutrients cost of goods sold decreased $361.2 million (15%). This is attributable to crop nutrients and grain marketing decreases of 15% in average cost per ton and a decrease in the tons sold of less than 1%.
Renewable fuels cost of goods sold decreased $172.5 million (11%) and is comprised of a decline in the average cost per gallon of $0.21 (12%), which was partially offset by an increase in volumes.
The remaining Ag segment product cost of goods sold, primarily feed and farm supplies, decreased $321.6 million due to a reduction in country operations retail sales and the purchase price of energy related products.
Total Ag cost of goods sold include "Other" cost of goods sold, which are generated from our country operations elevators and agri-service centers that incur costs from activities related to production agriculture. These cost of goods sold activities include grain storage, grain cleaning, fertilizer spreading, crop protection spraying and other associated services of this nature. In addition, our grain marketing operations incur "Other" costs at our export terminals from activities related to loading vessels.

All Other Segments
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Nitrogen Production COGS
$
(538
)
 
$
2,222

 
$

 
$
(2,760
)
 
(124.2
)%
 
$
2,222

 
NM

Corporate and Other COGS
$
4,361

 
$
431

 
$
1,827

 
$
3,930

 
911.8
 %
 
$
(1,396
)
 
(76.4
)%
NM - Not meaningful

Comparison of All Other Segments COGS for the years ended August 31, 2017, and 2016

There were no significant changes to COGS for our Nitrogen Production segment for fiscal 2017. The increase in COGS for Corporate and Other for fiscal 2017 was due to increased commission expense as a result of higher volumes of transactions in business solutions.

Comparison of All Other Segments COGS for the years ended August 31, 2016, and 2015

There were no significant changes to COGS for Corporate and Other for fiscal 2016. Our Nitrogen Production segment, which has COGS related to our commodity hedges, was not created until February 2016, and therefore there are no COGS for our Nitrogen Production segment during fiscal 2015.

Marketing, General and Administrative Expenses
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Marketing, general and administrative expenses
$
604,359

 
$
601,261

 
$
642,309

 
$
3,098

 
0.5
%
 
$
(41,048
)
 
(6.4
)%

Comparison of marketing, general and administrative expenses for the years ended August 31, 2017, and 2016

The $3.1 million increase in marketing, general and administrative expenses for fiscal 2017 reflects the following:
Primarily higher compensation expense, including incentive compensation accruals and separation expenses associated with the departure of our former chief executive officer.
The increase was partially offset by decreases in foreign currency exchange expenses and management focus on cost containment.

Comparison of marketing, general and administrative expenses for the years ended August 31, 2016, and 2015

The $41.0 million decrease in marketing, general and administrative expenses for fiscal 2016 is primarily due to reduced compensation expense, including a significant reduction of incentive compensation accruals.


32


Reserve and Impairment Charges
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Reserve and impairment charges
$
456,679

 
$
47,836

 
$
133,045

 
$
408,843

 
854.7
%
 
$
(85,209
)
 
(64.0
)%

Comparison of reserve and impairment charges for the years ended August 31, 2017, and 2016

The $408.8 million increase in reserve and impairment charges for fiscal 2017 reflects the following:
A Brazil trading partner in our Ag segment entering into bankruptcy-like proceedings under Brazilian law during fiscal 2017, which resulted in charges of $229.4 million.
The loan loss reserve expense in our Ag segment specific to a single producer borrower increased $81.0 million when compared to the prior year.
Charges of $110.6 million related to the impairment of long-lived assets and goodwill in our Ag segment during fiscal 2017.
An impairment charge in our Energy segment of $32.7 million associated with the cancellation of a capital project during fiscal 2017.
These increases were partially offset by decreases in bad debt expense related to other domestic and international areas of the business when compared to fiscal 2016.

Comparison of reserve and impairment charges for the years ended August 31, 2016, and 2015

Reserve and impairment charges for fiscal 2016 decreased $85.2 million as a result of:
In fiscal 2015 there was a $116.5 million charge related to our decision not to proceed with the development of a nitrogen fertilizer plant in Spiritwood, North Dakota, which did not reoccur in fiscal 2016.
The remaining fiscal 2016 charges relate to a net increase in receivables specific reserves related to an international customer and a domestic customer, along with increased costs related to prior year acquisitions included for the full year in fiscal 2016.

Gain (Loss) on Investments
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Gain (loss) on investments
$
(4,569
)
 
$
9,252

 
$
5,239

 
$
(13,821
)
 
(149.4
)%
 
$
4,013

 
76.6
%

Comparison of gain (loss) on investments for the years ended August 31, 2017, and 2016

The decrease in gain (loss) on investments is mainly attributable to the sale of an international investment during fiscal 2017 which resulted in a loss, along with fiscal 2016 gains on bond transactions specific to our international operations that did not reoccur during fiscal 2017.

Comparison of gain (loss) on investments for the years ended August 31, 2016, and 2015

The increase in gain (loss) on investments is mainly attributable to gains on bond transactions specific to our international operations.


33


Interest Expense
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Interest expense
$
171,239

 
$
113,704

 
$
70,659

 
$
57,535

 
50.6
%
 
$
43,045

 
60.9
%

Comparison of interest expense for the years ended August 31, 2017, and 2016

The $57.5 million increase in interest expense for fiscal 2017 was due to higher interest expense of $34.0 million associated with higher debt balances, as well as lower capitalized interest of $23.5 million associated with our ongoing capital projects.

Comparison of interest expense for the years ended August 31, 2016, and 2015

The $43.0 million increase in interest expense for fiscal 2016 reflects the following:
Approximately $50.9 million of the increase was related to interest expense associated with increased debt balances in fiscal 2016 as well as lower capitalized interest of $26.9 million associated with our ongoing capital projects.
The above increases were partially offset by $34.8 million associated with a reduction in patronage earned by the noncontrolling interest of NCRA (now known as CHS McPherson).

Other Income (Loss)
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Other income (loss)
$
95,415

 
$
38,357

 
$
10,326

 
$
57,058

 
148.8
%
 
$
28,031

 
271.5
%

Comparison of other income (loss) for the years ended August 31, 2017, and 2016

The $57.1 million increase in other income (loss) for fiscal 2017 reflects the following:
Higher financing fees associated with various customer activities and receivables totaling $27.8 million.
A gain recorded of $30.5 million associated with an embedded derivative within the contract relating to our strategic investment in CF Nitrogen. See Note 12, Derivative Financial Instruments and Hedging Activities, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.

Comparison of other income (loss) for the years ended August 31, 2016, and 2015

The $28.0 million increase in other income (loss) for fiscal 2016 is related to higher financing fees received from various customer activities and receivables.

Equity Income (Loss) from Investments
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Equity income (loss) from investments
$
137,338

 
$
175,777

 
$
107,850

 
$
(38,439
)
 
(21.9
)%
 
$
67,927

 
63.0
%

Comparison of equity income (loss) from investments for the years ended August 31, 2017, and 2016

Equity income (loss) from investments for fiscal 2017 primarily decreased due to lower equity income recognized from our equity method investments in Ventura Foods and CF Nitrogen caused by lower margins, which was partially offset by higher equity income recognized from our equity method investments in TEMCO and Ardent Mills. See Note 4, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information. We also recorded $20.2 million of impairments related to international investments as a result of continued downward pressures in the agricultural markets. We record equity income or loss from the investments in which we have an

34


ownership interest of 50% or less and have significant influence, but not control, for our proportionate share of income or loss reported by the entity, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations.

Comparison of equity income (loss) from investments for the years ended August 31, 2016, and 2015

Equity income (loss) from investments for fiscal 2016 primarily increased as a result of equity earnings recognized from our new equity method investment in CF Nitrogen. See Note 4, Investments, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.

Income Taxes
 
For the Years Ended August 31

 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Income taxes
$
182,075

 
$
4,091

 
$
12,165

 
$
177,984

 
NM
 
$
(8,074
)
 
(66.4
)%
NM - Not meaningful

Comparison of income taxes for the years ended August 31, 2017, and 2016

During fiscal 2017, we had an increase in income tax benefit when compared to fiscal 2016, which was primarily due to the recognition of deferred tax benefits related to the issuance of non-qualified equity certificates in fiscal 2013 and 2014, a tax benefit in fiscal 2017 from retaining a significant portion of the Domestic production activities deduction and the bad debt deduction in our U.S. tax returns related to the performance of guarantees caused by an approximate $229.4 million loss related to a Brazilian trading partner entering into bankruptcy-like proceedings under Brazilian law. The fiscal 2016 income tax benefit related to an appeals settlement with the Internal Revenue Service that did not reoccur in fiscal 2017. The federal and state statutory rate applied to nonpatronage business activity was 38.4% and 38.3% for the years ended August 31, 2017, and 2016, respectively. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years with fiscal 2017's income tax benefit being unusually large in comparison to income before taxes.

Comparison of income taxes for the years ended August 31, 2016, and 2015

During fiscal 2016, we had a decrease in income tax benefit when compared to fiscal 2015, which was primarily driven by an appeals settlement with the Internal Revenue Service for a fiscal 2007 and 2006 tax matter. The fiscal 2015 income tax benefit related to the issuance of non-qualified equity certificates in fiscal 2013 and 2014 and from the recognition of Kansas tax credits generated by CHS McPherson that did not reoccur in fiscal 2016. The federal and state statutory rate applied to nonpatronage business activity was 38.3% and 38.1% for the years ended August 31, 2016, and 2015, respectively. The income taxes and effective tax rate vary each year based upon profitability and nonpatronage business activity during each of the comparable years.


Liquidity and Capital Resources
Summary
In assessing our financial condition, we consider factors such as working capital and internal benchmarking related to our applicable covenants and other financial criteria. We fund our operations primarily through a combination of cash flows from operations and revolving credit facilities. We fund our capital expenditures and growth primarily through cash, operating cash flow and long-term debt financing.
On August 31, 2017, and August 31, 2016, we had working capital, defined as current assets less current liabilities, of $181.9 million and $414.4 million, respectively. The decrease in working capital was driven primarily by the decrease in our accounts receivable and cash balances. Our current ratio, defined as current assets divided by current liabilities, was 1.0 and 1.1 as of August 31, 2017, and August 31, 2016, respectively.
As of August 31, 2017, we had cash and cash equivalents of $181.4 million, total equities of $7.9 billion, long-term debt of $2.2 billion and notes payable of $2.0 billion. Our capital allocation priorities include maintaining the safety and compliance of our operations, paying our dividends, reducing funded debt and taking advantage of strategic opportunities that benefit our owners. We expect the down cycle in the Ag industry to continue and while we maintain appropriate levels of

35


liquidity, we will continue to consider opportunities to further diversify and enhance our sources and amounts of liquidity. These opportunities include reducing operating expenses, deploying and/or financing working capital more efficiently and identifying and disposing of nonstrategic or underperforming assets. We believe that cash generated by operating activities, along with available borrowing capacity under our credit facilities, will be sufficient to support our operations for the foreseeable future and we expect to remain in compliance with our loan covenants.
In connection with the losses caused by a trading partner of ours in Brazil entering into bankruptcy-like proceedings under Brazilian law, we intend to fund a total of approximately $170.0 million in loan guarantees to our Brazilian operations in the first nine months of fiscal 2018. It is our intention to fund these loan guarantees through a combination of sources including cash flow and the liquidity enhancement actions noted above.
Fiscal 2017 and 2016 Activity
On July 18, 2017, we amended an existing receivables and loans securitization facility (“Securitization Facility” or the "Facility") with certain unaffiliated financial institutions (the "Purchasers"). Under the Securitization Facility, CHS Capital and CHS both sell eligible trade account and notes receivable (“Receivables”) they have originated to Cofina Funding, LLC (“Cofina Funding”), a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina Funding in turn sells the purchased Receivables in their entirety to the Purchasers. Prior to amending the Securitization Facility in July 2017, the transfer of Receivables was accounted for as a secured borrowing. Under the terms of the amended Securitization Facility, CHS accounts for Receivables sold under the facility as a sale of financial assets and derecognizes the sold Receivables from its Consolidated Balance Sheets. The amount available under the Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business, with maximum availability of $700.0 million. As of August 31, 2017, the total availability under the Securitization Facility was $618.0 million, all of which had been utilized. The Securitization Facility had previously been amended in July 2016, which had increased total availability under the Facility to $850.0 million. The amount of funding outstanding against our securitized Receivables at August 31, 2016 was $550.0 million.
The Facility agreement contains certain customary representations and warranties and affirmative covenants, including as to the eligibility of the Receivables being sold, and contains customary program termination events and non-reinvestment events. We were in compliance with all covenants associated with our Securitization Facility as of August 31, 2017.

In February 2016, we invested $2.8 billion in CF Nitrogen, commencing our strategic venture with CF Industries. The investment consists of an 11.4% membership interest (based on product tons) in CF Nitrogen; and an associated 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 annually from CF Nitrogen for ratable delivery. The investment was financed through operating cash flow, the issuance of long-term debt, preferred stock proceeds and available cash.
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. See Note 7, Notes Payable and Long-Term Debt, of the notes to consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.

In December 2015, we entered into three bilateral, uncommitted revolving credit facilities with an aggregate capacity of $1.3 billion. As of August 31, 2017, one bilateral agreement remained with capacity of $250 million. Amounts borrowed under these short-term lines are used to fund our working capital.

In September 2015, we amended and restated our primary committed line of credit, which is a $3.0 billion five-year, unsecured revolving credit facility with a syndication of domestic and international banks that expires in September 2020. The outstanding balance on this facility was $480.0 million and $700.0 million as of August 31, 2017 and 2016, respectively. In addition, we entered into a ten-year term loan with a syndication of banks for up to $600.0 million. The full amount under the term loan was drawn down in January 2016. As of August 31, 2017, $300.0 million of principal under the term loan was outstanding. Principal on the term loan is payable in full on September 4, 2025.


36


Cash Flows

The following table presents summarized cash flow data for the years ended August 31, 2017, 2016, and 2015:
 
 
 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(Dollars in thousands)
Net cash provided by (used in) operating activities
$
932,994

 
$
1,263,498

 
$
570,010

 
$
(330,504
)
 
(26
)%
 
$
693,488

 
122
 %
Net cash provided by (used in) investing activities
(405,041
)
 
(3,746,971
)
 
(1,908,668
)
 
3,341,930

 
89
 %
 
(1,838,303
)
 
(96
)%
Net cash provided by (used in) financing activities
(621,193
)
 
1,814,196

 
153,828

 
(2,435,389
)
 
(134)%
 
1,660,368

 
1,079
 %
Effect of exchange rate changes on cash and cash equivalents
(4,694
)
 
(5,223
)
 
5,436

 
529

 
10
 %
 
(10,659
)
 
(196
)%
Net increase (decrease) in cash and cash equivalents
$
(97,934
)
 
$
(674,500
)
 
$
(1,179,394
)
 
$
576,566

 
85
 %
 
$
504,894

 
43
 %

Fiscal Year 2017 Compared to Fiscal Year 2016

Cash from operating activities for fiscal 2017 decreased $330.5 million, primarily due to the following:
Increases in inventory resulting from increased commodity prices and volumes on hand. On August 31, 2017, the per bushel market prices of two of our primary grain commodities, spring wheat and corn, increased by $1.33 (27%) and $0.41 (14%), respectively, when compared to the spot prices on August 31, 2016. The per bushel market price of our third primary commodity, soybeans, decreased by $0.24 (2%) when compared to the spot price on August 31, 2016. In general, crude oil market prices increased $2.53 (6%) per barrel on August 31, 2017, when compared to August 31, 2016. Partially offsetting grain prices, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses reflected decreases of up to 14%, depending on the specific products, compared to prices on August 31, 2016.
Lower net income due to increased reserve and impairment charges within our Ag and Energy segments.

The $3.3 billion increase in cash from investing activities for fiscal 2017 reflects the following:
Our $2.8 billion investment in CF Nitrogen completed in fiscal 2016 which didn't reoccur in fiscal 2017.
Reduced acquisitions of property, plant and equipment and other business acquisitions. The significant decrease in acquisitions of property, plant and equipment was primarily related to our plan to reduce our capital investments to allow us to actively reduce our funded debt obligations.
Net cash proceeds of $7.9 million related to the sale of Receivables associated with the Securitization Facility.

Cash from financing activities for fiscal 2017 decreased $2.4 billion, primarily due to the following:
Proceeds from issuances of debt instruments related primarily to the financing of the CF Nitrogen investment in fiscal 2016 which didn't reoccur in fiscal 2017.
The decrease above was partially offset by reduced payments of cash patronage in fiscal 2017 and the final contingent payment of the noncontrolling interest in CHS McPherson made in fiscal 2016.

Fiscal Year 2016 Compared to Fiscal Year 2015

Cash from operating activities for fiscal 2016 increased $693.5 million, primarily due to declines in inventory and other current assets resulting from decreased commodity prices. On August 31, 2016, the per bushel market prices of two of our primary grain commodities, corn and spring wheat, decreased by $0.90 (23%) and $0.11 (2%), respectively, when compared to the spot prices on August 31, 2015. The per bushel market price of our third primary commodity, soybeans, increased by $0.63 (7%) when compared to the spot price on August 31, 2015. In general, crude oil market prices decreased $4.50 (9%) per barrel on August 31, 2016, when compared to August 31, 2015. Comparing the same periods, fertilizer commodity prices affecting our wholesale crop nutrients and country operations retail businesses reflected decreases of up to 34%, depending on the specific products, compared to prices on August 31, 2015.

The $1.8 billion decrease in cash from investing activities for fiscal 2016, reflects the following:
Our $2.8 billion investment in CF Nitrogen.
The decrease above was partially offset by reduced acquisitions of property, plant and equipment and other business acquisitions. The significant decrease in acquisitions of property, plant and equipment was primarily related to our plan to reduce our capital investments to allow us to actively reduce our funded debt obligations.


37


Cash from financing activities for fiscal 2016 increased $1.7 billion, primarily due to proceeds from issuances of debt instruments related primarily to the financing of the CF Nitrogen investment.

Future Uses of Cash

We expect to utilize cash and cash equivalents, along with cash generated by operating activities to fund capital expenditures and payments for debt, interest, dividends and guarantees. The following is a summary of our primary cash requirements for fiscal 2018:

Capital expenditures. We expect total capital expenditures for fiscal 2018 to be approximately $602.0 million, compared to capital expenditures of $446.7 million in fiscal 2017. Included in that amount for fiscal 2018 is approximately $221.0 million for the acquisition of property, plant and equipment and major repairs at our Laurel, Montana and McPherson, Kansas refineries.
Major repairs. Refineries have planned major maintenance to overhaul, repair, inspect and replace process materials and equipment (referred to as "turnaround") which typically occur for a five-to-six week period every 2-5 years. Our Laurel, Montana refinery has planned maintenance scheduled for fiscal 2018 for approximately $92.0 million.
Debt and interest. We expect to repay approximately $149.1 million of long-term debt obligations and incur interest payments of approximately $87.8 million during fiscal 2018.
Preferred stock dividends. We had approximately $2.3 billion of preferred stock outstanding at August 31, 2017. We expect to pay dividends on our preferred stock of approximately $168.7 million during fiscal 2018.
Guarantees. We intend to fund a total of approximately $170 million in loan guarantees to our Brazilian operations in the next nine months as a result of losses caused by a trading partner of ours in Brazil entering into bankruptcy-like proceedings under Brazilian law.

Future Sources of Cash
    
We fund our operations primarily through a combination of cash flows from operations and committed and uncommitted revolving credit facilities, including our Securitization Facility. We believe these sources will provide adequate liquidity to meet our working capital needs. We fund certain of our long-term capital needs, primarily those related to acquisitions of property, plant and equipment by issuing privately placed long-term debt and term loans. In addition, our wholly-owned subsidiary, CHS Capital, makes loans to member cooperatives, businesses and individual producers of agricultural products included in our cash flows from investing activities, and has financing sources as detailed below in CHS Capital Financing.

Working Capital Financing

We finance our working capital needs through committed and uncommitted lines of credit with domestic and international banks. We believe our current cash balances and our available capacity on our committed lines of credit will provide adequate liquidity to meet our working capital needs. The following table summarizes our primary lines of credit as of August 31, 2017, and 2016:
Revolving Credit Facilities
 
Maturities
 
Total Capacity
 
Borrowings Outstanding
 
Interest Rates
 
 
 
 
2017
 
2017
 
2016
 
 
 
 
 
 
(Dollars in thousands)
 
 
Committed Five-Year Unsecured Facility
 
2020
 
$
3,000,000

 
$480,000
 
$700,000
 
LIBOR+0.00% to 1.45%
Uncommitted Bilateral Facilities
 
2017
 
250,000

 
250,000
 
300,000
 
LIBOR+0.00% to 1.05%
In addition to our primary revolving lines of credit, we have a three-year $325.0 million committed revolving pre-export credit facility for CHS Agronegocio Industria e Comercio Ltda ("CHS Agronegocio"), our wholly-owned subsidiary in Brazil. CHS Agronegocio uses the facility, which expires in April 2019, to finance its working capital needs related to its purchases and sales of grains, fertilizers and other agricultural products. As of August 31, 2017, the outstanding balance under the facility was $250.0 million.
In addition to our uncommitted bilateral facility above, as of August 31, 2017, our wholly-owned subsidiaries, CHS Europe S.a.r.l and CHS Agronegocio, had uncommitted lines of credit with $433.9 million outstanding. In addition, our other international subsidiaries had lines of credit with a total of $168.4 million outstanding as of August 31, 2017, of which $15.4 million was collateralized.


38


On August 31, 2017, and 2016, we had total short-term indebtedness outstanding on these various primary and other facilities, as well as other miscellaneous short-term notes payable, in the amount of $1.7 billion and $1.8 billion, respectively.
Long-term Debt Financing
The following table presents summarized long-term debt data for the years ended August 31, 2017, and 2016.
 
For the Years Ended August 31

 
2017
 
2016
 
(Dollars in thousands)
Private placement debt
$
1,643,886

 
$
1,775,924

Bank financing
445,000

 
345,000

Capital lease obligations
33,075

 
105,708

Other notes and contract payable
62,652

 
76,147

Deferred financing costs
(4,820
)
 
(5,574
)
 
$
2,179,793

 
$
2,297,205

Long-term debt outstanding as of August 31, 2017, has aggregate maturities, excluding fair value adjustments and capital leases, as follows:
 
(Dollars in thousands)
2018
$
149,050

2019
167,412

2020
31,478

2021
182,949

2022
126

Thereafter
1,611,385

 
$
2,142,400

See Note 7, Notes Payable and Long-Term Debt, of the notes to consolidated financial statements that are included in this Annual Report on Form 10-K for additional information.
CHS Capital Financing
For a description of the Securitization Facility, see above in Fiscal 2017 and 2016 activity.
CHS Capital has available credit under master participation agreements with numerous counterparties. Prior to the fourth quarter of fiscal 2017, all borrowings under these agreements were accounted for as secured borrowings. During the fourth quarter of fiscal 2017, certain of these agreements were amended resulting in the Company accounting for the participations as the sale of financial assets. As of August 31, 2017, the remaining participations accounted for as secured borrowings bear interest at variable rates ranging from 2.61% to 4.45%. As of August 31, 2017, the total funding commitment under these agreements was $94.1 million, of which $29.4 million was borrowed.

CHS Capital sells loan commitments it has originated to ProPartners Financial ("ProPartners") on a recourse basis. The total capacity for commitments under the ProPartners program is $265.0 million. The total outstanding commitments under the program totaled $220.2 million as of August 31, 2017, of which $144.1 million was borrowed under these commitments with an interest rate of 2.45%.

CHS Capital borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and bear interest at variable rates ranging from 0.10% to 0.90% as of August 31, 2017, and are due upon demand. Borrowings under these notes totaled $119.3 million as of August 31, 2017.

Covenants    
Our long-term debt is unsecured; however, restrictive covenants under various debt agreements have requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with all debt covenants and restrictions as of August 31, 2017. Based on our current 2018 projections, we expect continued covenant compliance in the near term.

39


In September 2015, we amended all outstanding notes to conform the financial covenants applicable thereto to those of our amended and restated five-year, unsecured, revolving credit facility. The amended notes provide that if our ratio of consolidated funded debt to consolidated cash flow is greater than 3.0 to 1.0, the interest rate on all outstanding notes will be increased by 0.25% until the ratio becomes 3.0 or less. During both fiscal 2017 and 2016, our ratio of funded debt to consolidated cash flow remained below 3.0 to 1.0.
Patronage and Equity Redemptions
In accordance with our bylaws and upon approval of our Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year. For the year ended August 31, 2017, our Board of Directors authorized only non-qualified distributions, with no cash patronage. For the years ended August 31, 2016, 2015, and 2014, the cash portion of the qualified distributions was deemed by our Board of Directors to be 40%.
The following table presents estimated patronage data for the year ending August 31, 2018, and actual patronage data for the years ended August 31, 2017, 2016, and 2015:
 
2018
 
2017
 
2016
 
2015
 
(Dollars in millions)
Patronage Distributed in Cash
$

 
$
103.9

 
$
251.7

 
$
271.2

Patronage Distributed in Equity
126.3

 
153.6

 
375.5

 
550.3

Total Patronage Distributed
$
126.3

 
$
257.5

 
$
627.2

 
$
821.5

 
In accordance with authorization from our Board of Directors, we expect total redemptions related to the year ended August 31, 2017, that will be distributed in fiscal 2018, to be approximately $10.0 million and to be mostly in the form of redemptions of equity owned by the estates of deceased individual producer members. These redemptions are classified as a current liability on the August 31, 2017, Consolidated Balance Sheet.
On March 30, 2017, we issued 695,390 shares of Class B Series 1 Preferred Stock to redeem approximately $20.0 million of qualified equity certificates to eligible owners. Each share of Class B Series 1 Preferred Stock was issued in redemption of $28.74 of qualified equity certificates.
In March 2016, we redeemed approximately $76.8 million of qualified equity certificates by issuing 2,693,195 shares of Class B Series 1 Preferred Stock, with a total redemption value of $67.3 million, excluding accumulated dividends. For each share of Class B Series 1 Preferred Stock that was issued, we redeemed $28.50 worth of capital equity certificates.
See Note 9, Equities, of the notes to consolidated financial statements that are included in this Annual Report on Form 10-K for a summary of our outstanding preferred stock as of August 31, 2017, each series of which is listed on the Global Select Market of NASDAQ.

Off Balance Sheet Financing Arrangements

Guarantees:

We are a guarantor for lines of credit and performance obligations of related, non-consolidated companies. Our bank covenants allow maximum guarantees of $1.0 billion, of which $105.3 million were outstanding on August 31, 2017. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide guarantees were current as of August 31, 2017.

Operating leases:
    
Minimum future lease payments required under noncancelable operating leases as of August 31, 2017, were $236.6 million.

Debt:

There is no material off balance sheet debt.


40


Receivables Securitization Facility and Loan Participations:

In fiscal 2017, we engaged in off-balance sheet arrangements through our Securitization Facility and certain loan participation agreements. Refer to further details about these arrangements in Note 2, Receivables, of the notes to the consolidated financial statements that are included in this Annual Report on Form 10-K.

Contractual Obligations

We had certain contractual obligations at August 31, 2017, which require the following payments to be made:
 
Payments Due by Period
 
Total
 
Less than
1 Year
 
1 - 3
Years
 
3 - 5
Years
 
More than
5 Years
 
(Dollars in thousands)
Long-term debt obligations (1)
$
2,142,400

 
$
149,050

 
$
198,890

 
$
183,075

 
$
1,611,385

Interest payments (2)
647,782

 
87,756

 
159,427

 
141,984

 
258,615

Capital lease obligations (3)
39,500

 
6,867

 
10,878

 
8,470

 
13,285

Operating lease obligations
236,620

 
57,957

 
76,989

 
44,874

 
56,800

Purchase obligations (4)
7,534,491

 
5,802,142

 
812,211

 
243,978

 
676,160

Other liabilities (5)
635,490

 
37,984

 
35,836

 
21,832

 
539,838

Total obligations
$
11,236,283

 
$
6,141,756

 
$
1,294,231

 
$
644,213

 
$
3,156,083

_______________________________________
(1) 
Excludes fair value adjustments to the long-term debt reported on our Consolidated Balance Sheet at August 31, 2017, resulting from fair value interest rate swaps and the related hedge accounting.
(2) 
Based on interest rates and long-term debt balances at August 31, 2017.
(3) 
Future minimum lease payments under capital leases include amounts related to bargain purchase options and residual value guarantees, which represent economic obligations as opposed to contractual payment obligations.
(4) 
Purchase obligations are legally binding and enforceable agreements to purchase goods or services that specify all significant terms, including fixed or minimum quantities; fixed, minimum or variable price provisions; and approximate time of the transactions. In the ordinary course of business, we enter into a significant number of forward purchase commitments for agricultural and energy commodities and the related freight. The purchase obligation amounts shown above include both short- and long-term obligations and are based on: a) fixed or minimum quantities to be purchased; and b) fixed or estimated prices to be paid at the time of settlement. Current estimates are based on assumptions about future market conditions that will exist at the time of settlement. Consequently, actual amounts paid under these contracts may differ due to the variable pricing provisions. Market risk related to the variability of our forward purchase commitments is economically hedged by offsetting forward sale contracts that are not included in the amounts above.
(5) 
Other liabilities include the long-term portion of deferred compensation, deferred tax liabilities and contractual redemptions. Of the total other liabilities and deferred tax liabilities of $611.9 million on our Consolidated Balance Sheet at August 31, 2017, the timing of the payments of $519.8 million of such liabilities cannot be determined.
    
Critical Accounting Estimates

Our consolidated financial statements are prepared in conformity with U.S. GAAP. The preparation of these consolidated financial statements requires the use of estimates as well as management’s judgments and assumptions regarding matters that are subjective, uncertain or involve a high degree of complexity, all of which affect the results of operations and financial condition for the periods presented. We believe that of our significant accounting policies, the following may involve a higher degree of estimates, judgments and complexity.


41


Inventory Valuation and Reserves

Grain, processed grain, oilseed and processed oilseed inventories are stated at net realizable value. All other inventories are stated at the lower of cost or net realizable value. The costs of certain energy inventories (wholesale refined products, crude oil and asphalt) are determined on the last-in, first-out ("LIFO") method; all other inventories of non-grain products purchased for resale are valued on the first-in, first-out ("FIFO") and average cost methods. Estimates are used in determining the net realizable values of grain and oilseed and processed grains and oilseeds inventories. These estimates include the measurement of grain in bins and other storage facilities, which use formulas in addition to actual measurements taken to arrive at appropriate quantities. Other determinations made by management include quality of the inventory and estimates for freight. Grain shrink reserves and other reserves that account for spoilage also affect inventory valuations. If estimates regarding the valuation of inventories, or the adequacy of reserves, are less favorable than management’s assumptions, then additional reserves or write-downs of inventories may be required.

Derivative Financial Instruments

We enter into exchange-traded commodity futures and options contracts to hedge our exposure to price fluctuations on energy, grain and oilseed transactions to the extent considered practicable for minimizing risk. Futures and options contracts used for hedging are purchased and sold through regulated commodity exchanges. We also use over-the-counter ("OTC") instruments to hedge our exposure on fixed-price contracts. Fluctuations in inventory valuations, however, may not be completely hedged, due in part to the absence of satisfactory hedging facilities for certain commodities and geographical areas and, in part, to our assessment of our exposure from expected price fluctuations. We also manage our risks by entering into fixed-price purchase contracts with preapproved producers and establishing appropriate limits for individual suppliers. Fixed-price sales contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. The fair values of futures and options contracts are determined primarily from quotes listed on regulated commodity exchanges. Fixed-price purchase and sales contracts are with various counterparties, and the fair values of such contracts are determined from the market price of the underlying product. We are exposed to loss in the event of nonperformance by the counterparties to the contracts and, therefore, contract values are reviewed and adjusted to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and also the risk that the counterparty will refuse to perform on a contract during periods of price fluctuations where contract prices are significantly different than the current market prices.

Pension and Other Postretirement Benefits

Pension and other postretirement benefits costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest costs, expected return on plan assets, mortality rates and other factors. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expenses and the recorded obligations in future periods. While our management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension and other postretirement obligations and future expenses.

Deferred Tax Assets and Uncertain Tax Positions

We assess whether a valuation allowance is necessary to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. While we have considered future taxable income, as well as other factors, in assessing the need for the valuation allowance, in the event that we were to determine that we would not be able to realize all, or part of, our net deferred tax assets in the future, an adjustment to our deferred tax assets would be charged to income in the period such determination was made. We are also significantly impacted by the utilization of tax credits, some of which were passed to us from CHS McPherson (formerly known as NCRA), related to refinery upgrades that enable us to produce ultra-low sulfur fuels. Our tax credit carryforwards are available to offset future federal and state tax liabilities with the tax credits becoming unavailable to us if not used by their expiration date. Our net operating loss carryforwards for tax purposes are available to offset future taxable income. If our loss carryforwards are not used, these loss carryforwards will expire.

Tax benefits related to uncertain tax positions are recognized in our financial statements if it is more likely than not that the position would be sustained upon examination by a tax authority that has full knowledge of all relevant information. The benefits are measured using a cumulative probability approach. Under this approach, we record in our financial statements the greatest amount of tax benefits that have a more than 50% probability of being realized upon final settlement with the tax authorities. In determining these tax benefits, we assign probabilities to a range of outcomes that we feel we could ultimately settle on with the tax authorities using all relevant facts and information available at the reporting date. Due to the complexity of these uncertainties, the ultimate resolution may result in a benefit that is materially different than our current estimate.

42



Long-Lived Assets

Property, plant and equipment is depreciated or amortized over the expected useful lives of individual or groups of assets based on the straight-line method. Economic circumstances, or other factors, may cause management’s estimates of expected useful lives to differ from actual.

All long-lived assets, including property, plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangibles, are evaluated for impairment in accordance with U.S. GAAP, at least annually for goodwill, and whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or asset group may not be recoverable. For goodwill, our annual impairment testing occurs in our fourth quarter. An impaired asset is written down to its estimated fair value based on the best information available. Fair value is generally measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and may differ from actual.

We have asset retirement obligations with respect to certain of our refineries and other assets due to various legal obligations to clean and/or dispose of the component parts at the time they are retired. In most cases, these assets can be used for extended and indeterminate periods of time, as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain refineries and related assets and to continue making improvements to those assets based on technological advances. As a result, we believe our refineries and related assets have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire a refinery and related assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery or other asset, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that future cost.

We have other assets that we may be obligated to dismantle at the end of corresponding lease terms subject to lessor discretion for which we have recorded asset retirement obligations. Based on our estimates of the timing, cost and probability of removal, these obligations are not material.

Effect of Inflation and Foreign Currency Transactions

We believe that inflation and foreign currency fluctuations have not had a significant effect on our operations during the three years ended August 31, 2017, since we conduct a significant portion of our business in U.S. dollars.

Recent Accounting Pronouncements

See Note 1, Organization, Basis of Presentation and Significant Accounting Policies, of the notes to consolidated financial statements that are included in this Annual Report on Form 10-K for information concerning new accounting standards and the impact of the implementation of those standards on our financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY PRICE RISK

When we enter into a commodity purchase or sales commitment, we incur risks related to price changes and performance including delivery, quality, quantity and shipment period. In the event that market prices decrease, we are exposed to risk of loss in the market value of inventory and purchase contracts with a fixed or partially fixed price. Conversely, we are exposed to risk of loss on our fixed or partially fixed price sales contracts in the event that market prices increase.

Our use of hedging reduces the exposure to price volatility by protecting against adverse short-term price movements, but it also limits the benefits of favorable short-term price movements. To reduce the price risk associated with fixed price commitments, we generally enter into commodity derivative contracts, to the extent practical, to achieve a net commodity position within the formal position limits we have established and deemed prudent for each commodity. These contracts are primarily transacted on regulated commodity futures exchanges but may also include over-the-counter derivative instruments when deemed appropriate. For commodities where there is no liquid derivative contract, risk is managed through the use of forward sales contracts, other pricing arrangements and, to some extent, futures contracts in highly correlated commodities. These contracts are economic hedges of price risk, but are not designated as hedging instruments for accounting purposes. The contracts are recorded on our Consolidated Balance Sheets at fair values based on quotes listed on regulated commodity exchanges or the market prices of the underlying products listed on the exchanges, except that fertilizer and propane contracts

43


are accounted for as normal purchase and normal sales transactions. Unrealized gains and losses on these contracts are recognized in cost of goods sold in our Consolidated Statements of Operations.
When a futures position is established, initial margin must be deposited with the applicable exchange or broker. The amount of margin required varies by commodity and is set by the applicable exchange at its sole discretion. If the market price relative to a short futures position increases, an additional margin deposit would be required. Similarly, a margin deposit would be required if the market price relative to a long futures position decreases. Conversely, if the market price increases relative to a long futures position or decreases relative to a short futures position, margin deposits may be returned by the applicable exchange or broker.
Our policy is to manage our commodity price risk exposure according to internal polices and in alignment with our tolerance for risk. Our profitability from operations is primarily derived from margins on products sold and grain merchandised, not from hedging transactions. At any one time, inventory and purchase contracts for delivery to us may be substantial. We have risk management policies and procedures that include established net position limits. These limits are defined for each commodity and business unit, and may include both trader and management limits as appropriate. The limits policy is overseen at a high level by our corporate compliance team, with day to day monitoring procedures managed within each individual business unit to ensure any limits overage is explained and exposures reduced or a temporary limit increase is established if needed. The position limits are reviewed, at least annually, with senior leadership and the Board of Directors. We monitor current market conditions and may expand or reduce our net position limits or procedures in response to changes in those conditions. In addition, all purchase and sales contracts are subject to credit approvals and appropriate terms and conditions.
The use of hedging instruments does not protect against nonperformance by counterparties to cash contracts. We evaluate counterparty exposure by reviewing contracts and adjusting the values to reflect potential nonperformance. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and the risk that the counterparty will refuse to perform on a contract during periods of price fluctuations where contract prices are significantly different than the current market prices. We manage these risks by entering into fixed price purchase and sales contracts with preapproved producers and by establishing appropriate limits for individual suppliers. Fixed price contracts are entered into with customers of acceptable creditworthiness, as internally evaluated. Regarding our use of derivatives, we primarily transact in exchange traded instruments or enter into over-the-counter derivatives that clear through a designated clearing organization, which limits our counterparty exposure relative to hedging activities. Historically, we have not experienced significant events of nonperformance on open contracts. Accordingly, we only adjust the estimated fair values of specifically identified contracts for nonperformance. Although we have established policies and procedures, we make no assurances that historical nonperformance experience will carry forward to future periods.
A 10% adverse change in market prices would not materially affect our results of operations, since we use commodity and freight futures and forward contracts as economic hedges of price risk, and since our operations have effective economic hedging requirements as a general business practice.

INTEREST RATE RISK

Debt used to finance inventories and receivables is represented by short-term notes payable, so that our blended interest rate for all such notes approximates current market rates. 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 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 fiscal 2017, we recorded offsetting fair value adjustments of $12.8 million, 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. 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

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did not issue additional fixed-rate debt as previously planned, and we reclassified all amounts previously recorded to other comprehensive income into earnings.

The table below provides information about our outstanding debt and derivative financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents scheduled contractual principal payments and related weighted average interest rates for the fiscal years presented. For interest rate swaps, the table presents notional amounts for payments to be exchanged by expected contractual maturity dates for the fiscal years presented and interest rates noted in the table.
Expected Maturity Date
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
 
Fair Value
Asset (Liability)
 
(Dollars in thousands)
Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Variable rate miscellaneous
short-term notes payable
$
1,695,423

 
$

 
$

 
$

 
$

 
$

 
$
1,695,423

 
$
(1,695,423
)
Average interest rate
2.4
%
 

 

 

 

 

 
2.4
%
 

Variable rate CHS Capital
short-term notes payable
$
292,792

 
$

 
$

 
$

 
$

 
$

 
$
292,792

 
$
(292,792
)
Average interest rate
1.7
%