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Table of Contents


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
Form 10-Q
________________________________________
þ
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended May 31, 2017.
or
o
 
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

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


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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Exchange Act).
YES o NO þ

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

 



INDEX
 
 
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 




Unless the context otherwise requires, for purposes of this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company” and “CHS” refer to CHS Inc., a Minnesota cooperative corporation, and its subsidiaries as of May 31, 2017.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains and our other publicly available documents may contain, and our officers, directors and other representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our businesses, financial condition and results of operations, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not place undue reliance on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements are discussed or identified in our public filings made with the U.S. Securities and Exchange Commission ("SEC"), including in the "Risk Factors" discussion in Item 1A of our Annual Report on Form 10-K for the year ended August 31, 2016. Any forward-looking statements made by us in this Quarterly Report on Form 10-Q are based only on information currently available to us and speak only as of the date on which the statement is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as required by applicable law.

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PART I. FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

CHS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
May 31,
2017
 
August 31,
2016
 
(Dollars in thousands)
ASSETS
 
 
 
Current assets:
 

 


Cash and cash equivalents
$
267,229

 
$
279,313

Receivables
2,722,325

 
2,880,763

Inventories
2,684,087

 
2,370,699

Derivative assets
388,188

 
543,821

Margin deposits
251,695

 
310,276

Supplier advance payments
431,433

 
347,600

Other current assets
255,236

 
202,708

Total current assets
7,000,193

 
6,935,180

Investments
3,841,749

 
3,795,976

Property, plant and equipment
5,409,151

 
5,488,323

Other assets
970,704

 
1,092,656

Total assets
$
17,221,797

 
$
17,312,135

LIABILITIES AND EQUITIES
 
 
 
Current liabilities:
 

 
 

Notes payable
$
3,321,808

 
$
2,731,479

Current portion of long-term debt
193,096

 
214,329

Customer margin deposits and credit balances
132,479

 
208,991

Customer advance payments
390,576

 
412,823

Accounts payable
1,809,868

 
1,819,049

Derivative liabilities
284,212

 
513,599

Accrued expenses
422,371

 
422,494

Dividends and equities payable
134,718

 
198,031

Total current liabilities
6,689,128

 
6,520,795

Long-term debt
2,046,264

 
2,082,876

Long-term deferred tax liabilities
350,966

 
487,762

Other liabilities
276,483

 
354,452

Commitments and contingencies


 


Equities:
 

 
 

Preferred stock
2,264,063

 
2,244,132

Equity certificates
4,214,657

 
4,237,174

Accumulated other comprehensive loss
(209,700
)
 
(211,726
)
Capital reserves
1,577,469

 
1,582,380

Total CHS Inc. equities
7,846,489

 
7,851,960

Noncontrolling interests
12,467

 
14,290

Total equities
7,858,956

 
7,866,250

Total liabilities and equities
$
17,221,797

 
$
17,312,135


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

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Table of Contents


 
CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
For the Three Months Ended
May 31,
 
For the Nine Months Ended
May 31,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Revenues
$
8,614,090

 
$
7,796,588

 
$
23,982,746

 
$
22,164,710

Cost of goods sold
8,366,988

 
7,479,076

 
23,142,205

 
21,346,376

Gross profit
247,102

 
317,512

 
840,541

 
818,334

Marketing, general and administrative
153,498

 
143,436

 
459,831

 
468,394

Reserve and impairment charges
323,901

 
26,016

 
414,009

 
33,869

Operating earnings (loss)
(230,297
)
 
148,060

 
(33,299
)
 
316,071

(Gain) loss on investments
(393
)
 
(700
)
 
4,226

 
(9,422
)
Interest expense
39,201

 
37,466

 
117,411

 
71,553

Other income
(11,554
)
 
(10,774
)
 
(70,409
)
 
(22,155
)
Equity (income) loss from investments
(48,393
)
 
(72,453
)
 
(124,521
)
 
(131,819
)
Income (loss) before income taxes
(209,158
)
 
194,521

 
39,994

 
407,914

Income tax expense (benefit)
(163,018
)
 
4,838

 
(137,781
)
 
(17,761
)
Net income (loss)
(46,140
)
 
189,683

 
177,775

 
425,675

Net income (loss) attributable to noncontrolling interests
(955
)
 
(592
)
 
(757
)
 
(92
)
Net income (loss) attributable to CHS Inc. 
$
(45,185
)
 
$
190,275

 
$
178,532

 
$
425,767


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


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CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
For the Three Months Ended
May 31,
 
For the Nine Months Ended
May 31,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Net income (loss)
$
(46,140
)
 
$
189,683

 
$
177,775

 
$
425,675

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
     Postretirement benefit plan activity, net of tax expense (benefit) of $2,257, $2,122, $6,580 and $5,911, respectively
3,635

 
3,378

 
10,599

 
9,806

     Unrealized net gain (loss) on available for sale investments, net of tax expense (benefit) of $(72), $744, $1,010 and $303, respectively
(117
)
 
1,201

 
1,627

 
462

     Cash flow hedges, net of tax expense (benefit) of $233, $1,595, $1,238 and $(2,456), respectively
375

 
2,574

 
1,993

 
(3,945
)
     Foreign currency translation adjustment, net of tax expense (benefit) of $(334), $0, $(329) and $0, respectively
(2,151
)
 
7,761

 
(12,193
)
 
(5,910
)
Other comprehensive income (loss), net of tax
1,742

 
14,914

 
2,026

 
413

Comprehensive income (loss)
(44,398
)
 
204,597

 
179,801

 
426,088

     Less: comprehensive income (loss) attributable to noncontrolling interests
(955
)
 
(592
)
 
(757
)
 
(92
)
Comprehensive income (loss) attributable to CHS Inc. 
$
(43,443
)
 
$
205,189

 
$
180,558

 
$
426,180


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



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Table of Contents


CHS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For the Nine Months Ended May 31,
 
2017
 
2016
 
(Dollars in thousands)
Cash flows from operating activities:
 

 
 

Net income
$
177,775

 
$
425,675

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

 
 

Depreciation and amortization
362,118

 
324,952

Amortization of deferred major repair costs
50,565

 
55,074

(Income) loss from equity investments
(124,521
)
 
(131,819
)
Provision for doubtful accounts
198,304

 
33,869

Distributions from equity investments
105,558

 
75,435

Unrealized (gain) loss on crack spread contingent liability
(13,273
)
 
(51,321
)
Long-lived asset impairment
85,431

 
14,428

Reserve against supplier advance payments
130,705

 

Deferred taxes
(145,357
)
 
(16,356
)
Other, net
25,559

 
(23,414
)
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Receivables
(55,498
)
 
120,613

Inventories
(344,914
)
 
(164,652
)
Derivative assets
120,294

 
(65,651
)
Margin deposits
58,581

 
(23,988
)
Supplier advance payments
(214,538
)
 
(208,679
)
Other current assets and other assets
19,289

 
91,095

Customer margin deposits and credit balances
(76,355
)
 
2,657

Customer advance payments
(23,700
)
 
(54,136
)
Accounts payable and accrued expenses
152,094

 
(72,161
)
Derivative liabilities
(229,881
)
 
9,315

Other liabilities
(53,471
)
 
(78,511
)
Net cash provided by (used in) operating activities
204,765

 
262,425

Cash flows from investing activities:
 

 
 

Acquisition of property, plant and equipment
(298,015
)
 
(557,689
)
Proceeds from disposition of property, plant and equipment
17,702

 
7,023

Expenditures for major repairs
(1,146
)
 
(19,338
)
Investments in joint ventures and other
(13,853
)
 
(2,833,968
)
Investments redeemed
7,698

 
24,912

Proceeds from sale of investments
6,170

 
19,477

Changes in CHS Capital notes receivable, net
(104,773
)
 
(230,874
)
Financing extended to customers
(57,783
)
 
(31,681
)
Payments from customer financing
67,126

 
23,005

Business acquisitions, net of cash acquired
(2,253
)
 
(10,139
)
Other investing activities, net
4,975

 
4,911

Net cash provided by (used in) investing activities
(374,152
)
 
(3,604,361
)
Cash flows from financing activities:
 

 
 

Proceeds from lines of credit and long-term borrowings
29,890,570

 
21,377,619

Payments on lines of credit, long term-debt and capital lease obligations
(29,362,970
)
 
(18,090,681
)
Mandatorily redeemable noncontrolling interest payments

 
(153,022
)
Changes in checks and drafts outstanding
(118,844
)
 
1,680

Preferred stock dividends paid
(125,475
)
 
(121,499
)
Retirements of equities
(25,503
)
 
(17,117
)
Cash patronage dividends paid
(103,879
)
 
(253,150
)
Other financing activities, net
1,539

 
(3,246
)
Net cash provided by (used in) financing activities
155,438

 
2,740,584

Effect of exchange rate changes on cash and cash equivalents
1,865

 
(6,060
)
Net increase (decrease) in cash and cash equivalents
(12,084
)
 
(607,412
)
Cash and cash equivalents at beginning of period
279,313

 
953,813

Cash and cash equivalents at end of period
$
267,229

 
$
346,401


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

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Table of Contents


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

Note 1        Organization, Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The unaudited Consolidated Balance Sheet as of May 31, 2017, the Consolidated Statements of Operations for the three and nine months ended May 31, 2017, and 2016, the Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2017, and 2016, and the Consolidated Statements of Cash Flows for the nine months ended May 31, 2017, and 2016, reflect in the opinion of our management, all normal recurring adjustments necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. The results of operations and cash flows for interim periods are not necessarily indicative of results for a full fiscal year because of, among other things, the seasonal nature of our businesses. Our Consolidated Balance Sheet data as of August 31, 2016, has been derived from our audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP").

The Consolidated Statements of Operations include a separate line called “Reserve and impairment charges” for the three and nine months ended May 31, 2017, and 2016, due to the materiality of certain charges incurred during the periods presented. The charges relate to reserves recorded as a result of a trading partner of ours in Brazil entering into bankruptcy proceedings under Brazilian law, intangible and fixed asset impairment charges associated with moving certain assets within our Ag segment to held for sale, a fixed asset impairment charge related to an asset in our Energy segment and all bad debt and loan loss reserve charges, of which a significant portion relates to a single large producer borrower for which the majority of charges were recorded in the first and second quarters of the current fiscal year. Prior year information has been revised to conform to the current presentation. See additional information related to the reserves and impairment charges in Note 2, Receivables and Note 5, Goodwill and Other Intangible Assets.

The notes to our consolidated financial statements make reference to our Energy, Ag, Nitrogen Production and Foods reportable segments, as well as our Corporate and Other category, which represents an aggregation of individually immaterial operating segments. The Nitrogen Production reportable segment resulted from our investment in CF Industries Nitrogen, LLC ("CF Nitrogen") in February 2016. The Foods segment resulted from our investment in Ventura Foods, LLC ("Ventura Foods") becoming a significant operating segment in fiscal 2016. See Note 10, Segment Reporting for more information.
 
Our consolidated financial statements include the accounts of CHS and all of our wholly owned and majority owned subsidiaries. The effects of all significant intercompany transactions have been eliminated.

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

Recent Accounting Pronouncements

Adopted

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update ("ASU") No. 2017-04, Simplifying the Test for Goodwill Impairment. The amendments within this ASU eliminate Step 2 of the goodwill impairment test, which requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under the amended standard, goodwill impairment is instead measured using Step 1 of the goodwill impairment test with goodwill impairment being equal to the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. We elected to early adopt ASU No. 2017-04 during the second quarter of fiscal 2017. The amendments have been applied to the annual goodwill impairment testing performed as of May 31, 2017, and will be applied prospectively to all future goodwill impairment tests performed on an interim or annual basis.

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

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

Not Yet Adopted

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

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

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to reduce existing diversity in practice in how certain cash receipts and payments are presented and classified in the statement of cash flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted, including in an interim period. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
    
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU introduce a new approach, based on expected losses, to estimate credit losses on certain types of financial instruments. This ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses associated with most financial assets measured at amortized

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cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September 1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which replaces the existing guidance in Accounting Standards Codification ("ASC") 840 - Leases. The amendments within this ASU introduce a lessee model requiring entities to recognize assets and liabilities for most leases, but continue recognizing the associated expenses in a manner similar to existing accounting guidance. This ASU does not make fundamental changes to existing lessor accounting; however, it does modify what constitutes a sales-type or direct financing lease and the related accounting, and aligns a number of the underlying principles with those of the new revenue standard, ASU No. 2014-09. The guidance also eliminates existing real estate-specific provisions and requires expanded qualitative and quantitative disclosures. Entities are required to apply the standard’s provisions using a modified retrospective approach at the beginning of the earliest comparative period presented in the year of adoption. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. We are currently evaluating the impact the adoption will have on our consolidated financial statements.
        
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The amendments within this ASU provide a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU includes a five step model for the recognition of revenue, including (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when (or as) an entity satisfies a performance obligation. This ASU also specifies the accounting for certain costs to obtain or fulfill a contract with a customer and requires expanded disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14 delaying the effective date of adoption for CHS to September 1, 2018. The FASB issued four subsequent ASUs in 2016 containing implementation guidance related to ASU No. 2014-09, including: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which is intended to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains certain provision and practical expedients in response to identified implementation issues; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which contains certain corrections and clarifications to increase stakeholders’ awareness of the proposals and to expedite improvements. ASU No. 2014-09 permits the use of either a full or modified retrospective method upon adoption. Although early application as of the original date is permitted, we expect to adopt ASU No. 2014-09 and the related ASUs on September 1, 2018, in the first quarter of fiscal 2019. We are continuing to evaluate the effect this guidance will have on our consolidated financial statements, including potential impacts on the timing of revenue recognition and additional information that may be necessary for expanded disclosures regarding revenue. We have completed an initial assessment of our revenue streams and are currently evaluating the quantitative and qualitative impacts of the new standard on our businesses. We expect to complete our evaluation by the end of fiscal 2017, which will allow us to select an adoption method and determine the impact that the new standard will have on our businesses.

Note 2        Receivables
 
May 31, 2017
 
August 31, 2016
 
(Dollars in thousands)
Trade accounts receivable
$
1,739,027

 
$
1,804,646

CHS Capital notes receivable
766,731

 
858,805

Other
464,051

 
380,956

 
2,969,809

 
3,044,407

Less allowances and reserves
247,484

 
163,644

Total receivables
$
2,722,325

 
$
2,880,763



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Trade accounts receivable are initially recorded at a selling price, which approximates fair value, upon the sale of goods or services to customers. Subsequently, trade accounts receivable are carried at net realizable value, which includes an allowance for estimated uncollectible amounts. We calculate this allowance based on our history of write-offs, level of past due accounts, and our relationships with, and the economic status of, our customers. The carrying value of CHS Capital, LLC ("CHS Capital") short-term notes receivable approximates fair value, given the notes' short duration and the use of market pricing adjusted for risk. Other receivables is comprised of certain other amounts recorded in the normal course of business, including receivables related to valued added taxes and production cost financing.

During the third quarter of fiscal 2017, a trading partner of ours in Brazil entered bankruptcy proceedings under Brazilian law, resulting in a $98.7 million increase to our accounts receivable reserve. We also recorded a reserve of approximately $130.7 million related to supplier advance payments held by this trading partner. We have initiated efforts to recover these losses; however, as such actions are in the early stages and are considered neither probable nor estimable, no recoveries have been recorded as of the date of this Quarterly Report on Form 10-Q.

CHS Capital has notes receivable from commercial and producer borrowers. The short-term notes receivable generally have terms of 12-14 months and are reported at their outstanding principal balances as CHS Capital has the ability and intent to hold these notes to maturity. The notes receivable from commercial borrowers are collateralized by various combinations of mortgages, personal property, accounts and notes receivable, inventories and assignments of certain regional cooperatives' capital stock. These loans are primarily originated in the states of Minnesota, Wisconsin, and North Dakota. CHS Capital also has loans receivable from producer borrowers which are collateralized by various combinations of growing crops, livestock, inventories, accounts receivable, personal property and supplemental mortgages and are originated in the same states as the commercial notes with the addition of Michigan. In addition to the short-term balances included in the table above, CHS Capital had long-term notes receivable with durations of generally not more than 10 years of $252.4 million and $322.4 million as of May 31, 2017, and August 31, 2016, respectively. The long-term notes receivable are included in other assets on our Consolidated Balance Sheets. As of May 31, 2017, and August 31, 2016, the commercial notes represented 52% and 26%, respectively, and the producer notes represented 48% and 74%, respectively, of the total CHS Capital notes receivable. As of August 31, 2016, a single producer borrower accounted for 20% of the total outstanding CHS Capital notes receivable. During the third quarter of fiscal 2017, CHS Capital concluded a transaction with the single producer borrower whereby CHS Capital obtained from the borrower title to approximately 14,000 acres of land and improvements that, prior to the transaction, was owned by the borrower and served as collateral for the outstanding loans to CHS Capital. The amount corresponding to the fair value of the land and improvements, approximately $139.0 million, was credited against the notes receivable from this single producer borrower. As a result of this arrangement, all remaining outstanding notes receivable balances and corresponding reserves related to this single producer borrower were removed from the balance sheet of CHS Capital. However, we continue to enforce our rights under the various agreements between us and the producer borrower to pursue future potential recoveries. The collateral received in connection with the arrangement has been recorded in “Property, plant and equipment” on the Consolidated Balance Sheet.

CHS Capital evaluates the collectability of both commercial and producer notes on a specific identification basis, based on the amount and quality of the collateral obtained, and records specific loan loss reserves when appropriate. A general reserve is also maintained based on historical loss experience and various qualitative factors. Further, the accrual of interest income is discontinued at the time the loan is 90 days past due unless the credit is well-collateralized and in process of collection. Past due amounts were approximately 5.0% and 2.5% of the total CHS Capital notes outstanding as of May 31, 2017, and August 31, 2016, respectively.

Specific and general loan loss reserves related to CHS Capital totaled $17.2 million and $45.8 million as of May 31, 2017, and August 31, 2016, respectively. The reduction in the reserve is substantially all related to the single producer borrower agreement discussed above.
CHS Capital has commitments to extend credit to customers as long as there are no violations of any contractually established conditions. As of May 31, 2017, customers of CHS Capital had additional available credit of approximately $966.2 million.



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Note 3        Inventories        
 
May 31, 2017
 
August 31, 2016
 
(Dollars in thousands)
Grain and oilseed
$
1,171,408

 
$
937,258

Energy
750,170

 
729,695

Crop nutrients
181,380

 
217,521

Feed and farm supplies
530,081

 
417,431

Processed grain and oilseed
27,991

 
48,930

Other
23,057

 
19,864

Total inventories
$
2,684,087

 
$
2,370,699


As of May 31, 2017, we valued approximately 19% of inventories, primarily related to our Energy segment, using the lower of cost, determined on the LIFO method, or market (19% as of August 31, 2016). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $140.9 million and $93.9 million as of May 31, 2017, and August 31, 2016, respectively. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Interim LIFO calculations are based on management's estimates of expected year-end inventory levels, and are subject to the final year-end LIFO inventory valuation.

Note 4        Investments
 
2017
 
2016
 
(Dollars in thousands)
Equity method investments:
 
 
 
CF Industries Nitrogen, LLC
$
2,808,993

 
$
2,796,323

Ventura Foods, LLC
374,006

 
369,487

Ardent Mills, LLC
195,869

 
194,986

TEMCO, LLC
41,581

 
44,578

Other equity method investments
290,391

 
263,025

Cost method investments
130,909

 
127,577

Total investments
$
3,841,749

 
$
3,795,976


Equity Method Investments

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

On February 1, 2016, we invested $2.8 billion in CF Nitrogen, commencing our strategic venture with CF Industries Holdings, Inc. ("CF Industries"). The investment consists of an 11.4% membership interest (based on product tons) in CF Nitrogen. We also entered into an 80-year supply agreement that entitles us to purchase up to 1.1 million tons of granular urea and 580,000 tons of urea ammonium nitrate ("UAN") annually from CF Nitrogen for ratable delivery. Our purchases under the supply agreement are based on prevailing market prices and we receive semi-annual cash distributions (in January and July of each year) from CF Nitrogen via our membership interest. These distributions are based on actual volumes purchased from CF Nitrogen under the strategic venture and will have the effect of reducing our investment to zero over 80 years on a straight-line basis. We account for this investment using the hypothetical liquidation at book value method, recognizing our share of the earnings and losses of CF Nitrogen based upon our contractual claims on the entity's net assets pursuant to the liquidation provisions of CF Nitrogen's limited liability company agreement, adjusted for the semi-annual cash distributions. For the three months ended May 31, 2017, and 2016, this amount was $24.5 million and $41.3 million, respectively. For the nine months ended May 31, 2017, and 2016, this amount was $60.8 million and $53.1 million, respectively. These amounts are included as equity income from investments in our Nitrogen Production segment.

We have a 50% interest in Ventura Foods, a joint venture which produces and distributes primarily vegetable oil-based products, and which constitutes our Foods segment. We account for Ventura Foods as an equity method investment, and as of

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May 31, 2017, our carrying value of Ventura Foods exceeded our share of its equity by $12.9 million, which represents equity method goodwill. The earnings are reported as equity income from investments in our Foods segment.

We have a 12% interest in Ardent Mills, LLC ("Ardent Mills"), a joint venture with Cargill Incorporated ("Cargill") and ConAgra Foods, Inc., which combines the North American flour milling operations of the three parent companies. We account for Ardent Mills as an equity method investment included in Corporate and Other.

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

The following table provides aggregate summarized unaudited financial information for our equity method investments in CF Nitrogen, Ventura Foods and Ardent Mills for the three and nine months ended May 31, 2017, and 2016:

 
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Net sales
 
$
2,043,628

 
$
1,623,696

 
$
5,807,777

 
$
4,673,341

Gross profit
 
234,055

 
255,191

 
651,705

 
638,093

Net earnings
 
133,132

 
121,022

 
317,674

 
283,996

Earnings attributable to CHS Inc.
 
38,662

 
64,615

 
104,568

 
118,845



Note 5        Goodwill and Other Intangible Assets

Goodwill of $153.3 million and $160.4 million as of May 31, 2017, and August 31, 2016, respectively, is included in other assets on our Consolidated Balance Sheets. Changes in the net carrying amount of goodwill for the nine months ended May 31, 2017, by segment, are as follows:
 
Energy
 
Ag
 
Corporate
and Other
 
Total
 
(Dollars in thousands)
Balances, August 31, 2016
$
552

 
$
148,916

 
$
10,946

 
$
160,414

Effect of foreign currency translation adjustments

 
(868
)
 

 
(868
)
Impairment

 
(5,542
)
 

 
(5,542
)
Other

 
(298
)
 
(372
)
 
(670
)
Balances, May 31, 2017
$
552

 
$
142,208

 
$
10,574

 
$
153,334


No goodwill has been allocated to our Nitrogen Production or Foods segments, which consist of investments accounted for under the equity method.

All long-lived assets, including property, plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangible assets, are evaluated for impairment in accordance with GAAP. Goodwill is evaluated for impairment annually as of May 31. All long-lived assets, including goodwill, are also evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group or reporting unit may not be recoverable. No impairments were identified as a result of the Company’s annual goodwill analyses performed as of May 31, 2017.

During the three months ended May 31, 2017, certain assets and liabilities associated with a disposal group in our Ag segment were classified as held for sale, including $5.5 million of goodwill allocated to the disposal group on a relative fair value basis. As a result of an impairment test performed over the disposal group, an impairment charge of $51.8 million which includes the allocated goodwill discussed above, was recorded in the Reserve and impairment charges line item in the Consolidated Statements of Operations for the three and nine months ended May 31, 2017. Following the impairment charge,

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the assets remaining within the disposal group primarily include property, plant and equipment of $32.4 million, inventories of $23.9 million, accounts receivable of $8.7 million, and intangible assets of $2.4 million. The disposal group represents assets being sold as part of a broader asset portfolio review project. Negotiations for the sale of these assets is ongoing and we believe their sale will be consummated within the next 12 months. The held for sale assets and liabilities are recorded in other current assets and accounts payable in our Consolidated Balance Sheet as of May 31, 2017.
 
Intangible assets subject to amortization primarily include customer lists, trademarks and non-compete agreements, and are amortized over their respective useful lives (ranging from 2 to 30 years). Information regarding intangible assets that are included in other assets on our Consolidated Balance Sheets is as follows:
 
May 31,
2017
 
August 31,
2016
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
Carrying Amount
 
Accumulated Amortization
 
Net
 
(Dollars in thousands)
Customer lists
$
48,975

 
$
(14,568
)
 
$
34,407

 
$
51,554

 
$
(15,550
)
 
$
36,004

Trademarks and other intangible assets
23,618

 
(21,713
)
 
1,905

 
35,015

 
(26,253
)
 
8,762

Total intangible assets
$
72,593

 
$
(36,281
)
 
$
36,312

 
$
86,569

 
$
(41,803
)
 
$
44,766


Total amortization expense for intangible assets during the three and nine months ended May 31, 2017, was $1.0 million and $3.3 million, respectively. Total amortization expense for intangible assets during the three and nine months ended May 31, 2016, was $1.1 million and $4.9 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows:
 
(Dollars in thousands)
Year 1
$
3,654

Year 2
3,653

Year 3
3,487

Year 4
3,344

Year 5
3,170



Note 6        Notes Payable and Long-Term Debt

Our notes payable and long-term debt are subject to various restrictive requirements for maintenance of minimum consolidated net worth and other financial ratios. We were in compliance with our debt covenants as of May 31, 2017.


May 31, 2017

August 31, 2016

(Dollars in thousands)
Notes payable
$
2,465,333


$
1,803,174

CHS Capital notes payable
856,475


928,305

Total notes payable
$
3,321,808


$
2,731,479


On May 31, 2017, our primary line of credit was a five-year, unsecured revolving credit facility with a committed amount of $3.0 billion which expires in September 2020. The outstanding balance on this facility was $1.1 billion and $700.0 million as of May 31, 2017, and August 31, 2016, respectively.

During the nine months ended May 31, 2017, we re-advanced $130.0 million under the revolving provision of our ten-year term loan with a syndication of banks that was originally arranged in September 2015. The terms of the re-advance are the same as the terms of the original term loan, with principal due on September 4, 2025, and interest calculated at a London Interbank Offered Rate ("LIBOR") plus an applicable margin ranging between 1.50% and 2.00%.
    
Interest expense for the three months ended May 31, 2017, and 2016, was $39.2 million and $37.5 million, respectively, net of capitalized interest of $1.6 million and $6.5 million, respectively. Interest expense for the nine months

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ended May 31, 2017, and 2016, was $117.4 million and $71.6 million, respectively, net of capitalized interest of $4.7 million and $27.3 million, respectively.

Note 7        Income Taxes

During the three months ended May 31, 2017, our Board of Directors adopted a resolution to treat equity redemptions of non-qualified equity certificates issued in fiscal 2013 and fiscal 2014 in the same manner as qualified equity certificates are treated and redeemed under the “Eligible Annual Association Equity” provision of the Board's Policy for the Redemption of CHS Inc. Equities. Previously we had not established an intent regarding the redemption of non-qualified equity certificates issued to cooperative association members and other corporate entity non-qualified equity participants, thus the tax benefit associated with redemption would have been recognized in future periods as those redemptions occurred. As a result of the new resolution, we recorded a $75.0 million deferred tax benefit during the third quarter of fiscal 2017 related to the future redemption, at the discretion of our Board of Directors, of non-qualified equity certificates to cooperative association members and other corporate entity non-qualified equity participants.

During the three months ended May 31, 2017, we incurred losses associated with a trading partner of ours in Brazil entering into bankruptcy proceedings under Brazilian law, and we will be required to fund approximately $230.0 million of losses in our Brazilian operations via guarantees in place with our Brazilian subsidiary and its lending syndicate. Performance of these guarantees results in a bad debt deduction on our U.S. tax return, subject to the insurance and subrogation recovery provisions within the U.S. Tax Code. As a result of performance on the guarantee, we recorded an $84.4 million deferred tax benefit during the third quarter of fiscal 2017.

These two tax benefits are the primary contributors to our tax benefit position for the three and nine month periods ended May 31, 2017, within the Consolidated Statements of Operations.

Note 8        Equities

Changes in Equities

Changes in equities for the nine months ended May 31, 2017, are as follows:
 
Equity Certificates
 
 
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
 
 
Capital
Equity
Certificates
 
Nonpatronage
Equity
Certificates
 
Nonqualified Equity Certificates
 
Preferred
Stock
 
 
Capital
Reserves
 
Noncontrolling
Interests
 
Total
Equities
 
(Dollars in thousands)
Balance, August 31, 2016
$
3,932,513

 
$
22,894

 
$
281,767

 
$
2,244,132

 
$
(211,726
)
 
$
1,582,380

 
$
14,290

 
$
7,866,250

Reversal of prior year patronage and redemption estimates
(121,892
)
 

 

 

 

 
278,968

 

 
157,076

Distribution of 2016 patronage refunds
153,589

 

 

 

 

 
(257,468
)
 

 
(103,879
)
Redemptions of equities
(43,949
)
 
(154
)
 
(1,386
)
 

 

 

 

 
(45,489
)
Equities issued, net
3,176

 

 

 
19,986

 

 

 

 
23,162

Preferred stock dividends

 

 

 

 

 
(139,760
)
 

 
(139,760
)
Other, net
(7,560
)
 
7,300

 
(391
)
 
(55
)
 

 
3,046

 
(1,066
)
 
1,274

Net income

 

 

 

 

 
178,532

 
(757
)
 
177,775

Other comprehensive income (loss), net of tax

 

 

 

 
2,026

 

 

 
2,026

Estimated 2017 cash patronage refunds

 

 

 

 

 
(68,229
)
 

 
(68,229
)
Estimated 2017 equity redemptions
(11,250
)
 

 

 

 

 

 

 
(11,250
)
Balance, May 31, 2017
$
3,904,627

 
$
30,040

 
$
279,990

 
$
2,264,063

 
$
(209,700
)
 
$
1,577,469

 
$
12,467

 
$
7,858,956

    

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Accumulated Other Comprehensive Loss        

Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows for the nine months ended May 31, 2017, and 2016:
 
Pension and Other Postretirement Benefits
 
Unrealized Net Gain on Available for Sale Investments
 
Cash Flow Hedges
 
Foreign Currency Translation Adjustment
 
Total
 
(Dollars in thousands)
Balance as of August 31, 2016
$
(165,146
)
 
$
5,656

 
$
(9,196
)
 
$
(43,040
)
 
$
(211,726
)
Current period other comprehensive income (loss), net of tax
(309
)
 
1,627

 
1,184

 
(12,208
)
 
(9,706
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
10,908

 

 
809

 
15

 
11,732

Net other comprehensive income (loss), net of tax
10,599

 
1,627

 
1,993

 
(12,193
)
 
2,026

Balance as of May 31, 2017
$
(154,547
)
 
$
7,283

 
$
(7,203
)
 
$
(55,233
)
 
$
(209,700
)

 
Pension and Other Postretirement Benefits
 
Unrealized Net Gain on Available for Sale Investments
 
Cash Flow Hedges
 
Foreign Currency Translation Adjustment
 
Total
 
(Dollars in thousands)
Balance as of August 31, 2015
$
(171,729
)
 
$
4,156

 
$
(5,324
)
 
$
(41,310
)
 
$
(214,207
)
Current period other comprehensive income (loss), net of tax
135

 
462

 
(6,805
)
 
(6,380
)
 
(12,588
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
9,671

 

 
2,860

 
470

 
13,001

Net other comprehensive income (loss), net of tax
9,806

 
462

 
(3,945
)
 
(5,910
)
 
413

Balance as of May 31, 2016
$
(161,923
)
 
$
4,618

 
$
(9,269
)
 
$
(47,220
)
 
$
(213,794
)
    
Amounts reclassified from accumulated other comprehensive income (loss) were primarily related to pension and other post-retirement benefits. Pension and other post-retirement reclassifications include amortization of net actuarial loss, prior service credit and transition amounts and are recorded as marketing, general and administrative expenses (see Note 9, Benefit Plans for further information).


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Note 9        Benefit Plans

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

Components of net periodic benefit costs for the three and nine months ended May 31, 2017, and 2016, are as follows:
 
Qualified
Pension Benefits
 
Non-Qualified
Pension Benefits
 
Other Benefits
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Components of net periodic benefit costs for the three months ended May 31 are as follows:
 (Dollars in thousands)
  Service cost
$
10,537

 
$
9,383

 
$
302

 
$
258

 
$
290

 
$
353

  Interest cost
5,753

 
7,691

 
210

 
352

 
232

 
427

  Expected return on assets
(12,058
)
 
(12,013
)
 

 

 

 

  Prior service cost (credit) amortization
385

 
402

 
4

 
57

 
(141
)
 
(30
)
  Actuarial (gain) loss amortization
5,708

 
4,765

 
136

 
172

 
(199
)
 
(116
)
Net periodic benefit cost
$
10,325

 
$
10,228

 
$
652

 
$
839

 
$
182

 
$
634

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

 
 

 
 

 
 

 
 

 
 

  Service cost
$
31,612

 
$
28,149

 
$
905

 
$
776

 
$
870

 
$
1,059

  Interest cost
17,257

 
23,075

 
632

 
1,055

 
698

 
1,282

  Expected return on assets
(36,173
)
 
(36,040
)
 

 

 

 

  Prior service cost (credit) amortization
1,155

 
1,205

 
14

 
171

 
(424
)
 
(90
)
  Actuarial (gain) loss amortization
17,123

 
14,294

 
409

 
518

 
(598
)
 
(348
)
Net periodic benefit cost
$
30,974

 
$
30,683

 
$
1,960

 
$
2,520

 
$
546

 
$
1,903


Employer Contributions

Total contributions to be made during fiscal 2017 will depend primarily on market returns on the pension plan assets and minimum funding level requirements. During the nine months ended May 31, 2017, we made no contributions to the pension plans. At this time, we do not anticipate being required to make a contribution for our benefit plans in fiscal 2017.

Note 10        Segment Reporting

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

Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag segment purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties; serves as a wholesaler and retailer of crop inputs; and produces and markets ethanol. Our Nitrogen Production segment consists solely of our equity method investment in CF Nitrogen, which was completed in February 2016 and which entitles us, pursuant to a supply agreement that we entered into with CF Nitrogen, to purchase up to a specified annual quantity of granular urea and UAN annually from CF Nitrogen. The addition of our Nitrogen Production segment had no impact on historically reported segment results and balances as this segment came into existence in fiscal 2016. Our Foods segment consists solely of our equity method investment in Ventura Foods. In prior periods, Ventura Foods was reported as a component of Corporate and Other. Historically reported segment results and balances have been revised to reflect the addition of our Foods segment. There were no changes to the composition of our Energy or Ag segments as a result of the addition of our Nitrogen Production and Foods segments. Corporate and Other primarily represents our non-consolidated wheat milling operations, as well as our business solutions operations, which primarily consists of commodities hedging, insurance and financial services related to crop production.


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

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

Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, ethanol, grains, oilseeds, crop nutrients and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage due to disease or insects, drought, the availability and adequacy of supply, government regulations and policies, world events, and general political and economic conditions.

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

Reconciling Amounts represent the elimination of revenues and interest between segments. Such transactions are executed at market prices to more accurately evaluate the profitability of the individual business segments.
        
Segment information for the three and nine months ended May 31, 2017, and 2016, is presented in the tables below.

Energy
 
Ag
 
Nitrogen Production
 
Foods
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Three Months Ended May 31, 2017:
(Dollars in thousands)
Revenues
$
1,638,107


$
7,053,991


$

 
$

 
$
26,820


$
(104,828
)

$
8,614,090

Operating earnings (loss)
(5,723
)

(226,668
)

(5,619
)
 
(3,101
)
 
10,814




(230,297
)
(Gain) loss on investments


(393
)


 

 




(393
)
Interest expense
4,343


16,609


10,708

 
(231
)
 
8,358


(586
)

39,201

Other income
(332
)
 
(12,493
)
 
(477
)
 

 
1,162

 
586

 
(11,554
)
Equity (income) loss from investments
(391
)

(9,199
)

(24,534
)
 
(9,920
)
 
(4,349
)



(48,393
)
Income (loss) before income taxes
$
(9,343
)

$
(221,192
)

$
8,684

 
$
7,050

 
$
5,643


$


$
(209,158
)
Intersegment revenues
$
(97,876
)

$
(7,545
)

$

 
$

 
$
593


$
104,828


$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Nitrogen Production
 
Foods
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Three Months Ended May 31, 2016:
(Dollars in thousands)
Revenues
$
1,322,624

 
$
6,526,714

 
$

 
$

 
$
25,114

 
$
(77,864
)
 
$
7,796,588

Operating earnings (loss)
103,614

 
24,432

 
253

 
(2,243
)
 
22,004

 

 
148,060

(Gain) loss on investments

 
(881
)
 

 

 
181

 

 
(700
)
Interest expense
(4,270
)
 
24,518

 
16,549

 
645

 
7,951

 
(7,927
)
 
37,466

Other income
(217
)
 
(17,473
)
 

 

 
(1,011
)
 
7,927

 
(10,774
)
Equity (income) loss from investments
(1,300
)
 
(5,931
)
 
(41,257
)
 
(19,922
)
 
(4,043
)
 

 
(72,453
)
Income (loss) before income taxes
$
109,401

 
$
24,199

 
$
24,961

 
$
17,034

 
$
18,926

 
$

 
$
194,521

Intersegment revenues
$
(76,114
)
 
$
(3,016
)
 
$

 
$

 
$
1,266

 
$
77,864

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 

16

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Energy
 
Ag
 
Nitrogen Production
 
Foods
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Nine Months Ended May 31, 2017:
(Dollars in thousands)
Revenues
$
4,867,321

 
$
19,345,316

 
$

 
$

 
$
85,691

 
$
(315,582
)
 
$
23,982,746

Operating earnings (loss)
86,563

 
(131,363
)
 
(14,033
)
 
(8,370
)
 
33,904

 

 
(33,299
)
(Gain) loss on investments

 
6,302

 

 

 
(2,076
)
 

 
4,226

Interest expense
12,176

 
49,798

 
35,626

 
(231
)
 
27,743

 
(7,701
)
 
117,411

Other income
(828
)
 
(48,103
)
 
(30,047
)
 

 
868

 
7,701

 
(70,409
)
Equity (income) loss from investments
(2,039
)
 
(18,071
)
 
(60,787
)
 
(28,850
)
 
(14,774
)
 

 
(124,521
)
Income (loss) before income taxes
$
77,254

 
$
(121,289
)
 
$
41,175

 
$
20,711

 
$
22,143

 
$

 
$
39,994

Intersegment revenues
$
(297,057
)
 
$
(16,068
)
 
$

 
$

 
$
(2,457
)
 
$
315,582

 
$

Total assets at May 31, 2017
$
4,292,789

 
$
7,028,635

 
$
2,834,040

 
$
374,007

 
$
2,692,326

 
$

 
$
17,221,797

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy
 
Ag
 
Nitrogen Production
 
Foods
 
Corporate
and Other
 
Reconciling
Amounts
 
Total
For the Nine Months Ended May 31, 2016:
(Dollars in thousands)
Revenues
$
4,162,685

 
$
18,221,420

 
$

 
$

 
$
68,210

 
$
(287,605
)
 
$
22,164,710

Operating earnings (loss)
214,827

 
77,605

 
(5,506
)
 
(6,319
)
 
35,464

 

 
316,071

(Gain) loss on investments

 
(6,595
)
 

 

 
(2,827
)
 

 
(9,422
)
Interest expense
(20,723
)
 
57,785

 
21,286

 
2,246

 
18,886

 
(7,927
)
 
71,553

Other income
(174
)
 
(27,778
)
 

 

 
(2,130
)
 
7,927

 
(22,155
)
Equity (income) loss from investments
(3,487
)
 
(8,152
)
 
(53,112
)
 
(55,449
)
 
(11,619
)
 

 
(131,819
)
Income (loss) before income taxes
$
239,211

 
$
62,345

 
$
26,320

 
$
46,884

 
$
33,154

 
$

 
$
407,914

Intersegment revenues
$
(250,425
)
 
$
(36,032
)
 
$

 
$

 
$
(1,148
)
 
$
287,605

 
$


Note 11        Derivative Financial Instruments and Hedging Activities

Our derivative instruments primarily consist of commodity and freight futures and forward contracts and, to a minor degree, may include foreign currency and interest rate swap contracts. These contracts are economic hedges of price risk, but we do not apply hedge accounting under ASC Topic 815, Derivatives and Hedging, except with respect to certain interest rate swap contracts which are accounted for as cash flow or fair value hedges. Derivative instruments are recorded on our Consolidated Balance Sheets at fair value as described in Note 12, Fair Value Measurements.


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The following tables present the gross fair values of derivative assets, derivative liabilities, and margin deposits (cash collateral) recorded on our Consolidated Balance Sheets along with the related amounts permitted to be offset in accordance with GAAP. We have elected not to offset derivative assets and liabilities when we have the right of offset under ASC Topic 210-20, Balance Sheet - Offsetting; or when the instruments are subject to master netting arrangements under ASC Topic 815-10-45, Derivatives and Hedging - Overall.
 
May 31, 2017
 
 
 
Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
 
 
 
Gross Amounts Recognized
 
Cash Collateral
 
Derivative Instruments
 
Net Amounts
 
(Dollars in thousands)
Derivative Assets:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
363,627

 
$

 
$
27,711

 
$
335,916

Foreign exchange derivatives
10,558

 

 
3,895

 
6,663

Interest rate derivatives - hedge
9,496

 

 

 
9,496

Embedded derivative asset - current
4,507

 

 

 
4,507

Total current derivatives
$
388,188

 
$

 
$
31,606

 
$
356,582

Embedded derivative asset - long term
20,540

 

 

 
20,540

Total
$
408,728

 
$

 
$
31,606

 
$
377,122

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
271,337

 
$
3,136

 
$
27,711

 
$
240,490

Foreign exchange derivatives
11,689

 

 
3,895

 
7,794

Interest rate derivatives - hedge
1,182

 

 

 
1,182

Interest rate derivatives - non-hedge
4

 

 

 
4

Total
$
284,212

 
$
3,136

 
$
31,606

 
$
249,470


 
August 31, 2016
 
 
 
Amounts Not Offset on the Consolidated Balance Sheet but Eligible for Offsetting
 
 
 
Gross Amounts Recognized
 
Cash Collateral
 
Derivative Instruments
 
Net Amounts
 
(Dollars in thousands)
Derivative Assets:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
500,192

 
$

 
$
23,689

 
$
476,503

Foreign exchange derivatives
21,551

 

 
9,187

 
12,364

Interest rate derivatives - hedge
22,078

 

 

 
22,078

Total
$
543,821

 
$

 
$
32,876

 
$
510,945

Derivative Liabilities:
 
 
 
 
 
 
 
Commodity and freight derivatives
$
491,302

 
$
811

 
$
23,689

 
$
466,802

Foreign exchange derivatives
22,289

 

 
9,187

 
13,102

Interest rate derivatives - non-hedge
8

 

 

 
8

Total
$
513,599

 
$
811

 
$
32,876

 
$
479,912


18

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Derivatives Not Designated as Hedging Instruments

The majority of our derivative instruments have not been designated as hedging instruments for accounting purposes. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Consolidated Statements of Operations for the three and nine months ended May 31, 2017, and 2016.

 
 
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
Location of
Gain (Loss)
 
2017
 
2016
 
2017
 
2016
 
 
 
(Dollars in thousands)
Commodity and freight derivatives
Cost of goods sold
 
$
102,327

 
$
(193,548
)
 
$
177,633

 
$
(103,532
)
Foreign exchange derivatives
Cost of goods sold
 
(7,168
)
 
2,249

 
(4,573
)
 
(7,550
)
Foreign exchange derivatives
Marketing, general and administrative
 
22

 
(12,820
)
 
(784
)
 
2,308

Interest rate derivatives
Interest expense
 

 
(5,096
)
 
4

 
(6,299
)
Embedded derivative
Other Income
 
477

 

 
30,051

 

Total
 
$
95,658

 
$
(209,215
)
 
$
202,331

 
$
(115,073
)

Commodity and Freight Contracts
    
As of May 31, 2017, and August 31, 2016, we had outstanding commodity futures, options and freight contracts that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity and freight contracts accounted for as derivative instruments.
 
May 31, 2017
 
August 31, 2016
 
Long
 
Short
 
Long
 
Short
 
(Units in thousands)
Grain and oilseed - bushels
663,358

 
860,178

 
774,279

 
995,396

Energy products - barrels
13,694

 
8,151

 
14,740

 
6,470

Processed grain and oilseed - tons
327

 
2,188

 
541

 
2,060

Crop nutrients - tons
70

 
241

 
108

 
135

Ocean and barge freight - metric tons
4,110

 
876

 
4,406

 
877

Rail freight - rail cars
210

 
97

 
205

 
79

Natural gas - MMBtu
3,275

 

 
3,550

 
300


Foreign Exchange Contracts

We are exposed to risk regarding foreign currency fluctuations even though a substantial amount of international sales are denominated in U.S. dollars. In addition to specific transactional exposure, foreign currency fluctuations can impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. From time to time, we enter into foreign currency hedge contracts to minimize the impact of currency fluctuations on our transactional exposures. The notional amounts of our foreign exchange derivative contracts were $789.4 million and $802.2 million as of May 31, 2017, and August 31, 2016, respectively.


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Table of Contents


Embedded Derivative Asset

Under the terms of our strategic investment in CF Nitrogen, if CF Industries' credit rating is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a non-refundable annual payment of $5.0 million from CF Industries. The payment would continue on an annual basis until the date that CF Industries' credit rating is upgraded to or above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier.
During the three months ended November 30, 2016, CF Industries' credit rating was reduced below the specified levels and we recorded a gain of $29.1 million in other income in our Consolidated Statement of Operations. During November 2016 we received a $5.0 million payment from CF Industries, which reduced the fair value of the associated embedded derivative asset to $24.1 million as of November 30, 2016. In addition, during the three months ended February 28, 2017, we recorded adjustments of $0.5 million in other income in our Consolidated Statement of Operations to reflect the $24.6 million fair value of the embedded derivative asset on our Consolidated Balance Sheet as of February 28, 2017. During the three months ended May 31, 2017, we recorded adjustments of $0.5 million in other income in our Consolidated Statement of Operations to reflect the $25.0 million fair value of the embedded derivative asset on our Consolidated Balance Sheet as of May 31, 2017. The current and long-term portions of the embedded derivative asset are included in derivative assets and other assets on our Consolidated Balance Sheet, respectively. See Note 12, Fair Value Measurements for more information on the valuation of the embedded derivative.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of May 31, 2017, and August 31, 2016, we had certain derivatives designated as cash flow and fair value hedges.

Interest Rate Contracts

We have outstanding interest rate swaps with an aggregate notional amount of $495.0 million designated as fair value hedges of portions of our fixed-rate debt. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the three-month U.S. dollar LIBOR interest rate, in essence converting the fixed-rate debt to variable-rate debt. Offsetting changes in the fair values of both the swap instruments and the hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. During the nine months ended May 31, 2017, and 2016, we recorded offsetting fair value adjustments of $13.8 million and $7.6 million, respectively, with no ineffectiveness recorded in earnings.

In fiscal 2015, we entered into forward-starting interest rate swaps with an aggregate notional amount of $300.0 million designated as cash flow hedges of the expected variability of future interest payments on our anticipated issuance of fixed-rate debt. During the first quarter of fiscal 2016, we determined that certain of the anticipated debt issuances would be delayed; and we consequently recorded the losses on the ineffective portion of the related swaps in earnings. Additionally, we paid $6.4 million in cash to settle two of the interest rate swaps upon their scheduled termination dates. During the second quarter of fiscal 2016, we settled an additional two interest rate swaps, paying $5.3 million in cash upon their scheduled termination. In January 2016, we issued the fixed-rate debt associated with these swaps and will amortize the amounts which were previously deferred to other comprehensive income into earnings over the life of the debt. The amounts to be included in earnings are not expected to be material during any 12-month period. During the third quarter of fiscal 2016, we settled the remaining two interest rate swaps, paying $5.1 million in cash upon their scheduled termination. We did not issue additional fixed-rate debt as previously planned, and we reclassified all amounts previously recorded to other comprehensive income into earnings. As of May 31, 2017, we had no outstanding cash flow hedges.

The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the three and nine months ended May 31, 2017, and 2016.
 
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars in thousands)
Interest rate derivatives
 
$

 
$

 
$

 
$
(10,070
)


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The following table presents the pretax gains (losses) relating to cash flow hedges that were reclassified from accumulated other comprehensive loss into income for the three and nine months ended May 31, 2017, and 2016.
 
 
 
For the Three Months Ended May 31,
 
For the Nine Months Ended May 31,
 
Location of
Gain (Loss)
 
2017
 
2016
 
2017
 
2016
 
 
 
(Dollars in thousands)
Interest rate derivatives
Interest expense
 
$
(435
)
 
$
(4,166
)
 
$
(1,311
)
 
$
(4,631
)


Note 12        Fair Value Measurements

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

Recurring fair value measurements at May 31, 2017, and August 31, 2016, are as follows:
 
May 31, 2017
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Dollars in thousands)
Assets:
 

 
 

 
 

 
 

Commodity and freight derivatives
$
25,493

 
$
338,134

 
$

 
$
363,627

Foreign currency derivatives

 
10,558

 

 
10,558

Interest rate swap derivatives

 
9,496

 

 
9,496

Deferred compensation assets
51,710

 

 

 
51,710

Embedded derivative asset

 
25,047

 

 
25,047

Other assets
13,760

 

 

 
13,760

Total
$
90,963

 
$
383,235

 
$

 
$
474,198

Liabilities: