CHS Inc. Annual Report 2016

Plain-text annual report

OUR VISION To be a globally integrated energy, grains and foods system innovatively linking producers to consumers. OUR MISSION To grow company profitability and stakeholder value. OUR VALUES At CHS, our values include a tradition of partnership and shared success. We build lasting and mutually rewarding customer relationships. We manage our business safely and with the highest integrity. We’re responsible stewards in our communities. Just as importantly, we value our people and their innovative spirit. Front cover: Top, Jon and Kim Chamberlain, with children Trent, Tyler and Ashlynn, farm near Geneseo, Ill., and are members of River Valley Cooperative, Davenport, Iowa. They deliver corn to the CHS Annawan, Ill., ethanol plant. Middle, Driver Brian Bultmann of Cooperative Energy, Sibley, Iowa, makes a propane delivery to a southern Minnesota hog operation. Bottom, Consultant Jacob Hagen, right, CHS Prairie Lakes, Starbuck, Minn., helps producer Dan Larson, Cyrus, Minn., get best results from his corn crop. Above: Top, in Renville, Minn., Co-op Country Farmers Elevator employees, from left, Joe Hennen, Sandra Refsland, Craig Hebrink, Brooke Hebrink and Larry Arentson and others volunteer in the community, including at this nearby local school. Middle, trucks line up for loading at the CF Industries facility at Port Neal, Iowa. Bottom, visitors enjoy interacting with newborn animals at the CHS Miracle of Birth Center during the Minnesota State Fair. DELIVERING THE ESSENTIALS From left, Bielenberg, Casale Rich soil. Timely rains. Sunshine. The for ﬁscal 2016 were $424.2 million, But even as we manage within right fuel, seed, fertilizer and crop down from $781.0 million for ﬁscal today’s economics, we never lose protection products. Expert advice. 2015. In ﬁscal 2017, based on ﬁscal our long-term view. Fiscal 2016 These are essentials when it comes 2016 results, we expect to return has been a landmark year for to raising a crop for maximum yield. $337 million in direct economic CHS and our owners. We’ve made value to our owners in the form of critical investments, detailed in this And the essentials for a successful cash patronage, equity redemptions annual report, and laid important cooperative? Dedication to safety. and preferred stock dividends. groundwork for not just the A sound balance sheet. Investments next few years, but for the next in people, facilities and equipment. While these are not easy times, we generations of cooperative owners An unwavering commitment know down cycles are inevitable and customers. to adding value that helps our in our agriculture and energy owners, customers, employees and businesses. We also know what it What’s essential as we move communities grow. takes to weather them: focusing on through ﬁscal 2017 and beyond? There’s no question that 2016 has been the most challenging year in well over a decade — from the farm to the global marketplace. A the essentials. The same essential tenet of our nearly nine-decade history: our CHS entered this uncertain commitment to being a ﬁnancially economic period in a position of sound company that adds value relative strength. As we navigate for our owners today and for their complex geopolitical environment, through it, we’ll stay focused children and grandchildren in the supply/demand imbalances and on our priorities. That includes years to come. more drove commodity prices always putting safety ﬁrst and lower and put pressure on margins. taking steps to maintain balance These challenges in agriculture sheet strength and proﬁtability. were compounded by an equally As we all know, one upside of soft market for CHS and member challenging times is the incentive cooperatives in the energy business. to scrutinize everything we do David Bielenberg to ensure optimal efficiency and Chairman, Board of Directors For ﬁscal 2016, CHS revenues were return on investment. Throughout $30.3 billion, down 12 percent from ﬁscal 2016 and as 2017 begins, $34.6 in ﬁscal 2015, largely due we’ve managed expenses and to continued lower prices for the staffing prudently, while continuing grain, fertilizer and energy products to invest in necessary maintenance that comprise the majority of our and upgrades to keep our assets in Carl Casale business. Our resulting earnings top operating form. President and Chief Executive Officer CHS 2016 1 THE ESSENTIALS IN REVIEW A new coker at the CHS reﬁnery at locations offer Cenex premium terminal expansions from Maine McPherson, Kan., allows the reﬁnery diesel fuel. Cenex ZipTrip® to Washington state, along with to process a larger variety of crude retail stores contributed record a proprietary supply agreement oils. This delivers the best value to proﬁtability and fuel sales in 2016. with NuStar Energy LP, helped owners and customers by using ensure continuous, dependable the most cost-effective crude oil Investment in the CHS pipeline supply. available. The reﬁnery became and connection with the NuStar fully owned by CHS on Sept. 1, 2015. pipeline, to be completed in early A market-leading risk The CHS reﬁnery at Laurel, Mont., calendar 2017, will help ensure management tool, the Cenex began operating a new coker in a dependable supply of Cenex Total Protection Plan® warranty 2008. These improvements and brand reﬁned fuels for customers gave equipment owners who others bring increased capacity to across North Dakota, South purchase Cenex lubricants serve CHS owners. Dakota and Minnesota. and fuels greater peace of mind and helped boost All retail Cenex® locations now Customer service and reliable lubricant and grease product carry Cenex TOP TIER™ Detergent supply is paramount for CHS sales. Cenex lubricants have Gasoline and more than 500 Propane. Rail capacity and been reformulated to meet Reﬁned fuels pipeline replacement and construction, eastern Montana Cenex® convenience store, Cooperative Energy, Sibley, Iowa 270 SCHOLARSHIPS FOR AG STUDENTS AT 85 COLLEGES 2 CHS 2016 120 MILLION GALLONS PROPANE TERMINAL AND RAIL CAPACITY GROWTH SINCE 2010 77 CENEX® RETAIL SITES OPENED IN FISCAL 2016 speciﬁcations of new engines, time for spring 2016 applications. The CHS Foundation continued which operate at higher The enhanced distribution its partnership with Progressive temperatures. system, served by truck, rail and Agriculture Foundation to help barge, includes more than 90 provide safety days for children. The Cenex Tanks of Thanks® locations that store and distribute CHS purchased rescue tubes and program celebrated ﬁve years fertilizer to retail customers. trained rural ﬁre departments of partnering with 1,450 local on preventing grain handling retailers to recognize good deeds Safety ﬁrst. The entire CHS accidents. in more than 3,000 communities. system works toward continual More than 13,000 people have improvement, including risk been honored since Tanks of assessment, training and Thanks began in 2012. communications that drive employee engagement. CHS With the CF Industries Nitrogen, Transportation continued to LLC, and CHS agreement focus on safety, with a signiﬁcant complete, customers began drop in accident rate, putting it in receiving fertilizer shipments in the top quartile of the industry. CHS-sponsored Progressive Ag Safety Day, Rochester, Minn. $2b CHS INVESTMENT IN REFINED FUELS MANUFACTURING AND DISTRIBUTION COMMITTED TO EFFICIENT REFINING COMBINED PRODUCTION OF CHS REFINERIES BARRELS PER DAY 125,000 155,000 30,000 45,000 60,000 1960 1980 2000 2010 2017 $500k+ IN FREE FUEL AWARDED TO TANKS OF THANKS® RECIPIENTS CHS 2016 3 THE ESSENTIALS IN REVIEW CHS Country Operations helped expectations in its ﬁrst year facilities achieved new food safety producer-owners deliver more and signiﬁcantly expanded both designations as the business value through collaboration. production and the product implemented an industry-leading Eight CHS business units in base for CHS Processing and pasteurization process. Idaho, Illinois, Montana, Food Ingredients. More non- North Dakota and Washington GMO soy oil products are being Business Solutions invested in combined operations to offered to meet demand. And partnerships to support member- achieve greater effectiveness. CHS farmer-owners can now owners, including the 100 percent Country Operations expanded enter contracts to produce CHS ownership stake in Russell partnerships with cooperatives high-oleic soybeans to meet Consulting, which provides ﬁnancial in Kansas and Alberta and also food production needs. and market advice for challenging invested in agronomy and grain times. The Land As Your Legacy® assets in Minnesota, Montana, Protecting food and feed quality, program continued to grow, North Dakota and Wisconsin. 12 CHS feed mills producing engaging farm families in planning The canola processing plant in Analysis Critical Control Point prepare them to transition land Hallock, Minn., exceeded volume certiﬁcation. Four CHS Sunﬂower to the next generation. Payback® feed received Hazard and educational seminars to CHS Prairie Lakes Agronomist/Crop Consultant Erica Boyum and producer Jerome Hanson, Hoffman, Minn. Producer Steve Nightingale, Osco, Ill., at the CHS Annawan, Ill., ethanol plant 100m TRANSACTIONS BY CHS PAYMENT SOLUTIONS FOR ENERGY CUSTOMERS IN FISCAL 2016 4 CHS 2016 65 COUNTRIES GRAIN SALES OR PURCHASES FOR THE CHS SYSTEM 8,350 HOURS OF DEFENSIVE DRIVING TRAINING COMPLETED BY 4,200 EMPLOYEES Ventura Foods, LLC, a joint venture U.S. wheat growers double organic The CHS Foundation and North between CHS and Mitsui, Inc., wheat acres by 2019. completed two signiﬁcant growth Dakota State University partnered on a new endowed chair in risk acquisitions in 2016. In February, CHS Government Affairs released management and trading, made it acquired Wings of Canada, a results of an Ernst & Young study possible by a $2.5 million grant Toronto-based manufacturer of on cooperative value, pointing from the foundation. The CHS dressings and sauces, and in June, to the CHS system as a catalyst Foundation also helped fund Ventura Foods acquired the Cargill for job creation and community the Montana State University dressings, sauces and mayonnaise vitality. More than 50 educational Auto/Diesel Technology Center at business in North America. Ventura events for federal, state and local Havre, Mont. The CHS Foundation Foods continues as a leading policymakers helped advocate is funded by charitable gifts from producer of food products for for CHS owners and businesses. CHS Inc. foodservice and retail customers. One key initiative was supporting Ardent Mills, LLC, a joint venture with for compliance to new railway Cargill and ConAgra, announced a requirements that could severely new initiative committed to helping restrict fertilizer shipments. legislation to extend the deadline $90m INVESTED IN UPPER-TIER ENERGY PRODUCT SUPPLY NETWORK Producers Danell and Kent Kalcevic, Bennett, Colo. CHS FOUNDATION MAKES A DIFFERENCE $3.2m TO DEVELOPING AG LEADERS $464k TO SUPPORT VIBRANT RURAL COMMUNITIES $264k TO PROMOTE AG SAFETY THE CHS FOUNDATION IS FUNDED BY CHARITABLE GIFTS FROM CHS INC. $230m IN IMPROVEMENTS TO CHS COUNTRY OPERATIONS LOCATIONS CHS 2016 5 FINANCIAL HIGHLIGHTS OWNER RETURN ON EQUITY (percent) 32.2 2012 22.3 2013 21.1 2014 12.1 2015 5.5 2016 40.6 2012 44.5 2013 42.7 2014 34.6 2015 30.3 2016 430.9 2012 598.9 2013 637.2 2014 533.8 2015 515.7 2016 1260.6 2012 992.4 2013 1081.4 781.0 424.2 2014 2015 2016 NET SALES ($ in billions) CASH RETURN* ($ in millions) *Includes preferred stock and dividends NET INCOME ($ in millions) 6 CHS 2016 Year-over-year CHS earnings and two reﬁneries. Earnings for the ethanol market prices, also partially revenues declined during ﬁscal company’s transportation business offset by increased volumes. 2016, largely the result of the also declined. Record performance ongoing down cycles within the by the CHS propane business for CHS recorded ﬁscal 2016 income global agriculture and energy ﬁscal 2016 improved signiﬁcantly over before taxes of $34.1 million, net of sectors that have resulted in lower ﬁscal 2015, which included reduced allocated expenses, from its February commodity prices and margins and crop drying and winter heating 2016 investment in CF Nitrogen affected a signiﬁcant portion of the demand. The CHS lubricants business under its Nitrogen Production segment. company’s businesses. Amid this also reported record earnings for a In addition, CHS recorded ﬁscal 2016 downturn, which has been felt by second consecutive year. pre-tax earnings of $64.8 million, net of CHS customers and competitors allocated expenses, for ownership throughout those industries, CHS CHS reports results for its agricultural in Ventura Foods, LLC, under its continues to take prudent actions inputs, grain marketing, local retail Foods segment; these results had to ensure the company remains and processing businesses under the previously been reported under ﬁnancially sound and positioned for Ag segment. The company recorded the Corporate and Other heading. future opportunities. ﬁscal 2016 Ag earnings before taxes Within the Corporate and Other of $30.9 million, down 79 percent category, CHS reported slightly CHS net income for ﬁscal 2016 from ﬁscal 2015, a year during which higher earnings for ﬁscal 2016 for (Sept. 1, 2015, through Aug. 31, 2016) results included a $116.5 million one- its business services operations, of $424.2 million declined 46 percent time impairment charge resulting including the company’s insurance, from $781.0 million for ﬁscal 2015, from the decision to cease planned risk management and ﬁnancing reﬂecting lower pre-tax earnings development of a nitrogen fertilizer businesses, while year-over-year within the company’s Energy and Ag plant at Spiritwood, N.D. income from its ownership in the segments, as well as its Corporate Ardent Mills, LLC, wheat milling joint and Other category. Lower pre-tax Within the Ag segment, earnings for venture declined. earnings within these two segments the company’s Country Operations were partly offset by increased local retail businesses declined, In ﬁscal 2016, based on ﬁscal 2015 pretax earnings in its Foods segment primarily due to lower grain earnings, CHS returned $515.7 million and seven months of earnings from margins. This was partially offset to its owners in cash patronage, its Nitrogen Production segment by higher grain volumes in ﬁscal equity redemptions, preferred generated by the February 2016 2016 compared with ﬁscal 2015. stock and dividends on preferred strategic investment CHS made in Lower margins also contributed to stock. Based on ﬁscal 2016 results, CF Industries Nitrogen, LLC (CF a decline in earnings for the CHS the company expects to return an Nitrogen). wholesale crop nutrients business. estimated $337 million to owners CHS grain marketing earnings during ﬁscal 2017. Overall CHS revenues for ﬁscal 2016 also decreased in ﬁscal 2016, were $30.3 billion, down 12 percent primarily due to lower margins As ﬁscal 2017 unfolds, CHS will from $34.6 billion for ﬁscal 2015, that were partially offset by larger sustain its focus on its ﬁnancial and largely due to lower values for the volumes. CHS Processing and Food operational priorities. This includes commodity energy, grains and Ingredients saw lower year-over-year always putting safety ﬁrst and fertilizer products that comprise earnings for ﬁscal 2016, primarily taking steps to maintain balance much of the company’s business. due to costs associated with the sale sheet strength and proﬁtability. The and impairment of assets, along with company will continue to manage Year-over-year pre-tax earnings for a speciﬁc customer receivable and, expenses and staffing prudently, the CHS Energy segment declined to a lesser extent, lower soybean while continuing to make investments 49 percent to $275.4 million for the crushing margins. The company’s in necessary maintenance and year ended Aug. 31, 2016, primarily renewable fuels marketing and essential operational upgrades and due to signiﬁcantly reduced reﬁning margins for the company’s production operations also declined from ﬁscal 2016 as a result of lower ensuring assets deliver appropriate levels of return. CHS 2016 7 4NOV201612340983 AUGUST 31 (DOLLARS IN THOUSANDS) 2016 2015 ASSETS Current assets: Cash and cash equivalents Receivables Inventories Derivative assets Margin deposits Supplier advance payments Other current assets Total current assets Investments Property, plant and equipment Other assets Total assets LIABILITIES AND EQUITIES Current liabilities: Notes payable Current portion of long-term debt Current portion of mandatorily redeemable noncontrolling interest Customer margin deposits and credit balances Customer advance payments Accounts payable Derivative liabilities Accrued expenses Dividends and equities payable Total current liabilities Long-term debt Long-term deferred tax liabilities Other liabilities Commitments and contingencies (Note 14) Equities: Preferred stock Equity certificates Accumulated other comprehensive loss Capital reserves Total CHS Inc. equities Noncontrolling interests Total equities Total liabilities and equities The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 8 8 CHS 2016 $ 279,313 $ 953,813 2,880,763 2,370,699 543,821 310,276 347,600 202,708 6,935,180 3,795,976 5,488,323 1,098,230 2,818,110 2,652,344 513,441 273,118 391,504 406,479 8,008,809 1,002,092 5,192,927 1,024,484 $ 17,317,709 $ 15,228,312 $ 2,731,479 $ 1,165,378 214,329 — 208,991 412,823 1,819,049 513,599 422,494 198,031 6,520,795 2,088,450 487,762 354,452 2,244,132 4,237,174 (211,726) 1,582,380 7,851,960 14,290 7,866,250 170,309 152,607 188,149 398,341 1,813,302 470,769 513,578 384,427 5,256,860 1,260,808 580,835 460,398 2,167,540 4,099,882 (214,207) 1,604,670 7,657,885 11,526 7,669,411 $ 17,317,709 $ 15,228,312 CONSOLIDATED FINANCIAL STATEMENTS 4NOV201612343338 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) 2016 2015 2014 Revenues Cost of goods sold Gross profit Marketing, general and administrative Operating earnings (Gain) loss on investments Interest expense, net $ 30,347,203 $ 34,582,442 $ 42,664,033 29,387,910 33,091,676 959,293 649,097 310,196 (9,252) 75,347 1,490,766 775,354 715,412 (5,239) 60,333 41,011,487 1,652,546 602,598 1,049,948 (114,162) 140,253 Equity (income) loss from investments (175,777) (107,850) (107,446) Income before income taxes Income taxes Net income Net income (loss) attributable to noncontrolling interests 419,878 (4,091) 423,969 (223) 768,168 (12,165) 780,333 (712) 1,131,303 48,296 1,083,007 1,572 Net income attributable to CHS Inc. $ 424,192 $ 781,045 $ 1,081,435 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 4NOV201612341411 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) 2016 2015 2014 Net income $ 423,969 $ 780,333 $ 1,083,007 Other comprehensive income (loss), net of tax: Postretirement benefit plan activity, net of tax expense (benefit) of $3,903, $(12,726) and $8,410 in 2016, 2015 and 2014, respectively 6,583 (19,877) 13,759 Unrealized net gain (loss) on available for sale investments, net of tax expense (benefit) of $947, $(154) and $1,251 in 2016, 2015 and 2014, respectively Cash flow hedges, net of tax expense (benefit) of $(2,410), $(1,607) and 1,500 (242) 2,028 $(8,883) in 2016, 2015 and 2014, respectively (3,872) (2,602) (14,407) Foreign currency translation adjustment, net of tax expense (benefit) of $1,163, $4,057 and $(783) in 2016, 2015 and 2014, respectively Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to noncontrolling interests (1,730) 2,481 426,450 (223) (34,729) (57,450) 722,883 (712) (1,270) 110 1,083,117 1,572 Comprehensive income attributable to CHS Inc. $ 426,673 $ 723,595 $ 1,081,545 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 9 CHS 2016 9 4NOV201612341269 FOR THE YEARS ENDED AUGUST 31, 2016, 2015 AND 2014 EQUITY CERTIFICATES CAPITAL EQUITY CERTIFICATES NONPATRONAGE EQUITY CERTIFICATES NONQUALIFIED EQUITY CERTIFICATES $ 3,430,537 $ 23,485 $ 134,324 (325,862) 422,670 (99,204) 14,278 (200,000) (1,034) 397,237 (130,149) 3,508,473 (267,088) 402,560 (127,707) 12,365 (2,723) 375,267 (107,250) 3,793,897 (268,017) 375,506 (22,948) 23,258 (76,756) (229) 23,256 (199) (129,462) 131,661 (176) (227) 148,579 284,699 (148,579) 147,710 (1,021) 119 23,057 282,928 (143) (820) (1,248) (20) (341) 167,381 (58,560) $ 3,932,513 $ 22,894 $ 281,767 (DOLLARS IN THOUSANDS) BALANCES, AUGUST 31, 2013 Reversal of prior year patronage and redemption estimates Distribution of 2013 patronage refunds Redemptions of equities Equities issued Capital equity certificates redeemed with preferred stock Preferred stock dividends Other, net Net income Other comprehensive income (loss), net of tax Estimated 2014 patronage refunds Estimated 2014 equity redemptions BALANCES, AUGUST 31, 2014 Reversal of prior year patronage and redemption estimates Distribution of 2014 patronage refunds Redemptions of equities Equities issued Preferred stock dividends Other, net Net income Other comprehensive income (loss), net of tax Estimated 2015 patronage refunds Estimated 2015 equity redemptions BALANCES, AUGUST 31, 2015 Reversal of prior year patronage and redemption estimates Distribution of 2015 patronage refunds Redemptions of equities Equities issued Capital equity certificates redeemed with preferred stock Preferred stock dividends Other, net Net income Other comprehensive income (loss), net of tax Estimated 2016 patronage refunds Estimated 2016 equity redemptions BALANCES, AUGUST 31, 2016 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 10 CHS 2016 10 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2016, 2015 AND 2014 PREFERRED STOCK ACCUMULATED OTHER COMPREHENSIVE LOSS CAPITAL RESERVES NONCONTROLLING INTERESTS TOTAL EQUITIES $ 319,368 $ (156,867) $ 1,380,361 $ 21,539 $ 5,152,747 670,809 200,000 110 1,190,177 (156,757) 977,363 (57,450) 2,167,540 (214,207) 76,756 (164) 2,481 841,386 (841,120) (61,658) 8,897 1,081,435 (810,641) 1,598,660 810,641 (821,496) 20 (145,723) 6,967 781,045 (625,444) 1,604,670 625,444 (627,246) (164,207) (1,505) 424,192 (278,968) 386,062 (286,789) (99,609) 685,087 — (61,658) 2,861 1,083,007 110 (264,825) (130,149) (4,775) 1,572 18,336 6,466,844 (6,098) (712) 11,526 2,987 (223) 394,974 (271,226) (128,907) 989,728 (145,723) (1,735) 780,333 (57,450) (250,177) (107,250) 7,669,411 357,427 (251,740) (23,911) 23,258 — (164,207) (291) 423,969 2,481 (111,587) (58,560) $ 2,244,132 $ (211,726) $ 1,582,380 $ 14,290 $ 7,866,250 11 CHS 2016 11 4NOV201612341130 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) Cash flows from operating activities: 2016 2015 2014 Net income $ 423,969 $ 780,333 $ 1,083,007 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Amortization of deferred major repair costs (Income) loss from equity investments Distributions from equity investments Noncash patronage dividends received (Gain) loss on sale of property, plant and equipment (Gain) loss on investments Unrealized (gain) loss on crack spread contingent liability Provision for doubtful accounts Long-lived asset impairment Deferred taxes Other, net Changes in operating assets and liabilities, excluding the effects of acquisitions: Receivables Inventories Derivative assets Margin deposits Supplier advance payments Other current assets and other long-term assets Customer margin deposits and credit balances Customer advance payments Accounts payable and accrued expenses Derivative liabilities Other liabilities Net cash provided by (used in) operating activities Cash flows from investing activities: Acquisition of property, plant and equipment Proceeds from disposals of property, plant and equipment Expenditures for major repairs Investments in joint ventures and other Investments redeemed Proceeds from sale of investments Changes in notes receivable Business acquisitions, net of cash acquired Other investing activities, net Net cash provided by (used in) investing activities Cash flows from financing activities: 447,492 73,483 (175,777) 178,464 (7,068) 452 (9,252) (60,931) 57,200 27,247 (24,178) 424 46,405 338,662 (20,257) (37,115) 44,047 120,993 20,841 5,664 (129,259) 36,283 (94,291) 1,263,498 (692,780) 13,417 (19,610) (2,855,218) 33,821 39,229 (257,968) (11,890) 4,028 355,422 45,953 (107,850) 80,917 (13,035) (7,350) (5,239) (36,310) 2,806 103,723 30,304 3,681 314,313 71,073 100,715 (8,534) 3,127 (87,426) (106,788) (223,463) (558,120) (134,033) (34,209) 570,010 (1,186,790) 11,347 (201,688) (64,259) 19,927 7,733 (184,067) (305,213) (5,658) (3,746,971) (1,908,668) Proceeds from lines of credit and long-term borrowings Payments on lines of credit, long term-debt and capital lease obligations Mandatorily redeemable noncontrolling interest payments Payments on crack spread contingent liability Changes in checks and drafts outstanding Preferred stock issued Preferred stock issuance costs Preferred stock dividends paid Redemptions of equities Cash patronage dividends paid Other financing activities, net Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 31,586,968 (29,232,842) (153,022) (2,625) 50,257 — (164) (163,324) (23,911) (251,740) 4,599 1,814,196 (5,223) (674,500) 953,813 279,313 $ The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 12 CHS 2016 12 8,954,420 (9,141,240) (65,981) — (43,353) 1,010,000 (32,637) (133,710) (128,907) (271,226) 6,462 153,828 5,436 (1,179,394) 2,133,207 $ 953,813 $ 2,133,207 306,247 45,070 (107,446) 79,685 (16,452) 3,316 (114,162) (19,217) 9,050 74,452 (24,397) 7,777 101,083 (37,792) (123,132) 39,861 67,688 (19,694) (34,051) 164,021 (189,803) 134,925 11,208 1,441,244 (919,076) 11,724 (2,930) (80,140) 138,485 4,668 (184,060) (281,490) (3,576) (1,316,395) 4,591,982 (4,540,558) (65,981) (8,670) (17,815) 702,979 (23,672) (50,761) (99,609) (286,789) 344 201,450 (1,624) 324,675 1,808,532 4NOV201612342658 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Organization, Basis of Presentation and Significant Accounting Policies Organization CHS Inc. (‘‘CHS’’, ‘‘we’’, ‘‘us’’, ‘‘our’’) is one of the nation’s leading integrated agricultural companies. As a cooper- ative, CHS is owned by farmers and ranchers and their member cooperatives (‘‘members’’) across the United States. We also have preferred stockholders that own shares of our various series of preferred stock, which are each listed on the Global Select Market of the NASDAQ Stock Market LLC (‘‘NASDAQ’’). See Note 9, Equities for more detailed information. We buy commodities from and provide products and services to patrons (including member and other non-member customers), both domestic and interna- tional. Those products and services include initial agri- cultural inputs such as fuels, farm supplies, crop nutrients and crop protection products; as well as agri- cultural outputs that include grains and oilseeds, grain and oilseed processing and food products, and ethanol production and marketing. A portion of our operations are conducted through equity investments and joint ventures whose operating results are not fully consoli- dated with our results; rather, a proportionate share of the income or loss from those entities is included as a component in our net income under the equity method of accounting. Basis of Presentation The consolidated financial statements include the accounts of CHS and all of our wholly-owned and majority-owned subsidiaries and limited liability compa- nies. The effects of all significant intercompany transac- tions have been eliminated. The notes to our consolidated financial statements make reference to our Energy, Ag, Nitrogen Production and Foods reportable segments, as well as our Corpo- rate and Other category, which represents an aggrega- tion 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 11, Segment Reporting for more information. Revisions In preparing our consolidated financial statements for the year ended August 31, 2015, we identified immaterial to our errors that impacted our previously issued consolidated financial statements. The primary errors related to: 1) incorrect application of Financial Accounting Stan- dards Board (‘‘FASB’’) Accounting Standards Codifica- lease tion (‘‘ASC’’) Topic 840, Leases arrangements and 2) inaccurate presentation of non-cash acquisitions of property, plant and equipment and expenditures for major repairs on our consolidated statements of cash flows. Prior period amounts presented in our consolidated financial statements and the related notes have been revised accordingly, and those revisions are noted where they appear. See Note 18, Correction of Immaterial Errors for a more detailed description of the revisions and for compari- sons of amounts previously reported to the revised amounts. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’) requires man- agement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclo- sure of contingent assets and liabilities at the date of the financial statements and the reported amounts of reve- nues and expenses during the reporting period. We base our estimates on assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates and assumptions. Cash and Cash Equivalents Cash equivalents include short-term, highly liquid investments with original maturities of three months or less at the date of acquisition. The fair value of cash and cash equivalents approximates the carrying value because of the short maturity of the instruments. Inventories Grain, processed grain, oilseed, processed oilseed and other minimally processed soy-based inventories are stated at net realizable values which approximate market values. These inventories are considered to be agricultural commodity inventories that are readily con- vertible to cash because of their commodity character- istics, widely available markets and international pricing mechanisms. Agricultural commodity inventories have 13 CHS 2016 13 ONE: O rg a n i z at i o n , B a s i s of P re s e n t at i o n a n d S i g n i f i c a n t Acco u n t i n g Po l i c i e s , co n t i n u e d quoted market prices in active markets, may be sold without significant further processing and have predict- able and insignificant disposal costs. Changes in the net realizable value of merchandisable agricultural com- modities inventories are recognized in earnings as a component of cost of goods sold. All other inventories are stated at the lower of cost or market. Costs for inventories produced or modified by us through a manufacturing process include fixed and variable production and raw material costs, and in-bound freight costs for raw materials. Costs for inven- tories purchased for resale include the cost of products and freight incurred to place the products at our points of sale. The costs of certain energy inventories (whole- sale refined products, crude oil and asphalt) are deter- mined 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. Derivative Financial Instruments and Hedging Activities We enter into various derivative instruments to manage our exposure to movements primarily associated with agricultural commodity prices and freight costs, and to a lesser degree, foreign currency exchange rates and interest rates. With the exception of certain interest rate swap contracts, which are accounted for as cash flow hedges or fair value hedges, our derivative instruments represent economic hedges of price risk for which hedge accounting under ASC Topic 815, Derivatives and Hedging, is not applied. Rather, the derivative instru- ments are recorded on our Consolidated Balance Sheets at fair value with changes in fair value being recorded directly to earnings, primarily within cost of goods sold in our Consolidated Statements of Operations. See Note 12, Derivative Financial Instruments and Hedging Activities and Note 13, Fair Value Measurements for additional information. Although we have certain netting arrangements for our exchange-traded futures and options contracts and cer- tain over-the-counter (‘‘OTC’’) contracts, we have elected to report our derivative instruments on a gross basis on our Consolidated Balance Sheets under ASC Topic 210-20, Balance Sheet—Offsetting. Margin Deposits Many of our derivative contracts with futures and options brokers require us to make margin deposits of cash or other assets. Subsequent margin deposits may also be necessary when changes in commodity prices result in a loss on the contract value, in order to comply with applicable regulations. Our margin deposit assets are held by external brokers in segregated accounts to support the associated derivative contracts and may be used to fund or partially fund the settlement of those contracts as they expire. Similar to our derivative finan- cial instruments, margin deposits are also reported on a gross basis. Supplier Advance Payments Supplier advance payments primarily include amounts paid for in-transit grain purchases from suppliers and amounts paid to crop nutrient suppliers to lock in future supply and pricing. Investments The equity method of accounting is used for joint ven- tures and other investments in which we are able to exercise significant influence over the entity’s opera- tions, but do not have a controlling interest in the entity. Various factors are considered when assessing signifi- cant influence, including our ownership interest, repre- sentation on the Board of Directors, voting rights, and the impact of commercial arrangements that may exist with the entity. The cost method of accounting is used for other invest- ments in which we do not exercise significant influence. Investments in other cooperatives are stated at cost, plus patronage dividends received in the form of capital stock and other equities. Patronage dividends are recorded as a reduction to cost of goods sold at the time qualified written notices of allocation are received. Investments in other debt and equity securities are clas- sified as available-for-sale financial instruments and are stated at fair value, with unrealized gains and losses included as a component of accumulated other com- prehensive loss on our Consolidated Balance Sheets. Investments in debt and equity instruments are carried at amounts that approximate fair values. 14 CHS 2016 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Deprecia- tion and amortization are provided on the straight-line method by charges to operations at rates based upon the expected useful lives of individual or groups of assets (15 to 20 years for land improvements; 20 to 40 years for buildings; 5 to 20 years for machinery and equipment; and 3 to 10 years for office and other). The cost and related accumulated depreciation and amorti- zation of assets sold or otherwise disposed of are removed from the related accounts and resulting gains or losses are reflected in operations. Expenditures for maintenance and minor repairs and renewals are expensed, while the costs for major maintenance activi- ties are capitalized and amortized on a straight-line basis over the period of time estimated to lapse until the next major maintenance activity occurs. We also capi- talize and amortize eligible costs to acquire or develop internal-use software that are incurred during the appli- cation development stage. When assets are sold or oth- erwise disposed of, the cost and related accumulated depreciation and amortization are removed from the related accounts and resulting gains or losses are reflected in operations. Property, plant and equipment and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable. This evaluation of recoverability is based on various indicators, including the nature, future economic benefits and geographic locations of the assets, historical or future profitability measures, and other external market conditions. If these indicators suggest that the carrying amounts of an asset or asset group may not be recoverable, potential impair- ment is evaluated using undiscounted estimated future cash flows. Should the sum of the expected future net cash flows be less than the carrying value, an impair- ment loss would be recognized. An impairment loss would be measured by the amount by which the car- rying value of the asset or asset group exceeds its fair value. 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 compo- nent parts at the time they are retired. In most cases, these assets can be used for extended and indetermi- nate periods of time, as long as they are properly main- tained 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 esti- mate 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 dis- mantle 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 obliga- tions are not material. Major Maintenance Activities Within our Energy segment, major maintenance activi- ties (‘‘turnarounds’’) are performed at our Laurel, Mon- tana and McPherson, Kansas refineries regularly. Turnarounds are the planned and required shutdowns of refinery processing units, which include the replace- ment or overhaul of equipment that have experienced decreased efficiency in resource conversion. Because turnarounds are performed to extend the life, increase the capacity, and/or improve the safety or efficiency of refinery processing assets, we follow the deferral method of accounting for turnarounds. Expenditures for turnarounds are capitalized (deferred) when incurred and amortized on a straight-line basis over a period of 2 to 4 years, which is the estimated time lapse between turnarounds. Should the estimated period between turnarounds change, we may be required to amortize the remaining cost of the turnaround over a shorter period, which would result in higher depreciation and amortization costs. Capitalized turnaround costs are included in other assets (long-term) on our Consoli- dated Balance Sheets and amortization expense related to the capitalized turnaround costs is included in cost of goods sold in our Consolidated Statements of Operations. 15 CHS 2016 15 ONE: O rg a n i z at i o n , B a s i s of P re s e n t at i o n a n d S i g n i f i c a n t Acco u n t i n g Po l i c i e s , co n t i n u e d The selection of the deferral method, as opposed to expensing the turnaround costs when incurred, results in deferring recognition of the turnaround expenditures. The deferral method also results in the classification of the related cash outflows as investing activities in our Consolidated Statements of Cash Flows, whereas expensing these costs as incurred, would result in classi- fying the cash outflows as operating activities. Repair, maintenance and related labor costs are expensed as incurred and are included in operating cash flows. Goodwill and Other Intangible Assets Goodwill and other intangible assets are included in other assets (long-term) on our Consolidated Balance Sheets. Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is tested for impairment on an annual basis as of May 31, or more frequently if events or circumstances occur which could indicate impairment. Goodwill is tested for impair- ment at the reporting unit level, which has been deter- mined to be our operating segments or one level below our operating segments in certain instances. Other intangible assets consist primarily of customer lists, trademarks and non-compete agreements. Intan- gible assets subject to amortization are expensed over their respective useful lives, which generally range from 2 to 30 years. We have no material intangible assets with indefinite useful lives. See Note 6, Other Assets for more information on goodwill and other intangible assets. We made acquisitions during the three years ended August 31, 2016, which were accounted for using the acquisition method of accounting. Operating results for these acquisitions were included in our consolidated financial statements beginning on the respective acqui- sition dates. The respective purchase prices were pre- liminarily allocated to the assets, liabilities and identifiable intangible assets acquired based upon the acquisition-date fair values. Any excess purchase price over the fair values of the acquired net assets acquired was recognized as goodwill. See Note 17, Acquisitions for more information on acquisition activity. Revenue Recognition We provide a wide variety of products and services, from agricultural inputs such as fuels, farm supplies and crop nutrients, to agricultural outputs that include grain and oilseed, processed grains and oilseeds and food products, and ethanol production and marketing. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is rea- sonably assured. Grain and oilseed sales are recorded after the commodity has been delivered to its destina- tion and final weights, grades and settlement prices have been agreed upon. All other sales are recognized upon transfer of title, which could occur either upon shipment to or receipt by the customer, depending upon the terms of the transaction. Shipping and han- dling amounts billed to a customer as part of a sales transaction are included in revenues and the related costs are included in cost of goods sold. Environmental Expenditures We are subject to various federal, state, and local envi- ronmental laws and regulations. Environmental expend- itures are expensed or capitalized depending on their future economic benefit. Liabilities, including legal costs, related to remediation of contaminated proper- ties are recognized when the related costs are consid- ered probable and can be reasonably estimated. Estimates of environmental costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regu- lations. Recoveries, if any, are recorded in the period in which recovery is received. Liabilities are monitored and adjusted as new facts or changes in law or technology occur. Income Taxes CHS is a nonexempt agricultural cooperative and files a consolidated federal income tax return with our 80% or more owned subsidiaries. We are subject to tax on income from nonpatronage sources, non-qualified patronage distributions and undistributed patronage- sourced income. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and lia- bilities. Deferred income taxes reflect the impact of tem- porary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for federal and state income tax purposes, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valu- ation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. 16 CHS 2016 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements Adopted In November 2015, the FASB issued Accounting Stan- dards Update (‘‘ASU’’) No. 2015-17, Balance Sheet Classi- fication of Deferred Taxes. ASU No. 2015-17 clarifies and simplifies the presentation of deferred income taxes by requiring deferred tax liabilities and assets to be classi- fied as non-current in a classified statement of financial position. This ASU is effective for us beginning Sep- tember 1, 2017, for our fiscal year 2018 and for interim periods within that fiscal year. Early adoption is per- mitted. We elected to early adopt ASU 2015-17 effective August 31, 2016 on a prospective basis. Adoption of ASU No. 2015-17 resulted in the netting of our current deferred tax assets against our non-current deferred tax assets in our Consolidated Balance Sheet as of August 31, 2016. Prior periods were not retrospectively adjusted. See Note 8, Income Taxes for more information on the adoption of ASU No. 2015-17. Not Yet Adopted In August 2016, the FASB issued ASU No. 2016-15, State- ment 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 classi- fied 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 amend- ments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision- useful information about the expected credit losses. This ASU is effective for us beginning September 1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. Entities may early adopt begin- ning after December 15, 2018. We are currently evalu- ating 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 gui- dance in ASC 840—Leases. This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortiza- tion of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. This ASU is effective for us beginning Sep- tember 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. We are currently evalu- ating the impact the adoption will have on our consoli- dated financial statements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires an entity to disclose sufficient qualitative and quantitative infor- mation surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from con- tracts from customers. This ASU supersedes the rev- enue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance throughout the Industry Topics of the Codification. In August 2015, the FASB issued ASU No. 2015-14 delaying the effective date for adoption. This ASU is now effec- tive for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Subsequently, the FASB issued ASUs in 2016 containing implementation guidance related to ASU No. 2014-09, including: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consid- erations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understand- ability 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 implementa- tion guidance; and ASU No. 2016-12, Revenue from Con- tracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which contains 17 CHS 2016 17 ONE: O rg a n i z at i o n , B a s i s of P re s e n t at i o n a n d S i g n i f i c a n t Acco u n t i n g Po l i c i e s , co n t i n u e d certain provision and practical expedients in response to identified implementation issues. We will adopt ASU No. 2014-09 and the related ASUs on September 1, 2018, in the first quarter of fiscal 2019. Early application as of the original date is permitted. ASU No. 2014-09 permits the use of either the full or modified retrospective method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transi- tion method nor have we determined the effect of the standard on our ongoing financial reporting. 4NOV201612344018 Receivables Receivables as of August 31, 2016 and 2015 are as follows: (DOLLARS IN THOUSANDS) 2016 2015 Trade accounts receivable $ 1,804,646 $ 1,793,147 CHS Capital short-term notes receivable Other 858,805 791,413 380,956 339,995 3,044,407 2,924,555 Less allowances and reserves 163,644 106,445 Total receivables $2,880,763 $ 2,818,110 Trade accounts receivable are initially recorded at a selling price, which approximates fair value, upon the sale of goods or services to customers. Subsequently, trade accounts receivable are carried at net realizable value, which includes an allowance for estimated uncol- lectible 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 approxi- mates fair value, given the notes’ short duration and the use of market pricing adjusted for risk. CHS Capital, our wholly-owned subsidiary, has short-term notes receivable from commercial and pro- ducer borrowers. The short-term notes receivable gen- erally have maturity terms of 12–14 months and are reported at their outstanding principal balances, as CHS Capital holds these notes to maturity. The short-term notes receivable are collateralized by various combina- tions of mortgages, personal property, accounts and notes receivable, inventories and assignments of certain inventories, accounts regional cooperative’s capital stock. These loans are pri- marily originated in the states of Minnesota, Wisconsin, North Dakota and Michigan. CHS Capital also has loans receivable from producer borrowers which are collater- alized by various combinations of growing crops, live- stock, receivable, personal property and supplemental mortgages. In addition to the short-term balances included in the table above, CHS Capital had long-term notes receivable, with dura- tions of generally not more than 10 years, totaling $322.4 million and $190.4 million at August 31, 2016 and 2015, respectively. The long-term notes receivable are included in other long-term assets on our Consolidated Balance Sheets. As of August 31, 2016 and 2015, the commercial notes represented 26% and 34%, respec- tively, and the producer notes represented 74% and 66%, respectively, of the total CHS Capital notes receivable. CHS Capital evaluates the collectability of both com- mercial 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 fac- tors. In total, the specific and general loan loss reserves related to CHS Capital are not material to our consoli- dated financial statements, nor are the associated his- torical write-offs. The accrual of interest income is discontinued at the time the loan is 90 days past due unless the credit is well-collateralized and in process of collection. The amount of CHS Capital notes that were past due was not significant at any reporting date presented. As of August 31, 2016, a single producer bor- rower accounted for 20% of the total outstanding CHS 18 CHS 2016 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Capital short-term and long-term notes receivable. These notes were originated in the midwestern region of the United States and are collateralized by inventories, personal property and mortgages, which CHS Capital has access to physically inspect. No other third party borrower accounted for more than 10% of the total out- standing CHS Capital notes receivable. CHS Capital has commitments to extend credit to cus- tomers as long as there are no violations of any contrac- tually established conditions. As of August 31, 2016, CHS Capital’s customers have additional available credit of $1.0 billion. 4NOV201612343743 Inventories Inventories as of August 31, 2016 and 2015 are as follows: (DOLLARS IN THOUSANDS) 2016 2015 Grain and oilseed $ 937,258 $ 966,923 Energy Crop nutrients Feed and farm supplies Processed grain and oilseed Other 729,695 217,521 417,431 48,930 19,864 785,116 369,105 465,744 48,078 17,378 Total inventories $ 2,370,699 $ 2,652,344 As of August 31, 2016, we valued approximately 19% of inventories, primarily crude oil and refined fuels within our Energy segment, using the lower of cost, deter- mined on the LIFO method, or market (18% as of August 31, 2015). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $93.9 million and $68.1 million at August 31, 2016 and 2015, respectively. 4NOV201612342382 Investments Investments as of August 31, 2016 and 2015 are as follows: (DOLLARS IN THOUSANDS) 2016 2015 Equity method investments: CF Industries Nitrogen, LLC $ 2,796,323 $ — Ventura Foods, LLC 369,487 347,749 Ardent Mills, LLC TEMCO, LLC Other equity method investments 194,986 196,808 44,578 57,656 263,025 269,423 Cost method investments 127,577 130,456 Total investments $ 3,795,976 $ 1,002,092 Joint ventures and other investments, in which we have significant ownership and influence, but not control, are accounted for in our consolidated financial statements using the equity method of accounting. Our significant equity method investments are summarized below. On February 1, 2016, we invested $2.8 billion in CF Nitrogen, commencing our strategic venture with CF Industries Holdings, Inc. The investment consists of an 11.4% membership interest (based on product tons) in CF Nitrogen. We also entered into an 80-year supply agreement that entitles us to purchase up to 1.1 million 19 CHS 2016 19 FOUR: I nve st m e n t s , co n t i n u e d tons of granular urea and 580,000 tons of urea ammo- nium nitrate (‘‘UAN’’) annually from CF Nitrogen for rat- able 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 mem- bership interest. These distributions are based on actual volumes purchased from CF Nitrogen under the stra- tegic 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 pur- suant to the liquidation provisions of CF Nitrogen’s Lim- ited Liability Company Agreement, adjusted for the semi-annual cash distributions. For the year ended August 31, 2016, this amount was $74.7 million, and is included as equity income from investments in our Nitrogen Production segment. The following tables provide aggregate summarized audited financial information for CF Nitrogen for the balance sheet as of August 31, 2016, and the statement of operations for the seven months ended August 31, 2016: (DOLLARS IN THOUSANDS) Current assets Non-current assets Current liabilities Non-current liabilities (DOLLARS IN THOUSANDS) Net sales Gross profit Net earnings Earnings attributable to CHS Inc. 2016 $ 534,878 7,043,121 556,696 — 2016 $ 1,027,142 243,911 186,665 74,700 We have a 50% interest in Ventura Foods, LLC, a joint venture which produces and distributes primarily vege- table oil-based products, and which constitutes our Foods segment. We account for Ventura Foods as an equity method investment, and as of August 31, 2016, our carrying value of Ventura Foods exceeded our share of its equity by $12.9 million, which represents equity method goodwill. During the first three quarters of fiscal 2014, we had a 24% interest in Horizon Milling, LLC and Horizon Milling, ULC (‘‘Horizon Milling’’), which were flour milling joint ventures with Cargill, Incorporated (‘‘Cargill’’) and were accounted for as equity method investments included in Corporate and Other. In the third quarter of fiscal 2014, we formed Ardent Mills LLC (‘‘Ardent Mills’’), a joint venture with Cargill and ConAgra Foods, Inc., which combined the North American flour milling oper- ations of the three parent companies, including the Horizon Milling assets and CHS-owned mills, with CHS holding a 12% interest in Ardent Mills. Prior to closing, we contributed $32.8 million to Horizon Milling to pay off existing debt as a pre-condition to close. Upon closing, Ardent Mills was financed with funds from third-party borrowings, which did not require credit support from the owners. We received $121.2 million of cash proceeds distributed to us in proportion to our ownership interest, adjusted for deviations in specified working capital target amounts, and recognized a gain of $109.2 million associated with this transaction. In connection with the closing, the parties also entered into various ancillary and non-compete agreements including, among other things, an agreement for us to supply Ardent Mills with certain wheat and durum products. As we hold one of the five board seats, we account for Ardent Mills as an equity method investment included in Corporate and Other. TEMCO, LLC (‘‘TEMCO’’) is owned and governed by Car- gill (50%) and CHS (50%). During the year ended August 31, 2012, we entered into an amended and restated agreement to expand the scope of the original agreement with Cargill. Pursuant to the terms of the agreement, CHS and Cargill each agreed to commit 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 for a term of 25 years. Cargill’s Tacoma, Washington and Portland Oregon facilities continues to be subleased to TEMCO. We account for TEMCO as an equity method investment included in our Ag segment. The following tables provide aggregate summarized audited financial information for our major equity method investments in Ventura Foods, Ardent Mills and TEMCO for balance sheets as of August 31, 2016 and 20 CHS 2016 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our investments in equity method investees other than the four entities described above are not significant in relation to our consolidated financial statements, either individually or in the aggregate. 2015, and statements of operations for the twelve months ended August 31, 2016, 2015 and 2014: (DOLLARS IN THOUSANDS) 2016 2015 Current assets $ 1,638,780 $ 1,892,563 Non-current assets Current liabilities 2,495,955 2,388,757 836,544 968,104 Non-current liabilities 853,549 881,312 (DOLLARS IN THOUSANDS) 2016 2015 2014 Net sales $ 8,776,261 $ 9,054,677 $ 8,796,648 Gross profit Net earnings 674,181 754,375 562,053 238,870 313,664 266,354 Earnings attributable to CHS Inc. 75,858 81,101 83,023 4NOV201612342101 Property, Plant and Equipment As of August 31, 2016 and 2015, major classes of prop- erty, plant and equipment, which include capital lease assets, consisted of the amounts in the table below. with the present value of the net minimum lease pay- ments as of August 31, 2016: (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) 2016 2015 Land and land improvements $ 266,016 $ 233,666 Buildings 1,040,943 838,386 Machinery and equipment 6,747,865 5,563,370 Office and other 250,879 163,026 2017 2018 2019 2020 2021 Construction in progress 523,817 1,337,633 Thereafter 8,829,520 8,136,081 Total minimum future lease payments $ 38,357 28,064 16,542 8,285 7,095 16,395 114,738 9,030 Less accumulated depreciation and amortization 3,341,197 2,943,154 Total property, plant and equipment $ 5,488,323 $ 5,192,927 We have various assets under capital leases totaling $206.3 million and $222.2 million as of August 31, 2016 and 2015, respectively. Accumulated amortization on assets under capital leases was $103.3 million and $101.3 million as of August 31, 2016 and 2015, respectively. The following is a schedule by fiscal years of future minimum lease payments under capital leases together Less amount representing interest Present value of net minimum lease payments $ 105,708 We announced in September 2014 that our Board of Directors had approved plans to begin construction of a fertilizer manufacturing plant in Spiritwood, North Dakota that was anticipated to cost more than $3.0 bil- lion. In August 2015, we made the decision to not move forward with the construction of the Spiritwood facility and evaluated the assets and other capitalized costs related to the project for recoverability under ASC Topic 360-10. Consequently, we concluded that these assets were impaired and we recorded an overall charge 21 CHS 2016 21 FIVE: P ro p e r t y, P l a n t a n d Eq u i p m e n t , co n t i n u e d of $116.5 million in marketing, general and administrative costs in our Ag segment. This charge was primarily com- prised of the impairment of construction-in-progress, land and equipment totaling $94.3 million. The remainder of the charge included the impairment of other assets and various contract termination costs associated with the cessation of the project. Depreciation expense, including amortization of capital lease assets, for the years ended August 31, 2016, 2015 and 2014, was $437.6 million, $344.4 million and $292.4 million, respectively. 4NOV201612343197 Other Assets Other assets as of August 31, 2016 and 2015 are as follows: (DOLLARS IN THOUSANDS) Goodwill Customer lists, trademarks and other intangible assets Notes receivable Long-term receivable Prepaid pension and other benefits Capitalized major maintenance Other 2016 2015 $ 160,414 $ 150,115 44,766 50,648 328,605 197,067 29,491 120,693 169,054 245,207 35,191 138,497 241,588 211,378 $ 1,098,230 $ 1,024,484 Changes in the net carrying amount of goodwill for the year ended August 31, 2016, by segment, are as follows: (DOLLARS IN THOUSANDS) Balances, August 31, 2014 Goodwill acquired during the period (1) Effect of foreign currency translation adjustments Balances, August 31, 2015 Goodwill acquired during the period Effect of foreign currency translation adjustments Goodwill disposed due to sale of business Balances, August 31, 2016 ENERGY AG CORPORATE AND OTHER TOTAL $ 552 $ 151,246 $ 6,898 $ 158,696 — — (3,283) (5,298) — — (3,283) (5,298) $ 552 $ 142,665 $ 6,898 $ 150,115 — — — 5,726 1,220 (695) 4,048 — — 9,774 1,220 (695) $ 552 $ 148,916 $ 10,946 $ 160,414 (1) Includes measurement period adjustments related to current and prior year acquisitions. Goodwill acquired during the period was $0.4 million. No goodwill has been allocated to our Nitrogen Production or Foods segments, which consist of investments accounted for under the equity method. 22 CHS 2016 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the years ended August 31, 2016 and 2015, we had acquisitions which resulted in $9.8 million and $0.4 million of goodwill, respectively, for which we paid cash consideration of $11.9 million and $305.2 million, respectively. These acquisitions were primarily within our Ag segment and were not material, individually or in aggregate, to our consolidated financial statements. During the year ended August 31, 2016, we disposed of a business resulting in a reduction of $0.7 million of goodwill. There were no business disposals resulting in decreases to goodwill during fiscal 2015. 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 included in other assets on our Consolidated Balance Sheets is as follows: (DOLLARS IN THOUSANDS) Customer lists AUGUST 31, 2016 AUGUST 31, 2015 CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT ACCUMULATED AMORTIZATION NET $ 51,554 $ (15,550) $ 36,004 $ 70,925 $ (30,831) $ 40,094 Trademarks and other intangible assets 35,015 (26,253) 8,762 42,688 (32,134) 10,554 Total intangible assets $ 86,569 $ (41,803) $ 44,766 $ 113,613 $ (62,965) $ 50,648 During the years ended August 31, 2016 and 2015, intan- gible assets acquired totaled $2.8 million and $0.8 mil- lion, respectively, and were primarily within our Ag segment. Intangible assets amortization expense for the years ended August 31, 2016, 2015 and 2014, was $6.1 million, $7.3 million and $9.7 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 Year 2 Year 3 Year 4 Year 5 Thereafter Total $ 4,411 4,081 4,079 3,793 3,644 24,662 $ 44,670 The costs of turnarounds in our Energy segment are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs, which is generally 2 to 4 years. Capitalized amounts are included in other assets on our Consolidated Balance Sheets and amortization expense related to turnaround costs is included in cost of goods sold in our Consolidated Statements of Operations. Activity related to capitalized major maintenance costs is summarized below: (DOLLARS IN THOUSANDS) 2016 2015 2014 BALANCE AT BEGINNING OF YEAR COST DEFERRED AMORTIZATION BALANCE AT END OF YEAR $ 241,588 $ 949 $ (73,483) $ 169,054 67,643 109,408 219,898 (45,953) 241,588 3,305 (45,070) 67,643 23 CHS 2016 23 4NOV201612342928 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 August 31, 2016. Notes Payable Notes payable as of August 31, 2016 and 2015, consisted of the following: WEIGHTED- AVERAGE INTEREST RATE (DOLLARS IN THOUSANDS) 2016 2015 2016 2015 Notes payable (a) 1.72% 2.33% $ 1,803,174 $ 813,717 CHS Capital notes payable (b) Total notes payable 1.31% 1.05% 928,305 351,661 $2,731,479 $ 1,165,378 (a) 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 Sep- tember 2020. The outstanding balance on this facility was $700.0 million as of August 31, 2016. There was no out- standing balance on the predecessor facility as of August 31, 2015. Amounts borrowed under this facility pri- marily bear interest at base rates (or London Interbank Offered Rates (‘‘LIBOR’’)) plus applicable margins ranging from 0.00% to 1.45%. In December 2015, we entered into three bilateral, uncom- mitted revolving credit facilities with an aggregate capacity of $1.3 billion. As of August 31, 2016, the aggregate capacity is $600 million. Amounts borrowed under these short-term lines are used to fund our working capital and bear interest Interbank Offered Rates at base rates (or London (‘‘LIBOR’’)) plus applicable margins ranging from 0.25% to 1.00%. As of August 31, 2016, outstanding borrowings under these facilities were $300.0 million. facility for CHS Agronegocio In addition to our primary revolving line of credit, we have a three-year $325.0 million committed revolving pre-export credit Industria e Comercio Ltda (‘‘CHS Agronegocio’’), our wholly-owned subsidiary, to provide financing for its working capital needs arising from its purchases and sales of grains, fertil- izers and other agricultural products which expires in April 2019. As of August 31, 2016, the outstanding balance under the facility was $260.0 million. As of August 31, 2016, our wholly-owned subsidiaries, CHS Europe S.a.r.l and CHS Agronegocio, had uncommitted 24 CHS 2016 24 lines of credit with $290.1 million outstanding. In addition, our other international subsidiaries had lines of credit with a total of $252.1 million outstanding as of August 31, 2016, of which $27.7 million was collateralized. We have two commercial paper programs with an aggre- gate capacity of $125.0 million, with two banks partici- pating in our revolving credit facilities. Terms of our credit facilities do not allow them to be used to pay principal under a commercial paper facility. On August 31, 2016 we had no commercial paper outstanding. Miscellaneous short-term notes payable totaled $1.0 million as of August 31, 2016. (b) Cofina Funding, LLC (‘‘Cofina Funding’’), a wholly-owned subsidiary of CHS Capital, has available credit totaling $850.0 million as of August 31, 2016, under note purchase agreements with various purchasers and through the issu- ance of short-term notes payable. CHS Capital and CHS Inc. both sell eligible receivables they have originated to Cofina Funding, which are then pledged as collateral under the note purchase agreements. The notes payable issued by Cofina Funding bear interest at variable rates based on commercial paper with a weighted average rate of 1.40% as of August 31, 2016. There were $550.0 million in borrowings by Cofina Funding utilizing the issuance of commercial paper under the note purchase agreements as of August 31, 2016. CHS Capital has available credit under master participation agreements with numerous counterparties. Borrowings under these agreements are accounted for as secured bor- rowings and bear interest at variable rates ranging from 1.90% to 2.50% as of August 31, 2016. As of August 31, 2016, the total funding commitment under these agreements was $116.9 million, of which $24.9 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 commit- ments under the program totaled $183.5 million as of August 31, 2016, of which $122.3 million was borrowed under these commitments with an interest rate of 1.67%. 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, 2016, and are due upon demand. Borrowings under these notes totaled $231.2 million as of August 31, 2016. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-Term Debt Amounts included in long-term debt on our Consolidated Balance Sheets as of August 31, 2016 and 2015 are presented in the table below. (DOLLARS IN THOUSANDS) 5.59% unsecured term loans from cooperative and other banks, due in equal installments beginning in 2013 through 2018 6.18% unsecured notes $400 million face amount, due in equal installments beginning in 2014 through 2018 5.60% unsecured notes $60 million face amount, due in equal installments beginning in 2012 through 2018 5.78% unsecured notes $50 million face amount, due in equal installments beginning in 2014 through 2018 4.00% unsecured notes $100 million face amount, due in equal installments beginning in 2017 through 2021 4.08% unsecured notes $130 million face amount, due in 2019 (a) 4.52% unsecured notes $160 million face amount, due in 2021 (a) 4.67% unsecured notes $130 million face amount, due in 2023 (a) 4.39% unsecured notes $152 million face amount, due in 2023 3.85% unsecured notes $80 million face amount, due in 2025 3.80% unsecured notes $100 million face amount, due in 2025 4.58% unsecured notes $150 million face amount, due in 2025 2.25% unsecured term loans from cooperative and other banks, due in 2025 (b) 4.82% unsecured notes $80 million face amount, due in 2026 4.69% unsecured notes $58 million face amount, due in 2027 4.74% unsecured notes $95 million face amount, due in 2028 4.89% unsecured notes $100 million face amount, due in 2031 4.71% unsecured notes $100 million face amount, due in 2033 5.40% unsecured notes $125 million face amount, due in 2036 Other notes and contracts with interest rates from 1.30% to 15.25% Capital lease obligations Total long-term debt Less current portion Long-term portion 2016 2015 $ 45,000 $ 75,000 160,000 240,000 13,846 23,077 20,000 30,000 100,000 141,344 162,633 138,101 152,000 80,000 100,000 150,000 300,000 80,000 58,000 95,000 100,000 100,000 125,000 76,147 105,708 2,302,779 214,329 100,000 132,161 164,654 135,422 — 80,000 100,000 — — 80,000 — — — 100,000 — 44,909 125,894 1,431,117 170,309 $ 2,088,450 $ 1,260,808 (a) We have entered into interest rate swaps designated as fair value hedging relationships with these notes. Changes in the fair value of the swaps are recorded each period with a corresponding adjustment to the carrying value of the debt. See Note 12, Derivative Financial Instruments and Hedging Activities for more information. (b) Borrowings are variable under the agreement and bear interest at a base rate (or a LIBO rate) plus an applicable margin. As of August 31, 2016, the carrying value of our long-term debt approximated its fair value, which is esti- mated to be $2.1 billion based on quoted market prices of similar debt (a Level 2 fair value measurement based on the classification hierarchy of ASC Topic 820, Fair Value Measurement). We have outstanding interest rate swaps designated as fair value hedges of select portions of our fixed-rate debt. During fiscal 2016, we recorded corresponding fair value adjustments of $9.8 million, which are included in the amounts in the table above. See Note 12, Derivative Financial Instruments and Hedging Activities for additional information. In September 2015, we entered into a ten-year term loan with a syndication of banks. The agreement provides for committed term loans in an amount up to $600.0 mil- lion. The full amount was drawn down in January 2016. Amounts drawn under this agreement that are subse- quently repaid or prepaid may not be reborrowed. Prin- cipal on the term loans is payable in full on September 4, 2025. Borrowings under the agreement bear interest at a base rate (or a LIBO rate) plus an applicable margin, or at a fixed rate of interest determined and quoted by the administrative agent under the agreement in its sole and absolute discretion from time to time. The applicable margin is based on our leverage ratio and ranges between 1.50% and 2.00% for LIBO rate loans and 25 CHS 2016 25 SEVEN: N o te s Paya b l e a n d Lo n g -Te r m D e b t , co n t i n u e d between 0.50% and 1.00% for base rate loans. As of August 31, 2016, $300.0 million was outstanding under this agreement. 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 which are included in the table above. and 2014. We have previously revised amounts for the year ended August 31, 2014 in this table to include interest expense related to capital lease obligations that were previously accounted for as operating leases. See Note 18, Correction of Immaterial Errors for more infor- mation on the nature and amounts of these revisions. (DOLLARS IN THOUSANDS) 2016 2015 2014 Interest expense $ 144,047 $ 93,152 $ 84,925 In June 2016, we amended the ten-year term loan so that $300.0 million of the $600.0 million loan balance pos- sesses a revolving feature, whereby we can pay down and re-advance an amount up to the referenced $300.0 million. The revolving feature matures on Sep- tember 1, 2017, and the total funded loan balance on that day reverts to a non-revolving term loan. No other mate- rial changes were made to the original terms and condi- tions of the ten-year term loan. Long-term debt outstanding as of August 31, 2016 has aggregate maturities, excluding fair value adjustments and capital leases (see Note 5, Property, Plant and Equipment for a schedule of minimum future lease pay- ments under capital leases), as follows: (DOLLARS IN THOUSANDS) 2017 2018 2019 2020 2021 Thereafter Total $ 176,403 177,539 150,142 20,142 180,142 1,470,384 $ 2,174,752 The following table presents the components of interest expense, net for the years ended August 31, 2016, 2015 Interest—purchase of CHS McPherson noncontrolling interests — 34,810 70,843 Capitalized interest (30,343) (57,303) (8,528) Interest income (38,357) (10,326) (6,987) Interest expense, net $ 75,347 $ 60,333 $ 140,253 In fiscal 2015, we entered into forward-starting interest rate swaps designated as cash flow hedging instru- ments that were terminated in fiscal 2016 as the issu- ance of the underlying debt was no longer probable. As a result, a $3.7 million loss was reclassified from accumu- lated other comprehensive loss into net income. This pre-tax loss is included as a component of interest expense in our Consolidated Statement of Operations for the year ended August 31, 2016. In fiscal 2013, we entered into derivative contracts des- ignated as cash flow hedging instruments that were ter- minated in fiscal 2014 as the issuance of the underlying debt was no longer probable. As a result, a $13.5 million gain was reclassified from accumulated other compre- hensive loss into net income. This pre-tax gain is included as a component of interest expense in our Con- solidated Statement of Operations for the year ended August 31, 2014. 26 CHS 2016 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4NOV201612341686 Income Taxes The provision for income taxes for the years ended August 31, 2016, 2015 and 2014 is as follows: (DOLLARS IN THOUSANDS) 2016 2015 2014 Current: Federal State Foreign Deferred: Federal State Foreign $ 3,386 $ (47,695) $ 38,653 3,972 12,729 3,891 1,335 31,203 2,837 20,087 (42,469) 72,693 (30,758) 29,348 (23,444) 8,512 (2,799) (1,893) (1,932) 3,755 940 (24,178) 30,304 (24,397) Total $ (4,091) $ (12,165) $ 48,296 Deferred taxes are comprised of basis differences related to investments, accrued liabilities and certain federal and state tax credits. Domestic income before income taxes was $490.8 mil- lion, $824.9 million, and $1.2 billion for the years ended August 31, 2016, 2015 and 2014, respectively. Foreign activity made up the difference between the total income before income taxes and the domestic amounts. Deferred tax assets and liabilities as of August 31, 2016 and 2015 are as follows: (DOLLARS IN THOUSANDS) Deferred tax assets: 2016 2015 Accrued expenses $ 87,251 $ 96,270 Postretirement health care and deferred compensation 111,983 89,934 Tax credit carryforwards 143,252 109,756 Loss carryforwards Other 155,966 85,860 64,669 68,625 Deferred tax assets valuation (194,277) (98,024) Total deferred tax assets 368,844 352,421 Deferred tax liabilities: Pension Investments Major maintenance 26,516 20,732 109,610 4,970 98,291 36,135 Property, plant and equipment 679,266 654,057 Other 33,779 25,836 Total deferred tax liabilities 854,141 835,051 Net deferred tax liabilities $ 485,297 $ 482,630 We have total gross loss carry forwards of $676.6 mil- lion, of which $425.7 million will expire over periods ranging from fiscal 2017 to fiscal 2038. The remainder will carry forward indefinitely. Based on estimates of future taxable profits and losses in certain foreign tax jurisdictions, we determined that a valuation allowance was required for specific foreign loss carry forwards as of August 31, 2016. If these estimates prove inaccurate, a change in the valuation allowance, up or down, could be required in the future. During fiscal 2016, valuation allowances related to foreign operations increased by $40.6 million due to net operating loss carry forwards and other timing differences. CHS McPherson’s (for- merly known as NCRA) gross state tax credit carry for- wards for income tax are approximately $133.5 million and $62.2 million as of August 31, 2016, and 2015, respectively. During the year ended August 31, 2016, the valuation allowance for CHS McPherson increased by $55.6 million, net of tax, due to a change in the amount of state tax credits that are estimated to be utilized. The significant increase in state tax credit carry forwards is the result of the refinery coker at CHS McPherson being placed in service during fiscal 2016, resulting in a corre- sponding in valuation allowance. CHS McPherson’s valuation allowance on Kansas state credits is necessary due to the limited amount of Kansas taxable income generated by the combined group on an annual basis. increase Our alternative minimum tax credit of $5.6 million will not expire. Our general business credits of $64.5 million, comprised primarily of low sulfur diesel credits, will begin to expire on August 31, 2027. Our state tax credits of $133.5 million will begin to expire on August 31, 2018. During the fourth quarter of fiscal 2016, we elected to early adopt ASU No. 2015-17, Balance Sheet Classifica- tion of Deferred Taxes, which requires deferred tax liabil- ities and assets to be classified as non-current in a classified statement of financial position. Our adoption of ASU No. 2015-17 is done on a prospective basis. As of August 31, 2016, net deferred tax assets of $2.5 million were included in other assets. As of August 31, 2015, net deferred tax assets of $85.0 million and $1.6 million were included in other current assets and other assets, respectively. 27 CHS 2016 27 EIGHT: I n co m e Ta xe s , co n t i n u e d The reconciliation of the statutory federal income tax rates to the effective tax rates for the years ended August 31, 2016, 2015 and 2014 is as follows: of the position. Reconciliation of the gross beginning and ending amounts of unrecognized tax benefits for the periods presented follows: 2016 2015 2014 (DOLLARS IN THOUSANDS) 2016 2015 2014 Statutory federal income tax rate 35.0% 35.0% 35.0% Balance at beginning of State and local income taxes, net of federal income tax benefit 0.4 (0.5) 1.6 Additions attributable to period $ 72,181 $ 72,181 $ 67,271 Patronage earnings (23.2) (29.0) (20.5) Domestic production activities deduction (13.2) (5.6) (10.0) Export activities at rates other than the U.S. statutory rate Valuation allowance Tax credits Crack spread contingency Other 1.5 19.6 (11.8) (5.0) (4.3) (0.2) (0.1) (0.8) (1.7) 1.3 Effective tax rate (1.0)% (1.6)% 1.2 1.7 (3.1) (0.6) (1.0) 4.3% During fiscal 2016, we recorded a deferred income tax benefit of $25.6 million due to a settlement with the Internal Revenue Service on a fiscal 2006 and 2007 tax matter. We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Our uncer- tain tax positions are affected by the tax years that are under audit or remain subject to examination by the relevant taxing authorities. In addition to the current year, fiscal 2007 through 2015 remain subject to exami- nation, at least for certain issues. We account for our income tax provisions in accordance with ASC Topic 740, Income Taxes, which prescribes a minimum threshold that a tax provision is required to meet before being recognized in our consolidated finan- cial statements. This interpretation requires us to recog- nize in our consolidated financial statements tax positions determined more likely than not to be sus- tained upon examination, based on the technical merits current year tax positions 1,387 Additions attributable to prior year tax positions — Reductions attributable to prior year tax positions (36,463) Reductions attributable to statute expiration — — — — — — 35,718 (9,867) (20,941) Balance at end of period $ 37,105 $ 72,181 $ 72,181 During fiscal 2016, we decreased our unrecognized tax benefits due to the settlement with the Internal Revenue Service mentioned above. In addition, we increased our unrecognized tax benefits for excise tax credits related to the blending and sale of renewable fuels deducted for income taxes. If we were to prevail on all tax positions taken relating to uncertain tax positions, all of the unrecognized tax ben- efits would benefit the effective tax rate. We do not believe it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. We recognize interest and penalties related to unrecog- nized tax benefits in our provision for income taxes. No amounts were recognized in our Consolidated State- ments of Operations for interest related to unrecog- nized tax benefits for the years ended August 31, 2016, 2015 and 2014. We recorded no interest payable related to unrecognized tax benefits on our Consolidated Bal- ance Sheets as of August 31, 2016 and 2015. 28 CHS 2016 28 4NOV201612342519 Equities NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In accordance with our bylaws and by action of the Board of Directors, annual net earnings from patronage sources are distributed to consenting patrons following the close of each fiscal year, and are based on amounts using financial statement earnings. The cash portion of the qualified patronage distribution is determined annu- ally by the Board of Directors, with the balance issued in the form of qualified and non-qualified capital equity certificates. Total qualified patronage distributions refunds for fiscal 2016 are estimated to be $279.0 mil- lion, with the cash portion estimated to be $111.6 million. No portion will be issued in the form of non-qualified capital equity certificates. The actual patronage distri- butions and cash portion for fiscal 2015, 2014, and 2013 were $627.2 million ($251.7 million in cash), $821.5 mil- lion ($271.2 million in cash), and $841.1 million ($286.8 million in cash), respectively. Annual net savings from patronage or other sources may be added to the unallocated capital reserve or, upon action by the Board of Directors, may be allocated to members in the form of nonpatronage equity certifi- cates. The Board of Directors authorized, in accordance with our bylaws, that 10% of the earnings from patronage business for fiscal 2016, 2015, and 2014 be added to our capital reserves. Redemptions are at the discretion of the Board of Direc- tors. Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (primarily member coop- eratives) who may participate in an annual retirement program for qualified equities held by them and another for individual members who are eligible for equity redemptions at age 70 or upon death. Beginning with fiscal 2017 patronage (for which distributions will be made in fiscal 2018), individuals will also be able to par- ticipate in an annual retirement program similar to the one that was previously only available to non-individual members. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2016 that will be distrib- uted in fiscal 2017, to be approximately $40.0 million. Additionally, we expect to redeem approximately $18.6 million of redemptions related to the year ended August 31, 2015 earnings that are carried over from the previous year’s authorization which had not been previ- ously distributed. The redemptions will also be distrib- uted in fiscal 2017 and are classified as a current liability on our August 31, 2016 Consolidated Balance Sheet. For the years ended August 31, 2016, 2015 and 2014, we redeemed in cash, equities in accordance with authori- zation from the Board of Directors, in the amounts of $23.9 million, $128.9 million and $99.6 million, respectively. In March 2016, we redeemed approximately $76.8 mil- lion of patrons’ equities by issuing 2,693,195 shares of Class B Cumulative Redeemable Preferred Stock, Series 1 (‘‘Class B Series 1 Preferred Stock’’), with a total redemption value of $67.3 million, excluding accumu- lated dividends. Each share of Class B Series 1 Preferred Stock was issued in redemption of $28.50 of patrons’ equities in the form of capital equity certificates. Addi- tionally, in fiscal 2014, we redeemed $200.0 million of patrons’ equities by issuing 6,752,188 shares of our Class B Series 1 Preferred Stock, with each share being issued in redemption of $29.62 of patrons’ equities in the form of members’ equity certificates. 29 CHS 2016 29 NINE: Eq u i t i e s , co n t i n u e d Preferred Stock The following is a summary of our outstanding preferred stock as of August 31, 2016, all of which are listed on the Global Select Market of NASDAQ: (DOLLARS IN MILLIONS) NASDAQ SYMBOL ISSUANCE DATE SHARES OUTSTANDING REDEMPTION VALUE NET PROCEEDS (a) DIVIDEND RATE (b) (c) DIVIDEND PAYMENT FREQUENCY REDEEMABLE BEGINNING (d) 8% Cumulative Redeemable CHSCP Class B Cumulative Redeemable Series 1 CHSCO (e) (f) 12,272,003 $306.8 $311.2 8.00% Quarterly 7/18/2023 20,764,558 $519.1 $549.4 7.875% Quarterly 9/26/2023 Class B Reset Rate Cumulative Redeemable Series 2 Class B Reset Rate Cumulative Redeemable Series 3 Class B Cumulative CHSCN 3/11/2014 16,800,000 $ 420.0 $ 406.2 7.10% Quarterly 3/31/2024 CHSCM 9/15/2014 19,700,000 $ 492.5 $ 476.7 6.75% Quarterly 9/30/2024 Redeemable Series 4 CHSCL 1/21/2015 20,700,000 $ 517.5 $ 501.0 7.50% Quarterly 1/21/2025 (a) Includes patrons’ equities redeemed with preferred stock. (b) The Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 accumulates dividends at a rate of 7.10% per year until March 31, 2024, and then at a rate equal to the three-month LIBOR plus 4.298%, not to exceed 8.00% per annum, subsequent to March 31, 2024. (c) The Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 accumulates dividends at a rate of 6.75% per year until September 30, 2024, and then at a rate equal to the three-month LIBOR plus 4.155%, not to exceed 8.00% per annum, subsequent to September 30, 2024. (d) Preferred stock is redeemable for cash at our option, in whole or in part, at a per share price equal to the per share liquidation preference of $25.00 per share, plus all dividends accumulated and unpaid on that share to and including the date of redemption, beginning on the dates set forth in this column. (e) The 8% Cumulative Redeemable Preferred Stock was issued at various times from 2003-2010. (f) 11,319,175 shares of Class B Series 1 Preferred Stock were issued on September 26, 2013; 6,752,188 shares were issued on August 25, 2014; and an additional 2,693,195 shares were issued on March 31, 2016. In June 2014, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (‘‘SEC’’). Under the shelf registration statement, which has been declared effective by the SEC, we may offer and sell, from time to time, up to $2.0 billion of our Class B Cumulative Redeemable Preferred Stock over a three-year period. As of August 31, 2016, $990.0 million of our Class B Cumulative Redeemable Preferred Stock remained available for issuance under the shelf registra- tion statement. We made dividend payments on our preferred stock of $163.3 million, $133.7 million, and $50.8 million, during the years ended August 31, 2016, 2015 and 2014, respec- tively. As of August 31, 2016 we have no authorized but unissued shares of preferred stock. 30 CHS 2016 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive income (loss) by component, net of tax, for the years ended August 31, 2016, 2015 and 2014 are as follows: (DOLLARS IN THOUSANDS) PENSION AND OTHER POSTRETIREMENT BENEFITS UNREALIZED NET GAIN (LOSS) ON AVAILABLE FOR SALE INVESTMENTS FOREIGN CURRENCY CASH FLOW TRANSLATION ADJUSTMENT HEDGES TOTAL Balance as of August 31, 2013 $ (165,611) $ 2,370 $ 11,685 $ (5,311) $ (156,867) Current period other comprehensive income (loss), net of tax (90) 2,028 (6,011) (1,957) (6,030) Amounts reclassified from accumulated other comprehensive income (loss), net of tax Net other comprehensive income (loss), net of tax 13,849 13,759 — (8,396) 2,028 (14,407) Balance as of August 31, 2014 (151,852) 4,398 (2,722) 687 (1,270) (6,581) 6,140 110 (156,757) Current period other comprehensive income (loss), net of tax (33,238) (242) (3,394) (34,729) (71,603) Amounts reclassified from accumulated other comprehensive income (loss), net of tax Net other comprehensive income (loss), net of tax Balance as of August 31, 2015 Current period other comprehensive income (loss), net 13,361 (19,877) (171,729) — 792 — 14,153 (242) (2,602) (34,729) (57,450) 4,156 (5,324) (41,310) (214,207) of tax (6,330) 1,500 (6,999) (2,200) (14,029) Amounts reclassified from accumulated other comprehensive income (loss), net of tax Net other comprehensive income (loss), net of tax 12,913 6,583 — 3,127 470 1,500 (3,872) (1,730) 16,510 2,481 Balance as of August 31, 2016 $ (165,146) $ 5,656 $ (9,196) $ (43,040) $ (211,726) Amounts reclassified from accumulated other compre- hensive income (loss) were related to pension and other postretirement benefits, cash flow hedges and foreign currency translation adjustments, and were recorded to net income. Pension and other postretirement reclassifi- cations include amortization of net actuarial loss, prior service credit and transition amounts and are recorded as marketing, general and administrative expenses (see Note 10, Benefit Plans for further information). During the third quarter of fiscal 2016, interest rate swaps, which were previously accounted for as cash flow hedges, were terminated as the issuance of the underlying debt was no longer probable. As a result, a $3.7 million loss was reclassified from accumulated other comprehensive loss into net income. This pre-tax loss is included as a component of interest expense, net in our Consolidated Statement of Operations for the year ended August 31, 2016. In fiscal 2014, interest rate swaps, which were previously accounted for as cash flow hedges, were terminated as the issuance of the underlying debt was no longer prob- able. As a result, a $13.5 million gain was reclassified from accumulated other comprehensive loss into net income. This pre-tax gain is included as a component of interest expense, net in our Consolidated Statement of Operations for the year ended August 31, 2014. 31 CHS 2016 31 4NOV201612343472 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. Financial information on changes in benefit obligation, plan assets funded and balance sheets status as of August 31, 2016 and 2015 is as follows: (DOLLARS IN THOUSANDS) Change in benefit obligation: QUALIFIED PENSION BENEFITS NON-QUALIFIED PENSION BENEFITS OTHER BENEFITS 2016 2015 2016 2015 2016 2015 Benefit obligation at beginning of period $ 730,795 $ 720,893 $ 33,184 $ 37,983 $ 41,997 $ 44,318 Service cost Interest cost Actuarial (gain) loss Assumption change Plan amendments Settlements Benefits paid 37,533 36,006 30,773 28,046 1,035 1,406 361 20,993 (3,333) 875 1,414 393 1,412 1,709 (4,892) 1,513 1,489 1,563 57,385 (16,297) 2,679 (1,082) 2,602 (5,136) 411 — — — (1,045) — (44,509) (58,846) (1,230) — (4,495) — (5,715) (684) (1,554) (1,750) — — Benefit obligation at end of period $ 812,749 $ 730,795 $ 32,696 $ 33,184 $ 36,779 $ 41,997 Change in plan assets: Fair value of plan assets at beginning of period $ 796,379 $ 822,125 $ — $ Actual gain (loss) on plan assets Company contributions Settlements Benefits paid 88,089 (6,065) 43,306 39,165 — — — 1,230 — (44,509) (58,846) (1,230) — $ — 6,399 (5,715) (684) — $ — 1,554 — — — 1,750 — (1,554) (1,750) Fair value of plan assets at end of period $ 883,265 $ 796,379 $ — $ — $ — $ — Funded status at end of period $ 70,516 $ 65,584 $ (32,696) $ (33,184) $ (36,779) $ (41,997) Amounts recognized on balance sheet: Non-current assets Accrued benefit cost: Current liabilities Non-current liabilities $ 70,594 $ 65,927 $ — $ — $ — $ — — (78) — (1,880) (1,752) (2,490) (2,708) (343) (30,816) (31,432) (34,289) (39,289) Ending balance $ 70,516 $ 65,584 $ (32,696) $ (33,184) $ (36,779) $ (41,997) Amounts recognized in accumulated other comprehensive loss (pretax): Prior service cost (credit) $ 4,021 $ 5,217 $ (641) $ 631 $ (4,847) $ (472) Net (gain) loss Ending balance 275,146 276,450 7,815 9,161 (12,235) (10,409) $ 279,167 $ 281,667 $ 7,174 $ 9,792 $ (17,082) $ (10,881) The accumulated benefit obligation of the qualified pen- sion plans was $766.2 million and $693.9 million at August 31, 2016 and 2015, respectively. The accumulated benefit obligation of the non-qualified pension plans was $23.7 million and $23.6 million at August 31, 2016 and 2015, respectively. One significant assumption for pension plan accounting is the discount rate. Historically, we have selected a dis- count rate each year (as of our fiscal year-end measure- ment date) for our plans based upon a high-quality corporate bond yield curve for which the cash flows from coupons and maturities match the year-by-year 32 CHS 2016 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS projected benefit cash flows for our pension plans. The corporate bond yield curve is comprised of high-quality fixed income debt instruments available at the measure- ment date. At August 31, 2016, we changed to use an individual spot-rate approach, discussed below. This alternative approach focuses on measuring the service cost and interest cost components of net periodic benefit cost by using individual spot rates derived from a high-quality corporate bond yield curve and matched with separate cash flows for each future year instead of a single weighted-average discount rate approach. As of August 31, 2016, we changed the method used to estimate the service and interest cost components of net periodic benefit cost for pension and other post retirement benefits. This change in methodology is expected to result in a decrease in the service and interest cost components for the pension and other post retirement benefit costs beginning in fiscal 2017. We historically estimated these service and interest cost components utilizing a single weighted-average dis- count rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2017, we elected to utilize a full-yield curve approach in the determination of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We elected to make this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corre- sponding spot yield curve rates. This change does not affect the measurement of our total benefit obligations at August 31, 2016, the net periodic cost recognized in fiscal 2016 or the ultimate benefit payment that must be made in the future. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis. Components of net periodic benefit costs for the years ended August 31, 2016, 2015 and 2014 are as follows: (DOLLARS IN THOUSANDS) 2016 2015 2014 2016 2015 2014 2016 2015 2014 QUALIFIED PENSION BENEFITS NON-QUALIFIED PENSION BENEFITS OTHER BENEFITS Components of net periodic benefit costs: Service cost Interest cost $ 37,533 $ 36,006 $ 30,417 $ 1,035 $ 875 $ 860 $ 1,412 $ 1,513 $ 1,729 30,773 28,046 29,900 1,406 1,414 1,660 1,709 1,489 1,918 Expected return on assets (48,055) (49,746) (47,655) Settlement of retiree obligations — — — Prior service cost (credit) amortization 1,606 Actuarial loss amortization 19,016 1,631 19,621 1,593 18,228 — — 228 692 — 1,635 228 1,058 — — 229 957 — — — — — — (120) (426) (493) (464) (431) (180) Net periodic benefit cost $ 40,873 $ 35,558 $ 32,483 $ 3,361 $ 5,210 $ 3,706 $ 2,537 $ 2,145 $ 2,974 Weighted-average assumptions to determine the net periodic benefit cost: Discount rate 4.20% 4.00% 4.80% 4.20% 4.00% 4.50% 4.20% 4.20% 3.75% Expected return on plan assets 6.00% 6.50% 6.75% N/A N/A N/A N/A N/A N/A Rate of compensation increase 4.90% 4.90% 4.85% 4.90% 5.15% 4.75% N/A N/A N/A Weighted-average assumptions to determine the benefit obligations: Discount rate 3.60% 4.20% 4.00% 3.30% 4.50% 4.50% 3.30% 3.75% 4.60% Rate of compensation increase 5.60% 4.90% 4.90% 5.60% 4.80% 4.80% N/A N/A N/A 33 CHS 2016 33 TEN: B e n e f i t P l a n s , co n t i n u e d The estimated amortization in fiscal 2017 from accumu- lated other comprehensive loss into net periodic benefit cost is as follows: Our retiree benefit payments, which reflect expected future service, are anticipated to be paid as follows: (DOLLARS IN THOUSANDS) Amortization of prior service cost NON- QUALIFIED QUALIFIED PENSION OTHER BENEFITS BENEFITS PENSION BENEFITS (benefit) $ 1,563 $ 19 $ (565) Amortization of net actuarial (gain) loss 26,969 546 (913) For measurement purposes, a 7.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 2016. The rate was assumed to decrease gradually to 4.5% by 2025 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in the assumed health care cost trend rates would have the following effects: (DOLLARS IN THOUSANDS) 1% INCREASE 1% DECREASE Effect on total of service and interest cost components $ 280 $ (240) Effect on postretirement benefit obligation 2,700 (2,300) We provide defined life insurance and health care bene- fits for certain retired employees and Board of Directors participants. The plan is contributory based on years of service and family status, with retiree contributions adjusted annually. We have other contributory defined contribution plans covering substantially all employees. Total contributions by us to these plans were $29.5 million, $27.4 million and $24.6 million, for the years ended August 31, 2016, 2015 and 2014, respectively. We voluntarily contributed $43.3 million to qualified pension plans in fiscal 2016. Based on the funded status of the qualified pension plans as of August 31, 2016, we do not believe we will be required to contribute to these plans in fiscal 2017, although we may voluntarily elect to do so. We expect to pay $4.4 million to participants of the non-qualified pension and postretirement benefit plans during fiscal 2017. (DOLLARS IN THOUSANDS) 2017 2018 2019 2020 2021 NON- QUALIFIED QUALIFIED PENSION BENEFITS PENSION OTHER BENEFITS GROSS BENEFITS $ 48,399 $ 1,880 $ 2,490 62,579 2,360 68,104 2,360 67,913 2,350 71,891 2,540 2,560 2,670 2,760 2,850 2022–2026 400,300 16,370 14,690 We have trusts that hold the assets for the defined benefit plans. CHS has a qualified plan committee that sets invest- ment guidelines with the assistance of external consul- tants. Investment objectives for the plans’ assets are as follows: • optimization of the long-term returns on plan assets at an acceptable level of risk; • maintenance of a broad diversification across asset classes and among investment managers; and • focus on long-term return objectives. Asset allocation targets promote optimal expected return and volatility characteristics given the long-term time horizon for fulfilling the obligations of the pension plans. Our pension plans’ investment policy strategy is such that liabilities match assets. This is being accomplished through the asset portfolio mix by reducing volatility and de-risking the plans. The plans’ target allocation percent- ages range between 35% and 55% for fixed income securi- ties, and range between 45% and 65% for equity securities. An annual analysis of the risk versus the return of the investment portfolio is conducted to justify the expected long-term rate of return assumption. We gener- ally use long-term historical return information for the targeted asset mix identified in asset and liability studies. Adjustments are made to the expected long-term rate of return assumption, when deemed necessary, based upon revised expectations of future investment performance of the overall investment markets. The discount rate reflects the rate at which the associ- ated benefits could be effectively settled as of the mea- surement date. In estimating this rate, we look at rates of return on fixed-income investments of similar duration 34 CHS 2016 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to the liabilities in the plans that receive high, invest- ment-grade ratings by recognized ratings agencies. international securities, short and long-term securities, growth and value equities, large and small cap stocks, as well as active and passive management styles. The investment portfolio contains a diversified portfolio of investment categories, including domestic and interna- tional equities, fixed-income securities and real estate. Securities are also diversified in terms of domestic and The committees believe that with prudent risk tolerance and asset diversification, the plans should be able to meet pension obligations in the future. Our pension plans’ recurring fair value measurements by asset category at August 31, 2016 and 2015 are presented in the tables below: (DOLLARS IN THOUSANDS) Cash and cash equivalents Equities: Mutual funds Common/collective trust at net asset value (1) Fixed income securities: Common/collective trust at net asset value (1) Partnership and joint venture interests measured at net asset value (1) Other assets measured at net asset value (1) 2016 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 4,841 $ — $ — $ 4,841 507 — — — — — — — — — — — — — — 507 228,717 551,604 95,744 1,852 Total $ 5,348 $ — $ — $ 883,265 (DOLLARS IN THOUSANDS) Cash and cash equivalents Equities: Mutual funds Common/collective trust at net asset value (1) Fixed income securities: Mutual funds Common/collective trust at net asset value (1) Partnership and joint venture interests measured at net asset value (1) Other assets measured at net asset value (1) 2015 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 4,882 $ — $ — $ 4,882 91,619 — — — 133,556 20,560 — — — — — — — — — — — — 91,619 194,463 154,116 296,684 52,640 1,975 Total $ 230,057 $ 20,560 $ — $ 796,379 (1) In accordance with ASC Topic 820-10, Fair Value Measurements, certain assets that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in the tables above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of net assets. Definitions for valuation levels are found in Note 13, Fair Value Measurements. We use the following valuation methodologies for assets measured at fair value. Mutual funds: Valued at quoted market prices, which are based on the net asset value of shares held by the plan at year end. Mutual funds traded in active markets are classified within Level 1 of the fair value hierarchy. Certain of the mutual fund investments held by the plan have observable inputs other than Level 1 and are classi- fied within Level 2 of the fair value hierarchy. Mutual funds measured at fair value using the net asset value per share practical expedient have not been categorized 35 CHS 2016 35 TEN: B e n e f i t P l a n s , co n t i n u e d in the fair value hierarchy in accordance with ASC Topic 820-10, Fair Value Measurement. Common/Collective Trusts: Common/Collective trusts primarily consist of equity and fixed income funds and are valued using other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risks, referenced indices, quoted prices in inactive markets, adjusted quoted prices in active markets, adjusted quoted prices on foreign equity securities that were adjusted in accor- dance with pricing procedures approved by the trust, etc.). Common/Collective trust investments can be redeemed daily and without restriction. Redemption of the entire investment balance generally requires a 45 to 60 day notice period. The equity funds provide expo- sure to large, mid and small cap U.S. equities, interna- tional large and small cap equities and emerging market equities. The fixed income funds provide exposure to U.S., international and emerging market debt securities. Common/Collective trusts measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy in accor- dance with ASC Topic 820-10, Fair Value Measurement. Partnership and joint venture interests: Valued at the net asset value of shares held by the plan at year end as a practical expedient for fair value. The net asset value is based on the fair value of the underlying assets owned by the trust, minus its liabilities then divided by the number of units outstanding. Redemptions of these interests gener- ally require a 45 to 60 day notice period. Partnerships and joint venture interests measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy in accordance with ASC Topic 820-10, Fair Value Measurement. Other assets: Other assets primarily includes real estate funds and hedge funds held in the asset portfolio of our U.S. defined benefit pension plans. Other funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy in accordance with ASC Topic 820-10, Fair Value Measurement. We are one of approximately 400 employers that con- tribute to the Co-op Retirement Plan (‘‘Co-op Plan’’), which is a defined benefit plan constituting a ‘‘multiple employer plan’’ under the Internal Revenue Code of 1986, as amended, and a ‘‘multiemployer plan’’ under the accounting standards. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects: • Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; • If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and • If we choose to stop participating in the multiem- ployer plan, we may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability. Our participation in the Co-op Plan for the years ended August 31, 2016, 2015, and 2014 is outlined in the table below: (DOLLARS IN THOUSANDS) PLAN NAME EIN/PLAN NUMBER 2016 2015 2014 CONTRIBUTIONS OF CHS SURCHARGE IMPOSED EXPIRATION DATE OF COLLECTIVE BARGAINING AGREEMENT Co-op Retirement Plan 01-0689331/001 $ 1,862 $ 2,021 $ 2,079 N/A N/A 36 CHS 2016 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our contributions for the years stated above did not represent more than 5% of total contributions to the Co-op Plan as indicated in the Co-op Plan’s most recently available annual report (Form 5500). The Pension Protection Act of 2006 (‘‘PPA’’) does not apply to the Co-op Plan because it is covered and defined as a single-employer plan. There is a special exemption for cooperative plans defining them as a the single-employer plan as long as the plan is maintained by more than one employer and at least 85% of the employers are rural cooperatives or cooperative organi- zations owned by agricultural producers. In the Co-op Plan, a ‘‘zone status’’ determination is not required, and therefore not determined. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employers. The most recent financial statements available in 2016 and 2015 are for the Co-op Plan’s year-end at March 31, 2015 and 2014, respectively. In total, the Co-op Plan was at least 80% funded on those dates based on the total plan assets and accumulated benefit obligations. Because the provisions of the PPA do not apply to the Co-op Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience. In addition to the contributions to the Co-op Plan listed above, total contributions to individually insignificant multi-employer pension plans were immaterial in fiscal 2016, 2015 and 2014. 4NOV201612341827 Segment Reporting We are an integrated agricultural enterprise, providing grain, foods and energy resources to businesses and con- sumers on a global basis. 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 and food products, and the production and marketing of ethanol. 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 Exec- utive Officer, evaluates performance and allocates resources in managing the 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 oil- seeds 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 con- sists solely of our equity method investment in CF Nitrogen, which was completed in February 2016 and which entitles us, pursuant to a supply agreement that we entered into with CF Nitrogen, to purchase granular urea and UAN annually from CF Nitrogen to a specified annual quantity. The addition of the 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 years Ven- tura Foods was reported as a component of Corporate and Other because it was an insignificant operating seg- ment. Historically reported segment results and balances have been revised to reflect the addition of the Foods segment. There were no changes to the composition of our Energy or Ag segments as a result of the addition of the Nitrogen Production or Foods segments. Corporate and Other primarily represents our non-consolidated wheat milling operations, as well as our business solutions operations, which consists of commodities hedging, insur- ance and financial services related to crop production. 37 CHS 2016 37 ELEVEN: S e g m e n t R e p o r t i n g , co n t i n u e d Corporate administrative expenses and interest are allo- cated to each business segment, and Corporate and Other, based on direct usage for services that can be tracked, such as information technology and legal, and other factors or considerations relevant to the costs incurred. Prior to fiscal 2015, our renewable fuels marketing busi- ness was included in our Energy segment and our renewable fuels production business was included in our Ag segment. At the beginning of fiscal 2015, we reorga- nized certain parts of our business to better align our ethanol supply chain. As a result, our renewable fuels marketing business is now managed together with our renewable fuels production business within our Ag seg- ment. Prior period segment information below has been revised to reflect this change to ensure comparability. Many of our business activities are highly seasonal and operating results vary throughout the year. For example, in our Ag segment, our crop nutrients and country opera- tions 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 crop drying seasons. Our revenues, assets and cash flows can be significantly affected by global market prices for commodities such as petroleum products, natural gas, grains, oilseeds, crop nutrients and flour. Changes in market prices for commodities that we purchase without a corresponding change in the selling prices of those products can affect revenues and operating earnings. Commodity prices are affected by a wide range of factors beyond our control, including the weather, crop damage due to disease or insects, 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 opera- tions are conducted through companies in which we hold ownership interests of 50% or less and do not con- trol the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from invest- ments, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Opera- tions. In our Ag segment, this principally includes our 50% ownership in TEMCO. In our Nitrogen Production segment, this consists of our 11.4% membership interest (based on product tons) in CF Nitrogen. In our Foods segment, this consists of our 50% ownership in Ventura Foods. In Corporate and Other, this principally includes our 12% ownership in Ardent Mills. See Note 4, Invest- ments for more information on these entities. Reconciling amounts represent the elimination of reve- nues between segments. Such transactions are exe- cuted at market prices to more accurately evaluate the profitability of the individual business segments. 38 CHS 2016 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segment information for the years ended August 31, 2016, 2015 and 2014 is presented in the tables below. We have previously revised amounts for the year ended August 31, 2014 in the table below to include activity and amounts related to capital leases that were previously accounted for as operating leases. See Note 18, Correction of Immaterial Errors for more information on the nature and amounts of these revisions. (DOLLARS IN THOUSANDS) ENERGY AG NITROGEN PRODUCTION FOODS CORPORATE AND OTHER RECONCILING AMOUNTS TOTAL For the year ended August 31, 2016: Revenues Operating earnings (Gain) loss on investments Interest expense, net Equity (income) loss from investments $ 5,789,307 $ 24,849,634 $ — $ — $ 92,725 $ (384,463) $ 30,347,203 248,173 — (22,531) (4,739) 52,334 (6,157) 35,199 (6,193) (7,719) — — 34,437 2,692 (7,644) (74,700) (75,175) 23,601 (3,095) 25,550 (13,519) — — — — 310,196 (9,252) 75,347 (175,777) Income before income taxes $ 275,443 Intersegment revenues Capital expenditures Depreciation and amortization $ (341,765) $ $ 376,841 193,525 Total assets as of August 31, 2016 $ 4,306,297 $ $ $ $ $ 30,936 (40,336) 260,865 230,172 $ $ $ $ 34,070 $ 64,764 $ 14,665 — $ — $ — $ — $ (2,362) — $ 55,074 — $ 23,795 7,002,916 $ 2,796,323 $ 369,487 $ 2,842,686 $ $ $ $ $ — $ 419,878 384,463 $ — — $ 692,780 — $ 447,492 — $ 17,317,709 (DOLLARS IN THOUSANDS) ENERGY AG FOODS CORPORATE AND OTHER RECONCILING AMOUNTS TOTAL For the year ended August 31, 2015: Revenues Operating earnings (Gain) loss on investments Interest expense, net Equity (income) loss from investments Income before income taxes Intersegment revenues Capital expenditures Depreciation and amortization Total assets as of August 31, 2015 $ 8,694,326 $ 26,311,350 $ — $ 74,828 $ (498,062) $ 34,582,442 523,451 190,860 (1,454) (2,875) 56,380 — 3,854 2,555 (2,364) 12,449 — (12,350) (2,330) $ 538,131 $ (483,989) $ $ 696,825 148,292 $ 4,624,471 $ $ $ $ $ (12,293) (67,955) (25,272) 149,648 (11,403) 417,950 192,438 $ $ $ $ 62,647 $ 17,742 — $ (2,670) — $ 72,015 — $ 14,692 7,814,689 $ 347,748 $ 2,441,404 $ $ $ $ $ — — — — 715,412 (5,239) 60,333 (107,850) — $ 768,168 498,062 $ — — $ 1,186,790 — $ 355,422 — $ 15,228,312 (DOLLARS IN THOUSANDS) ENERGY AG FOODS CORPORATE AND OTHER RECONCILING AMOUNTS TOTAL For the year ended August 31, 2014: Revenues Operating earnings (Gain) loss on investments Interest expense, net Equity (income) loss from investments Income before income taxes Intersegment revenues Capital expenditures Depreciation and amortization $ 12,181,212 $ 31,022,507 $ — $ 73,827 $ (613,513) $ 42,664,033 793,924 249,944 (1,292) 7,372 — 69,522 (4,014) (1,949) 60,742 — (112,213) 5,419 4,570 (22,279) (55,104) (26,049) — — — — 1,049,948 (114,162) 140,253 (107,446) $ 728,416 $ (600,433) $ $ 539,170 137,408 $ $ $ $ 213,430 (9,960) 329,613 157,102 $ $ $ $ 48,393 $ 141,064 — $ (3,120) — $ 50,293 — $ 11,737 $ $ $ $ — $ 1,131,303 613,513 $ — — $ 919,076 — $ 306,247 39 CHS 2016 39 ELEVEN: S e g m e n t R e p o r t i n g , co n t i n u e d We have international sales, which are predominantly in our Ag segment. The following table presents our sales, based on the geographic locations in which the sales originated, for the years ended August 31, 2016, 2015 and 2014: (DOLLARS IN MILLIONS) North America South America Europe, the Middle East and Africa (EMEA) Asia Pacific (APAC) Total 4NOV201612343878 2016 2015 2014 $ 23,276 $ 27,821 $ 38,287 1,847 4,166 1,058 1,529 4,221 1,011 2,133 1,602 642 $ 30,347 $ 34,582 $ 42,664 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 hedges or fair value hedges as described below. Derivative instruments are recorded on our Consolidated Balance Sheets at fair value as described in Note 13, Fair Value Measurements. The following tables present the gross fair values of deriv- ative 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 U.S. 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, Deriv- atives and Hedging—Overall. AUGUST 31, 2016 AMOUNTS NOT OFFSET ON THE CONSOLIDATED BALANCE SHEET BUT ELIGIBLE FOR OFFSETTING (DOLLARS IN THOUSANDS) Derivative Assets: Commodity and freight derivatives Foreign exchange derivatives Interest rate derivatives—hedge Total Derivative Liabilities: Commodity and freight derivatives Foreign exchange derivatives Interest rate derivatives—non-hedge Total 40 CHS 2016 40 GROSS AMOUNTS DERIVATIVE RECOGNIZED COLLATERAL INSTRUMENTS CASH NET AMOUNTS $ 500,192 $ — $ 23,689 $ 476,503 21,551 22,078 — — 9,187 12,364 — 22,078 $ 543,821 $ — $ 32,876 $ 510,945 $ 491,302 $ 811 $ 23,689 $ 466,802 22,289 8 — — 9,187 13,102 — 8 $ 513,599 $ 811 $ 32,876 $ 479,912 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2015 AMOUNTS NOT OFFSET ON THE CONSOLIDATED BALANCE SHEET BUT ELIGIBLE FOR OFFSETTING GROSS AMOUNTS DERIVATIVE RECOGNIZED COLLATERAL INSTRUMENTS CASH NET AMOUNTS $ 476,071 $ — $ 58,401 $ 417,670 $ $ 23,154 14,216 — — 11,682 — 11,472 14,216 513,441 $ — $ 70,083 $ 443,358 427,052 $ 11,482 $ 58,401 $ 357,169 37,598 6,058 61 — — — 11,682 25,916 — — 6,058 61 $ 470,769 $ 11,482 $ 70,083 $ 389,204 (DOLLARS IN THOUSANDS) Derivative Assets: Commodity and freight derivatives Foreign exchange derivatives Interest rate derivatives—hedge Total Derivative Liabilities: Commodity and freight derivatives Foreign exchange derivatives Interest rate derivatives—hedge Interest rate derivatives—non-hedge Total Derivatives Not Designated as Hedging Instruments The majority of our derivative instruments have not been designated as hedging instruments. The following table sets forth the pretax gains (losses) on derivatives not accounted for as hedging instruments that have been included in our Consolidated Statements of Oper- ations for the years ended August 31, 2016, 2015, and 2014. We have revised the information that we have his- torically included in this table below to correct for errors in the previously disclosed amounts. Although such gains and losses have been and continue to be appropri- ately recorded in the Consolidated Statements of Oper- ations, the previous disclosures did not accurately reflect the derivative gains and losses in each period. These revisions did not materially impact our consoli- dated financial statements. (DOLLARS IN THOUSANDS) LOCATION OF GAIN (LOSS) 2016 2015 2014 Commodity and freight derivatives Cost of goods sold $ (49,975) $ 143,314 $ 128,992 Foreign exchange derivatives Cost of goods sold Foreign exchange derivatives Marketing, general and administrative Interest rate derivatives Interest expense, net Total (10,904) (97) (6,292) 8,962 3,589 107 (4,920) (1,006) 114 $ (67,268) $ 155,972 $ 123,180 Commodity and Freight Contracts: 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 vola- tility 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 appro- priate. For commodities where there is no liquid deriva- tive contract, risk is managed through the use of forward sales contracts, other pricing arrangements 41 CHS 2016 41 TWELVE: D e r i vat i ve F i n a n c i a l I n st r u m e n t s a n d H e d g i n g Ac t i v i t i e s , co n t i n u e d and, to some extent, futures contracts in highly corre- lated 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 prod- ucts listed on the exchanges, except that fertilizer and propane contracts 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 com- modity 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 expo- sure 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 manage- ment 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 com- pliance 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 mon- itor 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 con- tracts. 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 iden- tified contracts for nonperformance. Although we have established policies and procedures, we make no assur- ances that historical nonperformance experience will carry forward to future periods. As of August 31, 2016 and 2015, we had outstanding commodity futures, options and freight contracts that were used as economic hedges, as well as fixed-price forward contracts related to physical purchases and sales of commodities. The table below presents the notional volumes for all outstanding commodity and freight contracts accounted for as derivative instruments. 2016 2015 (UNITS IN THOUSANDS) LONG SHORT LONG SHORT Grain and oilseed— bushels 774,279 995,396 711,066 895,326 Energy products— barrels 14,740 6,470 17,238 11,676 Processed grain and oilseed—tons Crop nutrients—tons Ocean and barge 541 108 2,060 135 706 48 2,741 116 freight—metric tons 4,406 Rail freight—rail cars 205 Natural gas—MMBtu 3,550 877 79 300 5,916 1,962 297 — 122 — 42 CHS 2016 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign Exchange Contracts: We conduct a substantial portion of our business in U.S. dollars, but we are exposed to immaterial risks relating to foreign currency fluctuations primarily due to grain marketing transactions in South America and Europe, and purchases of products from Canada. We use foreign currency derivative instruments to mitigate the impact of exchange rate fluctuations. Although our overall risk relating to foreign currency transactions is not signifi- cant, exchange rate fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of U.S. agricultural products compared to the same products offered by alternative sources of world supply. The notional amounts of our foreign exchange derivative contracts were $802.2 million and $1.3 billion as of August 31, 2016 and August 31, 2015, respectively. Derivatives Designated as Cash Flow or Fair Value Hedging Strategies As of August 31, 2016 and 2015, we have certain deriva- tives designated as cash flow and fair value hedges. Interest Rate Contracts: We have outstanding interest rate swaps with an aggre- gate notional amount of $420.0 million designated as fair value hedges of portions of our fixed-rate debt. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the 3-month U.S. dollar LIBOR interest rate, in essence converting the fixed-rate debt to variable-rate debt. Offsetting changes in the fair values of both the swap instruments and the hedged debt are recorded contemporaneously each period and only create an impact to earnings to the extent that the hedge is ineffective. During the years ended August 31, 2016 and 2015, we recorded offsetting fair value adjust- ments of $9.8 million and $8.0 million, respectively, with no ineffectiveness recorded in earnings. In fiscal 2015, we entered into forward-starting interest rate swaps with an aggregate notional amount of $300.0 million designated as cash flow hedges of the expected variability of future interest payments on our anticipated issuance of fixed-rate debt. During the first quarter of fiscal 2016, we determined that certain of the anticipated debt issuances would be delayed; and we consequently recorded an immaterial amount of losses on the ineffective portion of the related swaps in earn- ings. Additionally, we paid $6.4 million in cash to settle two of the interest rate swaps upon their scheduled ter- mination 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 reclassi- fied all amounts previously recorded to other compre- hensive income into earnings. In fiscal 2013, we entered into derivative contracts des- ignated as cash flow hedging instruments that were ter- minated in February 2014 as the issuance of the underlying debt was no longer probable. As a result, a $13.5 million gain was reclassified from accumulated other comprehensive loss into net income. This pre-tax gain is included as a component of interest expense, net in our Consolidated Statement of Operations for the year ended August 31, 2014. The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the years ended August 31, 2016, 2015, and 2014: (DOLLARS IN THOUSANDS) 2016 2015 2014 Interest rate derivatives $ (10,070) $(4,078) $ (10,580) The following table presents the pretax gains (losses) relating to cash flow hedges that were reclassified from accumulated other comprehensive loss into income for the years ended August 31, 2016, 2015, and 2014: (DOLLARS IN THOUSANDS) Interest rate derivatives LOCATION OF GAIN (LOSS) 2016 2015 2014 Interest expense, net $ (5,071) $ (792) $ 12,727 43 CHS 2016 43 4NOV201612343606 Fair Value Measurements ASC Topic 820, Fair Value Measurement 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. We determine fair values of derivative instruments and certain other assets, based on the fair value hierarchy established in ASC Topic 820, 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 that reflect the assumptions market participants would use in pricing the asset or liability based on the best information avail- able in the circumstances. ASC Topic 820 describes three levels within its hierarchy that may be used to measure fair value, and our assessment of relevant instruments within those levels is as follows: and liabilities include interest rate, foreign exchange, and commodity swaps; forward commodity and freight purchase and sales contracts with a fixed price compo- nent; and other OTC derivatives whose value is deter- mined with inputs that are based on exchange traded prices, adjusted for location specific inputs that are pri- marily observable in the market or can be derived princi- pally from, or corroborated by, observable market data. Level 3: Values are generated from unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities. These unobservable inputs would reflect our own estimates of assumptions that market participants would use in pricing related assets or liabilities. Valuation techniques might include the use of pricing models, dis- counted cash flow models or similar techniques. Level 1: Values are based on unadjusted quoted prices in active markets for identical assets or liabilities. These assets and liabilities include exchange-traded derivative instruments, Rabbi Trust investments, deferred compen- sation investments and available-for-sale investments. Level 2: Values are based on 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, or other inputs that are observable or can be corroborated by observable market data for substan- tially the full term of the assets or liabilities. These assets The following tables present assets and liabilities, included on our Consolidated Balance Sheets, that are recognized at fair value on a recurring basis, and indi- cate the fair value hierarchy utilized to determine these fair values. Assets and liabilities are classified, in their entirety, based on the lowest level of input that is a sig- nificant component of the fair value measurement. The lowest level of input is considered Level 3. Our assess- ment of the significance of a particular input to the fair value measurement requires judgment and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels. 44 CHS 2016 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recurring fair value measurements at August 31, 2016 and 2015 are as follows: 2016 (DOLLARS IN THOUSANDS) Assets: Commodity and freight derivatives Foreign currency derivatives Interest rate swap derivatives Deferred compensation assets Other assets Total Liabilities: Commodity and freight derivatives Foreign currency derivatives Interest rate swap derivatives Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests Total (DOLLARS IN THOUSANDS) Assets: QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS OBSERVABLE INPUTS (LEVEL 2) (LEVEL 1) SIGNIFICANT SIGNIFICANT OTHER UNOBSERVABLE INPUTS (LEVEL 3) TOTAL $ $ $ $ 62,538 $ 437,654 $ — $ 500,192 — — 50,099 12,678 21,551 22,078 — — — — — — 21,551 22,078 50,099 12,678 125,315 $ 481,283 $ — $ 606,598 22,331 $ 468,971 $ — $ 491,302 — — — 22,289 8 — — — 22,289 8 15,051 15,051 22,331 $ 491,268 $ 15,051 $ 528,650 2015 QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS OBSERVABLE INPUTS (LEVEL 2) (LEVEL 1) SIGNIFICANT SIGNIFICANT OTHER UNOBSERVABLE INPUTS (LEVEL 3) TOTAL Commodity and freight derivatives $ 46,976 $ 429,094 $ — $ 476,070 Foreign currency derivatives Interest rate swap derivatives Deferred compensation assets Other assets Total Liabilities: Commodity and freight derivatives Foreign currency derivatives Interest rate swap derivatives Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests $ $ — — 72,571 10,905 23,155 14,216 — — — — — — 23,155 14,216 72,571 10,905 130,452 $ 466,465 $ — $ 596,917 58,873 $ 368,179 $ — $ 427,052 — — — 37,598 6,119 — — 37,598 6,119 — 75,982 75,982 Total $ 58,873 $ 411,896 $ 75,982 $ 546,751 Commodity, freight and foreign currency derivatives— Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1. Our forward commodity purchase and sales contracts with fixed- price components, ocean freight contracts and other OTC derivatives are determined using inputs that are generally based on exchange traded prices and/or recent market bids and offers, adjusted for location spe- cific inputs, and are classified within Level 2. The loca- tion specific inputs are generally broker or dealer quotations, or market transactions in either the listed or OTC markets. Changes in the fair values of these con- tracts are recognized in our Consolidated Statements of Operations as a component of cost of goods sold. 45 CHS 2016 45 THIRTEEN: Fa i r Va l u e M e a s u re m e n t s , co n t i n u e d Interest rate swap derivatives—Fair values of our interest rate swap derivatives are determined utilizing valuation models that are widely accepted in the market to value these OTC derivative contracts. The specific terms of the contracts, as well as market observable inputs, such as interest rates and credit risk assumptions, are fac- tored into the models. As all significant inputs are market observable, all interest rate swaps are classified within Level 2. Changes in the fair values of contracts not designated as hedging instruments for accounting pur- poses are recognized in our Consolidated Statements of Operations as a component of interest expense, net. See Note 12, Derivative Financial Instruments and Hedging Activities for additional information about interest rates swaps designated as fair value and cash flow hedges. Deferred compensation and other assets—Our deferred compensation investments, Rabbi Trust assets and available-for-sale investments in common stock of other companies are valued based on unadjusted quoted prices on active exchanges and are classified within Level 1. Changes in the fair values of these other assets are primarily recognized in our Consolidated State- ments of Operations as a component of marketing, gen- eral and administrative expenses. Accrued liability for contingent crack spread payments related to purchase of CHS McPherson (formerly NCRA) noncontrolling interests—The fair value of the contin- gent consideration liability was calculated utilizing an average price option model, an adjusted Black-Scholes pricing model commonly used in the energy industry to value options. The model uses market observable inputs and unobservable inputs. Due to significant unobserv- able inputs used in the pricing model, the liability is clas- sified within Level 3. ITEM (DOLLARS IN THOUSANDS) FAIR VALUE AUGUST 31, 2016 VALUATION TECHNIQUE UNOBSERVABLE INPUT INPUT USED QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS Accrued liability for contingent crack spread payments related to purchase of noncontrolling interests $15,051 Adjusted Black-Scholes option pricing model Forward crack spread margin on August 31, 2016 (a) Contractual target crack spread margin (b) Expected volatility (c) Risk-free interest rate (d) Expected life—years (e) $16.43 $17.50 152.65% 0.94% 1.00 (a) Represents forward crack spread margin quotes and man- (d) Represents yield curves for U.S. Treasury securities. agement estimates based on the future settlement date. (e) Represents the number of years remaining related to the (b) Represents the minimum contractual threshold that would final contingent payment. require settlement with the counterparties. (c) Represents quarterly adjusted volatility estimates derived from daily historical market data. Valuation processes for Level 3 measurements—Manage- ment is responsible for determining the fair value of our Level 3 financial instruments. Option pricing methods are utilized, as indicated above. Inputs used in the option pricing models are based on quotes obtained from third party vendors. Each reporting period, management reviews the unobservable inputs provided by third-party vendors for reasonableness utilizing relevant information available to us. Management also takes into consideration current and expected market trends and compares the liability’s fair value to hypothetical payments using known historical market data to assess reasonableness of the resulting fair value. Sensitivity analysis of Level 3 measurements—The signif- icant unobservable inputs that are susceptible to peri- odic fluctuations used in the fair value measurement of the accrued liability for contingent crack spread pay- ments related to the purchase of noncontrolling inter- ests are the adjusted forward crack spread margin and the expected volatility. Significant increases (decreases) in either of these inputs in isolation would result in a significantly higher (lower) fair value measurement. Although changes in the expected volatility are driven 46 CHS 2016 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS by fluctuations in the underlying crack spread margin, changes in expected volatility are not necessarily accompanied by a directionally similar change in the forward crack spread margin. Directional changes in the expected volatility can be affected by a multitude of factors including the magnitude of daily fluctuations in the underlying market data, market trends, timing of fluctuations, and other factors. The following table represents a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the years ended August 31, 2016 and 2015: (DOLLARS IN THOUSANDS) Balance—beginning of year Amounts currently payable Total (gains) losses included in cost of goods sold Balance—end of year LEVEL 3 LIABILITIES ACCRUED LIABILITY FOR CONTINGENT CRACK SPREAD PAYMENTS RELATED TO PURCHASE OF NONCONTROLLING INTERESTS 2016 2015 $ 75,982 $ 114,917 — (60,931) (2,625) (36,310) $ 15,051 $ 75,982 There were no material transfers between Level 1, Level 2 and Level 3 assets and liabilities during the years ended August 31, 2016 and 2015. 4NOV201612342241 Commitments and Contingencies Environmental We are required to comply with various environmental laws and regulations incidental to our normal business operations. In order to meet our compliance require- ments, we establish reserves for the probable future costs of remediation of identified issues, which are included in cost of goods sold and marketing, general and administrative in our Consolidated Statements of Operations. The resolution of any such matters may affect consolidated net income for any fiscal period; however, 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. Other Litigation and Claims 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, 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. 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 $133.8 million were outstanding on August 31, 2016. 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 are current as of August 31, 2016. Credit Commitments CHS Capital has commitments to extend credit to cus- tomers as long as there is no violation of any condition established in the contracts. As of August 31, 2016, CHS Capital’s customers have additional available credit of $1.0 billion. Lease Commitments We lease certain property, plant and equipment used in our operations under both capital and operating lease agreements. Our operating leases, which are primarily for rail cars, equipment, vehicles and office space have 47 CHS 2016 47 FOURTEEN: Co m m i t m e n t s a n d Co n t i n g e n c i e s , co n t i n u e d remaining terms of one to 15 years. Total rental expense for operating leases was $74.7 million, $56.7 million and $47.4 million for the years ended August 31, 2016, 2015 and 2014, respectively. We lease certain rail cars, equip- ment, vehicles and other assets under capital lease arrangements. These assets are included in property, plant and equipment, net on our Consolidated Balance Sheets while the corresponding capital lease obligations are included in long-term debt. See Note 5, Property, Plant and Equipment and Note 7, Notes Payable and Long-Term Debt for more information about capital leases. Minimum future lease payments required under noncan- celable operating leases as of August 31, 2016 are as follows: (DOLLARS IN THOUSANDS) 2017 2018 2019 2020 2021 Thereafter $ 65,714 52,834 41,406 32,527 30,752 81,574 Total minimum future lease payments $ 304,807 Unconditional Purchase Obligations Unconditional purchase obligations are commitments to transfer funds in the future for fixed or minimum amounts or quantities of goods or services at fixed or minimum prices. Our long-term unconditional purchase obligations primarily relate to pipeline and grain handling take-or-pay and through-put agreements and are not recorded on our Consolidated Balance Sheets. As of August 31, 2016, minimum future payments required under long-term commit- ments that are noncancelable, and that third parties have used to secure financing for the facilities that will provide the contracted goods, are as follows: (DOLLARS IN THOUSANDS) PAYMENTS DUE BY PERIOD TOTAL LESS THAN 1 YEAR 1–3 YEARS 3–5 YEARS MORE THAN 5 YEARS Long-term unconditional purchase obligations $767,943 $ 60,655 $ 108,120 $ 113,553 $ 485,615 The discounted, aggregate amount of the minimum required payments under long-term unconditional purchase obligations, based on current exchange rates at August 31, 2016, is $627.2 million. Total payments under these arrangements were $88.0 million, $66.8 million and $65.5 million for the years ended August 31, 2016, 2015 and 2014, respectively. 48 CHS 2016 48 4NOV201612341964 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Supplemental Cash Flow and Other Information Additional information concerning supplemental disclosures of cash flow activities for the years ended August 31, 2016, 2015 and 2014 is included in the table below. We have previously revised amounts for the year ended August 31, 2014 in this table related to interest, capital expenditures and capital leases. See Note 18, Correction of Immaterial Errors for more information on the nature and amounts of these revisions. (DOLLARS IN THOUSANDS) Net cash paid during the period for: Interest Income taxes 2016 2015 2014 $ 147,089 $ 130,571 $ 166,524 5,184 54,229 23,363 Other significant noncash investing and financing transactions: Capital expenditures and major repairs incurred but not yet paid (1) 44,307 60,226 64,825 Capital lease obligations incurred Capital equity certificates redeemed with preferred stock Capital equity certificates issued in exchange for Ag acquisitions Accrual of dividends and equities payable Noncash consideration for Ag acquisition Payable for Ag acquisitions Assets contributed to Ardent Mills joint venture 23,921 76,756 19,089 9,741 62,425 — 200,000 15,618 14,278 198,031 384,427 409,961 14,586 4,211 — — — — — — 205,040 (1) Represents acquisition of property, plant and equipment and capitalized major maintenance costs for which cash payments have not yet been made as of the end of each fiscal period presented. Acquiring or constructing property, plant and equipment by incurring a liability does not result in a cash outflow for us until the liability is paid. In the period the liability is incurred, the change in operating accounts payable on our Consolidated Statements of Cash Flows is adjusted by such amount. In the period the liability is paid, the amount is reflected as a cash outflow from investing activities. 4NOV201612343063 Related Party Transactions Related party transactions with equity investees for the years ended August 31, 2016, 2015 and 2014, respectively, and balances as of August 31, 2016 and 2015, respectively, are as follows: (DOLLARS IN THOUSANDS) Sales Purchases (DOLLARS IN THOUSANDS) Due from related parties Due to related parties 2016 2015 2014 $ 2,728,793 $ 2,310,875 $ 3,247,197 1,707,990 1,762,663 1,648,030 2016 2015 $ 25,386 $ 73,000 40,543 6,656 The related party transactions were primarily with CF Nitrogen, TEMCO, Horizon Milling, Ardent Mills and Ventura Foods. 49 CHS 2016 49 4NOV201612342793 Acquisitions During the year ended August 31, 2016, we acquired various businesses primarily in our Ag segment for $50.3 million in consideration. These acquisitions were not material, individually or in aggregate, to our consoli- dated financial statements. During the year ended August 31, 2015, we acquired various businesses in our Ag segment for $321.0 million in consideration. These acquisitions were not material, individually or in aggregate, to our consolidated finan- cial statements. Included among these transactions was the June 2015 acquisition of Patriot Holdings, LLC, which operates an ethanol plant that has expanded our grain origination opportunities and increased our renewable fuels capacity. Additionally, we acquired Northstar Agri Industries, a canola processing and refining business in July 2015. The acquisition expanded our oilseed processing platform to include canola in addition to soybeans, expanded our oil product offer- ings to global food companies, and linked growers selling canola seed to CHS to an integrated supply chain. The allocation of consideration for net assets acquired in our aggregate acquisitions during the year ended August 31, 2015 is summarized as follows: (DOLLARS IN THOUSANDS) Current assets Property, plant and equipment Goodwill Other assets Current liabilities Other liabilities Total net assets acquired $ 60,577 312,288 423 16,118 (60,127) (8,261) $ 321,018 During the year ended August 31, 2014, we acquired various businesses primarily in our Ag segment for $281.5 million in consideration. These acquisitions were not material, individually or in aggregate, to our consoli- dated financial statements. Included among these trans- actions was the acquisition of Illinois River Energy LLC, which operates an ethanol plant that expanded our grain origination opportunities and increased renewable fuels capacity. Additionally, we acquired the fertilizer business and assets of Terral RiverService, a transporta- tion service company specializing in the bulk storage and handling of dry and liquid materials along the Mis- sissippi River system, the Gulf Intracoastal Waterway and inland waterways of Louisiana and southern Arkansas. See Note 6, Other Assets for information 50 CHS 2016 50 about the amounts of goodwill and intangible assets recorded as a result of these transactions. us transfer agreement between CHS McPherson Refinery Inc. (formerly National Cooperative Refinery Association or ‘‘NCRA’’) In November 2011, our Board of Directors approved a stock and GROWMARK, Inc. (‘‘Growmark’’), and a stock transfer agreement between us and MFA Oil Company (‘‘MFA’’). Pursuant to these agreements, we began to acquire from Growmark and MFA shares of Class A common stock and Class B common stock of NCRA representing approximately 25.6% of NCRA’s outstanding capital stock. Prior to the first closing, we owned the remaining approximately 74.4% of NCRA’s outstanding capital stock as of August 31, 2012 and accordingly, upon com- pletion of the acquisitions described by these agree- ments, NCRA would be a wholly-owned subsidiary. As of August 31, 2015, our ownership was 88.9% and with the final closing in September 2015, our ownership increased to 100%. The entity is now known as CHS McPherson Refinery Inc. (‘‘CHS McPherson’’). Pursuant to the agreement with Growmark, we acquired stock representing approximately 18.6% of NCRA’s out- standing capital stock in four separate closings held on September 1, 2012, September 1, 2013, September 1, 2014 and September 1, 2015, for an aggregate base purchase price of $255.5 million (approximately $48.0 million of which was paid through each of the first three closings, and $111.4 million of which was paid at the final closing in September 2015). In addition, Growmark is entitled to receive up to two contingent purchase price payments following each individual closing, calculated as set forth in the agreement with Growmark, if the average crack spread margin referred to therein over the year ending on August 31 of the calendar year in which the contin- gent payment date falls exceeds a specified target. Pursuant to the agreement with MFA, we acquired stock representing approximately 7.0% of NCRA’s out- standing capital stock in four separate closings held on September 1, 2012, September 1, 2013, September 1, 2014 and September 1, 2015, for an aggregate base purchase price of $95.5 million (approximately $18.0 million of which was paid through each of the first three closings, and $41.6 million of which was paid at the final closing in September 2015). In addition, MFA is entitled to receive up to two contingent purchase price payments fol- lowing each individual closing, calculated as set forth in NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the agreement with MFA, if the average crack spread margin referred to therein over the year ending on August 31 of the calendar year in which the contingent payment date falls exceeds a specified target. As of August 31, 2016 and 2015, the amounts recognized in other liabilities on our Consolidated Balance Sheets for these contingent consideration arrangements are $15.1 million and $76.0 million, respectively. Corre- sponding gains of $60.9 million and $36.3 million are included in cost of goods sold in our Consolidated Statements of Operations for the years ended August 31, 2016 and 2015, respectively. The first contin- gent consideration payment in the amount of $16.5 mil- lion was made in October 2013; and based on the average crack spread margins during fiscal 2014, no payment was made in October 2014. As of August 31, 2015, $2.6 million was recorded as a current liability and was subsequently paid in October 2015. Based on the average crack spread margin during fiscal 2016, no pay- ment was made in October 2016. In accordance with ASC Topic 480, patronage earned by Growmark and MFA has been included as interest expense in our Consolidated Statements of Operations. No interest was recognized during the year ended August 31, 2016. During the years ended August 31, 2015 and 2014, $31.0 million and $65.5 million, respectively, was recognized as interest expense for the patronage earned by Growmark and MFA. 4NOV201612341548 Correction of Immaterial Errors Lease Accounting: We lease rail cars, equipment, vehicles and other assets under noncancelable lease agreements for use in our agri- cultural and transportation operations in both our Energy and Ag segments. During the fourth quarter of fiscal 2015, we determined that we had historically applied the accounting principles of ASC Topic 840, Leases, incor- rectly by accounting for our lease arrangements as oper- ating leases. We subsequently determined that certain of our leases met, at lease inception, one or more of the ASC 840-10-25-1 criteria that require a lease to be classified and accounted for as a capital lease. Prior period amounts in the financial statements, notes thereto and related dis- closures were revised at that time. Statement of Cash Flows Presentation: During the fourth quarter of fiscal 2015, we determined that our historical presentation of cash flows related to the acquisition of property, plant and equipment and expenditures for major repairs was incorrect. Amounts presented as cash outflows in prior periods included acquisitions of assets for which cash had not yet been paid, resulting in misstatements of both investing and operating cash flows. Prior period amounts in the finan- cial statements, notes thereto and related disclosures were corrected at that time. Materiality Assessment: We assessed the materiality of the misstatements described above on prior period financial statements in accordance with SEC Staff Accounting Bulletin (‘‘SAB’’) No. 99, Materiality, codified in ASC 250 (‘‘ASC 250’’), Presentation of Financial Statements, and concluded these misstatements were not material to any prior annual or interim periods. Accordingly, in accordance with ASC 250 (SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstate- ments in Current Year Financial Statements), our con- solidated financial statements as of August 31, 2014 and for the year ended August 31, 2014, which are presented herein, were revised. 51 CHS 2016 51 EIGHTEEN: Co r re c t i o n of I m m ate r i a l E r ro r s , co n t i n u e d The following are selected line items from our consolidated financial statements illustrating the effects of these revisions: CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) Cost of goods sold Gross profit Operating earnings Interest expense, net Income before income taxes CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) Cash flows from operating activities: Depreciation and amortization Changes in operating assets and liabilities, excluding the effects of acquisitions: Accounts payable and accrued expenses Net cash provided by (used in) operating activities Cash flows from investing activities: Acquisition of property, plant and equipment Expenditures for major repairs Net cash provided by (used in) investing activities Cash flows from financing activities: Principal payments on capital lease obligations Other financing activities, net Net cash provided by (used in) financing activities FOR THE YEAR ENDED AUGUST 31, 2014 AS PREVIOUSLY REPORTED REVISION AS REVISED $ 41,016,798 $ (5,311) $ 41,011,487 1,647,235 1,044,637 134,942 1,131,303 5,311 5,311 5,311 — 1,652,546 1,049,948 140,253 1,131,303 FOR THE YEAR ENDED AUGUST 31, 2014 AS PREVIOUSLY REPORTED REVISION AS REVISED $ 267,167 $ 39,080 $ 306,247 (164,616) 1,427,351 (25,187) 13,893 (189,803) 1,441,244 (943,888) (3,305) (1,341,582) 24,812 375 25,187 — (447) (39,871) 791 240,530 (39,080) (919,076) (2,930) (1,316,395) (39,871) 344 201,450 Report of Independent Registered Public Accounting Firm To the Board of Directors and Members and Patrons of CHS Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of opera- tions, of comprehensive income, of changes in equities, and of cash flows present fairly, in all material respects, the financial position of CHS Inc. and its subsidiaries at August 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We con- ducted our audits of these statements in accordance with the standards of the Public Company Accounting Over- sight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 20NOV201512003910 PricewaterhouseCoopers LLP Minneapolis, Minnesota November 3, 2016 52 CHS 2016 52 BOARD OF DIRECTORS From left, front, Eischens, Schurr, Blew, Bielenberg, Erickson, Fritel, Anthony; back, Johnsrud, Carlson, Knecht, Meyer, Bass, Kruger, Holm, Malesich, Riegel, Kayser David Bielenberg Chairman Silverton, Oregon Steve Fritel First Vice Chairman Barton, North Dakota Dan Schurr Secretary-Treasurer LeClaire, Iowa Curt Eischens Second Vice Chairman Minneota, Minnesota Robert Bass David Kayser Reedsburg, Wisconsin Alexandria, South Dakota C.J. Blew Castleton, Kansas Randy Knecht Houghton, South Dakota Dennis Carlson Mandan, North Dakota Jon Erickson Minot, North Dakota Greg Kruger Eleva, Wisconsin Edward Malesich Dillon, Montana Alan Holm Perry Meyer Sleepy Eye, Minnesota New Ulm, Minnesota Don Anthony Assistant Secretary-Treasurer Lexington, Nebraska David Johnsrud Starbuck, Minnesota Steve Riegel Ford, Kansas CHS directors represent a broad range of operationally complex and geographically diverse agricultural businesses. As a key component of the board’s development commitment, CHS directors completed the National Association of Corporate Directors (NACD) certiﬁcation program, with many earning Board Leadership Fellow status. Detailed biographical information on the CHS Board of Directors is available at chsinc.com. CHS 2016 53 EXECUTIVE TEAM From left, Skidmore, Zell, Zappa, Johnson, Casale, Debertin, Cunningham Carl Casale President and Timothy Skidmore Acknowledgements Executive Vice President and Chief Executive Officer Chief Financial Officer For CHS, helping our member cooperative- and producer-owners grow is our essential promise today and every day as we serve today’s farmers and ranchers and cultivate the next generation of Shirley Cunningham James Zappa agriculture leaders. Executive Vice President and To create the annual report, CHS worked with General Counsel Lisa Zell Executive Vice President, Business Solutions Executive Vice President and Chief Operating Officer, Ag Business and Enterprise Strategy Jay Debertin Executive Vice President and Chief Operating Officer, Energy and Foods Lynden Johnson Executive Vice President and Chief Operating Officer, Country Operations Detailed biographical information on the CHS executive team is available at chsinc.com. 54 CHS 2016 member cooperatives, producers and their families. They shared their time, their stories and their homes with us. While you see in these pages our collective accomplishments and what’s possible for our future together, we’re reminded of who we are: families. CHS appreciates the time and contributions from the families who helped tell our cooperative story. Our work is really about you: our people. Colorado: Kent and Danell Kalcevic, Bennett, Colo.; Gary and Jerod Henrickson, Bella Holstein, Platteville, Colo.; Jason Brancel, president and CEO; Mark Reinert, marketing communications director; Keith Amen, board chair; and James Johnston, agronomist, Agﬁnity, Eaton, Colo.; Jim Magnuson, Eaton, Colo. Illinois: Jon and Kim Chamberlain, Geneseo, Ill.; Steve Nightingale, Osco, Ill. Iowa: Brian Dreessen, general manager, Cooperative Energy, Sibley, Iowa; Brian Bultmann, Sibley, Iowa; River Valley Cooperative, Davenport, Iowa Minnesota: Dan Larson, Cyrus, Minn.; Jerome Hanson, Hoffman, Minn.; Erica Boyum and Jacob Hagen, agronomists, CHS Prairie Lakes, Starbuck, Minn.; the Penning family, Wilmont, Minn. Montana: Joe Sandru, Twin Bridges, Mont. Back cover: Top, the CHS Warren, Minn., team applies N-Edge® fertilizer to a northwest Minnesota ﬁeld. Middle, a customer near Elrosa, Minn., beneﬁts from the tank ﬁll-up by a CHS Automated Fuel Delivery driver. Bottom, as Joe Sandru surveys his family’s beef herd near Twin Bridges, Mont., he knows he can count on CHS and Payback® feed. Above: Top left, Gary Henrickson, Platteville, Colo., counts on energy products from Agﬁnity in nearby Eaton to power his dairy business. Top right, Brooks Dagen, plant engineer, manages capital projects at the CHS Processing and Food Ingredients facility at Hallock, Minn. Middle, wheat harvest commences near the CHS reﬁnery at McPherson, Kan. Bottom left, the Penning family is raising next-generation leaders on its Wilmont, Minn., farm. Bottom right, Jim Magnuson, left, is an alum of the CHS New Leader Forum and an Eaton, Colo., grower who reviews crop production plans with Agﬁnity Agronomist James Johnston. 5500 Cenex Drive Inver Grove Heights, MN 55077 651-355-6000 chsinc.com NASDAQ: CHSCP, CHSCO, CHSCN, CHSCM, CHSCL

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