CHS Inc.
Annual Report 2018

Plain-text annual report

Focused In the nearly 90 years of our cooperative’s history, we have seen many ups and downs. The cyclical nature of our agricultural and energy businesses has trained us to prepare for good times and difficult times. And we have become incredibly skilled at managing those highs and lows in every part of the supply chain, from the farm field to the consumer’s table. But we wouldn’t be able to succeed or even survive those cycles without focus — focus on the big picture and on our long-term goal: serving those who produce food for the world. Fiscal 2018 was a challenging year on many levels, but we remained focused on our priorities. That single-minded focus helped us complete the year with significant results in many of our energy, grains and foods businesses. We’re proud of what we were able to accomplish as a system and as a company, despite demanding market conditions. One year ago, we described our fiscal 2018 priorities, which were to strengthen relationships with owners and employees, sharpen our operational excellence, and restore financial flexibility. Through the hard work of leaders and employees of CHS, our goals within those priorities have been met and exceeded. And they have laid the foundation for our 2019 priorities: • Enhance the owner experience through deeper relationships, seamless interactions with CHS at every level and more effective technology solutions From left, Debertin and Schurr We take that task seriously. We understand it will require better access to data, stronger connections between businesses, more effective understanding of owner needs and a streamlined approach to doing business with our complex system. And becoming the first choice for our owners and customers in every core business will require continuing to build deep relationships that benefit everyone. That focus on collaboration and mutually beneficial results is what cooperatives do best. Our success depends on the success of our owners. We are committed to delivering value to our owners — local cooperatives and producers — at every step. That value will come through providing creative solutions and local expertise, making global connections, and identifying practical approaches that give owners the advantages they need to reach their goals. We are • Equip our employees by enhancing their expertise, focused on their success. preparing them to serve CHS owners amid change and encouraging new perspectives • Drive enterprise business growth by focusing on our core businesses, continuing to improve efficiency and increasing market share The bottom line is a focus on our owners’ needs and on doing what we do well — but doing it even better. There is no shortage of companies striving to provide inputs and marketing services for American farmers. And as razor-thin margins continue to put pressure on farm income and force increasingly difficult decisions on farms and at local cooperatives, we know we will need to earn our owners’ business every day. Dan Schurr Chairman, Board of Directors Jay Debertin President and Chief Executive Officer 1 CHS 2018 Year in Review CHS refineries celebrated 75 years of serving cooperative owners and rural America in 2018. Together, the refineries in McPherson, Kan., and Laurel, Mont., process more than 160,000 barrels of crude oil per day, producing premium diesel fuel, gasoline, propane and other value-added energy products. 39 retail stores were converted to the Cenex® brand in fiscal 2018, representing an additional 31.6 million gallons of refined fuels volume. The sale of 33 former Cenex Zip Trip® stores was successfully completed in the second quarter, with collaboration between CHS Energy, finance, enterprise strategy and information technology teams enabling a smooth transition. Despite continued decline in agriculture fuel demand, CHS Refined Fuels sold more than 3 billion gallons of Cenex branded products, including more than 864 million gallons of premium diesel fuel. Cenex® Automated Fuel Delivery system drivers covered 3.5 million miles Achieving significant logistical savings, CHS Lubricants transitioned to total use of one-way drums for all Cenex brand lubricant products in 2018. This change helped alleviate concerns over the rising cost of steel, integrity of aging drums and inconsistent returns. The Cenex Total Protection Plan® warranty program, an industry-leading program for users of Cenex lubricants and premium diesel fuels for more than five decades, continued to expand as more owners recognized the value of regular used-oil analyses and coverage for both new and used equipment. The challenging 2017 harvest season triggered strong demand for propane throughout corn-production areas of the Midwestern U.S. CHS Transportation and CHS Propane met the demand with a 40 percent increase in propane loads in that quarter compared with the previous year. The Cenex Automated Fuel Delivery system provided 132 million gallons of refined fuels to farms, ranches, cooperatives and other businesses in 13 states. The results underscore continued interest in this innovative technology-based fuel delivery program. 2 CHS 2018More than 12,000 propane deliveries were made by CHS Transportation in fall 2017 A behavior-based safety observation program helped reinforce safe behavior and identify areas for improvement based on more than 700 recorded observations of daily activity within CHS Transportation, which continued its ranking in the top tier of U.S. fleets for safety. Trusted Payback® and Equis® feed brands from CHS Animal Nutrition completed the year with solid financial performance based on strong sales volume. With emphasis on serving beef and dairy producers, the business provides value- added livestock risk management tools, custom feed formulations informed by herd-specific nutritional consulting and livestock leasing options. CHS Global Grain Marketing continued to add value for owners with an increased volume of container shipments to the Asia Pacific region and building market share advantages for wheat sold to customers in North Africa and corn for southeast Asia customers. Enhanced collaboration between CHS businesses in grain marketing, agronomy, processing and local retail supply improved efficiency across the enterprise and allowed more effective use of assets, especially in the western Corn Belt. CHS markets grains and oilseeds to more than 65 countries In July 2018, tariffs on many U.S. commodities, including soybeans, corn and wheat, posed significant grain movement and logistics challenges for the grain marketing team and cooperatives throughout the system. Loss of shipments to China required CHS traders to search for other buyers, while local cooperatives and terminals prepared for anticipated grain storage concerns and uncertain markets for the 2018 harvest. 3 CHS 2018The XLR-rate® line of premium starter fertilizers from CHS Agronomy continued to gain traction with record volumes sold in fiscal 2018, even while volatile weather and cold, wet spring conditions made crop nutrient applications difficult in many regions. CHS introduced Agellum™, a digital farm planning and management platform that helps owners activate their data to generate full-farm agronomic and economic insights. The Allegiant® seed brand experienced significant growth, covering more corn and soybean acres and adding sunflowers to the portfolio. Agellum and Allegiant are available through CHS Country Operations retail locations. Executing on the promise at the close of fiscal 2017 to focus on core businesses and enhance financial flexibility, CHS completed sale of soy protein processing facilities in South Sioux City, Neb.; Hutchinson, Kan.; and Creston, Iowa. Strong performances at the company’s soy crushing facilities in Mankato and Fairmont, Minn., and canola processing facility in Hallock, Minn., continued to deliver excellent returns to cooperative owners through added-value production and increased demand for high-quality oils and other soy and canola food ingredients and livestock feed products. 4 More than 3 million gallons of liquid starter fertilizer boosted crop growth CHS Hedging completed fiscal 2018 with the second highest volume of any year in the group’s history. The business continued to focus on strengthening relationships with customers through expert advice and technical support, adding capabilities and placing brokers in strategic locations throughout the U.S. to match the needs of agriculture and energy risk management. CHS investment in nitrogen production continued with CF Nitrogen, differentiating CHS as an integrated supplier in the increasingly consolidated fertilizer industry that experienced tighter margins, increased costs and changed asset valuations in fiscal 2018. Multiple CF Nitrogen production sites, including a key facility in Port Neal, Iowa, helped CHS Agronomy provide owners with a consistent, competitively priced supply of nitrogen fertilizers to help crops reach their genetic potential for yield. CHS 2018More than 2 billion pounds of soybean and canola oil were refined Ventura Foods, LLC, a joint venture between CHS and Mitsui & Co., Ltd., is a leading producer of oils, dressings, sauces, mayonnaises and margarines for foodservice and retail customers in more than 60 countries. In fiscal 2018, with joint-venture partner Ram Reddy, Ventura Foods further established Flavor Reddy Foods as a key supplier of products in the U.S., servicing one of the world’s largest quick-service restaurant chains. The relationship supported ongoing efforts to diversify the company’s customer base and increase demand for oil-based food products. Ardent Mills, LLC, a CHS joint venture with Cargill and Conagra, is making connections across the supply chain to propel growth with food companies serving consumers interested in heritage and ancient grains, in addition to processing 260 million bushels of wheat originated through the CHS system. These efforts were supported by The Annex by Ardent Mills, a business unit focused on ingredient-based marketing, including branded quinoa. 5 8,000+ young people learned about safety practices for farm and home CHS Processing and Food Ingredients completed its first full year of processing Plenish high-oleic soybeans in collaboration with the Pioneer seed brand. With the ability to produce oil with no trans fats from these identity-preserved soybeans, the program added value for growers and helped meet consumer demand for healthier oils used in food products and food preparation. CHS Sunflower was incorporated into the CHS Processing and Food Ingredients business in fiscal 2018, which will support standardization of processing best practices across the enterprise. New trade advertising launched in 2018 will help increase awareness of CHS Sunflower as a global leader in confectionary sunflower products, serving bakery, snack and processed foods customers. CHS 2018Establishment of a center of excellence around environment, health and safety in 2018 reinforced a continuing companywide commitment to the safety of CHS employees and customers and the environment. With best practices and more efficient, consistent and transparent processes in place, CHS will continue to enhance its culture of safety. The Enterprise Risk Management team led conversations on key risks across the enterprise, focusing on critical impacts to people, financial health, corporate reputation and adherence to legal and compliance requirements. This work has increased understanding of risk at all levels and established principles regarding what are acceptable risks and appropriate actions to manage risk. CHS Government Affairs advocated for farmer-owners and the cooperative system at the federal level and in key states. Issues included expanded international market access, the 2018 Farm Bill, renewable fuel and transportation infrastructure, tax and regulatory reform, and state rulemaking and project permitting. CHS Seeds for Stewardship has awarded more than 100 grants By the close of fiscal 2018, more than 100 rural communities had benefitted from matching grants awarded by the CHS Seeds for Stewardship program. More than 600 students learned safety skills at Progressive Ag Safety Days hosted by five CHS Country Operations locations. The CHS Foundation continued to promote agricultural and cooperative education through scholarships, support of youth organizations and programs for agricultural educators. CHS Cooperative Resources led strategic planning sessions with more than 50 local cooperatives and helped several cooperatives identify and place key management personnel. The CHS Cooperative Leadership Academy provided individual and group learning opportunities for more than 200 current and emerging leaders within the cooperative system. 6 CHS 2018Fiscal 2018 Financial Highlights Owner Return on Equity (percent) Net Sales ($ in billions) 20 20 15 10 5 0 40 30 20 10 0 2014 (restated) 2015 (restated) 2016 (restated) 2017 (restated) 2018 2014 (restated) 2015 (restated) 2016 (restated) 2017 (restated) 2018 Cash Return ($ in millions) Net Income ($ in millions) 600 400 200 0 1250 1000 750 500 250 0 2014 2015 2016 2017 2018 2014 (restated) 2015 (restated) 2016 (restated) 2017 (restated) 2018 Cash patronage Equity redemption (paid in the form of cash or preferred stock) Preferred stock dividends 7 CHS 2018Fiscal 2018 Financial Highlights Overall results in all CHS segments improved significantly in fiscal 2018 over fiscal 2017, led by improved margins and results in refined fuels. Company businesses serving the agriculture industry faced continuation of historically low commodity prices plus demand pressure amid uncertainty related to international trade. Sales of assets contributed to strong income gains over the previous year. CHS net income of $775.9 million for fiscal 2018 (Sept. 1, 2017, through Aug. 31, 2018) increased significantly from net income of $71.6 million in fiscal 2017 (Sept. 1, 2016, through Aug. 31, 2017). Consolidated revenues totaled $32.7 billion for fiscal 2018, an increase of $646 million from consolidated revenues for fiscal 2017. Pretax income of $671.2 million in fiscal 2018 signified an increase of $781 million over fiscal 2017. Energy In Energy, year-over-year income before income taxes increased by $391.0 million to $452.1 million, primarily due to improved market conditions in the refined fuels business due to higher refinery margins and favorable crude oil discounts, which drove higher pretax earnings. These benefits were partially offset by planned maintenance activities at the company’s Laurel, Mont., refinery. Sale of the Council Bluffs pipeline and terminal and 34 Cenex Zip Trip® stores located in the Pacific Northwest contributed gains of $65.9 million. Propane revenues increased in fiscal 2018 as a result of an increase in the net average selling price and slightly higher volumes. The year-over-year increase in income for the Energy segment also reflected an impairment charge of $32.7 million that was recorded in fiscal 2017 related to cancellation of a capital project and did not recur in fiscal 2018. Ag The CHS Ag segment recorded income before income taxes in fiscal 2018 of $74.3 million versus a loss of $270.1 million in fiscal 2017. The segment includes domestic and global grain marketing, wholesale crop nutrients, renewable fuels, local retail operations, and processing and food ingredients. Lower demand and uncertainties primarily associated with international trade resulted in decreased margins across multiple businesses, led by global grain marketing. These challenges were partially offset by increased margins within the company’s processing and food ingredients business. The increased income for fiscal 2018 reflects significant reserve and impairment charges that were recorded in fiscal 2017 but did not recur in fiscal 2018. The most significant of those charges related to bankruptcy- like proceedings of a Brazilian trading partner. Impairments of $26.3 million related to international investments that CHS has exited or is in the process of exiting were also recorded in fiscal 2018. Additional Segments The CHS Nitrogen Production segment includes the company’s investment in CF Industries Nitrogen, LLC (CF Nitrogen) and generated $38.8 million in income before taxes in fiscal 2018, an increase of $9.0 million over results in fiscal 2017. The increase was largely due to higher pretax income attributed to increased sale prices of urea and UAN, crop nutrients products that are produced and sold by CF Nitrogen. A gain of $30.5 million was recorded in fiscal 2017 and was associated with an embedded derivative asset inherent in the agreement relating to the company’s investment in CF Nitrogen. The gain was solely responsible for Nitrogen Production income in fiscal 2017; there was no comparable gain in fiscal 2018. The Corporate and Other category recorded pretax income of $106.0 million, an increase from $69.1 million in pretax income recorded in fiscal 2017. The category primarily includes the company’s investment in food ingredient and wheat milling joint ventures and CHS Capital. The company’s insurance arm, CHS Insurance, was sold in fiscal 2018 and resulted in a gain of $58.2 million. The gain was offset by lower earnings from CHS investments in Ventura Foods, LLC, Ardent Mills, LLC, and CHS Capital. Other Factors Improved consolidated results over fiscal 2017 were also partially due to sales of assets that resulted in cash proceeds of approximately $234.9 million and a pretax gain of approximately $131.8 million. The cash proceeds were used to optimize debt levels, which helped enhance overall financial flexibility. In addition, CHS realized a tax benefit through revaluation of the company’s U.S. net deferred tax liability as a result of the Tax Cuts and Jobs Act enacted in 2017. In October, CHS filed a Form 8-K with the Securities and Exchange Commission (SEC) announcing that it would restate its audited consolidated financial results for fiscal years 2017, 2016 and 2015 and its unaudited consolidated financial results for the first three quarters of 2018 and 2017. The restatement was necessary to correct material misstatements related to valuation and accounting for certain rail freight contracts. The misstatements were discovered in an investigation the company conducted through external counsel and under the oversight of the Audit Committee of its Board of Directors. Appropriate personnel actions were taken, based on the investigation’s findings. All overstated non-cash values have been written off and appropriately reflected in the restated CHS financial results. CHS is taking actions to make prompt and sustained improvements in the company’s internal controls. Additional information can be found in the Form 10-K filed with the SEC. 8 CHS 20181DEC201817451453 AUGUST 31 (DOLLARS IN THOUSANDS) ASSETS Current assets: 2018 (AS RESTATED) 2017 Cash and cash equivalents $ 450,617 $ 181,379 Receivables Inventories Derivative assets Margin and related 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 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 15) Equities: Preferred stock Equity certificates Accumulated other comprehensive loss Capital reserves Total CHS Inc. equities Noncontrolling interests Total equities Total liabilities and equities 2,460,401 2,768,649 329,757 151,150 288,423 244,208 6,693,205 3,711,925 5,141,719 834,329 1,892,168 2,601,604 218,742 206,062 249,234 281,925 5,631,114 3,750,993 5,356,434 1,080,381 $ 16,381,178 $ 15,818,922 $ 2,272,196 $ 1,985,163 167,565 137,395 409,088 1,844,489 438,465 511,032 153,941 5,934,171 1,762,690 182,770 336,519 2,264,038 4,609,456 (199,915) 1,482,003 8,155,582 9,446 8,165,028 156,345 157,914 423,770 1,991,294 300,946 454,996 12,121 5,482,549 2,023,448 329,980 277,305 2,264,038 4,341,649 (180,360) 1,267,808 7,693,135 12,505 7,705,640 $ 16,381,178 $ 15,818,922 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 2 2 CHS 2018 9 CHS 2018CONSOLIDATED FINANCIAL STATEMENTS 1DEC201817452063 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) 2018 (AS RESTATED) 2017 (AS RESTATED) 2016 Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests $ 32,683,347 $ 32,037,426 $ 30,355,260 31,589,887 1,093,460 674,083 (37,709) 457,086 (131,816) 149,202 (78,015) (153,515) 671,230 (104,076) 775,306 (601) 31,142,766 29,386,515 894,660 612,007 456,679 (174,026) 2,190 171,239 (99,951) (137,338) (110,166) (181,124) 70,958 (634) 968,745 601,266 75,036 292,443 — 113,704 (47,609) (175,777) 402,125 19,099 383,026 (223) Net income (loss) attributable to CHS Inc. $ 775,907 $ 71,592 $ 383,249 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 1DEC201817451820 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) 2018 (AS RESTATED) 2017 (AS RESTATED) 2016 Net income (loss) $ 775,306 $ 70,958 $ 383,026 Other comprehensive income (loss), net of tax: Postretirement benefit plan activity Unrealized net gain (loss) on available for sale investments Cash flow hedges Foreign currency translation adjustment Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to noncontrolling interests 20,066 (3,148) 2,540 (12,021) 7,437 782,743 (601) 32,702 4,385 2,242 (8,159) 31,170 102,128 (634) 6,583 1,500 (3,872) (2,904) 1,307 384,333 (223) Comprehensive income attributable to CHS Inc. $ 783,344 $ 102,762 $ 384,556 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 3 CHS 2018 3 10 CHS 2018(DOLLARS IN THOUSANDS) 1DEC201817451697 FOR THE YEARS ENDED AUGUST 31, 2018, 2017, AND 2016 EQUITY CERTIFICATES CAPITAL EQUITY CERTIFICATES NONPATRONAGE EQUITY CERTIFICATES NONQUALIFIED EQUITY CERTIFICATES BALANCES, AUGUST 31, 2015 (AS PREVIOUSLY REPORTED) $ 3,793,897 $ 23,057 $ 282,928 Cumulative restatement adjustments Balances, August 31, 2015 (As Restated) Reversal of prior year patronage and redemption estimates Distribution of 2015 patronage refunds Redemptions of equities Equities issued Capital equity certificates exchanged for preferred stock Preferred stock dividends Other, net Net income (loss) Other comprehensive income (loss), net of tax Estimated 2016 patronage refunds Estimated 2016 equity redemptions BALANCES, AUGUST 31, 2016 (AS RESTATED) Reversal of prior year patronage and redemption estimates Distribution of 2016 patronage refunds Redemptions of equities Equities issued Capital equity certificates redeemed with preferred stock Preferred stock dividends Other, net Net income (loss) Other comprehensive income (loss), net of tax Estimated 2017 patronage refunds Estimated 2017 equity redemptions BALANCES, AUGUST 31, 2017 (AS RESTATED) Reversal of prior year patronage and redemption estimates Distribution of 2017 patronage refunds Redemptions of equities Preferred stock dividends Other, net Net income (loss) Other comprehensive income (loss), net of tax Reclassification of tax effects to retained earnings Estimated 2018 patronage refunds Estimated 2018 equity redemptions 3,793,897 (268,017) 375,506 (22,948) 23,258 (76,756) 23,057 282,928 (143) (820) (1,248) (20) (341) 153,579 (58,560) 3,918,711 (95,019) 153,589 (35,041) 3,194 (19,985) 22,894 281,767 (389) (1,960) (9,023) 7,331 (753) (10,000) 3,906,426 6,058 (6,064) (3,840) (65,000) 29,836 (185) (153) 126,333 405,387 (126,333) 128,831 (476) (361) 345,330 (10,000) BALANCES, AUGUST 31, 2018 $ 3,837,580 $ 29,498 $ 742,378 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 4 CHS 2018 11 4 CHS 2018CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED AUGUST 31, 2018, 2017, AND 2016 PREFERRED STOCK ACCUMULATED OTHER COMPREHENSIVE LOSS CAPITAL RESERVES NONCONTROLLING INTERESTS TOTAL EQUITIES $ 2,167,540 $ (214,207) $ 1,604,670 $ 11,526 $ 7,669,411 2,167,540 1,370 (212,837) 76,756 (164) 1,307 2,244,132 (211,530) 19,960 (54) 31,170 2,264,038 (180,360) 7,437 (26,992) (119,237) 1,485,433 625,444 (627,246) (122,824) 2,401 383,249 (257,458) 1,488,999 257,458 (257,468) 25 (167,643) 1,178 71,592 (126,333) 1,267,808 126,333 (128,831) (168,668) 2,792 775,907 26,992 (420,330) (105) 11,421 (117,972) $ 7,551,439 357,427 (251,740) (23,911) 23,258 — (122,824) 3,616 383,026 1,307 (103,879) (58,560) 7,759,159 162,439 (103,879) (37,390) 3,194 — (167,643) (2,368) 70,958 31,170 — (10,000) 2,988 (223) 14,186 (1,047) (634) 12,505 7,705,640 (2,458) (601) 6,058 — (6,725) (168,668) (4,020) 775,306 7,437 — (75,000) (75,000) $ 2,264,038 $ (199,915) $ 1,482,003 $ 9,446 $ 8,165,028 5 CHS 2018 5 12 CHS 20181DEC201817451578 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) Cash flows from operating activities: 2018 (AS RESTATED) 2017 (AS RESTATED) 2016 Net income (loss) $ 775,306 $ 70,958 $ 383,026 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Amortization of deferred major repair costs Equity (income) loss from investments Distributions from equity investments Provision for doubtful accounts (Gain) loss on disposal of business Unrealized (gain) loss on crack spread contingent liability Long-lived asset impairment, net of recoveries Reserve against supplier advance payments Deferred taxes Other, net Changes in operating assets and liabilities, net of acquisitions: Receivables Inventories Derivative assets Margin and related deposits Supplier advance payments Other current assets and other 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 disposition of property, plant and equipment Proceeds from sale of business Expenditures for major repairs Investments in joint ventures and other Changes in CHS Capital notes receivable, net Financing extended to customers Payments from customer financing Other investing activities, net Net cash provided by (used in) investing activities Cash flows from financing activities: 478,050 61,686 (153,515) 190,297 2,085 (131,816) — (10,352) — (146,961) 6,653 210,775 (169,581) (102,368) 54,912 (39,189) (13,450) (20,518) (14,682) (78,388) 132,495 40,629 1,072,068 (355,412) 91,153 234,914 (80,514) (21,679) 25,335 (74,402) 52,453 48,628 (79,524) 480,223 67,058 (137,338) 213,352 177,969 2,190 (15,051) 145,042 130,705 (194,467) 20,173 146,788 (333,479) 114,023 97,804 (33,952) (50,729) (50,920) (1,329) 227,967 (132,423) (25,446) 919,118 (444,397) 19,541 — (2,340) (16,645) 322 (67,225) 88,154 17,549 (405,041) 447,492 73,483 (175,777) 178,464 57,200 — (60,931) 27,247 — 28,190 (15,444) 1,570 353,572 29,822 (30,705) 43,415 128,603 20,841 (7,079) (129,587) 1,443 (94,291) 1,260,554 (692,780) 13,417 — (19,610) (2,855,218) (209,902) (82,302) 35,188 64,236 (3,746,971) Proceeds from lines of credit and long-term borrowings 36,040,240 Payments on lines of credit, long-term borrowings and capital lease obligations (36,525,136) 37,295,236 (37,584,011) 31,586,968 (29,232,842) Mandatorily redeemable noncontrolling interest payments 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 — (168,668) (8,847) — (69,759) (732,170) 8,864 269,238 181,379 450,617 $ $ — (167,642) (35,268) (103,879) (22,694) (618,258) (4,713) (108,894) 290,273 181,379 (153,022) (163,324) (23,911) (251,740) 52,067 1,814,196 (5,223) (677,444) 967,717 290,273 $ The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 6 CHS 2018 13 6 CHS 20181DEC201817273326 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Organization, Basis of Presentation and Significant Accounting Policies Organization CHS Inc. (‘‘CHS’’, ‘‘the Company’’, ‘‘we’’, ‘‘us’’, ‘‘our’’) is the nation’s leading integrated agricultural cooperative. As a cooperative, 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 10, Equities for more detailed information. We buy commodities from and provide products and services to individual agricultural producers, local coop- eratives and other companies (including member and other non-member customers), both domestic and international. Those products and services include initial agricultural 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 wholly-owned and majority- owned subsidiaries and limited liability companies. The effects of all significant intercompany transactions have been eliminated. As described in Note 2, Restatement of Previously Issued Consolidated Financial Statements the consoli- dated financial statements for the years ended August 31, 2017 and 2016, have been restated to reflect the correction of misstatements to the consolidated financial statements. We have also restated all amounts impacted within the Notes to the consolidated financial statements. Over the course of fiscal 2017, we incurred charges related to a trading partner of ours in Brazil, which entered into bankruptcy-like proceedings under Bra- zilian law; intangible and fixed asset impairment charges associated with certain assets meeting the criteria to be classified as held for sale; fixed asset impairment charges due to the cancellation of a capital project at one of our refineries; and bad debt/loan loss reserve charges relating to a single large producer borrower. Charges and impairments of this nature, as well as any recoveries related to amounts previously reserved, are included in the Consolidated Statements of Operations in the line item, ‘‘reserve and impairment charges (recoveries), net’’ for the twelve months ended August 31, 2018, 2017, and 2016. The timing and amounts of these charges and impairments, and any recoveries were determined utilizing facts and circumstances that were present in the respective years in which the charges, impairments or recoveries were recorded. See additional information related to the reserves and impairment charges in Note 3, Receivables, Note 6, Property, Plant and Equipment, and Note 7, Other Assets. The notes to our consolidated financial statements refer to our Energy, Ag and Nitrogen Production reportable segments, as well as our Corporate and Other category, which represents an aggregation of individually imma- terial operating segments. The Nitrogen Production reportable segment resulted from our investment in CF Industries Nitrogen, LLC (‘‘CF Nitrogen’’) in February 2016. Our investment in Ventura Foods, LLC (‘‘Ventura Foods’’) is no longer a significant operating segment and is now included in our Corporate and Other cate- gory. See Note 12, Segment Reporting for more information. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make esti- mates and assumptions that affect the reported amounts of assets and liabilities and disclosure of con- tingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our esti- mates on assumptions that are believed to be reason- able, the results of which form the basis for making judgments about the carrying values of assets and liabil- ities. Due to the inherent uncertainty involved in making estimates, actual results could differ from those esti- mates. We evaluate our estimates and assumptions on an ongoing basis. Cash and Cash Equivalents Cash equivalents include short-term, highly liquid investments with original maturities of three months or 7 CHS 2018 7 14 CHS 2018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 less at the date of acquisition. The fair value of cash and cash equivalents approximates the carrying value due to the short-term nature of the instruments. Instruments and Hedging Activities and Note 14, Fair Value Measurements for additional information. Inventories Grain, processed grain, oilseed, processed oilseed and other minimally processed soy-based inventories are stated at net realizable value. These inventories are agri- cultural commodity inventories that are readily convert- ible to cash because of their commodity characteristics, widely available markets and international pricing mechanisms. Agricultural commodity inventories have 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 net realizable value. 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 inventories purchased for resale include the cost of products and freight incurred to place the prod- ucts at our points of sale. The costs of certain energy inventories (wholesale refined products, crude oil and asphalt) are determined on the last-in, first-out (‘‘LIFO’’) method; all other inventories of non-grain products pur- chased 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 to a lesser degree, foreign currency exchange rates and interest rates. Except for 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 Accounting Standards Codification (‘‘ASC’’) Topic 815, Derivatives and Hedging, is not applied. Rather, the derivative instruments are recorded on our Consoli- dated Balance Sheets at fair value with changes in fair value being recorded directly to earnings, primarily within cost of goods sold in our Consolidated State- ments of Operations. See Note 13, Derivative Financial 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 and Related 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, to comply with applicable regulations. Our margin and related 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 deriva- tive financial instruments, margin and related deposits are also reported on a gross basis. Supplier Advance Payments and Rebates Supplier advance payments are typically for periods less than 12 months and primarily include amounts paid for grain purchases from suppliers and amounts paid to crop nutrient suppliers to lock in future supply and pricing. We receive volume-based rebates from certain vendors during the year. These vendor rebates are accounted for in accordance with ASC 605, Revenue Recognition, based on the terms of the volume rebate program. For those rebates which meet the definition of a binding arrangement and are both probable and estimable, we estimate the amount of the rebate we will receive and accrue it as a reduction of the cost of inventory over the period in which the rebate is earned. 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 8 8 CHS 2018 15 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS with the entity. Our equity in the income or loss of these equity method investments is recorded within equity (income) loss from investments in the Consolidated Statements of Operations. We account for our invest- ment in CF Nitrogen, LLC using the hypothetical liquida- tion at book value method which is discussed further in Note 5, Investments. 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. 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 on the expected useful lives of individual or groups of assets (generally 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 equipment and other). Expenditures for maintenance and minor repairs and renewals are expensed, while the costs for major maintenance activities are capitalized and amortized on a straight-line basis over the period estimated to lapse until the next major maintenance activity occurs. We also capitalize and amortize eligible costs to acquire or develop internal-use software that are incurred during the application development stage. When assets are sold or otherwise disposed of, the cost and related accu- mulated 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 at the amount by which the carrying 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 if they are properly maintained and/or upgraded. It is our practice and current intent to maintain refineries and related assets and to continue making improvements to those assets based on techno- logical 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 esti- mated at this time. When a date or range of dates can reasonably be estimated for the retirement of any com- ponent part of a refinery or other asset, we estimate the cost of performing the retirement activities and record a liability for the fair value of that future cost. We have other assets that we may be obligated to 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 9 CHS 2018 9 16 CHS 2018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 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 in our Consolidated Statements of goods sold Operations. The selection of the deferral method, as opposed to expensing the turnaround costs when incurred, results in deferring recognition of the turnaround expenditures. The deferral method also results in the classification of the related cash outflows as investing activities in our Consolidated Statements of Cash Flows, whereas expensing these costs as incurred would result in 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 July 31, or more frequently if triggering events or other circum- stances occur which could indicate impairment. Good- will is tested for impairment at the reporting unit level, which has been determined to be our operating seg- ments 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 7, Other Assets for more information on goodwill and other intangible assets. Revenue Recognition We provide a wide variety of products and services, ranging from agricultural inputs such as fuels, farm sup- plies and crop nutrients, to agricultural outputs that include grain and oilseed, processed grains and oilseeds and food products, and ethanol production and mar- keting. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Sales are generally 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 within our tax return period. We are subject to tax on income from nonpatronage sources, non-qualified patronage distri- butions and undistributed patronage-sourced income. Income tax expense is primarily the current tax payable for the period and the change during the period in cer- tain deferred tax assets and liabilities. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recog- nized 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. Valuation allowances are established, when necessary, to reduce 10 10 CHS 2018 17 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS deferred tax assets to the amount expected to be real- ized. Reserves are recorded against unrecognized tax benefits when we believe that certain fully supportable tax return positions are likely to be challenged and that we may or may not prevail. If we determine that a tax position is more likely than not to be sustained upon audit, based on the technical merits of the position, we recognize the benefit by measuring the amount that is greater than 50% likely of being realized. We reevaluate the technical merits of our tax positions and recognize an uncertain tax benefit, or derecognize a previously recorded tax benefit, when there is (i) a completion of a tax audit, (ii) effective settlement of an issue, (iii) a change in applicable tax law including a tax case or legislative guidance, or (iv) the expiration of the appli- cable statute of limitations. Significant judgment is required in accounting for tax reserves. (‘‘ASU’’) No. 2018-05, Recent Accounting Pronouncements Adopted In March 2018, the Financial Accounting Standards Board (the ‘‘FASB’’) issued Accounting Standards Income Taxes Update (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU pro- vides guidance on the income tax accounting implica- tions of the Tax Cuts and Jobs Act of 2017 (the ‘‘Tax Act’’) and allows for entities to report provisional amounts for specific income tax effects of the Tax Act for which the accounting under ASC Topic 740 was not yet complete, but a reasonable estimate could be deter- mined. A measurement period of one year is available to complete the accounting effects under ASC Topic 740 and revise any previous estimates reported. Any provi- sional amounts or subsequent adjustments included in an entity’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense in the reporting period the amounts are determined. As of August 31, 2018, we have not finalized our work associ- ated with the income tax effects of the enactment of the Tax Act, however, a reasonable estimate was provision- ally recorded as a net benefit of $155.2 million from the revaluation of our U.S. net deferred tax liability that resulted from the reduced corporate tax rate and CHS being subject to the employee compensation deduction limitations Internal Revenue Code Section 162(m). imposed by The income. amendments In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accu- mulated other comprehensive income are adjusted, cer- tain tax effects become stranded in accumulated other in comprehensive ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The amendments in this ASU also require certain disclosures about stranded tax effects. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. Early adoption in any period is permitted. The Company’s provisional adjustments recorded to account for the impact of the Tax Act resulted in stranded tax effects. We elected to early adopt ASU No. 2018-02 during the fourth quarter of fiscal 2018. The adoption resulted in a reclassification from accumulated other comprehensive income to retained earnings in the amount of $27.0 mil- lion for stranded tax effects resulting from the Tax Act. In August 2017, the FASB issued ASU No. 2017-12, Deriv- atives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU is intended to improve the financial reporting of hedging relationships to better represent the economic results of an entity’s risk management activities in its financial statements and make certain improvements to simplify the application of the hedge accounting guidance. The amendments in this ASU will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amend the presentation and disclosure requirements and change how entities assess effective- ness. Entities are required to apply this ASU’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. We elected to early adopt ASU No. 2017-12 during the fourth quarter of fiscal 2018. The adoption did not have a mate- rial impact on our consolidated financial statements. 11 CHS 2018 11 18 CHS 2018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 In October 2016, the FASB issued ASU No. 2016-16, Income Taxes—Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This ASU is intended to improve the accounting for the income tax conse- quences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. This ASU is effective for periods beginning after December 15, 2017; however, early adoption of this ASU is permitted during the first interim period if an entity issues interim financial statements. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earn- ings as of the beginning of the period of adoption. We elected to early adopt ASU No. 2016-16 during the first quarter of fiscal 2018. The adoption did not have a mate- rial impact on our consolidated financial statements. Not Yet Adopted In August 2018, the FASB issued ASU No. 2018-14, Dis- closure Framework—Changes to the Disclosure Require- ments for Defined Benefit Plans, which amends ASC 715-20, Compensation—Retirement Benefits—Defined Benefit Plans—General. This ASU modifies the disclo- sure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year and (b) the effects of a one-percentage-point change in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for postretirement health care benefits. The new disclo- sures include the interest crediting rates for cash bal- ance plans and an explanation of significant gains and losses related to changes in benefit obligations. This ASU is effective for us beginning September 1, 2021, for our fiscal year 2022 and for interim periods within that fiscal year, with early adoption permitted. The adoption of this amended guidance in not expected to have a material financial impact on our consolidated statements. In August 2018, the FASB issued ASU No. 2018-13, Dis- closure Framework—Changes to the Disclosure Require- ments for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. This ASU modifies the dis- closure requirements for fair value measurements by removing, modifying and adding certain disclosures. Specifically, the guidance removes the requirement to disclose the amount and reasons for any transfers between Level 1 and Level 2 of the fair value hierarchy and removes the requirement to disclose a description of the valuation processes used to value Level 3 fair value measurements. The guidance also requires addi- tional disclosures surrounding Level 3 changes in unrealized gains/losses included in other comprehen- sive income as well the range and weighted average significant unobservable inputs calculation. This ASU is effective for us beginning September 1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. Early adoption is permitted. We elected to remove the disclosures permitted by ASU No. 2018-13 during the fourth quarter of fiscal 2018 but have not early adopted the new required additional disclosures, which is per- mitted by the guidance. The adoption of this amended guidance is not expected to have a material impact on our consolidated financial statements. In March 2017, the FASB issued ASU No. 2017-07, Com- pensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Postretirement Benefit Cost. This ASU changes the presentation of net periodic pension cost and net peri- odic postretirement benefit cost in the Consolidated Statements of Operations. This ASU provides that the service cost component should be included in the same income statement line item as other compensation costs arising from services rendered by the employees during the period. The other components of net peri- odic benefit cost should be presented in the Consoli- dated Statements of Operations separately outside of operating income if that subtotal is presented. Addition- ally, only service cost may be capitalized in assets. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted as of the begin- ning of an annual period for which interim financial statements have not been issued or made available for issuance. The guidance on the presentation of the com- ponents of net periodic benefit cost in the Consolidated Statement of Operations should be applied retrospec- tively and the guidance regarding the capitalization of the service cost component in assets should be applied prospectively. The adoption of this amended guidance is not expected to have a material impact on our consoli- dated financial statements. 12 CHS 2018 19 12 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2017, the FASB issued ASU No. 2017-01, Busi- ness Combinations (Topic 805): Clarifying the Definition of a Business. The amendments within this ASU narrow the existing definition of a business and provide a more robust framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The definition of a business impacts various areas of accounting, including acquisi- tions, disposals and goodwill. Under the new guidance, fewer acquisitions are expected to be considered busi- nesses. This ASU is effective for us beginning Sep- tember 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is per- mitted, and the guidance should be applied prospec- tively to transactions following the adoption date. The adoption of this amended guidance is not expected to have a material impact on our consolidated financial statements. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU is intended to reduce diversity in practice by adding or clarifying guidance on classification and pres- entation of changes in restricted cash on the Consoli- dated Statements of Cash Flows. This ASU is effective for us beginning September 1, 2018, for our fiscal year 2019 and for interim periods within that fiscal year. Early adoption is permitted, including in an interim period. The amendments in this ASU should be applied retro- spectively to all periods presented. The adoption of this amended guidance is not expected to have a material impact on our Consolidated Statements of Cash Flows. 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 Consolidated Statements 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. The adoption of this amended guidance is not expected to have a material impact on our Consoli- dated Statements of Cash Flows. 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 introduce a new approach, based on expected losses, to estimate credit losses on certain investments types of financial instruments. This ASU is intended to provide financial statement users with more decision- useful information about the expected credit losses associated with most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net leases, and off-balance-sheet credit exposures. Entities are required to apply this ASU’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning Sep- tember 1, 2020, for our fiscal year 2021 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 In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which replaces the existing gui- dance in ASC 840—Leases. The amendments within this ASU, as well as within additional clarifying ASUs issued by the FASB, introduce a lessee model requiring entities to recognize assets and liabilities for most leases, but continue recognizing the associated expenses in a manner similar to existing accounting guidance. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends ASU No. 2016-02, Leases. This ASU is effective for us begin- ning September 1, 2019, for our fiscal year 2020 and for interim periods within that fiscal year. We have initiated our assessment of the new lease standard, including the utilization of surveys to gather more information about existing leases and the implementation of a new lease software to improve the collection, maintenance, and aggregation of lease data necessary for the expanded reporting and disclosure requirements under the new lease standard. It is expected that the primary impact upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancel- able operating leases as right of use assets and liabilities on our Consolidated Balance Sheets. This will result in a significant increase in assets and liabilities recorded on our Consolidated Balance Sheets. Although we expect the new lease guidance to have a material impact on our Consolidated Balance Sheets, we are continuing to eval- uate the practical expedient guidance provisions avail- able and the extent of potential impacts on our consolidated financial statements, processes, and internal controls. 13 CHS 2018 13 20 CHS 2018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 In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The amendments within this ASU, as well as within additional clarifying ASUs issued by the FASB, provide a single comprehen- sive model to be used in the accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue recogni- tion guidance includes a five-step model for the recog- nition of revenue, including (1) identifying the contract with a customer, (2) identifying the performance obliga- tions in the contract, (3) determining the transaction price, (4) allocating the transaction price to the per- formance obligations, and (5) recognizing revenue when (or as) an entity satisfies a performance obliga- tion. The adoption of the new revenue recognition gui- in our dance will require expanded disclosures consolidated financial statements including quantitative disclosure of revenues that fall within and outside the scope of the new revenue recognition guidance. Certain revenue streams are expected to fall within the scope of the new revenue recognition guidance; however, a sub- stantial portion of our revenue falls outside the scope of the new revenue recognition guidance and will continue to follow existing guidance, primarily ASC 815, Deriva- tives and Hedging. We have completed an initial assess- ment of our revenue streams and do not believe that the new revenue recognition guidance will have a material impact on our consolidated financial statements. We will adopt ASU No. 2014-09 and the related ASUs using the modified retrospective method on September 1, 2018, in the first quarter of fiscal 2019. 1DEC201817274400 Restatement of Previously Issued Consolidated Financial Statements The consolidated financial statements for the years ended August 31, 2017 and 2016, have been restated to reflect the correction of misstatements. We have also restated all amounts impacted within the Notes to the consolidated financial statements. A description of the adjustments and their impact on the previously issued financial statements are included below. Descriptions of Restatement Adjustments Restatement Background During the preparation of our Annual Report on Form 10-K for the year ended August 31, 2018, we noted potentially excessive valuations in the net derivative asset valuations relating to certain rail freight contracts purchased in connection with our North American grain marketing operations. An investigation concluded that the rail freight misstatements included in our consoli- dated financial statements for the periods identified below were due to intentional misconduct by a former employee in our rail freight trading operations, as well as due to rail freight contracts and certain non-rail con- tracts not meeting the technical accounting require- ments to qualify as a derivative financial instrument. The misconduct consisted of the former employee manipu- lating the mark-to-market valuation of rail cars that were the subject of rail freight purchase contracts and manipulating the quantity of rail cars included in the monthly mark-to-market valuation. In addition, the investigation revealed intentional misstatements were made by the former employee to our independent regis- tered public accounting firm in connection with its audit of our consolidated financial statements for the fiscal year ended August 31, 2017. During the course of, and as a result of, the investigation, we terminated the former employee and have taken additional personnel actions. As a result of the misstatements, we have restated our consolidated financial statements as of and for the year ended August 31, 2017, and for the year ended August 31, 2016, in accordance with ASC 250, Accounting Changes and Error Corrections (the ‘‘Restated Financial Statements’’). In addition to the adjustments related to freight derivatives and related misstatements, we also made adjustments related to certain intercompany balances and other historical mis- statements unrelated to the freight derivatives and related misstatements. 14 14 CHS 2018 21 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The restated interim financial information for the rele- vant unaudited interim financial statements for the quarterly periods ended November 30, 2017 and 2016, February 28, 2018 and 2017, May 31, 2018 and 2017, and August 31, 2017, is included in Note 18, Quarterly Finan- cial Information (Unaudited). The categories of restatement adjustments and their impact on previously reported consolidated financial statements are described below. (a) Freight Derivatives and Related Misstatements— Corrections for freight derivatives and related misstate- ments were driven by the misstatement of amounts associated with both the value and quantity of rail freight contracts, as well as due to rail freight contracts and certain non-rail freight contracts not meeting the technical accounting requirements to qualify as deriva- tive financial instruments. In addition to the elimination of the underlying freight derivative assets and liabilities and related impacts on revenues and cost of goods sold, additional adjustments were recorded to account for prepaid freight capacity balances in relevant periods and the impact of a goodwill impairment charge recorded as of May 31, 2015, for goodwill held within our grain marketing reporting unit. Additional details related to the impact of the freight derivatives and related mis- statements and their impact on each period are dis- cussed in restatement reference (a). (b) Intercompany Misstatements—As a result of the work performed in relation to the freight misstatement, additional misstatements related to the incorrect elimi- nation of intercompany balances were also identified and corrected within the consolidated financial state- ments. Certain of these intercompany misstatements resulted in a misstatement of various financial statement line items; however, the intercompany misstatements did not result in a material misstatement of income (loss) before income taxes or net income (loss). Addi- tional details related to the impact of the intercompany misstatements and their impact on each period are dis- cussed in restatement reference (b). (c) Other Misstatements—We made adjustments for other previously identified misstatements unrelated to the freight derivatives and related misstatements that were not material, individually or in the aggregate, to our consolidated financial statements. These other mis- statements related primarily to certain misclassifica- tions, adjustments to revenues and cost of goods sold, and adjustments to various income tax and indirect tax accrual accounts. Additional details related to the impact of the other misstatements and their impact on each period are discussed in restatement reference (c). Summary impact of restatement adjustments to previously reported financial information The following tables present the summary impacts of the restatement adjustments on our previously reported consolidated capital reserves and total equities at August 31, 2015, and income (loss) before income taxes and net income (loss) for the years ended August 31, 2017 and 2016: (DOLLARS IN THOUSANDS) AUGUST 31, 2015 CAPITAL RESERVES TOTAL EQUITIES As previously reported $ 1,604,670 $ 7,669,411 Cumulative restatement adjustments (119,237) (117,972) As restated $ 1,485,433 $ 7,551,439 FOR THE YEARS ENDED AUGUST 31 (DOLLARS IN THOUSANDS) 2017 2016 Income (loss) before income taxes—As previously reported $ (54,852) $ 419,878 Restatement adjustments (55,314) (17,753) Income (loss) before income taxes—As restated $ (110,166) $ 402,125 Net income (loss)—As previously reported $ 127,223 $ 423,969 Restatement adjustments (56,265) (40,943) Net income (loss)—As restated $ 70,958 $ 383,026 Reclassifications Amounts previously included within (gain) loss on investments were reclassified into other (income) loss to conform to the current year presentation. This reclassifi- cation had no impact on our previously reported net income, cash flows or shareholders’ equity and repre- sents a reclassification of $4.6 million and $9.3 million for the periods ended August 31, 2017, and August 31, 2016, respectively. 15 CHS 2018 15 22 CHS 2018TWO: R e st ate m e n t of P rev i o u s l y I ss u e d Co n s o l i d ate d F i n a n c i a l St ate m e n t s , co n t i n u e d Consolidated financial statement adjustment tables The following tables present the restatement adjust- ments to previously issued consolidated financial state- ments, including the previously reported Consolidated Balance Sheet as of August 31, 2017, and the Consoli- dated Statements of Operations, Comprehensive Income and Cash Flows for the years ended August 31, 2017, and 2016. The corrections of misstatements affecting fiscal years prior to fiscal 2017 are reflected as a cumulative adjustment to the balance of capital reserves and accumulated other comprehensive income as of August 31, 2015, on the Consolidated Statements of Changes in Shareholders’ Equity. 16 CHS 2018 23 16 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS Current assets: AS OF AUGUST 31, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES Cash and cash equivalents $ 181,379 $ — $ 181,379 Receivables Inventories Derivative assets Margin and related 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 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 15) Equities: Preferred stock Equity certificates Accumulated other comprehensive loss Capital reserves Total CHS Inc. equities Noncontrolling interests Total equities Total liabilities and equities 1,869,632 2,576,585 232,017 206,062 249,234 299,618 5,614,527 3,750,993 5,356,434 1,251,802 22,536 25,019 (13,275) — — (17,693) 16,587 — — c c a 1,892,168 2,601,604 218,742 206,062 249,234 281,925 a, c 5,631,114 3,750,993 5,356,434 (171,421) 1,080,381 a $ 15,973,756 $ (154,834) $ 15,818,922 $ 1,988,215 $ (3,052) $ 1,985,163 — — 10,607 40,002 (15,072) 17,469 — 49,954 — (3,241) (1,362) — — 3,310 (203,409) (200,099) 156,345 157,914 423,770 1,991,294 300,946 c c c a 454,996 a, c 12,121 5,482,549 2,023,448 329,980 277,305 2,264,038 4,341,649 (180,360) 1,267,808 7,693,135 a, c a a, c a, c 156,345 157,914 413,163 1,951,292 316,018 437,527 12,121 5,432,595 2,023,448 333,221 278,667 2,264,038 4,341,649 (183,670) 1,471,217 7,893,234 12,591 (86) 12,505 a 7,905,825 (200,185) 7,705,640 $ 15,973,756 $ (154,834) $ 15,818,922 17 CHS 2018 17 24 CHS 2018TWO: R e st ate m e n t of P rev i o u s l y I ss u e d Co n s o l i d ate d F i n a n c i a l St ate m e n t s , co n t i n u e d As of August 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $174.1 million reduction of total assets, a $39.1 million reduction of current liabili- ties, a $27.5 million increase of long-term liabilities, and a $162.4 million reduction of total equities. The reduction of total assets related primarily to the elimination of $156.0 million of long-term derivative assets, an approxi- mate $16.0 million reduction of goodwill which was trig- gered by the lower earnings associated with this restatement with the impairment charge recorded during fiscal 2015 and the elimination of $12.9 million of current derivative assets that had been recorded as assets on the Consolidated Balance Sheet. The decreases of total assets were partially offset by related adjustments, including an $8.9 million increase of pre- paid income taxes resulting from the income tax impact of the freight misstatement and the recognition of a $1.5 million prepaid freight capacity balance. The decrease of total current liabilities related primarily to an $18.0 million reduction of current derivative liabilities and a $21.1 million reduction of income taxes payable resulting from the income tax effect of the freight mis- statement. The increase of long-term liabilities resulted from a $28.9 million increase of long-term deferred tax liabilities, which was partially offset by a $1.4 million liabilities. The long-term derivative reduction of decrease of total equities related primarily to the elimi- nation of the derivative assets and liabilities described above and the related income tax impacts, as well as the reduction of goodwill associated with the goodwill impairment charge recorded during fiscal 2015. Intercompany misstatements (b) None Other misstatements (c) Adjustments for other misstatements related pri- marily to misclassifications between line items included within the Consolidated Balance Sheets, as well as the impact of certain income tax adjustments on prepaid income taxes, income taxes payable and deferred income taxes. The misclassification adjustments arose primarily due to the application of differing accounting policies between businesses and collectively with the impact of income tax adjustments resulted in a $19.3 million increase of total assets, an $89.1 million increase of current liabilities, a $32.1 million decrease of long-term liabilities and a $37.7 million decrease of total equities. The increase of total assets related primarily to a $49.2 million increase of inventory with a corresponding increase to accounts payable that resulted from a mis- classification adjustment for certain items previously included within a contra-inventory account to accounts payable. The increased inventories were partially offset by a $24.1 million misclassification adjustment to decrease inventory and increase accounts receivable as a result of a timing difference related to the settlement of a single ocean vessel. The increase of total assets was partially offset by a $28.1 million decrease of prepaid income taxes associated with the correction of other misstatements identified during fiscal 2017 and other periods. The increase of current liabilities related primarily to the $49.2 million increase of accounts payable as a result of a misclassification adjustment for certain items previ- ously included within a contra-inventory account to accounts payable and a $38.6 million increase of accrued expenses. The increase of accrued expenses primarily resulted from the recognition of a $24.9 million accrued income tax balance associated with the correc- tion of other misstatements identified during fiscal 2017 and other periods. Additionally, $13.7 million of accrued expenses were recorded in relation to the use of a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. The decrease of long-term liabilities related to a $32.1 million decrease of long-term deferred tax liabilities that arose from the correction of other misstatements identified during fiscal 2017 and other periods. The $37.7 million decrease of total equities was prima- rily related to the $20.6 million net impact on income tax accounts and the recognition of $13.7 million of addi- tional accrued expenses due to the use of a unit of mea- sure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. 18 CHS 2018 25 18 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES FOR THE YEAR ENDED AUGUST 31, 2017 FOR THE YEAR ENDED AUGUST 31, 2016 Revenues $ 31,934,751 $ 102,675 $ 32,037,426 $ 30,347,203 $ 8,057 $ 30,355,260 Cost of goods sold 30,985,510 157,256 31,142,766 29,387,910 (1,395) 29,386,515 Gross profit 949,241 (54,581) 894,660 959,293 9,452 968,745 604,359 7,648 612,007 601,261 5 601,266 Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense 456,679 (111,797) — 171,239 — 456,679 (62,229) (174,026) 2,190 — 2,190 171,239 47,836 310,196 — 113,704 Other (income) loss (90,846) (9,105) (99,951) (47,609) Equity (income) loss from investments Income (loss) before income (137,338) — (137,338) (175,777) 27,200 75,036 (17,753) 292,443 — — — — — 113,704 (47,609) (175,777) a, b, c a, b, c c c c c taxes (54,852) (55,314) (110,166) 419,878 (17,753) 402,125 Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests Net income (loss) (182,075) 951 (181,124) (4,091) 23,190 19,099 a, c 127,223 (56,265) 70,958 423,969 (40,943) 383,026 (634) — (634) (223) — (223) attributable to CHS Inc. $ 127,857 $ (56,265) $ 71,592 $ 424,192 $(40,943) $ 383,249 For the year ended August 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $38.1 million reduction of income before income taxes and a $47.3 million reduc- tion of net income. These adjustments related primarily to a $38.1 million increase of cost of goods sold and a $9.2 million increase of income tax expense resulting from the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $35.7 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $17.2 million decrease of income before income taxes and a $9.0 million decrease of net income. The $17.2 mil- lion decrease of income before income taxes related to a $12.1 million increase of cost of goods sold due to the use of a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018, a $2.6 million combined increase in cost of goods sold and marketing, general and administrative expenses for pos- tretirement benefit plan activity that resulted from a timing difference associated with recording certain benefit plan expenses and a $2.5 million increase of costs of goods sold related to the valuation of crack spread derivatives. An income tax benefit of $8.2 million partially offset the decrease of income before income taxes and was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subsequent periods. 19 CHS 2018 19 26 CHS 2018TWO: R e st ate m e n t of P rev i o u s l y I ss u e d Co n s o l i d ate d F i n a n c i a l St ate m e n t s , co n t i n u e d Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $138.4 million increase of revenues, a $138.3 million increase of cost of goods sold, a $7.0 mil- lion increase of marketing, general and administrative expenses, a $2.2 million increase of loss on disposal of business and a $9.1 million increase of other income. For the year ended August 31, 2016 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $15.7 million reduction of income before income taxes and a $9.9 million reduc- tion of net income. These adjustments related to a $15.7 million increase of cost of goods sold and a $5.8 million income tax benefit resulting from the tax effect of related misstatements. freight derivatives and the Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $57.5 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements The correction of other misstatements resulted in a $2.1 million decrease of income before income taxes and a $31.0 million decrease of net income. The $2.1 million decrease of income before income taxes related to a $1.7 million increase of cost of goods sold due to the use of a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018 and a $0.4 million increase of costs of goods sold related to the valuation of crack spread derivatives. In addition to the decrease of income before income taxes, additional income tax expense of $29.0 million was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subsequent periods. Additionally, misclassification and offsetting adjust- ments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These adjustments resulted in a $65.6 mil- lion increase of revenues, a $38.4 million increase of cost of goods sold and a $27.2 million increase of reserve and impairment charges (recoveries), net. 20 CHS 2018 27 20 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS) Net income (loss) Other comprehensive income (loss), net of tax: FOR THE YEAR ENDED AUGUST 31, 2017 FOR THE YEAR ENDED AUGUST 31, 2016 AS PREVIOUSLY REPORTED AS RESTATEMENT ADJUSTMENTS RESTATED AS PREVIOUSLY REPORTED AS RESTATEMENT ADJUSTMENTS RESTATED RESTATEMENT REFERENCES $ 127,223 $ (56,265) $ 70,958 $ 423,969 $ (40,943) $383,026 a, b, c Postretirement benefit plan activity 30,100 2,602 32,702 6,583 Unrealized net gain (loss) on available for sale investments Cash flow hedges Foreign currency translation adjustment Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to 4,385 2,242 (8,671) 28,056 155,279 — — 4,385 2,242 512 (8,159) 3,114 31,170 1,500 (3,872) (1,730) 2,481 — — — 6,583 1,500 (3,872) (1,174) (2,904) (1,174) 1,307 c a (53,151) 102,128 426,450 (42,117) 384,333 noncontrolling interests (634) — (634) (223) — (223) Comprehensive income attributable to CHS Inc. $ 155,913 $ (53,151) $ 102,762 $ 426,673 $ (42,117) $384,556 For the year ended August 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $47.3 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consoli- dated Statement of Operations section for the year ended August 31, 2017, above. The adjustment related to foreign currency translation relates to the foreign cur- rency impact associated with goodwill that was impaired during fiscal 2015. For the year ended August 31, 2016 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $9.9 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations section for the year ended August 31, 2016, above. The adjustment related to for- eign currency translation relates to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None Intercompany misstatements (b) None Other misstatements (c) The correction of other misstatements resulted in a $9.0 million decrease of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the year ended August 31, 2017, above. The adjustment related to postretirement benefit plan activity relates to a timing difference associated with recording certain benefit plan expenses. Other misstatements (c) The correction of other misstatements resulted in a $31.0 million decrease of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the year ended August 31, 2016, above. 21 CHS 2018 21 28 CHS 2018TWO: R e st ate m e n t of P rev i o u s l y I ss u e d Co n s o l i d ate d F i n a n c i a l St ate m e n t s , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITIES FOR THE YEARS ENDED AUGUST 31, 2017, 2016, AND 2015 (DOLLARS IN THOUSANDS) Balances, August 31, 2015 (As EQUITY CERTIFICATES EQUITY CERTIFICATES EQUITY CERTIFICATES CAPITAL NONPATRONAGE NONQUALIFIED ACCUMULATED OTHER EQUITY PREFERRED COMPREHENSIVE LOSS STOCK CERTIFICATES CAPITAL NONCONTROLLING INTERESTS RESERVES TOTAL EQUITIES previously reported) $ 3,793,897 $ 23,057 $ 282,928 $ 2,167,540 $ (214,207) $ 1,604,670 $ 11,526 $ 7,669,411 Cumulative restatement adjustments Balances, August 31, 2015 (As — — — — 1,370 (119,237) (105) (117,972) restated) $ 3,793,897 $ 23,057 $ 282,928 $ 2,167,540 $ (212,837) $ 1,485,433 $ 11,421 $ 7,551,439 Balances, August 31, 2016 (As previously reported) $ 3,932,513 $ 22,894 $ 281,767 $ 2,244,132 $ (211,726) $ 1,582,380 $ 14,290 $ 7,866,250 Cumulative restatement adjustments Balances, August 31, 2016 (As (13,802) — — — 196 (93,381) (104) (107,091) restated) $ 3,918,711 $ 22,894 $ 281,767 $ 2,244,132 $ (211,530) $ 1,488,999 $ 14,186 $ 7,759,159 Balances, August 31, 2017 (As previously reported) $ 3,906,426 $ 29,836 $ 405,387 $ 2,264,038 $ (183,670) $ 1,471,217 $ 12,591 $ 7,905,825 Cumulative restatement adjustments Balances, August 31, 2017 (As — — — — 3,310 (203,409) (86) (200,185) restated) $ 3,906,426 $ 29,836 $ 405,387 $ 2,264,038 $ (180,360) $ 1,267,808 $ 12,505 $ 7,705,640 As of August 31, 2017, 2016, and 2015 The decrease of total equities for each restated period was driven primarily by the elimination of derivative assets and liabilities associated with the freight derivatives and related misstatements. Adjustments for the freight derivatives and related misstatements resulted in a $162.4 million reduction of total equities as of August 31, 2017, a $115.7 million reduction of total equities as of August 31, 2016, and a $104.6 million reduction of total equities as of August 31, 2015. 22 CHS 2018 29 22 CHS 2018CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Amortization of deferred major repair costs Equity (income) loss from investments Distributions from equity investments Provision for doubtful accounts (Gain) loss on disposal of business Unrealized (gain) loss on crack spread contingent liability Long-lived asset impairment, net of recoveries Reserve against supplier advance payments Deferred taxes Other, net Changes in operating assets and liabilities, net of acquisitions: Receivables Inventories Derivative assets Margin and related deposits Supplier advance payments Other current assets and other 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 disposition of property, plant and equipment Expenditures for major repairs Investments in joint ventures and other Changes in CHS Capital notes receivable, net Financing extended to customers Payments from customer financing Other investing activities, net Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from lines of credit and long-term borrowings NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 31, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 127,223 $ (56,265) $ 70,958 a, b, c 480,223 67,058 (137,338) 213,352 177,969 — (15,051) 145,042 130,705 (175,914) 24,044 — — — — — 2,190 — — — (18,553) (3,871) 480,223 67,058 (137,338) 213,352 177,969 2,190 (15,051) 145,042 130,705 c (194,467) a, c 20,173 121,630 25,158 146,788 (293,549) (39,930) (333,479) 126,824 104,214 (34,583) (66,119) (50,920) (528) 197,445 (183,287) (25,446) 932,994 (444,397) 19,541 (2,340) (16,645) 322 (67,225) 88,154 17,549 (405,041) 37,295,236 (12,801) (6,410) 631 15,390 — (801) 30,522 50,864 — (13,876) — — — — — — — — — — 114,023 97,804 (33,952) (50,729) (50,920) (1,329) 227,967 (132,423) (25,446) 919,118 (444,397) 19,541 (2,340) (16,645) 322 (67,225) 88,154 17,549 (405,041) 37,295,236 b, c b, c a, b, c b, c b a, c b, c a, b, c a, b, c c c c Payments on lines of credit, long-term borrowings and capital lease obligations (37,580,959) (3,052) (37,584,011) Mandatorily redeemable noncontrolling interest payments 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 — (167,642) (35,268) (103,879) (28,681) (621,193) (4,694) (97,934) 279,313 — — — — 5,987 2,935 (19) — (167,642) (35,268) (103,879) (22,694) (618,258) (4,713) (10,960) (108,894) 10,960 290,273 $ 181,379 $ — $ 181,379 23 CHS 2018 23 30 CHS 2018TWO: R e st ate m e n t of P rev i o u s l y I ss u e d Co n s o l i d ate d F i n a n c i a l St ate m e n t s , co n t i n u e d For the year ended August 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $47.3 million reduction of net income for the year ended August 31, 2017. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Opera- tions section for the year ended August 31, 2017, above. The impact of the adjustments to the Consolidated Bal- ance Sheets as of August 31, 2017, and 2016, resulted in certain misclassifications between line items in the Con- solidated Statements of Cash Flows; however, none of the freight derivatives and related misstatements the classifications between operating, impacted investing or financing activities. Refer to descriptions of the adjustments and their impact on the Consolidated Balance Sheet in the Consolidated Balance Sheet sec- tion as of August 31, 2017, above. Intercompany misstatements (b) The correction of intercompany misstatements did not impact net income for the year ended August 31, 2017; however, the impact of adjustments to the Consol- idated Balance Sheets as of August 31, 2017, and 2016, resulted in certain misclassification adjustments between line items in the Consolidated Statements of Cash Flows. None of the intercompany misstatements the classifications between operating, impacted investing or financing activities within the Consolidated Statements of Cash Flows. Other misstatements (c) The correction of other misstatements resulted in a $9.0 million decrease of net income for the year ended August 31, 2017. Refer to further details of the adjust- ments and their impact on net income (loss) in the Con- solidated Statement of Operations section for the year ended August 31, 2017, above. The impact of the adjust- ments to the Consolidated Balance Sheets as of August 31, 2017, and 2016, resulted in certain misclassifi- cation adjustments between line items in the Consoli- dated Statements of Cash Flows. As a result, two misclassification adjustments were made between operating and financing activities, including a $3.1 mil- lion reduction of notes payable resulted from a duplica- tive entry and the misclassification of a $6.0 million negative cash balance associated with a timing differ- ence for the application of in-transit cash. Refer to descriptions of the adjustments and their impact on the Consolidated Balance Sheet in the Consolidated Bal- ance Sheet section as of August 31, 2017, above. Additionally, an adjustment of $11.0 million was recorded to the opening cash balance, which related to a timing difference associated with the application of in-transit cash. Refer to the Consolidated Statement of Cash Flows for the year ended August 31, 2016, below for further details. 24 CHS 2018 31 24 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income to net cash provided by (used in) operating activities: FOR THE YEAR ENDED AUGUST 31, 2016 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 423,969 $ (40,943) $ 383,026 a, b, c Depreciation and amortization Amortization of deferred major repair costs Equity (income) loss from investments Distributions from equity investments Provision for doubtful accounts Unrealized (gain) loss on crack spread contingent liability Long-lived asset impairment, net of recoveries Reserve against supplier advance payments Deferred taxes Other, net Changes in operating assets and liabilities, net of acquisitions: Receivables Inventories Derivative assets Margin and related deposits Supplier advance payments Other current assets and other 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 disposition of property, plant and equipment Expenditures for major repairs Investments in joint ventures and other Changes in CHS Capital notes receivable, net Financing extended to customers Payments from customer financing Other investing activities, net Net cash provided by (used in) investing activities Cash flows from financing activities: Proceeds from lines of credit and long-term borrowings Payments on lines of credit, long-term borrowings and capital lease obligations Mandatorily redeemable noncontrolling interest payments 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 447,492 73,483 (175,777) 178,464 57,200 (60,931) 27,247 — (24,178) (15,444) 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) (209,902) (82,302) 35,188 64,236 (3,746,971) 31,586,968 (29,232,842) (153,022) (163,324) (23,911) (251,740) 52,067 1,814,196 (5,223) (674,500) 953,813 — — — — — — — — 52,368 — (44,835) 14,910 50,079 6,410 (632) 7,610 — (12,743) 447,492 73,483 (175,777) 178,464 57,200 (60,931) 27,247 — 28,190 (15,444) 1,570 353,572 29,822 (30,705) 43,415 128,603 20,841 (7,079) (328) (129,587) (34,840) 1,443 — (94,291) (2,944) 1,260,554 a, c b, c b, c a, b, c b, c b a, c b, c a, b, c a, b, c — — — — — — — — — — — — — — — — — — (2,944) 13,904 (692,780) 13,417 (19,610) (2,855,218) (209,902) (82,302) 35,188 64,236 (3,746,971) 31,586,968 (29,232,842) (153,022) (163,324) (23,911) (251,740) 52,067 1,814,196 (5,223) (677,444) 967,717 c $ 279,313 $ 10,960 $ 290,273 25 CHS 2018 25 32 CHS 2018TWO: R e st ate m e n t of P rev i o u s l y I ss u e d Co n s o l i d ate d F i n a n c i a l St ate m e n t s , co n t i n u e d For the year ended August 31, 2016 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $9.9 million reduction of net income for the year ended August 31, 2016. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Opera- tions section for the year ended August 31, 2016, above. The impact of the adjustments to the Consolidated Bal- ance Sheets as of August 31, 2016, and 2015, resulted in certain misclassification adjustments between oper- ating activity line items in the Consolidated Statements of Cash Flows; however, none of the freight derivatives and related misstatements impacted the classifications between operating, investing or financing activities. Refer to descriptions of the adjustments and their impact on the Consolidated Balance Sheets in the Con- solidated Balance Sheet section as of August 31, 2017, and 2016, above. Intercompany misstatements (b) The correction of intercompany misstatements did not impact net income for the year ended August 31, 2016; however, the impact of adjustments to the Consol- idated Balance Sheet as of August 31, 2016, resulted in certain misclassification adjustments between oper- ating activity line items in the Consolidated Statements of Cash Flows. None of the intercompany misstate- ments impacted the classifications between operating, investing or financing activities within the Consolidated Statements of Cash Flows. Other misstatements (c) The correction of other misstatements resulted in a $31.0 million decrease of net income for the year ended August 31, 2016. Refer to further details of the adjust- ments and their impact on net income (loss) in the Con- solidated Statement of Operations section for the year ended August 31, 2016, above. The impact of the adjust- ments to the Consolidated Balance Sheets as of August 31, 2016, and 2015, resulted in certain misclassifi- cation adjustments between operating activity line items within Consolidated Statements of Cash Flows and a $2.9 million reduction of cash that resulted from a timing difference for the application of in-transit cash; however, none of the other misstatements impacted the classifications between operating, investing or financing activities. Refer to descriptions of the adjustments and their impact on the Consolidated Balance Sheets in the Consolidated Balance Sheet section as of August 31, 2017, and 2016, above. Additionally, an adjustment of $13.9 million was recorded to the opening cash balance, which related to a timing difference associated with the application of in-transit cash during the prior year. 26 CHS 2018 33 26 CHS 20181DEC201817274167 Receivables NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Receivables as of August 31, 2018, and 2017, are as follows: (DOLLARS IN THOUSANDS) (AS RESTATED) 2017 2018 Trade accounts receivable $ 1,578,764 $ 1,258,644 CHS Capital short-term notes receivable 569,379 164,807 Deferred purchase price receivable — 202,947 Other 534,071 491,496 2,682,214 2,117,894 Less allowances and reserves 221,813 225,726 Total receivables $ 2,460,401 $ 1,892,168 Trade Accounts 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. Receivables from related parties are dis- closed in Note 17, Related Party Transactions. During the third quarter of fiscal 2017, a trading partner of ours in Brazil entered bankruptcy-like proceedings under Brazilian law, resulting in a $98.7 million increase to our accounts receivable reserve. We also recorded a reserve of approximately $130.7 million related to sup- plier advance payments held by this trading partner, which is included in supplier advance payments in the Consolidated Balance Sheets. We initiated efforts to recover these losses during fiscal 2017 and we recorded a recovery of approximately $20.8 million during the fourth quarter of fiscal 2018 within reserve and impair- ment charges (recoveries), net in the Consolidated Statements of Operations. We continue to pursue addi- tional recoveries in relation to these losses; however, additional recoveries are not estimable and have not been recorded as of the date of this Annual Report on Form 10-K. CHS Capital Notes Receivable CHS Capital, our wholly-owned subsidiary, has short-term notes receivable from commercial and pro- ducer borrowers. The short-term notes receivable have maturity terms of 12 months or less and are reported at their outstanding unpaid principal balances, adjusted for the allowance of loan losses, as CHS Capital has the intent and ability to hold the applicable loans for the foreseeable future or until maturity or pay-off. The car- rying value of CHS Capital short-term notes receivable approximates fair value given the notes’ short-term duration and the use of market pricing adjusted for risk. The notes receivable from commercial borrowers are collateralized by various combinations of mortgages, personal property, accounts and notes receivable, inventories and assignments of certain regional cooper- ative’s capital stock. These loans are primarily originated in the states of Minnesota, Wisconsin and North Dakota. CHS Capital also has loans receivable from producer borrowers which are collateralized by various combina- tions of growing crops, livestock, inventories, accounts receivable, personal property and supplemental mort- gages and are originated in the same states as the com- mercial notes with the addition of Michigan. In addition to the short-term balances included in the table above, CHS Capital had long-term notes receiv- able, with durations of generally not more than 10 years, totaling $203.0 million and $17.0 million at August 31, 2018, and 2017, respectively. The long-term notes receiv- able are included in other assets on our Consolidated Balance Sheets. As of August 31, 2018, and 2017, the commercial notes represented 40% and 17%, respec- tively, and the producer notes represented 60% and 83%, respectively, of the total CHS Capital notes receiv- able. The increase in short-term and long-term notes receivable is the result of the activities described within the Sale of Receivables section below. CHS Capital has commitments to extend credit to cus- tomers if there are no violations of any contractually established conditions. As of August 31, 2018, CHS Capital’s customers have additional available credit of $706.3 million. Allowance for Loan Losses and Impairments CHS Capital maintains an allowance for loan losses which is the estimate of potential incurred losses inherent in the loans receivable portfolio. In accordance with FASB ASC 450-20, Accounting for Loss Contingen- cies, and ASC 310-10, Accounting by Creditors for Impairment of a Loan, the allowance for loan losses con- sists of general and specific components. The general 27 CHS 2018 27 34 CHS 2018THREE: R e ce i va b l e s , co n t i n u e d component is based on historical loss experience and qualitative factors addressing operational risks and industry trends. The specific component relates to loans receivable that are classified as impaired. Additions to the allowance for loan losses are reflected within reserve and impairment charges (recoveries), net in the Consoli- dated Statements of Operations. The portion of loans receivable deemed uncollectible is charged off against the allowance. Recoveries of previously charged off amounts increase the allowance for loan losses. No sig- nificant amounts of CHS Capital notes were past due as of August 31, 2018, or August 31, 2017, and specific and general loan loss reserves related to CHS Capital notes were not material as of either date. Interest Income Interest income is recognized on the accrual basis using a method that computes simple interest on a daily basis. The accrual of interest on commercial loans receivable is discontinued at the time the receivable is 90 days past due unless the credit is well-collateralized and in process of collection. Past due status is based on contractual terms of the loan. Producer loans receivable are placed in non-accrual status based on estimates and analysis due to the annual debt service terms inherent to CHS Capital’s producer loans. In all cases, loans are placed in nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Troubled Debt Restructurings A restructuring of a loan constitutes a troubled debt restructuring, or restructured loan, if the creditor for economic reasons related to the debtor’s financial diffi- culties grants a concession to the debtor that it would otherwise not consider. Concessions vary by program and borrower. Concessions may include interest rate reductions, term extensions, payment deferrals, or the acceptance of additional collateral in lieu of payments. In limited circumstances, principal may be forgiven. When a restructured loan constitutes a troubled debt restructuring, CHS includes these loans within its impaired loans. During the third quarter of fiscal 2017, CHS Capital con- cluded a transaction with a single producer borrower whereby CHS Capital obtained from the borrower title to approximately 14,000 acres of land and improve- ments that, prior to the transaction, was owned by the borrower and served as collateral for the outstanding loans to CHS Capital. The amount corresponding to the fair value of the land and improvements was credited against the notes receivable from this single producer borrower. As a result of this arrangement, all remaining outstanding notes receivable balances and corre- sponding reserves related to this single producer bor- rower were removed from the balance sheet of CHS Capital, with no incremental impact to the Consolidated Statements of Operations. During the first quarter of fiscal 2018, CHS Capital sold all rights to the outstanding notes receivable which had been previously removed from the balance sheet as they were deemed uncollect- ible. Through this sale, we realized a small recovery in the first quarter of fiscal year 2018. As of August 31, 2018, and 2017, CHS Capital had no other significant troubled debt restructurings and no third-party borrowers that accounted for more than 10% of the total CHS Capital notes receivable. (the facility receivable ‘‘Receivables’’) loans securitization Sale of Receivables Receivables Securitization Facility On June 28, 2018, we amended an existing receivables and (‘‘Securitization Facility’’) with certain unaffiliated financial institutions (the ‘‘Purchasers’’). Under the Securitization Facility, we and certain of our subsidiaries sell trade accounts and notes to Cofina Funding, LLC (‘‘Cofina’’), a wholly-owned bankruptcy- remote indirect subsidiary of CHS. Cofina in turn trans- fers the purchased Receivables to the Purchasers. During the period from July 2017 through the amend- ment of the Securitization Facility in June 2018, CHS accounted for Receivables sold under the Facility as a sale of financial assets pursuant to ASC 860, Transfers and Servicing, and the Receivables sold were der- ecognized from its Consolidated Balance Sheets. Under the terms of the amended Securitization Facility, the transfer of Receivables is accounted for as a secured borrowing. We use the proceeds from the sale of Receivables under the Securitization Facility for general corporate purposes. The Securitization Facility termi- nates on June 17, 2019, but may be extended. The amount available under the Securitization Facility fluctuates over time based on the total amount of eli- gible Receivables generated during the normal course of business, with maximum availability of $700.0 million. Sales of Receivables by Cofina occur continuously and are settled with the Purchasers on a monthly basis. As of August 31, 2018, and 2017, the total availability under the Securitization Facility was $645.0 million and 28 28 CHS 2018 35 CHS 2018$618.0 million, respectively, of which all had been uti- lized. Prior to amending the Securitization Facility in June 2018, the proceeds from the sale of these Receiv- ables were comprised of a combination of cash and a deferred purchase price (‘‘DPP’’) receivable. The DPP receivable was ultimately realized by CHS following the collection of the underlying Receivables sold to the Purchasers. At the time of the amendment to the Securitization Facility in June 2018, $1.0 billion of Receivables and $634.0 million of securitized debt were recognized and a DPP receivable of $386.9 million was removed from the Consolidated Balance Sheets. At the time of a pre- vious amendment to the Securitization Facility in July 2017, $1.1 billion of Receivables and $554.0 million of securitized debt were removed from the Consolidated Balance Sheets and a DPP receivable of $580.5 million was recognized. These amounts have been reflected as non-cash transactions in the Consolidated Statements of Cash Flows and disclosed within Note 16, Supple- mental Cash Flow and Other Information. Prior to its derecognition during June 2018, the fair value of the DPP receivable was determined by discounting the expected cash flows to be received based on unob- servable inputs consisting of the face amount of the Receivables adjusted for anticipated credit losses. Refer to Note 14, Fair Value Measurements, for details related to the fair value measurement of the DPP receivable. The following table is a reconciliation of the beginning and ending balances of the DPP receivable, including NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the long-term portion included in other assets, for the years ended August 31, 2018, and 2017: (DOLLARS IN THOUSANDS) 2018 2017 Balance—beginning of year $ 548,602 $ Cash collections on DPP receivable (10,961) — — Transfer of receivables (386,900) 580,509 Monthly settlements, net (169,827) (31,907) Fair value adjustment 19,086 — Balance—end of year $ — $ 548,602 Loan Participations During fiscal 2018 CHS Capital sold $64.1 million of notes receivable to numerous counterparties under a master participation agreement. The sale resulted in the removal of the notes receivable from the Consolidated Balance Sheet. CHS Capital has no retained interests in the transferred notes receivable, other than collection and administrative services. The proceeds from the sale of the notes receivable have been included in investing activities in the Consolidated Statement of Cash Flows. Fees received related to the servicing of the notes receivables are recorded in other income in the Consoli- dated Statements of Operations. We consider the fees received adequate compensation for services rendered, and accordingly have recorded no servicing asset or liability. Other Receivables Other receivables are comprised of certain other amounts recorded in the normal course of business, including receivables related to value added taxes and pre-crop financing, primarily to Brazilian farmers, to finance a portion of supplier production costs. CHS does not bear any of the costs or operational risks associated with the related growing crops. The financing is largely collateralized by future crops and physical assets of the suppliers, carries a local market interest rate and settles when the farmer’s crop is harvested and sold. 29 CHS 2018 29 36 CHS 20181DEC201817273080 Inventories Inventories as of August 31, 2018, and 2017, are as follows: (DOLLARS IN THOUSANDS) 2018 (AS RESTATED) 2017 Grain and oilseed $ 1,298,522 $ 1,121,141 Energy Crop nutrients Feed and farm supplies Processed grain and oilseed Other 715,161 246,326 391,906 99,426 17,308 755,886 248,699 402,293 49,723 23,862 Total inventories $ 2,768,649 $ 2,601,604 As of August 31, 2018, we valued approximately 16% of inventories, primarily crude oil and refined fuels within our Energy segment, using the lower of cost, deter- mined on the LIFO method, or net realizable value (19% as of August 31, 2017). If the FIFO method of accounting had been used, inventories would have been higher than the reported amount by $345.0 million and $186.2 mil- lion as of August 31, 2018, and 2017, respectively. 1DEC201817272840 Investments Investments as of August 31, 2018, and 2017, are as follows: (DOLLARS IN THOUSANDS) 2018 2017 Equity method investments: CF Industries Nitrogen, LLC $ 2,735,073 $ 2,756,076 Ventura Foods, LLC 360,150 347,016 Ardent Mills, LLC 205,898 206,529 Other equity method investments Cost method and other investments 288,016 309,767 122,788 131,605 Total investments $ 3,711,925 $ 3,750,993 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 consist of CF Nitrogen, Ven- tura Foods, and Ardent Mills, LLC (‘‘Ardent Mills’’), which are summarized below. CF Nitrogen 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 approximate 10% membership interest (based on product tons) in CF Nitrogen. We also entered into an 80-year supply agreement that entitles us to purchase up to 1.1 million tons of granular urea and 580,000 tons of urea ammonium nitrate (‘‘UAN’’) annually from CF Nitrogen for ratable delivery. Our purchases under the supply agreement are based on prevailing market prices and we receive semi-annual cash distributions (in Jan- uary and July of each year) from CF Nitrogen via our membership interest. These distributions are based on actual volumes purchased from CF Nitrogen under the strategic venture and will have the effect of reducing our investment to zero over 80 years on a straight-line basis. We account for this investment using the hypothetical liquidation at book value method, recognizing our share of the earnings and losses of CF Nitrogen based upon our contractual claims on the entity’s net assets pur- suant to the liquidation provisions of CF Nitrogen’s Lim- ited Liability Company Agreement, adjusted for the semi-annual cash distributions. For the years ended August 31, 2018, and 2017, these amounts were $106.9 million and $66.5 million, respectively, and are included as equity income from investments in our Nitrogen Production segment. 30 CHS 2018 37 30 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables provide aggregate summarized financial information for CF Nitrogen for the balance sheets as of August 31, 2018, and 2017, and the state- ments of operations for the twelve months ended August 31, 2018, and 2017, and the seven months ended August 31, 2016: (DOLLARS IN THOUSANDS) 2018 2017 Current assets Non-current assets Current liabilities Non-current liabilities $ 576,076 $ 394,089 7,447,594 7,314,629 215,104 390,206 71 6 (DOLLARS IN THOUSANDS) 2018 2017 2016 Net sales Gross profit Net earnings $ 2,449,695 $ 2,051,159 $ 1,027,142 423,612 195,142 243,911 401,295 123,965 186,665 Earnings attributable to CHS Inc. 106,895 66,530 74,700 Ventura Foods and Ardent Mills We have a 50% interest in Venture Foods which is a joint venture that produces and distributes primarily vege- table oil-based products and we have a 12% interest in Ardent Mills, which is a joint venture with Cargill Incor- porated (‘‘Cargill’’) and ConAgra Foods, Inc., which com- bines the North American flour milling operations of the three parent companies. We account for Ventura Foods and Ardent Mills as equity method investments included in Corporate and Other. The following tables provide aggregate summarized financial information for our equity method investments in Ventura Foods and Ardent Mills for balance sheets as of August 31, 2018, and 2017, and statements of opera- tions for the twelve months ended August 31, 2018, 2017 and 2016: (DOLLARS IN THOUSANDS) 2018 2017 Current assets Non-current assets Current liabilities $ 1,462,590 $ 1,483,384 2,331,295 2,358,434 671,928 685,462 Non-current liabilities 693,360 765,078 (DOLLARS IN THOUSANDS) 2018 2017 2016 Net sales $ 5,882,035 $ 5,762,849 $ 5,694,622 Gross profit Net earnings 601,927 673,329 677,920 226,776 265,126 265,025 Earnings attributable to CHS Inc. 46,069 60,716 88,936 Our investments in other equity method investees are not significant in relation to our consolidated financial statements, either individually or in the aggregate. 31 CHS 2018 31 38 CHS 20181DEC201817273814 Property, Plant and Equipment As of August 31, 2018, and 2017, 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, 2018: (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) 2018 2017 Land and land improvements $ 341,767 $ 357,829 Buildings 1,034,860 1,030,478 Machinery and equipment 7,199,509 6,950,435 Office equipment and other 316,946 235,361 2019 2020 2021 2022 2023 Construction in progress 204,207 327,682 Thereafter 9,097,289 8,901,785 Total minimum future lease payments $ 4,845 4,595 4,197 3,593 3,427 7,936 28,593 3,313 Less accumulated depreciation and amortization 3,955,570 3,545,351 Total property, plant and equipment $ 5,141,719 $ 5,356,434 We have various assets under capital leases totaling $50.0 million and $58.2 million as of August 31, 2018, and 2017, respectively. Accumulated amortization on assets under capital leases was $18.9 million and $27.4 million as of August 31, 2018, and 2017, respectively. The following is a schedule by fiscal year of future minimum lease payments under capital leases together Less amount representing interest Present value of net minimum lease payments $ 25,280 During fiscal 2017, our Ag segment recorded an impair- ment charge of $30.4 million from the reduction in the fair value of agricultural assets held, which was deter- mined using a market-based approach. In addition, our Energy segment recorded an impairment charge of $32.7 million associated with the cancellation of a capital project during fiscal 2017. These impairments were included in the reserve and impairment charges (recoveries), net line of the Consolidated Statements of Operations. Depreciation expense, including amortization of capital lease assets, for the years ended August 31, 2018, 2017, and 2016, was $475.8 million, $475.9 million and $437.6 million, respectively. 32 CHS 2018 39 32 CHS 20181DEC201817273570 Other Assets Other assets as of August 31, 2018, and 2017, are as follows: (DOLLARS IN THOUSANDS) Goodwill Customer lists, trademarks and other intangible assets Notes receivable Deferred purchase price receivable Long-term derivative assets Prepaid pension and other benefits Capitalized major maintenance Cash value life insurance Other NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2018 (AS RESTATED) 2017 $ 138,464 $ 138,454 29,338 211,986 — 23,084 101,539 130,780 123,010 76,128 33,330 51,586 345,655 40,897 122,433 105,006 118,677 124,343 $ 834,329 $ 1,080,381 Changes in the net carrying amount of goodwill for the years ended August 31, 2018, and 2017, by segment, are as follows: (DOLLARS IN THOUSANDS) ENERGY CORPORATE AND OTHER AG TOTAL Balances, August 31, 2016—As previously reported $ 552 $ 148,916 $ 10,946 $ 160,414 Cumulative restatement adjustments Balances, August 31, 2016—As restated Effect of foreign currency translation adjustments Impairment Other — 552 — — — (16,130) — (16,130) 132,786 10,946 144,284 352 (5,542) — — (268) (372) 352 (5,542) (640) Balances, August 31, 2017—As restated $ 552 $ 127,328 $ 10,574 $ 138,454 Effect of foreign currency translation adjustments Other Balances, August 31, 2018 — — 10 — — — 10 — $ 552 $ 127,338 $ 10,574 $ 138,464 No goodwill has been allocated to our Nitrogen Production segment, which consists of a single investment accounted for under the equity method. All long-lived assets, including property, plant and equipment, goodwill, investments in unconsolidated affiliates and other identifiable intangible assets, are evaluated for impairment in accordance with U.S. GAAP. Goodwill is evaluated for impairment annually as of July 31. All long-lived assets, including goodwill, are also evaluated for impairment whenever triggering events or other circumstances indicate that the carrying amount of an asset group or reporting unit may not be recoverable. No material impairments related to long-lived assets were recorded, and no goodwill impairments were identified as a result of CHS’s annual goodwill analyses performed as of July 31, 2018. During the year ended August 31, 2017, certain assets and liabilities associated with a disposal group in our Ag segment were classified as held for sale, including $5.5 million of goodwill allocated to the disposal group on a relative fair value basis. As a result of impairment tests performed over the disposal group, impairment charges of $78.8 mil- lion, which includes the allocated goodwill, were recorded in the reserve and impairment charges (recoveries), net line item in the Consolidated Statements of Operations for the year ended August 31, 2017. The disposal group assets were sold during the year ended August 31, 2018, and the related recoveries were recorded in the reserve and impairment charges (recoveries), net line item in the Consolidated Statements of Operations. 33 CHS 2018 33 40 CHS 2018SEVEN: O t h e r A ss e t s , co n t i n u e d 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, 2018 AUGUST 31, 2017 CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT ACCUMULATED AMORTIZATION NET $ 40,815 $ (13,082) $ 27,733 $ 46,180 $ (14,695) $ 31,485 Trademarks and other intangible assets 6,536 (4,931) 1,605 23,623 (21,778) 1,845 Total intangible assets $ 47,351 $ (18,013) $ 29,338 $ 69,803 $ (36,473) $ 33,330 Intangible asset amortization expense for the years ended August 31, 2018, 2017, and 2016, was $3.4 million, $4.3 million and $6.1 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) 2019 2020 2021 2022 2023 Thereafter Total $ 3,355 3,272 3,201 2,989 2,910 13,515 $ 29,242 Activity related to capitalized major maintenance costs at our refineries for the years ended August 31, 2018, 2017, and 2016, is summarized below: (DOLLARS IN THOUSANDS) 2018 2017 2016 BALANCE AT BEGINNING OF YEAR COST DEFERRED AMORTIZATION BALANCE AT END OF YEAR $ 105,006 $ 87,460 $ (61,686) $ 130,780 169,054 241,588 3,010 949 (67,058) 105,006 (73,483) 169,054 34 CHS 2018 41 34 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our primary committed line of credit is a five-year, unsecured revolving credit facility with a syndication of domestic and international banks. We maintain a series of uncommitted bilateral facilities that are renewed annually. Amounts borrowed under these short-term credit facilities are used to fund our working capital. The following table summarizes our pri- mary lines of credit as of August 31, 2018, and 2017: 1DEC201817272473 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, 2018. Notes Payable Notes payable as of August 31, 2018, and 2017, consisted of the following: WEIGHTED-AVERAGE INTEREST RATE (DOLLARS IN THOUSANDS) (AS RESTATED) 2017 2018 (AS RESTATED) 2017 2018 Notes payable 3.50% 2.40% $ 1,437,264 $ 1,695,423 CHS Capital notes payable Total notes payable 2.82% 1.90% 834,932 289,740 $ 2,272,196 $ 1,985,163 PRIMARY REVOLVING CREDIT FACILITIES (DOLLARS IN THOUSANDS) FISCAL YEAR OF MATURITIES TOTAL CAPACITY BORROWINGS OUTSTANDING INTEREST RATES 2018 2018 2017 Committed Five-Year Unsecured Facility 2021 $3,000,000 $ — $ 480,000 Uncommitted Bilateral Facilities 2019 515,000 515,000 350,000 LIBOR or Base Rate +0.00% to 1.45% LIBOR or Base Rate +0.00% to 1.20% In addition to our primary revolving lines of credit, we have a three-year $315.0 million committed revolving pre-export credit facility for CHS Agronegocio 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, fertilizers and other agricultural products which expires in April 2020. As of August 31, 2018, the out- standing balance under the facility was $181.1 million. As of August 31, 2018, our wholly-owned subsidiaries, CHS Europe S.a.r.l. and CHS Agronegocio, had uncom- mitted lines of credit with $454.1 million outstanding. In addition, our other international subsidiaries had lines of credit with a total of $279.4 million outstanding as of August 31, 2018, of which $40.5 million was collateralized. Miscellaneous short-term notes payable $7.4 million as of August 31, 2018. totaled CHS Capital Notes Payable On June 28, 2018, we amended our Securitization Facility with the Purchasers. Under the Securitization Facility, we and certain of our subsidiaries sell Receiv- ables to Cofina, a wholly-owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn transfers the purchased Receivables to the Purchasers. During the period from July 2017 through the amendment of the Securitization Facility in June 2018, CHS accounted for Receivables sold under the Securitization Facility as a sale of financial assets pursuant to ASC 860, Transfers and Servicing, and the Receivables sold were der- ecognized from its Consolidated Balance Sheets. Under the terms of the amended Securitization Facility, the transfer of Receivables is accounted for as a secured borrowing. We use the proceeds from the sale of Receivables under the Securitization Facility for general corporate purposes. The Securitization Facility termi- nates on June 17, 2019, but may be extended. See Note 3, Receivables for additional information. 35 CHS 2018 35 42 CHS 2018EIGHT: 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 CHS Capital has available credit under master participa- tion agreements with several counterparties. Borrow- ings under these agreements are accounted for as secured borrowings and bear interest at variable rates ranging from 2.22% to 3.72% as of August 31, 2018. As of August 31, 2018, the total funding commitment under these agreements was $36.0 million, of which $6.3 mil- lion was borrowed. CHS Capital sells loan commitments it has originated to ProPartners Financial on a recourse basis. The total out- standing commitments under the program totaled $180.9 million as of August 31, 2018, of which $98.3 mil- lion was borrowed under these commitments with an interest rate of 3.22%. 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 1.40% as of August 31, 2018, and are due upon demand. Borrowings under these notes totaled $69.3 million as of August 31, 2018. 36 CHS 2018 43 36 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-Term Debt During the year ended August 31, 2018, we repaid approximately $208 million of long-term debt consisting of scheduled debt maturities and optional prepayments. There were no new material borrowings of long-term debt during fiscal 2018. Amounts included in long-term debt on our Consolidated Balance Sheets as of August 31, 2018, and 2017, are presented in the table below. (DOLLARS IN THOUSANDS) 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 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 Private Placement debt 5.59% unsecured term loans from cooperative and other banks, due in equal installments beginning in 2013 through 2018 2.25% unsecured term loans from cooperative and other banks, due in 2025(b) Bank financing Capital lease obligations Other notes and contracts with interest rates from 1.30% to 15.25% Deferred financing costs Total long-term debt Less current portion Long-term portion 2018 2017 $ — $ 80,000 — — 4,615 10,000 60,000 80,000 129,229 130,690 157,528 163,496 128,577 135,792 152,000 152,000 80,000 80,000 100,000 100,000 145,213 149,293 80,000 80,000 58,000 58,000 95,000 95,000 100,000 100,000 100,000 100,000 125,000 125,000 1,510,547 1,643,886 — 15,000 366,000 430,000 366,000 445,000 25,280 32,607 33,075 62,652 (4,179) (4,820) 1,930,255 2,179,793 167,565 156,345 $ 1,762,690 $2,023,448 (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 13, 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. 37 CHS 2018 37 44 CHS 2018EIGHT: 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 As of August 31, 2018, the carrying value of our long-term debt approximated its fair value, which is esti- mated to be $1.8 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 2018, we recorded corresponding fair value adjustments of $18.7 million, which are included in the amounts in the table above. See Note 13, Derivative Financial Instruments and Hedging Activities for additional information. In September 2015, we entered into a 10-year term loan with a syndication of banks. The agreement provides for committed term loans in an amount up to $600.0 mil- lion. As of August 31, 2018, $236.0 million was out- standing under this agreement. In June 2016, we amended the 10-year term loan so that $300.0 million of the $600.0 million loan balance possessed a revolving feature, whereby we were able to pay down and re-advance an amount up to the referenced $300.0 mil- lion. During fiscal 2017, we re-advanced $130.0 million under the revolving provision of the loan. As of August 31, 2018, $130.0 million was outstanding under this agreement. Principal on the outstanding balances is payable in full in September 2025. Long-term debt outstanding as of August 31, 2018, has aggregate maturities, excluding fair value adjustments and capital leases (see Note 6, Property, Plant and Equipment for a schedule of minimum future lease pay- ments under capital leases), as follows: (DOLLARS IN THOUSANDS) 2019 2020 2021 2022 2023 Thereafter Total $ 162,846 30,671 182,472 65 282,065 1,260,570 $ 1,918,689 Interest expense for the years ended August 31, 2018, 2017, and 2016, was $149.2 million, $171.2 million and $113.7 million, respectively, net of capitalized interest of $6.7 million, $6.9 million and $30.3 million, respectively. 1DEC201817273204 Income Taxes The provision for (benefit from) income taxes for the years ended August 31, 2018, 2017, and 2016 is as follows: (DOLLARS IN THOUSANDS) 2018 (AS RESTATED) 2017 (AS RESTATED) 2016 Current: Federal State Foreign Deferred: Federal State Foreign $ 15,576 $ 8,394 $ (14,536) 7,041 20,268 42,885 (1,787) 6,736 13,343 (146,780) (173,184) (127) (54) (13,244) (8,039) (146,961) (194,467) 2,427 3,018 (9,091) 34,753 (13,684) 7,121 28,190 Total $ (104,076) $ (181,124) $ 19,099 The tax expense above for fiscal 2017 and 2016 are restatements of originally filed amounts to reflect nec- essary tax adjustments caused by restatements to pre-tax income for the relevant periods as well as to reflect certain tax only adjustments moved to or from other years. For fiscal 2017 and 2016, the adjustments to tax expense were $1.0 million and $23.2 million, respec- tively. In addition, the disclosures of deferred tax assets for fiscal 2017 discussed below similarly reflect restate- ments from originally filed amounts for changes in book income and tax only adjustments to or from previous years. The net deferred tax liability for fiscal 2017 reflects a total adjustment from originally filed for $3.7 million. All other disclosures reflect amounts after restatement. 38 CHS 2018 45 38 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Domestic income before income taxes was $717.4 mil- lion, $158.5 million, and $473.0 million for the years ended August 31, 2018, 2017, and 2016, respectively. For- eign income before income taxes was ($46.2) million, ($268.7) million, and ($70.9) million for the years ended August 31, 2018, 2017, and 2016, respectively. On December 22, 2017, the Tax Act was enacted into law. The Tax Act provides for significant U.S. tax law changes that reduced our federal corporate statutory tax rate from 35% to 21% as of January 1, 2018. As a fiscal year-end taxpayer, our annual statutory federal corpo- rate tax rate applicable to fiscal 2018 was a blended rate of 25.7%. Beginning in fiscal 2019, the annual statutory federal corporate tax rate will be 21%. The Tax Act also requires companies to pay a one-time repatriation tax on certain unrepatriated earnings of for- eign subsidiaries that were previously tax deferred (‘‘transition tax’’) and creates new taxes on certain for- eign sourced earnings. Foreign taxes have not histori- cally had a material impact on our consolidated financial statements. The foreign impacts of the Tax Act are dis- cussed below. The Tax Act initially repealed the Domestic Production Activities Deduction (‘‘DPAD’’) and enacted the Deduc- tion for Qualified Business Income of Pass-Thru Entities (‘‘QBI Deduction’’); however, the Consolidated Appro- priations Act, 2018 (the ‘‘Appropriations Act’’) enacted into law on March 23, 2018, impacted these deductions. The Appropriations Act modifies the QBI Deduction under Sec. 199A of the Tax Act to reenact DPAD for agricultural and horticultural cooperatives as it existed prior to the enactment of the Tax Act, and also modifies the QBI Deduction available to cooperative patrons as enacted by the Tax Act. All references to the Tax Act below include the modifications introduced by the Appropriations Act. As discussed in Note 1, Organization, Basis of Presenta- tion and Significant Accounting Policies, the FASB issued ASU 2018-05 during March 2018, which allows for entities to report provisional amounts for specific income tax effects associated with the Tax Act for which the accounting is not complete, but a reasonable esti- mate can be determined. As of August 31, 2018, we have not finalized our work associated with the income tax effects of the enactment of the Tax Act; however, a reasonable estimate was pro- visionally recorded as a net benefit of $155.2 million from the revaluation of our U.S. net deferred tax liability that resulted from the reduced federal corporate tax rate and CHS being subject to the employee compensation deduction limitations imposed by Internal Revenue Code Section 162(m). We have provisionally estimated that we will not have a transition tax liability; however, we continue to gather additional information and will refine that estimate, if necessary. Additionally, we continue to review the antici- pated impacts of global intangible low-taxed income (‘‘GILTI’’), including whether its tax effects should be accounted for as an in-period or deferred tax expense. Due to the complexity of the GILTI tax rules and the dependency upon future results of our global opera- tions and our global structure, we are currently unable to make a reasonable estimate of this provision and have not recorded any impact associated with GILTI in the tax rate for the year ended August 31, 2018. Deferred taxes are comprised of basis differences related to investments, accrued liabilities and certain federal and state tax credits. Deferred tax assets and liabilities as of August 31, 2018, and 2017, are as follows: (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued expenses Postretirement health care and deferred compensation Tax credit carryforwards Loss carryforwards Nonqualified equity Major maintenance Other 2018 (AS RESTATED) 2017 $ 138,417 $ 227,877 41,797 154,240 104,519 178,046 5,484 83,580 82,682 169,549 156,615 140,009 13,011 83,138 Deferred tax assets valuation reserve (230,373) (289,082) Total deferred tax assets Deferred tax liabilities: Pension Investments Property, plant and equipment Other Total deferred tax liabilities 475,710 583,799 19,397 98,608 513,238 26,828 658,071 32,150 130,816 709,313 40,323 912,602 Net deferred tax liabilities $ 182,361 $ 328,803 We have total gross loss carry forwards of $531.1 million, of which $342.8 million will expire over periods ranging from fiscal 2019 to fiscal 2040. The remainder will carry 39 CHS 2018 39 46 CHS 2018NINE: I n co m e Ta xe s , co n t i n u e d forward indefinitely. Based on estimates of future tax- able profits and losses in certain foreign tax jurisdic- tions, as well as consideration of other factors, we assessed whether a valuation allowance was necessary to reduce specific foreign loss carry forwards to amounts that we believe are more likely than not to be realized as of August 31, 2018. If our estimates prove inaccurate, adjustments to the valuation allowances may be required in the future with gains or losses being charged to income in the period such determination is made. During fiscal 2018, valuation allowances related to foreign operations decreased by $33.8 million due to net operating loss carry forwards and other timing differ- (‘‘CHS ences. CHS McPherson Refinery McPherson’’) (formerly known as National Cooperative Refinery Association) gross state tax credit carry for- wards for income tax were approximately $121.6 million and $172.9 million as of August 31, 2018, and 2017, respectively. During the year ended August 31, 2018, the valuation allowance for CHS McPherson decreased by $17.0 million, net of federal tax, due to a change in the amount of state tax credits that will be available for use and estimated to be utilized. The significant decrease in state tax credit carry forwards resulted from the CHS McPherson expansion project qualifying for an alterna- tive Kansas state credit than the credit under which the project previously qualified. CHS McPherson’s valuation allowance on Kansas state credits is necessary due to the limited amount of taxable income generated in Kansas by the combined group on an annual basis. Inc. Our foreign tax credit of $11.2 million was generated in fiscal 2018 and will expire in ten years. Our alternative minimum tax credit of $6.1 million will not expire. Our general business credits of $61.2 million, comprised pri- marily of low sulfur diesel credits, will begin to expire on August 31, 2027 and our state tax credits of $121.6 million will begin to expire on August 31, 2019. As of August 31, 2018, and 2017, net deferred tax assets of $0.4 million and $1.2 million were included in other assets, respectively. The reconciliation of the statutory federal income tax rates to the effective tax rates for the years ended August 31, 2018, 2017, and 2016 is as follows: 2018 (AS RESTATED) 2017 (AS RESTATED) 2016 Statutory federal income tax rate 25.7% 35.0% 35.0% State and local income taxes, net of federal income tax benefit Patronage earnings Domestic production activities deduction Export activities at rates other than the U.S. statutory rate U.S. tax reform Intercompany transfer of business assets Increase in unrecognized tax benefits Valuation allowance Tax credits Crack spread contingency Other Effective tax rate 0.7 (13.6) (8.4) 6.1 (23.2) (6.1) 6.8 (3.4) 0.7 — (0.8) (15.5)% 12.1 91.7 30.5 0.3 (21.2) (12.1) 51.6 (3.0) — — — (77.1) 22.8 4.8 (7.0) 164.4% — — — 25.4 (14.1) (5.3) (0.3) 4.7% The primary drivers of the fiscal 2018 income tax benefit are the recognition of deferred benefits from the revalu- ation of our net deferred tax liability resulting from the Tax Act, the intercompany transfer of a business on December 1, 2017, and a current tax benefit from retaining a significant portion of the DPAD, which were partially offset by deferred tax expense from an increase in our unrecognized tax benefit as described below. The components of the income tax benefit disclosed as a percentage of income (loss) before income taxes in the reconciliation of the statutory federal income tax rate for the year ended August 31, 2017, were magnified because our fiscal 2017 income tax benefit was unusu- ally large in relation to our income (loss) before income taxes. The primary drivers of the fiscal 2017 income tax benefit were the recognition of deferred tax benefits related to the issuance of non-qualified equity certifi- cates for fiscal 2013 and 2014, which is disclosed within ‘Patronage earnings’ and U.S. and Brazil deductions related to the Brazilian trading partner loss, which are disclosed within ‘Statutory federal income tax rate’ and ‘Export activities at rates other than the U.S. statutory 40 CHS 2018 47 40 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rate’, respectively, as well as a current tax benefit from retaining a significant portion of the DPAD. A significant income tax expense within the fiscal 2017 income tax benefit is an increase in the valuation allowance against deferred tax assets generated in the Brazilian trading partner loss and Kansas state tax credits. We file income tax returns in the U.S. federal jurisdiction, as well as various state and foreign jurisdictions. Our uncertain 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 2017 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 of the position. A reconciliation of the gross beginning and ending amounts of unrecognized tax benefits for the periods presented follows: (DOLLARS IN THOUSANDS) 2018 2017 2016 Balance at beginning of period $ 37,830 $ 37,105 $ 72,181 Additions attributable to current year tax positions 3,640 725 1,387 Additions attributable to prior year tax positions 49,665 — — Reductions attributable to prior year tax positions — — (36,463) Balance at end of period $ 91,135 $ 37,830 $ 37,105 During fiscal 2018, adverse judicial opinions received by other taxpayers with similar filing positions resulted in an increase to our unrecognized tax benefits primarily for excise tax credits related to the blending and sale of renewable fuels deducted from income taxes. During fiscal 2017, we increased our unrecognized tax benefits for excise tax credits related to the blending and sale of renewable fuels deducted for income taxes. During fiscal 2016, we decreased our unrecognized tax benefits due to a settlement with the Internal Revenue Service and 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 positions taken in relation to uncertain tax positions, $83.3 million of the unrecog- nized tax benefits would ultimately benefit our effective tax rate. However, we do not believe it is reasonably possible that the total amount of unrecognized tax ben- efits 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. We recognized $1.2 million for interest related to unrecog- nized tax benefits in our Consolidated Statement of Operations for the year ended August 31, 2018, and a related $1.2 million interest payable on our Consolidated Balance Sheet as of August 31, 2018. No interest or pen- alties were recognized in our Consolidated Statements of Operations for the years ended August 31, 2017, and 2016 and no interest payable was recorded on our Con- solidated Balance Sheet as of August 31, 2017. 1DEC201817273930 Equities 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, if any, is deter- mined annually by the Board of Directors, with the bal- ance issued in the form of qualified and/or non-qualified capital equity certificates. Total patronage distributions for fiscal 2018 are estimated to be $420.3 million, with 41 CHS 2018 41 48 CHS 2018TEN: Eq u i t i e s , co n t i n u e d the qualified cash portion estimated to be $75.0 million and non-qualified equity distributions of $345.3 million. No portion of annual net earnings for fiscal 2018 will be issued in the form of qualified capital equity certificates. Patronage distributions in fiscal 2017 were $128.8 mil- lion, with no cash portion. The actual patronage distri- butions and cash portion for fiscal 2016, and 2015 were $257.5 million ($103.9 million in cash), and $627.2 million ($251.7 million in cash), respectively. Annual net earnings 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 2018, 2017, and 2016 be added to our capital reserves. Redemptions of outstanding equity are at the discretion of the Board of Directors. Redemptions of capital equity certificates approved by the Board of Directors are divided into two pools, one for non-individuals (prima- rily member cooperatives) who may participate in an annual redemption 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 distri- butions were made in fiscal 2018), CHS’s redemption policy includes a redemption program for individuals similar to the one that was previously only available to non-individual members, subject to the CHS Board of Directors’ overall discretion whether to redeem out- standing equity. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2018, that will be distributed in fiscal 2019, to be approximately $75.0 mil- lion. This amount is classified as a current liability on our August 31, 2018, Consolidated Balance Sheet. During the years ended August 31, 2018, 2017, and 2016, we redeemed in cash, outstanding owners’ equities in accordance with authorization from the Board of Direc- tors, in the amounts of $8.8 million, $35.3 million and $23.9 million, respectively. In March 2017, we redeemed approximately $20.0 mil- lion of patrons’ equities by issuing 695,390 shares of Class B Cumulative Redeemable Preferred Stock, Series 1 (‘‘Class B Series 1 Preferred Stock’’), with a total redemption value of $17.4 million, excluding accumu- lated dividends. Each share of Class B Series 1 Preferred Stock was issued in redemption of $28.74 of patrons’ equities in the form of capital equity certificates. Addi- tionally, in fiscal 2016, we redeemed approximately $76.8 million of patrons’ equities by issuing 2,693,195 shares of 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. 42 CHS 2018 49 42 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Preferred Stock The following is a summary of our outstanding preferred stock as of August 31, 2018, all shares 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 (e) 12,272,003 $306.8 $311.2 8.00% Quarterly 7/18/2023 Class B Cumulative Redeemable, Series 1 CHSCO (f) 21,459,066 $536.5 $569.3 7.875% Quarterly 9/26/2023 Class B Reset Rate Cumulative Redeemable, Series 2 CHSCN 3/11/2014 16,800,000 $ 420.0 $ 406.2 7.10% Quarterly 3/31/2024 Class B Reset Rate Cumulative Redeemable, Series 3 CHSCM 9/15/2014 19,700,000 $ 492.5 $ 476.7 6.75% Quarterly 9/30/2024 Class B Cumulative 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 through 2010. (f) Shares of Class B Cumulative Redeemable Preferred Stock, Series 1 were issued on September 26, 2013, August 25, 2014, March 31, 2016 and March 30, 2017. We made dividend payments on our preferred stock of $168.7 million, $167.6 million, and $163.3 million, during the years ended August 31, 2018, 2017 and 2016, respec- tively. As of August 31, 2018, we have no authorized but unissued shares of preferred stock. 43 CHS 2018 43 50 CHS 2018TEN: Eq u i t i e s , co n t i n u e d Accumulated Other Comprehensive Loss Changes in accumulated other comprehensive income (loss) by component, for the years ended August 31, 2018, 2017, and 2016 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, 2015, net of tax (As previously reported) $ (171,729) $ 4,156 $ (5,324) $ (41,310) $ (214,207) Cumulative restatement adjustments Balance as of August 31, 2015, net of tax (As restated) Other comprehensive income (loss), before tax: Amounts before reclassifications Amounts reclassified out Total other comprehensive income (loss), before tax Tax effect Other comprehensive income (loss), net of tax Balance as of August 31, 2016, net of tax (As restated) Other comprehensive income (loss), before tax: Amounts before reclassifications Amounts reclassified out Total other comprehensive income (loss), before tax Tax effect Other comprehensive income (loss), net of tax Balance as of August 31, 2017, net of tax (As restated) Other comprehensive income (loss), before tax: Amounts before reclassifications Amounts reclassified out Total other comprehensive income (loss), before tax Tax effect Other comprehensive income (loss), net of tax Reclassification of tax effects to retained earnings — (171,729) (10,512) 20,998 10,486 (3,903) 6,583 (165,146) 25,216 26,174 51,390 (18,688) 32,702 (132,444) 7,633 21,804 29,437 (9,371) 20,066 (27,957) — — 1,370 1,370 4,156 (5,324) (39,940) (212,837) 2,447 (11,353) (2,210) (21,628) — 5,071 (6,282) 2,410 469 (1,741) (1,163) (3,872) (2,904) 26,538 4,910 (3,603) 1,307 (9,196) (42,844) (211,530) 1,892 1,742 3,634 (7,960) 15 (7,945) 26,265 27,931 54,196 2,447 (947) 1,500 5,656 7,117 — 7,117 (2,732) (1,392) (214) (23,026) 4,385 10,041 21,078 (25,534) (4,456) 1,308 (3,148) 2,242 (8,159) 31,170 (6,954) (51,003) (180,360) 1,031 1,704 2,735 (195) 2,540 (10,062) (2,042) (12,104) 83 (12,021) 19,680 (4,068) 15,612 (8,175) 7,437 1,968 (1,468) 465 (26,992) Balance as of August 31, 2018, net of tax $ (140,335) $ 8,861 $ (5,882) $ (62,559) $ (199,915) During fiscal 2018, we adopted ASU No. 2018-02, Reclassifi- cation of Certain Tax Effects From Accumulated Other Com- prehensive Income. Under U.S. GAAP, the effects of tax law changes on deferred tax balances, including adjustments to deferred taxes originally recorded to accumulated other comprehensive income (loss), are recorded as a component of income tax expense. Adjusting deferred tax balances related to items originally recorded in accumulated other comprehensive income (loss) through tax expense resulted in a remaining accumulated other comprehensive income (loss) balance that was disproportionate to the amounts that would have been recorded through net income in future periods. The new guidance allowed us to reclassify $27.0 million of disproportionate (or stranded) amounts related to the Tax Act to capital reserves. Amounts reclassified from accumulated other comprehen- sive income (loss) were related to pension and other postre- tirement benefits, cash flow hedges, available for sale investments and foreign currency translation adjustments. Pension and other postretirement reclassifications include amortization of net actuarial loss, prior service credit and transition amounts and are recorded as cost of goods sold and marketing, general and administrative expenses (see Note 11, Benefit Plans for further information). Amortization related to gains or losses on cash flow hedges is recorded to interest expense. Gains or losses on the sale of available for sale investments are recorded to other income. Foreign cur- rency translation reclassifications related to sales of busi- nesses are recorded to gain on sale of business or reserve and impairment charges (recoveries), net. 44 44 CHS 2018 51 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During fiscal 2016, interest rate swaps 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 in our Con- solidated Statement of Operations for the year ended August 31, 2016. 1DEC201817272596 Benefit Plans We have various pension and other defined benefit as well as 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 sheet status as of August 31, 2018, and 2017, is as follows: (DOLLARS IN THOUSANDS) Change in benefit obligation: QUALIFIED PENSION BENEFITS NON-QUALIFIED PENSION BENEFITS OTHER BENEFITS 2018 2017 2018 2017 2018 2017 Benefit obligation at beginning of period $ 806,174 $ 812,749 $ 25,599 $ 32,696 $ 31,836 $ 36,779 Service cost Interest cost Actuarial (gain) loss Assumption change Plan amendments Settlements Benefits paid 39,677 42,149 24,007 22,999 3,146 (10,054) 548 711 205 1,206 843 943 908 1,160 930 (5,692) (623) (4,650) (36,515) (17,750) (783) (655) (1,612) (775) 244 — — — — (4,824) (69,549) (43,919) (701) — (2,131) (668) — — — — (1,662) (1,608) Benefit obligation at end of period $ 767,184 $ 806,174 $ 20,755 $ 25,599 $ 29,790 $ 31,836 Change in plan assets: Fair value of plan assets at beginning of period $ 875,820 $ 883,265 $ Actual gain (loss) on plan assets Company contributions Settlements Benefits paid 23,345 36,474 — $ — — $ — — — — — 5,525 (4,824) (69,549) (43,919) (701) 2,799 (2,131) (668) — $ — 1,662 — — — 1,608 — (1,662) (1,608) Fair value of plan assets at end of period $ 829,616 $ 875,820 $ — $ — $ — $ — Funded status at end of period $ 62,432 $ 69,646 $ (20,755) $ (25,599) $ (29,790) $ (31,836) Amounts recognized on balance sheet: Non-current assets Accrued benefit cost: Current liabilities Non-current liabilities $ 62,432 $ 70,019 $ — $ — $ — $ — — — — (1,780) (2,270) (2,040) (2,140) (373) (18,975) (23,329) (27,750) (29,696) Ending balance $ 62,432 $ 69,646 $ (20,755) $ (25,599) $ (29,790) $ (31,836) Amounts recognized in accumulated other comprehensive loss (pretax): Prior service cost (credit) $ 1,288 $ 2,481 $ (691) $ (660) $ (3,716) $ (4,281) Net (gain) loss Ending balance 209,606 236,232 427 953 (17,875) (16,864) $ 210,894 $ 238,713 $ (264) $ 293 $ (21,591) $ (21,145) 45 CHS 2018 45 52 CHS 2018ELEVEN: B e n e f i t P l a n s , co n t i n u e d The accumulated benefit obligation of the qualified pen- sion plans was $736.2 million and $743.5 million at August 31, 2018, and 2017, respectively. The accumu- lated benefit obligation of the non-qualified pension plans was $18.6 million and $20.6 million at August 31, 2018, and 2017, respectively. Information for the pension plans with an accumulated benefit obligation in excess of plan assets is set forth below: (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED AUGUST 31 2018 2017 Projected benefit obligation $ 20,755 $ 28,177 Accumulated benefit obligation Fair value of plan assets 18,586 — 23,221 2,203 A 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 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 made the determina- tion 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 has and is expected to continue to result in a decrease in the service and interest cost components for the pen- sion and other post-retirement benefit costs. We histori- cally 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 fiscal 2017, we elected to utilize a full-yield curve approach in the determination of these compo- nents 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. 46 CHS 2018 53 46 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Components of net periodic benefit costs for the years ended August 31, 2018, 2017, and 2016 are as follows: (DOLLARS IN THOUSANDS) 2018 2017 2016 2018 2017 2016 2018 2017 2016 QUALIFIED PENSION BENEFITS NON-QUALIFIED PENSION BENEFITS OTHER BENEFITS Components of net periodic benefit costs: Service cost Interest cost $ 39,677 $ 42,149 $ 37,533 $ 548 $ 1,206 $ 1,035 $ 943 $ 1,160 $ 1,412 24,007 22,999 30,773 843 1,406 908 930 1,709 711 — Expected return on assets (48,159) (48,235) (48,055) — Settlement of retiree obligations Prior service cost (credit) — — — (112) (30) — — — — — — — — amortization 1,437 1,540 1,606 Actuarial loss (gain) amortization 18,073 22,869 19,016 30 61 19 228 (565) (565) (120) 546 692 (1,224) (798) (464) Net periodic benefit cost $ 35,035 $ 41,322 $ 40,873 $ 1,238 $ 2,584 $ 3,361 $ 62 $ 727 $ 2,537 Weighted-average assumptions to determine the net periodic benefit cost: Discount rate 3.80% 3.60% 4.20% 3.53% 3.28% 4.20% 3.56% 3.30% 4.20% Expected return on plan assets 5.75% 5.75% 6.00% N/A N/A N/A N/A N/A N/A Rate of compensation increase 5.08% 5.60% 4.90% 5.08% 5.60% 4.90% N/A N/A N/A Weighted-average assumptions to determine the benefit obligations: Discount rate 4.23% 3.80% 3.60% 4.09% 3.53% 3.28% 4.13% 3.56% 3.30% Rate of compensation increase 5.14% 5.08% 5.60% 5.14% 5.08% 5.60% N/A N/A N/A Components of net periodic benefit costs and amounts recognized in other comprehensive income (loss) for the years ended August 31, 2018, 2017, and 2016 are as follows: (DOLLARS IN THOUSANDS) 2018 2017 2016 2018 2017 2016 2018 2017 2016 QUALIFIED PENSION BENEFITS NON-QUALIFIED PENSION BENEFITS OTHER BENEFITS Other comprehensive income (loss) Prior service cost (credit) $ 244 $ — $ 411 $ — $ — $ (1,044) $ — $ — $ (4,495) Net actuarial loss (gain) Amortization of (8,553) (16,044) 17,712 (578) (6,345) (655) (2,234) (5,427) (2,290) actuarial loss (gain) (18,073) (22,869) (19,016) (61) (546) (692) 1,224 798 464 Amortization of prior service costs (credit) Settlement of retiree obligations (a) Total recognized in other comprehensive income (1,437) (1,540) (1,606) (30) (19) (228) 565 565 120 — — — 112 30 — — — — $ (27,819) $ (40,453) $ (2,499) $ (557) $ (6,880) $ (2,619) $ (445) $ (4,064) $ (6,201) (a) Reflects amounts reclassified from accumulated other comprehensive income (loss) to net earnings 47 CHS 2018 47 54 CHS 2018ELEVEN: 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 2019 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 BENEFITS PENSION BENEFITS OTHER BENEFITS (credit) $ 190 $ (75) $ (556) Amortization of net actuarial (gain) loss 12,266 2 (1,629) For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 2018. The rate was assumed to decrease gradually to 4.5% by 2027 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 $ 230 $ (200) Effect on postretirement benefit obligation 2,400 (2,100) 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 did not contribute to the qualified pension plans in fiscal 2018. Based on the funded status of the qualified pension plans as of August 31, 2018, we do not believe we will be required to contribute to these plans in fiscal 2019, although we may voluntarily elect to do so. We expect to pay $3.8 million to participants of the non-qualified pension and postretirement benefit plans during fiscal 2019. (DOLLARS IN THOUSANDS) 2019 2020 2021 2022 2023 NON- QUALIFIED QUALIFIED PENSION BENEFITS PENSION OTHER BENEFITS GROSS BENEFITS $ 66,528 $ 1,780 $ 2,040 62,320 61,279 1,670 1,750 62,877 2,230 64,573 1,840 2,260 2,400 2,590 2,720 2024–2028 328,313 9,270 12,690 We have trusts that hold the assets for the defined benefit plans. CHS has a qualified plan committee that sets investment guidelines with the assistance of external consultants. 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 accom- plished through the asset portfolio mix by reducing vol- atility and de-risking the plans. The plans’ target allocation percentages range between 45% and 65% for fixed income securities, and range between 35% and 55% for equity securities. An annual analysis of the risk versus the return of the investment portfolio is con- ducted to justify the expected long-term rate of return assumption. We generally 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 invest- ment 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 48 CHS 2018 55 48 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to the liabilities in the plans that receive high, invest- ment-grade ratings by recognized ratings agencies. long-term securities, growth and value equities, large and small cap stocks, as well as active and passive man- agement styles. The investment portfolio contains a diversified portfolio of investment categories, including domestic and inter- national equities, fixed-income securities and real estate. Securities are also diversified in terms of international securities, short and domestic and The committee believes 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, 2018, and 2017, 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) 2018 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 7,424 $ — $ — $ 7,424 692 — — — — — — — — — — — — — — 692 216,962 500,637 101,954 1,947 Total $ 8,116 $ — $ — $ 829,616 (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) 2017 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 9,988 $ — $ — $ 9,988 459 — — — — — — — — — — — — — — 459 231,228 535,185 96,994 1,966 Total $ 10,447 $ — $ — $ 875,820 (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 14, 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. Mutual funds measured at fair value using the net asset value per share practical expedient have not been cate- gorized in the fair value hierarchy in accordance with ASC Topic 820-10, Fair Value Measurement. 49 CHS 2018 49 56 CHS 2018ELEVEN: B e n e f i t P l a n s , co n t i n u e d 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 generally 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 expe- dient have not been categorized in the fair value hier- archy 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, 2018, 2017, and 2016 is outlined in the table below: (DOLLARS IN THOUSANDS) PLAN NAME EIN/PLAN NUMBER 2018 2017 2016 CONTRIBUTIONS OF CHS SURCHARGE IMPOSED EXPIRATION DATE OF COLLECTIVE BARGAINING AGREEMENT Co-op Retirement Plan 01-0689331 / 001 $ 1,662 $ 1,653 $ 1,862 N/A N/A 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). Provisions of the Pension Protection Act of 2006 (‘‘PPA’’) do not apply to the Co-op Plan because there is a special exemption for cooperative plans if the plan is maintained by more than one employer and at least 85% of the employers are rural cooperatives or cooperative organizations 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 avail- able in 2018 and 2017 are for the Co-op Plan’s year-end at March 31, 2018, and 2017, 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. 50 50 CHS 2018 57 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2018, 2017, and 2016. We have other contributory defined contribution plans covering substantially all employees. Total contributions by us to these plans were $24.7 million, $19.9 million and $29.5 million, for the years ended August 31, 2018, 2017, and 2016, respectively. 1DEC201817274284 Segment Reporting We are an integrated agricultural enterprise, providing grain, foods and energy resources to businesses and consumers 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 accor- dance with ASC Topic 280, Segment Reporting, to reflect the manner in which our chief operating decision maker, our Chief Executive Officer, evaluates perform- ance and allocates resources in managing the business. We have aggregated those operating segments into three reportable segments: Energy, Ag and Nitrogen Production. Our Energy segment produces and provides primarily for the wholesale distribution of petroleum products and transportation of those products. Our Ag segment purchases and further processes or resells grains and oilseeds originated by our country operations business, by our member cooperatives and by third parties; serves as a wholesaler and retailer of crop inputs; and produces and markets ethanol. Our Nitrogen Production segment consists solely of our equity method investment in CF Nitrogen, which was completed in February 2016 and which entitles us, pursuant to a supply agreement that we entered with CF Nitrogen, to purchase up to a speci- fied annual quantity of granular urea and UAN annually from CF Nitrogen. The addition of the Nitrogen Produc- tion segment had no impact on historically reported and Other primarily segment results and balances as this segment came into existence in fiscal 2016. There were no changes to the composition of our Energy or Ag segments as a result of the addition of the Nitrogen Production segment. Cor- represents our porate non-consolidated wheat milling operations and pack- aged food joint ventures, as well as our business solu- tions operations, which primarily consists of commodities hedging, financial services related to crop production, and insurance which was disposed of in May 2018. Our investment in Ventura Foods is included in our Corporate and Other category. 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. 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 oper- ations 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 exper- iences higher volumes and profitability in certain oper- ating areas, such as refined products, in the summer and early fall when gasoline and diesel fuel usage is highest 51 CHS 2018 51 58 CHS 2018TWELVE: S e g m e n t R e p o r t i n g , co n t i n u e d and is subject to global supply and demand forces. Other energy products, such as propane, may experi- ence 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 operations are conducted through companies in which we hold ownership interests of 50% or less and do not control the operations. We account for these invest- ments 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 Operations. In our Ag segment, this principally includes our 50% ownership in TEMCO. In our Nitrogen Production segment, this consists of our approximate 10% membership interest (based on product tons) in CF Nitrogen. In Corporate and Other, this principally includes our 50% ownership in Ventura Foods and our 12% ownership in Ardent Mills. See Note 5, Investments for more information related to CF Nitrogen, Ventura Foods and Ardent Mills. 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. 52 CHS 2018 59 52 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segment information for the years ended August 31, 2018, 2017, and 2016 is presented in the tables below. (DOLLARS IN THOUSANDS) ENERGY NITROGEN PRODUCTION CORPORATE AND OTHER RECONCILING AMOUNTS AG TOTAL For the year ended August 31, 2018: Revenues, including intersegment revenues $ 8,068,717 $ 25,052,395 $ — $ 64,516 $ (502,281) $ 32,683,347 Operating earnings (loss) (Gain) loss on disposal of business Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Intersegment revenues Capital expenditures Depreciation and amortization Total assets as of August 31, 2018 390,092 (65,862) 14,627 (7,718) (3,063) 95,883 (20,619) (8,270) — (58,247) — — 50,499 (3,061) (7,712) (3,388) (2,468) 2,468 (7,707) 94,256 (66,316) 457,086 (131,816) 149,202 (78,015) 1,392 (106,895) (44,949) — (153,515) $ 452,108 $ (479,598) $ 248,207 $ 230,230 $ 4,168,239 $ $ $ $ $ 74,258 (14,914) 77,962 218,716 $ $ $ $ 38,838 $ 106,026 — $ (7,769) — $ 29,243 — $ 29,104 6,534,777 $ 2,758,668 $ 2,919,494 $ $ $ $ $ — $ 671,230 502,281 $ — — $ 355,412 — $ 478,050 — $ 16,381,178 (DOLLARS IN THOUSANDS) ENERGY For the year ended August 31, 2017 (As restated): NITROGEN PRODUCTION CORPORATE AND OTHER RECONCILING AMOUNTS AG TOTAL Revenues, including intersegment revenues $ 6,620,680 $ 25,738,740 $ — $ 95,414 $ (417,408) $ 32,037,426 Operating earnings (loss) 75,138 (268,946) (18,430) 38,212 (Gain) loss on disposal of business Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Intersegment revenues Capital expenditures Depreciation and amortization Total assets as of August 31, 2017 — 18,365 (1,164) (3,181) $ 61,118 $ (392,842) $ 260,543 $ 223,229 $ 4,290,618 $ $ $ $ $ 2,190 71,986 — 48,893 (65,684) (30,534) — 33,250 (3,824) (7,277) (66,530) (60,350) (270,161) (20,312) 146,139 232,443 $ $ $ $ 29,741 $ 69,136 — $ (4,254) — $ 37,715 — $ 24,551 6,359,058 $ 2,781,610 $ 2,387,636 — — (1,255) 1,255 — (174,026) 2,190 171,239 (99,951) (137,338) $ $ $ $ $ — $ (110,166) 417,408 $ — — $ 444,397 — $ 480,223 — $ 15,818,922 (DOLLARS IN THOUSANDS) ENERGY For the year ended August 31, 2016 (As restated): NITROGEN PRODUCTION CORPORATE AND OTHER RECONCILING AMOUNTS AG TOTAL Revenues, including intersegment revenues $ 5,743,882 $ 24,896,354 $ — $ 92,725 $ (377,701) $ 30,355,260 Operating earnings (loss) Interest expense Other (income) loss 246,105 (22,244) 36,649 82,085 (287) (53,044) (6,193) 34,437 — 15,882 30,647 (5,499) Equity (income) loss from investments (4,739) (7,644) (74,700) (88,694) — (11,221) 11,221 — 292,443 113,704 (47,609) (175,777) Income (loss) before income taxes Intersegment revenues Capital expenditures Depreciation and amortization $ 273,375 $ (335,003) $ $ 376,841 193,525 $ $ $ $ 15,252 (40,336) 260,865 230,172 $ $ $ $ 34,070 $ 79,428 — $ (2,362) — $ 55,074 — $ 23,795 $ $ $ $ — $ 402,125 377,701 $ — — $ 692,780 — $ 447,492 53 CHS 2018 53 60 CHS 2018TWELVE: 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, 2018, 2017, and 2016: (DOLLARS IN THOUSANDS) North America South America Europe, the Middle East and Africa (EMEA) Asia Pacific (APAC) Total 2018 (AS RESTATED) 2017 (AS RESTATED) 2016 $ 29,475,724 $ 29,068,842 $ 26,571,367 1,569,330 536,501 1,101,792 1,441,316 652,308 874,960 1,847,284 878,407 1,058,202 $ 32,683,347 $ 32,037,426 $ 30,355,260 Included in North American revenues are revenues from the United States of $29.5 billion, $29.0 billion and $26.5 bil- lion for the years ended August 31, 2018, 2017, and 2016, respectively. Long-lived assets include our property, plant and equipment, capital lease assets and capitalized major maintenance costs. The following table presents long-lived assets by geographical region: (DOLLARS IN THOUSANDS) United States International Total 1DEC201817274048 2018 2017 $ 5,185,572 $ 5,359,270 86,927 102,170 $ 5,272,499 $ 5,461,440 Derivative Financial Instruments and Hedging Activities Our derivative instruments primarily consist of commodity 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 14, 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. 54 CHS 2018 61 54 CHS 2018(DOLLARS IN THOUSANDS) Derivative Assets: Commodity derivatives Foreign exchange derivatives Embedded derivative asset Total Derivative Liabilities: Commodity derivatives Foreign exchange derivatives Total (DOLLARS IN THOUSANDS) Derivative Assets: Commodity derivatives Foreign exchange derivatives Embedded derivative asset Total Derivative Liabilities: Commodity derivatives Foreign exchange derivatives Total Derivative assets and liabilities with maturities of less than 12 months are recorded in derivative assets and derivative liabilities, respectively, on the Consolidated Balance Sheets. Derivative assets and liabilities with maturities greater than 12 months are recorded in other assets and other liabilities, respectively, on the Consoli- dated Balance Sheets. The amount of long-term deriva- tive assets, excluding derivatives accounted for as fair value hedges, recorded on the Consolidated Balance Sheet at August 31, 2018, and 2017, was $23.1 million and $30.9 million, respectively. The amount of long-term derivative liabilities, excluding derivatives accounted for as fair value hedges, recorded on the Consolidated Bal- ance Sheet at August 31, 2018, and 2017, was $7.9 million and $12.3 million, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2018 AMOUNTS NOT OFFSET ON THE CONSOLIDATED BALANCE SHEET BUT ELIGIBLE FOR OFFSETTING GROSS AMOUNTS DERIVATIVE RECOGNIZED COLLATERAL INSTRUMENTS CASH NET AMOUNTS $ 313,033 $ — $ 26,781 $ 286,252 15,401 23,595 — — 8,703 6,698 — 23,595 352,029 $ — $ 35,484 $ 316,545 421,054 $ 12,983 $ 26,781 $ 381,290 24,701 — 8,703 15,998 445,755 $ 12,983 $ 35,484 $ 397,288 $ $ $ AUGUST 31, 2017 (AS RESTATED) AMOUNTS NOT OFFSET ON THE CONSOLIDATED BALANCE SHEET BUT ELIGIBLE FOR OFFSETTING GROSS AMOUNTS DERIVATIVE RECOGNIZED COLLATERAL INSTRUMENTS CASH NET AMOUNTS $ 215,349 $ — $ 34,912 $ 180,437 8,779 25,533 — — 3,636 5,143 — 25,533 249,661 $ — $ 38,548 $ 211,113 293,330 $ 3,898 $ 34,912 $ 254,520 19,931 — 3,636 16,295 313,261 $ 3,898 $ 38,548 $ 270,815 $ $ $ 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, 2018, 2017, and 2016. 55 CHS 2018 55 62 CHS 2018THIRTEEN: 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 (DOLLARS IN THOUSANDS) LOCATION OF GAIN (LOSS) Commodity derivatives Foreign exchange derivatives Cost of goods sold Cost of goods sold Foreign exchange derivatives Marketing, general and administrative Interest rate derivatives Embedded derivative Total Interest expense Other income (loss) (AS RESTATED) 2017 (AS RESTATED) 2016 2018 $ 162,321 $ 168,569 $ (67,014) (26,010) (13,140) (10,904) 596 (1) (1,604) (97) 8 (6,292) 3,061 30,533 — $ 139,967 $ 184,366 $ (84,307) Commodity Contracts: When we enter a commodity purchase or sales commit- ment, we are exposed to risks related to price changes and performance including delivery, quality, quantity and shipment period. If 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 if market prices increase. also exchanges but may 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 include futures over-the-counter derivative instruments when deemed appropriate. For commodities where there is no liquid derivative contract, risk is managed using forward sales contracts, other pricing arrangements and, to some extent, futures contracts in highly correlated commodi- ties. These contracts are economic hedges of price risk, but are not designated as hedging instruments for accounting purposes. The contracts are recorded on our Consolidated Balance Sheets at fair values based on quotes listed on regulated commodity exchanges or the market prices of the underlying products listed on the exchanges, except that fertilizer and certain 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 that include established net position limits. These limits are defined for each commodity and business unit, and may include both trader and manage- ment limits as appropriate. The limits policy is managed within each individual business unit to ensure any limits overage is explained and exposures reduced, or a tem- porary limit increase is established if needed. The posi- tion limits are reviewed, at least annually, with senior leadership and the Board of Directors. We monitor cur- rent market conditions and may expand or reduce our net position limits in response to changes in those con- ditions. 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 56 56 CHS 2018 63 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2018, and 2017, we had outstanding commodity futures and options 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 contracts accounted for as derivative instruments. 2018 (AS RESTATED) 2017 (UNITS IN THOUSANDS) LONG SHORT LONG SHORT Grain and oilseed— bushels 715,866 929,873 569,243 767,110 Energy products— barrels Processed grain and 17,011 8,329 15,072 18,252 oilseed—tons 1,064 2,875 299 2,347 Crop nutrients—tons Ocean freight—metric tons Natural gas—MMBtu 11 227 610 76 45 — 9 15 160 500 198 — Foreign Exchange Contracts We conduct a substantial portion of our business in U.S. dollars, but we are exposed to risks relating to foreign currency fluctuations primarily due to grain marketing transactions in South America, the Asia Pacific region, and Europe, and purchases of products from Canada. We use foreign currency derivative instruments to miti- gate the impact of exchange rate fluctuations. Although CHS has some risk exposure relating to foreign currency transactions, a larger impact with exchange rate fluctua- tions is 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 $988.8 million and $776.7 million as of August 31, 2018, and August 31, 2017, respectively. Embedded Derivative Asset Under the terms of our strategic investment in CF Nitrogen, if CF Industries’ credit rating is reduced below certain levels by two of three specified credit ratings agencies, we are entitled to receive a non-refundable annual payment of $5.0 million from CF Industries. These payments will continue on an annual basis until the date that CF Industries’ credit rating is upgraded to or above certain levels by two of the three specified credit ratings agencies or February 1, 2026, whichever is earlier. During the first quarter of fiscal 2017, CF Industries’ credit rating was reduced below the specified levels and we recorded a gain of $29.1 million in other income (loss) in our Consolidated Statement of Operations and received a $5.0 million payment from CF Industries. A total gain of $30.5 million was recognized in relation to the embedded credit derivative during fiscal 2017. During fiscal 2018, we received a second $5.0 million payment from CF Industries. The fair value of the embedded derivative asset recorded on our Consoli- dated Balance Sheet as of August 31, 2018, was equal to $23.6 million. The current and long-term portions of the embedded derivative asset are included in derivative assets and other assets on our Consolidated Balance Sheet, respectively. See Note 14, Fair Value Measure- ments for additional information regarding the valuation of the embedded derivative asset. Derivatives Designated as Cash Flow or Fair Value Hedging Strategies Fair Value Hedges As of August 31, 2018, and 2017, we had outstanding interest rate swaps with an aggregate notional amount 57 CHS 2018 57 64 CHS 2018THIRTEEN: 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 of $495.0 million designated as fair value hedges of por- tions of our fixed-rate debt that is due between fiscal 2019 and fiscal 2025. Our objective in entering into these transactions is to offset changes in the fair value of the debt associated with the risk of variability in the three-month U.S. dollar LIBOR interest rate (‘‘LIBOR’’), in essence converting the fixed-rate debt to variable-rate debt. Under these interest rate swaps, we receive fixed-rate interest payments and make interest pay- ments based on the three-month LIBOR. 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. The following table presents the fair value of our derivative interest rate swap instruments designated as fair value hedges and the line items on our Consolidated Balance Sheets in which they are recorded as of August 31, 2018, and 2017. BALANCE SHEET LOCATION (DOLLARS IN THOUSANDS) Derivative assets Other assets Total 2018 2017 DERIVATIVE ASSETS BALANCE SHEET LOCATION (DOLLARS IN THOUSANDS) $ — $ — Derivative liabilities — 9,978 Other liabilities $ — $ 9,978 Total 2018 2017 DERIVATIVE LIABILITIES $ 771 $ — 8,681 707 $ 9,452 $ 707 The following table sets forth the pretax gains (losses) on derivatives accounted for as hedging instruments that have been included in our Consolidated Statements of Operations for the years ended August 31, 2018, 2017, and 2016. GAIN (LOSS) ON FAIR VALUE HEDGING RELATIONSHIPS: (DOLLARS IN THOUSANDS) LOCATION OF GAIN (LOSS) 2018 2017 2016 Interest rate swaps Hedged item Total Interest expense Interest expense $ 18,723 $ 12,806 $ (9,842) (18,723) (12,806) 9,842 $ — $ — $ — The following table provides the location and carrying amount of hedged liabilities in our Consolidated Balance Sheets as of August 31, 2018, and 2017. BALANCE SHEET LOCATION (DOLLARS IN THOUSANDS) Long-term debt AUGUST 31, 2018 AUGUST 31, 2017 CUMULATIVE AMOUNT OF FAIR VALUE HEDGING ADJUSTMENTS INCLUDED IN THE CARRYING CARRYING AMOUNT OF HEDGED LIABILITIES AMOUNT OF HEDGED CARRYING AMOUNT OF HEDGED LIABILITIES LIABILITIES CUMULATIVE AMOUNT OF FAIR VALUE HEDGING ADJUSTMENTS INCLUDED IN THE CARRYING AMOUNT OF HEDGED LIABILITIES $ 485,548 $ 9,452 $ 504,271 $ (9,271) Cash Flow Hedges In the fourth quarter of fiscal 2018, our Energy segment entered into pay-fixed, receive-variable, cash-settled swaps designated as cash flow hedges of future crude oil purchases. We also entered into pay-variable, receive-fixed, cash-settled swaps designated as cash flow hedges of future refined product sales. These hedging instruments and the related hedged items are exposed to significant market price risk and potential volatility. As part of our risk management strategy, we look to hedge a portion of our expected future crude oil needs and the resulting refined product output based on prevailing futures prices, management’s expecta- tions about future commodity price changes and our risk appetite. As of August 31, 2018, the notional amount, the fair value and the amounts recorded in other com- prehensive income relating to these cash flow hedges were immaterial. There were no outstanding cash flow hedges as of August 31, 2017. 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 58 58 CHS 2018 65 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the years ended August 31, 2018, 2017, and 2016: (DOLLARS IN THOUSANDS) 2018 2017 2016 Interest rate derivatives $ 178 $ — $ (10,070) 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, 2018, 2017, and 2016: (DOLLARS IN THOUSANDS) Interest rate derivatives 1DEC201817272960 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 LOCATION OF GAIN (LOSS) 2018 2017 2016 Interest expense $ (1,704) $ (1,742) $ (5,071) measure fair value, and our assessment of relevant instruments within those levels is as follows: 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 com- pensation available-for-sale investments. investments and 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 and liabilities include interest rate, foreign exchange, and commodity swaps; forward commodity contracts with a fixed price component; and other OTC derivatives whose value is determined with inputs that are based on 59 CHS 2018 59 66 CHS 2018FOURTEEN: 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 exchange traded prices, adjusted for location specific inputs that are primarily observable in the market or can be derived principally from, or corroborated by, observ- able 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, discounted cash flow models or similar techniques. 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. Recurring fair value measurements at August 31, 2018, and 2017, are as follows: (DOLLARS IN THOUSANDS) Assets: Commodity derivatives Foreign currency derivatives Deferred compensation assets Embedded derivative asset Other assets Total Liabilities: Commodity derivatives Foreign currency derivatives Interest rate swap derivatives Total 2018 QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT SIGNIFICANT OTHER UNOBSERVABLE INPUTS (LEVEL 3) OBSERVABLE INPUTS (LEVEL 2) TOTAL $ 54,487 $ 259,359 $ — $ 313,846 — 39,073 — 5,334 15,401 — 23,595 — — — — — 15,401 39,073 23,595 5,334 $ 98,894 $ 298,355 $ — $ 397,249 $ 31,778 $ 389,911 $ — $ 421,689 — — 24,701 9,452 — — 24,701 9,452 $ 31,778 $ 424,064 $ — $ 455,842 60 CHS 2018 67 60 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2017 (AS RESTATED) QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS OBSERVABLE INPUTS (LEVEL 2) (LEVEL 1) SIGNIFICANT SIGNIFICANT OTHER UNOBSERVABLE INPUTS (LEVEL 3) TOTAL $ 48,483 $ 166,866 $ — $ 215,349 — — 52,414 — — 14,846 8,779 9,978 — — 25,533 — — — — 8,779 9,978 52,414 548,602 548,602 — — 25,533 14,846 $ 115,743 $ 211,156 $ 548,602 $ 875,501 $ 31,190 $ 262,140 $ — $ 293,330 — — 19,931 707 — — 19,931 707 $ 31,190 $ 282,778 $ — $ 313,968 (DOLLARS IN THOUSANDS) Assets: Commodity derivatives Foreign currency derivatives Interest rate swap derivatives Deferred compensation assets Deferred purchase price receivable Embedded derivative Other assets Total Liabilities: Commodity derivatives Foreign currency derivatives Interest rate swap derivatives Total Commodity 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, select 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 driven by local market supply and demand, and are generally based on broker or dealer quotations, or market transactions in either the listed or OTC markets. Changes in the fair values of these contracts are recognized in our Consolidated State- ments of Operations as a component of cost of goods sold. 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. See Note 13, 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. Embedded derivative asset—The embedded derivative asset relates to contingent payments inherent to our investment in CF Nitrogen. The inputs used in the fair value measurement include the probability of future upgrades and downgrades of CF Industries’ credit rating based on historical credit rating movements of other public companies and the discount rates applied to potential annual payments based on applicable his- torical and current yield coupon rates. Based on these observable inputs, our fair value measurement is classi- fied within Level 2. See Note 13, Derivative Financial Instruments and Hedging Activities for additional information. 61 CHS 2018 61 68 CHS 2018FOURTEEN: 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 Deferred purchase price receivable—As described in Note 3, Receivables our Securitization Facility was amended during fiscal 2018 such that no DPP receivable remained as of August 31, 2018. The fair value of the DPP receivable as of August 31, 2017, was included in receiv- ables, net and other assets, and was determined by dis- counting the expected cash flows to be received. The expected cash flows were primarily based on unobserv- able inputs consisting of the face amount of the Receiv- ables adjusted for anticipated credit losses. Due to the use of significant unobservable inputs in the pricing model, including management’s assumptions related to anticipated credit losses, the DPP receivable was classi- fied as a Level 3 fair value measurement. A reconciliation of the DPP receivable for the years ended August 31, 2018, and 2017, is included in Note 3, Receivables. 1DEC201817272717 Commitments and Contingencies Environmental We are required to comply with various environmental laws and regulations incidental to our normal business operations. To meet our compliance requirements, 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 adminis- trative in our Consolidated Statements of Operations. The resolution of any such matters may affect consoli- dated net income for any fiscal period; however, we believe any resulting liabilities, individually or in the aggregate, will not have a material effect on our consoli- dated 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, we believe 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 $122.3 million were outstanding on August 31, 2018. We have collateral for a portion of these contingent obligations. We have not recorded a liability 62 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 these guar- antees are current as of August 31, 2018. Credit Commitments CHS Capital has commitments to extend credit to cus- tomers if there is no violation of any condition estab- lished in the contracts. As of August 31, 2018, CHS Capital’s customers have additional available credit of $706.3 million. Lease Commitments We lease certain property, plant and equipment used in our operations under both capital and operating lease agreements. Many leases contain renewal options and escalation clauses. Our operating leases, which are pri- marily for rail cars, equipment, vehicles and office space have remaining terms of one to 19 years. Total rental expense for operating leases was $88.5 million, $81.3 million and $74.7 million for the years ended August 31, 2018, 2017, and 2016, respectively. On November 30, 2017, we completed a sale-leaseback transaction for our primary corporate office building located in Inver Grove Heights, Minnesota. Simultaneous with the closing of the sale of the building we entered into a 20-year operating lease arrangement with respect to the building, with base annual rent of approximately $3.4 million during the first year, followed by annual 62 CHS 2018 69 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS increases of 2% through the remainder of the lease period. Minimum future lease payments required under noncan- celable operating leases as of August 31, 2018, are as follows: We lease certain rail cars, equipment, vehicles and other assets under capital lease arrangements. These assets are included in property, plant and equipment on our Consolidated Balance Sheets while the corresponding capital lease obligations are included in long-term debt. See Note 6, Property, Plant and Equipment and Note 8, Notes Payable and Long-Term Debt for more informa- tion about capital leases. (DOLLARS IN THOUSANDS) 2019 2020 2021 2022 2023 Thereafter Total minimum future lease payments $ 103,800 50,653 41,428 29,733 22,648 103,800 $ 352,062 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, 2018, 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) TOTAL 2019 2020 2021 2022 2023 THEREAFTER Long-term unconditional purchase obligations $ 639,010 $ 54,631 $ 57,152 $ 57,523 $ 57,947 $ 58,372 $ 353,385 PAYMENTS DUE BY PERIOD Total payments under these arrangements were $61.4 million, $70.5 million and $88.0 million for the years ended August 31, 2018, 2017, and 2016, respectively. Gain Contingency As of August 31, 2018, a gain contingency resulted from applying ASC Topic 450-30, Gain Contingencies, to the facts and circumstances surrounding the potential for certain excise tax credits associated with manufacturing changes within our Energy business. The resulting gain, if recognized, will likely have a material impact on our consolidated financial statements. 63 CHS 2018 63 70 CHS 20181DEC201817273687 Supplemental Cash Flow and Other Information Additional information concerning supplemental disclosures of cash flow activities for the years ended August 31, 2018, 2017, and 2016, is included in the table below. (DOLLARS IN THOUSANDS) Net cash paid during the period for: Interest Income taxes 2018 2017 (AS RESTATED) 2016 $ 148,874 $ 160,040 $ 147,089 13,410 14,571 5,184 Other significant noncash investing and financing transactions: Notes receivable reacquired under Securitization Facility Trade receivables reacquired under Securitization Facility Securitized debt reacquired under Securitization Facility Deferred purchase price receivable extinguished under Securitization Facility Notes receivable sold under Securitization Facility Securitized debt extinguished under Securitization Facility Deferred purchase price receivable recognized under Securitization Facility Land and improvements received for notes receivable 615,089 402,421 634,000 386,900 — — — — — — — — 747,345 554,000 547,553 138,699 Capital expenditures and major repairs incurred but not yet paid 53,453 22,490 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 396 — — 153,941 6,832 19,985 2,928 12,121 — — — — — — — — 44,307 23,921 76,756 19,089 162,439 1DEC201817273452 Related Party Transactions Related party transactions with equity investees, primarily CF Nitrogen, TEMCO, Ardent Mills and Ventura Foods for the years ended August 31, 2018, 2017, and 2016, respectively, and balances as of August 31, 2018, and 2017, respec- tively, are as follows: (DOLLARS IN THOUSANDS) Sales Purchases (DOLLARS IN THOUSANDS) Due from related parties Due to related parties 2018 2017 2016 $ 2,928,984 $ 3,183,944 $ 2,728,793 2,505,185 2,610,887 1,707,990 2018 2017 $ 31,063 $ 33,119 52,284 39,232 As a cooperative, we are owned by farmers and ranchers and their member cooperatives, which are referred to as members. We buy commodities from and provide products and services to our members. Individually, our members do not have a significant ownership in CHS. 64 CHS 2018 71 64 CHS 20181DEC201817272335 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarterly Financial Information (Unaudited) As further described in Note 2, Restatement of Previously Issued Consolidated Financial Statements, the previously reported financial information for the quarters ended November 30, 2017 and 2016, February 28, 2018 and 2017, May 31, 2018 and 2017, and August 31, 2017, have been restated. Relevant restated financial information for the first, second and third quarters of fiscal 2018 is included in this Annual Report on Form 10-K in the tables that follow. The unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Although misstatements impacted individual line items within operating cash flows, the quarterly cash flow information classification between operating, investing and financing activities for these periods was not materially impacted by the misstatements and has not been presented. Restated amounts are computed independently each quarter; therefore, the sum of the quarterly amounts may not equal the total amount for the respective year due to rounding. 65 CHS 2018 65 72 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (DOLLARS IN THOUSANDS) ASSETS Current assets: AS OF NOVEMBER 30, 2017 (AS RESTATED) AS OF FEBRUARY 28, 2018 AS OF MAY 31, 2018 Cash and cash equivalents $ 249,767 $ 219,273 $ 533,887 Receivables Inventories Derivative assets Margin and related 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 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 15) Equities: Preferred stock Equity certificates Accumulated other comprehensive loss Capital reserves Total CHS Inc. equities Noncontrolling interests Total equities Total liabilities and equities 2,058,222 3,111,963 166,557 206,955 542,770 270,674 6,606,908 3,777,000 5,266,408 997,402 1,836,490 3,676,325 251,048 188,167 658,815 296,982 7,127,100 3,752,876 5,179,868 943,552 2,248,213 2,913,507 250,005 253,141 426,607 190,680 6,816,040 3,787,163 5,140,106 960,240 $ 16,647,718 $ 17,003,396 $ 16,703,549 $ 2,480,264 $ 3,071,639 $ 2,868,506 71,022 139,868 413,519 2,444,650 207,426 425,912 121,209 6,303,870 1,936,744 348,902 315,254 2,264,038 4,319,840 (177,341) 1,324,372 7,730,909 12,039 7,742,948 46,290 106,323 756,642 1,853,974 361,909 465,032 128,700 6,790,509 1,915,843 165,659 265,028 2,264,038 4,307,292 (167,230) 1,450,326 7,854,426 11,931 53,056 137,999 372,590 1,898,172 316,831 538,249 209,718 6,395,121 1,905,515 203,208 278,869 2,264,038 4,253,414 (167,302) 1,559,040 7,909,190 11,646 7,866,357 7,920,836 $ 16,647,718 $ 17,003,396 $ 16,703,549 66 66 CHS 2018 73 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF NOVEMBER 30, 2016 (AS RESTATED) AS OF FEBRUARY 28, 2017 AS OF MAY 31, 2017 CHS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 516,646 $ 276,137 $ 266,748 Receivables Inventories Derivative assets Margin and related 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 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 15) Equities: Preferred stock Equity certificates Accumulated other comprehensive loss Capital reserves Total CHS Inc. equities Noncontrolling interests Total equities Total liabilities and equities 3,034,083 3,143,551 277,498 312,899 476,907 187,524 7,949,108 3,828,899 5,443,079 1,054,454 2,767,150 3,730,682 233,429 290,291 701,705 196,237 8,195,631 3,802,379 5,404,347 1,056,873 2,767,967 2,688,949 206,187 251,695 431,433 265,469 6,878,448 3,841,749 5,405,651 955,532 $ 18,275,540 $ 18,459,230 $ 17,081,380 $ 3,227,564 $ 3,867,438 $ 3,321,808 206,894 180,850 543,411 2,574,006 282,658 397,446 239,857 7,652,686 1,958,907 511,821 332,610 2,244,132 4,194,534 (224,935) 1,592,434 7,806,165 13,351 7,819,516 205,136 149,625 897,464 1,919,421 232,507 392,058 131,380 7,795,029 2,051,567 531,522 272,532 2,244,114 4,201,803 (211,091) 1,560,498 7,795,324 13,256 7,808,580 193,096 132,479 391,122 1,865,803 233,955 436,111 134,718 6,709,092 2,046,264 369,170 276,483 2,264,063 4,214,657 (208,568) 1,397,834 7,667,986 12,385 7,680,371 $ 18,275,540 $ 18,459,230 $ 17,081,380 67 CHS 2018 67 74 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED (AS RESTATED) (DOLLARS IN THOUSANDS) NOVEMBER 30, 2017 FEBRUARY 28, 2018 FEBRUARY 28, 2018 MAY 31, 2018 MAY 31, 2018 AUGUST 31, 2018 Revenues $ 8,031,884 $ 6,980,153 $ 15,012,037 $ 9,087,328 $ 24,099,365 $ 8,583,982 Cost of goods sold 7,711,057 6,844,849 14,555,906 8,841,361 23,397,267 8,192,620 Gross profit 320,827 135,304 456,131 245,967 702,098 391,362 Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests Net income (loss) 139,500 186,713 326,213 161,579 487,792 186,291 (3,787) 185,114 — 40,702 (25,014) (11,346) (40,063) (7,705) 40,176 (11,364) (15,133) 145,051 (7,705) 80,878 (36,378) (3,811) 88,199 (18,944) 233,250 (124,050) (131,755) 49,340 (14,622) 130,218 (51,000) (18,765) 223,836 (61) 18,984 (27,015) (38,362) (39,441) (77,803) (59,308) (137,111) (16,404) 207,788 (21,729) 186,059 236,839 422,898 248,332 20,606 187,182 (187,688) (167,082) 165,959 353,141 55,219 181,620 (111,863) 534,761 7,787 240,545 (464) (48) (512) (187) (699) 98 attributable to CHS Inc. $ 187,646 $ 166,007 $ 353,653 $ 181,807 $ 535,460 $ 240,447 68 CHS 2018 75 68 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED (AS RESTATED) (DOLLARS IN THOUSANDS) NOVEMBER 30, 2016 FEBRUARY 28, 2017 FEBRUARY 28, 2017 MAY 31, 2017 MAY 31, 2017 AUGUST 31, 2017 Revenues $ 8,001,904 $ 7,400,773 $ 15,402,677 $ 8,638,410 $ 24,041,087 $ 7,996,339 Cost of goods sold 7,655,524 7,165,265 14,820,789 8,417,264 23,238,053 7,904,713 Gross profit 346,380 235,508 581,888 221,146 803,034 91,626 Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense 151,258 160,166 311,424 155,347 466,771 145,236 18,357 176,765 4,105 38,265 72,373 2,969 (1,395) 39,945 90,730 179,734 2,710 78,210 326,779 (260,980) 417,509 (81,246) (1,224) 39,201 1,486 117,411 39,170 (92,780) 704 53,828 Other (income) loss (44,509) (18,083) (62,592) (11,952) (74,544) (25,407) Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests Net income (loss) (40,328) (35,800) (76,128) (48,393) (124,521) (12,817) 219,232 18,302 237,534 (238,612) (1,078) (109,088) 16,076 203,156 3,685 14,617 19,761 217,773 (166,124) (146,363) (72,488) 145,285 (34,761) (74,327) (208) 406 198 (955) (757) 123 attributable to CHS Inc. $ 203,364 $ 14,211 $ 217,575 $ (71,533) $ 146,042 $ (74,450) 69 CHS 2018 69 76 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED (AS RESTATED) (DOLLARS IN THOUSANDS) NOVEMBER 30, 2017 FEBRUARY 28, 2018 FEBRUARY 28, 2018 MAY 31, 2018 MAY 31, 2018 AUGUST 31, 2018 Net income (loss) $ 187,182 $ 165,959 $ 353,141 $ 181,620 $ 534,761 $ 240,545 Other comprehensive income (loss), net of tax: Postretirement benefit plan activity Unrealized net gain (loss) on available for sale investments Cash flow hedges Foreign currency translation adjustment Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to noncontrolling interests Comprehensive income attributable to CHS Inc. 1,594 3,142 4,736 3,417 8,153 11,913 3,640 (4) 3,554 1,063 7,194 1,059 6,286 413 13,480 1,472 (16,628) 1,068 (2,211) 2,352 141 (10,188) (10,047) (1,974) 3,019 190,201 10,111 176,070 13,130 366,271 (72) 181,548 13,058 547,819 (5,621) 234,924 (464) (48) (512) (187) (699) 98 $ 190,665 $ 176,118 $ 366,783 $ 181,735 $ 548,518 $ 234,826 THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED (AS RESTATED) (DOLLARS IN THOUSANDS) NOVEMBER 30, 2016 FEBRUARY 28, 2017 FEBRUARY 28, 2017 MAY 31, 2017 MAY 31, 2017 AUGUST 31, 2017 Net income (loss) $ 203,156 $ 14,617 $ 217,773 $ (72,488) $ 145,285 $ (74,327) Other comprehensive income (loss), net of tax: Postretirement benefit plan activity Unrealized net gain (loss) on available for sale investments Cash flow hedges Foreign currency translation adjustment Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to noncontrolling interests Comprehensive income attributable to CHS Inc. 3,239 3,724 6,963 3,636 10,599 22,103 777 654 968 964 1,745 1,618 (118) 375 1,627 1,993 2,758 249 (18,075) 8,187 (9,888) (1,369) (11,257) 3,098 (13,405) 189,751 13,843 28,460 438 218,211 2,524 2,962 (69,964) 148,247 28,208 (46,119) (208) 406 198 (955) (757) 123 $ 189,959 $ 28,054 $ 218,013 $(69,009) $ 149,004 $ (46,242) 70 70 CHS 2018 77 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reclassifications Reclassifications Amounts previously included within (gain) loss on investments were reclassified into other (income) loss to conform to the current period presentation. This reclas- sification had no impact on our previously reported net income, cash flows or shareholders’ equity and repre- sents the periods ended for November 30, 2017 and 2016, and February 28, 2018 and 2017. The reclassifications included a $2.8 million gain three months ended the reclassification during November 30, 2017, a $4.1 million gain reclassification during the three months ended February 28, 2018, a $7.4 million loss during the three months ended November 30, 2016, and a $2.9 million gain during the three months ended February 28, 2017. for Consolidated financial statement adjustment tables The following tables present the impacts of the restate- ment adjustments to the previously reported financial information the quarterly periods ended November 30, 2017 and 2016, February 28, 2018 and 2017, May 31, 2018 and 2017, and August 31, 2017. Refer to discussion in Note 2, Restatement of Previously Issued Consolidated Financial Statements. The restate- ment references identified in the following tables directly correlate to the restatement adjustments detailed below. The categories of restatement adjustments and their impact on previously reported consolidated financial statements are described below. (a) Freight Derivatives and Related Misstatements— Corrections for freight derivatives and related misstate- ments were driven by the misstatement of amounts associated with both the value and quantity of rail freight contracts, as well as due to freight contracts not meeting the technical accounting requirements to qualify as derivative financial instruments. In addition to the elimination of the underlying freight derivative assets and liabilities and related impacts on revenues and cost of goods sold, additional adjustments were recorded to account for prepaid freight capacity bal- ances in relevant periods and the impact of a goodwill impairment charge recorded during fiscal 2015 for goodwill held within our Grain Marketing reporting unit which was triggered by the lowering of earnings due to the restatement. Additional details related to the impact of the freight derivatives and related misstatements and their impact on each period are discussed in restate- ment reference (a). (b) Intercompany Misstatements—As a result of the work performed in relation to the freight misstatement, additional misstatements related to the incorrect elimi- nation of intercompany balances were also identified and corrected within the consolidated financial state- ments. Certain of these intercompany misstatements resulted in a misstatement of various financial statement line items; however, the intercompany misstatements did not result in a material misstatement of income (loss) before income taxes or net income (loss). Addi- tional details related to the impact of the intercompany misstatements and their impact on each period are dis- cussed in restatement reference (b). (c) Other Misstatements—We made adjustments for other previously identified misstatements unrelated to the freight derivatives and related misstatements that were not material, individually or in the aggregate, to our consolidated financial statements. These other mis- statements related primarily to certain misclassifica- tions, adjustments to revenues and cost of goods sold, and adjustments to various income tax and indirect tax accrual accounts. Additional details related to the impact of the other misstatements and their impact on each period are discussed in restatement reference (c). 71 CHS 2018 71 78 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) AS OF NOVEMBER 30, 2017 AS OF NOVEMBER 30, 2016 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS RESTATED AS RESTATEMENT REFERENCES (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 252,129 $ (2,362) $ 249,767 $ 515,484 $ 1,162 $ 516,646 b, c Receivables Inventories Derivative assets Margin and related 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 2,059,623 3,046,101 283,256 206,955 542,139 289,250 6,679,453 3,777,000 5,266,408 (1,401) 65,862 (116,699) — 631 (18,576) 2,058,222 3,052,989 (18,906) 3,034,083 a, b, c 3,111,963 3,117,935 25,616 3,143,551 166,557 206,955 542,770 270,674 419,103 312,899 480,709 189,896 (141,605) — (3,802) (2,372) 277,498 312,899 476,907 187,524 c a, c b a, c (72,545) 6,606,908 8,089,015 (139,907) 7,949,108 — — 3,777,000 3,828,899 5,266,408 5,443,079 — — 3,828,899 5,443,079 1,061,562 (64,160) 997,402 1,069,468 (15,014) 1,054,454 a $ 16,784,423 $ (136,705) $ 16,647,718 $ 18,430,461 $ (154,921) $ 18,275,540 $ 2,480,264 $ — $ 2,480,264 $ 3,227,564 $ — $ 3,227,564 Current portion of long-term debt 71,022 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 15) 139,868 414,441 2,380,998 226,279 409,522 121,209 6,243,603 1,936,744 350,841 315,460 — — (922) 63,652 (18,853) 16,390 — 71,022 206,894 139,868 413,519 180,850 544,266 2,444,650 2,568,533 207,426 425,912 121,209 317,505 389,321 275,448 — — (855) 5,473 (34,847) 8,125 (35,591) 206,894 180,850 543,411 b, c 2,574,006 a, b, c 282,658 397,446 239,857 a, c a, c b, c 60,267 6,303,870 7,710,381 (57,695) 7,652,686 — 1,936,744 1,958,907 — 1,958,907 (1,939) (206) 348,902 315,254 497,283 332,610 14,538 511,821 a, c — 332,610 Equities: Preferred stock Equity certificates 2,264,038 4,319,840 — — 2,264,038 2,244,132 — 2,244,132 4,319,840 4,208,336 (13,802) 4,194,534 Accumulated other comprehensive loss (178,445) 1,104 (177,341) (226,220) 1,285 (224,935) b a Capital reserves Total CHS Inc. equities Noncontrolling interests 1,520,218 7,925,651 12,124 (195,846) 1,324,372 1,691,603 (194,742) 7,730,909 7,917,851 (85) 12,039 13,429 (99,169) (111,686) (78) 1,592,434 a, b, c 7,806,165 13,351 a Total equities 7,937,775 (194,827) 7,742,948 7,931,280 (111,764) 7,819,516 Total liabilities and equities $ 16,784,423 $ (136,705) $ 16,647,718 $ 18,430,461 $ (154,921) $ 18,275,540 72 CHS 2018 79 72 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of November 30, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $171.7 million reduction of total assets, a $38.6 million reduction of current liabili- ties, a $30.2 million increase of long-term liabilities and a $163.2 million reduction of total equities. The reduction of total assets related primarily to the elimination of $116.8 million of current derivative assets and a $49.2 million reduction of long-term derivative assets that had been recorded as assets on the Consolidated Balance Sheet as well as an approximate $16.0 million reduction of goodwill associated with a goodwill impair- ment charge recorded during fiscal 2015 The decreases of total assets were partially offset by related adjust- ments, including an $8.5 million increase of prepaid income taxes resulting from the income tax impact of the freight misstatement and the recognition of a $1.1 million prepaid freight capacity balance. The decrease of total current liabilities related primarily to a $16.5 million reduction of current derivative liabilities and a $22.2 million reduction of income taxes payable resulting from the income tax effect of the freight mis- statement. The increase of long-term liabilities resulted from a $30.2 million increase of long-term deferred tax liabilities. The decrease of total equities related primarily to the elimination of the derivative assets and liabilities described above and the related income tax impacts, as well as the reduction of goodwill associated with the goodwill impairment charge recorded during fiscal 2015. Intercompany misstatements (b) The correction of intercompany misstatements resulted in a $3.4 million reduction of total assets and a $3.4 million reduction of current liabilities due to dif- ferent practices of eliminating intercompany balances between CHS’s businesses which existed in previous periods. Other misstatements (c) Adjustments for other misstatements related pri- marily to misclassifications between line items included within the Consolidated Balance Sheets, as well as the impact of income tax adjustments on income tax accounts, including prepaid income taxes, income taxes payable and deferred income taxes. The misclassifica- tion adjustments arose primarily due to the application of differing accounting policies between businesses and collectively with the income tax adjustments resulted in a $38.4 million increase of total assets, a $102.3 million increase of current liabilities, a $32.3 million decrease of long-term liabilities and a $31.6 million decrease of total equities. The increase of total assets related primarily to a $67.5 million increase of inventories that resulted from a misclassification adjustment related to $67.5 million previously included as a contra-inventory balance moving to accounts payable. The increase related to inventories was partially offset by a $28.1 million decrease of other current assets that resulted from the reduction of prepaid income taxes associated with the correction of other misstatements identified during fiscal 2018 and other periods. The increase of current liabilities related primarily to a $67.5 million increase of accounts payable that resulted from a misclassification adjustment for amounts previ- ously included as a contra-inventory balance to accounts payable and a $38.6 million increase of accrued expenses. The increase of accrued expenses related to the recognition of a $24.9 million accrued income tax balance associated with the correction of other misstatements identified during fiscal 2018 and other periods, as well as the recognition of $13.7 million of accrued expense related to the use of a unit of mea- sure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. Long-term liabili- ties decreased primarily as a result of a $32.1 million decrease of long-term deferred tax liabilities related to the correction of other misstatements identified during fiscal 2018 and other periods. The $31.6 million decrease of total equities related pri- marily to the impacts associated with the $20.6 million net impact on income tax accounts and the recognition of an additional $13.7 million of accrued expense related to the use of a unit of measure assumption in the calcu- lation of an excise tax credit that was changed during fiscal 2018. As of November 30, 2016 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $145.5 million reduction of total assets, a $47.0 million reduction of current liabili- ties, a $15.5 million increase of long-term liabilities and a $114.0 million reduction of total equities. The reduction of total assets related primarily to the elimination of $141.0 million of current derivative assets that had been incorrectly recorded as assets on the Consolidated Bal- ance Sheet and an approximate $16.0 million reduction 73 CHS 2018 73 80 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d of goodwill associated with a goodwill impairment charge recorded during fiscal 2015. The decreases of total assets were partially offset by related adjustments, including a $4.0 million increase of receivables, a $5.7 million increase of prepaid income taxes resulting from the income tax impact of the freight misstatement and the recognition of a $0.9 million prepaid freight capacity balance. The decrease of total current liabilities related primarily to a $35.0 million reduction of current derivative liabilities and a $20.7 million reduction of income taxes payable resulting from the income tax effect of the freight misstatement. These decreases of current liabilities were partially offset by an $8.7 million increase of accounts payable. The increase of long-term liabilities resulted from a $15.5 million increase of long-term deferred tax liabilities. The decrease of total equities related primarily to the elimination of the deriv- ative assets and liabilities described above and the related income tax impacts, as well as the reduction of goodwill associated with the goodwill impairment charge recorded during fiscal 2015. Intercompany misstatements (b) The correction of intercompany misstatements resulted in a $73.3 million reduction of total assets, an $85.4 million reduction of current liabilities and a $12.1 million increase of total equities due to different intercompany balances practices of eliminating between CHS’s businesses which existed in previous periods. Other misstatements (c) Adjustments for other misstatements related pri- marily to misclassifications between line items included within the Consolidated Balance Sheets, as well as the impact of income tax adjustments on income tax accounts, including prepaid income taxes, income taxes payable and deferred income taxes. The misclassifica- tion adjustments arose primarily due to the application of differing accounting policies between businesses and collectively with the income tax adjustments resulted in a $63.9 million increase of total assets, a $74.6 million increase of current liabilities, a $0.9 million decrease of long-term liabilities and a $9.9 million decrease of total equities. The increase of total assets related primarily to a mis- classification adjustment for $73.8 million previously included as a contra-inventory balance moving to accounts payable. The increased inventories were par- tially offset by a $48.2 million reduction of inventory related to a misclassification adjustment for certain col- lateral moving from inventory to receivables. The increase of total liabilities relates primarily to a mis- classification adjustment for $73.8 million previously included as a contra-inventory balance moving to accounts payable. The $9.9 million decrease of total equities relates prima- rily to the $28.8 million net impact on income tax accounts and the recognition of $8.1 million of accrued expense related to the use of a unit of measure assump- tion in the calculation of an excise tax credit that was changed during fiscal 2018. The overall decrease in total equities was partially offset by an increase that arose from a $27.9 million timing difference for the accrual of dividends and equities payable. 74 CHS 2018 81 74 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) AS OF FEBRUARY 28, 2018 AS OF FEBRUARY 28, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 190,426 $ 28,847 $ 219,273 $ 249,801 $ 26,336 $ 276,137 b, c Receivables Inventories Derivative assets Margin and related deposits Supplier advance payments Other current assets Total current assets Investments Property, plant and equipment Other assets Total assets 1,765,640 3,650,158 429,625 188,167 658,815 310,674 7,193,505 3,752,876 5,179,868 958,613 70,850 26,167 (178,577) — — (13,692) (66,405) 1,836,490 2,697,699 69,451 2,767,150 a, b, c 3,676,325 3,752,218 (21,536) 3,730,682 251,048 188,167 658,815 386,613 290,291 701,705 (153,184) — — 296,982 200,288 (4,051) 233,429 290,291 701,705 196,237 7,127,100 8,278,615 (82,984) 8,195,631 c a, c b a, c — — 3,752,876 3,802,379 5,179,868 5,404,347 — — 3,802,379 5,404,347 (15,061) 943,552 1,072,824 (15,951) 1,056,873 a $ 17,084,862 $ (81,466) $ 17,003,396 $ 18,558,165 $ (98,935) $ 18,459,230 LIABILITIES AND EQUITIES Current liabilities: Notes payable $ 2,993,456 $ 78,183 $ 3,071,639 $ 3,867,438 $ — $ 3,867,438 c Current portion of long-term debt 46,290 Customer margin deposits and credit balances Customer advance payments Accounts payable Derivative liabilities Accrued expenses Dividends and equities payable 106,323 727,535 1,835,289 372,406 459,867 128,700 — — 29,107 18,685 46,290 205,136 106,323 756,642 149,625 871,370 1,853,974 1,877,040 (10,497) 361,909 275,484 5,165 — 465,032 128,700 378,318 131,380 — — 26,094 42,381 (42,977) 13,740 — 205,136 149,625 897,464 b, c 1,919,421 a, b, c 232,507 392,058 131,380 Total current liabilities 6,669,866 120,643 6,790,509 7,755,791 39,238 7,795,029 Long-term debt Long-term deferred tax liabilities Other liabilities Commitments and contingencies (Note 15) Equities: Preferred stock Equity certificates Accumulated other comprehensive loss Capital reserves 1,915,843 171,844 265,349 2,264,038 4,307,292 (168,225) 1,646,837 — 1,915,843 2,051,567 — 2,051,567 (6,185) (321) 165,659 265,028 516,681 272,532 14,841 — 531,522 272,532 — — 2,264,038 2,244,114 4,307,292 4,201,803 — — 2,244,114 4,201,803 995 (167,230) (211,442) 351 (211,091) (196,511) 1,450,326 1,713,784 (153,286) 1,560,498 Total CHS Inc. equities 8,049,942 (195,516) 7,854,426 7,948,259 (152,935) 7,795,324 Noncontrolling interests 12,018 (87) 11,931 13,335 (79) 13,256 Total equities 8,061,960 (195,603) 7,866,357 7,961,594 (153,014) 7,808,580 Total liabilities and equities $ 17,084,862 $ (81,466) $ 17,003,396 $ 18,558,165 $ (98,935) $ 18,459,230 a, c a, c c c b a a a, c a 75 CHS 2018 75 82 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d As of February 28, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $183.8 million reduction of total assets, a $26.8 million reduction of current liabili- ties, a $28.9 million increase of long-term liabilities and a $185.9 million reduction of total equities. The reduction of total assets related primarily to the elimination of $179.3 million of current derivative assets which had been incorrectly recorded as assets on the Consolidated Balance Sheet and an approximate $16.0 million impair- ment of goodwill which was triggered when earnings were lowered due to the restatement. The decrease of total assets was partially offset by a related adjustment to increase prepaid income taxes by $9.7 million as a result of the income tax impact of the freight misstate- ment. The decrease of total current liabilities related pri- marily to a $7.1 million reduction of current derivative liabilities and a $19.7 million reduction of income taxes payable resulting from the income tax effect of the freight misstatement. The increase of long-term liabili- ties was primarily attributable to the $28.9 million increase of long-term deferred tax liabilities. The decrease of total equities was related primarily to the elimination of derivative assets and liabilities from the Consolidated Balance Sheet as described above and the related income tax impacts, as well as the reduction of goodwill associated with the goodwill impairment charge recorded during fiscal 2015. Intercompany misstatements (b) The correction of intercompany misstatements resulted in a $5.6 million reduction of total assets and a $5.6 million reduction of current liabilities due to dif- ferent practices of eliminating intercompany balances between CHS’s businesses which existed in previous periods. Other misstatements (c) Adjustments for other misstatements related pri- marily to misclassifications between line items included within the Consolidated Balance Sheets, as well as the impact of income tax adjustments on income tax accounts, including prepaid income taxes, income taxes payable and deferred income taxes. These misclassifica- tion adjustments arose primarily due to the application of differing accounting policies between businesses and collectively with the income tax adjustments resulted in a $108.0 million increase of total assets, a $153.1 million increase of current liabilities, a $35.4 million decrease of long-term liabilities and a $9.7 million decrease of total equities. The increase of total assets related primarily to a $28.8 million increase of cash that resulted from a timing difference for the application of in-transit cash and a $78.2 million increase of receivables and notes payable related to a participation arrangement that did not meet certain criteria for off-balance sheet treatment. As a result, both receivables and notes payable were increased by $78.2 million. The increase of current liabilities related primarily to the $78.2 million increase of receivables and notes payable in a participation arrangement that did not meet certain criteria for off-balance sheet treatment, a $29.1 million increase of customer advance payments that resulted from a timing difference related to the application of in-transit cash and a$27.9 million increase of accounts payable that had previously been included as a contra- inventory balance. Long-term liabilities decreased pri- marily due to the recognition of long-term deferred tax liabilities of $35.1 million related to the correction of other misstatements identified during fiscal 2018 and other periods. The $9.7 million decrease of total equities relates prima- rily to the $14.1 million net impact on income tax accounts, which was partially offset by a $4.5 million increase related to the valuation of crack spread derivatives. As of February 28, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $160.3 million reduction of total assets, a $61.3 million reduction of current liabili- ties, a $15.8 million increase of long-term liabilities and a $114.7 million reduction of total equities. The reduction of total assets related primarily to the elimination of $153.0 million of current derivative assets that were incorrectly recorded as assets on the Consolidate Bal- ance Sheet and an approximate $16.0 million impair- ment of goodwill recorded in fiscal 2015 associated with lower earnings as a result of the restatement. The overall decrease of total assets was partially offset by related adjustments, including a $6.4 million increase of prepaid income taxes resulting from the income tax impact of the freight misstatement and the recognition of a $0.6 million prepaid freight capacity balance. The 76 76 CHS 2018 83 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS decrease of total current liabilities related primarily to a $43.0 million reduction of current derivative liabilities and a $20.7 million reduction of income taxes payable resulting from the income tax effect of the freight mis- statement, which were partially offset by the recogni- tion of a $2.3 million accounts payable balance. The increase of long-term liabilities resulted from the $15.8 million increase of long-term deferred tax liabili- ties. The decrease of total equities related primarily to the elimination of the derivative assets and liabilities described above and the related income tax impacts, as well as the reduction of goodwill associated with the goodwill impairment charge recorded during fiscal 2015. Intercompany misstatements (b) The correction of intercompany misstatements resulted in a $4.9 million reduction of total assets and a $4.9 million reduction of current liabilities due to dif- ferent practices of eliminating intercompany balances between CHS’s businesses which existed in previous periods. Other misstatements (c) Adjustments for other misstatements related pri- marily to misclassifications between line items included within the Consolidated Balance Sheets, as well as the impact of income tax adjustments on income tax accounts, including prepaid income taxes, income taxes payable and deferred income taxes. These misclassifica- tion adjustments arose primarily due to the application of differing accounting policies between businesses and collectively with the income tax adjustments resulted in a $66.3 million increase of total assets, a $105.5 million increase of current liabilities, a $0.9 million decrease of long-term liabilities and a $38.3 million decrease of total equities. The increase of total assets related primarily to a $24.8 million increase of cash that resulted from a timing difference for the application of in-transit cash and a $47.7 million increase of inventory with a corresponding increase to accounts payable as a result of a misclassifi- cation adjustment for certain items previously included as a contra-inventory balance moving to accounts pay- able. The increase of inventory was offset by a $48.2 mil- lion reduction of inventory that resulted from a misclassification adjustment for certain collateral being classified as receivables rather than inventory. The increase of current liabilities related primarily to the $47.7 million increase of accounts payable as a result of a misclassification adjustment for certain items previ- ously included as a contra-inventory balance moving to accounts payable, a $26.1 million increase of customer advance payments that resulted from a timing differ- ence for the application in-transit cash and $34.4 million increase of accrued expenses. The increase of accrued expenses related to the recognition of a $20.7 million accrued income tax balance associated with the correc- tion of other misstatements identified during fiscal 2017 and other periods and the recognition of $13.7 million of accrued expense related to the use of a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. The $38.3 million decrease of total equities related pri- marily to the impacts associated with the $24.4 million net impact on income tax accounts and the recognition of $13.7 million of accrued expense related to the use of a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. 77 CHS 2018 77 84 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) AS OF MAY 31, 2018 AS OF MAY 31, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 533,887 $ — $ 533,887 $ 267,229 $ (481) $ 266,748 b, c Receivables Inventories 2,198,211 50,002 2,248,213 2,722,325 2,940,907 (27,400) 2,913,507 2,684,087 Derivative assets 483,794 (233,789) Margin and related deposits Supplier advance payments Other current assets 253,141 426,607 198,078 — — (7,398) 250,005 253,141 426,607 190,680 388,188 251,695 431,433 255,236 45,642 4,862 (182,001) — — 2,767,967 a, b, c 2,688,949 206,187 251,695 431,433 c a, c b a, c 10,233 265,469 Total current assets 7,034,625 (218,585) 6,816,040 7,000,193 (121,745) 6,878,448 Investments Property, plant and equipment Other assets Total assets LIABILITIES AND EQUITIES Current liabilities: Notes payable 3,787,163 5,140,106 973,885 — — 3,787,163 3,841,749 — 3,841,749 5,140,106 5,409,151 (13,645) 960,240 970,704 (3,500) (15,172) 5,405,651 955,532 a $ 16,935,779 $ (232,230) $ 16,703,549 $ 17,221,797 $ (140,417) $ 17,081,380 $ 2,819,086 $ 49,420 $ 2,868,506 $ 3,321,808 $ — $ 3,321,808 Current portion of long-term debt 53,056 137,999 372,616 1,904,819 344,973 538,249 209,718 6,380,516 1,905,515 207,912 279,303 — — 53,056 193,096 137,999 132,479 (26) 372,590 390,576 — — 546 193,096 132,479 391,122 b, c (6,647) (28,142) — — 1,898,172 1,809,868 55,935 1,865,803 a, b, c 316,831 538,249 209,718 284,212 422,371 134,718 (50,257) 233,955 13,740 — 436,111 134,718 a, c a, c 14,605 6,395,121 6,689,128 19,964 6,709,092 — 1,905,515 2,046,264 — 2,046,264 (4,704) (434) 203,208 350,966 278,869 276,483 18,204 — 369,170 276,483 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 15) Equities: Preferred stock Equity certificates Accumulated other comprehensive 2,264,038 4,253,414 — — 2,264,038 2,264,063 4,253,414 4,214,657 — — 2,264,063 4,214,657 b a loss (169,726) 2,424 (167,302) (209,700) 1,132 (208,568) a, b, c Capital reserves 1,803,078 (244,038) 1,559,040 1,577,469 (179,635) 1,397,834 Total CHS Inc. equities 8,150,804 (241,614) 7,909,190 7,846,489 (178,503) 7,667,986 a Noncontrolling interests 11,729 (83) 11,646 12,467 (82) 12,385 Total equities 8,162,533 (241,697) 7,920,836 7,858,956 (178,585) 7,680,371 Total liabilities and equities $ 16,935,779 $ (232,230) $ 16,703,549 $ 17,221,797 $ (140,417) $ 17,081,380 78 CHS 2018 85 78 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of May 31, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $229.3 million reduction of total assets, a $50.5 million reduction of current liabili- ties, a $30.4 million increase of long-term liabilities and a $209.2 million reduction of total equities. The reduction of total assets related primarily to the elimination of $233.9 million of current derivative assets that had been recorded as assets on the Consolidated Balance Sheet and an approximate $16.0 million reduction of goodwill associated with a goodwill impairment charge recorded during fiscal 2015. The decreases of total assets were partially offset by related adjustments, including an $11.1 million increase of prepaid income taxes resulting from the income tax impact of the freight misstatement and the recognition of a $7.5 million prepaid freight capacity balance. The decrease of total current liabilities related primarily to a $25.6 million reduction of current derivative liabilities and a $24.9 million reduction of income taxes payable resulting from the income tax effect of the freight misstatement. The increase of long-term liabilities resulted from a $30.4 million increase of long-term deferred tax liabilities. The decrease of total equities related primarily to the elimi- nation of the derivative assets and liabilities described above and the related income tax impacts, as well as the reduction of goodwill associated with the goodwill impairment charge recorded during fiscal 2015. Intercompany misstatements (b) The correction of intercompany misstatements resulted in a $6.9 million reduction of total assets and a $6.9 million reduction of current liabilities due to dif- ferent practices of eliminating intercompany balances between CHS’s businesses which existed in previous periods. Other misstatements (c) Adjustments for other misstatements related pri- marily to misclassifications between line items included within the Consolidated Balance Sheets, as well as the impact of income tax adjustments on income tax accounts, including prepaid income taxes, income taxes payable and deferred income taxes. These misclassifica- tion adjustments arose primarily due to the application of differing accounting policies between businesses and collectively with the income tax adjustments resulted in a $3.9 million increase of total assets, a $72.0 million increase of current liabilities, a $35.5 million decrease of long-term liabilities and a $32.5 million decrease of total equities. The increase of total assets related primarily to a $49.4 million increase of receivables and notes payable for a participation arrangement that did not meet cer- tain criteria for off-balance sheet treatment. The increase of receivables was mostly offset by an $18.8 million decrease of inventories that resulted from the overstatement of inventories following the imple- mentation of a new enterprise resource planning software during the third quarter of fiscal 2018 and a $24.5 million reduction of prepaid income taxes as a result of the income tax effects associated with the cor- rection of other misstatements identified during fiscal 2018 and other periods. The increase of current liabilities resulted primarily from the $49.4 million increase of notes payable associated with the participation agreement described above, as well as the recognition of a $24.9 million accrued income tax balance due to the income tax effects of the other misstatements. The decrease of long-term liabili- ties related primarily to a $35.1 million decrease of long-term deferred tax liabilities related to the correc- tion of other misstatements identified during fiscal 2018 and other periods. The decrease of total equities related primarily to the $14.1 million net impact on income tax accounts and the $18.8 million timing difference adjustment associated with the implementation of a new enterprise resource planning software during the third quarter of fiscal 2018. As of May 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $181.6 million reduction of total assets, a $64.0 million reduction of current liabili- ties, a $19.1 million increase of long-term liabilities and a $136.8 million reduction of total equities. The reduction of total assets related primarily to the elimination of $181.8 million of current derivative assets that had been recorded as assets on the Consolidated Balance Sheet and an approximate $16.0 million reduction of goodwill associated with a goodwill impairment charge recorded during fiscal 2015. The decreases of total assets were partially offset by related adjustments, including a $12.9 million increase of prepaid income taxes resulting from the income tax impact of the freight misstatement, 79 CHS 2018 79 86 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d the recognition of a $2.0 million prepaid freight capacity balance and the recognition of a $0.5 million receivable. The decrease of total current liabilities related primarily to a $50.3 million reduction of current derivative liabili- ties and a $20.7 million reduction of income taxes pay- able resulting from the income tax effect of the freight misstatement, which were partially offset by the recog- nition of a $7.0 million accounts payable balance. The increase of long-term liabilities resulted from a $19.1 mil- lion increase of long-term deferred tax liabilities. The decrease of total equities related primarily to the elimi- nation of the derivative assets and liabilities described above and the related income tax impacts, as well as the reduction of goodwill associated with the goodwill impairment charge recorded during fiscal 2015. Intercompany misstatements (b) None Other misstatements (c) Adjustments for other misstatements related pri- marily to misclassifications between line items included within the Consolidated Balance Sheets, as well as the impact of income tax adjustments on income tax accounts, including prepaid income taxes, income taxes payable and deferred income taxes. These misclassifica- tion adjustments arose primarily due to the application of differing accounting policies between businesses and collectively with the income tax adjustments resulted in a $41.2 million increase of total assets, an $83.9 million increase of current liabilities, a $0.9 million decrease of long-term liabilities and a $41.8 million decrease of total equities. The most significant driver of the $41.2 million increase of total assets related to a $53.1 million misclassification adjustment for certain items previously included as a contra-inventory balance moving to accounts payable. The overall increase of inventories was mostly offset by a $48.2 million reduction of inventory that resulted from a misclassification adjustment for certain collateral being classified as receivables rather than inventory; however, this misstatement did not impact total assets. The increase of current liabilities related primarily to the $53.1 million increase of accounts payable associated with a misclassification adjustment for a contra-inven- tory balance moving to accounts payable, as well as the impact of the income tax adjustments on accrued income taxes, which increased by $20.7 million. The $41.8 million decrease of total equities related pri- marily to the $24.4 million net impact on income tax accounts, the recognition of $13.7 million of accrued expense related to the use of a unit of measure assump- tion in the calculation of an excise tax credit that was changed during fiscal 2018 and a $3.5 million increase of reserve and impairment charges related to a fixed asset impairment charge that should have been recorded during the third quarter of fiscal 2017 rather than the fourth quarter of fiscal 2017. 80 CHS 2018 87 80 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests FOR THE THREE MONTHS ENDED NOVEMBER 30, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 8,048,889 $ (17,005) $ 8,031,884 7,735,627 (24,570) 7,711,057 a, b, c a, b, c 313,262 140,168 (3,787) 176,881 40,702 (25,014) (38,362) 199,555 19,936 179,619 (464) 7,565 (668) — 8,233 — — — 8,233 670 7,563 — 320,827 139,500 (3,787) 185,114 40,702 (25,014) (38,362) 207,788 20,606 187,182 (464) c a Net income (loss) attributable to CHS Inc. $ 180,083 $ 7,563 $ 187,646 For the three months ended November 30, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $0.5 million reduction of income before income taxes and a $1.2 million reduction of net income. These adjustments related to a $0.5 mil- lion increase of cost of goods sold and a $0.7 million increase of income tax expense related to the tax effect of the freight derivatives and related misstatements. and net income. The $8.8 million increase of income before income taxes relates primarily to a $6.2 million decrease of cost of goods sold related to the valuation of crack spread derivatives and a $2.6 million decrease in costs related to postretirement benefit plan activity that resulted from a timing difference associated with recording certain benefit plan expenses (included in cost of goods sold and marketing, general and adminis- trative expenses). Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in an $11.4 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in an $8.8 million increase of income before income taxes Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $5.7 million decrease of revenues and cost of goods sold. 81 CHS 2018 81 88 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests FOR THE THREE MONTHS ENDED FEBRUARY 28, 2018 FOR THE SIX MONTHS ENDED FEBRUARY 28, 2018 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 6,851,093 $ 129,060 $ 6,980,153 $ 14,899,982 $ 112,055 $ 15,012,037 a, b, c 6,708,610 136,239 6,844,849 14,444,237 111,669 14,555,906 a, b, c 142,483 186,716 (11,349) (32,884) (7,705) 40,176 (11,364) (39,441) (14,550) (181,176) 166,626 (7,179) 135,304 455,745 386 456,131 (3) 3 186,713 326,881 (668) 326,213 (11,346) (15,133) — (15,133) c c (7,179) (40,063) 143,997 1,054 (7,705) 40,176 (7,705) 80,878 (11,364) (36,378) (39,441) (77,803) — — — — 145,051 (7,705) 80,878 (36,378) (77,803) (21,729) 185,005 1,054 186,059 (187,688) (161,240) (5,842) (167,082) a, c 165,959 346,245 6,896 353,141 — — — — (7,179) (6,512) (667) (48) — (48) (512) — (512) Net income (loss) attributable to CHS Inc. $ 166,674 $ (667) $ 166,007 $ 346,757 $ 6,896 $ 353,653 For the three months ended February 28, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $22.5 million reduction of income before income taxes and a $22.6 million reduc- tion of net income. These adjustments related to a $22.5 million increase of cost of goods sold and a $0.1 million increase of income tax expense related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $161.5 million increase of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $15.3 million increase of income before income taxes and a $21.9 million increase of net income. The $15.3 mil- lion increase of income before income taxes relates pri- marily to a $13.7 million decrease of cost of goods sold arising from the use of a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. The remaining increase relates to a $1.6 million decrease of cost of goods sold as a result of the valuation of crack spread derivatives. In addition to the increase of income before income taxes, an income tax benefit of $6.6 million was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subse- quent periods. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $27.7 million decrease of revenues and cost of goods sold. 82 82 CHS 2018 89 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the six months ended February 28, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $23.0 million reduction of income before income taxes and a $23.8 million reduc- tion of net income. These adjustments related to a $23.0 million increase of cost of goods sold and a $0.8 million increase of income tax expense related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $150.2 million increase of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in an $24.1 million increase of income before income taxes and a $30.7 million increase of net income. The $24.1 mil- lion increase of income before income taxes relates pri- marily to a $13.7 million decrease of cost of goods sold that arose from a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. The remaining increase relates to a $7.9 million decrease of cost of goods sold related to the valuation of crack spread derivatives and a $2.6 million increase to expense related to postretirement benefit plan activity that resulted from a timing difference asso- ciated with the recording of certain benefit plan expenses (included in cost of goods sold and marketing, general and administrative expenses). In addition to the increase of income before income taxes, an income tax benefit of $6.6 million was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subse- quent periods. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in $33.4 million decrease of revenues and cost of goods sold. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE THREE MONTHS ENDED MAY 31, 2018 FOR THE NINE MONTHS ENDED MAY 31, 2018 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 9,027,525 $ 59,803 $ 9,087,328 $ 23,927,508 $ 171,857 $ 24,099,365 8,728,914 112,447 8,841,361 23,173,151 224,116 23,397,267 a, b, c a, b, c 298,611 161,578 (3,811) 140,844 (52,644) 1 — (52,645) 245,967 161,579 (3,811) 88,199 754,357 488,459 (18,944) 284,842 49,340 (14,622) (59,308) 289,484 60,338 229,146 — — — — (124,050) (131,755) 49,340 (14,622) (59,308) 130,218 (51,000) (137,111) (52,645) 236,839 474,490 (5,119) (47,526) 55,219 (100,901) 181,620 575,391 (40,630) (52,259) 702,098 (667) 487,792 c — (51,592) — — — — (51,592) (10,962) (18,944) 233,250 (131,755) 130,218 (51,000) (137,111) 422,898 (111,863) 534,761 a, c (Gain) loss on disposal of business (124,050) (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests Net income (loss) attributable to CHS Inc. (187) — (187) (699) — (699) $ 229,333 $ (47,526) $ 181,807 $ 576,090 $ (40,630) $ 535,460 83 CHS 2018 83 90 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d For the three months ended May 31, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $29.8 million reduction of income before income taxes and a $24.7 million reduc- tion of net income. These adjustments related to a $29.8 million increase of cost of goods sold and a $5.1 million decrease of income tax expense related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $38.8 million increase of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $22.8 million decrease of income before income taxes and net income. The $22.8 million decrease of income before income taxes related primarily to an $18.8 million increase of cost of goods sold due to adjustments asso- ciated with the implementation of a new enterprise resource planning software during the third quarter of fiscal 2018. The remaining decrease relates to an $11.8 million increase of revenues and a $14.5 million increase of cost of goods sold related to the timing of revenue recognition as well as a $1.3 million increase of cost of goods sold related to the valuation of crack spread derivatives. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $9.2 million increase of revenues and cost of goods sold. For the nine months ended May 31, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $52.9 million reduction of income before income taxes and a $48.5 million reduc- tion of net income. These adjustments related to a $52.9 million increase of cost of goods sold and a $4.4 million increase of income tax benefit related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $189.0 million increase of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $1.3 million increase of income before income taxes and a $7.9 million increase of net income. The $1.3 million increase of income before income taxes relates to a combi- nation of offsetting misstatements, including a $13.7 million decrease of cost of goods sold that arose from a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018, a $6.6 million decrease of cost of goods sold related to the valuation of crack spread derivatives, and a $2.6 million decrease in expense related to postretirement benefit plan activity that resulted from a timing difference associated with recording certain benefit plan expenses (included in cost of goods sold and marketing, general and administrative expenses). The overall increase was mostly offset by an $18.8 million increase of cost of goods sold due to a timing difference associated with the implementation of a new enterprise resource planning software during the third quarter of fiscal 2018. The increase in income before income taxes and net income was also impacted by a $7.0 million increase of revenue and a $9.9 million increase of cost of goods sold related to the timing of revenue recognition. In addition to the increase of income before income taxes, an income tax benefit of $6.6 million was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subsequent periods. 84 CHS 2018 91 84 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjustments resulted in a $24.1 million decrease of revenues and cost of goods sold. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests FOR THE THREE MONTHS ENDED NOVEMBER 30, 2016 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 8,048,250 $ (46,346) $ 8,001,904 7,695,553 (40,029) 7,655,524 a, b, c a, b, c 352,697 147,849 18,357 186,491 — 38,265 (37,000) (40,328) 225,554 16,612 208,942 (208) (6,317) 346,380 3,409 — 151,258 18,357 (9,726) 176,765 4,105 — 4,105 38,265 (7,509) (44,509) — (40,328) (6,322) (536) 219,232 16,076 (5,786) 203,156 — (208) c c c a Net income (loss) attributable to CHS Inc. $ 209,150 $ (5,786) $ 203,364 For the three months ended November 30, 2016 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $0.1 million increase of income before income taxes and a $0.6 million increase of net income. These adjustments were primarily related to a $1.9 million increase of cost of goods sold, a $1.9 mil- lion increase of revenues related to the timing of revenue recognition, and a $0.6 million decrease of income tax expense related to the tax effect of the freight deriva- tives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $77.3 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $6.4 million decrease of income before income taxes and net income. The $6.4 million decrease of income before income taxes and net income relates primarily to an increase of cost of goods sold that arose from a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $29.1 million increase of revenues, a $29.1 million increase of cost of goods sold, a $3.4 mil- lion increase of marketing, general and administrative expenses, a $4.1 million increase of loss on disposal of business and a $7.5 million increase of other income. 85 CHS 2018 85 92 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense Other (income) loss FOR THE THREE MONTHS ENDED FEBRUARY 28, 2017 FOR THE SIX MONTHS ENDED FEBRUARY 28, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 7,320,406 $ 80,367 $ 7,400,773 $ 15,368,656 $ 34,021 $ 15,402,677 a, b, c 7,079,664 85,601 7,165,265 14,775,217 45,572 14,820,789 a, b, c 240,742 157,862 72,373 10,507 — 39,945 (17,235) (5,234) 235,508 593,439 (11,551) 581,888 2,304 160,166 305,711 5,713 311,424 — (7,538) (1,395) — 72,373 2,969 (1,395) 39,945 90,730 196,998 — 78,210 — 90,730 (17,264) 179,734 2,710 — 2,710 78,210 (848) (18,083) (54,235) (8,357) (62,592) c c c Equity (income) loss from investments (35,800) — (35,800) (76,128) — (76,128) Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests 23,597 8,624 14,973 (5,295) (4,939) (356) 18,302 3,685 14,617 249,151 25,236 223,915 (11,617) 237,534 (5,475) 19,761 a, c (6,142) 217,773 406 — 406 198 — 198 Net income (loss) attributable to CHS Inc. $ 14,567 $ (356) $ 14,211 $ 223,717 $ (6,142) $ 217,575 For the three months ended February 28, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $0.3 million reduction of income before income taxes and a $0.2 million increase of net income. These adjustments related to a $1.1 million reduction of revenues and a $0.9 million decrease of cost of goods sold, and a $0.5 million decrease of income tax expense related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $58.9 million increase of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $5.0 million decrease of income before income taxes and a $0.6 million decrease of net income. The $5.0 mil- lion decrease of income before income taxes relates pri- marily to a $5.6 million increase of cost of goods sold that arose from a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. The overall decrease of income before income taxes was partially offset by a $0.6 mil- lion decrease of cost of goods sold related to the valua- tion of crack spread derivatives. The decrease of income before income taxes was mostly offset by an income tax benefit of $4.5 million that was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subse- quent periods. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $22.6 million increase of revenues, a $22.5 million increase of cost of goods sold, a $2.3 mil- lion increase of marketing, general and administrative 86 86 CHS 2018 93 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS expenses, a $1.4 million increase of gain on disposal of business, and a $0.8 million increase of other income. For the six months ended February 28, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $0.2 million reduction of income before income taxes and a $0.8 million increase of net income. These adjustments related to a $0.7 mil- lion increase of revenues and a $1.0 million increase of cost of goods and a $1.0 million decrease of income tax expense related to the tax effect of the freight deriva- tives and related misstatements. Intercompany misstatements b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $18.4 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in an $11.4 million decrease of income before income taxes and a $6.9 million decrease of net income. The $11.4 mil- lion decrease of income before income taxes relates pri- marily to a $12.1 million increase of cost of goods sold that arose from a unit of measure assumption in the calculation of an excise tax credit that was changed during fiscal 2018. The overall decrease of income before income taxes was partially offset by a $0.7 mil- lion decrease of cost of goods sold related to the valua- tion of crack spread derivatives. The decrease of income before income taxes was partially offset by an income tax benefit of $4.5 million that was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subse- quent periods. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $51.7 million increase of revenues, a $51.6 million increase of cost of goods sold, a $5.7 million increase of marketing, general and administrative expenses, a $2.7 million increase of loss on disposal of business, and an $8.4 million increase of other income. 87 CHS 2018 87 94 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net FOR THE THREE MONTHS ENDED MAY 31, 2017 FOR THE NINE MONTHS ENDED MAY 31, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 8,614,090 $ 24,320 $ 8,638,410 $ 23,982,746 $ 58,341 $ 24,041,087 a, b, c 8,366,988 50,276 8,417,264 23,142,205 95,848 23,238,053 a, b, c 247,102 153,498 (25,956) 221,146 840,541 (37,507) 803,034 1,849 155,347 459,831 6,940 466,771 323,901 2,878 326,779 414,009 3,500 417,509 Operating earnings (loss) (230,297) (30,683) (260,980) (33,299) (47,947) (81,246) (Gain) loss on disposal of business — (1,224) (1,224) — Interest expense Other (income) loss 39,201 (11,947) Equity (income) loss from investments (48,393) — (5) — 39,201 117,411 1,486 — 1,486 117,411 (11,952) (66,183) (8,361) (74,544) (48,393) (124,521) — (124,521) c c c c Income (loss) before income taxes (209,158) (29,454) (238,612) 39,994 (41,072) (1,078) Income tax expense (benefit) (163,018) (3,106) (166,124) (137,781) (8,582) (146,363) a, c Net income (loss) (46,140) (26,348) (72,488) 177,775 (32,490) 145,285 Net income (loss) attributable to noncontrolling interests (955) — (955) (757) — (757) Net income (loss) attributable to CHS Inc. $ (45,185) $ (26,348) $ (71,533) $ 178,532 $ (32,490) $ 146,042 For the three months ended May 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $25.9 million reduction of income before income taxes and a $22.8 million reduc- tion of net income. These adjustments related to a $3.7 million decrease of revenues and a $22.2 million increase of cost of goods sold and a $3.1 million increase of income tax benefit related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $9.6 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $3.6 million decrease of income before income taxes and net income. The $3.6 million decrease of income before income taxes and net income relates primarily to a $3.5 million increase of reserve and impairment charges related to a timing difference for a fixed asset impairment charge that should have been recorded during the third quarter of fiscal 2017 rather than the fourth quarter of fiscal 2017. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in a $37.6 million increase of revenues, a $37.6 million increase of cost of goods sold, a $1.8 million increase of marketing, general and administrative expenses, a $0.6 million decrease of reserve and impair- ment charges and a $1.2 million increase of gain on dis- posal of business. For the nine months ended May 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $26.2 million reduction of 88 88 CHS 2018 95 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS income before income taxes and a $22.1 million reduc- tion of net income. These adjustments related to a $2.9 million reduction of revenues and a $23.2 million increase of cost of goods sold, as well as a $4.1 million increase of income tax benefit related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $28.0 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $14.9 million decrease of income before income taxes and a $10.4 million decrease of net income. The $14.9 million decrease of income before income taxes relates primarily to a $12.1 million increase of cost of goods sold that arose from a unit of measure assump- tion in the calculation of an excise tax credit that was changed during fiscal 2018 and a $3.5 million increase of reserve and impairment charges related to a fixed asset impairment charge that should have been recorded during the third quarter of fiscal 2017 rather than the fourth quarter of fiscal 2017. The overall decrease of income before income taxes was partially offset by a $0.7 million decrease of cost of goods sold related to the valuation of crack spread derivatives. The decrease of income before income taxes was partially offset by an income tax benefit of $4.5 million that was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subsequent periods. Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjust- ments resulted in an $89.2 million increase of revenues, a $89.2 million increase of cost of goods sold, a $6.9 mil- lion increase of marketing, general and administrative expenses, a $1.5 million increase of loss on sale of busi- ness and an $8.4 million increase of other income. 89 CHS 2018 89 96 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative Reserve and impairment charges (recoveries), net Operating earnings (loss) (Gain) loss on disposal of business Interest expense Other (income) loss Equity (income) loss from investments Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Net income (loss) attributable to noncontrolling interests FOR THE THREE MONTHS ENDED AUGUST 31, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 7,952,005 $ 44,334 $ 7,996,339 a, b, c 7,843,305 61,408 7,904,713 a, b, c 108,700 144,528 42,670 (17,074) 91,626 708 145,236 (3,500) 39,170 (78,498) (14,282) (92,780) — 53,828 (24,664) (12,817) (94,845) (44,293) (50,552) 123 704 — 704 53,828 (743) (25,407) — (12,817) (14,243) (109,088) 9,532 (34,761) a, c (23,775) (74,327) — 123 c c c c Net income (loss) attributable to CHS Inc. $ (50,675) $ (23,775) $ (74,450) For the three months ended August 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $12.0 million reduction of income before income taxes and a $25.2 million reduc- tion of net income. These adjustments related to a $2.9 million increase of revenues, and a $14.9 million increase of cost of goods sold and a $13.3 million decrease of income tax benefit related to the tax effect of the freight derivatives and related misstatements. Intercompany misstatements (b) The correction of intercompany misstatements had no impact on income (loss) before income taxes or net income (loss); however, the correction resulted in a $7.7 million decrease of both revenues and cost of goods sold due to different practices of eliminating intercompany sales between CHS’s businesses which existed in previous periods. Other misstatements (c) The correction of other misstatements resulted in a $2.3 million decrease of income before income taxes and a $1.4 million increase of net income. The $2.3 mil- lion decrease of income before income taxes related primarily to a $3.2 million increase of cost of goods sold related to the valuation of crack spread derivatives and a $2.6 million increase of cost of goods sold and mar- keting, general and administrative expenses related to a timing difference associated with the recording of cer- tain benefit plan expenses. These decreases of income before income taxes were partially offset by a $3.5 mil- lion decrease of reserve and impairment charges related to a timing difference for recording a fixed asset impair- ment charge. The decrease of net income was partially offset by an income tax benefit of $3.7 million that was recorded to adjust for the impact of other identified misstatements, as well as income tax items that had previously been identified and recorded as out of period adjustments in subsequent periods. 90 CHS 2018 97 90 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additionally, certain misclassification and offsetting adjustments were made between line items included in the Consolidated Statements of Operations primarily due to the application of differing accounting policies between businesses. These misclassification adjustments resulted in a $49.1 million increase of revenues, a $49.1 million increase of cost of goods sold, a $0.7 million increase of loss on disposal of business and a $0.7 million increase of other income. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARS IN THOUSANDS) Net income (loss) Other comprehensive income (loss), net of tax: Postretirement benefit plan activity, net of tax expense (benefit) of FOR THE THREE MONTHS ENDED NOVEMBER 30, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 179,619 $ 7,563 $ 187,182 a, c $2,620 4,196 (2,602) 1,594 c Unrealized net gain (loss) on available for sale investments net of tax expense (benefit) of $404 Cash flow hedges net of tax expense (benefit) of $(2) Foreign currency translation adjustment net of tax expense (benefit) of $(443) Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to noncontrolling interests 3,640 (4) (2,607) 5,225 184,844 (464) — — 396 (2,206) 3,640 (4) (2,211) 3,019 5,357 190,201 — (464) a Comprehensive income attributable to CHS Inc. $ 185,308 $ 5,357 $ 190,665 For the three months ended November 30, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $1.2 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations section for the three months ended November 30, 2017, above. The adjustment related to foreign currency translation is attributable to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in an $8.8 million increase of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the three months ended November 30, 2017, above. The adjustment related to postretirement benefit plan activity is attributable to a timing difference associ- ated with recording certain benefit plan expenses. 91 CHS 2018 91 98 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARS IN THOUSANDS) AS PREVIOUSLY REPORTED RESTATEMENT AS ADJUSTMENTS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES Net income (loss) $ 166,626 $ (667) $ 165,959 $ 346,245 $ 6,896 $ 353,141 a, c FOR THE THREE MONTHS ENDED FEBRUARY 28, 2018 FOR THE SIX MONTHS ENDED FEBRUARY 28, 2018 Other comprehensive income (loss), net of tax: Postretirement benefit plan activity net of tax expense (benefit) of $1,309 and $3,929 Unrealized net gain (loss) on available for sale investments net of tax expense (benefit) of $1,481 and $1,885 Cash flow hedges net of tax expense (benefit) of $443 and $441 Foreign currency translation adjustment net of tax expense (benefit) of $422 and $(21) Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to noncontrolling interests Comprehensive income attributable to 3,141 1 3,142 7,338 (2,602) 4,736 c 3,554 1,063 — — 3,554 1,063 7,194 1,059 — — 7,194 1,059 2,461 (109) 2,352 (146) 287 141 a 10,219 176,845 (108) 10,111 (775) 176,070 15,445 361,690 (2,315) 13,130 4,581 366,271 (48) — (48) (512) — (512) CHS Inc. $ 176,893 $ (775) $ 176,118 $ 362,202 $ 4,581 $ 366,783 For the three months ended February 28, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $22.6 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consoli- dated Statement of Operations section for the three months ended February 28, 2018, above. The adjust- ment related to foreign currency translation is attribu- table to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. (loss) in the Consolidated Statement of Operations sec- tion for the three months ended February 28, 2018, above. For the six months ended February 28, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $23.8 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consoli- dated Statement of Operations section for the six months ended February 28, 2018, above. The adjust- ment related to foreign currency translation is attribu- table to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Other misstatements (c) The correction of other misstatements resulted in a $21.9 million increase of net income. Refer to descrip- tions of the adjustments and their impact on net income Intercompany misstatements (b) None. 92 CHS 2018 99 92 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other misstatements (c) The correction of other misstatements resulted in a $30.7 million increase of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the six months ended February 28, 2018, above. The adjustment related to postretirement benefit plan activity is attributable to a timing difference associated with recording certain benefit plan expenses. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARS IN THOUSANDS) AS PREVIOUSLY REPORTED AS RESTATEMENT ADJUSTMENTS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES Net income (loss) $ 229,146 $ (47,526) $ 181,620 $ 575,391 $ (40,630) $ 534,761 a, c FOR THE THREE MONTHS ENDED MAY 31, 2018 FOR THE NINE MONTHS ENDED MAY 31, 2018 Other comprehensive income (loss), net of tax: Postretirement benefit plan activity net of tax expense (benefit) of $1,424 and $5,353 Unrealized net gain (loss) on available for sale investments net of tax expense (benefit) of $2,620 and $4,505 Cash flow hedges net of tax expense (benefit) of $172 and $613 Foreign currency translation adjustment net of tax expense (benefit) of $(254) and $(275) Other comprehensive income (loss), net 3,417 — 3,417 10,755 (2,602) 8,153 c 6,286 413 — — 6,286 13,480 413 1,472 — — 13,480 1,472 (11,617) 1,429 (10,188) (11,763) 1,716 (10,047) a of tax (1,501) 1,429 (72) Comprehensive income 227,645 (46,097) 181,548 13,944 589,335 (886) 13,058 (41,516) 547,819 Less comprehensive income attributable to noncontrolling interests Comprehensive income attributable to (187) — (187) (699) — (699) CHS Inc. $ 227,832 $ (46,097) $ 181,735 $ 590,034 $ (41,516) $ 548,518 For the three months ended May 31, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $24.7 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consoli- dated Statement of Operations section for the three months ended May 31, 2018, above. The adjustment related to foreign currency translation is attributable to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in a $22.8 million decrease of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the three months ended May 31, 2018, above. 93 CHS 2018 93 100 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d For the nine months ended May 31, 2018 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $48.5 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consoli- dated Statement of Operations section for the nine months ended May 31, 2018, above. The adjustment related to foreign currency translation is attributable to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in a $7.9 million increase of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the nine months ended May 31, 2018, above. The adjustment related to postretirement benefit plan activity relates to a timing difference associated with recording certain benefit plan expenses. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARS IN THOUSANDS) Net income (loss) FOR THE THREE MONTHS ENDED NOVEMBER 30, 2016 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 208,942 $ (5,786) $ 203,156 a, c Other comprehensive income (loss), net of tax: Postretirement benefit plan activity net of tax expense (benefit) of $2,011 Unrealized net gain (loss) on available for sale investments net of tax expense (benefit) of $482 Cash flow hedges net of tax expense (benefit) of $406 Foreign currency translation adjustment net of tax expense (benefit) of $(209) Other comprehensive income (loss), net of tax Comprehensive income 3,239 777 654 (19,164) (14,494) 194,448 — — — 3,239 777 654 1,089 1,089 (18,075) (13,405) (4,697) 189,751 a Less comprehensive income attributable to noncontrolling interests (208) — (208) Comprehensive income attributable to CHS Inc. $ 194,656 $ (4,697) $ 189,959 For the three months ended November 30, 2016 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $0.6 million increase of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations section for the three months ended November 30, 2016, above. The adjustment related to foreign currency translation is attributable to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. 94 CHS 2018 101 94 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in a $6.4 million decrease of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations section for the three months ended November 30, 2016, above. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARS IN THOUSANDS) Net income (loss) Other comprehensive income (loss), net of tax: Postretirement benefit plan activity net of tax expense (benefit) of $2,312 and $4,323 Unrealized net gain (loss) on available for sale investments net of tax expense (benefit) of $600 and $1,083 Cash flow hedges net of tax expense (benefit) of $598 and $1,005 Foreign currency translation adjustment net of tax expense (benefit) of $(204) and $5 Other comprehensive income (loss), net of tax Comprehensive income Less comprehensive income attributable to FOR THE THREE MONTHS ENDED FEBRUARY 28, 2017 FOR THE SIX MONTHS ENDED FEBRUARY 28, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ 14,973 $ (356) $ 14,617 $ 223,915 $ (6,142) $ 217,773 a, c 3,724 968 963 — — 1 3,724 6,963 968 964 1,744 1,618 — 1 — 6,963 1,745 1,618 9,123 (936) 8,187 (10,041) 153 (9,888) 14,778 29,751 (935) 13,843 284 154 438 (1,291) 28,460 224,199 (5,988) 218,211 c c a noncontrolling interests 406 — 406 198 — 198 Comprehensive income attributable to CHS Inc. $ 29,345 $ (1,291) $ 28,054 $ 224,001 $ (5,988) $ 218,013 For the three months ended February 28, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $0.2 million increase of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations section for the three months ended February 28, 2017, above. The adjustment related to foreign currency translation is attributable to the for- eign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in a $0.6 million decrease of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the three months ended February 28, 2017, above. For the six months ended February 28, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $0.8 million increase of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated 95 CHS 2018 95 102 CHS 2018EIGHTEEN: Q u a r te r l y F i n a n c i a l I n fo r m at i o n ( U n a u d i te d ) , co n t i n u e d Statement of Operations section for the six months ended February 28, 2017, above. The adjustment related to foreign currency translation relates to the foreign cur- rency impact associated with goodwill that was impaired during fiscal 2015. Other misstatements (c) The correction of other misstatements resulted in a $6.9 million decrease of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the six months ended February 28, 2017, above. Intercompany misstatements (b) None. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARS IN THOUSANDS) FOR THE THREE MONTHS ENDED MAY 31, 2017 FOR THE NINE MONTHS ENDED MAY 31, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES Net income (loss) $ (46,140) $ (26,348) $ (72,488) $ 177,775 $ (32,490) $ 145,285 a, c Other comprehensive income (loss), net of tax: Postretirement benefit plan activity net of tax expense (benefit) of $2,257 and $6,580 Unrealized net gain (loss) on available for sale investments net of tax expense (benefit) of $(72) and $1,010 Cash flow hedges net of tax expense (benefit) of $233 and $1,238 Foreign currency translation adjustment net of tax expense (benefit) of $(334) and $(329) Other comprehensive income (loss), net of 3,635 1 3,636 10,599 (117) 375 (1) — (118) 1,627 375 1,993 — — — 10,599 1,627 1,993 (2,151) 782 (1,369) (12,193) 936 (11,257) c c a tax 1,742 782 2,524 2,026 936 2,962 Comprehensive income (44,398) (25,566) (69,964) 179,801 (31,554) 148,247 Less comprehensive income attributable to noncontrolling interests (955) — (955) (757) — (757) Comprehensive income attributable to CHS Inc. $ (43,443) $ (25,566) $ (69,009) $ 180,558 $ (31,554) $ 149,004 For the three months ended May 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $22.8 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consoli- dated Statement of Operations section for the three months ended May 31, 2017, above. The adjustment related to foreign currency translation is attributable to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in a $3.6 million decrease of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the three months ended May 31, 2017, above. 96 CHS 2018 103 96 CHS 2018NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the nine months ended May 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $22.1 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations section for the nine months ended May 31, 2017, above. The adjustment related to foreign currency translation is attributable to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in a $10.4 million decrease of net income. Refer to descrip- tions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the nine months ended May 31, 2017, above. CHS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (DOLLARS IN THOUSANDS) Net income (loss) Other comprehensive income (loss), net of tax: Postretirement benefit plan activity net of tax expense (benefit) of FOR THE THREE MONTHS ENDED AUGUST 31, 2017 AS PREVIOUSLY REPORTED RESTATEMENT ADJUSTMENTS AS RESTATED RESTATEMENT REFERENCES $ (50,552) $ (23,775) $ (74,327) a, c $12,108 19,501 2,602 22,103 c Unrealized net gain (loss) on available for sale investments net of tax expense (benefit) of $1,722 Cash flow hedges net of tax expense (benefit) of $155 Foreign currency translation adjustment net of tax expense (benefit) of $542 Other comprehensive income (loss), net of tax 2,758 249 3,522 26,030 — — 2,758 249 (424) 3,098 a 2,178 28,208 Comprehensive income (24,522) (21,597) (46,119) Less comprehensive income attributable to noncontrolling interests 123 — 123 Comprehensive income attributable to CHS Inc. $ (24,645) $ (21,597) $ (46,242) For the three months ended August 31, 2017 Freight derivatives and related misstatements (a) The correction of freight derivatives and related misstatements resulted in a $25.2 million reduction of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consoli- dated Statement of Operations section for the three months ended August 31, 2017, above. The adjustment related to foreign currency translation is attributable to the foreign currency impact associated with goodwill that was impaired during fiscal 2015. Intercompany misstatements (b) None. Other misstatements (c) The correction of other misstatements resulted in a $1.4 million increase of net income. Refer to descriptions of the adjustments and their impact on net income (loss) in the Consolidated Statement of Operations sec- tion for the three months ended August 31, 2017, above. The adjustment related to postretirement benefit plan activity relates to a timing difference associated with recording certain benefit plan expenses. 97 CHS 2018 97 104 CHS 20181DEC201817451942 To the Board of Directors, Members and Patrons of CHS Inc.: We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CHS Inc. and its subsidiaries (the ‘‘Company’’) as of August 31, 2018 and 2017 and the related consolidated statements of operations, comprehensive income, changes in equities and cash flows for each of the three years in the period ended August 31, 2018 appearing in the 2018 Annual Report on Form 10-K and have issued our report thereon dated December 3, 2018, which included an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Restatement of Previously Issued Financial Statements As discussed in Note 2 in the 2018 Annual Report on Form 10-K, the Company has restated its 2017 and 2016 financial statements to correct misstatements. 20NOV201512003910 PricewaterhouseCoopers LLP Minneapolis, Minnesota December 3, 2018 98 CHS 2018 105 98 CHS 2018Board of Directors From left, seated: Riegel, Blew, Schurr, Johnsrud, Erickson; standing: Cordes, Kehl, Jones, Fritel, Knecht, Carlson, Anthony, Farrell, Holm, Kayser, Meyer, Malesich Dan Schurr Chairman LeClaire, Iowa C.J. Blew First Vice Chairman Castleton, Kansas David Johnsrud Secretary-Treasurer Starbuck, Minnesota Jon Erickson Second Vice Chairman Minot, North Dakota Steve Riegel Assistant Secretary-Treasurer Ford, Kansas Don Anthony Lexington, Nebraska Tracy Jones Kirkland, Illinois Dennis Carlson Mandan, North Dakota David Kayser Alexandria, South Dakota Scott Cordes Wanamingo, Minnesota Russ Kehl Quincy, Washington Mark Farrell Cross Plains, Wisconsin Randy Knecht Houghton, South Dakota Steve Fritel Barton, North Dakota Edward Malesich Dillon, Montana Alan Holm Sleepy Eye, Minnesota Perry Meyer New Ulm, Minnesota Detailed biographical information on the CHS Board of Directors is available at chsinc.com. 106 CHS 2018Executive Team From left: Halvorson, Black, Skidmore, Debertin, Hunhoff, Kaul-Hottinger, Griffith, Dusek, Zappa Jay Debertin President and John Griffith Senior Vice President, Global Grain Mary Kaul-Hottinger Senior Vice President, Chief Executive Officer Marketing and Renewable Fuels Human Resources David Black Senior Vice President, Enterprise Gary Halvorson Senior Vice President, Agronomy Strategy, and Chief Information Officer Rick Dusek Executive Vice President, Country Operations Darin Hunhoff Executive Vice President, Energy and Processing and Food Ingredients Timothy Skidmore Executive Vice President and Chief Financial Officer Jim Zappa Executive Vice President and General Counsel Detailed biographical information on the CHS leadership team is available at chsinc.com. Acknowledgements To create this annual report, CHS worked with local cooperatives and farmer owners and their families. The collective accomplish- ments described in these pages reflect their commitment to the cooperative system. We thank them for inviting us into their homes and businesses. Iowa: Billie Danner, West Liberty, Iowa, and employees of Japan Corn Starch Co. Minnesota: Bret Berg, Farmington; Matt Hart, Ag Partners Cooperative, Wanamingo; Dusty Dienst and team, Faribault Fire Department; Loren and Deb Zutz, Ronnie Zutz, CHS Ag Services and Northland Grain, Warren; Deron Johnson, Hector; Doug Lund, United Farmers Cooperative, Winthrop; Ken Doebbeling, CHS Transportation North Dakota: Dustin Johnsrud, Epping; Jamie Routledge, Glenburn; Dan Sem and staff, Dakota Agronomy Partners, Minot Oregon: Troy Kuenzi, Clinton Kuenzi and the staff of Pratum Cooperative, Salem; Ivan Schurter, Silverton South Dakota: Dave Farrell and the Cenex Automated Fuel Delivery system team, Brookings Washington: Beau Duff and employees of HighLine Grain Growers, Four Lakes Wisconsin: Lisa Kopp and students of Medford Area Public Schools, Medford 107 CHS 20185500 Cenex Drive Inver Grove Heights, MN 55077 651-355-6000 chsinc.com NASDAQ: CHSCP, CHSCO, CHSCN, CHSCM, CHSCL © 2018 CHS Inc. 

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