CHS Inc.
Annual Report 2020

Plain-text annual report

2020 CHS Annual Report OUR PURPOSE CREATING CONNECTIONS TO EMPOWER AGRICULTURE OUR VALUES INTEGRITY We set high standards and hold ourselves accountable. SAFETY We put the well-being of our people, customers and communities first every day. INCLUSION We believe excellence and growth stem from diverse thinking. COOPERATIVE SPIRIT We work together for shared success and to strengthen our communities. BUILT FOR YOU Dan Schurr Jay Debertin CHS was built to withstand ups and downs of markets, weather, trade and more. We plan for the unexpected — and we rise to the challenge when it happens. Our diverse company, our commitment to creating connections that empower agriculture and our people give us a firm foundation on which to stand strong and grow. Fiscal 2020 was a year of two halves. The first half was marked by a cold harvest season and early winter weather through much of our trade area. Crop yields were reduced by exceptionally poor 2019 planting conditions, the difficult harvest reduced grain volumes even more and prevented fall fertilizer applications. At the same time, our extensive supply network met historic demand for propane to dry corn and heat homes and businesses, which contributed to a record-setting year for propane volumes. The second half of the year enjoyed an excellent growing season in most regions, but the COVID-19 pandemic dramatically reduced refined fuels demand and disrupted the foodservice industry, which hurt our Ventura Foods, LLC, joint venture and oilseeds business. While our primarily rural customer base helped maintain diesel demand relatively well, the significant refining margins our refineries in Montana and Kansas enjoyed in fiscal 2019 by processing heavy Canadian crude oil diminished in fiscal 2020, reducing energy margins. A bright spot throughout the year was the easing of trade disruption with China. Increased grain purchases and new markets established by CHS traders helped sustain grain volumes and move stored grain to prepare for the large 2020 harvest. We realized a full year of revenue from our fiscal 2019 acquisition of the remaining 75 percent of West Central Distribution, LLC, a crop input distributor and supplier of proprietary crop protection products. Our ability to provide differentiated, high-value crop protection technologies combined with our substantial crop nutrients business make CHS a stronger agronomy partner for our owners and customers. Amid the year’s headwinds, our core businesses delivered solid performance and took significant steps toward more efficient operations. Our commitment to the Lean approach of employee- led continuous improvement laid the groundwork for lasting benefits. More centralized sourcing added cost savings and leveraged enterprisewide strength. Technology advances streamlined the flow of data throughout the supply chain, improving communications, shortening wait times, easing management requirements and adding value for our owners. The challenges we felt at the close of fiscal 2020 will continue well into fiscal 2021. We will face them head-on with these priorities: • We will navigate the pandemic, protecting the safety and well- being of our employees, owners, customers and communities. • We will protect our financial health by identifying efficiencies and cost savings across the enterprise. • We will advance our operating model to build a stronger, more efficient company, delivering more value at every point in our supply chain. Thank you for your business and for your commitment to the cooperative system. CHS is built to provide the products, services and value you need. Our system is built to help you withstand unexpected pressures and stay strong. CHS is built for you. Dan Schurr Chair, Board of Directors Jay Debertin President and Chief Executive Officer CHS 2020 1 YEAR IN REVIEW CHS Global Grain Marketing continued its transition to a product line operating model in fiscal 2020 while maintaining team productivity amid the global pandemic. The new model is improving data transfer and communication across the CHS global supply chain, enhancing value for owners, increasing efficiency and providing new career opportunities for employees. Reduced trade disruption triggered significant increases in grain volume in South America and record sales in Europe and Asia. Volumes of durum wheat more than tripled and canola origination increased significantly. CHS traders identified and served new customers in Nigeria, Turkey and other countries, and the container program for specialty products such as dry green peas and non-GMO crops continued to provide new market opportunities for growers. Collaboration in grain origination and trad- ing between CHS Global Grain Marketing and the CHS Country Operations retail channel brought additional opportunities related to purchasing scale and supply chain efficiency. One significant effort in this area included TEMCO, LLC, a grain- exporting joint venture with Cargill, for streamlined origination and movement of wheat through ports in the Pacific Northwest. Enhanced communication, better market insights and increased effi- ciency are adding value for CHS owners. market position in the Chicago market helped maintain volume and profitability. Construction at the Fairmont, Minn., soy- bean crushing plant continued; the $100 million project will be complete in late calendar 2021 and will increase production capacity by 30 percent. In early fiscal 2021, CHS consolidated its grain marketing and processing businesses into the CHS Global Grain & Processing business unit. Ongoing evolution of CHS Sunflower included firmly establishing CHS- owned Royal Hybrid® hybrid sunflower seed as the leading North American sunflower genetics supplier with the purchase of the Corteva Agriscience confectionary sunflower seed lines. One positive outcome of the pandemic has been increased interest in backyard bird-feeding, which triggered 20 percent growth in bird food sales for the Grandin, N.D., CHS sunflower processing plant. CHS Hedging marked fiscal 2020 by rebranding Russell Consulting as AgSurion SM Risk Consulting, a service of CHS Hedging. The business also updated its customer experience with a new brand presence and redesigned website and added clearing capabilities. Additional growth came through increased use of fertilizer risk management services by member cooperatives seeking to capitalize on volatile global markets. Major shocks to consumer demand related to the pandemic reduced edible vegetable oil consumption in the second half of the fiscal year, adding challenges for CHS Processing and Food Ingredients. The business responded by developing new markets for biodiesel and other soy oil products. While reductions in vehicle use diminished demand for ethanol from the CHS plants in Rochelle and Annawan, Ill., the strength of the CHS supply chain and CHS Capital grew its innovative producer financing programs with strategic part- nerships across the enterprise. The new Accolade Producer Financing Program was offered through member coop- eratives selling CHS crop nutrient and crop protection products. A 30 percent increase in loan commitments through the Country Operations Autumn Rewards Finance Program indicated strong accep- tance for the low-cost financing solution. 2 CHS 2020 SIGNIFICANT INCREASES IN GRAIN VOLUMES DELIVERED TO CUSTOMERS IN EUROPE AND ASIA CHS 2020 3 RECORD SALES OF 915 MILLION GALLONS OF CENEX® PREMIUM DIESEL FUEL 4 CHS 2020 Effects of the global pandemic were felt sharply in the energy sector, where miles driven plummeted in March and April 2020 as consumers adhered to stay-at- home orders. CHS Energy maintained its focus on the Cenex® brand, supporting retailers who serve a largely rural client base, including many essential workers. Despite difficult market conditions, strong demand for Cenex premium die- sel fuel drove record sales for that prod- uct line. New artificial intelligence tools helped manage inventory and price risk. Partnering with refined fuels retailers to provide an inviting customer experience, CHS launched the Cenex LIFT initiative to enhance outdoor lighting and brand image elements at retail locations across the country. Financing is available through CHS Capital for Cenex brand retailers to update store interiors. ensure safe propane handling and deliv- ery to homes, farms and rural businesses. Leveraging its strategic turnaround and capital investments completed in fiscal 2019, the CHS refinery in McPherson, Kan., processed a record-high volume of crude oil in fiscal 2020. Significant safety and reliability upgrades were made to piping systems at the Conway, Kan., underground storage facility, which provides unique flexibility to optimize product storage for the McPherson refinery. Replacement of the Cenex pipeline segment from Glendive, Mont., to Minot, N.D., was successfully completed in fiscal 2020 and will play an important long-term role in success of the CHS Laurel, Mont., refinery and ability of CHS to distribute gasoline and diesel products to eastern Montana, North Dakota and western Minnesota. CHS Lubricants recorded stronger year-over-year volumes with excellent earnings for the year, despite chal- lenging market conditions. A focus on safety in the three CHS lubricant blending plants resulted in no lost-time injuries for the second consecutive year, a first-time achievement. An exceptionally wet 2019 harvest sea- son sharply increased demand for fuel to dry crops and helped CHS Propane reach record earnings on sales of more than 1 billion total gallons of propane and natural gas liquids. Industry-leading programs and effective supply planning also led to significant market share growth. The energy equipment business leveraged access to valuable equipment solutions, an online ordering platform and emphasis on alternative propane uses to bring in record revenues for the year. The CHS propane safety reimburse- ment program, which gives financial support to propane marketers, helped CHS Transportation delivered strong return on assets in fiscal 2020, includ- ing reporting record volumes for its Automated Fuel Delivery program. Managing employee safety and asset use while addressing COVID-19 chal- lenges and seasonal demands called for strong collaboration across CHS businesses. CHS drivers showed their cooperative spirit as many shifted work locations, schedules, routes and load types to ensure owner product needs were met. Consistently performing in the top 10 percent of U.S. fleets for safety, CHS Transportation reported one of its best safety records in history in fiscal 2020 as its drivers logged more than 30 million miles and more than 350,000 deliveries. An investment in new in-cab computer systems and paperless documents will help ensure compliance with changing federal regulations and increase efficiency for CHS and its transportation customers. CHS 2020 5 CHS Agronomy successfully navigated pandemic challenges, finishing the fiscal year with record-high crop nutrient volumes and crop protection revenues. Maintaining emphasis on its branded proprietary crop protection product line and building relationships with strategic retail customers helped drive 12 percent year-over-year internal growth in crop protection revenues while shipments of crop nutrients topped 8 million tons. Continued alignment of the supply chain helped enable growth in all agronomy businesses. Coordinating wholesale and retail demand data and using increased scale delivered greater efficiency and sourcing advantages for cooperatives and growers. More than 4 million crop acres benefit- ted from a new line of soy-enhanced adjuvants formulated with refined soybean oil made from CHS owners’ soybeans. The adjuvant — available to growers as CHS Acuvant™ from CHS Country Operations and to retailers as Petrichor™ from CHS Agronomy — completed its first full season of availability. CHS received a patent for its proprietary Levesol® formulation that includes a unique chelate to make phosphorus more available to crops and powers a suite of products including Trivar™, a new enhanced-efficiency solution for dry phosphate fertilizers. CHS investment in a balanced supply chain including CF Nitrogen and import assets was maximized with a new agreement with The Mosaic Company to supply urea for sale in Brazil. Shifting market dynamics led to the sale of the Mermentau, La., CHS crop nutrients facility to allow more effective use of other facilities in the system. Executing on its strategy to expand its customer-focused retail solutions plat- form, CHS Country Operations deliv- ered strong annual revenues and growth while reducing operating costs through a focus on efficiency, including improved coordination across business areas to enable integrated competitive sourcing. Favorable growing conditions in most regions supported the strong perfor- mance despite market challenges related to the pandemic and the continued difficult ag economy. Leading enterprise efforts to advance customer experience through enhanced service, support and technology, CHS Country Operations enhanced its MyCHS and Agellum® plat- forms, empowering growers with tools to focus on productivity and profitability and access account information to enable day-to-day business decisions. The value-added CHS Animal Nutrition portfolio provided a strong return on assets with improved nutrition solutions for beef, dairy and other livestock producers. Quality and process advances, specialized training and a focus on sales and marketing helped build market share for trusted Payback® and Equis® feed brands. Ventura Foods, LLC, is a joint venture between CHS and Mitsui, Inc., and a leader in oils, dressings, sauces, mayon- naises and margarines for foodservice and retail customers in more than 60 countries. In fiscal 2020, Ventura Foods increased its presence in Latin America by establishing a co-manufacturing partner in Mexico. Ventura Foods also launched Culinaire™, a new line of dressings, sauces and mayonnaises for international distribution to foodservice, wholesale and retail customers. Ardent Mills, LLC, a CHS joint venture with Cargill Incorporated and Conagra Brands, pursued its growth strategy with acquisitions of a Klamath Falls, Ore., organic facility and the Andean Naturals quinoa business. CHS con- tinues as the largest wheat supplier to Ardent Mills, providing 51 million bushels as a key ingredient in innovative, nutritious grain-based food products. 6 CHS 2020 12 PERCENT GROWTH IN CROP PROTECTION REVENUES CHS 2020 7 MATCHING GRANTS SUPPORTED 360 RURAL COMMUNITIES 8 CHS 2020 CHS introduced new policies to help the company effectively manage trading risk in complex and highly regulated marketplaces. These policies will encour- age principle-based performance and intelligent risk management. CHS demonstrated its commitment to compliance and integrity creating an integrity champions program in key international markets that gives employees additional communications and training to promote a culture of integrity, improve risk detection and strengthen the company’s first line of defense for compliance concerns. Integrity champion networks will expand across U.S. locations over the next two years. A new online policy center helps CHS employees access current infor- mation, including the new unmanned aircraft system (drone) program that helps ensure this valuable technology can be used effectively to enhance safety and monitoring at CHS facilities. Collaboration across all areas of the company around the globe helped ensure the well-being of employees, owners, customers and communities as the organization responded to risks related to the COVID-19 pandemic. Software-assisted monitoring and response protocols helped track supplies of personal protective equipment (PPE) and sanitation materials, and manage business continuity and employee move- ment, including shifting many employees to remote work and keeping employees remaining in the workplace safe. Enhanced focus on the CHS value of safety across all businesses led to significant improvements in key safety metrics, including recording the lowest injury and crash rates in company his- tory and reductions of 24 to 33 percent over three-year averages for recordable lost-time and injury data, respectively. A companywide commitment to continuous improvement gained momentum during the year as a significant portion of CHS employees completed Lean training and began applying the approach. The Lean model is a collaborative approach to employee-driven process improvement. CHS Government Affairs helped navigate rapidly changing federal, state and local rules and regulations related to the pandemic. The team facilitated connections between CHS owners and leaders and key Washington, D.C., policymakers on issues ranging from international trade and taxes to funding for crucial infrastructure. The team continued to help lead advocacy efforts to preserve Section 199A (DPAD) tax benefits for CHS and its owners. CHS Community Giving exceeded its three-year goals for supporting safety and community well-being by providing safety equipment and training to first responders in 450 communities and delivering matching grants to 360 communities, including grants for COVID-19 relief efforts. The CHS Foundation exceeded its three-year goals to develop future ag leaders by supporting 6,000 students through scholarships and university support and better preparing more than 72,000 students for ag careers. Nearly 300 current and future member cooperative leaders participated in Cooperative Leadership Academy programs offered by CHS Cooperative Resources in fiscal 2020. To continue learning and development opportunities during the global pandemic and beyond, virtual options were developed and implemented for nearly all Cooperative Leadership Academy programs. A multimedia CHS brand campaign demonstrating the benefits of cooper- ative ownership launched in early fiscal 2020. The campaign reminds stake- holders of the value of working with a cooperative connected to CHS and brings to life the CHS purpose of creat- ing connections to empower agriculture. CHS 2020 9 FISCAL 2020 FINANCIAL HIGHLIGHTS REVENUES ($ in billions) NET INCOME ($ in millions) 829.9 775.9 422.4 900 800 700 600 500 400 300 200 100 0 383.2 71.6 2016 2017 2018 2019 2020 32.0 32.7 31.9 30.4 28.4 35 30 25 20 15 10 5 0 2016 2017 2018 2019 2020 CASH RETURN ($ in millions) Cash patronage Equity redemption Preferred stock dividends 515.7 600 500 400 300 200 100 0 326.8 330.0 355.2 177.5 2016 2017 2018 2019 2020 10 CHS 2020 NET INCOME DECLINED IN FISCAL 2020, DUE TO PANDEMIC-RELATED MARKET SWINGS AND POOR WEATHER Consolidated net income decreased in fiscal 2020 versus fiscal 2019, despite strong performance by our propane business and improved weather conditions during the 2020 planting season, which drove increased earnings across much of our Ag segment for the second half of fiscal 2020. Challenging market conditions in our refined fuels business, primarily driven by the COVID-19 pandemic, resulted in volume and price declines compared with the previous year. Poor weather for the 2019 harvest reduced grain quality and crop nutrient sales for fall applications, reducing revenues for our Ag segment in the first half of fiscal 2020. CHS reported net income of $422.4 million for fiscal 2020 (Sept. 1, 2019, through Aug. 31, 2020) compared with $829.9 million in net income reported in fiscal 2019 (Sept. 1, 2018, through Aug. 31, 2019). Consolidated revenues totaled $28.4 billion for fiscal 2020, compared with $31.9 billion recorded in fiscal 2019. Pretax income of $386.9 million for fiscal 2020 was a significant decrease from the $815.6 million in pretax income reported in fiscal 2019. Energy In Energy, year-over-year income before income taxes decreased by $392.9 million to $225.3 million, reflecting significantly less advantageous market conditions in our refined fuels business that reduced margins and volumes. These market conditions were driven by decreased crude oil differentials on heavy Canadian crude oil processed by our refineries and decreased crack spreads, which were negatively affected by demand shocks associated with COVID-19. Increased propane volumes and improved propane margins in fiscal 2020 were supported by significant demand for propane to dry crops and heat homes and businesses during the cold, wet weather at the close of calendar 2019 and helped partially offset decreased overall earnings. Energy segment results reflected positive resolution of an $80.8 million gain contingency associated with a tax credit in fiscal 2019 that did not reoccur in fiscal 2020. Ag The Ag segment, which includes global grain marketing, country operations, wholesale agronomy, processing and food ingredients and renewable fuels, recorded income before income taxes in fiscal 2020 of $53.7 million, a $10.7 million increase over fiscal 2019. Poor fall harvest conditions in calendar 2019 reduced grain volumes and ongoing global trade tensions limited revenues in the first half of fiscal 2020. Many of those conditions improved in the second half of the fiscal year, however, as optimism over improved trade relations between the United States and foreign trade partners and favorable spring planting conditions improved margins across certain Ag business segments, including feed and farm supplies, grain, and renewable fuels. Results were tempered somewhat by declining agronomy margins due to oversupply in the market and reduced margins in processing and food ingredients as a result of disruptions caused by the COVID-19 pandemic. Additional Segments and Categories The Nitrogen Production segment, which consists solely of our investment in CF Nitrogen, generated $51.8 million in income before income taxes, a $21.0 million decrease from fiscal 2019. The decrease reflects reduced sale prices of urea and UAN, which are produced and sold by CF Nitrogen. Corporate and Other recorded income before income taxes of $56.0 million, a $25.5 million decrease from fiscal 2019. The earnings decrease reflects lower income from our Ventura Foods, LLC, joint venture, which experienced significantly reduced demand in the foodservice industry due to the COVID-19 pandemic. Income also declined in our financing and brokerage businesses as a result of lower interest rates during fis- cal 2020 compared to the previous year. Based on fiscal 2020 earnings, CHS expects to return an estimated $30 million in cash patronage and $33 million in equity redemptions to member cooperatives and individual owners in fiscal 2021. CHS 2020 11 10NOV202015370565 AUGUST 31, (DOLLARS IN THOUSANDS) ASSETS Current assets: 2020 2019 Cash and cash equivalents $ 140,874 $ 211,179 Receivables Inventories 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 Accounts payable Accrued expenses Other current liabilities Total current liabilities Long-term debt Other liabilities Commitments and contingencies (Note 17) Equities: Preferred stock Equity certificates Accumulated other comprehensive loss Capital reserves Total CHS Inc. equities Noncontrolling interests Total equities Total liabilities and equities 2,366,047 2,742,138 1,017,488 6,266,547 3,630,033 4,957,938 1,139,429 2,731,209 2,854,288 865,919 6,662,595 3,683,996 5,088,708 1,012,195 $ 15,993,947 $ 16,447,494 $ 1,575,491 $ 2,156,108 189,287 1,724,516 501,904 928,843 4,920,041 1,601,836 652,897 2,264,038 5,161,610 (233,924) 1,618,147 8,809,871 9,302 8,819,173 39,210 1,931,415 555,323 901,651 5,583,707 1,749,901 496,356 2,264,038 4,988,877 (226,933) 1,584,158 8,610,140 7,390 8,617,530 $ 15,993,947 $ 16,447,494 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 12 CHS 2020 12 YEARS ENDED AUGUST 31, (DOLLARS IN THOUSANDS) Revenues Cost of goods sold Gross profit Marketing, general and administrative expenses Operating earnings Gain on disposal of business Interest expense Other income Equity income from investments Income before income taxes Income tax benefit Net income Net income (loss) attributable to noncontrolling interests CONSOLIDATED FINANCIAL STATEMENTS 10NOV202015373387 2020 2019 2018 $ 28,406,365 $ 31,900,453 $ 32,683,347 27,424,558 30,516,120 31,591,227 981,807 704,542 277,265 (1,450) 116,977 (38,425) (186,715) 386,878 (36,731) 423,609 1,170 1,384,333 1,092,120 724,731 659,602 (3,886) 167,065 (82,423) (236,755) 815,601 (12,456) 828,057 (1,823) 639,756 452,364 (131,816) 149,202 (82,737) (153,515) 671,230 (104,076) 775,306 (601) Net income attributable to CHS Inc. $ 422,439 $ 829,880 $ 775,907 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 10NOV202015370962 YEARS ENDED AUGUST 31, (DOLLARS IN THOUSANDS) Net income Other comprehensive income (loss), net of tax: Pension and other postretirement benefits Unrealized net loss on available-for-sale investments Cash flow hedges Foreign currency translation adjustment Other comprehensive (loss) income, net of tax Comprehensive income Comprehensive income (loss) attributable to noncontrolling interests 2020 2019 2018 $ 423,609 $ 828,057 $ 775,306 12,798 — (4,411) (15,378) (6,991) 416,618 1,170 (32,559) — 20,196 (9,949) (22,312) 805,745 (1,823) 20,066 (3,148) 2,540 (12,021) 7,437 782,743 (601) Comprehensive income attributable to CHS Inc. $ 415,448 $ 807,568 $ 783,344 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 13 CHS 2020 13 (DOLLARS IN THOUSANDS) 10NOV202015370831 YEARS ENDED AUGUST 31, 2020, 2019 AND 2018 EQUITY CERTIFICATES CAPITAL EQUITY CERTIFICATES NONPATRONAGE EQUITY CERTIFICATES NONQUALIFIED EQUITY CERTIFICATES BALANCES, AUGUST 31, 2017 $ 3,906,426 $ 29,836 $ 405,387 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, net of tax Reclassification of tax effects to capital reserves Estimated 2018 patronage refunds Estimated 2018 equity redemptions BALANCES, AUGUST 31, 2018 Reversal of prior year patronage and redemption estimates Distribution of 2018 patronage refunds Redemptions of equities Preferred stock dividends Other, net Net income (loss) Other comprehensive loss, net of tax Reclassification of tax effects to capital reserves Estimated 2019 patronage refunds Estimated 2019 equity redemptions BALANCES, AUGUST 31, 2019 Reversal of prior year patronage and redemption estimates Distribution of 2019 patronage refunds Redemptions of equities Preferred stock dividends ASC Topic 842 cumulative-effect adjustment Other, net Net income Other comprehensive loss, net of tax Estimated 2020 patronage refunds Estimated 2020 equity redemptions 6,058 — (6,064) — (3,840) — — — — (65,000) 3,837,580 78,941 — (70,859) — (2,169) — — — — (90,000) 3,753,493 80,000 — (80,133) — — (1,173) — — — (28,000) — — (185) — (153) — — — — — 29,498 — — (409) — (15) — — — — — 29,074 — — (340) — — (7) — — — — (126,333) 128,831 (476) — (361) — — — 345,330 (10,000) 742,378 (345,330) 352,980 (14,272) — (1,844) — — — 472,398 — 1,206,310 (462,398) 474,407 (15,965) — — (628) — — 211,970 (5,000) BALANCES, AUGUST 31, 2020 $ 3,724,187 $ 28,727 $ 1,408,696 The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 14 CHS 2020 14 CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED AUGUST 31, 2020, 2019 AND 2018 PREFERRED STOCK ACCUMULATED OTHER COMPREHENSIVE LOSS CAPITAL RESERVES NONCONTROLLING INTERESTS TOTAL EQUITIES $ 2,264,038 $ (180,360) $ 1,267,808 $ 12,505 $ 7,705,640 — — — — — — — — — — — — — — — — 7,437 (26,992) — — 126,333 (128,831) — (168,668) 2,792 775,907 — 26,992 (420,330) — — — — — (2,458) (601) — — — — 2,264,038 (199,915) 1,482,003 9,446 — — — — — — — — — — — — — — — — (22,312) (4,706) — — 2,264,038 (226,933) — — — — — — — — — — — — — — — — — (6,991) — — 420,330 (428,756) — (168,668) 7,061 829,880 — 4,706 (562,398) — 1,584,158 562,398 (564,522) — (168,668) 25,320 (1,008) 422,439 — (241,970) — — — — — (233) (1,823) — — — — 7,390 — — — — — 742 1,170 — — — 6,058 — (6,725) (168,668) (4,020) 775,306 7,437 — (75,000) (75,000) 8,165,028 153,941 (75,776) (85,540) (168,668) 2,800 828,057 (22,312) — (90,000) (90,000) 8,617,530 180,000 (90,115) (96,438) (168,668) 25,320 (2,074) 423,609 (6,991) (30,000) (33,000) $ 2,264,038 $ (233,924) $ 1,618,147 $ 9,302 $ 8,819,173 15 CHS 2020 15 10NOV202015370699 YEARS ENDED AUGUST 31, (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization, including amortization of deferred major maintenance Equity (income) loss from investments, net of distributions received Provision for doubtful accounts Gain/recovery on disposal of business Deferred taxes Other, net Changes in operating assets and liabilities, net of acquisitions: Receivables Inventories Accounts payable and accrued expenses Other, net Net cash provided by 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 maintenance Changes in CHS Capital notes receivable, net Financing extended to customers Payments from customer financing Business acquisitions, net of cash acquired Other investing activities, net Net cash used in investing activities Cash flows from financing activities: 2020 2019 2018 $ 423,609 $ 828,057 $ 775,306 550,251 49,130 3,418 (1,450) (32,761) (1,642) 308,399 104,884 (330,949) 14,340 1,087,229 (418,359) 32,670 1,139 (14,496) 119,591 (6,386) 35,791 231 6,114 (243,705) 541,507 12,560 57,745 (3,886) (13,852) 6,094 (218,192) 284,694 (38,229) (316,567) 1,139,931 (443,216) 53,974 5,044 (232,094) (10,903) (12,210) 90,193 (119,421) 7,350 (661,283) 539,736 36,782 2,085 (131,816) (146,961) (3,699) 210,775 (169,581) (78,388) 40,258 1,074,497 (355,412) 91,153 234,914 (80,514) 25,335 (74,402) 52,453 — 26,949 (79,524) Proceeds from notes payable and long-term borrowings Payments on notes payable, long-term debt and finance lease obligations 24,343,870 (24,948,926) 29,071,363 (29,450,339) 36,040,240 (36,525,136) Preferred stock dividends paid Redemptions of equities Cash patronage dividends paid Other financing activities, net Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net (decrease) increase in cash and cash equivalents and restricted cash Cash and cash equivalents and restricted cash at beginning of period Cash and cash equivalents and restricted cash at end of period Supplemental cash flow information: Cash paid for interest Cash paid for income taxes, net of refunds 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 Capital expenditures and major maintenance incurred but not yet paid $ $ Finance lease obligations incurred Accrual of dividends and equities payable Assets contributed to joint venture (168,668) (96,438) (90,115) 29,129 (931,148) 4,942 (82,682) 299,675 216,993 119,354 6,840 — — — — 14,906 11,190 63,000 — $ $ (168,668) (85,540) (75,776) (16,686) (725,646) 2,733 (244,265) 543,940 299,675 172,259 19,918 — — — — 28,478 7,351 180,000 7,353 $ $ (168,668) (8,847) — (69,759) (732,170) 8,864 271,667 272,273 543,940 148,874 13,410 615,089 402,421 634,000 386,900 53,453 396 153,941 — The accompanying notes are an integral part of the consolidated financial statements. CHS Inc. and Subsidiaries 16 CHS 2020 16 10NOV202015372495 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Organization, Basis of Presentation and Significant Accounting Policies Organization CHS Inc. (referred to herein as ‘‘CHS,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’) is the nation’s leading integrated agricultural cooperative. As a cooperative, CHS is owned by farmers and ranchers and their member cooperatives (‘‘mem- bers’’) across the United States. We also have preferred shareholders that own shares of our various series of preferred stock, which are each listed and traded on the Global Select Market of The Nasdaq Stock Market LLC (‘‘The Nasdaq’’). See Note 12, 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 nonmember customers), both domestic and inter- national. 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 our subsidiaries and limited liability companies in which we have a controlling interest. The effects of all significant intercompany transactions have been eliminated. 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 results from our investment in CF Industries Nitrogen, LLC (‘‘CF Nitrogen’’). See Note 14, Segment Reporting, for more information. Certain captions within the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows have been combined within other captions as allowed by Securities statement and Exchange Commission reporting requirements under Regulation S-X. Prior year information has been updated to conform with the cur- rent presentation. financial 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. Significant Accounting Policies Significant accounting policies are summarized below or within the related notes to our consolidated financial statements. Cash and Cash Equivalents and Restricted Cash Cash equivalents include short-term, highly liquid investments with original maturities of three months or less at the date of acquisition. The fair value of cash and cash equivalents approximates the carrying value due to the short-term nature of the instruments. Restricted cash is included in our Consolidated Balance Sheets within other current assets (current portion) and other assets (noncurrent portion), as appropriate, and primarily relates to customer deposits for futures and option contracts associated with regulated commodi- ties held in separate accounts as required under federal and other regulations. Pursuant to the requirements of the Commodity Exchange Act, such funds must be car- ried in separate accounts that are designated as segre- gated customer accounts, as applicable. Restricted cash also includes funds held in escrow pursuant to appli- cable regulations limiting their usage. The following table provides a reconciliation of cash and cash equivalents and restricted cash as reported within our Consolidated Balance Sheets that aggregates to the 17 CHS 2020 17 ONE: O rg a n i z at i o n , B a s i s of P re s e n t at i o n a n d S i g n i f i c a n t Acco u n t i n g Po l i c i e s , co n t i n u e d amount presented in our Consolidated Statements of Cash Flows. (DOLLARS IN THOUSANDS) 2020 2019 2018 AUGUST 31, Cash and cash equivalents Restricted cash included in other current assets Restricted cash included in other assets Total cash and cash equivalents and restricted cash $ 140,874 $ 211,179 $ 450,617 76,119 88,496 90,193 — — 3,130 $ 216,993 $ 299,675 $ 543,940 Recent Accounting Pronouncements Except for the recent accounting pronouncements described below, other recent accounting pronounce- ments are not expected to have a material impact on our condensed consolidated financial statements. Adopted We adopted Accounting Standards Codification (‘‘ASC’’) Topic 842, Leases (‘‘ASC Topic 842’’), as of Sep- tember 1, 2019, using the modified retrospective approach. In addition, we used the additional optional transition method and package of practical expedients in the period of adoption without retrospective adjust- ment to previous periods presented, although we elected not to apply the hindsight practical expedient available under the standard. As a result of using the modified retrospective method, prior periods have not been restated, and a $25.3 million cumulative-effect adjustment, including the deferred income tax impact, was recorded to increase the opening balance of capital reserves as of the adoption date related to recognition of previously deferred gains associated with the sale-leaseback of our primary corporate office building located in Inver Grove Heights, Minnesota. Additionally, adoption of ASC Topic 842 resulted in the recognition of operating lease right-of-use assets and associated lease liabilities of $268.4 million and $267.0 million, respec- tively, as of September 1, 2019. Adoption of ASC Topic 842 did not have a material impact on our Consolidated Statements of Operations or Consolidated Statements of Cash Flows. Additional information and further dis- closures related to our leases and lease-related financial statement amounts are included within Note 19, Leases. Not Yet Adopted In June 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) No. 2016-13, Financial Instruments—Credit Losses (‘‘ASC Topic 326’’): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU introduce a new approach, based on expected losses, to estimate credit losses on certain types of financial instruments. This ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses associated with most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. Enti- ties are required to apply the provisions of this ASU as a cumulative-effect adjustment to the opening balance of capital reserves as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for us beginning September 1, 2020, for our fiscal year 2021 and for interim periods within that fiscal year. Based on various data-gathering activities, devel- opment of a credit losses model, data analyses and accounting policy election determinations, the impact of adoption is not expected to have a material impact on our consolidated financial statements. 10NOV202015374146 Revenues We provide a wide variety of products and services, from agricultural inputs such as fuels, farm supplies and agronomy products, to agricultural outputs that include grain and oilseed, processed grains and oilseeds and food products, and renewable fuels production and marketing. We primarily conduct our operations and 18 CHS 2020 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS derive revenues within our Energy and Ag segments. Our Energy segment derives its revenues through refining, wholesaling and retailing of petroleum prod- ucts. Our Ag segment derives its revenues through orig- ination and marketing of grain, including service activities conducted at export terminals; through wholesale sales of agronomy products and processed sunflowers; from sales of soybean meal, soybean refined oil and soyflour products; through production and mar- keting of renewable fuels; and through retail sales of petroleum and agronomy products, and feed and farm supplies. Corporate and Other primarily consists of our financing and hedging businesses. Revenue is recognized when performance obligations under the terms of a contract with a customer are satis- fied, which generally occurs when control of the goods has transferred to customers in accordance with the underlying contract. For the majority of our contracts with customers, control transfers to customers at a point in time when goods/services have been delivered, as that is generally when legal title, physical possession and risks and rewards of ownership of the goods/ser- vices transfer to the customer. In limited arrangements, control transfers over time as the customer simultane- ously receives and consumes the benefits of the service as we complete our performance obligation(s). Revenue is recognized as the transaction price we expect to be entitled to in exchange for transferring goods or ser- vices to a customer, excluding amounts collected on behalf of third parties. For physically settled derivative sales contracts that are outside the scope of the revenue guidance, we recognize revenue when control of the inventory is transferred within the meaning of ASC Topic 606, Revenue from Contracts with Customers (‘‘ASC Topic 606’’). Revenues arising from our financing busi- ness are recognized in accordance with ASC Topic 470, REPORTABLE SEGMENT* (DOLLARS IN THOUSANDS) Energy Ag Corporate and Other Total revenues Debt (‘‘ASC Topic 470’’), and fall outside the scope of ASC Topic 606. Shipping and Handling Costs Shipping and handling 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. Shipping and handling is treated as a fulfillment activity rather than a promised service, and therefore is not con- sidered a separate performance obligation. Taxes Collected from Customers and Remitted to Governmental Authorities Revenues are recorded net of taxes collected from cus- tomers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Contract Costs Commissions related to contracts with a duration of less than one year are expensed as incurred. We recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets we otherwise would have recognized is one year or less. Disaggregation of Revenues The following table presents revenues recognized under ASC Topic 606 disaggregated by reportable segment, as well as the amount of revenues recognized under ASC Topic 815, Derivatives and Hedging (‘‘ASC Topic 815’’), and other applicable accounting guidance for the year ended August 31, 2020 and 2019. Other applicable accounting guidance primarily includes reve- nues recognized under ASC Topic 842 and ASC Topic 470 that fall outside the scope of ASC Topic 606. YEAR ENDED AUGUST 31, 2020 ASC TOPIC 606 ASC TOPIC 815 OTHER GUIDANCE TOTAL REVENUES $ 4,833,003 $ 598,131 $ — $ 5,431,134 5,963,198 16,901,258 22,903 — 61,643 26,229 22,926,099 49,132 $ 10,819,104 $ 17,499,389 $ 87,872 $ 28,406,365 19 CHS 2020 19 TWO: R eve n u e s , co n t i n u e d REPORTABLE SEGMENT* (DOLLARS IN THOUSANDS) Energy Ag Corporate and Other Total revenues YEAR ENDED AUGUST 31, 2019 ASC TOPIC 606 ASC TOPIC 815 OTHER GUIDANCE TOTAL REVENUES $ 6,393,075 $ 726,001 $ — $ 7,119,076 6,319,304 18,268,977 20,262 — 131,791 41,043 24,720,072 61,305 $ 12,732,641 $ 18,994,978 $ 172,834 $ 31,900,453 * Our Nitrogen Production reportable segment represents an equity method investment that records earnings and allocated expenses, but not revenues. Less than 1% of revenues accounted for under ASC Topic 606 included within the table above are recorded over time and relate primarily to service contracts. within our Consolidated Balance Sheets and were immaterial as of August 31, 2020 and 2019. Contract Assets and Contract Liabilities Contract assets relate to unbilled amounts arising from goods that have already been transferred to the cus- tomer where the right to payment is not conditional on the passage of time. This results in the recognition of an asset, as the amount of revenue recognized at a certain point in time exceeds the amount billed to the customer. Contract assets are recorded in accounts receivable Contract liabilities relate to advance payments from customers for goods and services that we have yet to provide. Contract liabilities of $139.1 million and $207.5 million as of August 31, 2020 and 2019, respec- tively, are recorded within other current liabilities on our Consolidated Balance Sheets. For the years ended August 31, 2020 and 2019, we recognized revenues of $194.8 million and $170.7 million, respectively, which were included in the other current liabilities balance at the beginning of the period. 10NOV202015373767 Receivables Receivables as of August 31, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) 2020 2019 Trade accounts receivable $ 1,476,585 $ 1,803,284 CHS Capital short-term notes receivable Other 563,934 592,909 491,068 511,821 Gross receivables 2,531,587 2,908,014 Less allowances and reserves 165,540 176,805 Total receivables $ 2,366,047 $ 2,731,209 Trade Accounts Receivable Trade accounts receivable are initially recorded at a selling price that approximates fair value upon the sale of goods or services to customers. Subsequently, trade accounts receivable are carried at net realizable value, which includes an allowance for estimated uncollectible amounts. We calculate this allowance based on our his- tory of write-offs, level of past due accounts and our relationships with and the economic status of our cus- tomers. Receivables from related parties are disclosed in Note 18, Related Party Transactions. No third-party cus- tomer accounted for more than 10% of the total receiv- ables balance as of August 31, 2020 or 2019. CHS Capital Notes Receivable Notes Receivable CHS Capital, LLC (‘‘CHS Capital’’), our wholly-owned subsidiary, has short-term notes receivable from com- mercial and producer borrowers. The short-term notes receivable have maturity terms of 12 months or less and are reported at their outstanding unpaid principal bal- ances, adjusted for the allowance of loan losses, as CHS Capital has the intent and ability to hold the applicable 20 CHS 2020 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS loans for the foreseeable future or until maturity or pay-off. The carrying value of CHS Capital short-term notes receivable approximates fair value given the notes’ short-term duration and use of market pricing adjusted for risk. Notes receivable from commercial borrowers are collat- eralized by various combinations of mortgages, per- sonal 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 North Dakota and Minnesota. CHS Capital also has loans receivable from producer bor- rowers that are collateralized by various combinations 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. 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 $101.5 million and $180.0 million at August 31, 2020 and 2019, respectively. The long-term notes receivable are included in other assets on our Consoli- dated Balance Sheets. As of August 31, 2020 and 2019, commercial notes represented 33% and 41%, respec- tively, and producer notes represented 67% and 59%, respectively, of total CHS Capital notes receivable. CHS Capital has commitments to extend credit to cus- tomers if there are no violations of any contractually established conditions. As of August 31, 2020, CHS Capital customers had additional available credit of $714.5 million. Allowance for Loan Losses and Impairments CHS Capital maintains an allowance for loan losses that is an estimate of potential incurred losses inherent in the loans receivable portfolio. In accordance with FASB ASC 450-20, Accounting for Loss Contingencies, and ASC 310-10, Accounting by Creditors for Impairment of a Loan, the allowance for loan losses consists of general and specific components. The general component is based on historical loss experience and qualitative fac- tors 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 marketing, general and administrative expenses in the Consolidated 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 significant amounts of CHS Capital notes were past due as of August 31, 2020 or 2019, 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. 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 nonaccrual 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 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. CHS Capital had no significant troubled debt restructurings and no third-party borrowers that accounted for more than 10% of the total CHS Capital notes receivable or total receivables as of August 31, 2020 or 2019. Loan Participations For the years ended August 31, 2020 and 2019, CHS Capital sold $70.6 million and $92.3 million of notes receivable, respectively, to various counterparties under a master participation agreement. The sale resulted in the removal of notes receivable from the Consolidated Balance Sheet. CHS Capital has no retained interests in the transferred notes receivable, other than collection and administrative services. Proceeds from sales of 21 CHS 2020 21 THREE: R e ce i va b l e s , co n t i n u e d notes receivable have been included in investing activi- ties in the Consolidated Statements of Cash Flows. Fees received related to the servicing of notes receivable are recorded in other income in the Consolidated State- ments 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 vendor rebates, value- added taxes, certain financing receivables and pre-crop financing, primarily to Brazilian farmers, to finance a portion of supplier production costs. We receive volume-based rebates from certain vendors during the year. These vendor rebates are accounted for in accor- dance with ASC 705, Cost of Sales and Services, based on the terms of the volume rebate program. For rebates that 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 and cost of goods sold over the period in which the rebate is earned. For pre-crop financing arrangements, we do not bear costs or operational risks associated with the related growing crops, although our ability to be paid depends on the crops actually being produced. The financing is collater- alized by future crops, land and physical assets of the suppliers, carries a local market interest rate and settles when the farmer’s crop is harvested and sold. No signifi- cant troubled debt restructurings occurred and no third-party customer or borrower accounted for more than 10% of the total receivables balance as of August 31, 2020 or 2019. 10NOV202015371988 Inventories Inventories as of August 31, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) 2020 2019 Grain and oilseed $ 1,064,079 $ 1,024,645 Energy Agronomy 696,858 717,378 822,535 954,037 Processed grain and oilseed 126,022 109,900 Other 32,644 48,328 Total inventories $ 2,742,138 $ 2,854,288 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 nongrain products pur- chased for resale are valued on the first-in, first-out (‘‘FIFO’’) and average cost methods. As of August 31, 2020 and 2019, we valued approxi- mately 16% of inventories, primarily crude oil and refined fuels within our Energy segment, using the lower of cost, determined on the LIFO method, or net realizable value. 22 CHS 2020 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS If the FIFO method of accounting had been used, inven- tories would have been higher than the reported amount by $93.5 million and $215.0 million as of August 31, 2020 and 2019, respectively. During the third quarter of fiscal 2020, we experienced price declines in our energy inventories associated with the COVID-19 pandemic. As a result, we recorded a noncash, lower of cost or market charge of $42.0 million in cost of goods sold to reduce the carrying value of our energy invento- ries to their market value as of May 31, 2020. Based upon market prices observed as of August 31, 2020, the lower of cost or market reserve was decreased by approxi- mately $34.0 million as prices improved while invento- ries were sold. 10NOV202015371606 Other Current Assets Other current assets as of August 31, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) 2020 2019 Derivative assets (Note 15) $ 371,195 $ 253,341 Margin and related deposits Supplier advance payments Other 194,097 198,699 155,306 197,290 253,497 259,982 Total other current assets $ 1,017,488 $ 865,919 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 generally held in segregated accounts to sup- port the associated derivative contracts and may be used to fund or partially fund the settlement of those contracts as they expire. Similar to our derivative finan- cial instruments, margin and related deposits are reported on a gross basis. Supplier Advance Payments 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 and crop protection product suppliers to lock in future supply and pricing. 10NOV202015373260 Investments Investments as of August 31, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) 2020 2019 Equity method investments: CF Industries Nitrogen, LLC $ 2,662,618 $ 2,708,942 Ventura Foods, LLC 381,351 374,516 Ardent Mills, LLC 208,927 209,027 Other equity method investments Other investments 253,182 123,955 267,247 124,264 Total investments $ 3,630,033 $ 3,683,996 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, LLC (‘‘Ventura Foods’’), and Ardent Mills, LLC (‘‘Ardent Mills’’), which are summarized below. In addition to the recognition of our share of income from our equity method investments, our equity method investments are evaluated for indicators of other-than-temporary impairment on an ongoing basis in accordance with U.S. GAAP. We have approximately $383.0 million of cumulative undistributed earnings from our equity method investees included in the invest- ments balance as of August 31, 2020. 23 CHS 2020 23 SIX: I nve st m e n t s , co n t i n u e d All equity securities that do not result in consolidation and are not accounted for under the equity method are measured at fair value with changes therein reflected in net income. We have elected to utilize the measurement alternative for equity investments that do not have readily determinable fair values and measure these investments at cost less impairment plus or minus observable price changes in orderly transactions. Our share in the income or loss of these equity method investments is recorded within equity (income) loss from investments in the Consolidated Statements of Operations. Other investments consist primarily of investments in cooperatives without readily determi- nable fair values and are generally recorded at cost, unless an impairment or other observable market price change occurs requiring an adjustment. Investments in other cooperatives are recorded in a manner similar to equity investments without readily determinable fair values, 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 debt and equity instruments are carried at amounts that approximate fair values. CF Nitrogen We have a $2.7 billion investment in CF Nitrogen, a stra- tegic venture with CF Industries Holdings, Inc. (‘‘CF Industries’’). The investment consists of an approximate 10% membership interest (based on product tons) in CF Nitrogen. At the time we entered into the strategic ven- ture, we also entered into a supply agreement that enti- tles 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 through fiscal 2096. Our purchases under the supply agreement are based on prevailing market prices and we receive semi-annual cash distributions (in January and July of each year) from CF Nitrogen via our membership interest. These distributions are based on actual volumes purchased from CF Nitrogen under the stra- tegic venture and will have the effect of reducing our investment to zero over 80 years on a straight-line basis. We account for this investment using the hypothetical liquidation at book value method, recognizing our share of the earnings and losses of CF Nitrogen as equity income from investments in our Nitrogen Production segment based on our contractual claims on the entity’s net assets pursuant to the liquidation provisions of CF Nitrogen’s Limited Liability Company Agreement, adjusted for the semi-annual cash distributions. Cash distributions received from CF Nitrogen for the years ended August 31, 2020 and 2019, were $174.3 mil- lion and $186.5 million, respectively. The following tables provide aggregate summarized financial information for CF Nitrogen for the balance sheets as of August 31, 2020 and 2019, and the state- ments of operations for the 12 months ended August 31, 2020, 2019 and 2018: (DOLLARS IN THOUSANDS) 2020 2019 Current assets Noncurrent assets Current liabilities Noncurrent liabilities $ 552,127 $ 590,057 6,564,086 7,028,766 222,391 228,324 3,036 2,455 (DOLLARS IN THOUSANDS) 2020 2019 2018 Net sales $ 2,522,827 $ 2,894,795 $ 2,449,695 Gross profit Net earnings 570,901 737,168 423,612 529,462 706,291 401,295 Earnings attributable to CHS Inc. 127,954 160,373 106,895 Ventura Foods and Ardent Mills We have a 50% interest in Ventura Foods, which is a joint venture with Wilsey Foods, Inc., a majority-owned subsid- iary of MBK USA Holdings, Inc., that produces and distrib- utes primarily vegetable-oil-based products, and we have a 12% interest in Ardent Mills, which is a joint venture with Cargill Incorporated and Conagra Brands, Inc., and is the largest flour miller in the United States. We account for Ventura Foods and Ardent Mills as equity method invest- ments 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, 2020 and 2019, and statements of operations for the 12 months ended August 31, 2020, 2019 and 2018: (DOLLARS IN THOUSANDS) 2020 2019 Current assets Noncurrent assets Current liabilities $ 1,548,930 $ 1,469,003 2,461,886 2,327,217 628,440 535,579 Noncurrent liabilities 895,620 790,401 (DOLLARS IN THOUSANDS) 2020 2019 2018 Net sales $ 5,440,143 $ 5,752,368 $ 5,882,035 Gross profit Net earnings 584,352 565,784 601,927 181,049 248,303 226,776 Earnings attributable to CHS Inc. 48,927 69,157 46,069 Our investments in other equity method investees are not significant in relation to our consolidated financial statements, either individually or in the aggregate. 24 CHS 2020 24 10NOV202015372876 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property, Plant and Equipment As of August 31, 2020 and 2019, major classes of prop- erty, plant and equipment, which include finance lease assets, consisted of the amounts in the table below. (DOLLARS IN THOUSANDS) 2020 2019 Land and land improvements $ 317,714 $ 319,452 Buildings 1,110,490 1,079,073 Machinery and equipment 7,559,437 7,392,767 Office equipment and other 362,084 346,649 Construction in progress 310,901 329,297 Gross property, plant and equipment 9,660,626 9,467,238 Less accumulated depreciation and amortization 4,702,688 4,378,530 Total property, plant and equipment $ 4,957,938 $ 5,088,708 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; five to 20 years for machinery and equipment; and three to 10 years for office equip- ment and other). Expenditures for maintenance and minor repairs and renewals are expensed. We also capi- talize and amortize eligible costs to acquire or develop internal-use software that are incurred during the appli- cation development stage. When assets are sold or oth- erwise disposed of, the cost and related accumulated depreciation and amortization are removed from the related accounts and resulting gains or losses are reflected in operations. Depreciation expense, including amortization of finance lease assets, for the years ended August 31, 2020, 2019 and 2018, was $470.4 million, $495.3 million and $475.8 million, respectively. 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 in accordance with U.S. GAAP. This evaluation of recoverability is based on various indicators, including the nature, future economic benefits and geographic locations of the assets, histor- ical or future profitability measures and other external market conditions. If these indicators suggest the car- rying amounts of an asset or asset group may not be recoverable, potential impairment 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 impairment loss would be recog- nized. An impairment loss would be measured as the amount by which the carrying value of the asset or asset group exceeds its fair value. No significant impairments were identified during fiscal 2020; however, as a result of these monitoring activities, our Ag segment recorded impairment charges of approximately $12.2 million asso- ciated with certain nonstrategic long-lived assets that ceased operation during fiscal 2019. These impairments were included in marketing, general and administrative expenses in the Consolidated Statements of Operations. 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 timing, cost and probability of removal, these obliga- tions are not material. 25 CHS 2020 25 10NOV202015371222 Other Assets Other assets as of August 31, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) Goodwill Customer lists, trademarks and other intangible assets Notes receivable Long-term derivative assets Prepaid pension and other benefits Capitalized major maintenance Cash value life insurance Operating lease right of use assets Other Total other assets 2020 2019 $ 172,404 $ 172,404 65,025 109,145 21,157 106,209 71,206 189,045 36,408 73,100 228,511 286,890 130,673 122,792 257,834 — 48,471 60,350 $ 1,139,429 $ 1,012,195 Goodwill and Other Intangible Assets Goodwill represents the excess of cost over the fair value of identifiable assets acquired. Goodwill is assessed for impairment on an annual basis as of July 31, either by first assessing qualitative factors to determine whether a quantitative goodwill impairment test is necessary or by proceeding directly to the quantitative test. The quantitative test may be required more frequently if triggering events or other circumstances occur that could indicate impair- ment. Goodwill is assessed for impairment at the reporting unit level, which has been determined to be our operating segments or one level below our operating segments in certain instances. There were no changes in the net carrying amount of goodwill for the year ended August 31, 2020. Changes in the net carrying amount of goodwill for the year ended August 31, 2019, by segment, are as follows: (DOLLARS IN THOUSANDS) Balances, August 31, 2018 Goodwill acquired during the period Impairment Balances, August 31, 2019 ENERGY CORPORATE AND OTHER AG TOTAL $ 552 $ 127,338 $ 10,574 $ 138,464 — — 61,358 (27,418) — — 61,358 (27,418) $ 552 $ 161,278 $ 10,574 $ 172,404 Goodwill of $61.4 million acquired during the third quarter of fiscal 2019 was related to our acquisition of the remaining 75% ownership in West Central Distribution, LLC (‘‘WCD’’) that we did not previously own. See Note 20, Acquisitions, for additional information related to the acquisition. No goodwill has been allocated to our Nitrogen Production segment, which consists of a single investment accounted for under the equity method. The outbreak and pandemic of the novel coronavirus known as COVID-19 and other factors resulted in substantial reductions in demand and sharp price declines in certain industries in which we operate during fiscal 2020, particu- larly with respect to the production of renewable fuels, other energy products and processing and food ingredients. Based on these deteriorated macroeconomic and industry conditions, management considered the impacts on each of our businesses and determined that we needed to perform interim impairment assessments of goodwill and asset groups, during our third quarter, for a reporting unit within our Ag segment that operates in the renewable fuels industry. Third-party price outlooks, projections of future volumes, expenses and other cash flows and a discount rate reflective of the relative risk of the cash flows were used to estimate fair value. Management believes the assumptions utilized in the assessment are appropriate and reasonable for estimating fair value. The estimated fair value of the reporting unit exceeded the carrying amount by approximately 18%, and thus no impairment was recorded. As a result of our annual goodwill impairment analyses performed as of July 31, 2019, we recorded a goodwill impairment charge of $27.4 million associated with a reporting unit in our Ag segment. The impairment charge 26 26 CHS 2020 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS primarily resulted from changing market dynamics that reduced future profitability within the reporting unit, as well as strategy changes and the challenging economic environment in the agriculture industry. The impairment charge was recorded in marketing, general and administrative expenses in the Consolidated Statement of Operations for the year ended August 31, 2019. No material impairments related to long-lived assets were recorded, and no goodwill impairments were identified as a result of our annual goodwill analyses performed as of July 31, 2020 or 2018. Management will continue to monitor the results and projected cash flows for each of our businesses to assess whether any reserves or impairments may be necessary in the future, particularly for our businesses that have experienced or could experience substantial reductions in demand or price declines associated with the COVID-19 pandemic. Intangible assets subject to amortization primarily include customer lists, trademarks and noncompete agreements, and are amortized over their respective useful lives (ranging from two to 30 years). We have no material intangible assets with indefinite useful lives. All long-lived assets, including other identifiable intangible assets, are also assessed for impairment in accordance with U.S. GAAP and evaluated for impairment whenever triggering events or other circumstances indicate the carrying amount of an asset group or reporting unit may not be recoverable. Intangible assets of $47.2 million were acquired during fiscal 2019 related to the acquisition of the remaining 75% ownership interest in WCD that we did not previously own. See Note 20, Acquisitions, for additional information related to the acquisition. Information regarding intangible assets is as follows: (DOLLARS IN THOUSANDS) Customer lists AUGUST 31, 2020 AUGUST 31, 2019 CARRYING AMOUNT ACCUMULATED AMORTIZATION NET CARRYING AMOUNT ACCUMULATED AMORTIZATION NET $ 84,895 $ (23,770) $ 61,125 $ 84,815 $ (17,609) $ 67,206 Trademarks and other intangible assets 10,735 (6,835) 3,900 9,736 (5,736) 4,000 Total intangible assets $ 95,630 $(30,605) $ 65,025 $ 94,551 $ (23,345) $ 71,206 Intangible asset amortization expense for the years ended August 31, 2020, 2019 and 2018, was $7.3 million, $5.3 mil- lion and $3.4 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) 2021 2022 2023 2024 2025 Thereafter Total $ 8,215 7,973 7,870 7,660 7,345 25,866 $ 64,929 Capitalized Major Maintenance Activity related to capitalized major maintenance costs at our refineries for the years ended August 31, 2020, 2019 and 2018, is summarized below: (DOLLARS IN THOUSANDS) 2020 2019 2018 BALANCE AT BEGINNING OF YEAR COST DEFERRED AMORTIZATION BALANCE AT END OF YEAR $ 286,890 $ 14,496 $ (72,875) $ 228,511 130,780 105,006 224,406 (68,296) 286,890 87,460 (61,686) 130,780 27 CHS 2020 27 EIGHT: O t h e r A ss e t s , co n t i n u e d Within our Energy segment, major maintenance activities are performed at our Laurel, Montana, and McPherson, Kansas, refineries regularly. Major maintenance activities are the planned and required shutdowns of refinery processing units, which include replacement or overhaul of equipment that has experienced decreased efficiency in resource conversion. Because major maintenance activities are performed to extend the life, increase the capacity and/or improve the safety or efficiency of refinery processing assets, we follow the deferral method of accounting for major maintenance activities. Expenditures for major maintenance activities are capitalized (deferred) when incurred and amortized on a straight-line basis over a period of two to five years, which is the estimated time lapse between major maintenance activities. Should the estimated period between major maintenance activities change, we may be required to amortize the remaining cost of the major maintenance activities over a shorter period, which would result in higher depreciation and amortization costs. Amortization expense related to the capitalized major maintenance costs is included in cost of goods sold in our Consolidated Statements of Operations. Selection of the deferral method, as opposed to expensing major maintenance activity costs when incurred, results in deferring recognition of major maintenance activity expenditures. The deferral method also results in classification of related cash outflows as investing activities in our Consolidated Statements of Cash Flows, whereas expensing these costs as incurred would result in classifying the cash outflows as operating activities. Repair, maintenance and related labor costs are expensed as incurred and are included in operating cash flows. 10NOV202015372238 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, 2020. Our primary line of credit is a five-year unsecured revolving credit facility with a syndicate of domestic and international banks. The credit facility provides a com- mitted amount of $2.75 billion that expires on July 16, 2024. Notes Payable Notes payable as of August 31, 2020 and 2019, consisted of the following: (DOLLARS IN THOUSANDS) WEIGHTED- AVERAGE INTEREST RATE 2020 2019 2020 2019 Notes payable 1.96% 3.36% $ 763,215 $ 1,330,550 CHS Capital notes payable 1.29% 2.90% 812,276 825,558 Total notes payable $ 1,575,491 $ 2,156,108 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. 28 CHS 2020 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes our primary lines of credit as of August 31, 2020 and 2019: PRIMARY REVOLVING CREDIT FACILITIES (DOLLARS IN THOUSANDS) FISCAL YEAR OF MATURITY TOTAL CAPACITY BORROWINGS OUTSTANDING INTEREST RATES 2020 2020 2019 Committed five-year unsecured facility 2024 $ 2,750,000 $ 345,000 $ 335,000 Uncommitted bilateral facilities* 2021 300,000 — 430,000 LIBOR or base rate +0.00% to 1.55% LIBOR or base rate + applicable margin * Total capacity for the uncommitted bilateral facilities was $630.0 million at August 31, 2019. As of August 31, 2020, the uncom- mitted bilateral facilities do not include $300.0 million of capacity with a banking partner for which we are currently in the process of terminating the related agreement. In addition to our facilities above, our wholly-owned subsidiaries, CHS Europe S.a.r.l. and CHS Agronegocio Industria e Comercio Ltda, had uncommitted lines of credit with $318.4 million outstanding as of August 31, 2020. In addition, our other international subsidiaries had lines of credit outstanding of $69.7 million as of August 31, 2020. CHS Capital Notes Payable We have a receivables and loans securitization facility (‘‘Securitization Facility’’) with certain unaffiliated finan- cial institutions (‘‘Purchasers’’). Under the Securitization Facility, we and certain of our subsidiaries (‘‘Origina- tors’’) sell trade accounts and notes receivable (‘‘Receiv- ables’’) to Cofina Funding, LLC (‘‘Cofina’’), a wholly- owned bankruptcy-remote indirect subsidiary of CHS. Cofina in turn transfers the Receivables to the Pur- chasers, and this arrangement is accounted for as a secured borrowing. We use the proceeds from the sale of Receivables under the Securitization Facility for gen- eral corporate purposes and settlements are made on a monthly basis. The amount available under the Securi- tization Facility fluctuates over time based on the total amount of eligible Receivables generated during the normal course of business. As of August 31, 2020, total availability under the Securitization Facility was $423.0 million, all of which had been utilized. We also have a repurchase facility (‘‘Repurchase Facility’’) related to the Securitization Facility. Under the Repurchase Facility, we can borrow up to $150.0 million, collateralized by a subordinated note issued by Cofina in favor of the Originators and representing a portion of the outstanding balance of the Receivables sold by the Originators to Cofina under the Securitization Facility. As of August 31, 2020 and 2019, the outstanding bal- ance under the Repurchase Facility was $150.0 million. On June 26, 2020, we amended our existing Securitiza- tion Facility and Repurchase Facility. As a result of the amendment, the maximum availability of the Securitiza- tion Facility was decreased from $700.0 million to $500.0 million. On September 24, 2020 the Securitiza- tion Facility and Repurchase Facility were further amended increasing the maximum availability under the from Securitization Facility $500.0 million and extending their respective termina- tion dates to July 30, 2021. to $600.0 million CHS Capital sells loan commitments it has originated to Compeer Financial, PCA, d/b/a ProPartners Financial on a recourse basis. The total outstanding commitments under the program were $150.0 million as of August 31, 2020, of which $133.3 million was borrowed under these commitments with an interest rate of 1.45%. CHS Capital borrows funds under short-term notes issued as part of a surplus funds program. Borrowings under this program are unsecured and bear interest at variable rates ranging from 0.35% to 1.40% as of August 31, 2020, and are due upon demand. Borrowings under these notes totaled $134.9 million as of August 31, 2020. On September 30, 2019, CHS Capital entered into a credit agreement with a revolving note. Under this agreement, CHS Capital had available capacity of $100.0 million of which no amount was outstanding as of August 31, 2020. This agreement matured subse- quent to August 31, 2020, and was not renewed. 29 CHS 2020 29 NINE: 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 Long-Term Debt During the year ended August 31, 2020, we repaid approximately $25.4 million of long-term debt consisting of scheduled debt maturities and optional prepayments. On August 14, 2020, we entered into a Note Purchase Agree- ment to borrow $375.0 million of long-term debt in the form of notes that was funded on November 2, 2020. Amounts included in longterm debt on our Consolidated Balance Sheets as of August 31, 2020 and 2019, are presented in the table below. (DOLLARS IN THOUSANDS) 4.00% unsecured notes $100 million face amount, due in equal installments beginning in fiscal 2017 through fiscal 2021 4.52% unsecured notes $160 million face amount, due in fiscal 2021 4.67% unsecured notes $130 million face amount, due in fiscal 2023 4.39% unsecured notes $152 million face amount, due in fiscal 2023 3.85% unsecured notes $80 million face amount, due in fiscal 2025 3.80% unsecured notes $100 million face amount, due in fiscal 2025 4.58% unsecured notes $150 million face amount, due in fiscal 2025 4.82% unsecured notes $80 million face amount, due in fiscal 2026 4.69% unsecured notes $58 million face amount, due in fiscal 2027 4.74% unsecured notes $95 million face amount, due in fiscal 2028 4.89% unsecured notes $100 million face amount, due in fiscal 2031 4.71% unsecured notes $100 million face amount, due in fiscal 2033 5.40% unsecured notes $125 million face amount, due in fiscal 2036 Private placement debt 2.25% unsecured term loans from cooperative and other banks, due in fiscal 2025(a) Bank financing Finance lease liabilities Other notes and contracts with interest rates from 0.0% to 10.0% Deferred financing costs Total long-term debt Less current portion Long-term portion 2020 2019 $ 20,000 $ 40,000 162,090 161,978 137,623 136,086 152,000 152,000 80,000 80,000 100,000 100,000 154,012 151,776 80,000 80,000 58,000 95,000 58,000 95,000 100,000 100,000 100,000 100,000 125,000 125,000 1,363,725 1,379,840 366,000 366,000 366,000 366,000 31,460 34,709 (4,771) 1,791,123 189,287 28,239 18,601 (3,569) 1,789,111 39,210 $ 1,601,836 $ 1,749,901 (a) Borrowings are variable under the agreement and bear interest at a base rate (or LIBOR) plus an applicable margin. As of August 31, 2020, the fair value of our long-term debt is estimated to be $1.9 billion based on quoted market prices of similar debt (a Level 2 fair value mea- surement based on the classification hierarchy of ASC Topic 820, Fair Value Measurement). an amount up to $300.0 million of the $600.0 million. As of August 31, 2020, $130.0 million of revolving loans were outstanding under this agreement. Principal on the outstanding balances is payable in full in September 2025. We have a 10-year term loan with a syndicate of banks. The agreement provides for committed term loans in an amount up to $600.0 million. As of August 31, 2020, $236.0 million of term loans were outstanding under this agreement. The agreement includes a revolving fea- ture, whereby we are able to pay down and re-advance Long-term debt outstanding as of August 31, 2020, has aggregate maturities, excluding fair value adjustments and finance leases (see Note 19, Leases, for a schedule of 30 CHS 2020 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS minimum future lease payments under finance leases), as follows: (DOLLARS IN THOUSANDS) Interest expense for the years ended August 31, 2020, 2019 and 2018, was $117.0 million, $167.1 million and $149.2 million, respectively, net of capitalized interest of $10.9 million, $9.4 million and $6.7 million, respectively. 2021 2022 2023 2024 2025 Thereafter Total 10NOV202015373513 $ 181,628 30,828 282,828 780 696,780 558,103 $ 1,750,947 Other Current Liabilities Other current liabilities as of August 31, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) Customer margin deposits and credit balances Customer advance payments Derivative liabilities (Note 15) Dividends and equity payable Total other current liabilities 10NOV202015371353 Income Taxes 2020 2019 $ 149,539 $ 143,049 300,100 336,645 416,204 241,957 63,000 180,000 $ 928,843 $ 901,651 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, nonqualified patronage distribu- tions and undistributed patronage-sourced income. Income tax (benefit) expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. Deferred income taxes reflect the impact of temporary differ- ences between the amounts of assets and liabilities recognized under U.S. GAAP and such amounts recog- nized 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. 31 CHS 2020 31 ELEVEN: I n co m e Ta xe s , co n t i n u e d The (benefit from) provision for income taxes for the years ended August 31, 2020, 2019 and 2018 is as follows: (DOLLARS IN THOUSANDS) 2020 2019 2018 Current: Federal State Foreign Total Current Deferred: Federal State Foreign Total Deferred Total $ 4,519 $ 211 $ 15,576 (2,231) 2,748 5,036 (36,231) (5,263) (273) 3,815 (2,630) 1,396 7,041 20,268 42,885 (4,923) (146,780) (8,491) (438) (127) (54) (41,767) (13,852) (146,961) $ (36,731) $ (12,456) $ (104,076) Domestic income before income taxes was $324.4 mil- lion, $825.7 million and $717.4 million for the years ended August 31, 2020, 2019 and 2018, respectively. For- eign income (loss) before income taxes was $62.5 mil- lion, ($3.1) million and ($46.2) million for the years ended August 31, 2020, 2019 and 2018, respectively. 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, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) Deferred tax assets: Accrued expenses Postretirement health care and deferred compensation Tax credit carryforwards Loss carryforwards Nonqualified equity Lease obligations Other 2020 2019 $ 51,560 $ 62,245 42,898 123,193 116,741 42,747 152,347 136,435 344,924 290,447 Total deferred tax assets Deferred tax liabilities: Pension Investments Major maintenance 17,131 95,916 91 11,237 99,838 4,679 Property, plant and equipment 556,160 560,334 Right of use asset Other Total deferred tax liabilities 64,140 15,326 — 1,760 748,764 677,848 Net deferred tax liabilities $ 139,343 $ 142,900 We have total gross loss carryforwards of $576.6 million, of which $366.9 million will expire over periods ranging 32 32 CHS 2020 from fiscal 2021 to fiscal 2041. The remainder will carry 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 carryforwards to amounts we believe are more likely than not to be real- ized as of August 31, 2020. If our estimates prove inaccu- rate, 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. McPherson refinery’s gross state tax credit carryfor- wards for income tax were approximately $125.5 million and $123.3 million as of August 31, 2020 and 2019, respectively. McPherson refinery’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. On March 27, 2020, the Coronavirus Aid, Relief and Eco- nomic Security (‘‘CARES’’) Act was signed into law. As a result, our alternative minimum tax credit became refundable and has been classified in other current assets on the Consolidated Balance Sheet as of August 31, 2020. Our general business credits of $59.1 million, comprised primarily of low-sulfur diesel credits, will begin to expire on August 31, 2027, and our state tax credits of $125.5 million began to expire on August 31, 2020. The reconciliation of the statutory federal income tax rates to the effective tax rates for the years ended August 31, 2020, 2019 and 2018 is as follows: 2020 2019 2018 Domestic production activities deduction (19.0) (9.9) (8.4) Export activities at rates other than the U.S. statutory rate U.S. tax reform 1.8 — Intercompany transfer of business assets (1.6) Increase in unrecognized tax benefits Valuation allowance Tax credits Other 4.2 (1.0) 0.2 (0.2) (2.1) 5.7 — — 0.2 2.6 0.4 1.3 (23.2) (6.1) 6.8 (3.0) 0.7 (0.8) Effective tax rate (9.5)% (1.5)% (15.5)% Deferred tax assets valuation reserve (219,891) (246,344) federal income tax benefit (1.8) (0.7) 0.7 609,421 534,948 Patronage earnings (13.1) (14.3) (13.6) 64,140 85,856 — Statutory federal income tax rate 21.0% 21.0% 25.7% 97,071 State and local income taxes, net of On December 22, 2017, the Tax Cuts and Jobs Act (‘‘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 Jan- uary 1, 2018. As a fiscal year-end taxpayer, our annual statutory federal corporate tax rate applicable to fiscal 2018 was a blended rate of 25.7%. For fiscal 2020 and fiscal 2019, the annual statutory federal corporate tax rate was 21%. Primary drivers of the fiscal 2020 income tax benefit were retaining the current Domestic Production Activi- ties Deduction (‘‘DPAD’’) benefit and from the settle- ment of a U.S. federal audit resulting in additional tax credit carryovers, which were partially offset by an increase in our unrecognized deferred tax benefit. Pri- mary drivers of the fiscal 2019 income tax benefit were retaining the current DPAD benefit and deducting previ- ously disallowed DPAD available from the carryback of excise tax credits, which were partially offset by an increase in our unrecognized deferred tax benefit as described below. Primary drivers of the fiscal 2018 income tax benefit were recognition of deferred bene- fits from revaluation of our net deferred tax liability resulting from the Tax Act, an 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. 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 2019 remain subject to exami- nation, at least for certain issues. Reserves are recorded against unrecognized tax bene- fits when we believe certain fully supportable tax return positions are likely to be challenged and we may or may not prevail. If we determine that a tax position is more NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 gui- dance, or (iv) expiration of the applicable statute of limi- tations. Significant judgment is required in accounting for tax reserves. A reconciliation of the gross beginning and ending amounts of unrecognized tax benefits for the periods presented follows: (DOLLARS IN THOUSANDS) 2020 2019 2018 Balance at beginning of period $ 101,128 $ 91,135 $ 37,830 Additions attributable to current year tax positions 14,410 14,162 3,640 Additions attributable to prior year tax positions 6,128 — 49,665 Reductions attributable to prior year tax positions (2,516) (4,169) — Balance at end of period $ 119,150 $ 101,128 $ 91,135 If we were to prevail on all positions taken in relation to uncertain tax positions, $111.3 million of the unrecog- nized tax benefits would ultimately benefit our effective tax rate. It is reasonably possible that the total amount of unrecognized tax benefits could significantly change in the next 12 months. We recognize interest and penalties related to unrecog- nized tax benefits in our provision for income taxes. We recognized $1.0 million benefit and $1.7 million expense for interest and penalties related to unrecognized tax benefits in our Consolidated Statement of Operations for the years ended August 31, 2020 and 2019, respec- tively, and a related $1.0 million and $2.9 million interest payable on our Consolidated Balance Sheet as of August 31, 2020 and 2019, respectively. No interest or penalties were recognized in our Consolidated State- ments of Operations for the year ended August 31, 2018. 10NOV202015373895 Equities Patronage and Equity Redemptions 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 nonqualified capital equity certificates. Total patronage distributions for fiscal 2020 are estimated to be $242.0 million, with the qualified cash portion estimated to be $30.0 million 33 CHS 2020 33 TWELVE: Eq u i t i e s , co n t i n u e d and nonqualified equity distributions of $212.0 million. No portion of annual net earnings for fiscal 2020 will be issued in the form of qualified capital equity certificates. Patronage distributions for the years ended August 31, 2019, 2018 and 2017 were $564.5 million (with a $90.1 million cash portion), $428.8 million (with a $75.8 million cash portion) and $128.8 million (with no cash portion), 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 2020, 2019 and 2018 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 nonindividuals (primarily 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. The CHS redemption policy includes a redemption pro- gram for individuals similar to the one that is available to nonindividual members, subject to CHS Board of Direc- tors overall discretion whether to redeem outstanding equity. In accordance with authorization from the Board of Directors, we expect total redemptions related to the year ended August 31, 2020, that will be distributed in fiscal 2021, to be approximately $33.0 million. This amount is classified as a current liability on our August 31, 2020, Consolidated Balance Sheet. During the years ended August 31, 2020, 2019 and 2018, we redeemed in cash, outstanding owners’ equities in accordance with authorization from the Board of Direc- tors, in the amounts of $96.4 million, $85.5 million and $8.8 million, respectively. 34 CHS 2020 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Preferred Stock The following is a summary of our outstanding preferred stock as of August 31, 2020, all shares of which are listed and traded on The 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. Preferred Stock Dividends We made dividend payments on our preferred stock of $168.7 million during each of the years ended August 31, 2020, 2019 and 2018. As of August 31, 2020, we have no authorized but unissued shares of preferred stock. The following is a summary of dividends per share by series of preferred stock for the years ended August 31, 2020 and 2019. (DOLLARS PER SHARE) Years Ended August 31, NASDAQ SYMBOL 2020 2019 8% Cumulative Redeemable CHSCP $ 2.00 $ 2.00 Class B Cumulative Redeemable, Series 1 CHSCO 1.97 1.97 Class B Reset Rate Cumulative Redeemable, Series 2 CHSCN 1.78 1.78 Class B Reset Rate Cumulative Redeemable, Series 3 CHSCM Class B Cumulative Redeemable, Series 4 CHSCL 1.69 1.88 1.69 1.88 35 CHS 2020 35 TWELVE: 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, 2020, 2019 and 2018 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, 2017, net of tax $ (132,444) $ 10,041 $ (6,954) $ (51,003) $ (180,360) 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 capital reserves Balance as of August 31, 2018, net of tax 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 7,633 21,804 29,437 (9,371) 20,066 (27,957) (140,335) (51,118) 10,279 (40,839) 8,280 (32,559) 21,078 (25,534) (4,456) 1,308 (3,148) 1,968 8,861 1,031 1,704 2,735 (195) 2,540 (1,468) (10,062) (2,042) (12,104) 83 (12,021) 19,680 (4,068) 15,612 (8,175) 7,437 465 (26,992) (5,882) (62,559) (199,915) — — — — — 37,709 (9,843) 27,866 (7,670) 20,196 (9,990) (23,399) — 436 (9,990) (22,963) 41 (9,949) 2,756 651 (22,312) (4,706) Reclassifications 416 (8,861) 983 Balance as of August 31, 2019, net of tax (172,478) 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 (4,751) 19,908 15,157 (2,359) 12,798 — — — — — — 15,297 (69,752) (226,933) 16,430 (17,021) (22,291) (5,861) 1,450 (4,411) — (17,021) 1,643 (15,378) (5,342) (2,383) (7,725) 734 (6,991) Balance as of August 31, 2020, net of tax $ (159,680) $ — $ 10,886 $ (85,130) $ (233,924) Amounts reclassified from accumulated other compre- hensive income (loss) were related to pension and other postretirement benefits, cash flow hedges, avail- able-for-sale investments and foreign currency transla- tion 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 13, Benefit Plans, for further information). Gains or losses on the sale of available-for-sale investments are recorded to other income. Foreign currency translation reclassifications related to sales of businesses are recorded to other income. 36 CHS 2020 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10NOV202015373639 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 nonquali- fied supplemental executive and Board retirement plans. We provide defined life insurance and health care benefits for certain retired employees and Board of Directors participants. The plan is contributory based on years of service and family status, with retiree contribu- tions adjusted annually. Financial information on changes in projected benefit obli- gation, plan assets funded and balance sheet status as of August 31, 2020 and 2019, is as follows: (DOLLARS IN THOUSANDS) Change in benefit obligation: QUALIFIED PENSION BENEFITS NONQUALIFIED PENSION BENEFITS OTHER BENEFITS 2020 2019 2020 2019 2020 2019 Projected benefit obligation at beginning of period $ 876,696 $ 767,184 $ 19,047 $ 20,755 $ 31,098 $ 29,790 Service cost Interest cost Actuarial loss (gain) Assumption change Plan amendments Settlements Benefits paid 42,151 21,722 38,592 28,396 6,265 (9,606) 40,694 102,441 — — 18 405 429 1,382 775 — 311 747 76 1,841 — 1,050 747 1,053 1,094 (2,286) (2,596) 1,275 3,398 — — — — (615) (2,130) (3,975) (69,526) (49,714) (725) (708) (1,568) (1,641) Projected benefit obligation at end of period $ 918,002 $ 876,696 $ 19,183 $ 19,047 $ 30,316 $ 31,098 Change in plan assets: Fair value of plan assets at beginning of period $ 909,427 $ 829,616 $ Actual gain on plan assets Company contributions Settlements Benefits paid — $ — — $ — 90,241 90,139 46,400 40,001 2,855 4,683 — (615) (2,130) (3,975) — $ — 1,568 — — — 1,641 — (69,526) (49,714) (725) (708) (1,568) (1,641) Fair value of plan assets at end of period $ 976,542 $ 909,427 $ — $ — $ — $ — Funded status at end of period $ 58,540 $ 32,731 $ (19,183) $ (19,047) $ (30,316) $ (31,098) Amounts recognized on balance sheet: Noncurrent assets Accrued benefit cost: Current liabilities Noncurrent liabilities $ 58,540 $ 32,731 $ — $ — $ — $ — — — — — (1,660) (1,580) (2,090) (2,040) (17,523) (17,467) (28,226) (29,058) Ending balance $ 58,540 $ 32,731 $ (19,183) $ (19,047) $ (30,316) $ (31,098) Amounts recognized in accumulated other comprehensive loss (pretax): Prior service cost (credit) $ 938 $ 1,117 $ (502) $ (616) $ (2,715) $ (3,160) Net loss (gain) Ending balance 225,983 244,164 3,813 2,151 (15,064) (15,445) $ 226,921 $ 245,281 $ 3,311 $ 1,535 $ (17,779) $ (18,605) 37 CHS 2020 37 THIRTEEN: 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 pension plans was $871.6 million and $833.2 million at August 31, 2020 and 2019, respectively. The accumulated benefit obli- gation of the nonqualified pension plans was $18.2 million and $16.9 million at August 31, 2020 and 2019, respectively. Information for the pension plans with an accumulated benefit obligation in excess of plan assets is set forth below: (DOLLARS IN THOUSANDS) YEARS ENDED AUGUST 31, 2020 2019 Projected benefit obligation $ 19,183 $ 19,047 Accumulated benefit obligation 18,172 16,907 Components of net periodic benefit costs for the years ended August 31, 2020, 2019 and 2018, are as follows: (DOLLARS IN THOUSANDS) 2020 2019 2018 2020 2019 2018 2020 2019 2018 QUALIFIED PENSION BENEFITS NON QUALIFIED PENSION BENEFITS OTHER BENEFITS Components of net periodic benefit costs: $ 42,151 $ 38,592 $ 39,677 $ 405 $ 311 $ 548 $ 1,050 $ 1,053 $ 943 Service cost Interest cost Expected return on assets (46,684) (44,968) (48,159) 21,722 28,396 24,007 429 747 — 711 — 191 (112) 747 1,094 908 — — — — — — — — 51 — — 178 190 1,437 (114) (75) 30 (445) (556) (565) 21,583 12,348 18,073 98 2 61 (1,392) (1,627) (1,224) Settlement of retiree obligations Prior service cost (credit) amortization Actuarial loss (gain) amortization Net periodic benefit cost (benefit) $ 38,950 $ 34,609 $ 35,035 $ 818 $ 1,176 $ 1,238 $ (40) $ (36) $ 62 Weighted-average assumptions to determine the net periodic benefit cost: Discount rate 3.06% 4.23% 3.80% 2.70% 4.09% 3.53% 2.89% 4.08% 3.56% Expected return on plan assets 5.50% 5.50% 5.75% N/A N/A N/A N/A N/A N/A Rate of compensation increase 5.28% 5.14% 5.08% 5.28% 5.14% 5.08% N/A N/A N/A Weighted-average assumptions to determine the benefit obligations: Discount rate 2.67% 3.06% 4.23% 2.15% 2.70% 4.09% 2.43% 2.89% 4.13% Rate of compensation increase 4.99% 5.28% 5.14% 4.99% 5.28% 5.14% N/A N/A N/A 38 CHS 2020 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Components of net periodic benefit costs and amounts recognized in other comprehensive loss (income) for the years ended August 31, 2020, 2019 and 2018, are as follows: (DOLLARS IN THOUSANDS) 2020 2019 2018 2020 2019 2018 2020 2019 2018 QUALIFIED PENSION BENEFITS NONQUALIFIED PENSION BENEFITS OTHER BENEFITS Other comprehensive loss (income): Prior service cost $ — $ 18 $ 244 $ — $ — $ — $ — $ — $ — Net actuarial loss (gain) Amortization of 3,401 47,556 (8,553) 2,157 1,917 (578) (1,011) 801 (2,234) actuarial (gain) loss (21,583) (12,307) (18,073) (98) (2) (61) 1,392 1,627 1,224 Amortization of prior service (credit) costs Settlement of retiree obligations (a) Total recognized in other comprehensive loss (income) (178) (190) (1,437) 114 75 (30) 445 556 565 — — — (397) (191) 112 — — — $ (18,360) $ 35,077 $ (27,819) $ 1,776 $ 1,799 $ (557) $ 826 $ 2,984 $ (445) (a) Reflects amounts reclassified from accumulated other comprehensive loss (income) to net earnings. Estimated amortization in fiscal 2021 from accumulated other comprehensive loss into net periodic benefit cost is as follows: (DOLLARS IN THOUSANDS) Amortization of prior service QUALIFIED NONQUALIFIED PENSION BENEFITS PENSION BENEFITS OTHER BENEFITS cost (credit) $ 178 $ (114) $ (445) Amortization of actuarial loss (gain) 21,790 212 (1,365) is conducted to An annual analysis of the risk versus the return of the justify the investment portfolio expected longterm rate of return assumption. We gen- erally 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 nec- essary, based upon revised expectations of future investment performance of the overall investment markets. A significant assumption for pension costs and obliga- tions is the discount rate. We utilize a full-yield curve approach by applying the specific spot rates along the yield curve used in the determination of the benefit obli- gation to the relevant projected cash flows. The dis- count rate reflects the rate at which the associated benefits could be effectively settled as of the measure- ment date. In estimating this rate, we look at rates of return on fixed-income investments of similar duration to the liabilities in the plans that receive high invest- ment-grade ratings by recognized ratings agencies. For measurement purposes, a 7.1% annual rate of increase in the per capita cost of covered health care benefits was assumed for the year ended August 31, 2020. 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 $ 200 $ (170) Effect on postretirement benefit obligation 2,100 (1,800) Contributions depend primarily on market returns on the pension plan assets and minimum funding level requirements. During fiscal 2020, we made a discre- tionary contribution of $46.4 million to the pension 39 CHS 2020 39 THIRTEEN: B e n e f i t P l a n s , co n t i n u e d plans. Based on the funded status of the qualified pen- sion plans as of August 31, 2020, we do not believe we will be required to contribute to these plans in fiscal 2021, 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 2021. Our retiree benefit payments, which reflect expected future service, are anticipated to be paid as follows: (DOLLARS IN THOUSANDS) 2021 2022 2023 2024 2025 2026–2030 QUALIFIED NONQUALIFIED PENSION BENEFITS OTHER BENEFITS PENSION BENEFITS $ 75,700 $ 1,660 $ 2,090 65,900 63,500 64,700 65,300 326,700 1,840 1,840 1,620 1,820 8,010 2,280 2,470 2,450 2,450 9,790 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 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. The investment portfolio contains a diversified portfolio of investment categories, including equities, fixed-income securities and real estate. Securities are also diversified in terms of domestic and international securities, short- and long-term securities, growth and value equities, large and small cap stocks, as well as active and passive management styles. Our pension plans’ investment policy strategy is such that liabilities match assets. This is being accomplished through the asset portfolio mix by reducing volatility and de-risking the plans. The plans’ target allocation percentages range between 45% and 65% for fixed income securities and range between 35% and 55% for equity securities. The qualified plan committee believes that with prudent risk tolerance and asset diversification, the plans should be able to meet pension obligations in the future. 40 CHS 2020 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our pension plans’ recurring fair value measurements by asset category at August 31, 2020 and 2019, are presented in the tables below: (DOLLARS IN THOUSANDS) Cash and cash equivalents Equities: 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) 2020 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 57,801 $ — $ — $ 57,801 — — — — — — — — — — — — 219,050 603,250 94,400 2,041 Total $ 57,801 $ — $ — $ 976,542 (DOLLARS IN THOUSANDS) Cash and cash equivalents Equities: 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) 2019 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 7,938 $ — $ — $ 7,938 — — — — — — — — — 209,860 — — — 574,296 101,641 15,692 Total $ 7,938 $ — $ — $ 909,427 (1) In accordance with ASC Topic 820-10, Fair Value Measurement, 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 16, Fair Value Measurements. We use the following valuation methodologies for assets measured at fair value. 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. 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. Other assets. Other assets primarily include real estate funds and hedge funds held in the asset portfolio of our U.S. defined benefit pension plans. 41 CHS 2020 41 THIRTEEN: B e n e f i t P l a n s , co n t i n u e d 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. The withdrawal liability associated with the multiemployer plan was approximately $46.0 million as of August 31, 2020. Our participation in the Co-op Plan for the years ended August 31, 2020, 2019 and 2018, is outlined in the table below: (DOLLARS IN THOUSANDS) PLAN NAME EIN/PLAN NUMBER 2020 2019 2018 CONTRIBUTIONS OF CHS SURCHARGE IMPOSED EXPIRATION DATE OF COLLECTIVE BARGAINING AGREEMENT Co-op Retirement Plan 01-0689331 / 001 $ 1,455 $ 1,712 $ 1,662 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 2020 and 2019 are for the Co-op Plan’s year-end at March 31, 2020 and 2019, respectively. In total, the Co-op Plan was at least 80% funded on those dates based on the total plan assets and accumulated benefit obligations. Because the provisions of the PPA do not apply to the Co-op Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience. In addition to the contributions to the Co-op Plan listed above, total contributions to individually insignificant multiemployer pension plans were immaterial in fiscal 2020, 2019 and 2018. We have other contributory defined contribution plans covering substantially all employees. Total contributions by us to these plans were $34.5 million, $31.0 million and $24.7 million, for the years ended August 31, 2020, 2019 and 2018, respectively. 42 CHS 2020 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10NOV202015371730 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 entitles us, pursuant to a supply agree- ment that we entered with CF Nitrogen, to purchase up to a specified quantity of granular urea and UAN annu- ally from CF Nitrogen. Corporate and Other represents our financing and hedging businesses, which primarily consists of a U.S. Commodity Futures Trading Commis- sion-regulated futures commission merchant for com- modities hedging, financial services related to crop production, and insurance which was disposed of in May 2018. Our nonconsolidated investments in Ventura Foods and Ardent Mills are also included in our Corpo- rate and Other category. Corporate administrative expenses and interest are allo- cated to each reportable segment, along with Corporate and Other, based on direct use for services, 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 country operations business generally experiences higher volumes and income during the spring planting season and during the fall harvest season and our agronomy business generally experiences higher volumes and income during the spring planting season. Our global 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 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 plant dis- ease or insects, drought, availability and adequacy of supply, availability of a reliable rail and river transporta- tion network, outbreaks of disease, government regula- tions and policies, global trade disputes, and general political and economic conditions. While our revenues and operating results are derived primarily from businesses and operations that are wholly-owned or subsidiaries and limited liability com- panies in which we have a controlling interest, a portion of our business operations are conducted through com- panies in which we hold ownership interests of 50% or less or do not control the operations. We account for these investments primarily using the equity method of accounting, wherein we record our proportionate share of income or loss reported by the entity as equity income from investments, without consolidating the revenues and expenses of the entity in our Consolidated Statements of Operations. In our Nitrogen Production segment, this consists of our approximate 10% member- ship interest (based on product tons) in CF Nitrogen. In 43 CHS 2020 43 FOURTEEN: S e g m e n t R e p o r t i n g , co n t i n u e d Corporate and Other, this principally includes our 50% ownership in Ventura Foods and our 12% ownership in Ardent Mills. See Note 6, Investments, for more informa- tion 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. Segment information for the years ended August 31, 2020, 2019 and 2018 is presented in the tables below. The fiscal 2020 and fiscal 2019 results for our Ag segment include results associated with our acquisition of the remaining 75% ownership interest in WCD that we did not previously own on March 1, 2019, which were not included in our fiscal 2018 results. Refer to further details related to our acquisition of the remaining 75% ownership interest in WCD that we did not previously own within Note 20, Acquisitions. (DOLLARS IN THOUSANDS) ENERGY NITROGEN PRODUCTION CORPORATE AND OTHER RECONCILING AMOUNTS AG Total For the year ended August 31, 2020 Revenues, including intersegment revenues $ 5,820,154 $ 22,940,712 $ — $ 55,567 $ (410,068) $ 28,406,365 Intersegment revenues (389,020) (14,613) — (6,435) 410,068 — Revenues, net of intersegment revenues $ 5,431,134 $ 22,926,099 $ — $ 49,132 $ — $ 28,406,365 Operating earnings (loss) Gain on disposal of business Interest expense Other income Equity income from investments 219,861 82,543 (33,497) — 308 (3,005) (2,759) (211) 71,682 (35,349) — 45,255 (2,635) 8,358 (1,239) 11,806 (9,510) — — (12,074) 12,074 — 277,265 (1,450) 116,977 (38,425) (186,715) (7,303) (127,954) (48,699) Income before income taxes $ 225,317 $ 53,724 $ 51,837 $ 56,000 $ — $ 386,878 Capital expenditures Depreciation and amortization 175,169 245,983 158,903 196,510 — — 84,287 34,882 Total assets as of August 31, 2020 4,447,526 6,325,857 2,681,616 2,538,948 — — — 418,359 477,375 15,993,947 (DOLLARS IN THOUSANDS) ENERGY AG NITROGEN PRODUCTION CORPORATE AND OTHER RECONCILING AMOUNTS TOTAL For the year ended August 31, 2019 Revenues, including intersegment revenues $ 7,581,450 $ 24,736,425 $ — $ 68,710 $ (486,132) $ 31,900,453 Intersegment revenues (462,374) (16,353) — (7,405) 486,132 — Revenues, net of intersegment revenues $ 7,119,076 $ 24,720,072 $ — $ 61,305 $ — $ 31,900,453 Operating earnings (loss) 615,662 65,181 (35,046) 13,805 Gain on disposal of business Interest expense Other income Equity income from investments — 5,719 (5,548) (2,697) (3,886) 101,386 (70,888) — 55,226 (2,769) — — — 11,684 (6,950) 659,602 (3,886) 167,065 (10,168) 6,950 (82,423) (4,447) (160,373) (69,238) — (236,755) Income before income taxes $ 618,188 $ 43,016 $ 72,870 $ 81,527 $ — $ 815,601 Capital expenditures Depreciation and amortization 268,877 233,624 110,197 208,294 — — 64,142 31,293 Total assets as of August 31, 2019 4,401,793 6,415,580 2,730,306 2,899,815 — — — 443,216 473,211 16,447,494 44 CHS 2020 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) ENERGY For the year ended August 31, 2018 NITROGEN PRODUCTION AG CORPORATE AND OTHER RECONCILING AMOUNTS TOTAL Revenues, including intersegment revenues $ 8,068,717 $25,052,395 $ — $ 64,516 $ (502,281) $32,683,347 Intersegment revenues (479,598) (14,914) — (7,769) 502,281 — Revenues, net of intersegment revenues $ 7,589,119 $ 25,037,481 $ — $ 56,747 $ — $32,683,347 Operating earnings (loss) 388,112 93,728 (20,619) (8,857) Gain on disposal of business (65,862) (7,707) — (58,247) — — 452,364 (131,816) Interest expense Other income Equity (income) loss from investments 14,627 (9,698) (3,063) 94,256 50,499 (7,712) (2,468) 149,202 (68,471) (3,061) (3,975) 2,468 (82,737) 1,392 (106,895) (44,949) — (153,515) Income before income taxes $ 452,108 $ 74,258 $ 38,838 $ 106,026 $ — $ 671,230 Capital expenditures Depreciation and amortization 248,207 230,230 77,962 218,716 — — 29,243 29,104 — — 355,412 478,050 We have international sales, which are predominantly in our Ag segment. The following table presents our sales, based on the geographic location of the subsidiary making the sale, for the years ended August 31, 2020, 2019 and 2018: (DOLLARS IN THOUSANDS) North America(a) South America Europe, Middle East and Africa (EMEA) Asia Pacific (APAC) Total 2020 2019 2018 $ 25,360,077 $ 27,896,269 $ 29,475,724 1,559,380 2,027,020 1,569,330 774,068 712,840 895,472 1,081,692 536,501 1,101,792 $ 28,406,365 $ 31,900,453 $ 32,683,347 (a) Revenues in North America are substantially all attributed to revenues from the United States. Long-lived assets include our property, plant and equipment, finance lease assets and capitalized major maintenance costs. The following table presents long-lived assets by geographical region based on physical location: (DOLLARS IN THOUSANDS) United States International Total 10NOV202015371480 2020 2019 $ 5,121,315 $ 5,295,752 65,134 79,846 $ 5,186,449 $ 5,375,598 Derivative Financial Instruments and Hedging Activities We enter into various derivative instruments to manage our exposure to movements primarily associated with agricul- tural and energy commodity prices and, to a lesser degree, foreign currency exchange rates and interest rates. Except for certain interest rate swaps and certain pay-fixed, receive-variable, cash-settled swaps related to future crude 45 CHS 2020 45 FIFTEEN: 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 oil purchases, which are accounted for as fair value hedges and cash flow hedges, respectively, our derivative instru- ments represent economic hedges of price risk for which hedge accounting under ASC Topic 815 is not applied. Rather, the derivative instruments are recorded on our Con- solidated Balance Sheets at fair value with changes in fair value being recorded directly to earnings, primarily within cost of goods sold in our Consolidated Statements of Operations. See Note 16, Fair Value Measurements, for addi- tional information. The majority of our exchange traded agricultural commodity futures are settled daily through CHS Hedging, our wholly-owned futures commission merchant. The following tables present the gross fair values of derivative assets, derivative liabilities and margin deposits (cash collateral) recorded on our Consolidated Balance Sheets, along with related amounts permitted to be offset in accordance with U.S. GAAP. Although we have certain netting arrangements for our exchange- traded futures and options contracts and certain 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. AUGUST 31, 2020 AMOUNTS NOT OFFSET ON THE CONSOLIDATED BALANCE SHEET BUT ELIGIBLE FOR OFFSETTING (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 GROSS AMOUNTS DERIVATIVE RECOGNIZED COLLATERAL INSTRUMENTS CASH NET AMOUNTS $ 327,493 $ — $ 2,980 $ 324,513 11,809 18,998 — — 9,385 2,424 — 18,998 358,300 $ — $ 12,365 $ 345,935 343,343 $ 956 $ 5,578 $ 336,809 69,466 — 9,385 60,081 412,809 $ 956 $ 14,963 $ 396,890 $ $ $ AUGUST 31, 2019 AMOUNTS NOT OFFSET ON THE CONSOLIDATED BALANCE SHEET BUT ELIGIBLE FOR OFFSETTING GROSS AMOUNTS DERIVATIVE RECOGNIZED COLLATERAL INSTRUMENTS CASH NET AMOUNTS $ 215,030 $ — $ 58,726 $ 156,304 10,334 21,364 — — 7,108 3,226 — 21,364 246,728 $ — $ 65,834 $ 180,894 223,410 $ 4,191 $ 41,647 $ 177,572 20,609 — 7,108 13,501 244,019 $ 4,191 $ 48,755 $ 191,073 $ $ $ Derivative assets and liabilities with maturities of less than 12 months are recorded in other current assets and other current liabilities, respectively, on the Consoli- dated Balance Sheets. Derivative assets and liabilities with maturities greater than 12 months are recorded in other assets and other liabilities, respectively, on the Consolidated Balance Sheets. The amount of long-term derivative assets, excluding derivatives accounted for as 46 CHS 2020 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS fair value hedges, recorded on the Consolidated Balance Sheet at August 31, 2020 and 2019, was $21.2 million and $26.6 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, 2020 and 2019, was $5.4 mil- lion and $7.4 million, respectively. 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, 2020, 2019 and 2018. DERIVATIVE TYPE (DOLLARS IN THOUSANDS) Commodity derivatives Foreign exchange derivatives Foreign exchange derivatives Interest rate derivatives Embedded derivative Total LOCATION OF GAIN (LOSS) Cost of goods sold Cost of goods sold Marketing, general and administrative expenses Interest expense Other income 2020 2019 2018 $ 89,248 $ 125,323 $ 162,321 (184,692) 4,228 (26,010) (2,986) (1,229) 596 (1,226) 2,634 — 2,769 (1) 3,061 $ (97,022) $ 131,091 $ 139,967 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. designated as hedging instruments for accounting pur- poses. 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 con- tracts are recognized in cost of goods sold in our Con- solidated Statements of Operations. Our use of hedging reduces exposure to price volatility by protecting against adverse short-term price move- ments, but also limits the benefits of favorable short-term price movements. To reduce price risk asso- ciated with fixed price commitments, we generally enter into commodity derivative contracts, to the extent prac- tical, to achieve a net commodity position within the formal position limits we have established and deemed prudent for each commodity. These contracts are pri- marily transacted on regulated commodity futures exchanges, but may also include over-the-counter derivative instruments when deemed appropriate. For commodities where there is no liquid derivative con- tract, risk is managed using forward sales contracts, other pricing arrangements and, to some extent, futures contracts in highly correlated commodities. These con- tracts are economic hedges of price risk, but are not 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 policies 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 47 CHS 2020 47 FIFTEEN: 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 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 our senior leadership and Board of Directors. We monitor current market conditions and may expand or reduce our net position limits in response to changes in those condi- tions. In addition, all purchase and sales contracts are subject to credit approvals and appropriate terms and conditions. The use of hedging instruments does not protect against nonperformance by counterparties to cash con- tracts. We evaluate counterparty exposure by reviewing contracts and adjusting the values to reflect potential nonperformance. Risk of nonperformance by counterparties includes 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 pro- ducers and by establishing appropriate limits for indi- vidual suppliers. Fixed price contracts are entered into with customers of acceptable creditworthiness, as inter- nally 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, 2020 and 2019, 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. DERIVATIVE TYPE (UNITS IN THOUSANDS) Grain and oilseed 2020 2019 LONG SHORT LONG SHORT (bushels) 664,673 892,303 547,096 717,522 Energy products (barrels) Processed grain and oilseed (tons) Crop nutrients (tons) Ocean freight (metric tons) Natural gas (MMBtu) 10,028 6,570 13,895 4,663 657 74 1,140 — 3,304 127 95 — 597 76 295 130 2,454 23 85 — 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 global grain mar- keting transactions in South America, the Asia Pacific region and Europe, and purchases of products from Canada. We use foreign currency derivative instruments to mitigate the impact of exchange rate fluctuations. Although CHS has some risk exposure relating to for- eign currency transactions, a impact with exchange rate fluctuations 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 $1.2 billion and $894.7 million as of August 31, 2020 and 2019, respectively. larger Embedded Derivative Asset Under the terms of our strategic investment in CF Nitrogen, if the CF Industries credit rating is reduced below certain levels by two of three specified credit rat- ings agencies, we are entitled to receive a nonrefund- able annual payment of $5.0 million from CF Industries. These payments will continue on an annual basis until the date the 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. Since the CF Industries credit rating was reduced below the specified levels during fiscal 2017, we have received an annual payment of $5.0 million from CF Industries. 48 CHS 2020 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Gains totaling $2.6 million, $2.8 million and $3.1 million were recognized in other income in our Consolidated Statements of Operations during fiscal 2020, fiscal 2019 and fiscal 2018, respectively. The fair value of the embedded derivative asset recorded on our Consoli- dated Balance Sheet as of August 31, 2020, was equal to $19.0 million. The current and long-term portions of the embedded derivative asset are included in other current assets and other assets on our Consolidated Balance Sheet, respectively. See Note 16, Fair Value Measure- ments, for additional information regarding the valua- tion of the embedded derivative asset. Derivatives Designated as Cash Flow or Fair Value Hedging Strategies Fair Value Hedges During the year ended August 31, 2020, we exited all our interest rate swaps resulting in a $16.4 million gain, which is being amortized over the life of the fixed-rate debt for which the swaps had previously been desig- nated as fair value hedges, through fiscal 2025. As of August 31, 2019, we had outstanding interest rate swaps with an aggregate notional amount of $365.0 million designated as fair value hedges of portions of our fixed-rate debt. Our objective in entering into these transactions was to offset changes in the fair value of the debt associated with the risk of variability in the three-month U.S. dollar LIBOR interest rate, in essence converting the fixed-rate debt to variable-rate debt. Under these interest rate swaps, we received fixed-rate interest payments and made interest payments based on the three-month LIBOR. Offsetting changes in the fair values of both the swap instruments and the hedged debt were recorded contemporaneously each period and only created an impact to earnings to the extent the hedge was 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, 2020 and 2019. BALANCE SHEET LOCATION (DOLLARS IN THOUSANDS) Other assets 2020 2019 DERIVATIVE ASSETS $ — $ 9,841 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, 2020, 2019 and 2018. GAIN (LOSS) ON FAIR VALUE HEDGING RELATIONSHIPS (DOLLARS IN THOUSANDS) LOCATION OF GAIN (LOSS) 2020 2019 2018 Interest rate swaps Hedged item Total Interest expense Interest expense $ (1,897) $ 21,158 $ 18,723 1,897 (21,158) (18,723) $ — $ — $ — The following table provides the location and carrying amount of hedged liabilities in our Consolidated Balance Sheets as of August 31, 2020 and 2019. BALANCE SHEET LOCATION (DOLLARS IN THOUSANDS) Long-term debt AUGUST 31, 2020 AUGUST 31, 2019 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 $ — $ — $ 334,389 $ 30,611 Cash Flow Hedges In fiscal 2018, our Energy segment began designating certain of its pay-fixed, receive-variable, cash-settled swaps as cash flow hedges of future crude oil purchases. We also began designating certain pay-variable, receive-fixed, cash-settled swaps as cash flow hedges of 49 CHS 2020 49 FIFTEEN: 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 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 expectations about future com- modity price changes and our risk appetite. As of August 31, 2020 and 2019, the aggregate notional amount of cash flow hedges was 9.7 million and 7.7 mil- lion barrels, respectively. The following table presents the fair value of our commodity derivative instruments designated as cash flow hedges and the line items on our Consolidated Balance Sheets in which they are recorded as of August 31, 2020 and 2019. BALANCE SHEET LOCATION (DOLLARS IN THOUSANDS) DERIVATIVE ASSETS 2020 2019 BALANCE SHEET LOCATION (DOLLARS IN THOUSANDS) Other current assets $ 34,052 $33,179 Other current liabilities DERIVATIVE LIABILITIES 2020 2019 $ 8,821 $ 5,351 The following table presents the pretax gains (losses) recorded in other comprehensive income relating to cash flow hedges for the years ended August 31, 2020, 2019 and 2018: (DOLLARS IN THOUSANDS) Commodity derivatives 2020 2019 2018 $ (2,596) $ 27,650 $178 The following table presents the pretax gains (losses) relating to cash flow hedges that were reclassified from accumulated other comprehensive loss into our Consolidated Statements of Operations for the years ended August 31, 2020, 2019 and 2018: (DOLLARS IN THOUSANDS) Commodity derivatives Location of Gain (Loss) 2020 2019 Cost of goods sold $ 23,807 $ 11,497 2018 $ — 10NOV202015373133 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. assumptions market participants would use in pricing the asset or liability based on the best information avail- able in the circumstances. ASC Topic 820 describes three levels within its hierarchy that may be used to measure fair value, and our assessment of relevant instruments within those levels is as follows: 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 Level 1. Values are based on unadjusted quoted prices in active markets for identical assets or liabilities. These assets and liabilities may include exchange-traded derivative instruments, rabbi trust investments, deferred compensation investments and available-for-sale investments. 50 CHS 2020 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 indicate 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, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) Assets Commodity derivatives Foreign currency derivatives Deferred compensation assets Embedded derivative asset Segregated investments Other assets Total Liabilities Commodity derivatives Foreign currency derivatives Total 2020 QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT SIGNIFICANT OTHER UNOBSERVABLE INPUTS (LEVEL 3) OBSERVABLE INPUTS (LEVEL 2) TOTAL $ 5,762 $ 355,783 $ — $ 361,545 — 47,669 — 85,950 5,276 11,523 — 18,998 — — — — — — — 11,523 47,669 18,998 85,950 5,276 $ 144,657 $ 386,304 $ — $ 530,961 $ 6,037 $ 346,126 $ — $ 352,163 — 69,467 — 69,467 $ 6,037 $ 415,593 $ — $ 421,630 51 CHS 2020 51 SIXTEEN: 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 2019 (DOLLARS IN THOUSANDS) Assets Commodity derivatives Foreign currency derivatives Interest rate swap derivatives Deferred compensation assets Embedded derivative asset Segregated investments Other assets Total Liabilities Commodity derivatives Foreign currency derivatives Total and foreign Commodity 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. Location- specific inputs are driven by local market supply and demand and are generally based on broker or dealer quotations or market transactions in either listed or OTC markets. Changes in the fair values of these contracts are recognized in our Consolidated Statements of Oper- ations 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 assump- tions, are factored 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 purposes are recognized in our Consoli- dated Statements of Operations as a component of interest expense. As of August 31, 2020, all interest rate 52 52 CHS 2020 QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS OBSERVABLE INPUTS (LEVEL 2) (LEVEL 1) SIGNIFICANT SIGNIFICANT OTHER UNOBSERVABLE INPUTS (LEVEL 3) TOTAL $ 67,817 $ 180,392 $ — $ 248,209 — — 40,368 — 77,777 6,519 10,339 9,841 — 21,364 — — — — — — — — 10,339 9,841 40,368 21,364 77,777 6,519 $ 192,481 $ 221,936 $ — $ 414,417 $ 40,305 $ 188,455 $ — $ 228,760 — 20,701 — 20,701 $ 40,305 $ 209,156 $ — $ 249,461 swaps were unwound. See Note 15, Derivative Financial Instruments and Hedging Activities, for additional infor- mation about interest rates swaps designated as fair value and cash flow hedges. Deferred compensation and other assets. Our deferred compensation investments consist primarily of rabbi trust assets that are valued based on unadjusted quoted prices on active exchanges and 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 the 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 historical and current yield coupon rates. Based on these observ- able inputs, our fair value measurement is classified within Level 2. See Note 15, Derivative Financial Instru- ments and Hedging Activities, for additional information. Segregated investments. Our segregated investments are comprised of U.S. Treasury securities, which are valued using quoted market prices and classified within Level 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10NOV202015372749 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 future costs of remediation associ- ated with identified issues that are both probable and can be reasonably estimated. Estimates of environ- mental costs are based on current available facts, existing technology, undiscounted site-specific costs and currently enacted laws and regulations and are included in cost of goods sold and marketing, general and administrative expenses in our Consolidated State- ments of Operations. 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. The resolution of any such matters may affect consolidated net income for any fiscal period; however, we believe any resulting liabilities, indi- vidually or in the aggregate, will not have a material effect on our consolidated financial position, results of operations or cash flows during any fiscal year. Other Litigation and Claims We are involved as a defendant in various lawsuits, claims and disputes, which are in the normal course of our business. The resolution of any such matters may affect consolidated net income for any fiscal period; however, 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, nonconsolidated companies. Our bank covenants allow maximum guarantees of $1.0 bil- lion, of which $127.9 million were outstanding on August 31, 2020. We have collateral for a portion of these contingent obligations. We have not recorded a liability related to the contingent obligations as we do not expect to pay out any cash related to them, and the fair values are considered immaterial. The underlying loans to the counterparties for which we provide these guarantees are current as of August 31, 2020. 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, 2020, CHS Capital customers have additional available credit of $714.5 million. 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 throughput agreements and are not recorded on our Consolidated Balance Sheets. As of August 31, 2020, minimum future payments required under long-term commit- ments that are noncancelable, and that third parties have used to secure financing for facilities that will provide contracted goods, are as follows: (DOLLARS IN THOUSANDS) Total 2021 2022 2023 2024 2025 THEREAFTER Long-term unconditional purchase obligations $ 544,203 $ 78,939 $ 58,214 $ 58,592 $ 58,262 $ 52,702 $ 237,494 PAYMENTS DUE BY PERIOD Total payments under these arrangements were $77.6 million, $70.8 million and $61.4 million for the years ended August 31, 2020, 2019 and 2018, respectively. 53 CHS 2020 53 10NOV202015371092 Related Party Transactions We purchase and sell grain and other agricultural commodity products from certain equity investees, primarily CF Nitrogen, Ventura Foods, Ardent Mills and TEMCO, LLC. Sales to and purchases from related parties for the years ended August 31, 2020, 2019 and 2018, respectively, are as follows: (DOLLARS IN THOUSANDS) Sales Purchases 2020 2019 2018 $ 2,528,921 $ 2,628,670 $ 2,928,984 872,819 901,812 2,505,185 Receivables due from and payables due to related parties as of August 31, 2020 and 2019, are as follows: (DOLLARS IN THOUSANDS) Due from related parties Due to related parties 2020 2019 $ 129,397 $ 26,785 53,602 60,156 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. 10NOV202015372115 Leases We adopted ASC Topic 842 on September 1, 2019, using the modified retrospective approach. In addition, we used the additional optional transition method and package of practical expedients in the period of adop- tion without retrospective adjustment to previous periods presented, although we elected not to apply the hindsight practical expedient. As a result of using the additional optional transition method and following a modified retrospective approach, prior periods have not been restated, and a $25.3 million cumulative-effect adjustment, including the deferred income tax impact, was recorded to increase the opening balance of capital reserves as of the adoption date related to recognition of previously deferred gains associated with the sale-leaseback of our primary corporate office building located Inver Grove Heights, Minnesota. Our accounting for finance leases (previously referred to as in capital leases) remains substantially unchanged; how- ever, adoption of ASC Topic 842 resulted in recognition of operating lease right of use assets and associated lease liabilities of $268.4 million and $267.0 million, respectively, as of September 1, 2019. Adoption of ASC Topic 842 did not have a material impact on our Consoli- dated Statements of Operations or Consolidated State- ments of Cash Flows. We assess arrangements at inception to determine whether they contain a lease. An arrangement is consid- ered to contain a lease if it conveys the right to control the use of an asset for a period of time in exchange for consideration. The right to control the use of an asset must include both (a) the right to obtain substantially all economic benefits associated with an identified asset and (b) the right to direct how and for what purpose the identified asset is used. Certain arrangements provide 54 CHS 2020 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS us with the right to use an identified asset; however, most of these arrangements are not considered to represent a lease as we do not control how and for what purpose the identified asset is used. For example, our supply agreements, warehousing and distribution ser- vices agreements, and transportation services agree- ments generally do not contain leases. We lease property, plant and equipment used in our operations primarily under operating lease agreements and, to a lesser extent, under finance lease agreements. Our operating leases are primarily for railcars, equip- ment, vehicles and office space, many of which contain renewal options and escalation clauses. Renewal options are included as part of the right of use asset and liability when it is reasonably certain that we will exercise the renewal option; however, renewal options are gener- ally not included as we are not reasonably certain to exercise such options. Operating lease right of use assets and liabilities for operating leases are recognized at the lease commence- ment date for leases in excess of 12 months based on the present value of lease payments over the lease term. For measurement and classification of lease agreements, lease and nonlease components are grouped into a single lease component for all asset classes. Variable lease payments are excluded from measurement of right of use assets and liabilities and generally include payments for nonlease components such as mainte- nance costs, payments for leased assets beyond their noncancelable lease term and payments for other nonlease components such as sales tax. The discount rate used to calculate present value is our collateralized incremental borrowing rate or, if available, the rate implicit in the lease. The incremental borrowing rate is determined for each lease based primarily on its lease term. Certain lease arrangements include rental pay- ments adjusted annually based on changes in an infla- tion index. Our lease arrangements generally do not contain residual value guarantees or material restrictive covenants. Lease expense is recognized on a straight-line basis over the lease term. The components of lease expense recognized in our Condensed Consolidated Statements of Operations are as follows: (DOLLARS IN THOUSANDS) Operating lease expense Finance lease expense: Amortization of assets Interest on lease liabilities Short-term lease expense Variable lease expense Total net lease expense* YEAR ENDED AUGUST 31, 2020 $ 71,541 8,205 1,060 15,991 3,674 $ 100,471 * Income related to sub-lease activity is not material and has been excluded from the table above. 55 CHS 2020 55 NINETEEN: Le a s e s , co n t i n u e d Supplemental balance sheet information related to operating and finance leases is as follows: (DOLLARS IN THOUSANDS) Operating leases Assets BALANCE SHEET LOCATION AUGUST 31, 2020 Operating lease right of use assets Other assets $ 257,834 Liabilities Current operating lease liabilities Long-term operating lease liabilities Total operating lease liabilities Finance leases Assets Finance lease assets Liabilities Current finance lease liabilities Long-term finance lease liabilities Total finance lease liabilities Weighted average remaining lease term (in years) Operating leases Finance leases Weighted average discount rate Operating leases Finance leases Accrued expenses Other liabilities 57,200 203,691 $ 260,891 Property, plant and equipment $ 44,860 Current portion of long-term debt Long-term debt 7,993 23,467 $ 31,460 8.3 6.0 3.11% 3.33% Supplemental cash flow and other information related to operating and finance leases is as follows: Maturities of lease liabilities as of August 31, 2020, were as follows: (DOLLARS IN THOUSANDS) Cash paid for amounts included in measurement of lease liabilities: YEAR ENDED AUGUST 31, 2020 Operating cash flows from operating leases $ 71,003 Operating cash flows from finance leases Financing cash flows from finance leases Supplemental noncash information: Right of use assets obtained in exchange for lease liabilities Right of use asset modifications 1,060 7,949 56,461 7,333 (DOLLARS IN THOUSANDS) FINANCE LEASES OPERATING LEASES AUGUST 31, 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 Thereafter Total maturities of lease liabilities Less amounts representing interest Present value of future minimum lease payments Less current obligations $ 8,845 $ 64,379 7,017 6,053 3,443 2,046 7,933 50,398 40,269 32,195 23,034 95,553 35,337 305,828 3,877 44,937 31,460 7,993 260,891 57,200 Long-term obligations $ 23,467 $ 203,691 56 CHS 2020 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Disclosures Related to Periods Prior to Adoption of New Lease Standard The following pertains to previously disclosed informa- tion in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which incorporates infor- mation about leases now in the scope of ASC Topic 842. Total rental expense for operating leases was $113.3 mil- lion, $88.5 million and $81.3 million for the years ended August 31, 2019, 2018 and 2017, respectively. Various leases under capital lease totaled $62.7 million and $50.0 million as of August 31, 2019 and 2018, respec- tively. Accumulated amortization on assets under capital leases was $20.6 million and $18.9 million as of August 31, 2019 and 2018, respectively. Minimum future lease payments required under noncancelable capital and operating leases as of August 31, 2019, were as follows: (DOLLARS IN THOUSANDS) FINANCE LEASES OPERATING LEASES AUGUST 31, 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Thereafter Total minimum future lease payments Less amount representing interest $ 6,761 $ 87,168 6,199 5,021 4,548 2,638 6,517 57,381 43,665 34,328 26,793 92,653 31,684 $ 341,988 3,445 Present value of net minimum lease payments $ 28,239 10NOV202015374020 Acquisitions On March 1, 2019, we completed our acquisition of the remaining 75% ownership interest in WCD, a full-service wholesale distributor of agronomy products that oper- ates primarily in the United States. The purchase price was equal to $113.4 million, including $6.7 million that was previously paid and $106.7 million paid on March 1, 2019, of which the net cash flows were reduced by $8.0 million of cash acquired. Prior to completing this acquisition and through February 28, 2019, we had a 25% ownership interest in WCD, which was accounted for under the equity method of accounting whereby we shared in the economics of WCD earnings on a pro-rata basis. Related party transactions through the date of the acquisition have been included within Note 18, Related Party Transactions. By acquiring the remaining owner- ship interest in WCD, we were able to expand our agronomy platform, position ourselves as a leading supply partner to cooperatives and retailers serving growers throughout the United States and add value for our owners. The WCD enterprise value was determined using a discounted cash flow model in which the fair value of the business was estimated based on the earning capacity of WCD. We estimated the fair value of the previously held equity interest to be equal to 25% of the total fair value of WCD, which was implied based on the purchase price we paid for the remaining 75% interest. The acquisition-date fair value of the previous equity interest was $37.8 million and is included in the measurement of the consideration transferred. We recognized a gain of approximately $19.1 million as a result of remeasuring our prior equity interest in WCD held before the acquisition of the remaining 75% interest. The gain is included in other (income) loss in our Consolidated Statements of Operations. Allocation of the purchase price for this transaction resulted in goodwill of $61.4 million, which is nondeduct- ible for tax purposes, and definite-lived intangible assets of $47.2 million. As this acquisition is not considered to have a material impact on our financial statements, pro 57 CHS 2020 57 TWENTY: Acq u i s i t i o n s , co n t i n u e d forma results of operations are not presented. The acquisition resulted in fair value measurements that are not on a recurring basis and did not have a material impact on our consolidated results of operations. Purchase accounting has been finalized and fair values assigned to the net assets acquired are as follows: (DOLLARS IN THOUSANDS) Cash Other current assets Property, plant and equipment Goodwill Other intangible assets Other non-current assets Liabilities Total net assets acquired $ 8,033 708,764 44,064 61,358 47,200 55 (718,262) $ 151,212 Operating results for WCD are included in our Consoli- dated Statements of Operations from the day of the acquisition on March 1, 2019, through August 31, 2020. WCD revenues and income before income taxes were $569.2 million and $19.0 million, respectively, for the year ended August 31, 2020, and $456.2 million and $12.9 million, respectively, for the year ended August 31, 2019. Due to the timing of the acquisition during the third quarter of fiscal 2019, WCD’s results prior to acqui- sition were not included in the fiscal 2019 or fiscal 2018 results. 58 CHS 2020 58 11NOV202018120425 To the Board of Directors, Members and Patrons of CHS Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CHS Inc. and its subsidiaries (the ‘‘Company’’) as of August 31, 2020 and 2019, 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, 2020, including the related notes (collectively referred to as the ‘‘consolidated financial statements’’). In our opinion, the consolidated financial state- ments present fairly, in all material respects, the financial position of the Company as of August 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of September 1, 2019. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 11NOV202017481043 PricewaterhouseCoopers LLP Minneapolis, Minnesota November 5, 2020 We have served as the Company’s auditor since 1998. 59 CHS 2020 59 ACKNOWLEDGEMENTS To create this annual report, CHS worked with cooperative teams and farmer-owners and their families. The collective accomplishments described in these pages reflect their commitment to the cooperative system. We thank them for their cooperative spirit. Minnesota: Ken Bourquin, Bourquin Farms, Eyota, Minn.; Dusty Dienst, Faribault, Minn.; Brittany Smith, Dallas Tesmer, Jordan Thiel, Tommy Weinrich and the teams at CHS locations based in Rochester, Minn.; the CHS team based in Herman, Minn.; the CHS grain terminal team at Savage, Minn.; Troy Hamstad and the CHS Agronomy team at Brooten, Minn. Montana: Amy Thompson, Lewiston, Mont.; Baily Hagedorn and Bronya Willmore, CHS Animal Nutrition, Lewiston, Mont.; the team at CHS Mountain West, Kalispell, Mont.; Darin Foote, Stene Hultgren and the CHS refinery team, Laurel, Mont. Nebraska: Greg, Davin and Erik Peterson, Gering, Neb.; Greta Birch, Marcie Oehlke and the team of WESTCO, Alliance, Neb. North Dakota: Peter Ness, Sharon, N.D.; Devin Gaugler and the CHS Sunflower team at Grandin, N.D. Oklahoma: Tim Darst, Jason Kroener and the CHS team at Okarche, Okla. Washington: Jordyn Land, Jori Templeton and the TEMCO export facility teams at Kalama and Tacoma, Wash. Wisconsin: The team of Synergy Cooperative, based in Ridgeland, Wis. 60 CHS 2020 CHS BOARD OF DIRECTORS Dan Schurr Chair LeClaire, Iowa C.J. Blew First vice chair Castleton, Kansas Jon Erickson Second vice chair Minot, North Dakota Russ Kehl Secretary-treasurer Quincy, Washington Steve Riegel Assistant secretary-treasurer Ford, Kansas David Beckman Elgin, Nebraska Hal Clemensen Aberdeen, South Dakota Scott Cordes Wanamingo, Minnesota Mark Farrell Cross Plains, Wisconsin Steve Fritel Barton, North Dakota Alan Holm Sleepy Eye, Minnesota David Johnsrud Starbuck, Minnesota Tracy Jones Kirkland, Illinois David Kayser Alexandria, South Dakota Edward Malesich Dillon, Montana Perry Meyer New Ulm, Minnesota Kevin Throener Cogswell, North Dakota Detailed biographical information on the CHS Board of Directors is available at chsinc.com. CHS 2020 61 EXECUTIVE TEAM Jay Debertin President and chief executive officer David Black Senior vice president, enterprise strategy and chief information officer Rick Dusek Executive vice president, CHS Country Operations John Griffith Senior vice president, CHS Global Grain & Processing and CHS Hedging Gary Halvorson Senior vice president, CHS Agronomy Darin Hunhoff Executive vice president, CHS Energy Mary Kaul-Hottinger Senior vice president, Human Resources Olivia Nelligan 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. 62 CHS 2020 5500 Cenex Drive Inver Grove Heights, MN 55077 chsinc.com NASDAQ: CHSCP, CHSCO, CHSCN, CHSCM, CHSCL © 2020 CHS Inc. 

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