8. INVESTMENTS IN JOINT VENTURES

Variable Interest Entity - Consolidated

We hold a 49.99% interest in Lamb Weston BSW, LLC (“Lamb Weston BSW”), a potato processing venture with Ochoa Ag Unlimited Foods, Inc. (“Ochoa”). We provide all sales and marketing services to Lamb Weston BSW. Under certain circumstances, we could be required to compensate Ochoa for lost profits resulting from significant production shortfalls. Commencing on June 1, 2018, or on an earlier date under certain circumstances, Lamb Weston has a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (the “call option”). Lamb Weston is currently subject to a contractual obligation to purchase all of Ochoa’s equity investment in Lamb Weston BSW at the option of Ochoa (the “put option”). The purchase prices under the call option and the put option (the “options”) are based on the book value of Ochoa’s equity interest at the date of exercise, as modified by an agreed-upon rate of return for the holding period of the investment balance. The agreed-upon rate of return varies depending on the circumstances under which any of the options are exercised.

Our variable interests in Lamb Weston BSW include an equity investment in the venture, the options, certain fees paid to Lamb Weston by Lamb Weston BSW for sales and marketing services, the contingent obligation related to production shortfalls and the contingent obligation to fund additional equity contributions or purchase the underlying notes associated with certain Lamb Weston BSW financings. Lamb Weston’s maximum exposure to loss as a result of Lamb Weston’s involvement with this venture is equal to Lamb Weston’s equity investment in the venture, the balance of any promissory notes extended to the venture which are subject to Lamb Weston’s purchase obligation, and the amount, if any, by which the put option exercise price exceeds the fair value of the non-controlling interest in Lamb Weston BSW upon its exercise. Also, in the event of a production shortfall, we could be required to compensate Ochoa for lost profits. It is not possible to determine the maximum exposure to losses from the potential exercise of the put option or from potential production shortfalls. However, we do not expect to incur material losses resulting from these potential exposures.

Lamb Weston and Lamb Weston BSW purchase potatoes from a shareholder of Ochoa. The aggregate amount of such purchases were $12.5 million and $11.4 million for the thirteen weeks ended November 27, 2016 and November 29, 2015, respectively; and $36.6 million and $27.8 million for the twenty-six weeks ended November 27, 2016 and November 29, 2015, respectively.

Lamb Weston BSW is a variable interest entity and we have determined that we are the primary beneficiary of the entity. We consolidate the financial statements of Lamb Weston BSW. The amounts presented for Lamb Weston BSW in the table below exclude intercompany balances eliminated in consolidation and include the non-controlling interest at redemption value as reported in the Condensed Combined and Consolidated Balance Sheets (dollars in millions):


	November 27,		May 29,
	2016		2016
Cash and equivalents	$	12.0	$	4.3
Receivables, less allowance for doubtful accounts (a)		0.1		0.1
Inventories		1.9		1.2
Prepaid expenses and other current assets		0.1		0.4
Property, plant and equipment, net		50.4		52.2
Goodwill		18.8		18.8
Intangible assets, net		4.8		5.2
Total assets	$	88.1	$	82.2
Notes payable	$	—	$	1.0
Current portion of long-term debt		1.2		0.5
Accounts payable		10.1		10.9
Accrued liabilities		2.5		1.7
Long-term debt, excluding current portion		28.8		29.5
Total liabilities	$	42.6	$	43.6
Redeemable noncontrolling interest (b)	$	50.0	$	47.4

(a)

As of November 27, 2016 and May 29, 2016, affiliate receivables of $22.2 million and $25.8 million are not included above as they are eliminated in consolidation.

(b)

Represents the amount that our joint venture partner, Ochoa, had the right to put its equity interest to Lamb Weston on November 27, 2016 and May 29, 2016.

The liabilities recognized as a result of consolidating the Lamb Weston BSW entity do not represent additional claims on Lamb Weston’s general assets. In connection with the Lamb Weston BSW long-term debt, we have entered into an agreement with the financial institution which provides that in the event that Lamb Weston BSW fails to comply with certain financial covenants or repayment terms, we are required to either make certain additional equity contributions to Lamb Weston BSW or to purchase the underlying notes. The assets recognized as a result of consolidating Lamb Weston BSW are the property of the venture and are not available to Lamb Weston for any other purpose.

Variable Interest Entity - Not Consolidated

Lamb Weston holds a 50% interest in Lamb-Weston/RDO Frozen (“Lamb Weston RDO”), a potato processing venture based in the United States. Lamb Weston provides all sales and marketing services to Lamb Weston RDO. Lamb Weston receives a fee for these services based on a percentage of the net sales of the venture. The fees received were $3.4 million and $3.1 million, for the thirteen weeks ended November 27, 2016 and November 29, 2015, respectively; and $6.9 million and $6.2 million for the twenty-six weeks ended November 27, 2016 and November 29, 2015, respectively. These fees are recorded as a reduction to selling, general, and administrative expense. Our ownership interest in this venture is included in “Equity method investments” in the Condensed Combined and Consolidated Balance Sheets. The balance of Lamb Weston’s investment was $15.8 million and $16.9 million at November 27, 2016 and May 29, 2016, respectively, representing our maximum exposure to loss as a result of our involvement with this venture. The capital structure of Lamb Weston RDO includes owners’ equity of $32.1 million and $33.9 million as of November 27, 2016 and May 29, 2016, respectively; and term borrowings from banks of $39.9 million and $16.9 million as of November 27, 2016 and May 29, 2016, respectively.

Lamb Weston has determined that Lamb Weston RDO is a variable interest entity, but Lamb Weston is not the primary beneficiary. Lamb Weston does not have the power to direct the activities that most significantly impact the economic performance of the joint venture. Accordingly, Lamb Weston does not consolidate the financial statements of this entity. Lamb Weston uses equity method accounting to account for its ownership in Lamb Weston RDO.

Other Investments

Lamb Weston also holds a 50% ownership interest in Lamb-Weston/Meijer v.o.f. (“Lamb-Weston/Meijer”), a Netherlands joint venture with Meijer Frozen Foods B.V., headquartered in the Netherlands, which manufactures and sells frozen potato products principally in Europe. We account for this investment using equity method accounting.

Transactions with Joint Ventures

The carrying value of our equity method investments, which include Lamb Weston RDO and Lamb-Weston/Meijer, at November 27, 2016 and May 29, 2016, was $150.8 million and $155.2 million, respectively. These amounts are included in “Equity method investments” in our Condensed Combined and Consolidated Balance Sheets. For the thirteen weeks ended November 27, 2016 and November 29, 2015, we had sales and payments to our equity method investments of $7.2 million and $3.6 million, respectively, and $3.4 million and $3.0 million, respectively; and for the twenty-six weeks ended November 27, 2016 and November 29, 2015, we had sales and payments to our equity method investments of $14.7 million and $6.7 million, respectively, and $7.3 million and $5.5 million, respectively. Total dividends from our equity method investments were $5.6 million and $4.7 million for the thirteen weeks ended November 27, 2016 and November 29, 2015, respectively, and $13.9 million and $7.8 million for the twenty-six weeks ended November 27, 2016 and November 29, 2015, respectively.