6. 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, we have a contractual right to purchase the remaining equity interest in Lamb Weston BSW from Ochoa (“call option”). We are currently subject to a contractual obligation to purchase all of Ochoa’s equity investment in Lamb Weston BSW at the option of Ochoa (“put option”). The purchase prices under the call option and the put option (“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. Our maximum exposure to loss as a result of our involvement with this venture is equal to our equity investment in the venture, the balance of any promissory notes extended to the venture which are subject to our 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 amounts of such purchases were $62.9 million, $58.6 million, and $61.1 million in fiscal 2017, 2016, and 2015, respectively. Additionally, Lamb Weston and Lamb Weston BSW utilize storage facilities and water treatment services from a shareholder of Ochoa. The aggregate amount of such costs were $5.1 million, $5.1 million, and $4.9 million in fiscal 2017, 2016, and 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 Combined and Consolidated Balance Sheets (dollars in millions):


	May 28,		May 29,
	2017		2016
Cash and equivalents	$	10.9	$	4.3
Receivables, less allowance for doubtful accounts (a)		0.1		0.1
Inventories		1.9		1.2
Prepaid expenses and other current assets		0.4		0.4
Property, plant and equipment, net		49.4		52.2
Goodwill		18.8		18.8
Intangible assets, net		4.5		5.2
Total assets	$	86.0	$	82.2
Notes payable	$	—	$	1.0
Current portion of long-term debt		1.5		0.5
Accounts payable		11.6		10.9
Accrued liabilities		2.0		1.7
Long-term debt, excluding current portion		28.0		29.5
Total liabilities	$	43.1	$	43.6
Redeemable noncontrolling interest (b)	$	50.7	$	47.4

(a)

As of May 28, 2017 and May 29, 2016, affiliate receivables of $24.0 million and $25.8 million, respectively, 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 May 28, 2017 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

We hold a 50% interest in Lamb-Weston/RDO Frozen (“Lamb Weston RDO”), a potato processing venture based in the United States. We provide all sales and marketing services to Lamb Weston RDO, and we receive a fee for these services based on a percentage of the net sales of the venture. The fees received were $13.9 million, $13.2 million, and $11.7 million in fiscal 2017, 2016, and 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 our Combined and Consolidated Balance Sheets. The balance of Lamb Weston’s investment was $17.2 million and $16.9 million at May 28, 2017 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 $34.4 million and $33.9 million as of May 28, 2017 and May 29, 2016, respectively; and term borrowings from banks of $59.3 million and $41.1 million as of May 28, 2017 and May 29, 2016, respectively.

We have 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, we do not consolidate the financial statements of this entity. We use equity method accounting to account for our ownership in Lamb Weston RDO.

Other Investments

We also hold a 50% ownership interest in Lamb-Weston/Meijer v.o.f. (“Lamb-Weston/Meijer”), a 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 May 28, 2017 and May 29, 2016, was $178.6 million and $155.2 million, respectively. These amounts are included in “Equity method investments” in our Combined and Consolidated Balance Sheets. In fiscal 2017, 2016, and 2015, we had sales and payments to our equity method investments of $30.1 million and $11.7 million, $15.0 million and $11.9 million, and $7.8 million and $12.8 million, respectively. Total dividends from our equity method investments were $31.0 million, $37.9 million, and $12.0 million for fiscal 2017, 2016, and 2015, respectively. As of May 28, 2017 and May 29, 2016, we had receivables from our joint ventures of $8.4 million and $4.1 million, respectively.

Summarized combined financial information for our equity method investments on a 100% basis is as follows:


	For the Fiscal Years Ended May
	2017		2016
Net sales	$	992.6	$	917.3
Gross margin		190.9		167.0
Earnings before income taxes (a)		106.6		143.3


	May 28,		May 29,
	2017		2016
Current assets	$	325.2	$	304.8
Noncurrent assets		312.5		294.8
Current liabilities		209.0		202.2
Noncurrent liabilities		71.7		81.7

(a)

Fiscal 2016 includes a $35.4 million non-cash gain related to the settlement of a pension plan of the Company’s Lamb-Weston/Meijer joint venture. Our Combined and Consolidated Statements of Earnings reflect our potion of this gain, or $17.7 million.