How does LDS interpret Colossians 1:16?

Referencing the Greek lexicon for the word create:

κτίζω (ktizō)

Root Word (Etymology): Probably akin to κτάομαι (G2932) (through the idea of proprietor-ship of the manufacturer)

Outline of Biblical Usage:

• to make habitable, to people, a place, region, island
  • to found a city, colony, state
• to create
  • of God creating the worlds
  • to form, shape, i.e. to completely change or transform

Strong’s Definitions: κτίζω ktízō, ktid'-zo; probably akin to G2932 (through the idea of proprietorship of the manufacturer); to fabricate, i.e. found (form originally):—create, Creator, make.

One can see a similarity to this answer, in that this verse indicate not creation ex nihilo but making a place habitable, founding, forming, or shaping with pre-existing material/matter.

For by him were all things created, that are in heaven, and that are in earth, visible and invisible, whether they be thrones, or dominions, or principalities, or powers: all things were created by him, and for him Colossians 1:16

The Church of Jesus Christ of Latter-day saints do believe that God organized/created the heaven, earth, visible and invisible. With the understanding that he formed matter into what we have today. Even though we don't believe he created the matter, he formed everything and so he is regarded as the Creator. (if someone builds a home for you, they are the creator even if they didn't personally create/gather the materials-God could also be considered the architect as all things were created spiritually first)

From unofficial apologist site (wording is clear and concise):

Thus, Jesus certainly participated in the creation of all created things—but He worked with preexisting chaotic materials. The angelic ranks of "thrones, dominions, principalities, and powers" were also created by Christ, for these beings did not assume their angelic status or form without divine creative power, even though some aspect of their "intelligence" pre-dated God's creative acts in their behalf.

"Create" is understood in the sense that the word is used in virtually all non-theological discussions--"create" means to organize. In the process, the creation is often imbued with attributes it did not previously have.

Beliefs on Creation ex Nihilo in General

One of the most direct discussions of creation ex-nihilo comes from Joseph Smith's King Follett discourse:

You ask the learned doctors why they say the world was made out of nothing, and they will answer, “Doesn’t the Bible say he created the world?” And they infer, from the word create, that it must have been made out of nothing. Now, the word create came from the word baurau, which does not mean to create out of nothing; it means to organize; the same as a man would organize materials and build a ship. Hence we infer that God had materials to organize the world out of chaos—chaotic matter, which is element, and in which dwells all the glory. Element had an existence from the time He had. The pure principles of element are principles which can never be destroyed; they may be organized and re-organized, but not destroyed. They had no beginning and can have no end. (source)

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The specific passage

A parallel argument can be made with respect to the Greek word , employed in Colossians 1:16. This verb is used to describe God's creation of both the earth & humans, and means "to create", "to build", "to form", or "to shape" (source). "Forming" & "shaping" are unambiguously not acts of creation ex nihilo, but involve working with existing materials.

As such, even if κτίζω meant creation out of nothing in some circumstance, it cannot be taken to always carry that meaning. I submit that there is no unambiguous usage of κτίζω to mean "creation out of nothing" in the New Testament (which is why the early Christian writers who supported creation ex-nihilo used 2 Maccabees, not the New Testament, as a proof text--see section 5.1 here). There are, on the other hand, examples in the New Testament where κτίζω clearly means to create out of something that already exists:

• Ephesians 2:15
• 1 Cor 11:9
• Ephesians 4:24
• Matthew 19:4 (critical text)

In particular, compare 1 Cor 11:9 & Matthew 19:4 to the description of those events in Genesis 2:7,22. God created (κτίζω per 1 Cor, Matthew) out of things/entities that already existed.

Appendix

Additional relevant scriptural statements include:

Man was also in the beginning with God. Intelligence, or the light of truth, was not created or made, neither indeed can be. (Doctrine & Covenants 93:29)

The elements are eternal (Doctrine & Covenants 93:33)

Note this does not say that the body or the spirit has existed from eternity past, but that the "intelligence" (or "self" or "inner person") has always existed.

For a more in-depth discussion of philosophy, physics, and history regarding creation ex-nihilo, see my answer here.