CLIFFS NATURAL RESOURCES INC., 10-Q filed on 10/27/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Oct. 24, 2016
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
CLIFFS NATURAL RESOURCES INC. 
 
Entity Central Index Key
0000764065 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
230,599,846 
Trading Symbol
clf 
 
Statements Of Condensed Consolidated Financial Position (USD $)
In Millions, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 132.2 
$ 285.2 
Accounts receivable, net
49.2 
40.2 
Inventories
317.3 
329.6 
Supplies and other inventories
84.0 
110.4 
Short-term assets of discontinued operations
14.9 
Loans to and accounts receivable from the Canadian Entities
69.3 
72.9 
Insurance coverage receivable
93.5 
Other current assets
47.6 
36.0 
TOTAL CURRENT ASSETS
699.6 
982.7 
PROPERTY, PLANT AND EQUIPMENT, NET
990.1 
1,059.0 
OTHER ASSETS
 
 
Other non-current assets
83.2 
93.8 
TOTAL OTHER ASSETS
83.2 
93.8 
TOTAL ASSETS
1,772.9 
2,135.5 
CURRENT LIABILITIES
 
 
Accounts payable
81.3 
106.3 
Accrued expenses
134.2 
156.0 
Short-term liabilities of discontinued operations
5.5 
6.9 
Guarantees
0.2 
96.5 
Insured loss
93.5 
Other current liabilities
102.3 
122.5 
TOTAL CURRENT LIABILITIES
323.5 
581.7 
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
198.5 
221.0 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
220.2 
231.2 
LONG-TERM DEBT
2,195.9 
2,699.4 
OTHER LIABILITIES
235.3 
213.8 
TOTAL LIABILITIES
3,173.4 
3,947.1 
COMMITMENTS AND CONTINGENCIES (SEE NOTE 20)
   
   
CLIFFS SHAREHOLDERS' DEFICIT
 
 
Preferred Stock - no par value, Class A - 3,000,000 shares authorized, 7 % Series A Mandatory Convertible, Class A, no par value and $1,000 per share liquidation preference, Issued and Outstanding - no shares (2015 - 731,223 shares), Class B - 4,000,000 shares authorized
731.3 
Common Shares - par value $0.125 per share, Authorized - 400,000,000 shares (2015 - 400,000,000 shares); Issued - 236,346,794 shares (2015 - 159,546,224 shares); Outstanding - 203,594,581 shares (2015 - 153,591,930 shares)
29.5 
19.8 
Capital in excess of par value of shares
3,336.0 
2,298.9 
Retained deficit
(4,653.4)
(4,748.4)
Cost of 5,752,213 common shares in treasury (2015 - 5,954,294 shares)
(255.2)
(265.0)
Accumulated other comprehensive loss
(1.2)
(18.0)
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
(1,544.3)
(1,981.4)
NONCONTROLLING INTEREST
143.8 
169.8 
TOTAL DEFICIT
(1,400.5)
(1,811.6)
TOTAL LIABILITIES AND DEFICIT
$ 1,772.9 
$ 2,135.5 
Statements Of Condensed Consolidated Financial Position (Parenthetical) (USD $)
Sep. 30, 2016
Dec. 31, 2015
Class of Stock [Line Items]
 
 
Preferred stock, par value
$ 0 
$ 0 
Common Stock, Par or Stated Value Per Share
$ 0.125 
$ 0.125 
Common shares, authorized (in shares)
400,000,000 
400,000,000 
Common shares, issued (in shares)
236,346,794 
159,546,224 
Common shares, outstanding
230,594,581 
153,591,930 
Common shares in treasury
5,752,213 
5,954,294 
Preferred Class A [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred stock, shares authorized (in shares)
3,000,000 
3,000,000 
Cumulative Mandatory Convertible
7.00% 
7.00% 
Preferred Stock, Liquidation Preference Per Share
$ 1,000 
$ 1,000 
Preferred Shares, Issued and Outstanding, Shares
731,223 
Preferred Class B [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred stock, shares authorized (in shares)
4,000,000 
4,000,000 
Statements Of Condensed Consolidated Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
Product
$ 508.6 
$ 542.5 
$ 1,237.0 
$ 1,399.9 
Freight and venture partners' cost reimbursements
44.7 
50.7 
118.0 
137.4 
TOTAL REVENUES
553.3 
593.2 
1,355.0 
1,537.3 
COST OF GOODS SOLD AND OPERATING EXPENSES
(467.9)
(538.1)
(1,147.2)
(1,344.1)
SALES MARGIN
85.4 
55.1 
207.8 
193.2 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
 
Selling, general and administrative expenses
(31.1)
(22.4)
(81.8)
(82.2)
Miscellaneous - net
(19.6)
(3.5)
(16.9)
15.8 
Other operating expense
(50.7)
(25.9)
(98.7)
(66.4)
OPERATING INCOME
34.7 
29.2 
109.1 
126.8 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest expense, net
(48.7)
(61.7)
(156.2)
(168.2)
Gain (loss) on extinguishment/restructuring of debt
(18.3)
79.2 
164.1 
392.9 
Other non-operating income (expense)
0.1 
(0.1)
0.4 
(3.0)
TOTAL OTHER INCOME (EXPENSE)
(66.9)
17.4 
8.3 
221.7 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(32.2)
46.6 
117.4 
348.5 
INCOME TAX BENEFIT (EXPENSE)
7.1 
3.4 
1.7 
(169.9)
Income (Loss) from Equity Method Investments
(0.1)
(0.1)
INCOME (LOSS) FROM CONTINUING OPERATIONS
(25.1)
49.9 
119.1 
178.5 
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX
(2.7)
(43.9)
(0.6)
(869.0)
NET INCOME (LOSS)
(27.8)
6.0 
118.5 
(690.5)
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
2.0 
4.6 
(23.5)
1.5 
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
(25.8)
10.6 
95.0 
(689.0)
PREFERRED STOCK DIVIDENDS
(25.6)
(38.4)
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
$ (25.8)
$ (15.0)
$ 95.0 
$ (727.4)
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
 
Continuing operations (in dollars per share)
$ (0.11)
$ 0.19 
$ 0.51 
$ 0.87 
Discontinued operations (in dollars per share)
$ (0.01)
$ (0.29)
$ 0.00 
$ (5.62)
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Basic (in dollars per share)
$ (0.12)
$ (0.10)
$ 0.51 
$ (4.75)
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
 
Continuing operations (in dollars per share)
$ (0.11)
$ 0.19 
$ 0.51 
$ 0.87 
Discontinued operations (in dollars per share)
$ (0.01)
$ (0.29)
$ 0.00 
$ (5.62)
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Diluted (in dollars per share)
$ (0.12)
$ (0.10)
$ 0.51 
$ (4.75)
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
Basic
206.3 
153.2 
186.5 
153.2 
Diluted
206.3 
153.2 
188.5 
153.2 
CASH DIVIDENDS DECLARED PER DEPOSITARY SHARE (in dollars per share)
$ 0.00 
$ 0.88 
$ 0.00 
$ 1.32 
Statements Of Condensed Consolidated Operations (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
$ 0 
$ 0 
$ 0 
$ 7.7 
Statements Of Condensed Consolidated Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
 
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ (25.8)
$ 10.6 
$ 95.0 
$ (689.0)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Changes in pension and other post-retirement benefits, net of tax
7.1 
6.6 
19.0 
36.0 
Unrealized net gain on marketable securities, net of tax
0.1 
1.6 
Unrealized net gain (loss) on foreign currency translation
0.9 
(11.4)
2.6 
157.1 
Unrealized net gain (loss) on derivative financial instruments, net of tax
0.7 
9.2 
(2.6)
16.7 
OTHER COMPREHENSIVE INCOME
8.7 
4.5 
19.0 
211.4 
OTHER COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
(0.9)
(0.7)
(2.2)
9.3 
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ (18.0)
$ 14.4 
$ 111.8 
$ (468.3)
Statements Of Condensed Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
OPERATING ACTIVITIES
 
 
NET INCOME (LOSS)
$ 118.5 
$ (690.5)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
 
 
Depreciation, depletion and amortization
88.9 
99.1 
Asset Impairment Charges, Cash Flows
76.6 
Deferred income taxes
160.0 
Gain on extinguishment/restructuring of debt
(164.1)
(392.9)
(Gain) loss on deconsolidation, net of cash deconsolidated
(3.2)
654.8 
Other
9.0 
52.7 
Changes in operating assets and liabilities:
 
 
Receivables and other assets
137.5 
293.1 
Inventories
21.6 
(76.2)
Payables, accrued expenses and other liabilities
(136.1)
(236.2)
Net cash provided (used) by operating activities
72.1 
(59.5)
INVESTING ACTIVITIES
 
 
Purchase of property, plant and equipment
(45.8)
(57.9)
Other investing activities
6.3 
0.7 
Net cash used by investing activities
(39.5)
(57.2)
FINANCING ACTIVITIES
 
 
Repayment of equipment loans
(95.6)
(36.9)
Distributions of partnership equity
(52.5)
(31.7)
Debt issuance costs
(5.2)
(33.6)
Net Proceeds from Issuance of Common Shares
287.6 
Proceeds from first lien notes offering
503.5 
Repurchase of debt
(301.0)
(225.9)
Borrowings under credit facilities
105.0 
309.8 
Repayment under credit facilities
(105.0)
(309.8)
Preferred stock dividends
(38.4)
Other financing activities
(19.3)
(38.8)
Net cash provided (used) by financing activities
(186.0)
98.2 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
0.4 
(2.2)
DECREASE IN CASH AND CASH EQUIVALENTS
(153.0)
(20.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
285.2 
290.9 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 132.2 
$ 270.2 
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.
As more fully described in the Form 10-K for the year ended December 31, 2015, we announced in January 2015, that the Bloom Lake Group commenced CCAA proceedings (the "Bloom Filing") with the Quebec Superior Court (Commercial Division) in Montreal (the "Montreal Court"). Effective January 27, 2015, following the Bloom Filing, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced CCAA proceedings (the "Wabush Filing") in the Montreal Court, which resulted in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent expenses directly associated with the Canadian Entities are included in our financial statements and classified within discontinued operations.
Also, for the majority of 2015, we operated two metallurgical coal operations in Alabama and West Virginia. In December 2015, we completed the sale of these two metallurgical coal operations, which marked our exit from the coal business. As of March 31, 2015, management determined that our North American Coal operating segment met the criteria to be classified as held for sale under ASC 205, Presentation of Financial Statements. As such, all presented North American Coal operating segment results are included and classified within discontinued operations in our financial statements.
Refer to NOTE 14 - DISCONTINUED OPERATIONS for further discussion of the Eastern Canadian Iron Ore and North American Coal segment's discontinued operations.
We report our results from continuing operations in two reportable segments: U.S. Iron Ore and Asia Pacific Iron Ore.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries, including the following operations as of September 30, 2016:
Name
 
Location
 
Ownership Interest
 
Operation
 
Status of Operations
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
Tilden
 
Michigan
 
85.0%
 
Iron Ore
 
Active
Empire
 
Michigan
 
79.0%
 
Iron Ore
 
Idle
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
 
Active

Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Our 23 percent ownership interest in Hibbing is recorded as an equity method investment. As of September 30, 2016 and December 31, 2015, our investment in Hibbing was $1.9 million and $2.4 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of our Australian subsidiaries is the Australian dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive loss. Income taxes generally are not provided for foreign currency translation adjustments. To the extent that monetary assets and liabilities, inclusive of intercompany notes, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Unaudited Condensed Consolidated Operations. Transaction gains and losses resulting from remeasurement of short-term intercompany loans are included in Miscellaneous - net in the Statements of Unaudited Condensed Consolidated Operations.
For the three and nine months ended September 30, 2016, we incurred a net loss of $0.3 million and $1.2 million, respectively, from the impact of transaction gains and losses resulting from remeasurement. Of these amounts, for the three months ended September 30, 2016, losses of $1.1 million and gains of $0.6 million and for the nine months ended September 30, 2016, gains of $0.3 million and losses of $2.0 million resulted from remeasurement of cash and cash equivalents and remeasurement of certain obligations, respectively.
For the three and nine months ended September 30, 2015, net gains of $2.4 million and $15.2 million, respectively, related to the impact of transaction gains and losses resulting from remeasurement. Of these amounts, for the three months ended September 30, 2015, gains of $0.1 million and $1.3 million, respectively, resulted from remeasurement of short-term intercompany loans and cash and cash equivalents. Additionally, of these amounts for the nine months ended September 30, 2015, gains of $11.1 million and $2.0 million resulted from remeasurement of short-term intercompany loans and cash and cash equivalents, respectively.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.
Recent Accounting Pronouncements
Issued and Not Effective
In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires recognition of lease assets and lease liabilities for leases previously classified as operating leases. The guidance is effective for fiscal years beginning after December 15, 2018. We are currently reviewing the guidance and assessing the potential impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting.  The new standard is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance is effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. We are currently reviewing the guidance and assessing the potential impact on our consolidated financial statements.
Issued and Adopted
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. The new standard addresses eight specific changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We have adopted the guidance for the period ended September 30, 2016 and have applied this amended accounting guidance to the Statements of Unaudited Condensed Consolidated Cash Flows for all periods presented. The adoption of ASU 2016-15 did not have an impact on prior results reported in the Statements of Unaudited Condensed Consolidated Cash Flows.
SEGMENT REPORTING
SEGMENT REPORTING
NOTE 2 - SEGMENT REPORTING
Our continuing operations are organized and managed according to geographic location: U.S. Iron Ore and Asia Pacific Iron Ore. Our U.S. Iron Ore segment is a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. There were no intersegment revenues in the first nine months of 2016 or 2015.
We have historically evaluated segment performance based on sales margin, defined as revenues less cost of goods sold, and operating expenses identifiable to each segment. Additionally, we evaluate segment performance based on the key indicators of EBITDA, defined as net income (loss) before interest, income taxes, depreciation, depletion and amortization, and Adjusted EBITDA, defined as EBITDA excluding certain items such as impacts of impairment of other long-lived assets, discontinued operations, extinguishment/restructuring of debt, severance and contractor termination costs, foreign currency remeasurement, and intersegment corporate allocations of SG&A costs.  These measures allow management and investors to focus on our ability to service our debt, as well as, illustrate how the business and each operating segment is performing.  Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these measures approximate the cash flows associated with operational earnings. 
The following tables present a summary of our reportable segments for the three and nine months ended September 30, 2016 and 2015, including a reconciliation of segment sales margin to Income (Loss) from Continuing Operations Before Income Taxes and a reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA:
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues from product sales and services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
428.3

 
77
%
 
$
471.0

 
79
%
 
$
975.5

 
72
%
 
$
1,152.5

 
75
%
Asia Pacific Iron Ore
125.0

 
23
%
 
122.2

 
21
%
 
379.5

 
28
%
 
384.8

 
25
%
Total revenues from product sales and services
$
553.3

 
100
%
 
$
593.2

 
100
%
 
$
1,355.0

 
100
%
 
$
1,537.3

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
66.5

 
 
 
$
48.7

 
 
 
$
149.7

 
 
 
$
177.7

 
 
Asia Pacific Iron Ore
18.9

 
 
 
6.4

 
 
 
58.1

 
 
 
15.5

 
 
Sales margin
85.4

 
 
 
55.1

 
 
 
207.8

 
 
 
193.2

 
 
Other operating expense
(50.7
)
 
 
 
(25.9
)
 
 
 
(98.7
)
 
 
 
(66.4
)
 
 
Other income (expense)
(66.9
)
 
 
 
17.4

 
 
 
8.3

 
 
 
221.7

 
 
Income (loss) from continuing operations before income taxes
$
(32.2
)
 
 
 
$
46.6

 
 
 
$
117.4

 
 
 
$
348.5

 
 
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net Income (Loss)
$
(27.8
)
 
$
6.0

 
$
118.5

 
$
(690.5
)
Less:
 
 
 
 
 
 
 
Interest expense, net
(48.7
)
 
(62.3
)
 
(156.2
)
 
(170.7
)
Income tax benefit (expense)
7.1

 
4.8

 
1.7

 
(167.3
)
Depreciation, depletion and amortization
(26.8
)
 
(35.6
)
 
(88.9
)
 
(99.1
)
EBITDA
$
40.6

 
$
99.1

 
$
361.9

 
$
(253.4
)
Less:
 
 
 
 
 
 
 
Impairment of other long-lived assets
$


$


$


$
(3.3
)
Impact of discontinued operations
(2.7
)
 
(44.8
)
 
(0.6
)
 
(865.9
)
Gain (loss) on extinguishment/restructuring of debt
(18.3
)
 
79.2

 
164.1

 
392.9

Severance and contractor termination costs

 
2.2

 
(0.1
)
 
(9.3
)
Foreign exchange remeasurement
(0.3
)
 
2.4

 
(1.2
)
 
15.2

Adjusted EBITDA
$
61.9

 
$
60.1

 
$
199.7

 
$
217.0

 
 
 
 
 
 
 
 
EBITDA:
 
 
 
 
 
 
 
U.S. Iron Ore
$
61.1

 
$
69.2

 
$
196.6

 
$
239.6

Asia Pacific Iron Ore
21.2

 
11.1

 
69.6

 
38.7

Other
(41.7
)
 
18.8

 
95.7

 
(531.7
)
Total EBITDA
$
40.6

 
$
99.1

 
$
361.9

 
$
(253.4
)
 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
U.S. Iron Ore
$
65.3

 
$
72.3

 
$
208.6

 
$
254.6

Asia Pacific Iron Ore
23.7

 
9.7

 
73.2

 
32.8

Other
(27.1
)
 
(21.9
)
 
(82.1
)
 
(70.4
)
Total Adjusted EBITDA
$
61.9

 
$
60.1

 
$
199.7

 
$
217.0

 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
U.S. Iron Ore
$
18.8

 
$
27.9

 
$
65.1

 
$
71.6

Asia Pacific Iron Ore
6.3

 
6.1

 
19.2

 
19.1

Other
1.7

 
1.6

 
4.6

 
5.2

Total depreciation, depletion and amortization
$
26.8

 
$
35.6

 
$
88.9

 
$
95.9

 
 
 
 
 
 
 
 
Capital additions1:
 
 
 
 
 
 
 
U.S. Iron Ore
$
25.8

 
$
15.0

 
$
39.5

 
$
35.8

Asia Pacific Iron Ore
0.2

 
0.3

 
0.2

 
4.8

Other
0.4

 
2.4

 
4.8

 
6.0

Total capital additions
$
26.4

 
$
17.7

 
$
44.5

 
$
46.6

                                         
1    Includes capital lease additions and non-cash accruals. Refer to NOTE 17 - CASH FLOW INFORMATION.
A summary of assets by segment is as follows:
 
(In Millions)
 
September 30,
2016
 
December 31,
2015
Assets:
 
 
 
U.S. Iron Ore
$
1,429.0

 
$
1,476.4

Asia Pacific Iron Ore
137.7

 
202.5

Total segment assets
1,566.7

 
1,678.9

Corporate
206.2

 
441.7

Assets of Discontinued Operations

 
14.9

Total assets
$
1,772.9

 
$
2,135.5

INVENTORIES
Inventories
NOTE 3 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2016 and December 31, 2015:
 
(In Millions)
 
September 30, 2016
 
December 31, 2015
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
248.8

 
$
20.4

 
$
269.2

 
$
252.3

 
$
11.7

 
$
264.0

Asia Pacific Iron Ore
17.3

 
30.8

 
48.1

 
20.8

 
44.8

 
65.6

Total
$
266.1

 
$
51.2

 
$
317.3

 
$
273.1

 
$
56.5

 
$
329.6

PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of September 30, 2016 and December 31, 2015:
 
(In Millions)
 
September 30,
2016
 
December 31,
2015
Land rights and mineral rights
$
500.5

 
$
500.5

Office and information technology
63.6

 
71.0

Buildings
61.1

 
60.4

Mining equipment
598.7

 
594.0

Processing equipment
541.2

 
516.8

Electric power facilities
49.6

 
46.4

Land improvements
24.8

 
24.8

Asset retirement obligation
18.3

 
87.9

Other
28.4

 
28.2

Construction in-progress
37.9

 
40.3

 
1,924.1

 
1,970.3

Allowance for depreciation and depletion
(934.0
)
 
(911.3
)
 
$
990.1

 
$
1,059.0


We recorded depreciation and depletion expense of $25.6 million and $85.1 million in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2016, respectively. This compares with depreciation and depletion expense of $34.6 million and $92.8 million for the three and nine months ended September 30, 2015, respectively.
DEBT AND CREDIT FACILITIES
DEBT AND CREDIT FACILITIES
NOTE 5 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of September 30, 2016 and December 31, 2015:
($ in Millions)
 
September 30, 2016
 
Debt Instrument
 
Annual Effective Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Undiscounted Interest/(Unamortized Discounts)
 
Total Debt
 
$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
$
325.7

 
$
(1.2
)
 
$
(0.2
)
 
$
324.3

(1)
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
244.8

 
(0.7
)
 
(0.2
)
 
243.9

(2)
$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.5
)
 
(3.4
)
 
292.5

(3)
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
225.6

 
(0.7
)
 
(0.5
)
 
224.4

(4)
$500 Million 3.95% 2018 Senior Notes
 
6.15%
 

 

 

 

(5)
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
540.0

 
(8.6
)
 
(27.4
)
 
504.0

 
$218.5 Million 8.00% 2020 1.5 Lien Notes
 
N/A
 
218.5

 

 
70.0

 
288.5

(6)
$544.2 Million 7.75% 2020 Second Lien Notes
 
15.55%
 
430.1

 
(6.2
)
 
(90.1
)
 
333.8

(7)
$550 Million ABL Facility:
 
 
 
 
 
 
 
 
 
 
 
ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 

(8)
Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
2.0

 
Total debt
 
 
 
$
2,833.1

 
 
 
 
 
$
2,213.4

 
Less: Current portion
 
 
 
 
 
 
 
 
 
17.5

 
Long-term debt
 
 
 
 
 
 
 
 
 
$
2,195.9

 
($ in Millions)
 
December 31, 2015
 
Debt Instrument
 
Annual Effective Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
 
$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
$
412.5

 
$
(1.7
)
 
$
(0.2
)
 
$
410.6

 
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
306.7

 
(1.1
)
 
(0.4
)
 
305.2

 
$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
492.8

 
(4.3
)
 
(5.8
)
 
482.7

 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
290.8

 
(1.1
)
 
(0.8
)
 
288.9

 
$500 Million 3.95% 2018 Senior Notes
 
6.30%
 
311.2

 
(0.9
)
 
(1.2
)
 
309.1

 
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
540.0

 
(10.5
)
 
(32.1
)
 
497.4

 
$544.2 Million 7.75% 2020 Second Lien Notes
 
15.55%
 
544.2

 
(9.5
)
 
(131.5
)
 
403.2

 
$550 Million ABL Facility:
 
 
 
 
 
 
 
 
 
 
 
ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 

(9)
Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
2.3

 
Total debt
 
 
 
$
3,448.2

 
 
 
 
 
$
2,699.4

 

(1)
On March 2, 2016, we exchanged as part of an exchange offer $76.3 million of the 4.875 percent senior notes for $30.5 million of the 8.00 percent 1.5 lien notes that were recorded at a carrying value of $41.5 million, including undiscounted interest payments as of the transaction date. Additionally, during the third quarter of 2016 we entered into a debt for equity exchange; see NOTE 15 - CAPITAL STOCK for further discussion of this transaction.
(2)
On March 2, 2016, we exchanged as part of an exchange offer $44.7 million of the 4.80 percent senior notes for $17.9 million of the 8.00 percent 1.5 lien notes that were recorded at a carrying value of $24.4 million, including undiscounted interest payments as of the transaction date. Additionally, during the second and third quarters of 2016 we entered into a debt for equity exchange; see NOTE 15 - CAPITAL STOCK for further discussion of this transaction.
(3)
On March 2, 2016, we exchanged as part of an exchange offer $194.4 million of the 6.25 percent senior notes for $75.8 million of the 8.00 percent 1.5 lien notes that were recorded at a carrying value of $103.0 million, including undiscounted interest payments as of the transaction date.
(4)
On March 2, 2016, we exchanged as part of an exchange offer $65.1 million of the 5.90 percent senior notes for $26.0 million of the 8.00 percent 1.5 lien notes that were recorded at a carrying value of $35.4 million, including undiscounted interest payments as of the transaction date.
(5)
See the section entitled "$500 million 3.95 percent 2018 Senior Notes - Full Redemption" below for further discussion related to this instrument. On March 2, 2016, we exchanged as part of an exchange offer $17.6 million of the 3.95 percent senior notes for $11.4 million of the 8.00 percent 1.5 lien notes that were recorded at a carrying value of $15.5 million, including undiscounted interest payments as of the transaction date. Additionally, during the first quarter of 2016, we entered into a debt for equity exchange; see NOTE 15 - CAPITAL STOCK for further discussion of this transaction.
(6)
See the section entitled "$218.5 million 8.00 percent 2020 Senior Secured 1.5 Lien Notes - 2016 Exchange Offers" below for further discussion related to this instrument. As of September 30, 2016, $17.5 million of the undiscounted interest is recorded as current and classified as Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
(7)
On March 2, 2016, we exchanged as part of an exchange offer $114.1 million of the 7.75 percent senior notes for $57.0 million of the 8.00 percent 1.5 lien notes that were recorded at a carrying value of $77.5 million, including undiscounted interest payments as of the transaction date.
(8)
As of September 30, 2016, no loans were drawn under the ABL Facility and we had total availability of $355.7 million as a result of borrowing base limitations. As of September 30, 2016, the principal amount of letter of credit obligations totaled $108.8 million, thereby further reducing available borrowing capacity on our ABL Facility to $246.9 million.
(9)
As of December 31, 2015, no loans were drawn under the ABL Facility and we had total availability of $366.0 million as a result of borrowing base limitations. As of December 31, 2015, the principal amount of letter of credit obligations totaled $186.3 million and commodity hedge obligations totaled $0.5 million, thereby further reducing available borrowing capacity on our ABL Facility to $179.2 million.
$500 million 3.95 percent 2018 Senior Notes - Full Redemption
On September 16, 2016, we redeemed in whole $283.6 million aggregate principal of the outstanding 3.95 percent senior notes due 2018 at a total redemption price of $301.0 million. As a result, we recorded a $19.9 million pre-tax loss on full retirement of long-term debt in the third quarter of 2016, which consisted of debt redemption premiums of $17.4 million and expenses of $2.5 million related to the write-off of unamortized debt issuance costs, unamortized bond discount and deferred losses on interest rate swaps. The loss was recorded against the Gain (Loss) on extinguishment/restructuring of debt in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2016.
$218.5 million 8.00 percent 2020 Senior Secured 1.5 Lien Notes - 2016 Exchange Offers
On March 2, 2016, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee and notes collateral agent, relating to our issuance of $218.5 million aggregate principal amount of 8.00 percent 1.5 Lien Senior Secured Notes due 2020 (the “1.5 Lien Notes”). The 1.5 Lien Notes were issued on March 2, 2016 in exchange offers for certain of our existing senior notes.
The 1.5 Lien Notes bear interest at a rate of 8.00 percent per annum. Interest on the 1.5 Lien Notes is payable semi-annually in arrears on March 31 and September 30 of each year, commencing on September 30, 2016. The 1.5 Lien Notes mature on September 30, 2020 and are secured senior obligations of the Company.
The 1.5 Lien Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of our material U.S. subsidiaries and are secured (subject in each case to certain exceptions and permitted liens) on (i) a junior first-priority basis by substantially all of our U.S. assets, other than the ABL collateral (the "Notes Collateral"), which secures the 8.25 percent senior first lien notes due 2020 (the "First Lien Notes") obligations on a senior first-priority basis, the 7.75 percent senior second lien notes due 2020 (the "Second Lien Notes") obligations on a second-priority basis and the ABL Facility obligations on a third-priority basis, and (ii) a junior second-priority basis by our ABL collateral, which secures our ABL obligations on a first-priority basis, the First Lien Notes obligations on a senior second-priority basis and the Second Lien Notes obligations on a third-priority basis.
The terms of the 1.5 Lien Notes are governed by the 1.5 Lien Notes indenture. The 1.5 Lien Notes indenture contains customary covenants that, among other things, limit our ability to incur certain secured indebtedness, create liens on principal property and the capital stock or debt of a subsidiary that owns a principal property, use proceeds of dispositions of collateral, enter into certain sale and leaseback transactions, merge or consolidate with another company and transfer or sell all or substantially all of our assets. Upon the occurrence of a “change of control triggering event,” as defined in the 1.5 Lien Notes indenture, we are required to offer to repurchase the 1.5 Lien Notes at 101 percent of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem any of the 1.5 Lien Notes beginning on September 30, 2017. The initial redemption price is 104 percent of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The redemption price will decline after September 30, 2017 and will be 100 percent of its principal amount, plus accrued interest, beginning on September 30, 2019. We may also redeem some or all of the 1.5 Lien Notes at any time and from time to time prior to September 30, 2017 at a price equal to 100 percent of the principal amount thereof plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time and from time to time on or prior to September 30, 2017, we may redeem in the aggregate up to 35 percent of the original aggregate principal amount of the 1.5 Lien Notes (calculated after giving effect to any issuance of additional 1.5 Lien Notes) with the net cash proceeds from certain equity offerings, at a redemption price of 108 percent, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least 65 percent of the original aggregate principal amount of the 1.5 Lien Notes (calculated after giving effect to any issuance of additional 1.5 Lien Notes) issued under the 1.5 Lien Notes indenture remain outstanding after each such redemption.
The 1.5 Lien Notes indenture contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other indebtedness, certain events of bankruptcy and insolvency and failure to pay certain judgments. An event of default under the 1.5 Lien Notes indenture will allow either the trustee or the holders of at least 25 percent in aggregate principal amount of the then-outstanding 1.5 Lien Notes issued under the 1.5 Lien Notes indenture to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the 1.5 Lien Notes.
We accounted for the 1.5 Lien Notes exchange as a TDR. For an exchange classified as TDR, if the future undiscounted cash flows of the newly issued debt are less than the net carrying value of the original debt, the carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount, a gain is recorded for the difference and no future interest expense is recorded. All future interest payments on the newly issued debt reduce the carrying value.  Accordingly, we recognized a gain of $174.3 million in the Gain (loss) on extinguishment/restructuring of debt in the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2016. As a result, our reported interest expense will be less than the contractual interest payments throughout the term of the 1.5 Lien Notes. Debt issuance costs incurred of $5.2 million related to the notes exchange were expensed and were included in the Gain (loss) on extinguishment/restructuring of debt in the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2016.
Letters of Credit
We issued standby letters of credit with certain financial institutions in order to support business obligations including, but not limited to, workers compensation and environmental obligations. As of September 30, 2016 and December 31, 2015, these letter of credit obligations totaled $108.8 million and $186.3 million, respectively.
Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings on the ABL Facility, based on the principal amounts outstanding at September 30, 2016:
 
(In Millions)
 
Maturities of Debt
2016 (October 1 - December 31)
$

2017

2018

2019

2020
1,659.0

2021
325.7

2022 and thereafter
298.4

Total maturities of debt
$
2,283.1

FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE MEASUREMENTS
NOTE 6 - FAIR VALUE MEASUREMENTS
We have various financial instruments that require fair value measurements classified as Level 1, Level 2 and Level 3 of the fair value hierarchy. The following discussion represents the assets and liabilities measured at fair value at September 30, 2016 and December 31, 2015.
There were no Level 1 financial assets as of September 30, 2016. Financial assets classified in Level 1 as of December 31, 2015, include money market funds of $30.0 million. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The derivative financial assets classified within Level 3 at September 30, 2016 and December 31, 2015 primarily relate to a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and adjust this provision to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot-rolled coil at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative assets and liabilities also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers at September 30, 2016 and December 31, 2015. These provisional pricing arrangements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the estimated final revenue at the date of sale and the estimated final revenue rate is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
Qualitative/Quantitative Information About Level 3 Fair Value Measurements
 
 
(In Millions)
Fair Value at September 30, 2016
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate per dry metric ton
(Weighted Average)
 
Provisional pricing arrangements
 
$
0.4

 
Other current assets
 
Market Approach
 
Management's
Estimate of 62% Fe
 
$56
 
$
2.7

 
Other current liabilities
 
 
 
Customer supply agreement
 
$
28.0

 
Other current assets
 
Market Approach
 
Hot-Rolled Coil Estimate
 
$430 - $530 ($470)

The significant unobservable input used in the fair value measurement of our provisional pricing arrangements is management’s estimate of 62 percent Fe fines spot price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable input used in the fair value measurement of our customer supply agreement is the future hot-rolled coil price that is estimated based on projections provided by the customer, current market data, analysts' projections and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
We recognize any transfers between levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended September 30, 2016 or 2015. The following tables represent a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2016 and 2015.
 
(In Millions)
 
Derivative Assets (Level 3)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
25.8

 
$
7.7

 
$
7.8

 
$
63.2

Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
14.6

 
15.0

 
62.6

 
28.1

Settlements
(12.0
)
 
(12.3
)
 
(42.0
)
 
(80.9
)
Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Ending balance - September 30
$
28.4

 
$
10.4

 
$
28.4

 
$
10.4

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
8.2

 
$
12.2

 
$
24.7

 
$
22.7


 
(In Millions)
 
Derivative Liabilities (Level 3)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
(2.6
)
 
$
(8.0
)
 
$
(3.4
)
 
$
(9.5
)
Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
(2.9
)
 
(13.7
)
 
(12.8
)
 
(45.4
)
Settlements
2.8

 
20.9

 
13.5

 
54.1

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Ending balance - September 30
$
(2.7
)
 
$
(0.8
)
 
$
(2.7
)
 
$
(0.8
)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
(2.7
)
 
$
(0.5
)
 
$
(2.7
)
 
$
(0.8
)

Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2016 and 2015.
The carrying amount for certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Accrued expenses) approximates fair value and, therefore, has been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at September 30, 2016 and December 31, 2015 were as follows:
 
 
 
(In Millions)
 
 
 
September 30, 2016
 
December 31, 2015
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Senior Notes—$700 million
Level 1
 
$
324.3

 
$
260.6

 
$
410.6

 
$
69.4

Senior Notes—$1.3 billion
Level 1
 
536.4

 
400.7

 
787.9

 
137.4

Senior Notes—$400 million
Level 1
 
224.4

 
194.9

 
288.9

 
52.8

Senior Notes—$500 million
Level 1
 

 

 
309.1

 
87.1

Senior First Lien Notes —$540 million
Level 1
 
504.0

 
573.2

 
497.4

 
414.5

Senior 1.5 Lien Notes —$218.5 million
Level 2
 
288.5

 
210.9

 

 

Senior Second Lien Notes —$544.2 million
Level 1
 
333.8

 
402.8

 
403.2

 
134.7

ABL Facility
Level 2
 

 

 

 

Fair value adjustment to interest rate hedge
Level 2
 
2.0

 
2.0

 
2.3

 
2.3

Total long-term debt
 
 
$
2,213.4

 
$
2,045.1

 
$
2,699.4

 
$
898.2


The fair value of long-term debt was determined using quoted market prices based upon current borrowing rates. The ABL Facility is variable rate interest and approximates fair value. See NOTE 5 - DEBT AND CREDIT FACILITIES for further information.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and OPEB plans, primarily consisting of retiree healthcare benefits, to most employees in the United States as part of a total compensation and benefits program. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations. The defined benefit pension plans largely are noncontributory and benefits generally are based on employees’ years of service and average earnings for a defined period prior to retirement or a minimum formula.
Historically, we selected a single-weighted discount rate to be used for all pension and OPEB plans based on the 10th to 90th percentile results. Beginning January 1, 2016, we elected to select a separate discount rate for each plan, based on 40th to 90th percentile results. The discount rates are determined by matching the projected cash flows used to determine the projected benefit obligation and accumulated postretirement benefit obligation to a projected yield curve of 688 Aa graded bonds. These bonds are either noncallable or callable with make-whole provisions. We made this change in order to more precisely measure our service and interest costs, by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates.  As this change is treated as a change in estimate, the impact is reflected in the first nine months of the current fiscal year and prospectively, and historical measurements of service and interest cost were not affected.
This change in estimate is anticipated to reduce our current year annual net periodic benefit expense by approximately $8.2 million for our pension plans and by approximately $1.8 million for our OPEB plans. Accordingly, for the three and nine months ended September 30, 2016, total service cost and interest cost for the defined benefit pension plans were $12.0 million and $35.9 million, respectively, a reduction of $1.9 million and $6.1 million, respectively, as a result of implementing the new approach.
For the three and nine months ended September 30, 2016, total service cost and interest cost for the OPEB plans were $2.7 million and $8.1 million, respectively, a reduction of $0.2 million and $1.4 million, respectively, as a result of implementing the new approach.
The following are the components of defined benefit pension and OPEB expense for the three and nine months ended September 30, 2016 and 2015:
Defined Benefit Pension Expense
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
4.2

 
$
3.1

 
$
13.2

 
$
15.7

Interest cost
7.8

 
9.0

 
22.7

 
27.9

Expected return on plan assets
(13.6
)
 
(14.5
)
 
(41.0
)
 
(44.4
)
Amortization:
 
 
 
 
 
 
 
Prior service costs
0.5

 
0.5

 
1.6

 
1.7

Net actuarial loss
5.4

 
4.5

 
15.9

 
15.3

    Curtailments/settlements

 
$
(0.1
)
 

 
0.2

Net periodic benefit cost to continuing operations
$
4.3

 
$
2.5

 
$
12.4

 
$
16.4


Other Postretirement Benefits Expense
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
0.4

 
$
(1.6
)
 
$
1.3

 
$
1.4

Interest cost
2.3

 
2.1

 
6.8

 
8.6

Expected return on plan assets
(4.3
)
 
(4.5
)
 
(12.8
)
 
(13.7
)
Amortization:
 
 
 
 
 
 
 
Prior service credits
(0.9
)
 
0.6

 
(2.8
)
 
(1.2
)
Net actuarial loss
1.7

 
1.1

 
4.5

 
4.2

Net periodic benefit credit to continuing operations
$
(0.8
)
 
$
(2.3
)
 
$
(3.0
)
 
$
(0.7
)

We made pension contributions of $0.5 million and $0.7 million for the three and nine months ended September 30, 2016, respectively, compared to pension contributions of $23.9 million and $34.1 million for the three and nine months ended September 30, 2015, respectively. OPEB contributions are typically made on an annual basis in the first quarter of each year, but due to plan funding requirements being met, no OPEB contributions were required or made for the three and nine months ended September 30, 2016 and September 30, 2015.
STOCK COMPENSATION PLANS
Stock Compensation Plans
NOTE 8 - STOCK COMPENSATION PLANS
Employees’ Plans
During the first quarter of 2016, the Compensation and Organization Committee of the Board of Directors approved grants under the 2015 Equity Plan of 3.4 million restricted share units to certain officers and employees with a grant date of February 23, 2016. The restricted share units granted under this award are subject to continued employment through the vesting date of December 31, 2018.
INCOME TAXES
Income Taxes
NOTE 9 - INCOME TAXES
Our 2016 estimated annual effective tax rate before discrete items is approximately 0.4 percent. The annual effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to deductions for percentage depletion in excess of cost depletion related to U.S. operations, a deduction for worthless stock and the placement of valuation allowance from operations in the current year. The 2015 estimated annual effective tax rate before discrete items at September 30, 2015 was 2.1 percent.
For the three and nine months ended September 30, 2016, we recorded discrete items that resulted in an income tax benefit of $2.9 million and $2.2 million, respectively. These items relate primarily to prior year adjustments due to a change in estimate of the 2015 net operating loss and corresponding reversal of valuation allowance and quarterly interest accrued on reserves for uncertain tax positions. For the three and nine months ended September 30, 2015, there were discrete items that resulted in an income tax benefit of $4.5 million and income tax expense of $162.6 million, respectively. These items were related primarily to the recording of valuation allowances against existing deferred tax assets as a result of the determination that these would no longer be realizable.
LEASE OBLIGATIONS
LEASE OBLIGATIONS
NOTE 10 - LEASE OBLIGATIONS
We lease certain mining, production and other equipment under operating and capital leases. The capital leases are for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the terms. Our operating lease expense was $2.2 million and $6.8 million for the three and nine months ended September 30, 2016, respectively, compared with $3.2 million and $9.5 million, respectively, for the same periods in 2015.
Future minimum payments under capital leases and non-cancellable operating leases at September 30, 2016 are as follows:
 
(In Millions)
 
Capital Leases
 
Operating Leases
2016 (October 1 - December 31)
$
6.4

 
$
2.3

2017
23.4

 
8.9

2018
18.9

 
7.6

2019
10.5

 
4.9

2020
9.4

 
4.9

2021 and thereafter
9.4

 
5.0

Total minimum lease payments
$
78.0

 
$
33.6

Amounts representing interest
14.2

 
 
Present value of net minimum lease payments
$
63.8

(1) 
 
(1) 
The total is comprised of $18.3 million and $45.5 million classified as Other current liabilities and Other liabilities, respectively, in the Statements of Unaudited Condensed Consolidated Financial Position at September 30, 2016.
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $222.8 million and $234.0 million at September 30, 2016 and December 31, 2015, respectively. The following is a summary of the obligations as of September 30, 2016 and December 31, 2015:
 
(In Millions)
 
September 30,
2016
 
December 31,
2015
Environmental
$
3.0

 
$
3.6

Mine closure
 
 
 
LTVSMC
25.0

 
24.1

Operating mines:
 
 
 
U.S. Iron Ore
176.8

 
189.9

Asia Pacific Iron Ore
18.0

 
16.4

Total mine closure
219.8

 
230.4

Total environmental and mine closure obligations
222.8

 
234.0

Less current portion
2.6

 
2.8

Long term environmental and mine closure obligations
$
220.2

 
$
231.2


Mine Closure
The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. The accretion of the liability and amortization of the related asset is recognized over the estimated mine lives for each location.
The following represents a rollforward of our asset retirement obligation liability related to our active mining locations for the nine months ended September 30, 2016 and for the year ended December 31, 2015:
 
(In Millions)
 
September 30,
2016
 
December 31,
2015
Asset retirement obligation at beginning of period
$
206.3

 
$
142.4

Accretion expense
8.4

 
6.5

Exchange rate changes
0.9

 
(1.1
)
Revision in estimated cash flows
(20.8
)
 
58.5

Asset retirement obligation at end of period
$
194.8

 
$
206.3


The revisions in the estimated cash flows recorded during the nine months ended September 30, 2016 relate primarily to revisions of the timing of the estimated cash flows related to one of our U.S. mines. For the year ended December 31, 2015, the revisions in estimated cash flows recorded during the year related primarily to revisions in the timing of the estimated cash flows and the technology associated with required storm water management systems expected to be implemented subsequent to the indefinite idling of the Empire mine.
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The carrying amount of goodwill for the nine months ended September 30, 2016 and the year ended December 31, 2015 was $2.0 million and related to our U.S. Iron Ore operating segment.
Other Intangible Assets and Liabilities
The following table is a summary of intangible assets and liabilities as of September 30, 2016 and December 31, 2015:
 
 
 
(In Millions)
 
 
 
September 30, 2016
 
December 31, 2015
 
Classification
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permits
Other non-current assets
 
$
78.7

 
$
(23.8
)
 
$
54.9

 
$
78.4

 
$
(20.2
)
 
$
58.2

Total intangible assets
 
 
$
78.7

 
$
(23.8
)
 
$
54.9

 
$
78.4

 
$
(20.2
)
 
$
58.2

Below-market sales contracts
Other current liabilities
 
$
(23.1
)
 
$
15.4

 
$
(7.7
)
 
$
(23.1
)
 
$

 
$
(23.1
)
Below-market sales contracts
Other liabilities
 
(205.8
)
 
205.8

 

 
(205.8
)
 
205.8

 

Total below-market sales contracts
 
 
$
(228.9
)
 
$
221.2

 
$
(7.7
)
 
$
(228.9
)
 
$
205.8

 
$
(23.1
)

Amortization expense relating to intangible assets was $1.2 million and $3.8 million for the three and nine months ended September 30, 2016, respectively, and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. Amortization expense relating to intangible assets was $0.9 million and $3.1 million, respectively, for the comparable periods in 2015. The estimated amortization expense relating to intangible assets for the remainder of this year and each of the five succeeding years is as follows:

(In Millions)

Amount
Year Ending December 31,

2016 (remaining three months)
$
1.0

2017
4.2

2018
4.2

2019
2.5

2020
2.5

2021
2.5

Total
$
16.9

The below-market sales contract is classified as a liability and recognized over the term of the underlying contract, which expires December 31, 2016. For the three and nine months ended September 30, 2016 and September 30, 2015, we recognized $7.7 million and $15.4 million, respectively, in Product revenues related to the below-market sales contract. The remaining $7.7 million is estimated to be recognized in Product revenues during the remainder of 2016.
DERIVATIVE INSTRUMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 13 - DERIVATIVE INSTRUMENTS
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2016 and December 31, 2015:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
Derivative Instrument
Balance Sheet Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Customer supply agreement
Other current assets
 
28.0

 
Other current assets
 
5.8

 
 
 

 
 
 

Provisional pricing arrangements
Other current assets
 
0.4

 
Other current assets
 
2.0

 
Other current liabilities
 
2.7

 
Other current liabilities
 
3.4

Commodity contracts
 
 

 
 
 

 
 
 

 
Other current liabilities
 
0.6

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
28.4

 
 
 
$
7.8

 
 
 
$
2.7

 
 
 
$
4.0


Derivatives Not Designated as Hedging Instruments
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors. The base price is the primary component of the purchase price for each contract. The indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based upon changes in specified price indices, including those for industrial commodities, energy and cold rolled steel and changes in the Platts IODEX. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimated the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments. Certain of our term supply agreements contain price collars, which typically limit the percentage increase or decrease in prices for our products during any given year.
A certain supply agreement with one U.S. Iron Ore customer provides for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled.
We recognized a $7.1 million and $26.8 million net gain in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2016, respectively, related to the supplemental payments. This compares with Product revenues of $11.6 million and $22.1 million for the comparable periods in 2015. Other current assets, representing the fair value of the pricing factors, were $28.0 million and $5.8 million in the September 30, 2016 and December 31, 2015 Statements of Unaudited Condensed Consolidated Financial Position, respectively.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore customer supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified period in time in the future, per the terms of the supply agreements. U.S. Iron Ore sales revenue primarily is recognized when cash is received.  For U.S. Iron Ore sales, the difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a freestanding derivative and must be accounted for separately once the provisional revenue has been recognized.  Asia Pacific Iron Ore sales revenue is initially recorded at the provisionally agreed-upon price with the pricing provision embedded in the receivable.  The pricing provision is an embedded derivative that must be bifurcated and accounted for separately from the receivable.  Subsequently, the derivative instruments for both U.S. Iron Ore and Asia Pacific Iron Ore are adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined. At September 30, 2016 and December 31, 2015, we recorded $0.4 million with our U.S. Iron Ore customers and $2.0 million with our Asia Pacific Iron Ore customers, respectively, as Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of the final revenue rate. At September 30, 2016 and December 31, 2015, we recorded $2.7 million with our Asia Pacific Iron Ore customers and $3.4 million with our U.S. Iron Ore and Asia Pacific Iron Ore customers, respectively, as Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of the final revenue rate. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final revenue rate based on the price calculations established in the supply agreements. As a result, we recognized a $4.5 million and $22.9 million net increase in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2016, respectively, related to these arrangements. This compares with a net $7.6 million increase and a net $0.2 million decrease in Product revenues for the comparable periods in 2015.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2016 and 2015:
(In Millions)
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in
Income on Derivative
Amount of Gain (Loss) Recognized in Income on Derivative
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Customer supply agreement
Product revenues
7.1

 
11.6

 
26.8

 
22.1

Provisional pricing arrangements
Product revenues
4.5

 
7.6

 
22.9

 
(0.2
)
Foreign exchange contracts
Other non-operating income (expense)

 
(1.1
)
 

 
(3.6
)
Commodity contracts
Cost of goods sold and operating expenses

 

 

 
(3.4
)
Foreign exchange contracts
Product revenues

 
(2.1
)