CLEVELAND-CLIFFS INC., 10-Q filed on 10/23/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 20, 2017
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
CLEVELAND-CLIFFS 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, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
296,510,023 
Trading Symbol
clf 
 
Statements Of Condensed Consolidated Financial Position (USD $)
In Millions, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 260.8 
$ 323.4 
Accounts receivable, net
63.9 
128.7 
Inventories
207.7 
178.4 
Supplies and other inventories
92.5 
91.4 
Derivative Asset, Current
89.5 
33.1 
Loans to and accounts receivable from the Canadian Entities
51.9 
48.6 
Other current assets
24.8 
21.0 
TOTAL CURRENT ASSETS
791.1 
824.6 
PROPERTY, PLANT AND EQUIPMENT, NET
993.8 
984.4 
OTHER ASSETS
 
 
OTHER NON-CURRENT ASSETS
138.4 
114.9 
TOTAL ASSETS
1,923.3 
1,923.9 
CURRENT LIABILITIES
 
 
Accounts payable
102.0 
107.6 
Accrued expenses
109.4 
123.3 
Interest Payable, Current
21.7 
40.2 
Contingent claims
50.0 
Derivative Liability, Current
9.3 
0.5 
Other current liabilities
125.1 
119.5 
TOTAL CURRENT LIABILITIES
417.5 
391.1 
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
254.3 
280.5 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
205.4 
193.9 
LONG-TERM DEBT
1,689.4 
2,175.1 
OTHER LIABILITIES
189.8 
213.8 
TOTAL LIABILITIES
2,756.4 
3,254.4 
COMMITMENTS AND CONTINGENCIES (REFER TO NOTE 18)
   
   
CLIFFS SHAREHOLDERS' DEFICIT
 
 
Common Shares - par value $0.125 per share, Authorized - 600,000,000 shares (2016 - 400,000,000 shares); Issued - 301,886,794 shares (2016 - 238,636,794 shares); Outstanding - 296,503,284 shares (2016 - 233,074,091 shares)
37.7 
29.8 
Capital in excess of par value of shares
3,913.2 
3,347.0 
Retained deficit
(4,517.2)
(4,574.3)
Cost of 5,383,510 common shares in treasury (2016 - 5,562,703 shares)
(236.2)
(245.5)
Accumulated other comprehensive loss
(30.8)
(21.3)
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
(833.3)
(1,464.3)
NONCONTROLLING INTEREST
0.2 
133.8 
TOTAL DEFICIT
(833.1)
(1,330.5)
TOTAL LIABILITIES AND DEFICIT
$ 1,923.3 
$ 1,923.9 
Statements Of Condensed Consolidated Financial Position (Parenthetical) (USD $)
Sep. 30, 2017
Dec. 31, 2016
Class of Stock [Line Items]
 
 
Preferred stock, par value
$ 0 
$ 0.000 
Common Stock, Par or Stated Value Per Share
$ 0.125 
$ 0.125 
Common shares, authorized (in shares)
600,000,000 
400,000,000 
Common shares, issued (in shares)
301,886,794 
238,636,794 
Common shares, outstanding
296,503,284 
233,074,091 
Common shares in treasury
5,383,510 
5,562,703 
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 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, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
Product
$ 627.5 
$ 508.6 
$ 1,552.3 
$ 1,237.0 
Freight and venture partners' cost reimbursements
70.9 
44.7 
177.0 
118.0 
TOTAL REVENUES
698.4 
553.3 
1,729.3 
1,355.0 
COST OF GOODS SOLD AND OPERATING EXPENSES
(538.2)
(467.9)
(1,328.3)
(1,147.2)
SALES MARGIN
160.2 
85.4 
401.0 
207.8 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
 
Selling, general and administrative expenses
(24.6)
(31.1)
(77.8)
(81.8)
Miscellaneous - net
(5.9)
(19.6)
3.0 
(16.9)
Other operating expense
(30.5)
(50.7)
(74.8)
(98.7)
OPERATING INCOME
129.7 
34.7 
326.2 
109.1 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest expense, net
(28.9)
(48.7)
(103.1)
(156.2)
Gain (loss) on extinguishment/restructuring of debt
(88.6)
(18.3)
(165.4)
164.1 
Other non-operating income
0.8 
0.1 
2.3 
0.4 
TOTAL OTHER INCOME (EXPENSE)
(116.7)
(66.9)
(266.2)
8.3 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
13.0 
(32.2)
60.0 
117.4 
INCOME TAX BENEFIT
7.6 
7.1 
6.8 
1.7 
INCOME (LOSS) FROM CONTINUING OPERATIONS
20.6 
(25.1)
66.8 
119.1 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
32.3 
(2.7)
(13.6)
(0.6)
NET INCOME (LOSS)
52.9 
(27.8)
53.2 
118.5 
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
0.5 
2.0 
3.9 
(23.5)
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 53.4 
$ (25.8)
$ 57.1 
$ 95.0 
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
 
Continuing operations (in dollars per share)
$ 0.07 
$ (0.11)
$ 0.25 
$ 0.51 
Discontinued operations (in dollars per share)
$ 0.11 
$ (0.01)
$ (0.05)
$ 0.00 
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Basic (in dollars per share)
$ 0.18 
$ (0.12)
$ 0.20 
$ 0.51 
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
 
Continuing operations (in dollars per share)
$ 0.07 
$ (0.11)
$ 0.24 
$ 0.51 
Discontinued operations (in dollars per share)
$ 0.11 
$ (0.01)
$ (0.05)
$ 0.00 
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Diluted (in dollars per share)
$ 0.18 
$ (0.12)
$ 0.19 
$ 0.51 
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
Basic
296.1 
206.3 
285.8 
186.5 
Diluted
301.1 
206.3 
290.5 
188.5 
Statements Of Condensed Consolidated Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 53.4 
$ (25.8)
$ 57.1 
$ 95.0 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Changes in pension and other post-retirement benefits, net of tax
7.5 
7.1 
18.9 
19.0 
Unrealized net gain (loss) on foreign currency translation
0.5 
0.9 
(13.6)
2.6 
Unrealized net gain (loss) on derivative financial instruments, net of tax
0.7 
(2.6)
OTHER COMPREHENSIVE INCOME
8.0 
8.7 
5.3 
19.0 
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Noncontrolling Interest
5.7 
0.9 
1.1 
2.2 
Other comprehensive income (loss)
$ 55.7 
$ (18.0)
$ 61.3 
$ 111.8 
Statements Of Condensed Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
OPERATING ACTIVITIES
 
 
NET INCOME (LOSS)
$ 53.2 
$ 118.5 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
Depreciation, depletion and amortization
66.3 
88.9 
(Gain) loss on extinguishment/restructuring of debt
165.4 
(164.1)
(Gain) loss on deconsolidation, net of cash deconsolidated
16.3 
(3.2)
Unrealized Gain (Loss) on Derivatives and Commodity Contracts
(47.5)
(22.6)
Other
19.0 
31.6 
Changes in operating assets and liabilities:
 
 
Receivables and other assets
68.9 
137.5 
Inventories
(26.1)
21.6 
Payables, accrued expenses and other liabilities
(108.8)
(136.1)
Net cash provided by operating activities
206.7 
72.1 
INVESTING ACTIVITIES
 
 
Purchase of property, plant and equipment
(78.9)
(45.8)
Other investing activities
(5.5)
6.3 
Net cash used by investing activities
(84.4)
(39.5)
FINANCING ACTIVITIES
 
 
Payments for Repurchase of Redeemable Noncontrolling Interest
(105.0)
Proceeds from issuance of senior notes
1,057.8 
Debt issuance costs
(12.0)
(5.2)
Net proceeds from issuance of common shares
661.3 
287.6 
Repurchase of debt
(1,720.7)
(301.0)
Distributions of partnership equity
(53.0)
(52.5)
Repayment of equipment loans
(95.6)
Borrowings under credit facilities
105.0 
Repayment under credit facilities
(105.0)
Other financing activities
(17.0)
(19.3)
Net cash used by financing activities
(188.6)
(186.0)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
3.7 
0.4 
DECREASE IN CASH AND CASH EQUIVALENTS
(62.6)
(153.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
323.4 
285.2 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 260.8 
$ 132.2 
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, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017 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, 2016.
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 subsidiaries, including the following operations as of September 30, 2017:
Name
 
Location
 
Ownership Interest
 
Operation
 
Status of Operations
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
Tilden1
 
Michigan
 
100.0%
 
Iron Ore
 
Active
Empire1
 
Michigan
 
100.0%
 
Iron Ore
 
Indefinitely Idled
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
 
Active
 
 
 
 
 
 
 
 
 
1 During the third quarter of 2017, our ownership interest in Tilden and Empire changed. Refer to the Noncontrolling Interests section below for additional information.

Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of September 30, 2017 and December 31, 2016, our investment in Hibbing was $6.1 million and $8.7 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Noncontrolling Interests
During the third quarter of 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the noncontrolling interest net assets for $132.7 million to ArcelorMittal, in exchange for its interest in Empire. The net assets were agreed to be distributed in three installments of approximately $44.2 million, the first of which was paid upon the execution of the agreement and the remaining distributions are due in August 2018 and August 2019. Upon payment of the first installment, we assumed ArcelorMittal's 21% interest and have reflected this ownership percentage change in our unaudited condensed consolidated financial statements as of and for the period ended September 30, 2017. We accounted for the increase in ownership as an equity transaction, which resulted in a $16.0 million decrease in equity attributable to Cliffs' shareholders and a $116.7 million decrease in Noncontrolling interest.
During the third quarter of 2017, we also acquired the remaining 15% equity interest in Tilden owned by U.S. Steel for $105.0 million. With the closing of this transaction, we now have 100% ownership of the mine. We accounted for the increase in ownership as an equity transaction, which resulted in an $89.1 million decrease in equity attributable to Cliffs' shareholders and a $15.9 million decrease in Noncontrolling interest.
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 our Australian 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. 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, including short-term intercompany loans, 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.
The following represents the transaction gains and losses resulting from remeasurement for the three and nine months ended September 30, 2017 and 2016:
 
 
(In Millions)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Remeasurement of short-term intercompany loans
 
$
0.1

 
$
0.2

 
$
16.7

 
$
0.5

Remeasurement of cash and cash equivalents
 
(1.1
)
 
(1.1
)
 
(2.8
)
 
0.3

Other remeasurement
 
(1.4
)
 
0.6

 
(2.7
)
 
(2.0
)
Net impact of transaction gains (losses) resulting from remeasurement
 
$
(2.4
)
 
$
(0.3
)
 
$
11.2

 
$
(1.2
)

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, 2016 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 August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  The new standard simplifies hedge accounting through changes to both designation and measurement requirements.  For hedges that qualify as highly effective, the new standard eliminates the requirement to separately measure and record hedge ineffectiveness resulting in better alignment between the presentation of the effects of the hedging instrument and the hedged item in the financial statements.  ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update.  We are currently assessing the impact this ASU will have on the consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires the service cost component of pension and other postretirement benefit expenses to be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of net benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The guidance is effective for fiscal years beginning after December 15, 2017. The adoption of ASU No. 2017-07 in the first quarter of 2018 will impact the Statements of Unaudited Condensed Consolidated Operations by changing our classification of the components of pension and OPEB costs; however, it will not impact our Net Income (Loss). The following represents the estimated impact from the adoption of ASU No. 2017-07 for the nine months ended September 30, 2017:
 
 
($ in Millions)
 
 
Nine Months Ended
September 30, 2017
 
 
 
 
Estimate
Financial Statement Line Impacted
 
As Reported
 
Adoption of ASU No. 2017-07
 
As Adjusted
Cost of goods sold and operating expenses
 
$
(1,328.3
)
 
$
1.3

 
$
(1,327.0
)
Selling, general and administrative expenses
 
$
(77.8
)
 
$
(5.8
)
 
$
(83.6
)
Miscellaneous - net
 
$
3.0

 
$
(1.2
)
 
$
1.8

Operating income
 
$
326.2

 
$
(5.7
)
 
$
320.5

Other non-operating income
 
$
2.3

 
$
5.7

 
$
8.0

Net Income (Loss)
 
$
53.2

 
$

 
$
53.2


In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. We plan to adopt the standard on its effective date of January 1, 2019. The new standard must be adopted using a modified retrospective approach and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently finalizing our implementation plan, compiling an inventory of existing leases and evaluating the effect the updated standard will have on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenues from Contracts with Customers. The new revenue guidance broadly replaces the revenue guidance provided throughout the Codification. The core principle of the revenue guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Reporting entities must prepare new disclosures providing qualitative and quantitative information on the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. New disclosures also include qualitative and quantitative information on significant judgments, changes in judgments, and contract acquisition assets. We plan to adopt the standard on its effective date of January 1, 2018 using the modified retrospective transition method. As of September 30, 2017, we have completed the evaluation of the new standard and the related review and assessment of substantially all existing contracts with our customers. We determined that revenue will generally be recognized upon delivery for our U.S. Iron Ore customers, which is earlier than under the current guidance. Current guidance requires us to recognize revenue when title transfers which is generally the point at which we receive payment. However, the total amount of revenue recognized during the year should remain substantially the same as under current GAAP. We do not anticipate any significant changes in the timing and pattern of revenue recognition for our Asia Pacific Iron Ore contracts. Based on our analysis to date, we anticipate the primary impact of the adoption on our consolidated financial statements will be the additional required disclosures around revenue recognition in the notes to the consolidated financial statements.
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 2017 or 2016.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well as a consolidated basis, based on EBITDA and Adjusted EBITDA. 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 are 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, 2017 and 2016, including a reconciliation of segment sales margin to Income 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,
 
2017
 
2016
 
2017
 
2016
Revenues from product sales and services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
596.7

 
85
%
 
$
428.3

 
77
%
 
$
1,354.2

 
78
%
 
$
975.5

 
72
%
Asia Pacific Iron Ore
101.7

 
15
%
 
125.0

 
23
%
 
375.1

 
22
%
 
379.5

 
28
%
Total revenues from product sales and services
$
698.4

 
100
%
 
$
553.3

 
100
%
 
$
1,729.3

 
100
%
 
$
1,355.0

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
157.2

 
 
 
$
66.5

 
 
 
$
349.8

 
 
 
$
149.7

 
 
Asia Pacific Iron Ore
3.0

 
 
 
18.9

 
 
 
51.2

 
 
 
58.1

 
 
Sales margin
160.2

 
 
 
85.4

 
 
 
401.0

 
 
 
207.8

 
 
Other operating expense
(30.5
)
 
 
 
(50.7
)
 
 
 
(74.8
)
 
 
 
(98.7
)
 
 
Other income (expense)
(116.7
)
 
 
 
(66.9
)
 
 
 
(266.2
)
 
 
 
8.3

 
 
Income (loss) from continuing operations before income taxes
$
13.0

 
 
 
$
(32.2
)
 
 
 
$
60.0

 
 
 
$
117.4

 
 
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net Income (Loss)
$
52.9

 
$
(27.8
)
 
$
53.2

 
$
118.5

Less:
 
 
 
 
 
 
 
Interest expense, net
(28.9
)
 
(48.7
)
 
(103.1
)
 
(156.2
)
Income tax benefit
7.6

 
7.1

 
6.8

 
1.7

Depreciation, depletion and amortization
(21.5
)
 
(26.8
)
 
(66.3
)
 
(88.9
)
EBITDA
$
95.7

 
$
40.6

 
$
215.8

 
$
361.9

Less:
 
 
 
 
 
 
 
Gain (loss) on extinguishment/restructuring of debt
$
(88.6
)
 
$
(18.3
)
 
$
(165.4
)
 
$
164.1

Foreign exchange remeasurement
(2.4
)
 
(0.3
)
 
11.2

 
(1.2
)
Impact of discontinued operations
32.3

 
(2.7
)
 
(13.6
)
 
(0.6
)
Severance and contractor termination costs

 

 

 
(0.1
)
Adjusted EBITDA
$
154.4

 
$
61.9

 
$
383.6

 
$
199.7

 
 
 
 
 
 
 
 
EBITDA
 
 
 
 
 
 
 
U.S. Iron Ore
$
168.9

 
$
61.1

 
$
381.8

 
$
196.6

Asia Pacific Iron Ore
2.3

 
21.2

 
54.9

 
69.6

Other
(75.5
)
 
(41.7
)
 
(220.9
)
 
95.7

Total EBITDA
$
95.7

 
$
40.6

 
$
215.8

 
$
361.9

 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
U.S. Iron Ore
$
174.2

 
$
65.3

 
$
399.8

 
$
208.6

Asia Pacific Iron Ore
4.9

 
23.7

 
61.7

 
73.2

Other
(24.7
)
 
(27.1
)
 
(77.9
)
 
(82.1
)
Total Adjusted EBITDA
$
154.4

 
$
61.9

 
$
383.6

 
$
199.7

 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
U.S. Iron Ore
$
16.5

 
$
18.8

 
$
49.6

 
$
65.1

Asia Pacific Iron Ore
3.3

 
6.3

 
11.3

 
19.2

Other
1.7

 
1.7

 
5.4

 
4.6

Total depreciation, depletion and amortization
$
21.5

 
$
26.8

 
$
66.3

 
$
88.9

 
 
 
 
 
 
 
 
Capital additions:
 
 
 
 
 
 
 
U.S. Iron Ore
$
19.2

 
$
25.8

 
$
70.9

 
$
39.5

Asia Pacific Iron Ore
0.8

 
0.2

 
1.6

 
0.2

Other
7.1

 
0.4

 
7.1

 
4.8

Total capital additions1
$
27.1

 
$
26.4

 
$
79.6

 
$
44.5

 
 
 
 
 
 
 
 
1 Includes cash paid for capital additions of $78.9 million and $45.8 million and an increase in non-cash accruals of $0.7 million and a decrease in non-cash accruals of $1.3 million for the nine months ended September 30, 2017 and 2016, respectively.

A summary of assets by segment is as follows:
 
(In Millions)
 
September 30,
2017
 
December 31,
2016
Assets:
 
 
 
U.S. Iron Ore
$
1,467.2

 
$
1,372.5

Asia Pacific Iron Ore
139.4

 
155.1

Total segment assets
1,606.6

 
1,527.6

Corporate
316.7

 
396.3

Total assets
$
1,923.3

 
$
1,923.9

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, 2017 and December 31, 2016:
 
(In Millions)
 
September 30, 2017
 
December 31, 2016
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in Process
 
Total
Inventory
U.S. Iron Ore
$
151.3

 
$
18.6

 
$
169.9

 
$
124.4

 
$
12.6

 
$
137.0

Asia Pacific Iron Ore
29.4

 
8.4

 
37.8

 
23.6

 
17.8

 
41.4

Total
$
180.7

 
$
27.0

 
$
207.7

 
$
148.0

 
$
30.4

 
$
178.4

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, 2017 and December 31, 2016:
 
(In Millions)
 
September 30,
2017
 
December 31,
2016
Land rights and mineral rights
$
500.7

 
$
500.5

Office and information technology
66.2

 
65.1

Buildings
80.0

 
67.9

Mining equipment
585.4

 
592.2

Processing equipment
607.9

 
552.0

Electric power facilities
57.0

 
49.4

Land improvements
23.7

 
23.5

Asset retirement obligation
19.6

 
19.8

Other
30.4

 
28.1

Construction in-progress
35.4

 
42.8

 
2,006.3

 
1,941.3

Allowance for depreciation and depletion
(1,012.5
)
 
(956.9
)
 
$
993.8

 
$
984.4


We recorded depreciation and depletion expense of $21.0 million and $64.8 million in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2017, respectively. This compares with depreciation and depletion expense of $25.6 million and $85.1 million for the three and nine months ended September 30, 2016, 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, 2017 and December 31, 2016:
(In Millions)
September 30, 2017
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Unsecured Notes
 
 
 
 
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
$
88.9

 
$
(0.2
)
 
$
(0.2
)
 
$
88.5

$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
122.4

 
(0.3
)
 
(0.1
)
 
122.0

$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
138.4

 
(0.3
)
 
(0.1
)
 
138.0

$1.075 Billion 5.75% 2025 Senior Notes
 
5.75%
 
1,075.0

 
(11.2
)
 
(17.0
)
 
1,046.8

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.4
)
 
(3.4
)
 
292.6

ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
1.5

Long-term debt
 
 
 
 
 
 
 
 
 
$
1,689.4

(In Millions)
December 31, 2016
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Undiscounted Interest/
(Unamortized Discounts)
 
Total Debt
Secured Notes
 
 
 
 
 
 
 
 
 
 
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
$
540.0

 
$
(8.0
)
 
$
(25.7
)
 
$
506.3

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

 

 
65.7

 
284.2

$544.2 Million 7.75% 2020 Second Lien Notes
 
15.55%
 
430.1

 
(5.8
)
 
(85.2
)
 
339.1

Unsecured Notes
 
 
 
 
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
225.6

 
(0.6
)
 
(0.5
)
 
224.5

$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
236.8

 
(0.7
)
 
(0.2
)
 
235.9

$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
309.4

 
(1.0
)
 
(0.2
)
 
308.2

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.5
)
 
(3.4
)
 
292.5

ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
1.9

Total debt
 
 
 


 
 
 
 
 
$
2,192.6

Less current portion
 
 
 
 
 
 
 
 
 
17.5

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,175.1


$1.075 Billion 5.75% 2025 Senior Notes - 2017 Offering
On February 27, 2017, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the issuance of $500 million aggregate principal amount of 5.75% Senior Notes due 2025. On August 7, 2017, we issued an additional $575 million aggregate principal amount of our 5.75% Senior Notes due 2025 (together referred to as the "5.75% Senior Notes"). The 5.75% Senior Notes were issued in private transactions exempt from the registration requirements of the Securities Act. Pursuant to the registration rights agreement executed as part of this offering, we agreed to file a registration statement with the SEC with respect to a registered offer to exchange the 5.75% Senior Notes for publicly registered notes within 365 days of the closing date, with all significant terms and conditions remaining the same.
The 5.75% Senior Notes bear interest at a rate of 5.75% per annum, which is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2017. The 5.75% Senior Notes mature on March 1, 2025.
The 5.75% Senior Notes are general unsecured senior obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness and rank senior in right of payment to all of our existing and future subordinated indebtedness. The 5.75% Senior Notes are effectively subordinated to our existing or future secured indebtedness to the extent of the value of the assets securing such indebtedness. The 5.75% Senior Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the 5.75% Senior Notes.
The terms of the 5.75% Senior Notes are governed by an indenture, which contains customary covenants that, among other things, limit our and our subsidiaries' ability to create liens on property that secure indebtedness, enter into sale and leaseback transactions and merge, consolidate or amalgamate with another company. Upon the occurrence of a “change of control triggering event,” as defined in the indenture, we are required to offer to repurchase the 5.75% Senior Notes at 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem the 5.75% Senior Notes, in whole or in part, on or after March 1, 2020, at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, and prior to March 1, 2020, at a redemption price equal to 100% of the principal amount thereof plus a “make-whole” premium set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. We may also redeem up to 35% of the aggregate principal amount of the 5.75% Senior Notes on or prior to March 1, 2020 at a redemption price equal to 105.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption with the net cash proceeds of one or more equity offerings.
The 5.75% Senior 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 indenture will allow either the trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding notes issued under the indenture to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the 5.75% Senior Notes. Debt issuance costs of $12.0 million were incurred related to the offering of the 5.75% Senior Notes, $11.2 million of which is included in Long-term debt in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2017.
Debt Extinguishment
The following is a summary of the debt extinguished during the nine months ended September 30, 2017 and the respective gain (loss) on extinguishment for the three and nine months ended September 30, 2017:
(In Millions)
 
 
 
 
Gain (Loss) on Extinguishment1
 
 
Debt Extinguished
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
Secured Notes
 
 
 
 
 
 
$540 Million 8.25% 2020 First Lien Notes
 
$
540.0

 
$
(88.6
)
 
$
(93.5
)
$218.5 Million 8.00% 2020 1.5 Lien Notes
 
218.5

 

 
45.1

$544.2 Million 7.75% 2020 Second Lien Notes
 
430.1

 

 
(104.5
)
Unsecured Notes
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
136.7

 

 
(7.8
)
$500 Million 4.80% 2020 Senior Notes
 
114.4

 

 
(1.9
)
$700 Million 4.875% 2021 Senior Notes
 
171.0

 

 
(2.8
)
 
 
$
1,610.7

 
$
(88.6
)
 
$
(165.4
)
 
 
 
 
 
 
 
1 This includes premiums paid related to the redemption of our notes of $62.4 million and $110.0 million for the three and nine months ended September 30, 2017, respectively.

Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings under the ABL Facility, based on the principal amounts outstanding at September 30, 2017:
 
(In Millions)
 
Maturities of Debt
2017 (October 1 - December 31)
$

2018

2019

2020
211.3

2021
138.4

2022

2023 and thereafter
1,373.4

Total maturities of debt
$
1,723.1


ABL Facility
As of September 30, 2017 and December 31, 2016, no loans were drawn under the ABL Facility and we had total availability of $254.2 million and $333.0 million, respectively, as a result of borrowing base limitations. As of September 30, 2017 and December 31, 2016, the principal amount of letter of credit obligations totaled $45.0 million and $106.0 million, respectively, to support business obligations primarily related to workers compensation and environmental obligations, thereby further reducing available borrowing capacity on our ABL Facility to $209.2 million and $227.0 million, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE MEASUREMENTS
NOTE 6 - FAIR VALUE MEASUREMENTS
The following represents the assets and liabilities of the Company measured at fair value at September 30, 2017 and December 31, 2016:
 
(In Millions)
 
September 30, 2017
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
40.0

 
$
37.0

 
$

 
$
77.0

Derivative assets

 

 
89.5

 
89.5

Total
$
40.0

 
$
37.0

 
$
89.5

 
$
166.5

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$

 
$
9.3

 
$
9.3

Total
$

 
$

 
$
9.3

 
$
9.3

 
(In Millions)
 
December 31, 2016
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
177.0

 
$

 
$

 
$
177.0

Derivative assets

 
1.5

 
31.6

 
33.1

Total
$
177.0

 
$
1.5

 
$
31.6

 
$
210.1

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$

 
$
0.5

 
$
0.5

Total
$

 
$

 
$
0.5

 
$
0.5


Financial assets classified in Level 1 as of September 30, 2017 and December 31, 2016 include money market funds of $40.0 million and $177.0 million, respectively. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable. Level 2 assets included $37.0 million of commercial paper at September 30, 2017 and $1.5 million of commodity hedge contracts at December 31, 2016.
The Level 3 assets include derivative assets that consist of freestanding derivative instruments related to certain supply agreements with one of our U.S Iron Ore customers and certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers.
The supply agreements included in our Level 3 assets/liabilities include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing or the average annual daily market price for hot-rolled coil steel at the time the product is consumed in the customer’s blast furnaces. We account for these provisions as derivative instruments at the time of sale and adjust these provisions 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 instruments are determined using a market approach with one supply agreement based on an estimate of the annual realized price of hot-rolled coil steel at the steelmaker’s facilities and the other supply agreement based on the estimate of the average annual daily market price for hot-rolled coil steel. Both estimates take into consideration current market conditions and nonperformance risk. We had assets of $84.8 million and $21.3 million at September 30, 2017 and December 31, 2016, respectively, related to supply agreements.
The provisional pricing arrangements included in our Level 3 assets/liabilities 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 at the measurement date 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. We had assets of $4.7 million and $10.3 million at September 30, 2017 and December 31, 2016, respectively, related to provisional pricing arrangements. In addition, we had liabilities of $9.3 million and $0.5 million related to provisional pricing arrangements at September 30, 2017 and December 31, 2016, respectively.
The following table illustrates information about quantitative inputs and assumptions for the assets and 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, 2017
 
Balance Sheet
Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate
(Weighted Average)
 
Provisional pricing arrangements
 
$
4.7

 
Derivative assets
 
Market Approach
 
Management's
Estimate of Platts 62% Price
per dry metric ton
 
$61 - $74
($73)
 
 
 
 
Market Hot-Rolled Coil Steel Estimate
per net ton
 
$580 - $660
($625)
Provisional pricing arrangements
 
$
9.3

 
Derivative liabilities
 
Market Approach
 
Management's
Estimate of Platts 62% Price
per dry metric ton
 
$61 - $74
($73)
Customer supply agreements
 
$
84.8

 
Derivative assets
 
Market Approach
 
Customer Hot-Rolled Steel Estimate
per net ton
 
$558 - $622
($565)
 
 
 
 
Market Hot-Rolled Coil Steel Estimate
per net ton
 
$580 - $660
($625)

The significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements are management’s estimates of Platts 62% Price based upon current market data, index pricing and the average annual daily steel market price for hot-rolled coil steel, each of which includes forward-looking estimates determined by management. Significant increases or decreases in these inputs would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable inputs used in the fair value measurement of our customer supply agreements are the customer's future hot-rolled coil steel price that is estimated based on projections provided by the customer, analysts' projections and estimates determined by management, and the average annual daily market price for hot-rolled coil steel, each of which include forward-looking estimates determined by management. Significant increases or decreases in these inputs 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, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2017 and 2016. 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, 2017 and 2016.
 
(In Millions)
 
Level 3 Assets
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
72.5

 
$
25.8

 
$
31.6

 
$
7.8

Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
60.6

 
14.6

 
156.0

 
62.6

Settlements
(43.6
)
 
(12.0
)
 
(98.1
)
 
(42.0
)
Ending balance - September 30
$
89.5

 
$
28.4

 
$
89.5

 
$
28.4

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
0.1

 
$
8.2

 
$
53.4

 
$
24.7


 
(In Millions)
 
Level 3 Liabilities
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
(20.9
)
 
$
(2.6
)
 
$
(0.5
)
 
$
(3.4
)
Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
(19.3
)
 
(2.9
)
 
(64.9
)
 
(12.8
)
Settlements
30.9

 
2.8

 
56.1

 
13.5

Ending balance - September 30
$
(9.3
)
 
$
(2.7
)
 
$
(9.3
)
 
$
(2.7
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
6.0

 
$
(2.7
)
 
$
(14.8
)
 
$
(2.7
)

Gains and losses from derivative assets and liabilities are included in earnings and are reported in Product revenues for the three and nine months ended September 30, 2017 and 2016.
The carrying amount of 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, 2017 and December 31, 2016 were as follows:
 
 
 
(In Millions)
 
 
 
September 30, 2017
 
December 31, 2016
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Secured Notes
 
 
 
 
 
 
 
 
 
First Senior Lien Notes —$540 million
Level 1
 
$

 
$

 
$
506.3

 
$
595.0

1.5 Senior Lien Notes —$218.5 million
Level 2
 

 

 
284.2

 
229.5

Second Senior Lien Notes —$544.2 million
Level 1
 

 

 
339.1

 
439.7

Unsecured Notes
 
 
 
 
 
 
 
 
 
Senior Notes—$1.075 billion
Level 1
 
1,046.8

 
1,032.0

 

 

Senior Notes—$400 million
Level 1
 
88.5

 
88.4

 
224.5

 
219.6

Senior Notes—$500 million
Level 1
 
122.0

 
116.9

 
235.9

 
221.1

Senior Notes—$700 million
Level 1
 
138.0

 
132.4

 
308.2

 
283.1

Senior Notes—$800 million
Level 1
 
292.6

 
249.0

 
292.5

 
234.7

ABL Facility
Level 2
 

 

 

 

Fair value adjustment to interest rate hedge
Level 2
 
1.5

 
1.5

 
1.9

 
1.9

Total long-term debt
 
 
$
1,689.4

 
$
1,620.2

 
$
2,192.6

 
$
2,224.6


The fair value of long-term debt was determined using quoted market prices based upon current borrowing rates.
Items Measured at Fair Value on a Non-Recurring Basis
The following tables present information about the financial assets and liabilities that were measured on a fair value basis at September 30, 2017 and December 31, 2016 for the Canadian Entities. The tables also indicate the fair value hierarchy of the valuation techniques used to determine such fair value.
 
 
(In Millions)
 
 
September 30, 2017
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Year-to-Date Gains
Assets:
 
 
 
 
 
 
 
 
 
 
Loans to and accounts receivables from the Canadian Entities
 
$

 
$

 
$
51.9

 
$
51.9

 
$
3.3

Liabilities:
 
 
 
 
 
 
 
 
 
 
Guarantees
 
$

 
$

 
$

 
$

 
$
31.4

    
 
 
(In Millions)
 
 
December 31, 2016
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Year-to-Date Gains (Losses)
Assets:
 
 
 
 
 
 
 
 
 
 
Loans to and accounts receivables from the Canadian Entities
 
$

 
$

 
$
48.6

 
$
48.6

 
$
(17.5
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
Guarantees
 
$

 
$

 
$
37.2

 
$
37.2

 
$
0.4


We determined the fair value and recoverability of our Canadian investments by comparing the estimated fair value of the remaining underlying assets of the Canadian Entities to remaining estimated liabilities. We recorded the Canadian denominated guarantees at book value, which best approximated fair value, and adjusted the carrying balance on a quarterly basis based on the change in foreign exchange rates.
We previously recorded liabilities of $37.2 million related to guarantees for certain environmental obligations of the Canadian Entities, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of December 31, 2016. During the three months ended September 30, 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings. As part of the transaction, we were required to fund the buyer's financial assurance shortfall of $7.7 million in order to complete the conveyance of the environmental remediation obligations to the buyer, which released us from our guarantees, and along with other current period activity, resulted in a net gain of $31.4 million included in Income (Loss) from Discontinued Operations, net of tax in the Statements of Unaudited Condensed Consolidated Operations.
To assess the fair value and recoverability of the accounts receivable from the Canadian Entities, we estimated the fair value of the underlying net assets of the Canadian Entities available for distribution to their creditors in relation to the estimated creditor claims and the priority of those claims. These underlying amounts are denominated primarily in Canadian dollars and are remeasured on a quarterly basis.
Our estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments made by the Canadian Entities. Our ultimate recovery is subject to the final liquidation value of the Canadian Entities. Further, the final liquidation value and ultimate recovery of the creditors of the Canadian Entities, including, if any, to Cliffs and various subsidiaries, may impact our estimates of liability exposure described previously.
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 a minimum formula or employees’ years of service and average earnings for a defined period prior to retirement.
The following are the components of defined benefit pension and OPEB costs and credits for the three and nine months ended September 30, 2017 and 2016:
Defined Benefit Pension Costs
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
3.4

 
$
4.2

 
$
12.9

 
$
13.2

Interest cost
7.9

 
7.8

 
22.9

 
22.7

Expected return on plan assets
(13.8
)
 
(13.6
)
 
(40.9
)
 
(41.0
)
Amortization:
 
 
 
 
 
 
 
Prior service costs
0.6

 
0.5

 
1.9

 
1.6

Net actuarial loss
6.1

 
5.4

 
16.7

 
15.9

Net periodic benefit cost
$
4.2

 
$
4.3

 
$
13.5

 
$
12.4


Other Postretirement Benefits Credits
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
0.3

 
$
0.4

 
$
1.3

 
$
1.3

Interest cost
1.9

 
2.3

 
6.2

 
6.8

Expected return on plan assets
(4.4
)
 
(4.3
)
 
(13.3
)
 
(12.8
)
Amortization:
 
 
 
 
 
 
 
Prior service credits
(0.8
)
 
(0.9
)
 
(2.3
)
 
(2.8
)
Net actuarial loss
0.9

 
1.7

 
3.4

 
4.5

Net periodic benefit credit
$
(2.1
)
 
$
(0.8
)
 
$
(4.7
)
 
$
(3.0
)

Based on funding requirements, we made pension contributions of $19.7 million and $22.0 million for the three and nine months ended September 30, 2017, respectively, compared to pension contributions of $0.5 million and $0.7 million for the three and nine months ended September 30, 2016, 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, 2017 and September 30, 2016.
STOCK COMPENSATION PLANS
Stock Compensation Plans
NOTE 8 - STOCK COMPENSATION PLANS
Employees’ Plans
On June 26, 2017, the Compensation and Organization Committee of the Board of Directors approved a grant under the A&R 2015 Equity Plan to the Chief Executive Officer for the performance period commencing June 1, 2017 and ending December 31, 2019. Shares granted under the awards consisted of 0.5 million restricted share units and 0.2 million performance shares.
On February 21, 2017, the Compensation and Organization Committee of the Board of Directors approved grants under the 2015 Equity Plan to certain officers and employees for the 2017 to 2019 performance period. Shares granted under the awards consisted of 0.6 million restricted share units and 0.6 million performance shares.
Restricted share units granted during 2017 are subject to continued employment, are retention based, will vest December 31, 2019, and are payable in common shares at a time determined by the Compensation and Organization Committee at its discretion.
Performance shares are subject to continued employment, and each performance share, if earned, entitles the holder to receive common shares within a range between a threshold and maximum number of our common shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Compensation and Organization Committee. The performance share grants vest over the performance period. The performance awards granted have a performance condition that is measured on the basis of relative TSR for the period of January 1, 2017 to December 31, 2019 and the period of June 1, 2017 to December 31, 2019, for the February 21, 2017 and the June 26, 2017 grants, respectively, and measured against the constituents of the S&P Metals and Mining ETF Index and the SPDR S&P Metals and Mining ETF Index, respectively, at the beginning of the relevant performance period. The final payout will vary from zero to 200% of the original grant.
Determination of Fair Value
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and our predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the plan agreements. We estimate the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds with a term commensurate with the remaining life of the performance period.
The following assumptions were utilized to estimate the fair value for the 2017 performance share grants:
Grant Date
 
Grant Date Market Price
 
Average Expected Term (Years)
 
Expected Volatility
 
Risk-Free Interest Rate
 
Dividend Yield
 
Fair Value
 
Fair Value (Percent of Grant Date Market Price)
February 21, 2017
 
$
11.67

 
2.86
 
92.1%
 
1.51%
 
—%
 
$
19.69

 
168.72%
June 26, 2017
 
$
6.64

 
2.51
 
92.8%
 
1.45%
 
—%
 
$
10.74

 
161.75%
INCOME TAXES
Income Taxes
NOTE 9 - INCOME TAXES
Our 2017 estimated annual effective tax rate before discrete items is approximately negative 1.7%. The annual effective tax rate differs from the U.S. statutory rate of 35% primarily due to the deductions for percentage depletion in excess of cost depletion related to U.S. operations and the reversal of valuation allowance from operations in the current year. The 2016 estimated annual effective tax rate before discrete items at September 30, 2016 was 0.4%.
For the three and nine months ended September 30, 2017, we recorded discrete items that resulted in an income tax benefit of $5.9 million and $5.8 million respectively. These items relate primarily to the monetization of unused AMT credits upon the filing of the 2016 U.S. federal income tax return and adjustments to reserves for uncertain tax positions. For the three and nine months ended September 30, 2016, there were discrete items that resulted in an income tax benefit of $2.9 million and $2.2 million, respectively. These items related 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.
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 $1.8 million and $5.3 million for the three and nine months ended September 30, 2017, respectively, compared with $2.2 million and $6.8 million for the comparable periods in 2016.
Future minimum payments under capital leases and non-cancellable operating leases at September 30, 2017 are as follows:
 
(In Millions)
 
Capital Leases
 
Operating Leases
2017 (October 1 - December 31)
$
6.1

 
$
1.8

2018
19.3

 
5.9

2019
10.7

 
2.9

2020
9.7

 
2.9

2021
9.0

 
3.0

2022 and thereafter
0.7

 

Total minimum lease payments
$
55.5

 
$
16.5

Amounts representing interest
9.0

 
 
Present value of net minimum lease payments1
$
46.5

 
 
 
 
 
 
1 The total is comprised of $17.0 million and $29.5 million classified as Other current liabilities and Other liabilities, respectively, in the Statements of Unaudited Condensed Consolidated Financial Position at September 30, 2017.
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 $216.2 million and $206.8 million at September 30, 2017 and December 31, 2016, respectively. The following is a summary of the obligations as of September 30, 2017 and December 31, 2016:
 
(In Millions)
 
September 30,
2017
 
December 31,
2016
Environmental
$
2.9

 
$
2.8

Mine closure
 
 
 
U.S. Iron Ore1
195.0

 
187.8

Asia Pacific Iron Ore
18.3

 
16.2

Total mine closure
213.3

 
204.0

Total environmental and mine closure obligations
216.2

 
206.8

Less current portion
10.8

 
12.9

Long-term environmental and mine closure obligations
$
205.4

 
$
193.9