Quarterly report pursuant to Section 13 or 15(d)

Fair Value Of Financial Instruments

v2.3.0.15
Fair Value Of Financial Instruments
9 Months Ended
Sep. 30, 2011
Fair Value Of Financial Instruments [Abstract]  
Fair Value Of Financial Instruments

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The following represents the assets and liabilities of the Company measured at fair value at September 30, 2011 and December 31, 2010:

 

We had no financial instruments measured at fair value that were in a liability position at December 31, 2010.

Financial assets classified in Level 1 at September 30, 2011 and December 31, 2010 include money market funds and available-for-sale marketable securities. The valuation of these instruments is determined using a market approach, taking into account current interest rates, creditworthiness, and liquidity risks in relation to current market conditions, and 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 for substantially the full term of the financial instrument. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At September 30, 2011 and December 31, 2010, such derivative financial instruments included our existing foreign currency exchange contracts. The fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk, and liquidity risks associated with current market conditions.

 

The Level 2 derivative assets at September 30, 2011 also consist of freestanding derivatives related to certain supply agreements with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. During the third quarter of 2011, we reached final pricing settlement with a majority of our U.S. Iron Ore customers. However, in some cases we are still in the process of revising the terms of our customer supply agreements to incorporate changes to historical pricing mechanisms and as a result, we have recorded certain shipments made during the first nine months of 2011 on a provisional basis until final settlement is reached. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once the product is shipped. The derivative instrument, which is settled and billed once final pricing settlement is reached, is marked to fair value as a revenue adjustment each reporting period. During the second quarter of 2011 and the third quarter of 2010, we revised the inputs used to determine the fair value of these derivatives to include 2011 published pricing indices and settlements realized by other companies in the industry. Prior to this change, the fair value was primarily determined based on significant unobservable inputs to develop the forward price expectation of the final price settlement for 2011. Based on these changes to the determination of the fair value, we transferred $20 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy during the second quarter of 2011. A similar revision to the inputs used to determine the fair value of these derivatives was made during the third quarter of 2010, and based on the changes we transferred $161.8 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy at that time. The derivative instrument was settled in the fourth quarter of 2010, upon settlement of the pricing provisions with some of our U.S. Iron Ore and Eastern Canadian Iron Ore customers, and is therefore not reflected in the Statement of Consolidated Financial Position at December 31, 2010. The fair value of our derivatives is determined using a market approach and takes into account current market conditions and other risks, including nonperformance risk.

The derivative financial assets classified within Level 3 at September 30, 2011 and December 31, 2010 include 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 mark this provision to fair value as a revenue adjustment 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 steel at the steelmaker's facilities, and takes into consideration current market conditions and nonperformance risk.

Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value. We had no financial assets or liabilities measured at fair value on a non-recurring basis at September 30, 2011 or December 31, 2010.

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 of the fair value hierarchy as of September 30, 2011. As noted above, there was a transfer from Level 3 to Level 2 during the second quarter of 2011 and the third quarter of 2010, as reflected in the table below. The following represents 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, 2011 and 2010.

 

     (In Millions)  
     Derivative Assets  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Beginning balance

     $ 64.0           $ 238.9           $ 45.6           $ 63.2     

Total gains

           

Included in earnings

     53.8           25.1           144.9           824.9     

Included in other comprehensive income

     -             -             -             -       

Settlements

     (50.0)          (56.4)          (102.7)          (680.5)    

Transfers out of Level 3

     -             (161.8)          (20.0)          (161.8)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance - September 30

     $ 67.8           $ 45.8           $ 67.8           $ 45.8     
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     $       53.8           $       25.1           $       144.9           $       93.4     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gains and losses included in earnings are reported in Product revenues on the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and 2010.

The carrying amount and fair value of our long-term receivables and long-term debt at September 30, 2011 and December 31, 2010 were as follows:

 

     (In Millions)  
     September 30, 2011      December 31, 2010  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Long-term receivables:

           

Customer supplemental payments

     $ 22.3           $ 20.5           $ 22.3           $       19.5     

ArcelorMittal USA - Ispat receivable

     28.1           32.7           32.8           38.9     

Other

     8.8           8.8           8.1           8.1     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term receivables (1)

     $ 59.2           $ 62.0           $ 63.2           $ 66.5     
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt:

           

Term loan - $1.25 billion

     $ 922.1           $ 922.1           $ -             $ -       

Senior notes - $700 million

     699.3           705.7           -             -       

Senior notes - $1.3 billion

     1,289.1           1,382.8           990.3           972.5     

Senior notes - $400 million

     398.0           439.7           397.8           422.8     

Senior notes - $325 million

     325.0           351.7           325.0           355.6     

Revolving loan

     250.0           250.0           -             -       

Customer borrowings

     5.1           5.1           4.0           4.0     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

     $       3,888.6           $       4,057.1           $       1,717.1           $     1,754.9     
  

 

 

    

 

 

    

 

 

    

 

 

 

(1) Includes current portion.

           

The terms of one of our U.S. Iron Ore pellet supply agreements require supplemental payments to be paid by the customer during the period 2009 through 2013, with the option to defer a portion of the 2009 monthly amount up to $22.3 million in exchange for interest payments until the deferred amount is repaid in 2013. Interest is payable by the customer quarterly, and payments began in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of September 30, 2011, we have a receivable of $22.3 million recorded in Other non-current assets on the Statements of Unaudited Condensed Consolidated Financial Position reflecting the terms of this deferred payment arrangement. This compares with a receivable of $22.3 million recorded as of December 31, 2010. The fair value of the receivable of $20.5 million and $19.5 million at September 30, 2011 and December 31, 2010, respectively, is based on a discount rate of 4.7 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.

In 2002, we entered into an agreement with Ispat that restructured the ownership of the Empire mine and increased our ownership from 46.7 percent to 79 percent in exchange for the assumption of all mine liabilities. Under the terms of the agreement, we indemnified Ispat from obligations of Empire in exchange for certain future payments to Empire and to us by Ispat of $120 million, recorded at a present value of $28.1 million and $32.8 million at September 30, 2011 and December 31, 2010, respectively. The fair value of the receivable of $32.7 million and $38.9 million at September 30, 2011 and December 31, 2010, respectively, is based on a discount rate of 3.1 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.

 

The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest debt and approximate fair value. See NOTE 8 – DEBT AND CREDIT FACILITIES for further information.