Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v2.4.0.8
FAIR VALUE OF FINANCIAL INSTRUMENTS
6 Months Ended
Jun. 30, 2014
Fair Value Disclosures [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 June 30, 2014 and December 31, 2013:
 
(In Millions)
 
June 30, 2014
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
$
84.0

 
$

 
$

 
$
84.0

Derivative assets

 
3.6

 
33.0

 
36.6

Available-for-sale marketable securities
27.1

 

 

 
27.1

Foreign exchange contracts

 
12.1

 

 
12.1

Total
$
111.1

 
$
15.7

 
$
33.0

 
$
159.8

Liabilities:

 

 

 

Derivative liabilities
$

 
$

 
$
20.2

 
$
20.2

Foreign exchange contracts

 
0.5

 

 
0.5

Total
$

 
$
0.5

 
$
20.2

 
$
20.7

 
(In Millions)
 
December 31, 2013
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
$
85.0

 
$

 
$

 
$
85.0

Derivative assets

 

 
58.9

 
58.9

Available-for-sale marketable securities
21.4

 

 

 
21.4

Foreign exchange contracts

 
0.3

 

 
0.3

Total
$
106.4

 
$
0.3

 
$
58.9

 
$
165.6

Liabilities:

 

 

 

Derivative liabilities
$

 
$
2.1

 
$
10.3

 
$
12.4

Foreign exchange contracts

 
26.9

 

 
26.9

Total
$

 
$
29.0

 
$
10.3

 
$
39.3

Financial assets classified in Level 1 at June 30, 2014 and December 31, 2013 include money market funds and available-for-sale marketable securities. 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 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At June 30, 2014 and December 31, 2013, such derivative financial instruments included our existing foreign currency exchange contracts and interest rate swaps. 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 derivative financial assets classified within Level 3 at June 30, 2014 and December 31, 2013 included 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 steel 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 June 30, 2014 and to certain provisional pricing arrangements with our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customers at December 31, 2013. 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 provisionally agreed-upon price 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 June 30, 2014
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate
(Weighted Average)
 
Provisional Pricing Arrangements
 
$
20.2

 
Derivative liabilities
 
Market Approach
 
Management's
Estimate of 62% Fe
 
$93
Customer Supply Agreement
 
$
33.0

 
Derivative assets
 
Market Approach
 
Hot-Rolled Steel Estimate
 
$635 - $665 ($650)

The significant unobservable input used in the fair value measurement of the reporting entity’s provisional pricing arrangements is management’s estimate of 62 percent Fe 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 the reporting entity’s customer supply agreement is the future hot-rolled steel price that is estimated based on current market data, analysts' projections, projections provided by the customer 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 six months ended June 30, 2014 or 2013. 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 six months ended June 30, 2014 and 2013.
 
(In Millions)
 
Derivative Assets (Level 3)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
43.3

 
$
53.3

 
$
58.9

 
$
62.4

Total gains
 
 
 
 
 
 
 
Included in earnings
33.0

 
32.4

 
62.0

 
60.4

Settlements
(43.3
)
 
(40.6
)
 
(87.9
)
 
(77.7
)
Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Ending balance - June 30
$
33.0

 
$
45.1

 
$
33.0

 
$
45.1

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
33.0

 
$
32.4

 
$
62.0

 
$
60.4


 
(In Millions)
 
Derivative Liabilities (Level 3)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
(7.4
)
 
$
(6.8
)
 
$
(10.3
)
 
$
(11.3
)
Total gains
 
 
 
 
 
 
 
Included in earnings
(12.8
)
 
(25.2
)
 
(20.2
)
 
(32.0
)
Settlements

 

 
10.3

 
11.3

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Ending balance - June 30
$
(20.2
)
 
$
(32.0
)
 
$
(20.2
)
 
$
(32.0
)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
(12.8
)
 
$
(25.2
)
 
$
(20.2
)
 
$
(32.0
)

Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2014 and 2013.
The carrying amount for certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Accrued expenses) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at June 30, 2014 and December 31, 2013 were as follows:
 
 
 
(In Millions)
 
 
 
June 30, 2014
 
December 31, 2013
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Senior notes—$700 million
Level 2
 
$
699.5

 
$
756.6

 
$
699.4

 
$
718.2

Senior notes—$1.3 billion
Level 2
 
1,289.8

 
1,537.4

 
1,289.6

 
1,404.9

Senior notes—$400 million
Level 2
 
398.5

 
450.2

 
398.4

 
432.1

Senior notes—$500 million
Level 2
 
496.9

 
532.4

 
496.5

 
523.8

Revolving loan
Level 2
 
275.0

 
275.0

 

 

Equipment loan facilities
Level 2
 
130.0

 
130.0

 
140.8

 
140.8

Fair value adjustment to interest rate hedge
Level 2
 
3.3

 
3.3

 
(2.1
)
 
(2.1
)
Total long-term debt
 
 
$
3,293.0

 
$
3,684.9

 
$
3,022.6

 
$
3,217.7


The fair value of debt is based on the fair market yield curves for the remainder of the term expected to be outstanding. The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The revolving loan is variable rate interest and approximates fair value. See NOTE 8 - DEBT AND CREDIT FACILITIES for further information.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the impairment charges on both financial and nonfinancial assets that were measured on a fair value basis at December 31, 2013. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value. We had no financial assets and liabilities measured at fair value on a non-recurring basis at June 30, 2014.
 
 
(In Millions)
 
 
December 31, 2013
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 Losses
Assets:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment -
Ferroalloys reporting unit
 
$

 
$

 
$

 
$

 
$
80.9

Other long-lived assets -
Property, plant and equipment
 

 

 
46.3

 
46.3

 
155.4

Other long-lived assets -
Intangibles and long-term
deposits
 

 

 
1.6

 
1.6

 
14.5

Investment in ventures
    impairment - Amapá
 

 

 

 

 
67.6

 
 
$

 
$

 
$
47.9

 
$
47.9

 
$
318.4


Financial Assets
In light of the March 28, 2013 collapse of the Santana port shiploader and subsequent evaluation of the effect that this event had on the carrying value of our investment in Amapá as of June 30, 2013, we recorded an impairment charge of $67.6 million in the second quarter of 2013. The sale of Amapá was completed in the fourth quarter of 2013.
Non-Financial Assets
During the fourth quarter of 2013, a goodwill impairment charge of $80.9 million was recorded for our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Ferroalloys operating segment. The impairment charge was primarily a result of the decision to indefinitely suspend the Chromite Project and to not allocate additional capital for the project given the uncertain timeline and risks associated with the development of necessary infrastructure to bring the project online. Based on our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.
We also recorded impairment charges to property, plant and equipment during 2013 related to our Wabush operation within our Eastern Canadian Iron Ore operating segment, our Cliffs Chromite Ontario and Cliffs Chromite Far North reporting units within our Other reportable segments and certain mineral lands at our Asia Pacific Iron Ore operating segment to reduce the related assets to their estimated fair value as we determined that the cash flows associated with these operations were not sufficient to support the recoverability of the carrying value of these assets. Fair value was determined based on management's estimate of liquidation value, which is considered a Level 3 input, and resulted in a charge of $155.4 million.