CLIFFS NATURAL RESOURCES INC., 10-Q filed on 10/25/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2013
Oct. 21, 2013
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, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
153,124,101 
Trading Symbol
clf 
 
Statements Of Condensed Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
Product
$ 1,454.6 
$ 1,447.9 
$ 3,928.8 
$ 4,096.6 
Freight and venture partners' cost reimbursements
92.0 
97.0 
246.8 
240.2 
TOTAL REVENUES
1,546.6 
1,544.9 
4,175.6 
4,336.8 
COST OF GOODS SOLD AND OPERATING EXPENSES
(1,197.9)
(1,346.6)
(3,320.8)
(3,403.2)
SALES MARGIN
348.7 
198.3 
854.8 
933.6 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
 
Selling, general and administrative expenses
(70.6)
(63.9)
(167.9)
(202.6)
Exploration costs
(10.6)
(45.6)
(45.9)
(95.2)
Miscellaneous - net
(43.5)
(12.5)
13.3 
25.5 
Other operating expense
(124.7)
(122.0)
(200.5)
(272.3)
OPERATING INCOME
224.0 
76.3 
654.3 
661.3 
OTHER INCOME (EXPENSE)
 
 
 
 
Interest expense, net
(44.7)
(45.3)
(134.5)
(135.7)
Other non-operating income (expense)
(1.2)
1.4 
(2.9)
1.0 
TOTAL OTHER INCOME (EXPENSE)
(45.9)
(43.9)
(137.4)
(134.7)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES
178.1 
32.4 
516.9 
526.6 
INCOME TAX BENEFIT (EXPENSE)
(65.7)
64.0 
(69.0)
235.2 
EQUITY LOSS FROM VENTURES, net of tax
(0.5)
(15.3)
(73.9)
(22.7)
INCOME FROM CONTINUING OPERATIONS
111.9 
81.1 
374.0 
739.1 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
2.0 
(2.7)
2.0 
5.1 
NET INCOME
113.9 
78.4 
376.0 
744.2 
LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
3.3 
6.7 
(5.8)
(25.2)
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
117.2 
85.1 
370.2 
719.0 
PREFERRED STOCK DIVIDENDS
(12.9)
(35.9)
NET INCOME ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
$ 104.3 
$ 85.1 
$ 334.3 
$ 719.0 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
 
Continuing operations
$ 0.67 
$ 0.62 
$ 2.20 
$ 5.02 
Discontinued operations
$ 0.01 
$ (0.02)
$ 0.01 
$ 0.04 
Earnings per Common Share Attributable to Cliffs Common Shareholders - Basic:
$ 0.68 
$ 0.60 
$ 2.21 
$ 5.06 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
 
Continuing operations
$ 0.65 
$ 0.61 
$ 2.13 
$ 5.00 
Discontinued operations
$ 0.01 
$ (0.02)
$ 0.01 
$ 0.04 
Earnings per Common Share Attributable to Cliffs Common Shareholders - Diluted:
$ 0.66 
$ 0.59 
$ 2.14 
$ 5.04 
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
Basic
153,029 
142,396 
151,288 
142,332 
Diluted
178,459 
142,895 
172,624 
142,780 
CASH DIVIDENDS DECLARED PER DEPOSITARY SHARE
$ 0.44 
$ 0.00 
$ 1.22 
$ 0.00 
CASH DIVIDENDS DECLARED PER COMMON SHARE
$ 0.15 
$ 0.63 
$ 0.45 
$ 1.54 
Statements Of Condensed Consolidated Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Statement of Comprehensive Income [Abstract]
 
 
 
 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 117.2 
$ 85.1 
$ 370.2 
$ 719.0 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Pension and OPEB liability, net of tax
6.6 
7.6 
20.8 
20.9 
Unrealized net gain (loss) on marketable securities, net of tax
4.4 
(0.1)
7.6 
(0.6)
Unrealized net gain (loss) on foreign currency translation
22.8 
18.6 
(124.9)
12.2 
Unrealized net gain (loss) on derivative financial instruments, net of tax
28.3 
14.2 
(23.1)
13.6 
OTHER COMPREHENSIVE INCOME (LOSS)
62.1 
40.3 
(119.6)
46.1 
OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
(0.9)
(1.5)
(3.2)
(4.5)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 178.4 
$ 123.9 
$ 247.4 
$ 760.6 
Statements Of Condensed Consolidated Financial Position (USD $)
In Millions, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 298.8 
$ 195.2 
Accounts receivable, net
291.7 
329.0 
Inventories
438.4 
436.5 
Supplies and other inventories
257.4 
289.1 
Derivative assets
72.7 
78.6 
Other current assets
310.6 
321.6 
TOTAL CURRENT ASSETS
1,669.6 
1,650.0 
PROPERTY, PLANT AND EQUIPMENT, NET
11,354.8 
11,207.3 
OTHER ASSETS
 
 
Investments in ventures
71.5 
135.8 
Goodwill
158.6 
167.4 
Intangible assets, net
110.8 
129.0 
Deferred income taxes
5.3 
91.8 
Other non-current assets
196.1 
193.6 
TOTAL OTHER ASSETS
542.3 
717.6 
TOTAL ASSETS
13,566.7 
13,574.9 
CURRENT LIABILITIES
 
 
Accounts payable
350.8 
555.5 
Accrued expenses
404.7 
442.6 
Income taxes payable
57.3 
28.3 
Current portion of debt
7.9 
94.1 
Deferred revenue
15.1 
35.9 
Derivative liabilities
36.1 
13.2 
Other current liabilities
188.6 
211.9 
TOTAL CURRENT LIABILITIES
1,060.5 
1,381.5 
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
556.1 
618.3 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
299.5 
252.8 
DEFERRED INCOME TAXES
1,000.5 
1,108.1 
LONG-TERM DEBT
3,319.6 
3,960.7 
OTHER LIABILITIES
395.9 
492.6 
TOTAL LIABILITIES
6,632.1 
7,814.0 
COMMITMENTS AND CONTINGENCIES (SEE NOTE 19)
   
   
CLIFFS SHAREHOLDERS' EQUITY
 
 
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 (See Note 15), Issued and Outstanding - 731,250 shares (2012 - none)
731.3 
Common Shares - par value $0.125 per share, Authorized - 400,000,000 shares (2012- 400,000,000 shares); Issued - 159,545,469 shares (2012 - 149,195,469 shares); Outstanding - 153,124,449 shares (2012 - 142,495,902 shares)
19.8 
18.5 
Capital in excess of par value of shares
2,029.8 
1,774.7 
Retained earnings
3,483.3 
3,217.7 
Cost of 6,421,264 common shares in treasury (2012 - 6,699,567 shares)
(306.1)
(322.6)
Accumulated other comprehensive loss
(178.4)
(55.6)
TOTAL CLIFFS SHAREHOLDERS' EQUITY
5,779.7 
4,632.7 
NONCONTROLLING INTEREST
1,154.9 
1,128.2 
TOTAL EQUITY
6,934.6 
5,760.9 
TOTAL LIABILITIES AND EQUITY
$ 13,566.7 
$ 13,574.9 
Statements Of Condensed Consolidated Financial Position (Parenthetical) (USD $)
Sep. 30, 2013
Dec. 31, 2012
Class of Stock [Line Items]
 
 
Preferred stock, par value
$ 0 
 
Cumulative Mandatory Convertible
7.00% 
 
Common shares, par value
$ 0.125 
$ 0.125 
Common shares, authorized (in shares)
400,000,000 
400,000,000 
Common shares, issued (in shares)
159,545,469 
149,195,469 
Common shares, outstanding
153,124,449 
142,495,902 
Common shares in treasury
6,421,264 
6,699,567 
Preferred Class A [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred Stock, Liquidation Preference Per Share
$ 1,000 
 
Preferred stock, shares authorized (in shares)
3,000,000 
 
Preferred Shares, Issued and Outstanding, Shares
731,250 
Preferred Class B [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred stock, shares authorized (in shares)
4,000,000 
 
Statements Of Condensed Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
OPERATING ACTIVITIES
 
 
Net income
$ 376.0 
$ 744.2 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
Depreciation, depletion and amortization
438.0 
382.3 
Derivatives and currency hedges
0.4 
12.0 
Equity loss in ventures (net of tax)
73.9 
22.7 
Deferred income taxes
(39.5)
(352.5)
Changes in deferred revenue and below-market sales contracts
(52.2)
(36.2)
Other
(18.3)
(55.7)
Changes in operating assets and liabilities:
 
 
Receivables and other assets
36.2 
(118.6)
Product inventories
(10.8)
(70.4)
Payables and accrued expenses
(117.8)
(252.3)
Net cash provided by operating activities
685.9 
275.5 
INVESTING ACTIVITIES
 
 
Purchase of property, plant and equipment
(742.2)
(793.6)
Other investing activities
7.8 
8.9 
Net cash used by investing activities
(734.4)
(784.7)
FINANCING ACTIVITIES
 
 
Net proceeds from issuance of Series A, Mandatory Convertible Preferred Stock, Class A
709.4 
Net proceeds from issuance of common shares
285.3 
Repayment of term loan
(847.1)
(49.9)
Borrowings under credit facilities
567.0 
670.0 
Repayment under credit facilities
(512.0)
(420.0)
Proceeds from equipment loan
62.1 
Contributions by joint ventures, net
17.7 
68.8 
Common stock dividends
(68.8)
(217.8)
Preferred stock dividends
(23.0)
Other financing activities
(28.6)
(23.9)
Net cash provided by financing activities
162.0 
27.2 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(9.9)
(0.1)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
103.6 
(482.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
195.2 
521.6 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 298.8 
$ 39.5 
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS SUMMARY 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 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, 2013 are not necessarily indicative of results to be expected for the year ended December 31, 2013 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, 2012.
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:
Name
 
Location
 
Ownership Interest
 
Operation
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
Wabush
 
Newfoundland and Labrador/ Quebec, Canada
 
100.0%
 
Iron Ore
Bloom Lake
 
Quebec, Canada
 
75.0%
 
Iron Ore
Tilden
 
Michigan
 
85.0%
 
Iron Ore
Empire
 
Michigan
 
79.0%
 
Iron Ore
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
Pinnacle
 
West Virginia
 
100.0%
 
Coal
Oak Grove
 
Alabama
 
100.0%
 
Coal
CLCC
 
West Virginia
 
100.0%
 
Coal

Intercompany transactions and balances are eliminated upon consolidation.
Also included in our consolidated results are Cliffs Chromite Ontario Inc. and Cliffs Chromite Far North Inc. Cliffs Chromite Ontario Inc. holds a 100 percent interest in each of the Black Label and Black Thor chromite deposits and, together with Cliffs Chromite Far North Inc., a 70 percent interest in the Big Daddy chromite deposit, all located in northern Ontario, Canada.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, are accounted for under the equity method. The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2013 and December 31, 2012. Parentheses indicate a net liability.
 
 
 
 
 
 
 
 
(In Millions)
Investment
 
Classification
 
Accounting
Method
 
Interest
Percentage
 
September 30,
2013
 
December 31, 2012
Amapá
 
Investments in ventures
 
Equity Method
 
30
 
$
29.4

 
$
101.9

Cockatoo
 
Other liabilities2
 
Equity Method
 
 
N/A

 
(25.3
)
Hibbing
 
Investments in ventures1
 
Equity Method
 
23
 
8.3

 
(2.1
)
Other
 
Investments in ventures
 
Equity Method
 
Various
 
33.8

 
33.9

 
 
 
 
 
 
 
 
$
71.5

 
$
108.4

                                         
1 At December 31, 2012 the classification for Hibbing was Other liabilities.
2 At December 31, 2012 our ownership interest percentage for Cockatoo was 50 percent.
Amapá
On December 27, 2012, our board of directors authorized the sale of our 30 percent interest in Amapá. Per this original agreement, together with Anglo American plc, we were to sell our respective interest in a 100 percent sale transaction to a single entity.
On March 28, 2013, an unknown event caused the Santana port shiploader to collapse into the Amazon River, preventing further ship loading by the mine operator, Anglo American plc. 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.
On August 28, 2013, we entered into an agreement to sell our 30 percent interest in Amapá to Anglo American plc for nominal cash consideration, plus the right to certain contingent deferred consideration upon the two year anniversary of the closing.  The closing is conditional on obtaining certain regulatory approvals.  The transaction is expected to close in the fourth quarter of 2013.     
Cockatoo Island
On July 31, 2012, we entered into a definitive asset sale agreement with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources, which was amended on August 31, 2012. On September 7, 2012, the closing date, Pluton Resources paid a nominal sum of AUD $4.00 and assumed ownership of the assets and responsibility for the environmental rehabilitation obligations and other assumed liabilities not inherently attached to the tenements acquired. The rehabilitation obligations and assumed liabilities that are inherently attached to the tenements were transferred to Pluton Resources upon registration by the Department of Mining and Petroleum denoting Pluton Resources as the tenement holder. Upon final settlement of the sale, which was completed during the second quarter of 2013, we transferred approximately $18.6 million related to the estimated cost of the rehabilitation.
Discontinued Operations
On July 10, 2012, we entered into a definitive share and asset sale agreement to sell our 45 percent economic interest in the Sonoma joint venture coal mine located in Queensland, Australia. Upon completion of the transaction on November 12, 2012, we collected approximately AUD $141.0 million in net cash proceeds. The Sonoma operations previously were included in Other within our reportable segments.
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, 2012 included in our Annual Report on Form 10-K filed with the SEC. The significant accounting policies requiring updates have been included within the disclosures below.
Other Intangible Assets and Liabilities
Other intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives or on a units of production basis as follows:
Intangible Assets
 
Basis
 
Useful Life (years)
Permits - Asia Pacific Iron Ore
 
Units of production
 
Life of mine
Permits - All Other
 
Straight line
 
15 - 40
Utility contracts
 
Straight line
 
5
Leases - North American Coal
 
Units of production
 
Life of mine
Leases - All Other
 
Straight line
 
4.5 - 17.5

Earnings Per Share
We present both basic and diluted earnings per share amounts. Basic earnings per share amounts are calculated by dividing Net Income Attributable to Cliffs Shareholders less any paid or declared but unpaid dividends on our depositary shares by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share amounts are calculated by dividing Net Income Attributable to Cliffs Shareholders by the weighted average number of common shares, common share equivalents under stock plans using the treasury stock method and the number of common shares that would be issued under an assumed conversion of our outstanding depositary shares, each representing a 1/40th interest in a share of our Series A Mandatory Convertible Preferred Stock, Class A, under the if-converted method. Our outstanding depositary shares are convertible into common shares based on the volume weighted average of closing prices of our common stock over the 20 consecutive trading day period ending on the third day immediately preceding the end of the reporting period. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect. See NOTE 18 - EARNINGS PER SHARE for further information.
Recent Accounting Pronouncements
On July 18, 2013, the FASB issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. ASU 2013-11 is effective for interim and annual periods beginning after December 15, 2013. We will adopt ASU 2013-11 in the fourth quarter of 2013 on a prospective basis, which will impact the presentation of our non-current Deferred income taxes and unrecognized tax benefits (within non-current Other liabilities) in the Statements of Unaudited Condensed Consolidated Financial Position.
In February 2013, the FASB amended the guidance on the presentation of comprehensive income in order to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendment does not change the current requirements for reporting net income or other comprehensive income in financial statements. Rather, it requires the entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The new guidance was applied prospectively for reporting periods beginning after December 15, 2012. We adopted the provisions of guidance required for the period beginning January 1, 2013. Refer to NOTE 16 - SHAREHOLDERS' EQUITY for further information.
SEGMENT REPORTING
SEGMENT REPORTING
NOTE 2 - SEGMENT REPORTING
Our Company’s primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal, Latin American Iron Ore, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that primarily provide iron ore to the seaborne market for Asian steel producers. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. The North American Coal segment is comprised of our four metallurgical coal mines and one thermal coal mine that provide metallurgical coal primarily to the integrated steel industry and thermal coal primarily to the energy industry. There are no intersegment revenues.
The Latin American Iron Ore operating segment is comprised of our 30 percent Amapá interest in Brazil. The Ferroalloys operating segment is comprised of our interests in chromite deposits held in Northern Ontario, Canada and the Global Exploration Group is focused on early involvement in exploration activities to identify new projects for future development or projects that add significant value to existing operations. The Latin American Iron Ore, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and, therefore, are not reported separately.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold, and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.
The following table presents a summary of our reportable segments for the three and nine months ended September 30, 2013 and 2012, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and Equity Loss from Ventures:
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues from product sales and services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
782.4

 
51
%
 
$
796.0

 
52
 %
 
$
1,894.2

 
45
%
 
$
1,942.7

 
45
%
Eastern Canadian Iron Ore
284.2

 
18
%
 
253.1

 
16
 %
 
743.4

 
18
%
 
777.8

 
18
%
Asia Pacific Iron Ore
301.7

 
20
%
 
254.2

 
16
 %
 
899.5

 
22
%
 
975.3

 
22
%
North American Coal
178.3

 
11
%
 
241.8

 
16
 %
 
638.5

 
15
%
 
640.9

 
15
%
Other

 
%
 
(0.2
)
 
 %
 

 
%
 
0.1

 
%
Total revenues from product sales and services
$
1,546.6

 
100
%
 
$
1,544.9

 
100
 %
 
$
4,175.6

 
100
%
 
$
4,336.8

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
273.5

 
 
 
$
255.9

 
 
 
$
647.1

 
 
 
$
708.9

 
 
Eastern Canadian Iron Ore
(22.0
)
 
 
 
(40.5
)
 
 
 
(52.3
)
 
 
 
(43.0
)
 
 
Asia Pacific Iron Ore
99.0

 
 
 
(15.8
)
 
 
 
255.3

 
 
 
256.1

 
 
North American Coal
(1.8
)
 
 
 
(1.3
)
 
 
 
6.6

 
 
 
3.8

 
 
Other

 
 
 

 
 
 
(1.9
)
 
 
 
7.8

 
 
Sales margin
348.7

 
 
 
198.3

 
 
 
854.8

 
 
 
933.6

 
 
Other operating expense
(124.7
)
 
 
 
(122.0
)
 
 
 
(200.5
)
 
 
 
(272.3
)
 
 
Other expense
(45.9
)
 
 
 
(43.9
)
 
 
 
(137.4
)
 
 
 
(134.7
)
 
 
Income from continuing operations before income taxes and equity (loss) from ventures
$
178.1

 
 
 
$
32.4

 
 
 
$
516.9

 
 
 
$
526.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
27.3

 
 
 
$
24.9

 
 
 
$
82.3

 
 
 
$
71.9

 
 
Eastern Canadian Iron Ore
46.8

 
 
 
41.7

 
 
 
130.3

 
 
 
118.2

 
 
Asia Pacific Iron Ore
38.0

 
 
 
40.2

 
 
 
116.1

 
 
 
110.0

 
 
North American Coal
38.8

 
 
 
25.1

 
 
 
99.7

 
 
 
69.5

 
 
Other
2.2

 
 
 
1.0

 
 
 
9.6

 
 
 
12.7

 
 
Total depreciation, depletion and amortization
$
153.1

 
 
 
$
132.9

 
 
 
$
438.0

 
 
 
$
382.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital additions (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
15.2

 
 
 
$
19.6

 
 
 
$
39.1

 
 
 
$
82.5

 
 
Eastern Canadian Iron Ore
181.5

 
 
 
285.5

 
 
 
535.3

 
 
 
593.4

 
 
Asia Pacific Iron Ore
2.0

 
 
 
5.8

 
 
 
8.6

 
 
 
132.0

 
 
North American Coal
10.4

 
 
 
33.3

 
 
 
37.2

 
 
 
105.1

 
 
Other
2.2

 
 
 
10.3

 
 
 
4.9

 
 
 
61.0

 
 
Total capital additions
$
211.3

 
 
 
$
354.5

 
 
 
$
625.1

 
 
 
$
974.0

 
 
                                         
(1)    Includes capital lease additions and non-cash accruals. Refer to NOTE 20 - CASH FLOW INFORMATION.
A summary of assets by segment is as follows:
 
(In Millions)
 
September 30,
2013
 
December 31, 2012
Assets:
 
 
 
U.S. Iron Ore
$
1,770.6

 
$
1,735.1

Eastern Canadian Iron Ore
7,982.7

 
7,605.1

Asia Pacific Iron Ore
1,188.7

 
1,506.3

North American Coal
1,831.8

 
1,877.8

Other
696.5

 
570.9

Total segment assets
13,470.3

 
13,295.2

Corporate
96.4

 
279.7

Total assets
$
13,566.7

 
$
13,574.9

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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, 2013 and December 31, 2012:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
Derivative
Instrument
Balance Sheet Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate Swaps
Derivative assets
 
$
1.7

 
 
 
$

 
 
 
$

 
 
 
$

Foreign Exchange Contracts
Derivative assets
 
4.3

 
Derivative assets
 
16.2

 
Derivative liabilities
 
22.0

 
Derivative liabilities
 
1.9

Total derivatives designated as hedging instruments under ASC 815
 
 
$
6.0

 
 
 
$
16.2

 
 
 
$
22.0

 
 
 
$
1.9

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Contracts
 
 
$

 
 
 
$

 
Derivative liabilities
 
$
2.7

 
 
 
$

Customer Supply Agreements
Derivative assets
 
62.1

 
Derivative assets
 
58.9

 
 
 

 
 
 

Provisional Pricing Arrangements
Derivative assets
 
4.6

 
Derivative assets
 
3.5

 
Derivative liabilities
 
11.4

 
Derivative liabilities
 
11.3

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
66.7

 
 
 
$
62.4

 
 
 
$
14.1

 
 
 
$
11.3

Total derivatives
 
 
$
72.7

 
 
 
$
78.6

 
 
 
$
36.1

 
 
 
$
13.2


Derivatives Designated as Hedging Instruments
Cash Flow Hedges
Australian and Canadian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia and Canada. With respect to Australia, foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore sales. The functional currency of our Canadian operations is the U.S. dollar; however, the production costs for these operations primarily are incurred in the Canadian dollar.
We use foreign currency exchange contracts to hedge our foreign currency exposure for a portion of our U.S. dollar sales receipts in our Australian functional currency entities and our Canadian dollar operating costs. For our Australian operations, U.S. dollars are converted to Australian dollars at the currency exchange rate in effect during the period the transaction occurred. For our Canadian operations, U.S. dollars are converted to Canadian dollars at the exchange rate in effect for the period the operating costs are incurred. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and U.S. and Canadian currency exchange rates, respectively, and to protect against undue adverse movement in these exchange rates. These instruments qualify for hedge accounting treatment, and are tested for effectiveness at inception and at least once each reporting period. If and when any of our hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
As of September 30, 2013, we had outstanding Australian and Canadian foreign currency exchange contracts with notional amounts of $333.0 million and $453.5 million, respectively, in the form of forward contracts with varying maturity dates ranging from October 2013 to September 2014. This compares with outstanding Australian and Canadian foreign currency exchange contracts with a notional amount of $400.0 million and $630.4 million, respectively, as of December 31, 2012.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Financial Position. Any ineffectiveness is recognized immediately in income and, as of September 30, 2013 and 2012, there was no material ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive loss are reclassified into earnings in the same period the forecasted transaction affects earnings. Of the amounts remaining in Accumulated other comprehensive loss related to Australian hedge contracts and Canadian hedge contracts, we estimate that losses of $13.4 million and gains of $1.0 million (net of tax), respectively, will be reclassified into earnings within the next 12 months.
The following summarizes the effect of our derivatives designated as cash flow hedging instruments, net of tax in Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2013 and 2012:
 
(In Millions)
Derivatives in Cash Flow
Amount of Gain (Loss)
Recognized in OCI on Derivative
 
Location of Gain (Loss)
Reclassified
from Accumulated OCI into Earnings
 
Amount of Gain (Loss)
Reclassified
from Accumulated
OCI into Earnings
Hedging Relationships
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
Three Months Ended
September 30,
 
 
 
Three Months Ended
September 30,
 
2013
 
2012
 
 
 
2013
 
2012
Australian Dollar Foreign
Exchange Contracts
(hedge designation)
$
2.9

 
$
1.4

 
Product revenues
 
$
(8.9
)
 
$
5.1

Canadian Dollar Foreign Exchange Contracts (hedge designation)
9.2

 
11.3

 
Cost of goods sold and operating expenses
 
(7.3
)
 
1.3

Total
$
12.1

 
$
12.7

 
 
 
$
(16.2
)
 
$
6.4

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
2013
 
2012
 
 
 
2013
 
2012
Australian Dollar Foreign
Exchange Contracts
(hedge designation)
$
(25.2
)
 
$
7.5

 
Product revenues
 
$
(4.5
)
 
$
7.8

Canadian Dollar Foreign Exchange Contracts (hedge designation)
(9.9
)
 
6.2

 
Cost of goods sold and operating expenses
 
(7.5
)
 
1.6

 
$
(35.1
)
 
$
13.7

 
 
 
$
(12.0
)
 
$
9.4


Fair Value Hedges
Interest Rate Hedges
Interest rate risk is managed using a portfolio of variable- and fixed-rate debt composed of short- and long-term instruments, such as U.S. treasury lock agreements and interest rate swaps. From time to time, these instruments, which are derivative instruments, are entered into to facilitate the maintenance of the desired ratio of variable- to fixed-rate debt. These derivative instruments, with a notional amount of $250.0 million, are designated and qualify as fair value hedges as of September 30, 2013. These instruments did not have a material impact on our financial statements for the year ended December 31, 2012.
For derivative instruments that are designated and qualify as fair-value hedges, the gain or loss on the hedge instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current net income. We include the gain or loss on the derivative instrument and the offsetting loss or gain on the hedged item in Other non-operating income (expense). The net gain or loss recognized in Other non-operating income (expense) for the three and nine months ended September 30, 2013 and 2012 were as follows:
(In Millions)
Derivatives in Fair Value Hedging Relationships
Location of Gain Recognized in
Income on Derivative
Net Gain Recognized in Income on Derivative
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Interest Rate Swaps
Other non-operating income (expense)
$
0.1

 
$

 
$
0.1

 
$


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, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The base price is the primary component of the purchase price for each contract. The inflation-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 the Platts 62 percent Fe market rate and/or international pellet prices and changes in specified Producers Price Indices, including those for all commodities, industrial commodities, energy and steel. 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 supply agreements with one U.S. Iron Ore customer provide 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 $53.9 million and $113.4 million as Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2013, respectively, related to the supplemental payments. This compares with Product revenues of $49.8 million and $131.8 million for the comparable respective periods in 2012. Derivative assets, representing the fair value of the pricing factors, were $62.1 million and $58.9 million in the September 30, 2013 and December 31, 2012 Statements of Unaudited Condensed Consolidated Financial Position, respectively.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore, Eastern Canadian 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 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 freestanding derivative and is required to be accounted for separately once the provisional 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. At September 30, 2013 and December 31, 2012, we recorded $4.6 million and $3.5 million, respectively, as Derivative assets and $11.4 million and $11.3 million, respectively, as Derivative liabilities in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of final revenue rate with our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customers at September 30, 2013 and related to our U.S. Iron Ore and Eastern Canadian Iron Ore customers at December 31, 2012. 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 net $24.3 million increase and a net $6.8 million decrease in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2013, respectively, related to these arrangements. This compares with a net $8.1 million decrease and a net $10.3 million decrease in Product revenues for the comparable respective periods in 2012.
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, 2013 and 2012:
(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,
 
 
2013
 
2012
 
2013
 
2012
Foreign Exchange Contracts
Other income (expense)
$

 
$

 
$

 
$
0.3

Foreign Exchange Contracts
Income (Loss) from Discontinued Operations, net of tax

 
1.1

 

 
1.1

Commodity Contracts
Other non-operating income (expense)
(2.7
)
 

 
(2.7
)
 

Customer Supply Agreements
Product revenues
53.9

 
49.8

 
113.4

 
131.8

Provisional Pricing Arrangements
Product revenues
24.3

 
(10.3
)
 
(6.8
)
 
(10.3
)
Total
 
$
75.5

 
$
40.6

 
$
103.9

 
$
122.9


Refer to NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
INVENTORIES
Inventories
NOTE 4 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2013 and December 31, 2012:
 
(In Millions)
 
September 30, 2013
 
December 31, 2012
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
160.4

 
$
20.3

 
$
180.7

 
$
147.2

 
$
22.9

 
$
170.1

Eastern Canadian Iron Ore
54.2

 
36.2

 
90.4

 
62.6

 
44.2

 
106.8

Asia Pacific Iron Ore
54.0

 
34.7

 
88.7

 
36.7

 
37.2

 
73.9

North American Coal
55.6

 
23.0

 
78.6

 
36.7

 
49.0

 
85.7

Total
$
324.2

 
$
114.2

 
$
438.4

 
$
283.2

 
$
153.3

 
$
436.5


We recorded a lower-of-cost-or-market inventory charge during the third quarter of 2013 of $5.9 million relating to concentrate inventory primarily driven by extended maintenance shutdowns that resulted in higher costs and reduced fixed-cost leverage. We recorded these charges in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for our Eastern Canadian Iron Ore operations. For the nine months ended September 30, 2013, the lower-of-cost-or-market inventory charge recorded was $10.6 million concentrate inventory. During the first half of 2013, the Wabush concentrate inventory charge was caused by higher costs as a result of transitioning into concentrate-only production and the forest fire that temporarily idled the mine in June.
Additionally, as a result of the idling of our Wabush pellet plant during the second quarter of 2013, we recorded a lower-of-cost-or-market inventory charge of $11.1 million relating to Wabush pellets that are contractually committed tons, and we recorded an unsaleable inventory impairment charge of $10.6 million relating to Wabush pellets. Both of these charges were recorded in Cost of goods sold and operating expenses in the second quarter of 2013 and included in the Statements of Unaudited Condensed Consolidated Operations for the nine months ended September 30, 2013 for our Eastern Canadian Iron Ore operations. No lower-of-cost-or-market inventory adjustments were recorded for the three and nine months ended September 30, 2012 within the Eastern Canadian Iron Ore operating segment results.
We recorded lower-of-cost-or-market inventory charges of $2.6 million and $5.3 million in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2013, respectively, for our North American Coal operations. These charges were a result of market declines and costs associated with operational and geological issues. For the three and nine months ended September 30, 2012, we recorded lower-of-cost-or-market inventory charges of $8.0 million and $17.9 million, respectively, for our North American Coal operations due to market prices for coal.
PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
NOTE 5 - 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, 2013 and December 31, 2012:
 
(In Millions)
 
September 30,
2013
 
December 31, 2012
Land rights and mineral rights
$
7,826.5

 
$
7,920.8

Office and information technology
119.3

 
92.4

Buildings
214.0

 
162.0

Mining equipment
1,554.7

 
1,290.7

Processing equipment
2,172.8

 
1,937.4

Railroad equipment
222.3

 
240.8

Electric power facilities
82.9

 
58.7

Port facilities
103.8

 
114.3

Interest capitalized during construction
25.5

 
20.8

Land improvements
63.0

 
43.9

Other
91.8

 
39.0

Construction in progress
1,049.2

 
1,123.9

 
13,525.8

 
13,044.7

Allowance for depreciation and depletion
(2,171.0
)
 
(1,837.4
)
 
$
11,354.8

 
$
11,207.3


We recorded depreciation and depletion expense of $148.3 million and $423.1 million in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2013, respectively. This compares with depreciation and depletion expense of $127.7 million and $364.9 million for the three and nine months ended September 30, 2012, respectively.
The accumulated amount of capitalized interest included within construction in progress at September 30, 2013 is $30.1 million, of which $15.3 million was capitalized during 2013. At December 31, 2012, $17.1 million of capitalized interest was included within construction in progress, of which $15.4 million was capitalized during 2012.
DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS
NOTE 6 - DISCONTINUED OPERATIONS
The table below sets forth selected financial information related to operating results of our business classified as discontinued operations. While the reclassification of revenues and expenses related to discontinued operations for prior periods has no impact upon previously reported net income, the Statements of Unaudited Condensed Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to discontinued operations. During the fourth quarter of 2012, we sold our 45 percent economic interest in Sonoma. The Sonoma operations previously were included in Other within our reportable segments.
The following table presents detail of our operations related to our Sonoma operations in the Statements of Unaudited Condensed Consolidated Operations:
 
(In Millions)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
 
 
 
Product
$

 
$
42.6

 
$

 
$
141.6

 
 
 
 
 
 
 
 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax
$
2.0

 
$
(2.7
)
 
$
2.0

 
$
5.2


Income (Loss) from Discontinued Operations, net of tax during the three and nine months ended September 30, 2013 relates to additional income tax benefit resulting from the actual tax gain from the sale of Sonoma as included on the 2012 tax return, which was filed during the three months ended September 30, 2013.
We recorded a loss from discontinued operations of $2.7 million, net of $1.2 million in income tax credits, and income from discontinued operations of $5.2 million, net of $2.1 million in tax expense in Income (Loss) from Discontinued Operations, net of tax for the three and nine months ended September 30, 2012, respectively, related to our previously owned interest in the Sonoma operations.
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The following table summarizes changes in the carrying amount of goodwill allocated by operating segment for the nine months ended September 30, 2013 and the year ended December 31, 2012:
 
(In Millions)
 
September 30, 2013
 
December 31, 2012
 
U.S. Iron Ore
 
Eastern Canadian Iron Ore
 
Asia Pacific
Iron Ore
 
North American Coal
 
Other
 
Total
 
U.S. Iron Ore
 
Eastern
Canadian Iron Ore
 
Asia Pacific Iron Ore
 
North American Coal
 
Other
 
Total
Beginning Balance
$
2.0

 
$

 
$
84.5

 
$

 
$
80.9

 
$
167.4

 
$
2.0

 
$
986.2

 
$
83.0

 
$

 
$
80.9

 
$
1,152.1

Arising in business combinations

 

 

 

 

 

 

 
13.8

 

 

 

 
13.8

Impairment

 

 

 

 

 

 

 
(1,000.0
)
 

 

 

 
(1,000.0
)
Impact of foreign currency translation

 

 
(8.8
)
 

 

 
(8.8
)
 

 

 
1.5

 

 

 
1.5

Ending Balance
$
2.0

 
$

 
$
75.7

 
$

 
$
80.9

 
$
158.6

 
$
2.0

 
$

 
$
84.5

 
$

 
$
80.9

 
$
167.4

Accumulated Goodwill Impairment Loss
$

 
$
(1,000.0
)
 
$

 
$
(27.8
)
 
$

 
$
(1,027.8
)
 
$

 
$
(1,000.0
)
 
$

 
$
(27.8
)
 
$

 
$
(1,027.8
)

Other Intangible Assets and Liabilities
Following is a summary of intangible assets and liabilities as of September 30, 2013 and December 31, 2012:
 
 
 
(In Millions)
 
 
 
September 30, 2013
 
December 31, 2012
 
Classification
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permits
Intangible assets, net
 
$
130.3

 
$
(35.7
)
 
$
94.6

 
$
136.1

 
$
(31.7
)
 
$
104.4

Utility contracts
Intangible assets, net
 
54.7

 
(40.8
)
 
13.9

 
54.7

 
(32.4
)
 
22.3

Leases
Intangible assets, net
 
5.7

 
(3.4
)
 
2.3

 
5.7

 
(3.4
)
 
2.3

Total intangible assets
 
 
$
190.7

 
$
(79.9
)
 
$
110.8

 
$
196.5

 
$
(67.5
)
 
$
129.0

Below-market sales contracts
Other current liabilities
 
$
(46.0
)
 
$
13.3

 
$
(32.7
)
 
$
(46.0
)
 
$

 
$
(46.0
)
Below-market sales contracts
Other liabilities
 
(250.7
)
 
199.6

 
(51.1
)
 
(250.7
)
 
181.6

 
(69.1
)
Total below-market sales contracts
 
 
$
(296.7
)
 
$
212.9

 
$
(83.8
)
 
$
(296.7
)
 
$
181.6

 
$
(115.1
)

Amortization expense relating to intangible assets was $4.8 million and $14.9 million for the three and nine months ended September 30, 2013, 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 $4.8 million and $14.1 million for the comparable respective periods in 2012. The estimated amortization expense relating to intangible assets for each of the five succeeding years is as follows:

(In Millions)

Amount
Year Ending December 31

2013 (remaining three months)
$
6.1

2014
19.3

2015
8.5

2016
8.4

2017
8.4

2018
7.8

Total
$
58.5


The below-market sales contracts are classified as a liability and recognized over the term of the underlying contracts, which have remaining lives ranging from one to four years. For the three and nine months ended September 30, 2013, we recognized $14.7 million and $31.3 million, respectively, in Product revenues related to the below-market sales contracts, compared with $14.7 million and $31.3 million for the three and nine months ended September 30, 2012, respectively. The following amounts are estimated to be recognized in Product revenues for the remainder of this year and each of the three succeeding fiscal years:
 
(In Millions)
 
Amount
Year Ending December 31
 
2013 (remaining three months)
$
14.7

2014
23.0

2015
23.0

2016
23.1

Total
$
83.8

FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at September 30, 2013 and December 31, 2012:
 
(In Millions)
 
September 30, 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
$
192.0

 
$

 
$

 
$
192.0

Derivative assets

 
1.7

 
66.7

 
68.4

Marketable securities
26.7

 

 

 
26.7

Foreign exchange contracts

 
4.3

 

 
4.3

Total
$
218.7

 
$
6.0

 
$
66.7

 
$
291.4

Liabilities:

 

 

 

Derivative liabilities
$

 
$
2.7

 
$
11.4

 
$
14.1

Foreign exchange contracts

 
22.0

 

 
22.0

Total
$

 
$
24.7

 
$
11.4

 
$
36.1

 
(In Millions)
 
December 31, 2012
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
$
100.0

 
$

 
$

 
$
100.0

Derivative assets

 

 
62.4

 
62.4

Marketable securities
27.0

 

 

 
27.0

Foreign exchange contracts

 
16.2

 

 
16.2

Total
$
127.0

 
$
16.2

 
$
62.4

 
$
205.6

Liabilities:

 

 

 

Derivative liabilities
$

 
$

 
$
11.3

 
$
11.3

Foreign exchange contracts

 
1.9

 

 
1.9

Total
$

 
$
1.9

 
$
11.3

 
$
13.2

Financial assets classified in Level 1 at September 30, 2013 and December 31, 2012 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 September 30, 2013, such derivative financial instruments included our existing foreign currency exchange contracts, commodity contracts, and interest rate swaps. At December 31, 2012, 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 derivative financial assets classified within Level 3 at September 30, 2013 and December 31, 2012 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 at September 30, 2013 and December 31, 2012, also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore customers at September 30, 2013 and our U.S. Iron Ore and Eastern Canadian Iron Ore customers at December 31, 2012. 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
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate
(Weighted Average)
 
9/30/2013
Provisional Pricing Arrangements
 
$
4.6

 
Derivative assets
 
Market Approach
 
Management's
Estimate of 62% Fe
 
$131
 
 
$
11.4

 
Derivative liabilities
 
 
 
 
 
 
Customer Supply Agreement
 
$
62.1

 
Derivative assets
 
Market Approach
 
Hot-Rolled Steel Estimate
 
$590 - $660 ($630)

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 agreements 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.
Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value.
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 during the nine months of 2013 or 2012. 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, 2013 and 2012.
 
(In Millions)
 
Derivative Assets (Level 3)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Beginning balance
$
45.1

 
$
83.9

 
$
62.4

 
$
157.9

Total gains
 
 
 
 
 
 
 
Included in earnings
57.6

 
24.9

 
118.0

 
129.6

Settlements
(36.0
)
 
(52.9
)
 
(113.7
)
 
(231.6
)
Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Ending balance - September 30
$
66.7

 
$
55.9

 
$
66.7

 
$
55.9

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
57.6

 
$
24.9

 
$
118.0

 
$
129.6


 
(In Millions)
 
Derivative Liabilities (Level 3)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Beginning balance
$
(32.0
)
 
$
(15.8
)
 
$
(11.3
)
 
$
(19.5
)
Total gains
 
 
 
 
 
 
 
Included in earnings
20.6

 
4.1