CLIFFS NATURAL RESOURCES INC., 10-K filed on 2/12/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Feb. 11, 2013
Jun. 30, 2012
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-K 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
Document Fiscal Year Focus
2012 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
142,506,400 
 
Trading Symbol
clf 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 7,314,008,684 
Statements Of Condensed Consolidated Financial Position (USD $)
In Millions, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 195.2 
$ 519.3 
Accounts receivable, net
329.0 
287.9 
Inventories
436.5 
456.9 
Supplies and other inventories
289.1 
216.9 
Deferred and refundable income taxes
105.4 
21.9 
Derivative assets
78.6 
82.1 
Assets held for sale
159.9 
Other current assets
216.2 
166.3 
TOTAL CURRENT ASSETS
1,650.0 
1,911.2 
PROPERTY, PLANT AND EQUIPMENT, NET
11,207.3 
10,404.1 
OTHER ASSETS
 
 
Investments in ventures
135.8 
526.6 
Goodwill
167.4 
1,152.1 
Intangible assets, net
129.0 
147.0 
Deferred income taxes
91.8 
209.5 
Other non-current assets
193.6 
191.2 
TOTAL OTHER ASSETS
717.6 
2,226.4 
TOTAL ASSETS
13,574.9 
14,541.7 
CURRENT LIABILITIES
 
 
Accounts payable
555.5 
364.7 
Accrued employment costs
135.6 
144.1 
Income taxes payable
28.3 
265.4 
Current portion of debt
94.1 
74.8 
Accrued expenses
258.9 
165.0 
Accrued royalties
48.1 
75.7 
Deferred revenue
35.9 
126.6 
Liabilities held for sale
25.9 
Other current liabilities
225.1 
259.9 
TOTAL CURRENT LIABILITIES
1,381.5 
1,502.1 
POSTEMPLOYMENT BENEFIT LIABILITIES
 
 
Pensions
403.8 
394.7 
Other postretirement benefits
214.5 
271.1 
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES
618.3 
665.8 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
252.8 
213.2 
DEFERRED INCOME TAXES
1,108.1 
1,062.4 
LONG-TERM DEBT
3,960.7 
3,608.7 
OTHER LIABILITIES
492.6 
449.8 
TOTAL LIABILITIES
7,814.0 
7,502.0 
COMMITMENTS AND CONTINGENCIES (SEE NOTE 20)
   
   
CLIFFS SHAREHOLDERS' EQUITY
 
 
Common Shares - par value $0.125 per share, Authorized - 400,000,000 shares (2011 - 400,000,000 shares); Issued - 149,195,469 shares (2011 - 149,195,469 shares); Outstanding - 142,495,902 shares (2011 - 142,021,718 shares)
18.5 
18.5 
Capital in excess of par value of shares
1,774.7 
1,770.8 
Retained earnings
3,217.7 
4,424.3 
Cost of 6,699,567 common shares in treasury (2011 - 7,173,751 shares)
(322.6)
(336.0)
Accumulated other comprehensive loss
(55.6)
(92.6)
TOTAL CLIFFS SHAREHOLDERS' EQUITY
4,632.7 
5,785.0 
NONCONTROLLING INTEREST
1,128.2 
1,254.7 
TOTAL EQUITY
5,760.9 
7,039.7 
TOTAL LIABILITIES AND EQUITY
$ 13,574.9 
$ 14,541.7 
Statements Of Condensed Consolidated Financial Position (Parenthetical) (USD $)
Dec. 31, 2012
Dec. 31, 2011
Class of Stock [Line Items]
 
 
Preferred stock, par value
$ 0 
$ 0 
Common shares, par value
$ 0.125 
$ 0.125 
Common shares, authorized (in shares)
400,000,000 
400,000,000 
Common shares, issued (in shares)
149,195,469 
149,195,469 
Common shares, outstanding
142,495,902 
142,021,718 
Common shares in treasury
6,699,567 
7,173,751 
Preferred Class A [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred stock, shares authorized (in shares)
3,000,000 
3,000,000 
Preferred stock, shares issued (in shares)
Preferred Class B [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred stock, shares authorized (in shares)
4,000,000 
4,000,000 
Preferred stock, shares issued (in shares)
Statements Of Condensed Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$ 5,520.9 
$ 6,321.3 
$ 4,218.5 
Freight and venture partners' cost reimbursements
351.8 
242.6 
265.3 
TOTAL REVENUES
5,872.7 
6,563.9 
4,483.8 
COST OF GOODS SOLD AND OPERATING EXPENSES
(4,700.6)
(3,953.0)
(3,025.1)
SALES MARGIN
1,172.1 
2,610.9 
1,458.7 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
Selling, general and administrative expenses
(282.5)
(248.3)
(171.7)
Exploration costs
(142.8)
(80.5)
(33.7)
Impairment of goodwill and other long-lived assets
(1,049.9)
(27.8)
Consolidated Thompson acquisition costs
(25.4)
Miscellaneous - net
(5.7)
67.9 
(20.5)
TOTAL OTHER OPERATING INCOME (EXPENSE)
(1,480.9)
(314.1)
(225.9)
OPERATING INCOME (LOSS)
(308.8)
2,296.8 
1,232.8 
OTHER INCOME (EXPENSE)
 
 
 
Gain on acquisition of controlling interests
40.7 
Changes in fair value of foreign currency contracts, net
(0.1)
101.9 
39.8 
Interest expense, net
195.6 
206.2 
59.4 
Other non-operating income (expense)
2.7 
(2.0)
12.5 
TOTAL OTHER INCOME (EXPENSE)
(193.0)
(106.3)
33.6 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY INCOME (LOSS) FROM VENTURES
(501.8)
2,190.5 
1,266.4 
INCOME TAX EXPENSE
(255.9)
(407.7)
(282.5)
EQUITY INCOME (LOSS) FROM VENTURES
(404.8)
9.7 
13.5 
INCOME (LOSS) FROM CONTINUING OPERATIONS
(1,162.5)
1,792.5 
997.4 
INCOME (LOSS) and GAIN ON SALE FROM DISCONTINUED OPERATIONS, net of tax
35.9 
20.1 
22.5 
NET INCOME (LOSS)
(1,126.6)
1,812.6 
1,019.9 
LESS: INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
(227.2)
193.5 
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ (899.4)
$ 1,619.1 
$ 1,019.9 
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
Continuing operations (in usd per share)
$ (6.57)
$ 11.41 
$ 7.37 
Discontinued operations (in usd per share)
$ 0.25 
$ 0.14 
$ 0.17 
Earnings per common share attributable to Cliffs shareholders - Basic (in usd per share)
$ (6.32)
$ 11.55 
$ 7.54 
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
Continuing operations (in usd per share)
$ (6.57)
$ 11.34 
$ 7.32 
Discontinued operations (in usd per share)
$ 0.25 
$ 0.14 
$ 0.17 
Earnings per common share attributable to Cliffs shareholders - Diluted (in usd per share)
$ (6.32)
$ 11.48 
$ 7.49 
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
Basic (in shares)
142,351 
140,234 
135,301 
Diluted (in shares)
142,351 
141,012 
136,138 
CASH DIVIDENDS DECLARED PER SHARE (in usd per share)
$ 2.15 
$ 0.84 
$ 0.51 
Statements Of Condensed Consolidated Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Statement of Other Comprehensive Income [Abstract]
 
 
 
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ (899.4)
$ 1,619.1 
$ 1,019.9 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Pension and OPEB liability, net of tax
33.8 
(121.4)
14.8 
Unrealized net gain (loss) on marketable securities, net of tax
(0.5)
(31.0)
4.2 
Unrealized net gain (loss) on foreign currency translation
3.8 
(2.2)
151.6 
Unrealized net gain (loss) on derivative financial instruments, net of tax
7.5 
(1.5)
(1.3)
OTHER COMPREHENSIVE INCOME (LOSS)
44.6 
(156.1)
169.3 
LESS: OTHER COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
7.6 
(17.6)
0.8 
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ (862.4)
$ 1,480.6 
$ 1,188.4 
Statements Of Condensed Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
OPERATING ACTIVITIES
 
 
 
Net income
$ (1,126.6)
$ 1,812.6 
$ 1,019.9 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
Depreciation, depletion and amortization
525.8 
426.9 
322.3 
Impairment of goodwill and other long-lived assets
1,049.9 
27.8 
Derivatives and currency hedges
4.1 
(69.0)
(39.0)
Foreign exchange loss (gains)
2.2 
(6.2)
39.1 
Share-based compensation
16.5 
13.9 
12.5 
Equity (income) loss in ventures (net of tax)
404.8 
(9.7)
(13.5)
Pensions and other postretirement benefits
(26.1)
(26.3)
8.7 
Deferred income taxes
127.0 
(66.6)
15.2 
Changes in deferred revenue and below-market sales contracts
(24.5)
(146.0)
39.3 
Gain on acquisition of controlling interests
(40.7)
Other
(37.6)
(0.1)
9.9 
Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
(74.8)
81.4 
(204.6)
Product inventories
39.9 
(74.5)
61.2 
Payables and accrued expenses
(366.1)
324.6 
89.7 
Net cash provided by operating activities
514.5 
2,288.8 
1,320.0 
INVESTING ACTIVITIES
 
 
 
Acquisition of Consolidated Thompson, net of cash acquired
(4,423.5)
Acquisition of controlling interests, net of cash acquired
(994.5)
Net settlements in Canadian dollar foreign exchange contracts
93.1 
Investment in Consolidated Thompson senior secured notes
(125.0)
Purchase of property, plant and equipment
(1,127.5)
(880.7)
(266.9)
Investments in ventures
(5.2)
(191.3)
Proceeds from sale of Sonoma
152.6 
Other investing activities
13.1 
36.9 
85.0 
Net cash used by investing activities
(961.8)
(5,304.4)
(1,367.7)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common shares
853.7 
Net proceeds from issuance of senior notes
497.0 
998.1 
1,388.1 
Borrowings on term loan
1,250.0 
Repayment of term loan
(124.8)
(278.0)
Borrowings on bridge credit facility
750.0 
Repayment of bridge credit facility
(750.0)
Borrowings under revolving credit facility
1,012.0 
250.0 
450.0 
Repayment under revolving credit facility
(687.0)
(250.0)
(450.0)
Debt issuance costs
(4.3)
(54.8)
Repayment of Consolidated Thompson convertible debentures
(337.2)
Repayment of senior notes
(325.0)
Repayment of $200 million term loan
(200.0)
Payments under share buyback program
(289.8)
Contributions by joint ventures, net
95.4 
Common stock dividends
(307.2)
(118.9)
(68.9)
Other financing activities
(36.5)
(48.0)
(31.6)
Net cash provided by financing activities
119.6 
1,975.1 
1,087.6 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
1.3 
(4.6)
24.1 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(326.4)
(1,045.1)
1,064.0 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
521.6 
1,566.7 
502.7 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 195.2 
$ 521.6 
$ 1,566.7 
Statements of Consolidated Changes in Equity (USD $)
In Millions, except Share data, unless otherwise specified
Total
Common Stock [Member]
Capital in Excess of Par Value of Shares [Member]
Retained Earnings [Member]
Common Shares in Treasury [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Noncontrolling Interest [Member]
Balance, beginning of period at Dec. 31, 2009
$ 2,537.0 
$ 16.8 
$ 695.4 
$ 1,973.1 
$ (19.9)
$ (122.6)
$ (5.8)
Balance, beginning of period (in shares) at Dec. 31, 2009
 
131,000,000 
 
 
 
 
 
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
 
 
 
 
 
Net income
1,019.9 
 
 
1,019.9 
 
 
Pension and OPEB liability, net of tax
14.8 
 
 
 
 
14.0 
0.8 
Unrealized net gain on marketable securities, net of tax
4.2 
 
 
 
 
4.2 
 
Unrealized net gain (loss) on foreign currency translation
151.6 
 
 
 
 
151.6 
 
Reclassification of net gains on derivative financial instruments into net income, net of tax
(3.2)
 
 
 
 
(3.2)
 
Unrealized gain on derivative instruments, net of tax
1.9 
 
 
 
 
1.9 
 
Total comprehensive income (loss)
1,189.2 
 
 
 
 
 
0.8 
Purchase of subsidiary shares from noncontrolling interest
(0.5)
 
 
 
 
 
(0.5)
Undistributed losses to noncontrolling interest
(4.7)
 
 
 
 
 
(4.7)
Capital contribution by noncontrolling interest to subsidiary
3.0 
 
 
 
 
 
3.0 
Purchase of additional noncontrolling interest
(1.6)
 
(1.6)
 
 
 
 
Acquisition of controlling interest (in shares)
 
4,200,000 
 
 
 
 
 
Acquisition of controlling interest
173.1 
0.5 
172.6 
 
 
 
 
Stock and other incentive plans (in shares)
 
300,000 
 
 
 
 
 
Stock and other incentive plans
12.1 
 
19.4 
 
(7.3)
 
 
Common stock dividends
(68.9)
 
 
(68.9)
 
 
 
Other
 
10.5 
 
(10.5)
 
 
Balance, end of period at Dec. 31, 2010
3,838.7 
17.3 
896.3 
2,924.1 
(37.7)
45.9 
(7.2)
Balance, end of period (in shares) at Dec. 31, 2010
 
135,500,000 
 
 
 
 
 
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
 
 
 
 
 
Net income
1,812.6 
 
 
1,619.1 
 
 
193.5 
Pension and OPEB liability, net of tax
(121.4)
 
 
 
 
(103.8)
(17.6)
Unrealized net gain on marketable securities, net of tax
(31.0)
 
 
 
 
(31.0)
 
Unrealized net gain (loss) on foreign currency translation
(2.2)
 
 
 
 
(2.2)
 
Reclassification of net gains on derivative financial instruments into net income, net of tax
(3.3)
 
 
 
 
(3.3)
 
Unrealized gain on derivative instruments, net of tax
1.8 
 
 
 
 
1.8 
 
Total comprehensive income (loss)
1,656.5 
 
 
 
 
 
175.9 
Share buyback (in shares)
 
(4,000,000)
 
 
 
 
 
Share buyback
(289.8)
 
 
 
(289.8)
 
 
Equity offering (in shares)
 
10,300,000 
 
 
 
 
 
Equity offering
853.7 
1.2 
852.5 
 
 
 
 
Purchase of subsidiary shares from noncontrolling interest
4.5 
 
 
 
 
 
4.5 
Capital contribution by noncontrolling interest to subsidiary
6.3 
 
0.2 
 
 
 
6.1 
Acquisition of controlling interest
1,075.4 
 
 
 
 
 
1,075.4 
Stock and other incentive plans (in shares)
 
200,000 
 
 
 
 
 
Stock and other incentive plans
13.3 
 
21.8 
 
(8.5)
 
 
Common stock dividends
(118.9)
 
 
(118.9)
 
 
 
Balance, end of period at Dec. 31, 2011
7,039.7 
18.5 
1,770.8 
4,424.3 
(336.0)
(92.6)
1,254.7 
Balance, end of period (in shares) at Dec. 31, 2011
142,021,718 
142,000,000 
 
 
 
 
 
Comprehensive Income (Loss), Net of Tax, Including Portion Attributable to Noncontrolling Interest [Abstract]
 
 
 
 
 
 
 
Net income
(1,126.6)
 
 
(899.4)
 
 
(227.2)
Pension and OPEB liability, net of tax
33.8 
 
 
 
 
26.2 
7.6 
Unrealized net gain on marketable securities, net of tax
(0.5)
 
 
 
 
(0.5)
 
Reclassification of net gain on foreign currency translation
(14.4)
 
 
 
 
(14.4)
 
Unrealized net gain (loss) on foreign currency translation
18.2 
 
 
 
 
18.2 
 
Reclassification of net gains on derivative financial instruments into net income, net of tax
(18.1)
 
 
 
 
(18.1)
 
Unrealized gain on derivative instruments, net of tax
25.6 
 
 
 
 
25.6 
 
Total comprehensive income (loss)
(1,082.0)
 
 
 
 
 
(219.6)
Purchase of subsidiary shares from noncontrolling interest
(2.1)
 
 
 
 
 
(2.1)
Undistributed losses to noncontrolling interest
0.4 
 
 
 
 
 
0.4 
Capital contribution by noncontrolling interest to subsidiary
104.4 
 
1.6 
 
 
 
102.8 
Acquisition of controlling interest
(8.0)
 
 
 
 
 
(8.0)
Stock and other incentive plans (in shares)
 
500,000 
 
 
 
 
 
Stock and other incentive plans
15.7 
 
2.3 
 
13.4 
 
 
Common stock dividends
(307.2)
 
 
(307.2)
 
 
 
Balance, end of period at Dec. 31, 2012
$ 5,760.9 
$ 18.5 
$ 1,774.7 
$ 3,217.7 
$ (322.6)
$ (55.6)
$ 1,128.2 
Balance, end of period (in shares) at Dec. 31, 2012
142,495,902 
142,500,000 
 
 
 
 
 
Statements of Consolidated Changes in Equity (Parenthetical) (Common Stock [Member], USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Common Stock [Member]
 
 
 
Class of Stock [Line Items]
 
 
 
Common stock dividends per share
$ 2.16 
$ 0.84 
$ 0.51 
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
NOTE 1 - BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
Business Summary
We are an international mining and natural resources company, a major global iron ore producer and a significant producer of high and low-volatile metallurgical coal. In the U.S., we operate five iron ore mines in Michigan and Minnesota, six metallurgical coal mines located in West Virginia and Alabama and one thermal coal mine located in West Virginia. We also operate two iron ore mines in Eastern Canada. As of December 31, 2012, our Asia Pacific operations consist solely of our Koolyanobbing iron ore mining complex in Western Australia. Our 50 percent equity interest in Cockatoo Island, an iron ore mine, and our 45 percent economic interest in Sonoma, a coking and thermal coal mine, were also included in these operations through their sale dates in the third and fourth quarter, respectively. In Latin America, we have a 30 percent interest in Amapá, a Brazilian iron ore project, the sale of which our board approved in December 2012, and in Ontario, Canada we have a major chromite project in the feasibility study stage of exploration. In addition, our Global Exploration Group is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. Our Company’s operations are organized 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.
Significant Accounting Policies
We consider the following policies to be beneficial in understanding the judgments that are involved in the preparation of our consolidated financial statements and the uncertainties that could impact our financial condition, results of operations and cash flows.
Use of Estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions related to mineral reserves future realizable cash flow; environmental, reclamation and closure obligations; valuation of goodwill, long-lived assets and investments; valuation of inventory, valuation of post-employment, post-retirement and other employee benefit liabilities; valuation of deferred tax assets; reserves for contingencies and litigation; and the fair value of derivative instruments. Actual results could differ from estimates. On an ongoing basis, management reviews estimates. Changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.
Basis of Consolidation
The 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.
On May 12, 2011, we acquired all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt. The consolidated financial statements as of and for the year ended December 31, 2011 reflect our 100 percent interest in Consolidated Thompson since that date. Refer to NOTE 6 - ACQUISITIONS AND OTHER INVESTMENTS for further information.
Also included in our consolidated results are Cliffs Chromite Ontario Inc. and Cliffs Chromite Far North Inc., which together have a 100 percent interest in each of the Black Label and Black Thor chromite deposits and a 70 percent interest in the Big Daddy chromite deposit, all located in northern Ontario, Canada.
Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit as well as all short-term securities held for the primary purpose of general liquidity. We consider investments in highly liquid debt instruments with an original maturity of three months or less from the date of acquisition to be cash equivalents. We routinely monitor and evaluate counterparty credit risk related to the financial institutions by which our short-term investment securities are held.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company establishes provisions for losses on accounts receivable when it is probable that all or part of the outstanding balance will not be collected. The Company regularly reviews its accounts receivable balances and establishes or adjusts the allowance as necessary using the specific identification method. The allowance for doubtful accounts was $8.1 million at December 31, 2012. There was no allowance for doubtful accounts at December 31, 2011. Bad debt expense was $9.0 million and $5.9 million for the years ended December 31, 2012 and 2011. There was no bad debt expense for the year ended December 31, 2010.
Inventories
U.S. Iron Ore
U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method.
We had approximately 1.3 million tons and 1.2 million tons of finished goods stored at ports and customer facilities on the lower Great Lakes to service customers at December 31, 2012 and 2011, respectively. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers.
Eastern Canadian Iron Ore
Iron ore pellet inventories are stated at the lower of cost or market. The cost is determined using the LIFO method. We primarily maintain ownership of these inventories until loading of the product at the port.
Iron ore concentrate inventories are stated at the lower of cost or market. The cost of iron ore concentrate inventories is determined using weighted average cost. We maintain ownership of the iron ore concentrate inventories until loading of the product at the port.
Asia Pacific Iron Ore
Asia Pacific Iron Ore product inventories are stated at the lower of cost or market. Costs of inventories are being valued on a weighted average basis. We maintain ownership of the inventories until title has transferred to the customer, which is generally when the product is loaded into the vessel.
North American Coal
North American Coal product inventories are stated at the lower of cost or market. Cost of coal inventories is calculated using the weighted average cost. We maintain ownership until coal is loaded into rail cars at the mine for domestic sales and until loaded in the vessels at the terminal for export sales.
Supplies and Other Inventories
Supply inventories include replacement parts, fuel, chemicals, and other general supplies which are expected to be used or consumed in normal operations within one year. Supply inventories also include critical spares. Critical spares are replacement parts for equipment that is critical for the continued operation of the mine or processing facilities.
Supply inventories are stated at the lower of cost or market using average cost, less an allowance for obsolete and surplus items.
Derivative Financial Instruments and Hedging Activities
We are exposed to certain risks related to the ongoing operations of our business, including those caused by changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures, including the use of certain derivative instruments, to manage such risks.
Derivative financial instruments are recognized as either assets or liabilities in the Statements of Consolidated Financial Position and measured at fair value. On the date a derivative instrument is entered into, we generally designate a qualifying derivative instrument as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability or forecasted transaction (cash flow hedge). We formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific firm commitments or forecasted transactions. We also formally assesses both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the related hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively and record all future changes in fair value in the period of the instrument's earnings or losses. The policy allows for not more than 75 percent, but not less than 40 percent for up to 12 months and not less than 10 percent for up to 15 months, of forecasted net currency exposures that are probable to occur.
For derivative instruments that have been designated as cash flow hedges, the effective portion of the changes in fair value are recorded in accumulated other comprehensive income (loss) and any portion that is ineffective is recorded in current period earnings or losses. Amounts recorded in accumulated other comprehensive income (loss) are reclassified to earnings or losses in the period the underlying hedged transaction affects earnings or when the underlying hedged transaction is no longer probable of occurring.
For derivative instruments that have not been designated as cash flow hedges, changes in fair value are recorded in the period of the instrument's earnings or losses.
Refer to NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Property, Plant and Equipment
U.S. Iron Ore and Eastern Canadian Iron Ore
U.S. Iron Ore and Eastern Canadian Iron Ore properties are stated at cost. Depreciation of plant and equipment is computed principally by the straight-line method based on estimated useful lives, not to exceed the mine lives. Northshore, United Taconite, Empire, Tilden and Wabush use the double declining balance method of depreciation for certain mining equipment. Depreciation is provided over the following estimated useful lives:
Asset Class
 
Basis
 
Life
Buildings
 
Straight line
 
45 Years
Mining equipment
 
Straight line/Double declining
balance
 
10 to 20 Years
Processing equipment
 
Straight line
 
15 to 45 Years
Information technology
 
Straight line
 
2 to 7 Years

Depreciation continues to be recognized when operations are temporarily idled.
Asia Pacific Iron Ore
Our Asia Pacific Iron Ore properties are stated at cost. Depreciation is calculated by the straight-line method or production output basis, not to exceed the mine life, provided over the following estimated useful lives:
Asset Class
 
Basis
 
Life
Plant and equipment
 
Straight line
 
5 to 10 Years
Plant and equipment and mine assets
 
Production output
 
10 Years
Motor vehicles, furniture & equipment
 
Straight line
 
3 to 5 Years

The costs capitalized and classified as Land rights and mineral rights represent lands where we own the surface and/or mineral rights.
Our Asia Pacific Iron Ore, Bloom Lake, Wabush, and United Taconite operations' interest in iron ore reserves and mineralized materials was valued when acquired using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from iron ore operations over the economic lives of the mines. Refer to NOTE 5 - PROPERTY, PLANT AND EQUIPMENT for further information.
North American Coal
North American Coal properties are stated at cost. Depreciation is provided over the estimated useful lives, not to exceed the mine lives and is calculated by the straight-line method. Depreciation is provided over the following estimated useful lives:
Asset Class
 
Basis
 
Life
Buildings
 
Straight line
 
30 Years
Mining equipment
 
Straight line
 
2 to 22 Years
Processing equipment
 
Straight line
 
2 to 30 Years
Information technology
 
Straight line
 
2 to 3 Years

Our North American Coal operation leases coal mining rights from third parties through lease agreements. The lease agreements are for varying terms and extend through the earlier of their lease termination date or until all merchantable and mineable coal has been extracted. Our interest in coal reserves and non-reserve coal was valued when acquired using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from coal operations over the life of the reserves acquired.
Capitalized Stripping Costs
During the development phase, stripping costs are capitalized as a part of the depreciable cost of building, developing and constructing a mine. These capitalized costs are amortized over the productive life of the mine using the units of production method. The production phase does not commence until the removal of more than a de minimis amount of saleable mineral material occurs in conjunction with the removal of overburden or waste material for purposes of obtaining access to an ore body. The stripping costs incurred in the production phase of a mine are variable production costs included in the costs of the inventory produced (extracted) during the period that the stripping costs are incurred.
Stripping costs related to expansion of a mining asset of proven and probable reserves are variable production costs that are included in the costs of the inventory produced during the period that the stripping costs are incurred.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, the ventures' operating activities 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 Consolidated Financial Position as of December 31, 2012 and December 31, 2011. Parentheses indicate a net liability.
 
 
 
 
 
 
 
 
(In Millions)
Investment
 
Classification
 
Accounting
Method
 
Interest
Percentage
 
December 31, 2012
 
December 31, 2011
Amapá
 
Investments in ventures
 
Equity Method
 
30
 
$
101.9

 
$
498.6

Cockatoo
 
Other liabilities
 
Equity Method
 
50
 
(25.3
)
 
(15.0
)
Hibbing
 
Other liabilities
 
Equity Method
 
23
 
(2.1
)
 
(6.8
)
Other
 
Investments in ventures
 
Equity Method
 
Various
 
33.9

 
28.0

 
 
 
 
 
 
 
 
$
108.4

 
$
504.8


Amapá
Our 30 percent ownership is accounted for under the equity method as we do not have control, but have the ability to exercise significant influence over operating and financial policies. Accordingly, our share of the results from Amapá is reflected as Equity income (loss) from ventures in the Statements of Consolidated Operations. The financial information of Amapá included in our financial statements is for the twelve months ended November 30, 2012, 2011 and 2010 and as of November 30, 2012 and 2011. The earlier cut-off is to allow for sufficient time needed by Amapá to properly close and prepare complete financial information, including consolidating and eliminating entries, conversion to U.S. GAAP and review by the Company.
On December 27, 2012, our Board of Directors authorized the sale of our 30 percent interest in Amapá. Together with Anglo American plc., we will be selling our respective interest in a 100 percent sale transaction to a single entity. The carrying value of our investment was in excess of the net proceeds expected from the sale, which approximates fair value, resulting in a $365.4 million impairment charge, which was recorded through Equity income (loss) from ventures in the Statements of Consolidated Operations for the year ended December 31, 2012.
Hibbing and Cockatoo Island
Our share of equity income (loss) is eliminated against consolidated product inventory upon production, and against Cost of goods sold and operating expenses when sold. This effectively reduces our cost for our share of the mining ventures' production cost, reflecting the cost-based nature of our participation in unconsolidated ventures.
In August 2011, we entered into a term sheet 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. On July 31, 2012, the parties entered into a definitive asset sale agreement, which was amended on August 31, 2012. On September 7, 2012, the closing date, Pluton Resources paid as consideration under the asset sale agreement, 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. With respect to those rehabilitation obligations and assumed liabilities that are inherently attached to the tenements, those obligations and liabilities will automatically transfer to, and be assumed by, Pluton Resources upon registration of each of the tenements in Pluton Resources' name. Registration of the tenements in Pluton Resources' name cannot occur until the Office of State Revenue assesses the amount of stamp duty payable by Pluton Resources and the requisite bonds and stamped transfer forms are lodged by Pluton Resources with the Department of Mining and Petroleum. This process is expected to be completed during the first half of 2013. As of December 31, 2012, our portion of the current estimated cost of the rehabilitation is approximately $24 million and will be extinguished upon registration of the tenements in Pluton Resources' name. Cliffs and HWE Cockatoo Pty Ltd. completed the current stage of mining, Stage 3, at Cockatoo Island on September 30, 2012.
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. We had goodwill of $167.4 million and $1,152.1 million recorded in the Statements of Consolidated Financial Position at December 31, 2012 and 2011, respectively. In accordance with the provisions of ASC 350, we compare the fair value of the respective reporting unit to its carrying value on an annual basis (or more frequently if necessary as discussed below) to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied value of the goodwill within the reporting unit is less than the carrying value of its goodwill.
After performing our annual goodwill impairment test in the fourth quarter of 2012, we determined that $997.3 million and $2.7 million of goodwill associated with our CQIM and Wabush reporting units, respectively, was impaired.
Refer to NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES and NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
Other Intangible Assets and Liabilities
Other intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:
Intangible Asset
 
Useful Life (years)
Permits
 
15 - 40
Utility contracts
 
5
Leases
 
4.5 - 17.5

Asset Impairment
Long-Lived Tangible and Intangible Assets
We monitor conditions that may affect the carrying value of our long-lived tangible and intangible assets when events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available ("asset group"). An impairment loss exists when projected undiscounted cash flows are less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach.
We determined there was long-lived asset impairment related to the Wabush mine's pelletizing operations that resulted in an impairment charge of $49.9 million at December 31, 2012.
Refer to NOTE 5 - PROPERTY, PLANT AND EQUIPMENT and NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
Fair Value Measurements
Valuation Hierarchy
ASC 820 establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below:
Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Valuation methodologies used for assets and liabilities measured at fair value are as follows:
Cash Equivalents
Where quoted prices are available in an active market, cash equivalents are classified within Level 1 of the valuation hierarchy. Cash equivalents classified in Level 1 at December 31, 2012 and 2011 include money market funds. Valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets.
Marketable Securities
Where quoted prices are available in an active market, marketable securities are classified within Level 1 of the valuation hierarchy. Marketable securities classified in Level 1 at December 31, 2012 and 2011 include available-for-sale securities. The valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets.
Derivative Financial Instruments
Derivative financial instruments valued using financial models that use as their basis readily observable market parameters are classified within Level 2 of the valuation hierarchy. Such derivative financial instruments include substantially all of our foreign currency exchange contracts and derivative financial instruments that are valued based upon published pricing settlements realized by other companies in the industry. Derivative financial instruments that are valued based upon models with significant unobservable market parameters and are normally traded less actively, are classified within Level 3 of the valuation hierarchy.
Refer to NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 13 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Pensions and Other Postretirement Benefits
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total compensation and benefits program. Upon the acquisition of the remaining 73.2 percent interest in Wabush in February 2010, we fully consolidated the related Canadian plans into our pension and OPEB obligations. We do not have employee pension or post-retirement benefit obligations at our Asia Pacific Iron Ore operations.
We recognize the funded or unfunded status of our postretirement benefit obligations on our December 31, 2012 and 2011 Statements of Consolidated Financial Position based on the difference between the market value of plan assets and the actuarial present value of our retirement obligations on that date, on a plan-by-plan basis. If the plan assets exceed the retirement obligations, the amount of the surplus is recorded as an asset; if the retirement obligations exceed the plan assets, the amount of the underfunded obligations are recorded as a liability. Year-end balance sheet adjustments to postretirement assets and obligations are recorded as Accumulated other comprehensive loss.
The market value of plan assets is measured at the year-end balance sheet date. The PBO is determined based upon an actuarial estimate of the present value of pension benefits to be paid to current employees and retirees. The APBO represents an actuarial estimate of the present value of OPEB benefits to be paid to current employees and retirees.
The actuarial estimates of the PBO and APBO retirement obligations incorporate various assumptions including the discount rates, the rates of increases in compensation, healthcare cost trend rates, mortality, retirement timing and employee turnover. For the U.S. and Canadian plans, the discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration matching the expected cash flow timing of the benefit payments from the various plans. The remaining assumptions are based on our estimates of future events by incorporating historical trends and future expectations. The amount of net periodic cost that is recorded in the Statements of Consolidated Operations consists of several components including service cost, interest cost, expected return on plan assets, and amortization of previously unrecognized amounts. Service cost represents the value of the benefits earned in the current year by the participants. Interest cost represents the cost associated with the passage of time. Certain items, such as plan amendments, gains and/or losses resulting from differences between actual and assumed results for demographic and economic factors affecting the obligations and assets of the plans, and changes in other assumptions are subject to deferred recognition for income and expense purposes. The expected return on plan assets is determined utilizing the weighted average of expected returns for plan asset investments in various asset categories based on historical performance, adjusted for current trends. See NOTE 13 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Asset Retirement Obligations
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The fair value of the liability is determined as the discounted value of the expected future cash flow. The asset retirement obligation is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and amortized over the life of the related asset. Reclamation costs are adjusted periodically to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. We review, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site in accordance with the provisions of ASC 410. We perform an in-depth evaluation of the liability every three years in addition to routine annual assessments, most recently performed in 2011, except for Asia Pacific Iron Ore operations which was performed in 2012.
Future remediation costs for inactive mines are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. See NOTE 12 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Environmental Remediation Costs
We have a formal policy for environmental protection and restoration. Our mining and exploration activities are subject to various laws and regulations governing protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost only can be estimated as a range of possible amounts with no point in the range being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements reasonably can be estimated. It is possible that additional environmental obligations could be incurred, the extent of which cannot be assessed. Potential insurance recoveries have not been reflected in the determination of the liabilities. See NOTE 12 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Revenue Recognition
U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore
We sell our products pursuant to comprehensive supply agreements negotiated and executed with our customers. Revenue is recognized from a sale when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product is delivered in accordance with F.O.B. terms, title and risk of loss have transferred to the customer in accordance with the specified provisions of each supply agreement and collection of the sales price reasonably is assured. Our U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore supply agreements provide that title and risk of loss transfer to the customer either upon loading of the vessel, shipment or, as is the case with some of our U.S. Iron Ore supply agreements, when payment is received. Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customers’ facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure.
Iron ore sales are recorded at a sales price specified in the relevant supply agreements resulting in revenue and a receivable at the time of sale. Upon revenue recognition for provisionally priced sales, a freestanding derivative is created for the difference between the sales price used and expected future settlement price. The derivative, which does not qualify for hedge accounting, is adjusted to fair value through Product revenues as a revenue adjustment each reporting period based upon current market data and forward-looking estimates determined by management until the final sales price is determined. The principal risks associated with recognition of sales on a provisional basis include iron ore price fluctuations between the date initially recorded and the date of final settlement. For revenue recognition, we estimate the future settlement rate; however, if significant changes in iron ore prices occur between the provisional pricing date and the final settlement date, we might be required to either return a portion of the sales proceeds received or bill for the additional sales proceeds due based on the provisional sales price. Refer to NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing for the year 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 record this provision at fair value until the year the product is consumed and the amounts are settled as an adjustment to revenue. Refer to NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
Revenue from product sales also includes reimbursement for freight charges paid on behalf of customers in Freight and venture partners' cost reimbursements separate from Product revenues. Revenue is recognized for the expected reimbursement of services when the services are performed.
North American Coal
We sell our products pursuant to supply agreements negotiated and executed with our customers. Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, the product is delivered in accordance with F.O.B. terms, title and risk of loss have transferred to the customer in accordance with the specified provisions of each supply agreement and collection of the sales price reasonably is assured. Delivery on our coal sales is determined to be complete for revenue recognition purposes when title and risk of loss has passed to the customer in accordance with stated contractual terms and there are no other future obligations related to the shipment. For domestic shipments, title and risk of loss generally passes as the coal is loaded into transport carriers for delivery to the customer. For international shipments, title generally passes at the time coal is loaded onto the shipping vessel. Revenue from product sales in 2012, 2011 and 2010 included reimbursement for freight charges paid on behalf of customers of $101.0 million, $18.3 million and $41.9 million, respectively and recorded in Freight and venture partners' cost reimbursements on the Statements of Consolidated Operations.
Deferred Revenue
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 2012, with the option to defer a portion of the 2009 monthly amount in exchange for interest payments until the deferred amount is repaid in 2013. Installment amounts received under this arrangement in excess of sales are classified as deferred revenue in the Statements of Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement, which extends until 2022, in equal annual installments. As of December 31, 2012 and 2011, installment amounts received in excess of sales totaled $128.4 million and $91.7 million, respectively. As of December 31, 2012, deferred revenue of $12.8 million is recorded as current in Deferred revenue and $115.6 million is recorded as long-term in Other liabilities in the Statements of Consolidated Financial Position. As of December 31, 2011, $91.7 million was recorded as current in Deferred revenue in the Statements of Consolidated Financial Position.
In 2012 and 2011, certain customers purchased and paid for 0.2 million tons and 0.2 million tons of pellets that were not delivered by year-end, respectively. In 2012, the customer purchases were made in order to secure the 2012 pricing on shipments to occur in early 2013, and in 2011, the customer purchases were made in order to secure the 2011 pricing on shipments that occurred in early 2012. In 2012 and 2011, at the request of the customers the ore was not shipped, therefore the inventory remained at our facilities. We considered whether revenue should be recognized on these sales under the “bill and hold” guidance provided by the SEC Staff; however, based upon the assessment performed, revenue recognition on these transactions totaling $17.1 million and $15.8 million, respectively, was deferred on the December 31, 2012 and 2011 Statements of Consolidated Financial Position. As of December 31, 2011, 0.1 million tons that had been previously paid for by the customer in 2010, resulted in the recognition of $15.1 million of revenues in 2012 when shipped.
Cost of Goods Sold
U.S. Iron Ore, Eastern Canadian Iron Ore and Asia Pacific Iron Ore
Cost of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations. Operating expenses primarily represent the portion of the Tilden mining venture costs for which we do not own; that is, the costs attributable to the share of the mine’s production owned by the other joint venture partner in the Tilden mine. The mining venture functions as a captive cost company; it supplies product only to its owners effectively on a cost basis. Accordingly, the noncontrolling interests’ revenue amounts are stated at cost of production and are offset by an equal amount included in Cost of goods sold and operating expenses resulting in no sales margin reflected for the noncontrolling partner participant. As we are responsible for product fulfillment, we act as a principal in the transaction and, accordingly, record revenue under these arrangements on a gross basis.
The following table is a summary of reimbursements in our U.S. Iron Ore operations for the years ended December 31, 2012, 2011 and 2010:
 
 
(In Millions)
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Reimbursements for:
 
 
 
 
 
 
Freight
 
$
142.0

 
$
128.4

 
$
83.6

Venture partners’ cost
 
108.8

 
95.9

 
139.8

Total reimbursements
 
$
250.8

 
$
224.3

 
$
223.4


Where we have joint ownership of a mine, our contracts entitle us to receive royalties and/or management fees, which we earn as the pellets are produced.
North American Coal
Cost of goods sold and operating expenses represent all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations.
Repairs and Maintenance
Repairs, maintenance and replacement of components are expensed as incurred. The cost of major power plant overhauls is capitalized and depreciated over the estimated useful life, which is the period until the next scheduled overhaul, generally five years. All other planned and unplanned repairs and maintenance costs are expensed when incurred.
Share-Based Compensation
The fair value of each grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. Consistent with the guidelines of ASC 718, a correlation matrix of historic and projected stock prices was developed for both the Company and its 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 three plan year agreements. We estimated 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 plans.
Cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense are classified as financing cash flows. Refer to NOTE 14 - STOCK COMPENSATION PLANS for additional information.
Income Taxes
Income taxes are based on income for financial reporting purposes, calculated using tax rates by jurisdiction, and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes. Any interest or penalties on income tax are recognized as a component of income tax expense.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results of operations.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits.
See NOTE 15 - INCOME TAXES for further information.
Earnings Per Share
We present both basic and diluted EPS amounts. Basic EPS are calculated by dividing income attributable to Cliffs common shareholders by the weighted average number of common shares outstanding during the period presented. Diluted EPS are calculated by dividing Net Income (Loss) Attributable to Cliffs Shareholders by the weighted average number of common shares, common share equivalents and convertible preferred stock outstanding during the period, utilizing the treasury stock method for employee stock plans. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect. See NOTE 19 - EARNINGS PER SHARE for further information.
Foreign Currency Translation
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of the Company’s Australian subsidiaries is the Australian Dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive loss. Where the U.S. dollar is the functional currency, translation adjustments are recorded in the Statements of Consolidated Operations. Income taxes generally are not provided for foreign currency translation adjustments.
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 13, 2012, we collected approximately AUD $141.0 million in net cash proceeds. The assets sold included our interests in the Sonoma mine along with our ownership of the affiliated washplant. As of September 30, 2012, we began reporting the assets and liabilities of the Sonoma operations as Assets held for sale and Liabilities held for sale in the Statements of Consolidated Financial Position and reflected the results of operations as discontinued operations in the Statements of Consolidated Operations for all periods presented. The Sonoma operations were previously included in Other within our reportable segments. Refer to NOTE 7 - DISCONTINUED OPERATIONS for additional information.
On September 27, 2011, we announced our plans to cease and dispose of the operations at the renewaFUEL biomass production facility in Michigan. On January 4, 2012, we entered into an agreement to sell the renewaFUEL assets to RNFL Acquisition, LLC. The results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. We recorded a loss of $0.1 million as Income (Loss) and Gain on Sale from Discontinued Operations, net of tax in the Statements of Consolidated Operations for the year ended December 31, 2012. This compares to losses of $18.5 million, net of $9.2 million in tax benefits, and $3.1 million, net of $1.5 million in tax benefits, respectively, for the years ended December 31, 2011 and 2010. The loss recorded for the year ended December 31, 2011, included a $16.0 million impairment charge, taken to write the renewaFUEL assets down to fair value.
The impairment charge taken in the third quarter of 2011 was based on an internal assessment around the recovery of the renewaFUEL assets, primarily property, plant and equipment. The assessment considered several factors including the unique industry, the highly customized nature of the related property, plant and equipment and the fact that the plant had not performed up to design capacity. Given these points of consideration, it was determined that the expected recovery values on the renewaFUEL assets were low. The renewaFUEL total assets were recorded at fair value in the Statements of Consolidated Financial Position as of December 31, 2011, and primarily are comprised of property, plant and equipment. The renewaFUEL operations were previously included in Other within our reportable segments.
Recent Accounting Pronouncements
In May 2011, the FASB amended the guidance on fair value as a result of the joint efforts by the FASB and the IASB to develop a single, converged fair value framework. The amended fair value framework provides guidance on how to measure fair value and on what disclosures to provide about fair value measurements. The significant amendments to the fair value measurement guidance and the new disclosure requirements include: (1) the highest and best use and valuation premise for non-financial assets; (2) the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risks; (3) premiums or discounts in fair value measurement; (4) fair value of an instrument classified in a reporting entity’s shareholders’ equity; (5) for Level 3 measurements, a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place and a narrative description of the sensitivity of the fair value to changes in the unobservable inputs and interrelationships between those inputs; and (6) the level in the fair value hierarchy of items that are not measured at fair value in the Statement of Financial Position but whose fair value must be disclosed. The new guidance is effective for interim and annual periods beginning after December 15, 2011. We adopted the amended guidance as of January 1, 2012. Refer to NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS 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 six 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, which we expect the sale of to close during the first half of 2013. 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 Asia Pacific Coal, Latin American Iron Ore, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and, therefore, are not reported separately.
During the fourth quarter of 2012, we sold our 45 percent economic interest in Sonoma, which comprised the Asia Pacific Coal operating segment. Refer to NOTE 7 - DISCONTINUED OPERATIONS.
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 years ended December 31, 2012, 2011, and 2010, including a reconciliation of segment sales margin to Income (Loss) from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures:
 
(In Millions)
 
2012
 
2011
 
2010
Revenues from product sales and services:
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
2,723.3

 
46
%
 
$
3,509.9

 
53
%
 
$
2,443.7

 
54
%
Eastern Canadian Iron Ore
1,008.9

 
17
%
 
1,178.1

 
18
%
 
477.7

 
11
%
Asia Pacific Iron Ore
1,259.3

 
22
%
 
1,363.5

 
21
%
 
1,123.9

 
25
%
North American Coal
881.1

 
15
%
 
512.1

 
8
%
 
438.2

 
10
%
Other
0.1

 
%
 
0.3

 
%
 
0.3

 
%
Total revenues from product sales and services
$
5,872.7

 
100
%
 
$
6,563.9

 
100
%
 
$
4,483.8

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
976.2

 
 
 
$
1,679.3

 
 
 
788.4

 
 
Eastern Canadian Iron Ore
(121.4
)
 
 
 
290.9

 
 
 
133.6

 
 
Asia Pacific Iron Ore
311.0

 
 
 
699.5

 
 
 
566.2

 
 
North American Coal
(1.8
)
 
 
 
(58.4
)
 
 
 
(28.6
)
 
 
Other
8.1

 
 
 
(0.4
)
 
 
 
(0.9
)
 
 
Sales margin
1,172.1

 
 
 
2,610.9

 
 
 
1,458.7

 
 
Other operating expense
(1,480.9
)
 
 
 
(314.1
)
 
 
 
(225.9
)
 
 
Other income (expense)
(193.0
)
 
 
 
(106.3
)
 
 
 
33.6

 
 
Income (loss) from continuing operations before income taxes and equity income (loss) from ventures
$
(501.8
)
 
 
 
$
2,190.5

 
 
 
1,266.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
100.9

 
 
 
$
86.2

 
 
 
61.7

 
 
Eastern Canadian Iron Ore
160.2

 
 
 
124.6

 
 
 
41.9

 
 
Asia Pacific Iron Ore
151.9

 
 
 
100.9

 
 
 
133.9

 
 
North American Coal
98.2

 
 
 
86.5

 
 
 
60.4

 
 
Other
14.6

 
 
 
28.7

 
 
 
24.4

 
 
Total depreciation, depletion and amortization
$
525.8

 
 
 
$
426.9

 
 
 
322.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital additions (1):
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
168.8

 
 
 
$
191.4

 
 
 
84.7

 
 
Eastern Canadian Iron Ore
865.2

 
 
 
303.1

 
 
 
18.8

 
 
Asia Pacific Iron Ore
87.7

 
 
 
262.0

 
 
 
53.6

 
 
North American Coal
144.1

 
 
 
181.0

 
 
 
89.5

 
 
Other
69.5

 
 
 
23.4

 
 
 
29.2

 
 
Total capital additions
$
1,335.3

 
 
 
$
960.9

 
 
 
275.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
1,735.1

 
 
 
1,691.8

 
 
 
1,537.1

 
 
Eastern Canadian Iron Ore
7,605.1

 
 
 
7,973.1

 
 
 
629.6

 
 
Asia Pacific Iron Ore
1,506.3

 
 
 
1,511.2

 
 
 
1,195.3

 
 
North American Coal
1,877.8

 
 
 
1,814.4

 
 
 
1,623.8

 
 
Other
570.9

 
 
 
1,017.6

 
 
 
1,257.8

 
 
Total segment assets
13,295.2

 
 
 
14,008.1

 
 
 
6,243.6

 
 
Corporate
279.7

 
 
 
533.6

 
 
 
1,534.6

 
 
Total assets
13,574.9

 
 
 
14,541.7

 
 
 
7,778.2

 
 
                                         
(1)    Includes capital lease additions and non-cash accruals. Refer to NOTE 21 - CASH FLOW INFORMATION
Included in the consolidated financial statements are the following amounts relating to geographic location:
 
(In Millions)
 
2012
 
2011
 
2010
Revenue
 
 
 
 
 
United States
$
2,108.5

 
$
2,774.1

 
$
1,966.3

China
2,008.2

 
2,114.5

 
1,212.6

Canada
728.1

 
914.3

 
696.5

Other countries
1,027.9

 
761.0

 
608.4

Total revenue
5,872.7

 
6,563.9

 
4,483.8

Property, Plant and Equipment, Net
 
 
 
 
 
United States
$
2,795.3

 
$
2,684.9

 
$
2,498.8

Australia
1,042.4

 
1,017.8

 
973.7

Canada
7,369.6

 
6,701.4

 
506.7

Total Property, Plant and Equipment, Net
11,207.3

 
10,404.1

 
3,979.2


Concentrations in Revenue
In 2012, one customer individually accounted for more than 10 percent of our consolidated product revenue. In 2011 and 2010, one customer and three customers, respectively, individually accounted for more than 10 percent of our consolidated product revenue. Total revenue from those customers accounted for more than 10 percent of our consolidated product revenues and represents approximately $923.7 million, $1.4 billion and $1.8 billion of our total consolidated product revenue in 2012, 2011 and 2010, respectively, and is attributable to our U.S. Iron Ore, Eastern Canadian Iron Ore and North American Coal business segments.
The following table represents the percentage of our total revenue contributed by each category of products and services in 2012, 2011, and 2010:
 
 
2012
 
2011
 
2010
Revenue Category
 
 
 
 
 
 
Iron ore
 
81
%
 
88
%
 
84
%
Coal
 
13
%
 
8
%
 
9
%
Freight and venture partners’ cost reimbursements
 
6
%
 
4
%
 
7
%
Total revenue
 
100
%
 
100
%
 
100
%
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 Consolidated Financial Position as of December 31, 2012 and December 31, 2011:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
Derivative assets
 
$
16.2

 
Derivative assets
 
$
5.2

 
Other current liabilities
 
$
1.9

 
Other current liabilities
 
$
3.5

Total derivatives designated as hedging instruments under ASC 815
 
 
$
16.2

 
 
 
$
5.2

 
 
 
$
1.9

 
 
 
$
3.5

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
Derivative assets
 
$

 
Derivative assets
 
$
2.8

 
 
 
$

 
 
 
$

Customer Supply Agreements
Derivative assets
 
58.9

 
Derivative assets
 
72.9

 
 
 

 
 
 

Provisional Pricing Arrangements
Derivative assets
 
3.5

 
Derivative assets
 
1.2

 
Other current liabilities
 
11.3

 
Other current liabilities
 
19.5

 
Accounts receivable, net
 

 
Accounts receivable, net
 
83.8

 
 
 

 
 
 

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
62.4

 
 
 
$
160.7

 
 
 
$
11.3

 
 
 
$
19.5

Total derivatives
 
 
$
78.6

 
 
 
$
165.9

 
 
 
$
13.2

 
 
 
$
23.0


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 and coal 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 December 31, 2012, we had outstanding Australian and Canadian foreign currency exchange contracts with notional amounts of $400.0 million and $630.4 million, respectively, in the form of forward contracts with varying maturity dates ranging from January 2013 to December 2013. This compares with outstanding Australian foreign currency exchange contracts with a notional amount of $400.0 million as of December 31, 2011. There were no outstanding Canadian foreign currency exchange contracts as of December 31, 2011, as we did not begin entering into Canadian foreign currency exchange contracts until January 2012.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of Consolidated Financial Position. Any ineffectiveness is recognized immediately in income and as of December 31, 2012 and 2011, 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 gains of $6.7 million and $3.4 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 hedging instruments, net of tax in Accumulated other comprehensive loss and the Statements of Consolidated Operations for the years ended December 31, 2012, 2011 and 2010:

(In Millions)
Derivatives in Cash Flow
Amount of Gain (Loss)
Recognized in Accumulated OCI on Derivative
 
Location of Gain
(Loss) Reclassified
from Accumulated OCI into Earnings
 
Amount of Gain
Reclassified
from Accumulated
OCI into Earnings
Hedging Relationships
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
Year Ended
December 31,
 
 
 
Year Ended
December 31,
 
2012
 
2011
 
2010
 
 
 
2012
 
2011
 
2010
Australian Dollar Foreign
Exchange Contracts
(hedge designation)
$
20.2

 
$
1.8

 
$
1.9

 
Product revenues
 
$
14.8

 
$
2.6

 
$

Canadian Dollar Foreign Exchange Contracts (hedge designation)
6.7

 

 

 
Cost of goods sold and operating expenses
 
3.3

 

 

Australian Dollar Foreign
Exchange Contracts
(prior to de-designation)

 

 

 
Product revenues
 

 
0.7

 
3.2

Treasury Locks
(1.3
)
 

 

 
Changes in fair value of foreign currency contracts, net
 

 

 

Total
$
25.6

 
$
1.8

 
1.9

 
 
 
$
18.1

 
$
3.3

 
$
3.2


Interest Rate Risk Management
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 and fixed-rate debt. These derivative instruments are designated and qualify as cash flow hedges.
In the second quarter of 2012, with the expected issuance of long-term debt to repay our private placement senior notes due in 2013 and 2015, as well as for general corporate purposes, we entered into U.S. treasury lock agreements with a notional value of $200.0 million to hedge the exposure to the possible rise in the interest rate prior to the issuance of the five-year senior notes due 2018 discussed in NOTE 10 - DEBT AND CREDIT FACILITIES. The U.S. treasury locks were settled in the fourth quarter of 2012 upon the issuance of $500.0 million principal amount of the senior notes due 2018 for a cumulative after-tax loss of $1.3 million, which was recorded in Accumulated other comprehensive loss and is being amortized to Changes in fair value of foreign currency contracts, net over the life of the senior notes due 2018. Approximately $0.1 million net of tax is expected to be recognized in earnings in 2013.
Derivatives Not Designated as Hedging Instruments
Australian Dollar Foreign Exchange Contracts
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 and the sale was completed on November 13, 2012. The assets sold included our interests in the Sonoma mine along with our ownership of the affiliated wash plant. We hedged the Sonoma sale price on the open market by entering into foreign currency exchange forward contracts with a notional amount of AUD $141.0 million. The hedge contracts were considered economic hedges, which did not qualify for hedge accounting. The forward contracts had a maturity date of November 13, 2012, the date the sale was completed. The hedge contracts resulted in net realized losses of $0.3 million recognized through Income (Loss) and Gain on Sale from Discontinued Operations, net of tax in the Statements of Consolidated Operations based on the Australian to U.S. dollar spot rate of 1.04 at the contract maturity date of November 13, 2012.
Canadian Dollar Foreign Exchange Contracts and Options
On January 11, 2011, we entered into a definitive agreement with Consolidated Thompson to acquire all of its common shares in an all-cash transaction, including net debt. We hedged a portion of the purchase price on the open market by entering into foreign currency exchange forward contracts and an option contract with a combined notional amount of C$4.7 billion. The hedge contracts were considered economic hedges, which did not qualify for hedge accounting. The forward contracts had various maturity dates and the option contract had a maturity date of April 14, 2011.
During the first half of 2011, swaps were executed in order to extend the maturity dates of certain of the forward contracts through the consummation of the Consolidated Thompson acquisition and the repayment of the Consolidated Thompson convertible debentures. These swaps and the maturity of the forward contracts resulted in net realized gains of $93.1 million recognized through Changes in fair value of foreign currency contracts, net in the Statements of Consolidated Operations for the year ended December 31, 2011.
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 benchmark and 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 $171.4 million, $178.0 million and $120.2 million, respectively, as Product revenues in the Statements of Consolidated Operations for the years ended December 31, 2012, 2011 and 2010, respectively, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $58.9 million and $72.9 million, respectively, in the December 31, 2012 and December 31, 2011 Statements of Consolidated Financial Position.
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 sales price 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 sales price 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 sales price is determined. We have recorded $3.5 million as Derivative assets and $11.3 million as derivative liabilities included in Other current liabilities in the Statements of Consolidated Financial Position at December 31, 2012 related to our estimate of final sales price with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. 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 sales price based on the price calculations established in the supply agreements. As a result, we recognized a net $7.8 million as a decrease in Product revenues in the Statements of Consolidated Operations for the year ended December 31, 2012 related to these arrangements. At December 31, 2011 and 2010, we did not have any derivative assets or liabilities recorded due to these arrangements.
In instances when we were still working to revise components of the pricing calculations referenced within our supply agreements to incorporate new market inputs to the pricing mechanisms, we recorded certain shipments made to customers based on an agreed-upon provisional price. The shipments were recorded based on the provisional price until settlement of the market inputs to the pricing mechanisms were finalized. The lack of agreed-upon market inputs results in these provisional prices being characterized as derivatives. The derivative instrument, which is settled and billed or credited once the determinations of the market inputs to the pricing mechanisms are finalized, is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates determined by management. During the third quarter, we reached final pricing settlements on the customer supply agreements in which components of the pricing calculations were still being revised. As such, at December 31, 2012, no shipments were recorded based upon contracts where the market inputs to the pricing mechanisms were still being finalized, as all outstanding were settled during the year. We recognized $809.1 million as an increase in Product revenues in the Statements of Consolidated Operations for the year ended December 31, 2011 under the pricing provisions for certain shipments to U.S. Iron Ore and Eastern Canadian Iron Ore customers as we were still in the process of revising the terms of the related customer supply agreements. For the year ended December 31, 2011, $309.4 million of the revenues were realized due to the pricing settlements that primarily occurred with our U.S. Iron Ore customers during 2011. This compares with an increase in Product revenues of $960.7 million for the year ended December 31, 2010 related to estimated forward price settlements for shipments to our Asia Pacific Iron Ore, U.S. Iron Ore and Eastern Canadian Iron Ore customers until prices actually settled.
At December 31, 2011, we recorded $1.2 million Derivative assets, $19.5 million derivative liabilities included in Other current liabilities and $83.8 million Accounts receivable, net in the Statements of Consolidated Financial Position related to these types of provisional pricing arrangements with various U.S. Iron Ore and Eastern Canadian Iron Ore customers. In 2010, the derivative instrument was settled in the fourth quarter upon the settlement of pricing provisions with some of our U.S. Iron Ore customers and therefore is not reflected in the Statements of Consolidated Financial Position at December 31, 2010.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Consolidated Operations for the years ended December 31, 2012, 2011 and 2010:
(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
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Foreign Exchange Contracts
Product revenues
$

 
$
1.0

 
$
11.1

Foreign Exchange Contracts
Other income (expense)
0.3

 
101.9

 
39.8

Foreign Exchange Contracts
Income (Loss) and Gain on Sale from Discontinued Operations, net of tax
(0.3
)
 

 

Treasury Locks
Changes in fair value of foreign currency contracts, net
(0.4
)
 

 

Customer Supply Agreements
Product revenues
171.4

 
178.0

 
120.2

Provisional Pricing Arrangements
Product revenues
(7.8
)
 
809.1

 
960.7

Total
 
$
163.2

 
$
1,090.0

 
$
1,131.8


Refer to NOTE 9 - 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 Consolidated Financial Position as of December 31, 2012 and 2011:

(In Millions)

December 31, 2012
 
December 31, 2011
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
147.2

 
$
22.9

 
$
170.1

 
$
100.2

 
$
8.5

 
$
108.7

Eastern Canadian Iron Ore
62.6

 
44.2

 
106.8

 
96.2

 
43.0

 
139.2

Asia Pacific Iron Ore
36.7

 
37.2

 
73.9

 
57.2

 
21.6

 
78.8

North American Coal
36.7

 
49.0

 
85.7

 
19.7

 
110.5

 
130.2

Total
$
283.2

 
$
153.3

 
$
436.5

 
$
273.3

 
$
183.6

 
$
456.9


U.S. Iron Ore
The excess of current cost over LIFO cost of iron ore inventories was $122.2 million and $117.1 million at December 31, 2012 and 2011, respectively. As of December 31, 2012, the product inventory balance for U.S. Iron Ore increased, resulting in creation of a LIFO layer in 2012. The effect of the inventory build was an increase in Inventories of $47.5 million in the Statements of Consolidated Financial Position for the year ended December 31, 2012. As of December 31, 2011, the product inventory balance for U.S. Iron Ore declined, resulting in liquidation of LIFO layers in 2011. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $15.2 million in the Statements of Consolidated Operations for the year ended December 31, 2011.
Eastern Canadian Iron Ore
The excess of current cost over LIFO cost of iron ore inventories was $27.7 million and $21.9 million at December 31, 2012 and 2011, respectively. As of December 31, 2012, the iron ore pellet inventory balance for Eastern Canadian Iron Ore declined, resulting in liquidation of LIFO layers in 2012. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $7.0 million in the Statements of Consolidated Operations. As of December 31, 2011, the product inventory balance for Eastern Canadian Iron Ore increased to $47.1 million, resulting in an additional LIFO layer being added during the year.
North American Coal
We recorded lower-of-cost-or-market inventory charges of $24.4 million, $6.6 million and $26.1 million in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for the years ended December 31, 2012, 2011 and 2010, respectively. These charges were a result of market declines and operational and geological issues.
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 December 31, 2012 and 2011:
 
(In Millions)
 
December 31,
 
2012
 
2011
Land rights and mineral rights
$
7,920.8

 
$
7,868.7

Office and information technology
92.4

 
66.8

Buildings
162.0

 
132.2

Mining equipment
1,290.7

 
1,323.8

Processing equipment
1,937.4

 
1,311.6

Railroad equipment
240.8

 
161.6

Electric power facilities
58.7

 
57.9

Port facilities
114.3

 
64.1

Interest capitalized during construction
20.8

 
22.5

Land improvements
43.9

 
30.4

Other
39.0

 
43.2

Construction in progress
1,123.9

 
612.8

 
13,044.7

 
11,695.6

Allowance for depreciation and depletion
(1,837.4
)
 
(1,291.5
)
 
$
11,207.3

 
$
10,404.1


We recorded depreciation expense of $293.5 million, $237.8 million and $165.4 million in the Statements of Consolidated Operations for the years ended December 31, 2012, 2011 and 2010, respectively.
The accumulated amount of capitalized interest included within construction in progress is $17.1 million of which $15.4 million was capitalized during 2012.
Due to lower than previously expected profits as a result of decreased iron ore pricing expectations and increased costs, we determined that indicators of impairment with respect to certain of our long-lived assets or asset groups existed at December 31, 2012. Our asset groups generally consist of the assets and liabilities of one or more mines, preparation plants and associated reserves for which the lowest level of identifiable cash flows largely are independent of cash flows of other mines, preparation plants and associated reserves.
As a result of this assessment, we determined that the cash flows associated with our Eastern Canadian pelletizing operations were not sufficient to support the recoverability of the carrying value of these productive assets. Accordingly, during the fourth quarter of 2012, an asset impairment charge of $49.9 million was recorded as Impairment of goodwill and other long-lived assets in the Statements of Consolidated Operations related to the Wabush mine pelletizing operations reported in our Eastern Canadian Iron Ore operating segment. The fair value estimate was calculated using a market approach. There was no impairment of the dock facilities or the mine and concentrator long-lived assets that are part of the Wabush mine.
We did not record any other long-lived tangible and intangible assets impairment charges in 2012, 2011 or 2010, except for as discussed below in Discontinued Operations.
The net book value of the land rights and mineral rights as of December 31, 2012 and 2011 is as follows:
 
(In Millions)
 
December 31,
 
2012