CLIFFS NATURAL RESOURCES INC., 10-Q filed on 4/25/2013
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2013
Apr. 22, 2013
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
CLIFFS NATURAL RESOURCES INC. 
 
Entity Central Index Key
0000764065 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
153,095,713 
Trading Symbol
clf 
 
Statements Of Condensed Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
Product
$ 1,082.6 
$ 1,148.6 
Freight and venture partners' cost reimbursements
57.9 
63.8 
TOTAL REVENUES
1,140.5 
1,212.4 
COST OF GOODS SOLD AND OPERATING EXPENSES
(902.6)
(920.6)
SALES MARGIN
237.9 
291.8 
OTHER OPERATING INCOME (EXPENSE)
 
 
Selling, general and administrative expenses
(48.4)
(59.5)
Exploration costs
(22.7)
(18.8)
Miscellaneous - net
1.5 
9.4 
OTHER OPERATING INCOME (EXPENSE)
(69.6)
(68.9)
OPERATING INCOME
168.3 
222.9 
OTHER INCOME (EXPENSE)
 
 
Interest expense, net
(49.1)
(45.1)
Other non-operating income
1.1 
1.8 
TOTAL OTHER INCOME (EXPENSE)
(48.0)
(43.3)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES
120.3 
179.6 
INCOME TAX BENEFIT
6.0 
213.2 
EQUITY LOSS FROM VENTURES
(5.5)
(6.9)
INCOME FROM CONTINUING OPERATIONS
120.8 
385.9 
INCOME FROM DISCONTINUED OPERATIONS, net of tax
5.5 
NET INCOME
120.8 
391.4 
INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(13.8)
(15.6)
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
107.0 
375.8 
PREFERRED STOCK DIVIDENDS
(9.9)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$ 97.1 
$ 375.8 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
Continuing operations
$ 0.66 
$ 2.60 
Discontinued operations
$ 0.00 
$ 0.04 
Earnings per Common Share Attributable to Cliffs Shareholders - Basic:
$ 0.66 
$ 2.64 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
Continuing operations
$ 0.66 
$ 2.59 
Discontinued operations
$ 0.00 
$ 0.04 
Earnings per Common Share Attributable to Cliffs Shareholders - Diluted:
$ 0.66 
$ 2.63 
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
Basic
147,827 
142,226 
Diluted
148,081 
142,709 
CASH DIVIDENDS DECLARED PER DEPOSITARY SHARE
$ 0.34 
$ 0.00 
CASH DIVIDENDS DECLARED PER COMMON SHARE
$ 0.15 
$ 0.28 
Statements Of Condensed Consolidated Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Statement of Other Comprehensive Income [Abstract]
 
 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 107.0 
$ 375.8 
OTHER COMPREHENSIVE INCOME
 
 
Pension and OPEB liability, net of tax
6.5 
6.2 
Unrealized net gain on marketable securities, net of tax
2.6 
2.3 
Unrealized net gain on foreign currency translation
3.3 
10.9 
Unrealized net gain (loss) on derivative financial instruments, net of tax
(7.0)
3.8 
OTHER COMPREHENSIVE INCOME
5.4 
23.2 
OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
(1.2)
(1.5)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ 111.2 
$ 397.5 
Statements Of Condensed Consolidated Financial Position (USD $)
In Millions, unless otherwise specified
Mar. 31, 2013
Dec. 31, 2012
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 287.2 
$ 195.2 
Accounts receivable, net
272.3 
329.0 
Inventories
630.1 
436.5 
Supplies and other inventories
270.0 
289.1 
Derivative assets
66.4 
78.6 
Other current assets
297.9 
321.6 
TOTAL CURRENT ASSETS
1,823.9 
1,650.0 
PROPERTY, PLANT AND EQUIPMENT, NET
11,236.3 
11,207.3 
OTHER ASSETS
 
 
Investments in ventures
131.8 
135.8 
Goodwill
167.6 
167.4 
Intangible assets, net
124.5 
129.0 
Deferred income taxes
137.3 
91.8 
Other non-current assets
200.5 
193.6 
TOTAL OTHER ASSETS
761.7 
717.6 
TOTAL ASSETS
13,821.9 
13,574.9 
CURRENT LIABILITIES
 
 
Accounts payable
299.9 
555.5 
Accrued expenses
470.5 
442.6 
Income taxes payable
81.5 
28.3 
Current portion of debt
94.1 
Deferred revenue
22.9 
35.9 
Other current liabilities
226.6 
225.1 
TOTAL CURRENT LIABILITIES
1,101.4 
1,381.5 
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
600.0 
618.3 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
240.4 
252.8 
DEFERRED INCOME TAXES
1,114.4 
1,108.1 
LONG-TERM DEBT
3,433.0 
3,960.7 
OTHER LIABILITIES
473.7 
492.6 
TOTAL LIABILITIES
6,962.9 
7,814.0 
COMMITMENTS AND CONTINGENCIES (SEE NOTE 19)
   
   
CLIFFS SHAREHOLDERS' EQUITY
 
 
Preferred Stock - no par value, Class A - 3,000,000 shares authorized, 7 % Series A Mandatory Convertible, Class A, no par value and $1,000 per share liquidation preference (See Note 15), Issued and Outstanding - 731,250 shares (2012 - none)
731.3 
Common Shares - par value $0.125 per share, Authorized - 400,000,000 shares (2012- 400,000,000 shares); Issued - 159,545,469 shares (2012 - 149,195,469 shares); Outstanding - 153,095,702 shares (2012 - 142,495,902 shares)
19.8 
18.5 
Capital in excess of par value of shares
2,020.9 
1,774.7 
Retained earnings
3,291.7 
3,217.7 
Cost of 6,449,767 common shares in treasury (2012 - 6,699,567 shares)
(307.7)
(322.6)
Accumulated other comprehensive loss
(51.4)
(55.6)
TOTAL CLIFFS SHAREHOLDERS' EQUITY
5,704.6 
4,632.7 
NONCONTROLLING INTEREST
1,154.4 
1,128.2 
TOTAL EQUITY
6,859.0 
5,760.9 
TOTAL LIABILITIES AND EQUITY
$ 13,821.9 
$ 13,574.9 
Statements Of Condensed Consolidated Financial Position (Parenthetical) (USD $)
Mar. 31, 2013
Dec. 31, 2012
Class of Stock [Line Items]
 
 
Preferred stock, par value
$ 0 
 
Cumulative Mandatory Convertible
7.00% 
 
Common shares, par value
$ 0.125 
$ 0.125 
Common shares, authorized (in shares)
400,000,000 
400,000,000 
Common shares, issued (in shares)
159,545,469 
149,195,469 
Common shares, outstanding
153,095,702 
142,495,902 
Common shares in treasury
6,449,767 
6,699,567 
Preferred Class A [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred Stock, Liquidation Preference Per Share
$ 1,000 
 
Preferred stock, shares authorized (in shares)
3,000,000 
 
Preferred Shares, Issued and Outstanding, Shares
731,250 
Preferred Class B [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred stock, shares authorized (in shares)
4,000,000 
 
Statements Of Condensed Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
OPERATING ACTIVITIES
 
 
Net income
$ 120.8 
$ 391.4 
Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
Depreciation, depletion and amortization
140.6 
117.3 
Derivatives and currency hedges
5.2 
(9.9)
Equity loss in ventures (net of tax)
5.5 
6.9 
Pensions and other postretirement benefits
(11.0)
(24.8)
Deferred income taxes
(46.3)
(248.5)
Changes in deferred revenue and below-market sales contracts
(14.9)
(23.3)
Other
5.2 
(5.7)
Changes in operating assets and liabilities:
 
 
Receivables and other assets
102.7 
(9.5)
Product inventories
(194.0)
(219.0)
Payables and accrued expenses
(139.2)
(103.9)
Net cash used by operating activities
(25.4)
(129.0)
INVESTING ACTIVITIES
 
 
Purchase of property, plant and equipment
(230.4)
(241.1)
Investments in ventures
(11.2)
Other investing activities
2.0 
0.3 
Net cash used by investing activities
(228.4)
(252.0)
FINANCING ACTIVITIES
 
 
Net proceeds from issuance of Series A, Mandatory Convertible Preferred Stock, Class A
709.4 
Net proceeds from issuance of common shares
285.6 
Repayment of term loan
(847.1)
(12.5)
Borrowings under revolving credit facility
297.0 
Repayment under revolving credit facility
(72.0)
Contributions by joint ventures, net
11.3 
30.0 
Common stock dividends
(22.9)
(39.7)
Other financing activities
(15.4)
1.0 
Net cash provided (used) by financing activities
345.9 
(21.2)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(0.1)
2.9 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
92.0 
(399.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
195.2 
521.6 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 287.2 
$ 122.3 
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations, comprehensive income and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of results to be expected for the year ended December 31, 2013 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly owned and majority-owned subsidiaries, including the following operations:
Name
 
Location
 
Ownership Interest
 
Operation
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
Wabush
 
Newfoundland and Labrador/Quebec, Canada
 
100.0%
 
Iron Ore
Bloom Lake
 
Quebec, Canada
 
75.0%
 
Iron Ore
Tilden
 
Michigan
 
85.0%
 
Iron Ore
Empire
 
Michigan
 
79.0%
 
Iron Ore
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
Pinnacle
 
West Virginia
 
100.0%
 
Coal
Oak Grove
 
Alabama
 
100.0%
 
Coal
CLCC
 
West Virginia
 
100.0%
 
Coal

Intercompany transactions and balances are eliminated upon consolidation.
Also included in our consolidated results are Cliffs Chromite Ontario Inc. and Cliffs Chromite Far North Inc. Cliffs Chromite Ontario, Inc. holds a 100 percent interest in each of the Black Label and Black Thor chromite deposits and, together with Cliffs Chromite Far North Inc., a 70 percent interest in the Big Daddy chromite deposit, all located in northern Ontario, Canada.
Equity Method Investments
Investments in unconsolidated ventures that we have the ability to exercise significant influence over, but not control, are accounted for under the equity method. The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2013 and December 31, 2012. Parentheses indicate a net liability.
 
 
 
 
 
 
 
 
(In Millions)
Investment
 
Classification
 
Accounting
Method
 
Interest
Percentage
 
March 31, 2013
 
December 31, 2012
Amapá
 
Investments in ventures
 
Equity Method
 
30
 
$
96.9

 
$
101.9

Cockatoo
 
Other liabilities
 
Equity Method
 
50
 
(25.4
)
 
(25.3
)
Hibbing
 
Investments in ventures (1)
 
Equity Method
 
23
 
1.4

 
(2.1
)
Other
 
Investments in ventures
 
Equity Method
 
Various
 
33.5

 
33.9

 
 
 
 
 
 
 
 
$
106.4

 
$
108.4

                                         
(1)     At December 31, 2012 the classification for Hibbing was Other liabilities.
Amapá
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. On March 28, 2013, an unknown event caused the Santana port shiploader to collapse into the Amazon river, preventing further ship loading by the mine operator, Anglo American. The investigation into the root cause of the collapse is ongoing as Anglo American develops a business continuation plan. The previously announced sale transaction remains in place, but without a projected close date until the port situation is clarified.
Cockatoo Island
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 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 second quarter of 2013. As of March 31, 2013, 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.
Discontinued Operations
On July 10, 2012, we entered into a definitive share and asset sale agreement to sell our 45 percent economic interest in the Sonoma joint venture coal mine located in Queensland, Australia. Upon completion of the transaction on November 12, 2012, we collected approximately AUD $141.0 million in net cash proceeds. The assets sold included our interests in the Sonoma mine along with our ownership of the affiliated washplant and are reflected as Assets held for sale and Liabilities held for sale in the Statements of Unaudited Condensed Consolidated Financial Position and reflected the results of operations as discontinued operations in the Statements of Unaudited Condensed Consolidated Operations for periods presented prior to completion of the sale. The Sonoma operations previously were included in Other within our reportable segments.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2012, included in our Annual Report on Form 10-K filed with the SEC. The significant accounting policies requiring updates have been included within the disclosures below.
Other Intangible Assets and Liabilities
Other intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives or on a units of production basis as follows:
Intangible Assets
 
Basis
 
Useful Life (years)
Permits - Asia Pacific Iron Ore
 
Units of production
 
Life of mine
Permits - All Other
 
Straight line
 
15 - 40
Utility contracts
 
Straight line
 
5
Leases - North American Coal
 
Units of production
 
Life of mine
Leases - All Other
 
Straight line
 
4.5 - 17.5

Earnings Per Share
We present both basic and diluted earnings per share amounts. Basic earnings per share amounts are calculated by dividing Net Income Attributable to Cliffs Shareholders less any paid or declared but unpaid dividends on our depositary shares by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share amounts are calculated by dividing Net Income Attributable to Cliffs Shareholders by the weighted average number of common shares, common share equivalents under stock plans using the treasury stock method and the number of common shares that would be issued under an assumed conversion of our outstanding depositary shares, each representing a 1/40th interest in a share of our Series A Mandatory Convertible Preferred Stock, Class A, under the if-converted method. Our outstanding depositary shares are convertible into common shares based on the volume weighted average of closing prices of our common stock over the 20 consecutive trading day period ending on the third day immediately preceding the end of the reporting period. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect. See NOTE 18 - EARNINGS PER SHARE for further information.
Recent Accounting Pronouncements
In February 2013, the FASB amended the guidance on the presentation of comprehensive income in order to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendment does not change the current requirements for reporting net income or other comprehensive income in financial statements. Rather, it requires the entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The new guidance is effective prospectively for reporting periods beginning after December 15, 2012. We adopted the provisions of guidance required for the period beginning January 1, 2013. Refer to NOTE 16 - SHAREHOLDERS' EQUITY for further information.
SEGMENT REPORTING
SEGMENT REPORTING
NOTE 2 - SEGMENT REPORTING
Our Company’s primary operations are organized and managed according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, Asia Pacific Iron Ore, North American Coal, Latin American Iron Ore, Ferroalloys and our Global Exploration Group. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Eastern Canadian Iron Ore segment is comprised of two Eastern Canadian mines that primarily provide iron ore to the seaborne market for Asian steel producers. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. The North American Coal segment is comprised of our 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. On March 28, 2013, an unknown event caused the Santana port shiploader to collapse into the Amazon river, preventing further ship loading by the mine operator, Anglo American. The investigation into the root cause of the collapse is ongoing as Anglo American develops a business continuation plan. The previously announced sale transaction remains in place, but without a projected close date until the port situation is clarified. The Ferroalloys operating segment is comprised of our interests in chromite deposits held in Northern Ontario, Canada and the Global Exploration Group is focused on early involvement in exploration activities to identify new projects for future development or projects that add significant value to existing operations. The Latin American Iron Ore, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and, therefore, are not reported separately.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.
The following table presents a summary of our reportable segments for the three months ended March 31, 2013 and 2012, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and Equity Loss from Ventures:
 
(In Millions)
 
Three Months Ended
March 31,
 
2013
 
2012
Revenues from product sales and services:
 
 
 
 
 
 
 
U.S. Iron Ore
$
410.1

 
36
%
 
$
441.7

 
36
%
Eastern Canadian Iron Ore
245.3

 
22
%
 
220.7

 
18
%
Asia Pacific Iron Ore
270.8

 
24
%
 
359.8

 
30
%
North American Coal
214.3

 
18
%
 
189.9

 
16
%
Other

 
%
 
0.3

 
%
Total revenues from product sales and services
$
1,140.5

 
100
%
 
$
1,212.4

 
100
%
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
U.S. Iron Ore
$
157.3

 
 
 
$
166.9

 
 
Eastern Canadian Iron Ore
19.4

 
 
 
(14.3
)
 
 
Asia Pacific Iron Ore
61.3

 
 
 
125.0

 
 
North American Coal
1.8

 
 
 
14.5

 
 
Other
(1.9
)
 
 
 
(0.3
)
 
 
Sales margin
237.9

 
 
 
291.8

 
 
Other operating expense
(69.6
)
 
 
 
(68.9
)
 
 
Other income (expense)
(48.0
)
 
 
 
(43.3
)
 
 
Income from continuing operations before income taxes and equity loss from ventures
$
120.3

 
 
 
$
179.6

 
 
 
 
 
 
 
 
 
 
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
U.S. Iron Ore
$
26.6

 
 
 
$
23.2

 
 
Eastern Canadian Iron Ore
41.1

 
 
 
37.9

 
 
Asia Pacific Iron Ore
36.4

 
 
 
30.0

 
 
North American Coal
32.5

 
 
 
20.1

 
 
Other
4.0

 
 
 
6.1

 
 
Total depreciation, depletion and amortization
$
140.6

 
 
 
$
117.3

 
 
 
 
 
 
 
 
 
 
Capital additions (1):
 
 
 
 
 
 
 
U.S. Iron Ore
$
11.7

 
 
 
$
34.8

 
 
Eastern Canadian Iron Ore
167.0

 
 
 
130.6

 
 
Asia Pacific Iron Ore
4.3

 
 
 
109.3

 
 
North American Coal
11.1

 
 
 
39.1

 
 
Other
1.6

 
 
 
39.6

 
 
Total capital additions
$
195.7

 
 
 
$
353.4

 
 
                                         
(1)    Includes capital lease additions and non-cash accruals. Refer to NOTE 20 - CASH FLOW INFORMATION.
A summary of assets by segment is as follows:
 
(In Millions)
 
March 31, 2013
 
December 31, 2012
Assets:
 
 
 
U.S. Iron Ore
$
1,848.4

 
$
1,735.1

Eastern Canadian Iron Ore
7,719.7

 
7,605.1

Asia Pacific Iron Ore
1,474.4

 
1,506.3

North American Coal
1,829.7

 
1,877.8

Other
599.3

 
570.9

Total segment assets
13,471.5

 
13,295.2

Corporate
350.4

 
279.7

Total assets
$
13,821.9

 
$
13,574.9

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2013 and December 31, 2012:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
Derivative
Instrument
Balance Sheet Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
Derivative assets
 
$
13.1

 
Derivative assets
 
$
16.2

 
Other current liabilities
 
$
8.5

 
Other current liabilities
 
$
1.9

Total derivatives designated as hedging instruments under ASC 815
 
 
$
13.1

 
 
 
$
16.2

 
 
 
$
8.5

 
 
 
$
1.9

Derivatives not designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer Supply Agreements
Derivative assets
 
$
49.4

 
Derivative assets
 
$
58.9

 
 
 
$

 
 
 
$

Provisional Pricing Arrangements
Derivative assets
 
3.9

 
Derivative assets
 
3.5

 
Other current liabilities
 
6.8

 
Other current liabilities
 
11.3

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
53.3

 
 
 
$
62.4

 
 
 
$
6.8

 
 
 
$
11.3

Total derivatives
 
 
$
66.4

 
 
 
$
78.6

 
 
 
$
15.3

 
 
 
$
13.2


Derivatives Designated as Hedging Instruments
Cash Flow Hedges
Australian and Canadian Dollar Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia and Canada. With respect to Australia, foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore sales. The functional currency of our Canadian operations is the U.S. dollar; however, the production costs for these operations primarily are incurred in the Canadian dollar.
We use foreign currency exchange contracts to hedge our foreign currency exposure for a portion of our U.S. dollar sales receipts in our Australian functional currency entities and our Canadian dollar operating costs. For our Australian operations, U.S. dollars are converted to Australian dollars at the currency exchange rate in effect during the period the transaction occurred. For our Canadian operations, U.S. dollars are converted to Canadian dollars at the exchange rate in effect for the period the operating costs are incurred. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and U.S. and Canadian currency exchange rates, respectively, and to protect against undue adverse movement in these exchange rates. These instruments qualify for hedge accounting treatment, and are tested for effectiveness at inception and at least once each reporting period. If and when any of our hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
As of March 31, 2013, we had outstanding Australian and Canadian foreign currency exchange contracts with notional amounts of $378.0 million and $557.3 million, respectively, in the form of forward contracts with varying maturity dates ranging from April 2013 to March 2014. This compares with outstanding Australian and Canadian foreign currency exchange contracts with a notional amount of $400.0 million and $630.4 million, respectively, as of December 31, 2012.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Financial Position. Any ineffectiveness is recognized immediately in income and as of March 31, 2013 and 2012, there was no material ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive loss are reclassified into earnings in the same period the forecasted transaction affects earnings. Of the amounts remaining in Accumulated other comprehensive loss related to Australian hedge contracts and Canadian hedge contracts, we estimate that gains of $8.1 million and losses of $5.0 million (net of tax), respectively, will be reclassified into earnings within the next 12 months.
The following summarizes the effect of our derivatives designated as hedging instruments, net of tax in Accumulated other comprehensive loss in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012:

(In Millions)
Derivatives in Cash Flow
Amount of Gain (Loss)
Recognized in OCI on Derivative
 
Location of Gain
Reclassified
from Accumulated OCI into Earnings
 
Amount of Gain
Reclassified
from Accumulated
OCI into Earnings
Hedging Relationships
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
Three Months Ended
March 31,
 
 
 
Three Months Ended
March 31,
 
2013
 
2012
 
 
 
2013
 
2012
Australian Dollar Foreign
Exchange Contracts
(hedge designation)
$
3.2

 
$
3.0

 
Product revenues
 
$
1.8

 
$
3.1

Canadian Dollar Foreign Exchange Contracts (hedge designation)
(8.2
)
 
0.7

 
Cost of goods sold and operating expenses
 
0.2

 
0.5

Total
$
(5.0
)
 
$
3.7

 
 
 
$
2.0

 
$
3.6


Derivatives Not Designated as Hedging Instruments
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The base price is the primary component of the purchase price for each contract. The inflation-indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based upon changes in the Platts 62 percent Fe market rate and/or international pellet prices and changes in specified Producers Price Indices, including those for all commodities, industrial commodities, energy and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimated the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $24.1 million and $39.2 million, respectively, as Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012, respectively, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $49.4 million and $58.9 million, respectively, in the March 31, 2013 and December 31, 2012 Statements of Unaudited Condensed 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 $3.9 million and $3.5 million, respectively, as Derivative assets and $6.8 million and $11.3 million, respectively, as derivative liabilities included in Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position at March 31, 2013 and December 31, 2012, respectively, related to our estimate of final sales price with our U.S. Iron Ore and Asia Pacific Iron Ore customers at March 31, 2013 and related to our U.S. Iron Ore and Eastern Canadian Iron Ore customers at December 31, 2012. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final sales price based on the price calculations established in the supply agreements. As a result, we recognized a net $2.9 million as a decrease and a net $3.0 million as an increase in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012, respectively, related to these arrangements.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012:
(In Millions)
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in
Income on Derivative
Amount of Gain/(Loss) Recognized in Income on Derivative
 
 
Three Months Ended
March 31,
 
 
2013
 
2012
Foreign Exchange Contracts
Other income (expense)
$

 
$
0.3

Customer Supply Agreements
Product revenues
24.1

 
39.2

Provisional Pricing Arrangements
Product revenues
(2.9
)
 
3.0

Total
 
$
21.2

 
$
42.5


Refer to NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.
INVENTORIES
Inventories
NOTE 4 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2013 and December 31, 2012:

(In Millions)

March 31, 2013
 
December 31, 2012
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
293.9

 
$
27.2

 
$
321.1

 
$
147.2

 
$
22.9

 
$
170.1

Eastern Canadian Iron Ore
101.0

 
38.4

 
139.4

 
62.6

 
44.2

 
106.8

Asia Pacific Iron Ore
73.5

 
16.4

 
89.9

 
36.7

 
37.2

 
73.9

North American Coal
49.5

 
30.2

 
79.7

 
36.7

 
49.0

 
85.7

Total
$
517.9

 
$
112.2

 
$
630.1

 
$
283.2

 
$
153.3

 
$
436.5


We recorded lower-of-cost-or-market inventory charges of $2.0 million and $1.3 million in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012, respectively, for our North American Coal operations. 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 March 31, 2013 and December 31, 2012:
 
(In Millions)
 
March 31,
2013
 
December 31, 2012
Land rights and mineral rights
$
7,922.8

 
$
7,920.8

Office and information technology
114.8

 
92.4

Buildings
190.7

 
162.0

Mining equipment
1,342.9

 
1,290.7

Processing equipment
2,081.9

 
1,937.4

Railroad equipment
242.1

 
240.8

Electric power facilities
61.4

 
58.7

Port facilities
114.7

 
114.3

Interest capitalized during construction
20.8

 
20.8

Land improvements
48.7

 
43.9

Other
53.1

 
39.0

Construction in progress
1,013.2

 
1,123.9

 
13,207.1

 
13,044.7

Allowance for depreciation and depletion
(1,970.8
)
 
(1,837.4
)
 
$
11,236.3

 
$
11,207.3


We recorded depreciation and depletion expense of $135.9 million and $111.4 million in the Statements of Unaudited Condensed Consolidated Operations for the periods ended March 31, 2013 and 2012, respectively.
The accumulated amount of capitalized interest included within construction in progress at March 31, 2013 is $24.2 million of which $7.1 million was capitalized during 2013. At December 31, 2012, $17.1 million of capitalized interest was included within construction in progress of which $15.4 million was capitalized during 2012.
DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS
NOTE 6 - DISCONTINUED OPERATIONS
The table below sets forth selected financial information related to operating results of our business classified as discontinued operations. While the reclassification of revenues and expenses related to discontinued operations for prior periods have no impact upon previously reported net income, the Statements of Unaudited Condensed Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to discontinued operations. During the fourth quarter of 2012, we sold our 45 percent economic interest in Sonoma. The Sonoma operations previously were included in Other within our reportable segments.
The following table presents detail of our operations related to our Sonoma operations in the Statements of Unaudited Condensed Consolidated Operations:
 
(In Millions)
 
Three Months Ended March 31,
 
2013
 
2012
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$

 
$
52.4

 
 
 
 
INCOME FROM DISCONTINUED OPERATIONS, net of tax
$

 
$
5.5


We recorded income from discontinued operations of $5.5 million, net of $2.4 million in tax expense in Income from Discontinued Operations, net of tax in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2012 related to our sale of the Sonoma operations, which was completed as of November 12, 2012.
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The following table summarizes changes in the carrying amount of goodwill allocated by operating segment for the three months ended March 31, 2013 and the year ended December 31, 2012:
 
(In Millions)
 
March 31, 2013
 
December 31, 2012
 
U.S. Iron Ore
 
Eastern Canadian Iron Ore
 
Asia Pacific
Iron Ore
 
North American Coal
 
Other
 
Total
 
U.S. Iron Ore
 
Eastern
Canadian Iron Ore
 
Asia Pacific Iron Ore
 
North American Coal
 
Other
 
Total
Beginning Balance
$
2.0

 
$

 
$
84.5

 
$

 
$
80.9

 
$
167.4

 
$
2.0

 
$
986.2

 
$
83.0

 
$

 
$
80.9

 
$
1,152.1

Arising in business combinations

 

 

 

 

 

 

 
13.8

 

 

 

 
13.8

Impairment

 

 

 

 

 

 

 
(1,000.0
)
 

 

 

 
(1,000.0
)
Impact of foreign currency translation

 

 
0.2

 

 

 
0.2

 

 

 
1.5

 

 

 
1.5

Ending Balance
$
2.0

 
$

 
$
84.7

 
$

 
$
80.9

 
$
167.6

 
$
2.0

 
$

 
$
84.5

 
$

 
$
80.9

 
$
167.4

Accumulated Goodwill Impairment Loss
$

 
$
(1,000.0
)
 
$

 
$
(27.8
)
 
$

 
$
(1,027.8
)
 
$

 
$
(1,000.0
)
 
$

 
$
(27.8
)
 
$

 
$
(1,027.8
)

Other Intangible Assets and Liabilities
Following is a summary of intangible assets and liabilities as of March 31, 2013 and December 31, 2012:
 
 
 
(In Millions)
 
 
 
March 31, 2013
 
December 31, 2012
 
Classification
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permits
Intangible assets, net
 
$
136.2

 
$
(33.5
)
 
$
102.7

 
$
136.1

 
$
(31.7
)
 
$
104.4

Utility contracts
Intangible assets, net
 
54.7

 
(35.2
)
 
19.5

 
54.7

 
(32.4
)
 
22.3

Leases
Intangible assets, net
 
5.7

 
(3.4
)
 
2.3

 
5.7

 
(3.4
)
 
2.3

Total intangible assets
 
 
$
196.6

 
$
(72.1
)
 
$
124.5

 
$
196.5

 
$
(67.5
)
 
$
129.0

Below-market sales contracts
Other current liabilities
 
$
(46.0
)
 
$
1.9

 
$
(44.1
)
 
$
(46.0
)
 
$

 
$
(46.0
)
Below-market sales contracts
Other liabilities
 
(250.7
)
 
181.6

 
(69.1
)
 
(250.7
)
 
181.6

 
(69.1
)
Total below-market sales contracts
 
 
$
(296.7
)
 
$
183.5

 
$
(113.2
)
 
$
(296.7
)
 
$
181.6

 
$
(115.1
)

Amortization expense relating to intangible assets was $4.7 million and $4.8 million, respectively, for the three months ended March 31, 2013 and 2012, and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. The estimated amortization expense relating to intangible assets for each of the five succeeding years is as follows:

(In Millions)

Amount
Year Ending December 31

2013 (remaining nine months)
$
14.5

2014
18.8

2015
7.8

2016
7.7

2017
7.9

2018
7.7

Total
$
64.4


The below-market sales contracts are classified as a liability and recognized over the term of the underlying contracts, which have remaining lives ranging from one to four years. For each of the three months ended March 31, 2013 and 2012, we recognized $1.9 million in Product revenues related to the below-market sales contracts. The following amounts are estimated to be recognized in Product revenues for the remainder of this year and each of the three succeeding fiscal years:
 
(In Millions)
 
Amount
Year Ending December 31
 
2013 (remaining nine months)
$
44.1

2014
23.1

2015
23.0

2016
23.0

Total
$
113.2

FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at March 31, 2013 and December 31, 2012:
 
(In Millions)
 
March 31, 2013
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
135.0

 
$

 
$

 
$
135.0

Derivative assets

 

 
53.3

 
53.3

Marketable securities
30.0

 

 

 
30.0

Foreign exchange contracts

 
13.1

 

 
13.1

Total
$
165.0

 
$
13.1

 
$
53.3

 
$
231.4

Liabilities:

 

 

 

Derivative liabilities
$

 
$

 
$
6.8

 
$
6.8

Foreign exchange contracts

 
8.5

 

 
8.5

Total
$

 
$
8.5

 
$
6.8

 
$
15.3

 
(In Millions)
 
December 31, 2012
Description
Quoted Prices in Active
Markets for Identical
Assets/Liabilities (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
100.0

 
$

 
$

 
$
100.0

Derivative assets

 

 
62.4

 
62.4

Marketable securities
27.0

 

 

 
27.0

Foreign exchange contracts

 
16.2

 

 
16.2

Total
$
127.0

 
$
16.2

 
$
62.4

 
$
205.6

Liabilities:

 

 

 

Derivative liabilities
$

 
$

 
$
11.3

 
$
11.3

Foreign exchange contracts

 
1.9

 

 
1.9

Total
$

 
$
1.9

 
$
11.3

 
$
13.2

Financial assets classified in Level 1 at March 31, 2013 and December 31, 2012 include money market funds and available-for-sale marketable securities. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At March 31, 2013 and December 31, 2012, such derivative financial instruments included our existing foreign currency exchange contracts. The fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk and liquidity risks associated with current market conditions.
The derivative financial assets classified within Level 3 at March 31, 2013 and December 31, 2012 included a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and adjust this provision to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot-rolled steel at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative assets and liabilities at March 31, 2013 and December 31, 2012, also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers at March 31, 2013 and our U.S. Iron Ore and Eastern Canadian Iron Ore customers at December 31, 2012. These provisional pricing arrangements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final 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.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
Qualitative/Quantitative Information About Level 3 Fair Value Measurements
($ in millions)
Fair Value at
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
3/31/2013
Provisional Pricing Arrangements
$
3.9

 
Derivative assets
 
Market Approach
 
Managements
Estimate of 62% Fe
 
$137
 
$
6.8

 
Other current liabilities
 
 
 
 
 
 
Customer Supply Agreement
$
49.4

 
Derivative assets
 
Market Approach
 
Hot-Rolled Steel Estimate
 
$600 - $645 ($630)

The significant unobservable input used in the fair value measurement of the reporting entity’s provisional pricing arrangements is management’s estimate of 62 percent Fe price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable input used in the fair value measurement of the reporting entity’s customer supply agreements is the future hot-rolled steel price that is estimated based on current market data, analysts' projections, projections provided by the customer and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
These significant estimates are determined by a collaboration of our commercial, finance and treasury departments and are reviewed by management.
Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value.
We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2013 and 2012. The following table represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013 and 2012.
 
(In Millions)
 
Derivative Assets
(Level 3)
 
Derivative Liabilities
(Level 3)
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2013
 
2012
 
2013
 
2012
Beginning balance - January 1
$
62.4

 
$
157.9

 
$
(11.3
)
 
$
(19.5
)
Total gains

 

 
 
 
 
Included in earnings
28.0

 
43.3

 
(6.8
)
 
(1.1
)
Included in other comprehensive income

 

 

 

Settlements
(37.1
)
 
(132.0
)
 
11.3

 
19.5

Transfers into Level 3

 

 

 

Transfers out of Level 3

 

 

 

Ending balance - March 31
$
53.3

 
$
69.2

 
$
(6.8
)
 
$
(1.1
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) on assets (liabilities) still held at the reporting date
$
28.0

 
$
43.3

 
$
(6.8
)
 
$
(1.1
)

Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012.
The carrying amount for certain financial instruments (e.g. Accounts receivable, net, Accounts payable and Accrued expenses) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at March 31, 2013 and December 31, 2012 were as follows:
 
 
 
(In Millions)
 
 
 
March 31, 2013
 
December 31, 2012
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Other receivables:
 
 
 
 
 
 
 
 
 
Customer supplemental payments
Level 2
 
$
16.7

 
$
16.1

 
$
22.3

 
$
21.3

ArcelorMittal USA—Receivable
Level 2
 
17.4

 
19.1

 
19.3

 
21.3

Other
Level 2
 
10.5

 
10.5

 
10.9

 
10.9

Total receivables
 
 
$
44.6

 
$
45.7

 
$
52.5

 
$
53.5

Long-term debt:
 
 
 
 
 
 
 
 
 
Term loan—$1.25 billion
Level 2
 
$

 
$

 
$
753.0

 
$
753.0

Senior notes—$700 million
Level 2
 
699.4

 
751.4

 
699.4

 
759.4

Senior notes—$1.3 billion
Level 2
 
1,289.4

 
1,513.2

 
1,289.4

 
1,524.7

Senior notes—$400 million
Level 2
 
398.3

 
458.8

 
398.2

 
464.3

Senior notes—$500 million
Level 2
 
495.9

 
527.7

 
495.7

 
528.4

Revolving loan
Level 2
 
550.0

 
550.0

 
325.0

 
325.0

Total long-term debt
 
 
$
3,433.0

 
$
3,801.1

 
$
3,960.7

 
$
4,354.8


The fair value of the receivables and debt are based on the fair market yield curves for the remainder of the term expected to be outstanding.
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 up to $22.3 million in exchange for interest payments until the deferred amount is repaid in 2013. Interest is payable by the customer quarterly and began in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of March 31, 2013 and December 31, 2012, the receivable of $16.7 million and $22.3 million, respectively, classified as current and was recorded in Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position as all supplemental payments to be paid by the customer are due by the end of 2013. The fair value of the receivable of $16.1 million and $21.3 million at March 31, 2013 and December 31, 2012, respectively, is based on a discount rate of 2.14 percent and 2.81 percent, respectively, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
In 2002, we entered into an agreement with Ispat that restructured the ownership of the Empire mine and increased our ownership from 46.7 percent to 79.0 percent in exchange for the assumption of all mine liabilities. Under the terms of the agreement, we indemnified Ispat from obligations of Empire in exchange for certain future payments to Empire and to us by Ispat of $120.0 million, recorded at a present value of $17.4 million and $19.3 million at March 31, 2013 and December 31, 2012, respectively, of which $10.0 million was recorded in Other current assets for each respective period. The fair value of the receivable of $19.1 million and $21.3 million at March 31, 2013 and December 31, 2012, respectively, is based on a discount rate of 2.24 percent and 2.85 percent, respectively, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest and approximate fair value. See NOTE 9 - DEBT AND CREDIT FACILITIES for further information.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the impairment charges on both financial and nonfinancial assets that were measured on a fair value basis for the year ended December 31, 2012. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value. We had no financial assets and liabilities measured at fair value on a non-recurring basis at March 31, 2013.
 
(In Millions)
 
December 31, 2012
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Investment in ventures impairment -
     Amapá
$

 
$

 
$
72.5

 
$
72.5


Financial Assets
On December 27, 2012, the board of directors approved the sale of our 30 percent investment in Amapá, which is recorded as an equity method investment in the Statements of Unaudited Condensed Consolidated Operations. The carrying value of the investment was reduced to fair value of $72.5 million as of December 31, 2012, resulting in an impairment charge of $365.4 million, which was recorded in the fourth quarter of 2012. We believe the sum of the sale proceeds approximates fair value. The fair value of the proceeds (and therefore the portion of the equity method investment measured at fair value) was determined using a probability-weighted cash flow approach.
DEBT AND CREDIT FACILITIES
DEBT AND CREDIT FACILITIES
NOTE 9 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of March 31, 2013 and December 31, 2012:
($ in Millions)
 
March 31, 2013
 
Debt Instrument
Type
 
Annual Effective Interest Rate
 
Final Maturity
 
Total Face Amount
 
Total Debt
 
$700 Million 4.875% 2021 Senior Notes
Fixed
 
4.89%
 
2021
 
$
700.0

 
$
699.4

(2)
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
Fixed
 
4.83%
 
2020
 
500.0

 
499.2

(3)
$800 Million 6.25% 2040 Senior Notes
Fixed
 
6.34%
 
2040
 
800.0

 
790.2

(4)
$400 Million 5.90% 2020 Senior Notes
Fixed
 
5.98%
 
2020
 
400.0

 
398.3

(5)
$500 Million 3.95% 2018 Senior Notes
Fixed
 
4.14%
 
2018
 
500.0

 
495.9

(6)
$1.75 Billion Credit Facility:
 
 
 
 
 
 
 
 
 
 
Revolving Loan
Variable
 
2.65%
 
2017
 
1,750.0

 
550.0

(7)
Total debt
 
 
 
 
 
 
$
4,650.0

 
$
3,433.0

 
Less current portion
 
 
 
 
 
 
 
 

 
Long-term debt
 
 
 
 
 
 
 
 
$
3,433.0

 
($ in Millions)
 
December 31, 2012
 
Debt Instrument
Type
 
Annual Effective Interest Rate
 
Final Maturity
 
Total Face Amount
 
Total Debt
 
$1.25 Billion Term Loan
Variable
 
1.83%
 
2016
 
$
847.1

(1)
$
847.1

(1)
$700 Million 4.875% 2021 Senior Notes
Fixed
 
4.88%
 
2021
 
700.0

 
699.4

(2)
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
Fixed
 
4.80%
 
2020
 
500.0

 
499.2

(3)
$800 Million 6.25% 2040 Senior Notes
Fixed
 
6.25%
 
2040
 
800.0

 
790.2

(4)
$400 Million 5.90% 2020 Senior Notes
Fixed
 
5.90%
 
2020
 
400.0

 
398.2

(5)
$500 Million 3.95% 2018 Senior Notes
Fixed
 
4.14%
 
2018
 
500.0

 
495.7

(6)
$1.75 Billion Credit Facility:
 
 
 
 
 
 
 
 
 
 
Revolving Loan
Variable
 
2.02%
 
2017
 
1,750.0

 
325.0

(7)
Total debt
 
 
 
 
 
 
$
5,497.1

 
$
4,054.8

 
Less current portion
 
 
 
 
 
 
 
 
94.1

 
Long-term debt
 
 
 
 
 
 
 
 
$
3,960.7

 
                                         
(1)
As of March 31, 2013, the term loan was repaid in full. During the first quarter of 2013, repayments totaling $847.1 million were made. As of December 31, 2012, $402.8 million had been paid down on the original $1.25 billion term loan and, of the remaining term loan $94.1 million, was classified as Current portion of debt. The current classification was based upon the principal payment terms of the arrangement requiring principal payments on each three-month anniversary following the funding of the term loan.
(2)
As of March 31, 2013 and December 31, 2012, the $700 million 4.875 percent senior notes were recorded at a par value of $700 million less unamortized discounts of $0.6 million, based on an imputed interest rate of 4.89 percent.
(3)
As of March 31, 2013 and December 31, 2012, the $500 million 4.80 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $0.8 million, based on an imputed interest rate of 4.83 percent.
(4)
As of March 31, 2013 and December 31, 2012, the $800 million 6.25 percent senior notes were recorded at par value of $800 million less unamortized discounts of $9.8 million, based on an imputed interest rate of 6.34 percent.
(5)
As of March 31, 2013 and December 31, 2012, the $400 million 5.90 percent senior notes were recorded at a par value of $400 million less unamortized discounts of $1.7 million and $1.8 million, respectively, based on an imputed interest rate of 5.98 percent.
(6)
As of March 31, 2013 and December 31, 2012, the $500 million 3.95 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $4.1 million and $4.3 million, respectively, based on an imputed interest rate of 4.14 percent.
(7)
As of March 31, 2013 and December 31, 2012, $550.0 million and $325.0 million revolving loans were drawn under the credit facility, respectively, and the principal amount of letter of credit obligations totaled $27.7 million for each period, thereby reducing available borrowing capacity to $1.2 billion and $1.4 billion for each period, respectively.
Credit Facility and Term Loan
On February 8, 2013, we amended the Term Loan Agreement among Cliffs Natural Resources Inc. and various lenders dated March 4, 2011, as amended, or term loan, and the Amended and Restated Multicurrency Credit Agreement among Cliffs Natural Resources Inc. and various lenders dated August 11, 2011 (as further amended by Amendment No. 1 as of October 16, 2012), or amended credit agreement, to effect the following:
Suspend the current Funded Debt to EBITDA ratio requirement for all quarterly measurement periods in 2013, after which point it will revert back to the period ending March 31, 2014 until maturity.
Require a Minimum Tangible Net Worth of approximately $4.6 billion as of each of the three-month periods ended March 31, 2013, June 30, 2013, September 30, 2013 and December 31, 2013. Minimum Tangible Net Worth, in accordance with the amended credit agreement and term loan, is defined as total equity less goodwill and intangible assets.
Maintain a Maximum Total Funded Debt to Capitalization of 52.5 percent from the amendments' effective date until the period ending December 31, 2013.
The amended agreements retain the Minimum Interest Coverage Ratio requirement of 2.5 to 1.0, as defined above.
During February 2013, we repaid the $847.1 million outstanding balance under the term loan through the use of proceeds from the 2013 public equity offerings. Additionally, as a result of the term loan repayment, the remaining deferred financing costs of $7.1 million were expensed. Upon the repayment of the term loan, the financial covenants associated with the term loan no longer are applicable.
Per the terms of the amended credit agreement, we are subject to higher borrowing costs. The applicable interest rate is determined by reference to the former Funded Debt to EBITDA ratio. Based on the amended terms, borrowing costs could increase as much as 0.5 percent relative to the outstanding borrowings, as well as 0.1 percent on unborrowed amounts. Furthermore, the amended credit agreement places certain restrictions upon our declaration and payment of dividends, our ability to consummate acquisitions and the debt levels of our subsidiaries.
As of March 31, 2013, we were in compliance with all applicable financial covenants related to the amended credit agreement.
At December 31, 2012, prior to the amendments made on February 8, 2013 that are discussed above, the terms of the term loan and amended credit agreement each contained customary covenants that require compliance with certain financial covenants based on: (1) debt to earnings ratio (Total Funded Debt to EBITDA, as those terms are defined in the amended credit agreement), as of the last day of each fiscal quarter cannot exceed (i) 3.5 to 1.0, if none of the $270.0 million private placement senior notes due 2013 remain outstanding, or otherwise (ii) the then applicable maximum multiple under the $270.0 million private placement senior notes due 2013 and (2) interest coverage ratio (Consolidated EBITDA to Interest Expense, as those terms are defined in the amended credit agreement), for the preceding four quarters must not be less than 2.5 to 1.0 on the last day of any fiscal quarter. As the $270.0 million private placement senior notes due 2013 were repaid on December 28, 2012 with proceeds from the 2012 public debt offering, the financial covenant relating to the outstanding notes no longer was applicable. As of December 31, 2012, we were in compliance with the financial covenants related to both the term loan and the amended credit agreement.
Short-Term Facilities
Asia Pacific Iron Ore maintains a bank contingent instrument and cash advance facility. The facility, which is renewable annually at the bank’s discretion, provides A$40.0 million ($41.7 million at March 31, 2013 and $41.6 million at December 31, 2012) in credit for contingent instruments, such as performance bonds, and the ability to request a cash advance facility to be provided at the discretion of the bank. As of March 31, 2013, the outstanding bank guarantees under this facility totaled A$34.0 million ($35.4 million), thereby reducing borrowing capacity to A$6.0 million ($6.3 million). As of December 31, 2012, the outstanding bank guarantees under this facility totaled A$25.0 million ($26.0 million), thereby reducing borrowing capacity to A$15.0 million ($15.6 million). We have provided a guarantee of the facility, along with certain of our Australian subsidiaries. The terms of the short-term facility contain certain customary covenants; however, there are no financial covenants.
Letters of Credit
In conjunction with our acquisition of Consolidated Thompson, we issued standby letters of credit with certain financial institutions in order to support Consolidated Thompson’s and Bloom Lake’s general business obligations. In addition, we issued standby letters of credit with certain financial institutions during the third quarter of 2011 in order to support Wabush’s obligations. As of March 31, 2013 and December 31, 2012, these letter of credit obligations totaled $95.0 million and $96.9 million, respectively. All of these standby letters of credit are in addition to the letters of credit provided for under the amended credit agreement.
Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings on the amended credit agreement, based on the principal amounts outstanding at March 31, 2013:
 
(In Millions)
 
Maturities of Debt
2013 (April 1 - December 31)
$

2014

2015

2016