CLIFFS NATURAL RESOURCES INC., 10-Q filed on 5/6/2015
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2015
May 4, 2015
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, 2015 
 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
153,279,552 
Trading Symbol
clf 
 
Statements Of Condensed Consolidated Operations (USD $)
In Millions, except Share data in Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
Product
$ 399.5 
$ 559.2 
Freight and venture partners' cost reimbursements
46.5 
56.3 
TOTAL REVENUES
446.0 
615.5 
COST OF GOODS SOLD AND OPERATING EXPENSES
(365.2)
(425.5)
SALES MARGIN
80.8 
190.0 
OTHER OPERATING INCOME (EXPENSE)
 
 
Selling, general and administrative expenses
(29.1)
(37.5)
Miscellaneous - net
20.2 
(13.3)
Other operating expense
(8.9)
(50.8)
OPERATING INCOME
71.9 
139.2 
OTHER INCOME (EXPENSE)
 
 
Interest expense, net
(42.9)
(40.4)
Gain on extinguishment of debt
313.7 
Other non-operating income (expense)
(0.8)
0.8 
TOTAL OTHER EXPENSE
270.0 
(39.6)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES
341.9 
99.6 
INCOME TAX EXPENSE
(175.1)
(29.6)
EQUITY LOSS FROM VENTURES, net of tax
(0.3)
INCOME FROM CONTINUING OPERATIONS
166.8 
69.7 
LOSS FROM DISCONTINUED OPERATIONS, net of tax
(928.5)
(140.4)
NET LOSS
(761.7)
(70.7)
LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST (2015 - Loss of $7.7 million related to Discontinued Operations, 2014 - Loss of $7.3 million related to Discontinued Operations)
1.9 
0.4 
NET LOSS ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
(759.8)
(70.3)
PREFERRED STOCK DIVIDENDS
(12.8)
(12.8)
NET LOSS ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
$ (772.6)
$ (83.1)
Earnings (Loss) Per Common Share Attributable to Cliffs Shareholders - Basic
 
 
Continuing operations
$ 1.02 
$ 0.37 
Discontinued operations
$ (6.06)
$ (0.92)
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Basic:
$ (5.04)
$ (0.55)
Earnings (Loss) Per Common Share Attributable to Cliffs Shareholders - Diluted
 
 
Continuing operations
$ 0.94 
$ 0.37 
Discontinued operations
$ (5.20)
$ (0.91)
Earnings (Loss) per Common Share Attributable to Cliffs Common Shareholders - Diluted:
$ (4.26)
$ (0.54)
Weighted Average Number of Shares Outstanding Reconciliation [Abstract]
 
 
Basic
153,185 
153,040 
Diluted
178,696 
153,653 
Statements Of Condensed Consolidated Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
NET LOSS ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ (759.8)
$ (70.3)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
Changes in pension and other post-retirement benefits, net of tax
28.8 
3.4 
Unrealized net gain on marketable securities, net of tax
0.8 
3.9 
Unrealized net gain on foreign currency translation
168.0 
40.5 
Unrealized net gain (loss) on derivative financial instruments, net of tax
(0.8)
10.5 
OTHER COMPREHENSIVE INCOME
196.8 
58.3 
OTHER COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
10.8 
(0.5)
TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$ (552.2)
$ (12.5)
Statements Of Condensed Consolidated Financial Position (USD $)
In Millions, unless otherwise specified
Mar. 31, 2015
Dec. 31, 2014
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 355.7 
$ 271.3 
Accounts receivable, net
87.1 
122.7 
Inventories
408.5 
260.1 
Supplies and other inventories
120.4 
118.6 
Income tax receivable
165.5 
217.6 
Short-term assets of discontinued operations
197.2 
330.6 
Other current assets
190.0 
128.0 
TOTAL CURRENT ASSETS
1,524.4 
1,448.9 
PROPERTY, PLANT AND EQUIPMENT, NET
1,047.2 
1,070.5 
OTHER ASSETS
 
 
Long-term assets of discontinued operations
400.1 
Other Non-Current Assets
131.0 
244.5 
TOTAL OTHER ASSETS
131.0 
644.6 
TOTAL ASSETS
2,702.6 
3,164.0 
CURRENT LIABILITIES
 
 
Accounts payable
114.3 
166.1 
Accrued expenses
167.1 
201.7 
Short-term liabilities of discontinued operations
265.0 
400.6 
Other current liabilities
300.1 
190.2 
TOTAL CURRENT LIABILITIES
846.5 
958.6 
PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
250.2 
259.7 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
165.6 
165.6 
LONG-TERM DEBT
2,880.9 
2,843.3 
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS
125.2 
436.1 
OTHER LIABILITIES
216.3 
235.0 
TOTAL LIABILITIES
4,484.7 
4,898.3 
COMMITMENTS AND CONTINGENCIES (SEE NOTE 20)
   
   
CLIFFS SHAREHOLDERS' DEFICIT
 
 
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, Issued and Outstanding - 731,223 shares (2014 - 731,223)
731.3 
731.3 
Common Shares - par value $0.125 per share, Authorized - 400,000,000 shares (2014 - 400,000,000 shares); Issued - 159,546,224 shares (2014 - 159,546,224 shares); Outstanding - 153,184,519 shares (2014 - 153,246,754 shares)
19.8 
19.8 
Capital in excess of par value of shares
2,308.1 
2,309.8 
Retained deficit
(4,733.2)
(3,960.7)
Cost of 6,266,672 common shares in treasury (2014 - 6,299,470 shares)
(283.5)
(285.7)
Accumulated other comprehensive loss
(38.2)
(245.8)
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
(1,995.7)
(1,431.3)
NONCONTROLLING INTEREST (DEFICIT)
213.6 
(303.0)
TOTAL DEFICIT
(1,782.1)
(1,734.3)
TOTAL LIABILITIES AND DEFICIT
$ 2,702.6 
$ 3,164.0 
Statements Of Condensed Consolidated Financial Position (Parenthetical) (USD $)
Mar. 31, 2015
Dec. 31, 2014
Class of Stock [Line Items]
 
 
Preferred stock, par value
$ 0 
$ 0.000 
Common shares, par value
$ 0.125 
$ 0.125 
Common shares, authorized (in shares)
400,000,000 
400,000,000 
Common shares, issued (in shares)
159,546,224 
159,546,224 
Common shares, outstanding
153,279,552 
153,246,754 
Common shares in treasury
6,266,672 
6,299,470 
Preferred Class A [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred Stock, Liquidation Preference Per Share
$ 1,000 
$ 1,000 
Cumulative Mandatory Convertible
7.00% 
7.00% 
Preferred stock, shares authorized (in shares)
3,000,000 
3,000,000 
Preferred Shares, Issued and Outstanding, Shares
731,223 
731,223 
Preferred Class B [Member]
 
 
Class of Stock [Line Items]
 
 
Preferred stock, shares authorized (in shares)
4,000,000 
4,000,000 
Statements Of Condensed Consolidated Cash Flows (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2015
Mar. 31, 2014
OPERATING ACTIVITIES
 
 
NET LOSS
$ (761.7)
$ (70.7)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
 
 
Depreciation, depletion and amortization
33.0 
141.1 
Impairment of long-lived assets
76.6 
Deferred income taxes
165.8 
15.1 
Gain on extinguishment of debt
(313.7)
Loss on deconsolidation, net of cash deconsolidated
776.1 
Other
31.6 
3.2 
Changes in operating assets and liabilities:
 
 
Receivables and other assets
71.7 
161.5 
Product inventories
(154.9)
(214.5)
Payables and accrued expenses
(152.7)
(117.7)
Net cash used by operating activities
(228.2)
(82.0)
INVESTING ACTIVITIES
 
 
Purchase of property, plant and equipment
(15.9)
(103.3)
Other investing activities
0.2 
12.6 
Net cash used by investing activities
(15.7)
(90.7)
FINANCING ACTIVITIES
 
 
Proceeds from first lien notes offering
503.5 
Debt issuance costs
(33.1)
Repurchase of debt
(133.3)
Borrowings under credit facilities
295.0 
225.0 
Repayment under credit facilities
(295.0)
Common stock dividends
(23.0)
Preferred stock dividends
(12.8)
(12.8)
Other financing activities
(14.3)
8.7 
Net cash provided by financing activities
310.0 
197.9 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(1.3)
3.3 
INCREASE IN CASH AND CASH EQUIVALENTS
64.8 
28.5 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
290.9 
335.5 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$ 355.7 
$ 364.0 
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, 2015 are not necessarily indicative of results to be expected for the year ending December 31, 2015 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, 2014.
As more fully described in NOTE 14 - DISCONTINUED OPERATIONS, in January 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec, under the CCAA. Bloom Lake had recently suspended operations and for several months had been exploring options to sell certain of its Canadian assets, among other initiatives. Effective January 27, 2015, following the CCAA filing of the Bloom Lake Group, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations (collectively, the "Canadian Entities"). Our pre-filing financial results in Canada and subsequent expenses directly associated with the Canadian Entities are included in our financial statements and classified within discontinued operations.
Additionally, as we continue to re-focus our strategy on strengthening our U.S. Iron Ore operations, management has determined that our North American Coal operating segment as of March 31, 2015 met the criteria to be classified as held for sale under ASC 205 - Presentation of Financial Statements. As such, all current and historical North American Coal operating segment results are included in our financial statements and classified within discontinued operations.
We will now report our results from continuing operations in two reportable segments: U.S. Iron Ore and Asia Pacific Iron Ore.
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
 
Status of Operations
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
Tilden
 
Michigan
 
85.0%
 
Iron Ore
 
Active
Empire
 
Michigan
 
79.0%
 
Iron Ore
 
Active
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
 
Active
Pinnacle
 
West Virginia
 
100.0%
 
Coal
 
Active - Held for Sale
Oak Grove
 
Alabama
 
100.0%
 
Coal
 
Active - Held for Sale
Wabush1
 
Newfoundland and Labrador/ Quebec, Canada
 
100.0%
 
Iron Ore
 
Permanent closure
Bloom Lake1
 
Quebec, Canada
 
82.8%
 
Iron Ore
 
Care-and-maintenance
Cliffs Chromite Ontario - Black Label Deposit1
 
Ontario, Canada
 
100.0%
 
Chromite
 
Suspended
Cliffs Chromite Ontario - Black Thor Deposit1
 
Ontario, Canada
 
100.0%
 
Chromite
 
Suspended
Cliffs Chromite Ontario & Cliffs Chromite Far North - Big Daddy Deposit1
 
Ontario, Canada
 
70.0%
 
Chromite
 
Suspended
1 As of January 27, 2015, we deconsolidated substantially all of our Canadian operations following the CCAA filing. See NOTE 14 - DISCONTINUED OPERATIONS for further information.

Intercompany transactions and balances are eliminated upon consolidation.
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, 2015 and December 31, 2014. Parentheses indicate a net liability.
 
 
 
 
 
 
 
 
(In Millions)
Investment
 
Classification
 
Accounting
Method
 
Interest
Percentage
 
March 31,
2015
 
December 31,
2014
Hibbing
 
Other non-current assets
 
Equity Method
 
23%
 
$
2.5

 
$
3.1

Other
 
Other non-current assets
 
Equity Method
 
Various
 
0.9

 
1.0

 
 
 
 
 
 
 
 
$
3.4

 
$
4.1


Foreign Currency
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. Income taxes generally are not provided for foreign currency translation adjustments. To the extent that monetary assets and liabilities, inclusive of intercompany notes, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Unaudited Condensed Consolidated Operations. Transaction gains and losses resulting from remeasurement of short-term intercompany loans are included in Miscellaneous - net in our Statements of Unaudited Condensed Consolidated Operations. For the three months ended March 31, 2015, net gains of $13.5 million related to the impact of transaction gains and losses resulting from remeasurement. Of these transaction gains and losses, for the three months ended March 31, 2015, gains of $12.4 million and gains of $1.5 million, respectively, resulted from remeasurement of short-term intercompany loans and cash and cash equivalents. For the three months ended March 31, 2014, losses of $11.4 million related to the impact of transaction gains and losses resulting from remeasurement, of which included losses of $8.8 million and losses of $3.1 million, respectively, resulted from remeasurement of short-term intercompany loans and cash and cash equivalents.
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, 2014 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.
Derivative Financial Instruments and Hedging Activities
According to our global hedge policy, the policy allows for hedging 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. Full hedge compliance under the policy has been waived through December 31, 2015. The waiver was a result of the evaluation of the potential risk of being over hedged and the uncertainty of the 2015 currency exposures. During 2015, we have not entered into any new foreign currency exchange contracts to hedge our foreign currency exposure and we do not expect to enter into any during the remainder of 2015. In the future, we may enter into additional hedging instruments as needed in order to further hedge our exposure to changes in foreign currency exchange rates.
Recent Accounting Pronouncements
Issued and Not Effective
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and will be effective for us beginning in our first quarter of 2016. Early adoption is permitted. We do not expect this adoption to have an impact on our Statements of Unaudited Condensed Consolidated Operations or Statements of Unaudited Condensed Consolidated Cash Flows.  The impact of the adoption of the guidance will result in reclassification of the unamortized debt issuance costs on the Statements of Unaudited Condensed Consolidated Financial Position, which were $46.2 million and $25.6 million at March 31, 2015 and December, 31, 2014, respectively.
SEGMENT REPORTING
SEGMENT REPORTING
NOTE 2 - SEGMENT REPORTING
Our continuing operations are organized and managed according to product category and geographic location: U.S. Iron Ore and Asia Pacific Iron Ore. 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 Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. There were no intersegment product revenues in the first quarters of 2015 or 2014.
We have historically evaluated segment performance based on sales margin, defined as revenues less cost of goods sold, and operating expenses identifiable to each segment. Additionally, beginning in the third quarter of 2014, concurrent with the change in control on July 29, 2014, management began to evaluate segment performance based on EBITDA, defined as Net Loss before interest, income taxes, depreciation, depletion and amortization, and Adjusted EBITDA, defined as EBITDA excluding certain items such as impacts of discontinued operations, foreign currency remeasurement, severance recorded in Selling, general and administrative expenses, or SG&A, extinguishment of debt and intersegment corporate allocations of SG&A costs. Management uses and believes that investors benefit from referring to these measures in evaluating operating and financial results, as well as in planning, forecasting and analyzing future periods as these financial measures approximate the cash flows associated with the operational earnings.
The following tables present a summary of our reportable segments for the three months ended March 31, 2015 and 2014, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and Equity Loss from Ventures and a reconciliation of Net Loss to EBITDA and Adjusted EBITDA:
 
(In Millions)
 
Three Months Ended
March 31,
 
2015
 
2014
Revenues from product sales and services:
 
 
 
 
 
 
 
U.S. Iron Ore
$
311.8

 
70
%
 
$
361.3

 
59
%
Asia Pacific Iron Ore
134.2

 
30
%
 
254.2

 
41
%
Total revenues from product sales and services
$
446.0

 
100
%
 
$
615.5

 
100
%
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
U.S. Iron Ore
$
80.0

 
 
 
$
95.0

 
 
Asia Pacific Iron Ore
0.8

 
 
 
66.3

 
 
Eliminations with Discontinued Operations

 
 
 
28.7

 
 
Sales margin
80.8

 
 
 
190.0

 
 
Other operating income
(8.9
)
 
 
 
(50.8
)
 
 
Other income (expense)
270.0

 
 
 
(39.6
)
 
 
Income from continuing operations before income taxes and equity loss from ventures
$
341.9

 
 
 
$
99.6

 
 


 
(In Millions)
 
Three Months Ended
March 31,
 
2015
 
2014
Net Loss
$
(761.7
)
 
$
(70.7
)
Less:
 
 
 
Interest expense, net
(44.2
)
 
(42.7
)
Income tax benefit (expense)
(175.0
)
 
21.8

Depreciation, depletion and amortization
(33.0
)
 
(141.1
)
EBITDA
$
(509.5
)
 
$
91.3

Less:
 
 
 
Impact of discontinued operations
$
(924.1
)
 
$
(118.1
)
North American Coal operations impact
(5.5
)
 
18.2

Gain on extinguishment of debt
313.7

 

Severance in SG&A
(1.5
)
 
(6.0
)
Foreign exchange remeasurement
13.5

 
(11.4
)
Adjusted EBITDA
$
94.4

 
$
208.6

 
 
 
 
EBITDA:
 
 
 
U.S. Iron Ore
$
101.6

 
$
123.6

Asia Pacific Iron Ore
18.0

 
85.3

Other
(629.1
)
 
(117.6
)
Total EBITDA
$
(509.5
)
 
$
91.3

 
 
 
 
Adjusted EBITDA:
 
 
 
U.S. Iron Ore
$
105.1

 
$
128.7

Asia Pacific Iron Ore
5.7

 
99.1

Other
(16.4
)
 
(19.2
)
Total Adjusted EBITDA
$
94.4

 
$
208.6

 
(In Millions)
 
Three Months Ended
March 31,
 
2015
 
2014
Depreciation, depletion and amortization:
 
 
 
U.S. Iron Ore
$
21.7

 
$
28.7

Asia Pacific Iron Ore
6.3

 
39.1

Other
1.8

 
1.9

Total depreciation, depletion and amortization
$
29.8

 
$
69.7

 
 
 
 
Capital additions1:
 
 
 
U.S. Iron Ore
$
9.5

 
$
14.9

Asia Pacific Iron Ore
3.4

 
3.2

Other
0.4

 
0.9

Total capital additions
$
13.3

 
$
19.0

                                         
1    Includes capital lease additions and non-cash accruals. Refer to NOTE 17 - CASH FLOW INFORMATION.
A summary of assets by segment is as follows:
 
(In Millions)
 
March 31,
2015
 
December 31,
2014
Assets:
 
 
 
U.S. Iron Ore
$
1,550.1

 
$
1,464.9

Asia Pacific Iron Ore
250.6

 
274.6

Other
31.2

 
147.0

Total segment assets
1,831.9

 
1,886.5

Corporate
673.5

 
546.8

Assets of Discontinued Operations
197.2

 
730.7

Total assets
$
2,702.6

 
$
3,164.0

INVENTORIES
Inventories
NOTE 3 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2015 and December 31, 2014:
 
(In Millions)
 
March 31, 2015
 
December 31, 2014
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
294.5

 
$
13.9

 
$
308.4

 
$
132.1

 
$
13.5

 
$
145.6

Asia Pacific Iron Ore
15.1

 
85.0

 
100.1

 
26.4

 
88.1

 
114.5

Total
$
309.6

 
$
98.9

 
$
408.5

 
$
158.5

 
$
101.6

 
$
260.1

PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
NOTE 4 - 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, 2015 and December 31, 2014:
 
(In Millions)
 
March 31,
2015
 
December 31,
2014
Land rights and mineral rights
$
500.5

 
$
500.5

Office and information technology
69.7

 
73.7

Buildings
59.8

 
59.8

Mining equipment
584.9

 
585.1

Processing equipment
512.7

 
510.2

Electric power facilities
44.2

 
46.8

Land improvements
24.8

 
24.7

Other
54.7

 
55.0

Construction in-progress
20.7

 
14.4

 
1,872.0

 
1,870.2

Allowance for depreciation and depletion
(824.8
)
 
(799.7
)
 
$
1,047.2

 
$
1,070.5


We recorded depreciation and depletion expense of $28.7 million and $67.7 million in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2015 and March 31, 2014, respectively.
DEBT AND CREDIT FACILITIES
DEBT AND CREDIT FACILITIES
NOTE 5 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of March 31, 2015 and December 31, 2014:
($ in Millions)
 
March 31, 2015
 
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
 
$
423.2

 
$
422.9

(1)
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
 
Fixed
 
4.83%
 
2020
 
308.5

 
308.1

(2)
$800 Million 6.25% 2040 Senior Notes
 
Fixed
 
6.34%
 
2040
 
492.8

 
487.0

(3)
$400 Million 5.90% 2020 Senior Notes
 
Fixed
 
5.98%
 
2020
 
326.8

 
325.7

(4)
$500 Million 3.95% 2018 Senior Notes
 
Fixed
 
6.32%
 
2018
 
436.0

 
433.8

(5)
$540 Million 8.25% 2020 First Lien Notes
 
Fixed
 
9.97%
 
2020
 
540.0

 
503.5

(6)
$544.2 Million 7.75% 2020 Second Lien Notes
 
Fixed
 
15.55%
 
2020
 
544.2

 
397.2

(7)
$550 Million ABL Facility:
 
 
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
Variable
 
—%
 
2020
 
550.0

 

(8)
Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
2.7

 
Total debt
 
 
 
 
 
 
 
$
3,621.5

 
$
2,880.9

 
Less: Short-term and current portion of long-term debt
 
 
 
 
 
 
 
 
 

 
Long-term debt
 
 
 
 
 
 
 
 
 
$
2,880.9

 
($ in Millions)
 
December 31, 2014
 
Debt Instrument
 
Type
 
Annual Effective Interest Rate
 
Final Maturity
 
Total Face Amount
 
Total Debt
 
$700 Million 4.875% 2021 Senior Notes
 
Fixed
 
4.88%
 
2021
 
$
690.0

 
$
689.5

(1)
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
 
Fixed
 
4.83%
 
2020
 
490.0

 
489.4

(2)
$800 Million 6.25% 2040 Senior Notes
 
Fixed
 
6.34%
 
2040
 
800.0

 
790.5

(3)
$400 Million 5.90% 2020 Senior Notes
 
Fixed
 
5.98%
 
2020
 
395.0

 
393.7

(4)
$500 Million 3.95% 2018 Senior Notes
 
Fixed
 
5.17%
 
2018
 
480.0

 
477.4

(5)
$1.125 Billion Credit Facility:
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Agreement
 
Variable
 
2.94%
 
2017
 
1,125.0

 

(9)
Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
2.8

 
Total debt
 
 
 
 
 
 
 
$
3,980.0

 
$
2,843.3

 
Less: Short-term and current portion of long-term debt
 
 
 
 
 
 
 
 
 

 
Long-term debt
 
 
 
 
 
 
 
 
 
$
2,843.3

 

(1)
During the first quarter of 2015, we purchased $58.3 million of outstanding 4.875 percent senior notes that were trading at a discount of 52.0 percent which resulted in a gain on extinguishment of $20.0 million. In addition, on March 27, 2015, we exchanged as part of a tender offer $208.5 million of the 4.875 percent senior notes for $170.3 million of the 7.75 percent second lien notes at a discount of $46.0 million based on an imputed interest rate of 15.55 percent, resulting in a gain on extinguishment of $83.1 million, net of amounts expensed for unamortized original issue discount and deferred origination fees. As of March 31, 2015, the $700.0 million 4.875 percent senior notes were recorded at a par value of $423.2 million less unamortized discounts of $0.3 million, based on an imputed interest rate of 4.89 percent. As of December 31, 2014, the $700.0 million 4.875 percent senior notes were recorded at a par value of $690.0 million less unamortized discounts of $0.5 million based on an imputed interest rate of 4.88 percent.
(2)
During the first quarter of 2015, we purchased $43.8 million of outstanding 4.80 percent senior notes that were trading at a discount of 54.3 percent, which resulted in a gain on extinguishment of $15.6 million. In addition, on March 27, 2015, we exchanged as part of a tender offer $137.8 million of the 4.80 percent senior notes for $112.9 million of the 7.75 percent second lien notes at a discount of $30.5 million based on an imputed interest rate of 15.55 percent, resulting in a gain on extinguishment of $54.6 million, net of amounts expensed for unamortized original issue discount and deferred origination fees. As of March 31, 2015, the $500.0 million 4.80 percent senior notes were recorded at a par value of $308.5 million less unamortized discounts of $0.4 million, based on an imputed interest rate of 4.83 percent. As of December 31, 2014, the $500.0 million 4.80 percent senior notes were recorded at a par value of $490.0 million less unamortized discounts of $0.6 million based on an imputed interest rate of 4.83 percent.
(3)
During the first quarter of 2015, we purchased $45.9 million of outstanding 6.25 percent senior notes that were trading at a discount of 52.5 percent, which resulted in a gain on extinguishment of $15.0 million. In addition, on March 27, 2015, we exchanged as part of a tender offer $261.3 million of the 6.25 percent senior notes for $203.5 million of the 7.75 percent second lien notes at a discount of $55.0 million based on an imputed interest rate of 15.55 percent, resulting in a gain on extinguishment of $107.3 million, net of amounts expensed for unamortized original issue discount and deferred origination fees. As of March 31, 2015, the $800 million 6.25 percent senior notes were recorded at a par value of $492.8 million less unamortized discounts of $5.8 million, based on an imputed interest rate of 6.34 percent. As of December 31, 2014, the $800 million 6.25 percent senior notes were recorded at a par value of $800.0 million less unamortized discounts of $9.5 million based on an imputed interest rate of 6.34 percent.
(4)
During the first quarter of 2015, we purchased $1.3 million of outstanding 5.90 percent senior notes that were trading at a discount of 58.0 percent, which resulted in a gain on extinguishment of $0.3 million. In addition, on March 27, 2015, we exchanged as part of a tender offer $67.0 million of the 5.90 percent senior notes for $57.5 million of the 7.75 percent second lien notes at a discount of $15.5 million based on an imputed interest rate of 15.55 percent, resulting in a gain on extinguishment of $24.5 million, net of amounts expensed for unamortized original issue discount and deferred origination fees. As of March 31, 2015, the $400.0 million 5.90 percent senior notes were recorded at a par value of $326.8 million less unamortized discounts of $1.1 million, based on an imputed interest rate of 5.98 percent. As of December 31, 2014, the $400.0 million 5.90 percent senior notes were recorded at a par value of $395.0 million less unamortized discounts of $1.3 million based on an imputed interest rate of 5.98 percent.
(5)
During the first quarter of 2015, we purchased $44.0 million of outstanding 3.95 percent senior notes that were trading at a discount of 77.5 percent, which resulted in a gain on the extinguishment of debt of $7.1 million. As of March 31, 2015, the $500.0 million 3.95 percent senior notes were recorded at a par value of $436.0 million less unamortized discounts of $2.2 million, based on an imputed interest rate of 6.32 percent. As of December 31, 2014, the $500.0 million 3.95 percent senior notes were recorded at a par value of $480.0 million less unamortized discounts of $2.6 million based on an imputed interest rate of 5.17 percent.
(6)
As of March 31, 2015, the $540.0 million 8.25 percent first lien notes were recorded at a par value of $540.0 million less unamortized discounts of $36.5 million, based on an imputed interest rate of 9.97 percent.
(7)
As of March 31, 2015, the $544.2 million 7.75 percent second lien notes were recorded at a par value of $544.2 million less unamortized discounts of $147.0 million, based on an imputed interest rate of 15.55 percent. See NOTE 6 - FAIR VALUE MEASUREMENTS for further discussion of unamortized discount as a result of the exchange offers.
(8)
As of March 31, 2015, no loans were drawn under the ABL Facility and we had total availability of $441.1 million as a result of borrowing base limitations. As of March 31, 2015, the principal amount of letter of credit obligations totaled $136.2 million and foreign exchange hedge obligations totaled $5.5 million, thereby further reducing available borrowing capacity on our ABL Facility to $299.4 million.
(9)
As of December 31, 2014, we had no revolving loans drawn under the revolving credit agreement of which had $1.125 billion availability. As of December 31, 2014, the principal amount of letter of credit obligations totaled $149.5 million, thereby further reducing available borrowing capacity on the revolving credit agreement to $975.5 million.
Revolving Credit Facility
As of March 30, 2015, we eliminated the revolving credit agreement which was last amended on January 22, 2015 (Amendment No. 6). The amended terms waived the potential event of default related to a CCAA filing for Canadian entities. The CCAA filing for our Bloom Lake Group was made subsequent to the effectiveness of this amendment. The amendment also reduced the size of the existing facility from $1.125 billion to $900 million. The revolving credit agreement was replaced with our ABL Facility.
As of December 31, 2014, we were in compliance with all applicable financial covenants related to the revolving credit agreement.
ABL Facility
On March 30, 2015, we entered into a new senior secured asset-based revolving credit facility with various financial institutions. The ABL Facility will mature upon the earlier of March 30, 2020 or 60 days prior to the maturity of the New First Lien Notes (as defined below) and certain other material debt, and provides for up to $550.0 million in borrowings, comprised of (i) a $450.0 million U.S. tranche, including a $250.0 million sublimit for the issuance of letters of credit and a $100.0 million sublimit for U.S. swingline loans, and (ii) a $100.0 million Australian tranche, including a $50.0 million sublimit for the issuance of letters of credit and a $20.0 million sublimit for Australian swingline loans. Availability under both the U.S. tranche and Australian tranche of the ABL Facility is limited to an eligible U.S. borrowing base and Australian borrowing base, as applicable, determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment. As of March 31, 2015, no loans were drawn under the ABL Facility and we had total availability of $441.1 million on our ABL Facility, as a result of borrowing base limitations. As of March 31, 2015, the principal amount of letter of credit obligations totaled $136.2 million and foreign exchange hedge obligations totaled $5.5 million, thereby reducing available borrowing capacity on our ABL Facility to $299.4 million.
The ABL Facility and certain bank products and hedge obligations are guaranteed by us and certain of our existing wholly-owned U.S. and Australian subsidiaries and are required to be guaranteed by certain of our future U.S. and Australian subsidiaries; provided, however, that the obligations of any U.S. entity will not be guaranteed by any Australian entity. Amounts outstanding under the ABL Facility will be secured by (i) a first-priority security interest in the ABL Collateral (as defined herein), including, in the case of the Australian tranche only, ABL Collateral owned by a borrower or guarantor that is organized under laws of Australia, and (ii) a third-priority security interest in the Notes Collateral. The priority of the security interests in the ABL Collateral and the Notes Collateral of the lenders under the ABL Facility and the holders of the First Lien Notes are set forth in intercreditor provisions contained in and ABL intercreditor agreement.
The ABL Collateral generally consists of the following assets of our direct and indirect wholly-owned U.S. subsidiaries (other than certain excluded subsidiaries): accounts receivable and other rights to payment, inventory, as-extracted collateral, investment property, certain general intangibles and commercial tort claims, certain mobile equipment, commodities accounts, deposit accounts, securities accounts and other related assets and proceeds and products of each of the foregoing.
Borrowings under the ABL Facility bear interest, at our option, at a base rate, an Australian base rate or, if certain conditions are met, a LIBOR rate, in each case plus an applicable margin. The base rate is equal to the greater of the federal funds rate plus ½ of 1 percent, the LIBOR rate based on a one-month interest period plus 1 percent and the floating rate announced by BAML as its “prime rate.” The Australian base rate is equal to the LIBOR rate as of 11:00 a.m. on the first business day of each month for a one-month period. The LIBOR rate is a per annum fixed rate equal to LIBOR with respect to the applicable interest period and amount of LIBOR rate loan requested.
The ABL Facility contains customary representations and warranties and affirmative and negative covenants including, among others, covenants regarding the maintenance of certain financial ratios if certain conditions are triggered, covenants relating to financial reporting, covenants relating to the payment of dividends on, or purchase or redemption of our capital stock, covenants relating to the incurrence or prepayment of certain debt, covenants relating to the incurrence of liens or encumbrances, compliance with laws, transactions with affiliates, mergers and sales of all or substantially all of our assets and limitations on changes in the nature of our business.
The ABL Facility provides for customary events of default, including, among other things, the event of nonpayment of principal, interest, fees, or other amounts, a representation or warranty proving to have been materially incorrect when made, failure to perform or observe certain covenants within a specified period of time, a cross-default to certain material indebtedness, the bankruptcy or insolvency of the Company and certain of its subsidiaries, monetary judgment defaults of a specified amount, invalidity of any loan documentation, a change of control of the Company, and ERISA defaults resulting in liability of a specified amount. In the event of a default by us (beyond any applicable grace or cure period, if any), the administrative agent may and, at the direction of the requisite number of lenders, shall declare all amounts owing under the ABL Facility immediately due and payable, terminate such lenders’ commitments to make loans under the ABL Facility and/or exercise any and all remedies and other rights under the ABL Facility. For certain defaults related to insolvency and receivership, the commitments of the lenders will be automatically terminated and all outstanding loans and other amounts will become immediately due and payable.
As of March 31, 2015, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
$540 Million 8.25% 2020 Senior Secured First Lien Notes - 2015 Offering

On March 30, 2015, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee and notes collateral agent, relating to our issuance of $540 million aggregate principal amount of 8.25 percent Senior First Lien Notes due 2020 (the "First Lien Notes"). The First Lien Notes were sold on March 30, 2015 in a private transaction exempt from the registration requirements of the Securities Act.
The First Lien Notes bear interest at a rate of 8.25 percent per annum. Interest on the Notes is payable semi-annually in arrears on March 31 and September 30 of each year, commencing on September 30, 2015. The First Lien Notes mature on March 31, 2020 and are secured senior obligations of the Company.
The First Lien Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of our material domestic subsidiaries and are secured (subject in each case to certain exceptions and permitted liens) by (i) a first-priority lien on substantially all of our assets, other than the ABL Collateral (the "Notes Collateral"), and (ii) a second-priority lien on the ABL Collateral, which is junior to a first-priority lien for the benefit of the lenders under the ABL Facility. The First Lien Notes and guarantees are general senior obligations of the Company and the applicable guarantor; are effectively senior to all of our unsecured indebtedness, to the extent of the value of the collateral; together with other obligations secured equally and ratably with the First Lien Notes, are effectively (i) senior to our existing and future ABL obligations, to the extent and value of the Notes Collateral and (ii) senior to our obligations under the Second Lien Notes, to the extent and value of the collateral; are effectively subordinated to (i) our existing and future ABL obligations, to the extent and value of the ABL Collateral, and (ii) any existing or future indebtedness that is secured by liens on assets that do not constitute a part of the collateral, to the extent of the value of such assets; will rank equally in right of payment with all existing and future senior indebtedness, and any guarantees thereof; will rank equally in priority as to the Notes Collateral with any future debt secured equally and ratably with the First Lien Notes incurred after March 30, 2015; rank senior in right of payment to all existing and future subordinated indebtedness; and structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the First Lien Notes. The relative priority of the liens securing our First Lien Notes obligations and Second Lien Notes obligations compared to the liens securing our obligations under the ABL Facility and certain other matters relating to the administration of security interests are set forth in intercreditor agreements.
The terms of the First Lien Notes are governed by the First Lien Notes indenture. The First Lien Notes indenture contains customary covenants that, among other things, limit our ability to incur secured indebtedness, create liens on principal property and the capital stock or debt of a subsidiary that owns a principal property, use proceeds of dispositions of collateral, enter into sale and leaseback transactions, merge or consolidate with another company, and transfer or sell all or substantially all of our assets. Upon the occurrence of a “change of control triggering event,” as defined in the indenture, we are required to offer to repurchase the First Lien Notes at 101 percent of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem any of the First Lien Notes beginning on March 31, 2018. The initial redemption price is 108.25 percent of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The redemption price will decline after 2018 and will be 100 percent of their principal amount, plus accrued interest, beginning on June 30, 2019. We may also redeem some or all of the First Lien Notes at any time and from time to time prior to March 31, 2018 at a price equal to 100 percent of the principal amount thereof plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time and from time to time on or prior to March 31, 2018, we may redeem in the aggregate up to 35 percent of the original aggregate principal amount of the First Lien Notes (calculated after giving effect to any issuance of additional First Lien Notes) with the net cash proceeds of certain equity offerings, at a redemption price of 108.25 percent, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least 65 percent of the original aggregate principal amount of the First Lien Notes (calculated after giving effect to any issuance of additional First Lien Notes) issued under the First Lien Notes indenture remain outstanding after each such redemption.
The First Lien Notes indenture contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other indebtedness, certain events of bankruptcy and insolvency, and failure to pay certain judgments. An event of default under the First Lien indenture will allow either the trustee or the holders of at least 25 percent in aggregate principal amount of the then-outstanding First Lien Notes issued under such indenture to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the First Lien Notes.
$544 Million Senior Secured Second Lien Notes - 2015 Offering
On March 30, 2015, we also entered into an indenture among the Company, the guarantors and U.S. Bank National Association, as trustee and notes collateral agent, relating to our issuance of $544.2 million aggregate principal amount of 7.75 percent second lien senior secured notes due 2020 (the "Second Lien Notes"). The Second Lien Notes were issued on March 30, 2015 in exchange offers for certain of our existing senior notes.
The Second Lien Notes bear interest at a rate of 7.75 percent per annum. Interest on the Second Lien Notes is payable semi-annually in arrears on March 31 and September 30 of each year, commencing on September 30, 2015. The Second Lien Notes mature on March 31, 2020 and are secured senior obligations of the Company.
The Second Lien Notes have substantially similar terms to those of the First Lien Notes except with respect to their priority security interest in the collateral. The Second Lien Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of our material domestic subsidiaries and are secured (subject in each case to certain exceptions and permitted liens) by (i) a second-priority lien (junior to the First Lien Notes) on substantially all of our assets, other than the ABL Collateral, and (ii) a third-priority lien (junior to the ABL Facility and the First Lien Notes) on the ABL Collateral.
The Company may redeem any of the Second Lien Notes beginning on March 31, 2017. The initial redemption price is 103.875 percent of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The redemption price will decline each year after March 31, 2017 and will be 100 percent of their principal amount, plus accrued interest, beginning on March 31, 2019. The Company may also redeem some or all of the Second Lien Notes at any time and from time to time prior to March 31, 2017 at a price equal to 100 percent of the principal amount thereof plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time and from time to time on or prior to March 31, 2017, the Company may redeem in the aggregate up to 35 percent of the original aggregate principal amount of the Second Lien Notes (calculated after giving effect to any issuance of additional Second Lien Notes) with the net cash proceeds of certain equity offerings, at a redemption price of 107.75 percent, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least 65 percent of the original aggregate principal amount of the Second Lien Notes (calculated after giving effect to any issuance of additional Second Lien Notes) issued under the Second Lien Notes Indenture remain outstanding after each such redemption.    
Letters of Credit
We issued standby letters of credit with certain financial institutions in order to support general business obligations including, but not limited to, workers compensation and environmental obligations. As of March 31, 2015 and December 31, 2014, these letter of credit obligations totaled $136.2 million and $149.5 million, respectively.
Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings on the ABL Facility, based on the principal amounts outstanding at March 31, 2015:
 
(In Millions)
 
Maturities of Debt
2015 (April 1 - December 31)
$

2016

2017

2018
436.0

2019

2020
1,719.5

2021 and thereafter
916.0

Total maturities of debt
$
3,071.5

FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 6 - FAIR VALUE MEASUREMENTS
The following represents the assets and liabilities of the Company measured at fair value at March 31, 2015 and December 31, 2014:
 
(In Millions)
 
March 31, 2015
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
$
120.0

 
$

 
$

 
$
120.0

Derivative assets

 

 
34.5

 
34.5

Available-for-sale marketable securities
2.8

 

 

 
2.8

Total
$
122.8

 
$

 
$
34.5

 
$
157.3

Liabilities:

 

 

 

Derivative liabilities
$

 
$
1.6

 
$
16.2

 
$
17.8

Foreign exchange contracts

 
8.7

 

 
8.7

Total
$

 
$
10.3

 
$
16.2

 
$
26.5

 
(In Millions)
 
December 31, 2014
Description
Quoted Prices in Active
Markets for Identical
Assets/Liabilities (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$

 
$
63.2

 
$
63.2

Available-for-sale marketable securities
4.3

 

 

 
4.3

Total
$
4.3

 
$

 
$
63.2

 
$
67.5

Liabilities:

 

 

 

Derivative liabilities
$

 
$

 
$
9.5

 
$
9.5

Foreign exchange contracts

 
31.5

 

 
31.5

Total
$

 
$
31.5

 
$
9.5

 
$
41.0

Financial assets classified in Level 1 at March 31, 2015 include money market funds and available-for-sale marketable securities. Financial assets classified in Level 1 at December 31, 2014 include 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, 2015 and December 31, 2014, 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, 2015 and December 31, 2014 included a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and adjust this provision to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instrument is determined using a market approach based on an estimate of the annual realized price of hot-rolled steel at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative assets and liabilities also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers at March 31, 2015 and December 31, 2014. These provisional pricing arrangements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
Qualitative/Quantitative Information About Level 3 Fair Value Measurements
 
 
(In Millions)
Fair Value at March 31, 2015
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate per ton
(Weighted Average)
 
Provisional Pricing Arrangements
 
$
16.2

 
Other current liabilities
 
Market Approach
 
Management's
Estimate of 62% Fe
 
$51
Customer Supply Agreement
 
$
34.5

 
Other current assets
 
Market Approach
 
Hot-Rolled Steel Estimate
 
$540 - $575 ($563)

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 fines spot price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable input used in the fair value measurement of the reporting entity’s customer supply agreement is the future hot-rolled steel price that is estimated based on projections provided by the customer, current market data, analysts' projections and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
We recognize any transfers between levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2015 or 2014. The following tables represent a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014.
 
(In Millions)
 
Derivative Assets (Level 3)
 
Three Months Ended
March 31,
 
2015
 
2014
Beginning balance
$
63.2

 
$
57.7

Total gains (losses)
 
 
 
Included in earnings
10.1

 
29.0

Settlements
(38.8
)
 
(43.4
)
Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance - March 31
$
34.5

 
$
43.3

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
10.1

 
$
29.0


 
(In Millions)
 
Derivative Liabilities (Level 3)
 
Three Months Ended
March 31,
 
2015
 
2014
Beginning balance
$
(9.5
)
 
$
(1.0
)
Total gains (losses)
 
 
 
Included in earnings
(16.2
)
 
(4.0
)
Settlements
9.5

 
1.0

Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance - March 31
$
(16.2
)
 
$
(4.0
)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
(16.2
)
 
$
(4.0
)

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, 2015 and 2014.
The carrying amount for certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Accrued expenses) approximates fair value and, therefore, has been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at March 31, 2015 and December 31, 2014 were as follows:
 
 
 
(In Millions)
 
 
 
March 31, 2015
 
December 31, 2014
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Senior notes—$700 million
Level 1
 
$
422.9

 
$
220.0

 
$
689.5

 
$
367.3

Senior notes—$1.3 billion
Level 1
 
795.1

 
425.8

 
1,279.9

 
704.0

Senior notes—$400 million
Level 1
 
325.7

 
190.5

 
393.7

 
228.1

Senior notes—$500 million
Level 1
 
433.8

 
337.9

 
477.4

 
312.0

Senior First Lien Notes —$540 million
Level 1
 
503.5

 
507.6

 

 

Senior Second Lien Notes —$544.2 million
Level 2
 
397.2

 
397.2

 

 

Asset-Based Revolving Credit Facility
Level 2
 

 

 

 

Fair value adjustment to interest rate hedge
Level 2
 
2.7

 
2.7

 
2.8

 
2.8

Total long-term debt
 
 
$
2,880.9

 
$
2,081.7

 
$
2,843.3

 
$
1,614.2


The fair value of long-term debt was determined using quoted market prices based upon current borrowing rates. The asset based lending credit facility is variable rate interest and approximates fair value. See NOTE 5 - DEBT AND CREDIT FACILITIES for further information.
Items Measured at Fair Value on a Non-Recurring Basis
The following tables present information about the financial and non-financial assets and liabilities that were measured on a fair value basis at March 31, 2015 and December 31, 2014. The tables also indicate the fair value hierarchy of the valuation techniques used to determine such fair value.
 
 
(In Millions)
 
 
March 31, 2015
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Gains
Liabilities:
 
 
 
 
 
 
 
 
 
 
$544.2 Million 7.75% 2020 Second Lien Notes
 
$

 
$
397.2

 
$

 
$
397.2

 
$
269.5

 
 
$

 
$
397.2

 
$

 
$
397.2

 
$
269.5

The $544.2 million 7.75 percent Second Lien Notes issued in the exchange offers were recorded as an extinguishment of debt as the change in debt terms was considered substantial. As such, the newly issued Second Lien Senior Notes were recorded at fair value at the issuance date. In order to determine the fair value of the Second Lien Senior Notes on the date of the exchange, we utilized the median bid ask spread obtained from various investment banks for the exchange date. The bid ask spread is indicative of the fair value of the notes on the exchange date. The 27.0 percent discount equated to a discount of $147.0 million on the issue value of $544.2 million, or an estimated fair value of $397.2 million.
 
 
(In Millions)
 
 
December 31, 2014
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Losses
Assets:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment -
Asia Pacific Iron Ore reporting unit
 
$

 
$

 
$

 
$

 
$
73.5

Other long-lived assets -
Property, plant and equipment
    and Mineral rights:
 
 
 
 
 
 
 
 
 
 
Asia Pacific Iron Ore reporting unit
 

 

 
72.4

 
72.4

 
526.5

Other reporting units
 

 

 

 

 
11.3

Other long-lived assets -
Intangibles and other long-term assets:
 
 
 
 
 
 
 
 
 
 
Asia Pacific Iron Ore reporting unit
 

 

 
7.0

 
7.0

 
24.2

Investment in ventures
impairment - Global Exploration
 

 

 

 

 
9.2

 
 
$

 
$

 
$
79.4

 
$
79.4

 
$
644.7


Financial Assets
During the third quarter of 2014, an impairment charge of $9.2 million to investment in ventures was recorded within our Global Exploration operating segment as a decision was made to abandon the investment during the period.
Non-Financial Assets
During the third and fourth quarter of 2014, we identified factors that indicated the carrying values of the asset groups in the chart above may not be recoverable primarily due to long-term price forecasts as part of management’s long-range planning process. Updated estimates of long-term prices for all products, specifically the Platts 62 percent Fe fines spot price were lower than prior estimates. This especially affects the Asia Pacific Iron Ore business segment because their contracts correlate heavily to world market spot pricing. These estimates were updated based upon current market conditions, macro-economic factors influencing the balance of supply and demand for our products and expectations for future cost and capital expenditure requirements. Additionally, our CEO, Lourenco Goncalves, was appointed by the Board of Directors in early August 2014 and was subsequently identified as the CODM in accordance with ASC 280, Segment Reporting. Our CODM views Asia Pacific Iron Ore as a non-core asset and has communicated plans to evaluate the business unit for a change in strategy including possible divestiture. These factors, among other considerations utilized in the individual impairment assessments, indicate that the carrying value of the respective asset groups in the chart above and Asia Pacific Iron Ore goodwill may not be recoverable.
During the third quarter of 2014, a goodwill impairment charge of $73.5 million was recorded for our Asia Pacific Iron Ore reporting units within our Asia Pacific Iron Ore operating segment. Based on our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.
We also recorded impairment charges to property, plant and equipment, mineral rights, intangible assets and other long-term assets during the second half of 2014 related to our Asia Pacific Iron Ore operating segment, along with impairments charged to reporting units within our Other reportable segments. A detailed break out of the impairment charges is shown in the chart above. The recorded impairment charges reduce the related assets to their estimated fair value as we determined that the future cash flows associated with these operations were not sufficient to support the recoverability of the carrying value of these assets. Fair value was determined based on management's best estimate within a range of fair values, which is considered a Level 3 input, and resulted in an asset impairment charge of $562.0 million. The Level 3 inputs used to determine fair value included models developed and market inputs obtained by management which provided a range of fair value estimates of property, plant and equipment. Management’s models include internally developed long-term future cash flow estimates, capital expenditure and cost estimates, market inputs to determine long-term pricing assumptions, discount rates, and foreign exchange rates.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The following are the components of defined benefit pension and OPEB expense for the three months ended March 31, 2015 and 2014:
Defined Benefit Pension Expense
 
(In Millions)
 
Three Months Ended
March 31,
 
2015
 
2014
Service cost
$
6.3

 
$
6.7

Interest cost
9.4

 
10.1

Expected return on plan assets
(14.9
)
 
(14.5
)
Amortization:
 
 
 
Prior service costs
0.6

 
0.6

Net actuarial loss
5.4

 
3.5

    Curtailments/settlements
0.3

 
0.3

Net periodic benefit cost to continuing operations
$
7.1

 
$
6.7


Other Postretirement Benefits Expense
 
(In Millions)
 
Three Months Ended
March 31,
 
2015
 
2014
Service cost
$
1.5

 
$
1.7

Interest cost
3.3

 
3.4

Expected return on plan assets
(4.6
)
 
(4.3
)
Amortization:
 
 
 
Prior service costs
(0.9
)
 
(0.9
)
Net actuarial loss
3.1

 
1.3

Net periodic benefit cost to continuing operations
$
2.4

 
$
1.2


We made pension contributions of $3.9 million for the three months ended March 31, 2015, compared to pension contributions of $4.0 million for the three months ended March 31, 2014. OPEB contributions are typically made on an annual basis in the first quarter of each year, but due to plan funding requirements being met, no OPEB contributions were required or made for the three months ended March 31, 2015 and March 31, 2014.
STOCK COMPENSATION PLANS
STOCK COMPENSATION PLANS
NOTE 8 - STOCK COMPENSATION PLANS
Employees’ Plans
The Compensation and Organization Committee of the Board of Directors approved grants under the 2012 Amended Equity Plan to certain officers and employees for the 2015 to 2017 performance period. Shares granted under the awards during 2015 consisted of 0.9 million performance shares based on TSR, 0.9 million restricted share units and 0.4 million stock options, each of which may or may not convert into shares based on our shares achieving and maintaining certain milestones above an absolute threshold during the performance period.
For the outstanding 2012 Equity Plan awards that were issued subsequent to October 2013 and the 2012 Amended Equity Plan awards, each performance share, if earned, entitles the holder to receive common shares or cash within a range between a threshold and maximum number of our common shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Compensation and Organization Committee. The performance share or unit grants vest over a period of three years and are intended to be paid out in common shares or cash in certain circumstances. Performance for the 2015 to 2017 performance period is measured on the basis of relative TSR for the period and measured against the constituents of the S&P Metals and Mining ETF Index on the last day of trading of the performance period. The final payouts for the 2015 to 2017 performance period grants will vary from zero to 200 percent of the original grant.
The restricted share units are subject to continued employment, are retention based, will vest in equal thirds on each of December 31, 2015, December 31, 2016 and December 31, 2017, and are payable in common shares or cash in certain circumstances at a time determined by the Committee at its discretion.
The stock options vest on December 31, 2017, subject to continued employment through the vesting date, are exercisable at a strike price of $7.70 after the vesting date and expire on January 12, 2025.
Determination of Fair Value
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and our 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 estimate 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 period.
The following assumptions were utilized to estimate the fair value for the first quarter of 2015 performance share grants:
Grant Date
 
Grant Date Market Price
 
Average Expected Term (Years)
 
Expected Volatility
 
Risk-Free Interest Rate
 
Dividend Yield
 
Fair Value
 
Fair Value (Percent of Grant Date Market Price)
January 12, 2015
 
$
7.70

 
2.97
 
58.3%
 
0.91%
 
—%
 
$
11.56

 
150.13%
February 9, 2015
 
$
6.57

 
2.89
 
58.3%
 
0.87%
 
—%
 
$
9.86

 
150.13%

The fair value of each stock option grant is estimated on the date of grant using a Black-Scholes valuation model. The expected term of the option grant is determined using the simplified method. We estimate the volatility of our common shares using historical stock prices with consistent frequency over the most recent historical period equal to the option’s expected term. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the expected term.
The following assumptions were utilized to estimate the fair value for the first quarter of 2015 stock option grants:
Grant Date
 
Grant Date Market Price
 
Average Expected Term (Years)
 
Expected Volatility
 
Risk-Free Interest Rate
 
Dividend Yield
 
Fair Value
January 12, 2015
 
$
7.70

 
6.47
 
75.3%
 
1.60%
 
—%
 
$
5.23


The fair value of the restricted share units is determined based on the closing price of our common shares on the grant date. The restricted share units granted under either the 2012 Equity Plan or the 2012 Amended Equity Plan generally vest over a period of three years.
INCOME TAXES
Income Taxes
NOTE 9 - INCOME TAXES
For the three months ended March 31, 2015, we recorded an income tax expense in continuing operations of $175.1 million compared with an expense of $29.6 million for the comparable prior-year period. The increase of income tax expense was primarily driven by the placement of a valuation allowance against U.S. deferred tax assets that were recognized in prior years.
We determined our interim tax provision using a methodology required by ASC 740, Income Taxes, as it is the Company’s position that the use of an estimated annual effective tax rate would not be reliable. The year-to-date expense was calculated using the year-to-date income, considering non-taxable and non-deductible items expected to be incurred for the full year unless those items are expected to be ratably incurred based on operating activity or profitability, (e.g. depletion), in which case we only considered year-to-date actual amounts, multiplied by the statutory rate and offset by the computed valuation allowance.
There were discrete items recorded in the first quarter of 2015 which resulted in a $167.5 million expense. These adjustments relate primarily to the placement of a valuation allowance against US deferred tax assets that were recognized in prior years.
LEASE OBLIGATIONS
LEASE OBLIGATIONS
NOTE 10 - LEASE OBLIGATIONS
We lease certain mining, production and other equipment under operating and capital leases. The leases are for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the terms. Our operating lease expense was $4.3 million for the three months ended March 31, 2015, respectively, compared with $6.2 million for the same respective period in 2014.
Future minimum payments under capital leases and non-cancellable operating leases at March 31, 2015 are as follows:
 
(In Millions)
 
Capital Leases
 
Operating Leases
2015 (April 1 - December 31)
$
20.5

 
$
7.5

2016
25.8

 
7.9

2017
22.8

 
7.3

2018
18.4

 
6.6

2019
10.0

 
4.8

2020 and thereafter
18.8

 
9.9

Total minimum lease payments
$
116.3

 
$
44.0

Amounts representing interest
25.1

 
 
Present value of net minimum lease payments
$
91.2

(1) 
 
                                         
(1) 
The total is comprised of $19.5 million and $71.7 million classified as Other current liabilities and Other liabilities, respectively, in the Statements of Unaudited Condensed Consolidated Financial Position at March 31, 2015.
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $169.0 million and $170.8 million at March 31, 2015 and December 31, 2014, respectively. The following is a summary of the obligations as of March 31, 2015 and December 31, 2014:
 
(In Millions)
 
March 31,
2015
 
December 31,
2014
Environmental
$
3.7

 
$
5.5

Mine closure
 
 
 
LTVSMC
23.2

 
22.9

Operating mines:
 
 
 
U.S. Iron Ore
121.8

 
120.9

Asia Pacific Iron Ore
20.3

 
21.5

Total mine closure
165.3

 
165.3

Total environmental and mine closure obligations
169.0

 
170.8

Less current portion
3.4

 
5.2

Long term environmental and mine closure obligations
$
165.6

 
$
165.6


Mine Closure
The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. The accretion of the liability and amortization of the related asset is recognized over the estimated mine lives for each location.
The following represents a rollforward of our asset retirement obligation liability related to our active mining locations for the three months ended March 31, 2015 and for the year ended December 31, 2014:
 
(In Millions)
 
March 31,
2015
 
December 31,
2014 (1)
Asset retirement obligation at beginning of period
$
142.4

 
$
177.6

Accretion expense
1.2

 
5.7

Exchange rate changes
(1.5
)
 
(2.4
)
Revision in estimated cash flows

 
(38.5
)
Asset retirement obligation at end of period
$
142.1

 
$
142.4


(1) Represents a 12-month rollforward of our asset retirement obligation at December 31, 2014.
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
NOTE 12 - 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, 2015 and the year ended December 31, 2014:
 
(In Millions)
 
March 31, 2015
 
December 31, 2014
 
U.S. Iron Ore
 
Asia Pacific
Iron Ore
 
Total
 
U.S. Iron Ore
 
Asia Pacific Iron Ore
 
Total
Beginning Balance
$
2.0

 
$

 
$
2.0

 
$
2.0

 
$
72.5

 
$
74.5

Arising in business combinations

 

 

 

 

 

Impairment

 

 

 

 
(73.5
)
 
(73.5
)
Impact of foreign currency translation

 

 

 

 
1.0

 
1.0

Ending Balance
$
2.0

 
$

 
$
2.0

 
$
2.0

 
$

 
$
2.0

Accumulated goodwill impairment loss
$

 
$
(73.5
)
 
$
(73.5
)
 
$

 
$
(73.5
)
 
$
(73.5
)

Other Intangible Assets and Liabilities
The following table is a summary of intangible assets and liabilities as of March 31, 2015 and December 31, 2014:
 
 
 
(In Millions)
 
 
 
March 31, 2015
 
December 31, 2014
 
Classification
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permits
Other non-current assets
 
$
78.7

 
$
(17.5
)
 
$
61.2

 
$
79.2

 
$
(16.5
)
 
$
62.7

Total intangible assets
 
 
$
78.7

 
$
(17.5
)
 
$
61.2

 
$
79.2

 
$
(16.5
)
 
$
62.7

Below-market sales contracts
Other current liabilities
 
$
(23.0
)
 
$

 
$
(23.0
)
 
$
(23.0
)
 
$

 
$
(23.0
)
Below-market sales contracts
Other liabilities
 
(205.9
)
 
182.8

 
(23.1
)
 
(205.9
)
 
182.8

 
(23.1
)
Total below-market sales contracts
 
 
$
(228.9
)
 
$
182.8

 
$
(46.1
)
 
$
(228.9
)
 
$
182.8

 
$
(46.1
)

Amortization expense relating to intangible assets was $1.1 million for the three months ended March 31, 2015 and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. Amortization expense relating to intangible assets was $2.3 million for the comparable period in 2014. The estimated amortization expense relating to intangible assets for the remainder of this year and each of the five succeeding years is as follows:

(In Millions)

Amount
Year Ending December 31,

2015 (remaining nine months)
$
3.0

2016
4.0

2017
4.0

2018
4.2

2019
3.1

2020
2.5

Total
$
20.8


The below-market sales contract is classified as a liability and recognized over the term of the underlying contract, which has a remaining life of approximately two years and expires December 31, 2016. For the three months ended March 31, 2015 and 2014, there were no Product revenues related to the below-market sales contract due to the timing of the Great Lakes shipping season. The following amounts are estimated to be recognized in Product revenues for the remainder of this year and the succeeding fiscal year:
 
(In Millions)
 
Amount
Year Ending December 31,
 
2015 (remaining nine months)
$
23.0

2016
23.1

Total
$
46.1