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NOTE 1 — BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
Business Summary
We are an international mining and natural resources company, a major global iron ore producer and a significant producer of high and low-volatile metallurgical coal. In the U.S., we operate five iron ore mines in Michigan and Minnesota, five metallurgical coal mines located in West Virginia and Alabama and one thermal coal mine located in West Virginia. We also operate two iron ore mines in Eastern Canada that primarily provide iron ore to the seaborne market for Asian steel producers. Our Asia Pacific operations are comprised of two iron ore mining complexes in Western Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore, and a 45 percent economic interest in Sonoma, a coking and thermal coal mine located in Queensland, Australia. In Latin America, we have a 30 percent interest in Amapá, a Brazilian iron ore project, and in Ontario, Canada we have a major chromite project in the pre-feasibility stage of exploration. In addition, our Global Exploration Group is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. Our Company's operations are organized according to product category and geographic location: U.S. Iron Ore, Eastern Canadian Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal, Latin American Iron Ore, Ferroalloys, and our Global Exploration Group.
Accounting Policies
We consider the following policies to be beneficial in understanding the judgments that are involved in the preparation of our consolidated financial statements and the uncertainties that could impact our financial condition, results of operations and cash flows.
Use of Estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. On an ongoing basis, management reviews estimates. Changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.
Basis of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly owned and majority-owned subsidiaries, including the following subsidiaries:
Name |
Location |
Ownership Interest | Operation | |||||||
Northshore |
Minnesota | 100.0 | % | Iron Ore | ||||||
United Taconite |
Minnesota | 100.0 | % | Iron Ore | ||||||
Wabush |
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 | ||||||
Freewest |
Ontario, Canada | 100.0 | % | Chromite | ||||||
Spider |
Ontario, Canada | 100.0 | % | Chromite |
Intercompany transactions and balances are eliminated upon consolidation.
On May 12, 2011, we acquired all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt. The consolidated financial statements as of and for the year ended December 31, 2011 reflect our 100 percent interest in Consolidated Thompson since that date. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for further information.
Discontinued Operations
On September 27, 2011, we announced our plans to cease and dispose of the operations at the renewaFUEL biomass production facility in Michigan. As we continue to successfully grow our core iron ore mining business, the decision to sell our interest in the renewaFUEL operations was made to allow our management focus and allocation of capital resources to be deployed where we believe we can have the most impact for our stakeholders. On January 4, 2012, we entered into an agreement to sell the renewaFUEL assets to RNFL Acquisition LLC. The results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. We recorded $18.5 million, net of $9.2 million in tax benefits as Loss From Discontinued Operations in the Statements of Consolidated Operations for the year ended December 31, 2011, including a $16.0 million impairment charge, net of $8.0 million in tax benefits to write the renewaFUEL asset down to fair value. This compares to losses of $3.1 million, net of $1.5 million of tax benefits, and $3.4 million, net of $1.7 million in tax benefits, respectively, for years ended December 31, 2010 and 2009.
The impairment charge taken in the third quarter of 2011 was based on an internal assessment around the recovery of the renewaFUEL assets, primarily property, plant and equipment. The assessment considered several factors including the unique industry, the highly customized nature of the related property, plant and equipment and the fact that the plant had not performed up to design capacity. Given these points of consideration, it was determined that the expected recovery values on the renewaFUEL assets were low. The renewaFUEL total assets have been recorded at fair value in the Statements of Consolidated Financial Position as of December 31, 2011, and primarily are comprised of property, plant and equipment. The renewaFUEL operations were previously included in Other within our reportable segments.
Cash Equivalents
Cash and cash equivalents include cash on hand and in the bank as well as all short-term securities held for the primary purpose of general liquidity. We consider investments in highly liquid debt instruments with an original maturity of three months or less from the date of acquisition to be cash equivalents. We routinely monitor and evaluate counterparty credit risk related to the financial institutions by which our short-term investment securities are held.
Inventories
The following table presents the detail of our Inventories in the Statements of Consolidated Financial Position at December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Segment |
Finished Goods |
Work-in Process |
Total Inventory |
Finished Goods |
Work-in Process |
Total Inventory |
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U.S. Iron Ore |
$ | 100.2 | $ | 8.5 | $ | 108.7 | $ | 101.1 | $ | 9.7 | $ | 110.8 | ||||||||||||
Eastern Canadian Iron Ore |
96.2 | 43.0 | 139.2 | 43.5 | 21.2 | 64.7 | ||||||||||||||||||
North American Coal |
19.7 | 110.5 | 130.2 | 16.1 | 19.8 | 35.9 | ||||||||||||||||||
Asia Pacific Iron Ore |
57.2 | 21.6 | 78.8 | 34.7 | 20.4 | 55.1 | ||||||||||||||||||
Other |
18.0 | 0.8 | 18.8 | 2.6 | 0.1 | 2.7 | ||||||||||||||||||
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Total |
$ | 291.3 | $ | 184.4 | $ | 475.7 | $ | 198.0 | $ | 71.2 | $ | 269.2 | ||||||||||||
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U.S. Iron Ore
U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method. The excess of current cost over LIFO cost of iron ore inventories was $117.1 million and $112.4 million at December 31, 2011 and 2010, respectively. As of December 31, 2011, the product inventory balance for U.S. Iron Ore declined, resulting in liquidation of LIFO layers in 2011. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $15.2 million in the Statements of Consolidated Operations for the year ended December 31, 2011. As of December 31, 2010, the product inventory balance for U.S. Iron Ore declined, resulting in liquidation of LIFO layers in 2010. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $4.6 in the Statements of Consolidated Operations for the year ended December 31, 2010.
We had approximately 1.2 million tons and 0.8 million tons of finished goods stored at ports and customer facilities on the lower Great Lakes to service customers at December 31, 2011 and 2010, respectively. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers, as we retain title to the product until payment is received from the customer. We track the movement of the inventory and verify the quantities on hand.
Eastern Canadian Iron Ore
Iron ore pellet inventories are stated at the lower of cost or market. Similar to U.S. Iron Ore product inventories, the cost is determined using the LIFO method. The excess of current cost over LIFO cost of iron ore inventories was $21.9 million and $2.5 million at December 31, 2011 and 2010, respectively. As of December 31, 2011, the iron ore pellet inventory balance for Eastern Canadian Iron Ore increased to $47.1 million, resulting in an additional LIFO layer being added. As of December 31, 2010, the product inventory balance for Eastern Canadian Iron Ore increased to $43.5 million, resulting in an additional LIFO layer being added during the year. We primarily maintain ownership of these inventories until loading of the product at the port.
Iron ore concentrate inventories are stated at the lower of cost or market. The cost of iron ore concentrate inventories is determined using weighted average cost. As of December 31, 2011, the iron ore concentrate inventory balance for Eastern Canadian Iron Ore was $49.1 million as a result of the Consolidated Thompson acquisition. For the majority of the iron ore concentrate inventories, we maintain ownership of the inventories until title passes on the bill of lading date, which is upon the loading of the product at the port.
North American Coal
North American Coal product inventories are stated at the lower of cost or market. Cost of coal inventories includes labor, supplies and operating overhead and related costs and is calculated using the average production cost. We maintain ownership until coal is loaded into rail cars at the mine for domestic sales and until loaded in the vessels at the terminal for export sales. We recorded lower-of-cost-or-market inventory charges of $6.6 million and $26.1 million in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for the years ended December 31, 2011 and 2010, respectively. These charges were a result of operational and geological issues at our Pinnacle and Oak Grove mines during the periods.
Asia Pacific Iron Ore
Asia Pacific Iron Ore product inventories are stated at the lower of cost or market. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to the inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a weighted average basis. We maintain ownership of the inventories until title has transferred to the customer at the F.O.B. point, which is generally when the product is loaded into the vessel.
Derivative Financial Instruments
We are exposed to certain risks related to the ongoing operations of our business, including those caused by changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures, including the use of certain derivative instruments, to manage such risks. Refer to NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
U.S. Iron Ore and Eastern Canadian Iron Ore
U.S. Iron Ore and Eastern Canadian Iron Ore properties are stated at cost. Depreciation of plant and equipment is computed principally by the straight-line method based on estimated useful lives, not to exceed the mine lives. Northshore, United Taconite, Empire, Tilden and Wabush use the double declining balance method of depreciation for certain mining equipment. Depreciation is provided over the following estimated useful lives:
Asset Class |
Basis |
Life | ||
Buildings |
Straight line | 45 Years | ||
Mining equipment |
Straight line/Double declining balance | 10 to 20 Years | ||
Processing equipment |
Straight line | 15 to 45 Years | ||
Information technology |
Straight line | 2 to 7 Years |
Depreciation is not curtailed when operations are temporarily idled.
North American Coal
North American Coal properties are stated at cost. Depreciation is provided over the estimated useful lives, not to exceed the mine lives and is calculated by the straight-line method. Depreciation is provided over the following estimated useful lives:
Asset Class |
Basis |
Life | ||
Buildings |
Straight line | 30 Years | ||
Mining equipment |
Straight line | 2 to 22 Years | ||
Processing equipment |
Straight line | 2 to 30 Years | ||
Information technology |
Straight line | 2 to 3 Years |
Asia Pacific Iron Ore
Our Asia Pacific Iron Ore properties are stated at cost. Depreciation is calculated by the straight-line method or production output basis provided over the following estimated useful lives:
Asset Class |
Basis |
Life | ||
Plant and equipment |
Straight line | 5 - 10 Years | ||
Plant and equipment and mine assets |
Production output | 10 Years | ||
Motor vehicles, furniture & equipment |
Straight line | 3 - 5 Years |
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of December 31, 2011 and 2010:
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Land rights and mineral rights |
$ | 7,918.9 | $ | 3,019.9 | ||||
Office and information technology |
67.0 | 60.4 | ||||||
Buildings |
132.2 | 107.6 | ||||||
Mining equipment |
1,323.8 | 628.5 | ||||||
Processing equipment |
1,441.8 | 658.8 | ||||||
Railroad equipment |
164.3 | 122.9 | ||||||
Electric power facilities |
57.9 | 54.4 | ||||||
Port facilities |
64.1 | 64.0 | ||||||
Interest capitalized during construction |
22.5 | 19.4 | ||||||
Land improvements |
30.4 | 25.0 | ||||||
Other |
43.2 | 36.0 | ||||||
Construction in progress |
615.4 | 140.0 | ||||||
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11,881.5 | 4,936.9 | |||||||
Allowance for depreciation and depletion |
(1,356.9 | ) | (957.7 | ) | ||||
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$ | 10,524.6 | $ | 3,979.2 | |||||
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We recorded depreciation expense of $237.8 million, $165.4 million and $120.6 million in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009, respectively.
The costs capitalized and classified as Land rights and mineral rights represent lands where we own the surface and/or mineral rights. The value of the land rights is split between surface only, surface and minerals, and minerals only.
Our North American Coal operation leases coal mining rights from third parties through lease agreements. The lease agreements are for varying terms and extend through the earlier of their lease termination date or until all merchantable and mineable coal has been extracted. Our interest in coal reserves and resources was valued using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from coal operations over the life of the reserves.
Our Asia Pacific Iron Ore, Bloom Lake, Wabush, and United Taconite operation's interest in iron ore reserves and resources was valued using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from iron ore operations over the economic lives of the mines.
The net book value of the land rights and mineral rights as of December 31, 2011 and 2010 is as follows:
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Land rights |
$ | 37.3 | $ | 36.8 | ||||
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Mineral rights: |
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Cost |
$ | 7,881.6 | $ | 2,983.1 | ||||
Less depletion |
533.9 | 376.4 | ||||||
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Net mineral rights |
$ | 7,347.7 | $ | 2,606.7 | ||||
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Accumulated depletion relating to mineral rights, which was recorded using the unit-of-production method, is included in Allowance for depreciation and depletion. We recorded depletion expense of $159.7 million, $95.5 million and $68.1 million in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009, respectively.
We review iron ore and coal reserves based on current expectations of revenues and costs, which are subject to change. Iron ore and coal reserves include only proven and probable quantities which can be economically and legally mined and processed utilizing existing technology.
Capitalized Stripping Costs
Stripping costs during the development of a mine, before production begins, are capitalized as a part of the depreciable cost of building, developing and constructing a mine. These capitalized costs are amortized over the productive life of the mine using the units of production method. The productive phase of a mine is deemed to have begun when saleable minerals are extracted (produced) from an ore body, regardless of the level of production. The production phase does not commence with the removal of de minimis saleable mineral material that occurs in conjunction with the removal of overburden or waste material for purposes of obtaining access to an ore body. The stripping costs incurred in the production phase of a mine are variable production costs included in the costs of the inventory produced (extracted) during the period that the stripping costs are incurred.
Stripping costs related to expansion of a mining asset of proven and probable reserves are variable production costs that are included in the costs of the inventory produced during the period that the stripping costs are incurred.
Investments in Ventures
The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Consolidated Financial Position. Parentheses indicate a net liability.
(In Millions) | ||||||||||||||
Investment |
Classification | Interest Percentage |
December 31, 2011 |
December 31, 2010 |
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Amapá |
Investments in ventures | 30 | $ | 498.6 | $ | 461.3 | ||||||||
AusQuest |
Investments in ventures | 30 | 3.7 | 24.1 | ||||||||||
Cockatoo (1) |
Other liabilities | 50 | (15.0 | ) | 10.5 | |||||||||
Hibbing |
Other liabilities | 23 | (6.8 | ) | (5.8 | ) | ||||||||
Other |
Investments in ventures | 24.3 | 18.9 | |||||||||||
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$ | 504.8 | $ | 509.0 | |||||||||||
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(1) | Recorded as Investments in ventures at December 31, 2010. |
Amapá
Our 30 percent ownership interest in Amapá, in which we do not have control but have the ability to exercise significant influence over operating and financial policies, is accounted for under the equity method. Accordingly, our share of the results from Amapá is reflected as Equity Income (Loss) from Ventures in the Statements of Consolidated Operations. The financial information of Amapá included in our financial statements is for the periods ended November 30, 2011, 2010 and 2009 and as of November 30, 2011 and 2010. The earlier cut-off is to allow for sufficient time needed by Amapá to properly close and prepare complete financial information, including consolidating and eliminating entries, conversion to U.S. GAAP and review by the Company. There were no intervening transactions or events that materially affected Amapá's financial position or results of operations that were not reflected in our year-end financial statements.
AusQuest
Our 30 percent ownership interest in AusQuest, in which we do not have control but have the ability to exercise significant influence over operating and financial policies, is accounted for under the equity method. Accordingly, our share of the results from AusQuest is reflected as Equity Income (Loss) from Ventures in the Statements of Consolidated Operations. The financial information of AusQuest included in our financial statements is for the periods ended November 30, 2011, 2010 and 2009 and as of November 30, 2011 and 2010. The earlier cut-off is to allow for sufficient time needed by AusQuest to properly close and prepare complete financial information, including consolidating and eliminating entries, conversion to U.S. GAAP and review and approval by the Company. There were no intervening transactions or events that materially affected AusQuest's financial position or results of operations that were not reflected in our year-end financial statements.
Hibbing and Cockatoo Island
Investments in certain joint ventures (Cockatoo Island and Hibbing) in which our ownership is 50 percent or less, or in which we do not have control but have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Our share of equity income (loss) is eliminated against consolidated product inventory upon production, and against Cost of goods sold and operating expenses when sold. This effectively reduces our cost for our share of the mining venture's production to its cost, reflecting the cost-based nature of our participation in unconsolidated ventures.
In August 2011, we entered into a term sheet with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources. As consideration for the acquisition, Pluton Resources will be responsible for the environmental rehabilitation of Cockatoo Island when it concludes its mining. As of December 31, 2011, our portion of the current estimated cost of the rehabilitation is approximately $20 million. The potential transaction is expected to occur at the end of the current stage of mining, Phase 3, which is anticipated to be complete in late 2012. Due diligence has been completed and the definitive sale agreement is being drafted and negotiated. The definitive sale agreement will be conditional on the receipt of regulatory and third-party consents and the satisfaction of other customary closing conditions.
Sonoma
Through various interrelated arrangements, we achieve a 45 percent economic interest in the collective operations of Sonoma, despite the ownership percentages of the individual components of Sonoma. We own 100 percent of CAWO, 8.33 percent of the exploration permits and applications for mining leases for the real estate that is involved in Sonoma ("Mining Assets") and 45 percent of the infrastructure, including the rail loop and related equipment ("Non-Mining Assets"). The following substantive legal entities exist within the Sonoma structure:
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CAC, a wholly owned Cliffs subsidiary, is the conduit for Cliffs' investment in Sonoma. |
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CAWO, a wholly owned subsidiary of CAC, owns the washplant and receives 40 percent of Sonoma coal production in exchange for providing coal washing services to the remaining Sonoma participants. |
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SMM is the appointed operator of the mine assets, non-mine assets and the washplant.We own a 45 percent interest in SMM. |
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Sonoma Sales, a wholly owned subsidiary of QCoal, is the sales agent for the participants of the coal extracted and processed in the Sonoma Project. |
The objective of Sonoma is to mine and process coking and thermal coal for the benefit of the participants. In 2011, 2010 and 2009, we invested an additional $3.1 million, $3.3 million and $8.6 million, respectively, in the project, for a total investment of approximately $147.9 million.
While the individual components of our investment are disproportionate to the overall economics of the investment, the total investment is the same as if we had acquired a 45 percent interest in the Mining Assets and had committed to funding 45 percent of the cost of developing the Non-Mining Assets and the washplant. In particular, the terms of the interrelated agreements under which we obtain our 45 percent interest provide that, we, through a wholly owned subsidiary, constructed and hold title to the washplant. We wash all of the coal produced by the Sonoma Project for a fee based upon a cost to wash plus an arrangement such that we only bear 45 percent of the cost of owning and operating the washplant. In addition, we have committed to purchasing certain amounts of coal from the other participants such that we take title to 45 percent of the coal mined. In addition, several agreements were entered into which provide for the allocation of mine and washplant reclamation obligations such that we are responsible for 45 percent of the reclamation costs. Lastly, management agreements were entered into that allocates the costs of operating the mine to each participant based upon their respective ownership interests in SMM, 45 percent in our case. Once the coal is washed, each participant then engages Sonoma Sales to sell their coal to third parties for which Sonoma Sales earns a fee under an agreement with fixed and variable elements.
The legal entities were each evaluated under the guidelines for consolidation of a VIE as follows:
CAWO — CAC owns 100 percent of the legal equity in CAWO; however, CAC is limited in its ability to make significant decisions about CAWO because the significant decisions are made by, or subject to approval of, the Operating Committee of the Sonoma Project, of which CAC is only entitled to 45 percent of the vote. As a result, we determined that CAWO is a VIE and that CAC should consolidate CAWO as the primary beneficiary because it absorbs greater than 50 percent of the residual returns and expected losses.
Sonoma Sales — We, including our related parties, do not have voting rights with respect to Sonoma Sales and are not party to any contracts that represent significant variable interests in Sonoma Sales. Therefore, even if Sonoma Sales were a VIE, it has been determined that we are not the primary beneficiary and therefore would not consolidate Sonoma Sales.
SMM — SMM does not have sufficient equity at risk and is therefore a VIE. Through CAC, we have a 45 percent voting interest in SMM and a contractual requirement to reimburse SMM for 45 percent of the costs that it incurs in connection with managing the Sonoma Project. However, we, along with our related parties, do not have any contracts that would cause us to absorb greater than 50 percent of SMM's expected losses, and therefore, we are not considered to be the primary beneficiary of SMM. Thus, we account for our investment in SMM in accordance with the equity method rather than consolidate the entity. The effect of SMM on our financial statements is determined to be minimal.
Mining and Non-Mining Assets — Since we have an undivided interest in these assets and Sonoma is in an extractive industry, we have pro rata consolidated our share of these assets and costs.
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. We had goodwill of $1,152.1 million and $196.5 million recorded in the Statements of Consolidated Financial Position at December 31, 2011 and 2010, respectively. In accordance with the provisions of ASC 350, we compare the fair value of the respective reporting unit to its carrying value on an annual basis to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level in the fourth quarter of each year or as circumstances occur that potentially indicate that the carrying amount of these assets may not be recoverable. Based on the assessment performed, we concluded that there were no such events or changes in circumstances during 2011. After performing our annual goodwill impairment test in the fourth quarter of 2011, we determined that $27.8 million of goodwill associated with our CLCC reporting unit included in the North American Coal operating segment was impaired as the carrying value with this reporting unit exceeded its fair value. No impairment charges were identified in connection with our annual goodwill impairment test with respect to our other identified reporting units. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
Asset Impairment
Long-Lived Assets and Intangible Assets
We monitor conditions that may affect the carrying value of our long-lived and intangible assets when events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available. An impairment loss exists when projected undiscounted cash flows are less than the carrying value of the assets. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the assets. Fair value can be determined using a market approach, income approach or cost approach. We did not record any such impairment charges in 2011, 2010 or 2009 except for as discussed above in Discontinued Operations.
Equity Investments
We evaluate the loss in value of our equity method investments each reporting period to determine whether the loss is other than temporary. The primary factors that we consider in evaluating the impairment include the extent and time the fair value of each investment has been below cost, the financial condition and near-term prospects of the investment, and our intent and ability to hold the investment to recovery. If a decline in fair value is judged other than temporary, the basis of the investment is written down to fair value as a new cost basis, and the amount of the write-down is included as a realized loss.
Our investment in Amapá resulted in equity income of $32.4 million in 2011 compared with equity income of $17.2 million in 2010 and equity loss of $62.2 million in 2009. In 2011, the investment's equity income was a result of operations for the year. In 2010, the investment's equity income was a result of nearly break-even operating results during the year combined with the reversal of the debt guarantee, upon repayment of total project debt outstanding, and the reversal of certain accruals. The equity losses in 2009 resulted from start-up costs and production delays resulting in the determination that indicators of impairment may exist relative to our investment in Amapá. Although Amapá's results improved throughout 2011 and 2010, we continued to perform an assessment of the potential impairment of our investment, most recently in the fourth quarter of 2011, using a discounted cash flow model to determine the fair value of our investment in relation to its carrying value at each reporting period. Based upon the analyses performed, we have determined that our investment is not impaired as of December 31, 2011. In assessing the recoverability of our investment in Amapá, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the investment must be made, including among other things, estimates related to pricing, volume and resources. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for our investment in the period such determination is made. We will continue to evaluate our investment on a periodic basis and as circumstances arise that indicate the investment is not recoverable.
During 2011, we recorded impairment charges of $19.1 million related to the decline in the fair value of our 30 percent ownership interest in AusQuest, which was determined to be other than temporary. We evaluated the severity of the decline in the fair value of the investment as compared to our historical carrying amount, considering the broader macroeconomic conditions and the status of current exploration prospects, and could not reasonably assert that the impairment period would be temporary. As of December 31, 2011, our investment in AusQuest had a fair value of $3.7 million based upon the closing market price of the 68.3 million shares held as of December 31, 2011. As we account for this investment as an equity method investment, we recorded the impairment charge as a component of Equity Income (Loss) from Ventures in the Statements of Consolidated Operations for the year ended December 31, 2011.
Fair Value Measurements
Valuation Hierarchy
ASC 820 establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below:
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Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
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Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement. |
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Valuation methodologies used for assets and liabilities measured at fair value are as follows:
Cash Equivalents
Where quoted prices are available in an active market, cash equivalents are classified within Level 1 of the valuation hierarchy. Cash equivalents classified in Level 1 at December 31, 2011 and 2010 include money market funds. The valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. In these instances, the valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for substantially the full term of the financial instrument and the related financial instrument is therefore classified within Level 2 of the valuation hierarchy. Level 2 securities include short-term investments for which the value of each investment is a function of the purchase price, purchase yield and maturity date.
Marketable Securities
Where quoted prices are available in an active market, marketable securities are classified within Level 1 of the valuation hierarchy. Marketable securities classified in Level 1 at December 31, 2011 and 2010 include available-for-sale securities. The valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets.
Derivative Financial Instruments
Derivative financial instruments valued using financial models that use as their basis readily observable market parameters are classified within Level 2 of the valuation hierarchy. Such derivative financial instruments include substantially all of our foreign currency exchange contracts and derivative financial instruments that are valued based upon published pricing settlements realized by other companies in the industry. Derivative financial instruments that are valued based upon models with significant unobservable market parameters and are normally traded less actively, are classified within Level 3 of the valuation hierarchy.
Non-Financial Assets and Liabilities
We adopted the provisions of ASC 820 effective January 1, 2009 with respect to our non-financial assets and liabilities. The initial measurement provisions of ASC 820 have been applied to our asset retirement obligations, guarantees, assets and liabilities acquired through business combinations, and certain other items, and are reflected as such in our consolidated financial statements. Effective January 1, 2009, we also adopted the fair value provision with respect to our pension and other postretirement benefit plan assets. No transition adjustment was necessary upon adoption.
In January 2010, we adopted the amended guidance on fair value to add new disclosures about transfers into and out of Levels 1 and 2. Our policy is to recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels.
Refer to NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 10 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Pensions and Other Postretirement Benefits
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total compensation and benefits program. This includes employees of CLCC who became employees of the Company through the July 2010 acquisition. Upon the acquisition of the remaining 73.2 percent interest in Wabush in February 2010, we fully consolidated the related Canadian plans into our pension and OPEB obligations. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations.
We recognize the funded status of our postretirement benefit obligations on our December 31, 2011 and 2010 Statements of Consolidated Financial Position based on the market value of plan assets and the actuarial present value of our retirement obligations on that date. For each plan, we determine if the plan assets exceed the benefit obligations or vice-versa. If the plan assets exceed the retirement obligations, the amount of the surplus is recorded as an asset; if the retirement obligations exceed the plan assets, the amount of the underfunded obligations are recorded as a liability. Year-end balance sheet adjustments to postretirement assets and obligations are charged to Accumulated other comprehensive income (loss).
The market value of plan assets is measured at the year-end balance sheet date. The PBO is determined based upon an actuarial estimate of the present value of pension benefits to be paid to current employees and retirees. The APBO represents an actuarial estimate of the present value of OPEB benefits to be paid to current employees and retirees.
The actuarial estimates of the PBO and APBO retirement obligations incorporate various assumptions including the discount rates, the rates of increases in compensation, healthcare cost trend rates, mortality, retirement timing and employee turnover. For the U.S. plans, the discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration matching the expected cash flow timing of the benefit payments from the various plans. For the Canadian plans, the discount rate is determined by calculating the single level discount rate that, when applied to a particular cash flow pattern, produces the same present value as discounting the cash flow pattern using spot rates generated from a high-quality corporate bond yield curve. The remaining assumptions are based on our estimates of future events incorporating historical trends and future expectations. The amount of net periodic cost that is recorded in the Statements of Consolidated Operations consists of several components including service cost, interest cost, expected return on plan assets, and amortization of previously unrecognized amounts. Service cost represents the value of the benefits earned in the current year by the participants. Interest cost represents the cost associated with the passage of time. In addition, the net periodic cost is affected by the anticipated income from the return on invested assets, as well as the income or expense resulting from the recognition of previously deferred items. Certain items, such as plan amendments, gains and/or losses resulting from differences between actual and assumed results for demographic and economic factors affecting the obligations and assets of the plans, and changes in plan assumptions are subject to deferred recognition for income and expense purposes. The expected return on plan assets is determined utilizing the weighted average of expected returns for plan asset investments in various asset categories based on historical performance, adjusted for current trends. See NOTE 10 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Asset Retirement Obligations
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The fair value of the liability is determined as the discounted value of the expected future cash flow. The asset retirement obligation is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset's carrying value and amortized over the life of the related asset. Reclamation costs are adjusted periodically to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. We review, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site in accordance with the provisions of ASC 410. We perform an in-depth evaluation of the liability every three years in addition to routine annual assessments, most recently performed in 2011.
Future remediation costs for inactive mines are accrued based on management's best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. See NOTE 9 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Environmental Remediation Costs
We have a formal policy for environmental protection and restoration. Our mining and exploration activities are subject to various laws and regulations governing protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities, including obligations for known environmental remediation exposures at active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost only can be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements reasonably can be estimated. It is possible that additional environmental obligations could be incurred, the extent of which cannot be assessed. Potential insurance recoveries have not been reflected in the determination of the liabilities. See NOTE 9 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Revenue Recognition and Cost of Goods Sold and Operating Expenses
U.S. Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our U.S. Iron Ore term supply agreements provide that title and risk of loss transfer to the customer when payment is received.
We recognize revenue based on the gross amount billed to a customer as we earn revenue from the sale of the goods or services. Revenue from product sales also includes reimbursement for freight charges paid on behalf of customers in Freight and venture partners' cost reimbursements separate from product revenue.
Costs of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations. Operating expenses within this line item primarily represent the portion of the Tilden mining venture costs for which we do not own; that is, the costs attributable to the share of the mine's production owned by the other joint venture partner in the Tilden mine. The mining venture functions as a captive cost company; it supplies product only to its owners effectively on a cost basis. Accordingly, the noncontrolling interests' revenue amounts are stated at cost of production and are offset in entirety by an equal amount included in Cost of goods sold and operating expenses resulting in no sales margin reflected in the noncontrolling interest participant. As we are responsible for product fulfillment, we retain the risks and rewards of a principal in the transaction and accordingly record revenue under these arrangements on a gross basis.
The following table is a summary of reimbursements in our U.S. Iron Ore operations for the years ended December 31, 2011, 2010 and 2009:
(In Millions) | ||||||||||||
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Reimbursements for: |
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Freight |
$ | 128.4 | $ | 83.6 | $ | 22.4 | ||||||
Venture partners' cost |
95.9 | 139.8 | 71.3 | |||||||||
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Total reimbursements |
$ | 224.3 | $ | 223.4 | $ | 93.7 | ||||||
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As of December 31, 2011, Product revenues and Costs of goods sold and operating expenses in the Statements of Consolidated Operations reflect consolidation of the Empire mining venture and recognition of a noncontrolling interest. A subsidiary of ArcelorMittal USA is a 21 percent partner in the Empire mining venture, resulting in a noncontrolling interest adjustment for ArcelorMittal USA's ownership percentage to Net income attributable to noncontrolling interest in the Statements of Consolidated Operations. The accounting for our interest in the Empire mine previously was based upon the assessment that the mining venture functioned as a captive cost company, supplying product only to the venture partners effectively on a cost basis. Upon the execution of the partnership arrangement in 2002, the underlying notion of the arrangement was for the partnership to provide pellets to the venture partners at an agreed-upon rate to cover operating and capital costs. Furthermore, any gains or losses generated by the mining venture throughout the life of the partnership were expected to be minimal and the mine historically has been in a net loss position. The partnership arrangement provides that the venture partners share profits and losses on an ownership percentage basis of 79 percent and 21 percent, with the noncontrolling interest partner limited on the losses produced by the mining venture to its equity interest. Therefore, the noncontrolling interest partner cannot have a negative ownership interest in the mining venture. Under our captive cost company arrangements, the noncontrolling interests' revenue amounts are stated at an amount that is offset entirely by an equal amount included in Cost of goods sold and operating expenses, resulting in no sales margin attributable to noncontrolling interest participants. In addition, under the Empire partnership arrangement, the noncontrolling interest net losses historically were recorded in the Statements of Consolidated Operations through Cost of goods sold and operating expenses. This was based on the assumption that the partnership would operate in a net liability position, and as mentioned, the noncontrolling partner is limited on the partnership losses that can be allocated to its ownership interest. Due to a change in the partnership pricing arrangement to align with the industry's shift towards shorter-term pricing arrangements linked to the spot market, the partnership began to generate profits in 2011. The change in partnership pricing was a result of the negotiated settlement with ArcelorMittal USA effective beginning for the three months ended March 31, 2011. The modification of the pricing mechanism changed the nature of our cost sharing arrangement and we determined that we should have been recording a noncontrolling interest adjustment in accordance with ASC 810 in the Statements of Unaudited Condensed Consolidated Operations and in the Statements of Unaudited Condensed Consolidated Financial Position to the extent that the partnership was in a net asset position, beginning in the first quarter of 2011. Refer to NOTE 20 — QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) for additional information regarding this prospective change.
Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customer's facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure. In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer's annual steel pricing for the year the product is consumed in the customer's blast furnaces. We account for this provision as a derivative instrument at the time of sale and record this provision at fair value until the year the product is consumed and the amounts are settled as an adjustment to revenue.
Where we are joint venture participants in the ownership of a mine, our contracts entitle us to receive royalties and/or management fees, which we earn as the pellets are produced. Revenue is recognized on the sale of services when the services are performed.
Eastern Canadian Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our Eastern Canadian Iron Ore term supply agreements provide that title and risk of loss transfer to the customer upon loading of the product at the port.
Since the acquisition date of Consolidated Thompson, Product revenues and Costs of goods sold and operating expenses in the Statements of Consolidated Operations reflect our 100 percent ownership interest in Consolidated Thompson. WISCO is a 25 percent partner in the Bloom Lake mine, resulting in a noncontrolling interest adjustment for WISCO's ownership percentage to Net income attributable to noncontrolling interest in the Statements of Consolidated Operations.
North American Coal
We recognize revenue when title passes to the customer. For domestic coal sales, this generally occurs when coal is loaded into rail cars at the mine. For export coal sales, this generally occurs when coal is loaded into the vessels at the terminal. Revenue from product sales in 2011, 2010 and 2009 included reimbursement for freight charges paid on behalf of customers of $18.3 million, $41.9 million and $32.1 million, respectively.
Asia Pacific Iron Ore
Sales revenue is recognized at the F.O.B. point, which generally is when the product is loaded into the vessel.
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 2013, with the option to defer a portion of the 2009 monthly amount in exchange for interest payments until the deferred amount is repaid in 2013. Installment amounts received under this arrangement in excess of sales are classified as Deferred revenue in the Statement of Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement upon shipment of the pellets. As of December 31, 2011 and 2010, installment amounts received in excess of sales totaled $91.7 million and $58.1 million, respectively, which were recorded as Deferred revenue in the Statement of Consolidated Financial Position.
In 2011 and 2010, certain customers purchased and paid for 0.2 million tons and 2.4 million tons of pellets that were not delivered by year-end, respectively. In 2011, the customer purchases were made in order to secure the 2011 pricing on shipments that will occur in early 2012, and in 2010, the purchases were made in order to meet minimum contractual purchase requirements under the terms of take-or-pay contracts. In 2011 and 2010, the inventory was stored at our facilities in upper Great Lakes stockpiles. At the request of the customers, the ore was not shipped. We considered whether revenue should be recognized on these sales under the "bill and hold" guidance provided by the SEC Staff; however, based upon the assessment performed, revenue recognition on these transactions totaling $15.8 million and $155.3 million, respectively, was deferred on the December 31, 2011 and 2010 Statements of Consolidated Financial Position. As of December 31, 2011, 0.1 million tons remain of the 2.4 million tons that were deferred at the end of 2010, resulting in the related revenue of $15.1 million being deferred into 2012.
Repairs and Maintenance
Repairs, maintenance and replacement of components are expensed as incurred. The cost of major power plant overhauls is capitalized and depreciated over the estimated useful life, which is the period until the next scheduled overhaul, generally five years. All other planned and unplanned repairs and maintenance costs are expensed when incurred.
Share-Based Compensation
We adopted the fair value recognition provisions of ASC 718 effective January 1, 2006 using the modified prospective transition method. The fair value of each grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. Consistent with the guidelines of ASC 718, a correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan year agreements. We estimated the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.
Cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense are classified as financing cash flows. Refer to NOTE 11 — STOCK COMPENSATION PLANS for additional information.
Income Taxes
Income taxes are based on income for financial reporting purposes calculated using tax rates by jurisdiction and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes. Any interest or penalties on income tax are recognized as a component of income tax expense.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results of operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits. See NOTE 12 — INCOME TAXES for further information.
Earnings Per Share
We present both basic and diluted EPS amounts. Basic EPS are calculated by dividing income attributable to Cliffs common shareholders by the weighted average number of common shares outstanding during the period presented. Diluted EPS are calculated by dividing Net Income Attributable to Cliffs Shareholders by the weighted average number of common shares, common share equivalents and convertible preferred stock outstanding during the period, utilizing the treasury share method for employee stock plans. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect. See NOTE 15 — EARNINGS PER SHARE for further information.
Foreign Currency Translation
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of the Company's Australian subsidiaries is the Australian Dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive income (loss). Where the U.S. dollar is the functional currency, translation adjustments are recorded in the Statements of Consolidated Operations. Income taxes generally are not provided for foreign currency translation adjustments.
Recent Accounting Pronouncements
In January 2010, the FASB amended the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amendment also revises the guidance on employers' disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The amended guidance was effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the provisions of guidance required for the period beginning January 1, 2011. Refer to NOTE 10 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
In December 2010, the FASB issued amended guidance on business combinations in order to clarify the disclosure requirements around pro forma revenue and earnings. The update was issued in response to the diversity in practice about the interpretation of such requirements. The amendment specifies that pro forma revenue and earnings of the combined entity be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The new guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted the amended guidance upon our acquisition of Consolidated Thompson. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for further information.
In May 2011, the FASB amended the guidance on fair value as a result of the joint efforts by the FASB and the IASB to develop a single, converged fair value framework. The converged fair value framework provides converged guidance on how to measure fair value and on what disclosures to provide about fair value measurements. The significant amendments to the fair value measurement guidance and the new disclosure requirements include: (1) the highest and best use and valuation premise for nonfinancial assets; (2) the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risks; (3) premiums or discounts in fair value measurement; (4) fair value of an instrument classified in a reporting entity's shareholders' equity; (5) for Level 3 measurements, a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and a narrative description of the sensitivity of the fair value to changes in the unobservable inputs and interrelationships between those inputs; and (6) the level in the fair value hierarchy of items that are not measured at fair value in the Statement of Financial Position but whose fair value must be disclosed. The new guidance is effective for interim and annual periods beginning after December 15, 2011. We currently are evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income in order to improve comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in OCI. The update also facilitates the convergence of GAAP and IFRS. The amendment eliminates the presentation options under ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. In either presentation option, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statements where the components of net income and the components of OCI are presented. The amendment does not change the items that must be reported in other comprehensive income. After the issuance of the amended guidance on the presentation of comprehensive income, stakeholders raised concerns that the new presentation requirements about reclassifications of items out of accumulated OCI would be difficult for preparers and may add unnecessary complexity to financial statements. In addition, it is difficult for some stakeholders to change systems in time to gather the information for the new presentation requirements by the effective date prescribed in ASU 2011-05. Given these issues, and in order to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments, in December 2011, FASB issued amended guidance on the presentation of comprehensive income to supersede guidance in ASU 2011-05 related to reclassifications out of accumulated OCI. FASB determined a reassessment of the costs and benefits of the provisions in ASU 2011-05 related to reclassifications out of accumulated OCI is necessary. Due to the time required to properly make such a reassessment and to evaluate alternative presentation formats, FASB decided in the December 2011 amended guidance, to indefinitely defer the requirements related to reclassification out of accumulated OCI until further deliberation and to reinstate the requirements for the presentation of reclassifications out of accumulated OCI that were in place before the issuance of ASU 2011-05. All other requirements in ASU 2011-05 are not affected by this December 2011 amended guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We have early adopted this new guidance which requires retrospective application as of December 31, 2011. As this guidance only amends the presentation of the components of comprehensive income, the adoption does not have an impact on our Statements of Consolidated Financial Position or Statements of Consolidated Operations.
In September 2011, the FASB issued amended guidance in order to simplify how entities test goodwill for impairment under ASC 350. The revised guidance provides entities testing goodwill for impairment with the option of performing a qualitative assessment before calculating the fair value of the reporting unit as required in step 1 of the goodwill impairment test. If the qualitative assessment provides the basis that the fair value of the reporting unit is more likely than not less than the carrying amount, then step 1 of the impairment test is required. The amended guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the revised guidance does not amend the requirement to test goodwill for impairment between annual tests if certain events or circumstances warrant that such a test be performed. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We currently are evaluating the impact that the adoption of this amendment will have on our annual goodwill impairment test and do not expect that this amendment will have a material impact on our consolidated financial statements.
In September 2011, the FASB issued amended guidance to increase the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension and other postretirement benefits. The objective of the amended guidance is to enhance the transparency of disclosures about: (1) the significant multiemployer plans in which an employer participates, including the plan names and identifying numbers; (2) the level of the employer's participation in those plans; (3) the financial health of the plans; and (4) the nature of the employer's commitments to the plans. For plans for which additional public information outside of the employer's financial statements is not available, the amended guidance requires additional disclosures, including: (1) a description of the nature of the plan benefits; (2) a qualitative description of the extent to which the employer could be responsible for the obligation of the plan; and (3) other information to help users understand the financial information about the plan, to the extent available. The new guidance is effective for fiscal years ending after December 15, 2011, with early adoption permitted, and the amendments are required to be applied retrospectively for all prior periods presented. We adopted the amended guidance for the year ended December 31, 2011; however, adoption of this amendment did not have a material impact on our consolidated financial statements. To determine no material impact on our consolidated financial statements, we evaluated each of our multiemployer plans and found none to be individually significant.
In December 2011, the FASB issued amended guidance to increase the disclosure requirements about the nature of an entity's rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective of this amended guidance is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of rights of setoff associated with certain financial and derivative instruments in the scope of this amended guidance. The new guidance is effective for annual and interim reporting periods beginning on or after January 1, 2013, and the amendments are required to be applied retrospectively for all prior periods presented. We currently are evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
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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, North American Coal, Asia Pacific Iron Ore, Asia Pacific 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 North American Coal segment is comprised of our five 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. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to steel producers in China and Japan. There are no intersegment revenues.
The Asia Pacific Coal operating segment is comprised of our 45 percent economic interest in Sonoma, located in Queensland, Australia. The Latin American Iron Ore operating segment is comprised of our 30 percent Amapá interest in Brazil. The Ferroalloys operating segment is comprised of our interests in chromite deposits held by Freewest and Spider in Northern Ontario, Canada and the Global Exploration Group is focused on early involvement in exploration activities to identify new world-class projects for future development or projects that add significant value to existing operations. The Asia Pacific Coal, Latin American Iron Ore, Ferroalloys and Global Exploration Group operating segments do not meet reportable segment disclosure requirements and therefore are not separately reported.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. This measure of operating performance is an effective measurement as we focus on reducing production costs throughout the Company.
The following table presents a summary of our reportable segments for the years ended December 31, 2011, 2010 and 2009, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures:
(In Millions) | ||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||
Revenues from product sales and services: |
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U.S Iron Ore |
$ | 3,509.9 | 52 | % | $ | 2,443.7 | 52 | % | $ | 1,211.6 | 52 | % | ||||||||||||
Eastern Canadian Iron Ore |
1,178.1 | 17 | % | 477.7 | 10 | % | 236.2 | 10 | % | |||||||||||||||
North American Coal |
512.1 | 8 | % | 438.2 | 9 | % | 207.2 | 9 | % | |||||||||||||||
Asia Pacific Iron Ore |
1,363.5 | 20 | % | 1,123.9 | 24 | % | 542.1 | 23 | % | |||||||||||||||
Other |
230.7 | 3 | % | 198.6 | 4 | % | 144.9 | 6 | % | |||||||||||||||
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Total revenues from product sales and services for reportable segments |
$ | 6,794.3 | 100 | % | $ | 4,682.1 | 100 | % | $ | 2,342.0 | 100 | % | ||||||||||||
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Sales margin: |
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U.S. Iron Ore |
$ | 1,679.3 | $ | 788.4 | $ | 213.2 | ||||||||||||||||||
Eastern Canadian Iron Ore |
290.9 | 133.6 | 62.3 | |||||||||||||||||||||
North American Coal |
(58.4 | ) | (28.6 | ) | (71.9 | ) | ||||||||||||||||||
Asia Pacific Iron Ore |
699.5 | 566.2 | 87.2 | |||||||||||||||||||||
Other |
77.3 | 66.9 | 20.9 | |||||||||||||||||||||
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Sales margin |
2,688.6 | 1,526.5 | 311.7 | |||||||||||||||||||||
Other operating expense |
(340.0 | ) | (256.3 | ) | (75.6 | ) | ||||||||||||||||||
Other income (expense) |
(107.1 | ) | 32.8 | 60.4 | ||||||||||||||||||||
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Income from continuing operations before income taxes and equity income (loss) from ventures |
$ | 2,241.5 | $ | 1,303.0 | $ | 296.5 | ||||||||||||||||||
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Depreciation, depletion and amortization: |
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U.S. Iron Ore |
$ | 86.2 | $ | 61.7 | $ | 67.4 | ||||||||||||||||||
Easten Canadian Iron Ore |
124.6 | 41.9 | 6.9 | |||||||||||||||||||||
North American Coal |
86.5 | 60.4 | 38.2 | |||||||||||||||||||||
Asia Pacific Iron Ore |
100.9 | 133.9 | 110.6 | |||||||||||||||||||||
Other |
28.7 | 24.4 | 13.5 | |||||||||||||||||||||
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|
|
|||||||||||||||||||
Total depreciation, depletion and amortization |
$ | 426.9 | $ | 322.3 | $ | 236.6 | ||||||||||||||||||
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|
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Capital additions (1): |
||||||||||||||||||||||||
U.S. Iron Ore |
$ | 191.4 | $ | 84.7 | $ | 42.6 | ||||||||||||||||||
Eastern Canadian Iron Ore |
303.1 | 18.8 | — | |||||||||||||||||||||
North American Coal |
181.0 | 89.5 | 20.8 | |||||||||||||||||||||
Asia Pacific Iron Ore |
262.0 | 53.6 | 96.2 | |||||||||||||||||||||
Other |
23.4 | 29.2 | 8.6 | |||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||||
Total capital additions |
$ | 960.9 | $ | 275.8 | $ | 168.2 | ||||||||||||||||||
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|
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Assets: |
||||||||||||||||||||||||
U.S. Iron Ore |
$ | 1,691.8 | $ | 1,537.1 | ||||||||||||||||||||
Eastern Canadian Iron Ore |
7,973.1 | 629.6 | ||||||||||||||||||||||
North American Coal |
1,814.4 | 1,623.8 | ||||||||||||||||||||||
Asia Pacific Iron Ore |
1,511.2 | 1,195.3 | ||||||||||||||||||||||
Other |
1,017.6 | 1,257.8 | ||||||||||||||||||||||
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|
|||||||||||||||||||||
Total segment assets |
14,008.1 | 6,243.6 | ||||||||||||||||||||||
Corporate |
533.6 | 1,534.6 | ||||||||||||||||||||||
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|
|
|||||||||||||||||||||
Total assets |
$ | 14,541.7 | $ | 7,778.2 | ||||||||||||||||||||
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|
|
(1) | Includes capital lease additions. |
Included in the consolidated financial statements are the following amounts relating to geographic locations:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Revenue (1) |
||||||||||||
United States |
$ | 2,774.1 | $ | 1,966.3 | $ | 1,049.5 | ||||||
China |
2,123.4 | 1,262.0 | 711.5 | |||||||||
Canada |
914.3 | 696.5 | 236.6 | |||||||||
Japan |
460.4 | 311.1 | 157.4 | |||||||||
Other countries |
522.1 | 446.2 | 187.0 | |||||||||
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|
|
|
|||||||
Total revenue |
$ | 6,794.3 | $ | 4,682.1 | $ | 2,342.0 | ||||||
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|
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Property, Plant and Equipment, Net |
||||||||||||
United States |
$ | 2,684.9 | $ | 2,498.8 | ||||||||
Australia |
1,138.3 | 973.7 | ||||||||||
Canada |
6,701.4 | 506.7 | ||||||||||
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|
|
|
|||||||||
Total Property, Plant and Equipment, Net |
$ | 10,524.6 | $ | 3,979.2 | ||||||||
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|
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(1) | Revenue is attributed to countries based on the location of the customer and includes both Product sales and services. |
Concentrations in Revenue
In 2011, we had one customer that individually accounted for more than 10 percent of our consolidated product revenue. In 2010 and 2009, we had two and one additional customers that individually accounted for more than 10 percent of our consolidated product revenue, respectively. Total revenue from those customers that accounted for more than 10 percent of our consolidated product revenues represents approximately $1.4 billion, $1.8 billion and $0.8 billion of our total consolidated product revenue in 2011, 2010 and 2009, respectively, and is attributable to our U.S. Iron Ore, Eastern Canadian Iron Ore and North American Coal business segments.
The following table represents the percentage of our total revenue contributed by each category of products and services in 2011, 2010 and 2009:
2011 | 2010 | 2009 | ||||||||||
Revenue Category |
||||||||||||
Iron ore |
85 | % | 81 | % | 81 | % | ||||||
Coal |
11 | 13 | 14 | |||||||||
Freight and venture partners' cost reimbursements |
4 | 6 | 5 | |||||||||
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|||||||
Total revenue |
100 | % | 100 | % | 100 | % | ||||||
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NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Consolidated Financial Position as of December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||||||||||||||||||||
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 (current) |
$ | 5.2 | Derivative assets (current) |
$ | 2.8 | Other current liabilities |
$ | 3.5 | $ | — | |||||||||||||
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|
|||||||||||||||||
Total derivatives designated as hedging instruments under ASC 815 |
$ | 5.2 | $ | 2.8 | $ | 3.5 | $ | — | ||||||||||||||||
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|
|||||||||||||||||
Derivatives not designated as hedging instruments under ASC 815: |
||||||||||||||||||||||||
Foreign Exchange Contracts |
Derivative assets (current) |
$ | 2.8 | Derivative assets (current) |
$ | 34.2 | $ | — | $ | — | ||||||||||||||
Other non- current assets |
— | Other non- current assets |
2.0 | — | — | |||||||||||||||||||
Customer Supply Agreements |
Derivative assets (current) |
72.9 | Derivative assets (current) |
45.6 | — | — | ||||||||||||||||||
Provisional Pricing Arrangements |
Derivative assets (current) |
1.2 | Other current liabilities |
19.5 | — | |||||||||||||||||||
Accounts receivable |
83.8 | — | — | |||||||||||||||||||||
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|
|||||||||||||||||
Total derivatives not designated as hedging instruments under ASC 815 |
$ | 160.7 | $ | 81.8 | $ | 19.5 | $ | — | ||||||||||||||||
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|
|||||||||||||||||
Total derivatives |
$ | 165.9 | $ | 84.6 | $ | 23.0 | $ | — | ||||||||||||||||
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Derivatives Designated as Hedging Instruments
Cash Flow Hedges
Australian Foreign Exchange Contracts
We are subject to changes in foreign currency exchange rates as a result of our operations in Australia. Foreign exchange risk arises from our exposure to fluctuations in foreign currency exchange rates because the functional currency of our Asia Pacific operations is the Australian dollar. Our Asia Pacific operations receive funds in U.S. currency for their iron ore and coal sales. We use foreign currency exchange forward contracts, call options and collar options to hedge our foreign currency exposure for a portion of our Australian dollar sales receipts. U.S. currency is converted to Australian dollars at the currency exchange rate in effect at the time of the transaction. The primary objective for the use of these instruments is to reduce exposure to changes in Australian and U.S. currency exchange rates and to protect against undue adverse movement in these exchange rates. Effective October 1, 2010, we elected hedge accounting for certain types of our foreign exchange contracts entered into subsequent to September 30, 2010. These instruments are subject to formal documentation, intended to achieve qualifying hedge treatment, and are tested for effectiveness at inception and at least once each reporting period. During the third quarter of 2011, we implemented a global foreign exchange hedging policy to apply to all of our operating segments and our consolidated subsidiaries that engage in foreign exchange risk mitigation. The policy allows for not more than 75 percent, but not less than 40 percent for up to 12 months and not less than 10 percent for up to 15 months, of forecasted net currency exposures that are probable to occur. For our Asia Pacific operations, the forecasted net currency exposures are in relation to anticipated operating costs designated as cash flow hedges on future sales. Prior to the implementation of this policy, our Asia Pacific operations had a policy in place that was specific to local operations and allowed no more than 75 percent of anticipated operating costs for up to 12 months and no more than 50 percent of operating costs for up to 24 months to be designated as cash flow hedges of future sales. If and when any of our hedge contracts are determined not to be highly effective as hedges, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.
As of December 31, 2011, we had outstanding foreign currency exchange contracts with a notional amount of $400.0 million in the form of forward contracts with varying maturity dates ranging from January 2012 to December 2012. This compares with outstanding foreign currency exchange contracts with a notional amount of $70.0 million as of December 31, 2010.
Changes in fair value of highly effective hedges are recorded as a component of Accumulated other comprehensive income (loss) in the Statements of Consolidated Financial Position. Unrealized gains of $1.8 million were recorded as of December 31, 2011 related to these hedge contracts, based on the Australian to U.S. dollar spot rate of 1.02 as of December 31, 2011. Unrealized gains of $1.9 million were recorded as of December 31, 2010 related to the Australian dollar hedge contracts, based on the Australian to U.S. dollar spot rate of 1.02 at December 31, 2010. Any ineffectiveness is recognized immediately in income and as of December 31, 2011 and 2010, there was no ineffectiveness recorded for these foreign exchange contracts. Amounts recorded as a component of Accumulated other comprehensive income (loss) are reclassified into earnings in the same period the forecasted transaction affects earnings and are recorded as Product revenues in the Statements of Consolidated Operations. For the year ended December 31, 2011, we recorded realized gains of $6.5 million. Of the amounts remaining in Accumulated other comprehensive income (loss), we estimate that net gains of $1.2 million will be reclassified into earnings within the next 12 months.
The following summarizes the effect of our derivatives designated as hedging instruments on Accumulated other comprehensive income (loss) and the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009:
(In Millions) | ||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships |
Amount of Gain Recognized in OCI on Derivative (Effective Portion) |
Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion) |
|||||||||||||||||||||||
Year ended December 31, |
Year ended December 31, |
|||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Australian Dollar Foreign Exchange Contracts |
$ | 1.8 | $ | 1.9 | $ | — | Product revenue | $ | 2.6 | $ | — | $ | — | |||||||||||||
Australian Dollar Foreign Exchange Contracts |
— | — | — | Product revenue | 0.7 | 3.2 | 15.1 | |||||||||||||||||||
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|
|
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Total |
$ | 1.8 | $ | 1.9 | $ | — | $ | 3.3 | $ | 3.2 | $ | 15.1 | ||||||||||||||
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Derivatives Not Designated as Hedging Instruments
Australian Dollar Foreign Exchange Contracts
Effective July 1, 2008, we discontinued hedge accounting for foreign exchange contracts entered into for all outstanding contracts at the time and continued to hold such instruments as economic hedges to manage currency risk as described above. The notional amount of the outstanding non-designated foreign exchange contracts was $15.0 million as of December 31, 2011. The contracts are in the form of collar options with maturity dates in January 2012. This compares with outstanding non-designated foreign exchange contracts with a notional amount of $230.0 million as of December 31, 2010.
As a result of discontinuing hedge accounting, the instruments prospectively are marked to fair value each reporting period through Changes in fair value of foreign currency contracts, net in the Statements of Consolidated Operations. For the year ended December 31, 2011, the change in fair value of our foreign currency contracts resulted in net gains of $8.8 million, based on the Australian to U.S. dollar spot rate of 1.02 at December 31, 2011. This compares with net gains of $39.8 million for the year ended December 31, 2010, based on the Australian to U.S. dollar spot rate of 1.02 at December 31, 2010. For the year ended December 31, 2009, the change in fair value of our foreign currency contracts resulted in net gains of $85.7 million, based on the Australian to U.S. dollar spot rate of 0.90 at December 31, 2009. The amounts that previously were recorded as a component of Accumulated other comprehensive income (loss) are reclassified to earnings with a corresponding realized gain or loss recognized in the same period the forecasted transaction affected earnings. The amounts that previously were recorded as a component of Accumulated other comprehensive income (loss) were all reclassified to earnings during the first half of 2011, with a corresponding realized gain or loss recognized in the same period the forecasted transactions affected earnings.
Canadian Dollar Foreign Exchange Contracts and Options
On January 11, 2011, we entered into a definitive agreement with Consolidated Thompson to acquire all of its common shares in an all-cash transaction, including net debt. We hedged a portion of the purchase price on the open market by entering into foreign currency exchange forward contracts and an option contract with a combined notional amount of C$4.7 billion. The hedge contracts were considered economic hedges, which do not qualify for hedge accounting. The forward contracts had various maturity dates and the option contract had a maturity date of April 14, 2011.
During the first half of 2011, swaps were executed in order to extend the maturity dates of certain of the forward contracts through the consummation of the Consolidated Thompson acquisition and the repayment of the Consolidated Thompson convertible debentures. These swaps and the maturity of the forward contracts resulted in net realized gains of $93.1 million recognized through Changes in fair value of foreign currency contracts, net in the Statements of Consolidated Operations for the year ended December 31, 2011.
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors, some of which are subject to annual price collars in order to limit the percentage increase or decrease in prices for our iron ore pellets during any given year. The price adjustment factors vary based on the agreement but typically include adjustments based upon changes in international pellet prices, changes in specified Producers Price indices including those for all commodities, industrial commodities, energy and steel. The 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. 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 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 marked to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled. We recognized $178.0 million, $120.2 million and $22.2 million as Product revenues in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009, respectively, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $72.9 million and $45.6 million, respectively, on the December 31, 2011 and 2010 Statements of Consolidated Financial Position.
Provisional Pricing Arrangements
During 2010, the world's largest iron ore producers began to move away from the annual international benchmark pricing mechanism referenced in certain of our customer supply agreements, resulting in a shift in the industry toward shorter-term pricing arrangements linked to the spot market. This change has impacted certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customer supply agreements for the 2011 contract year. We reached final pricing settlement with a majority of our U.S. Iron Ore customers for the 2011 contract year. However, in some cases we are still working to revise components of the pricing calculations referenced within our supply agreements to incorporate new pricing mechanisms as a result of the changes to historical benchmark pricing. As a result, we have recorded certain shipments made to our U.S. Iron Ore and Eastern Canadian Iron Ore customers in 2011 on a provisional basis until final settlement is reached. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once the product is shipped. The derivative instrument, which is settled and billed once final pricing settlement is reached, is marked to fair value as a revenue adjustment each reporting period based upon the estimated forward settlement until prices actually are settled. We recognized $809.1 million as an increase in Product revenues in the Statements of Consolidated Operations for the year ended December 31, 2011 under these pricing provisions for certain shipments to our U.S. Iron Ore and Eastern Canadian Iron Ore customers. For the year ended December 31, 2011, $309.4 million of the revenues were realized due to the pricing settlements that primarily occurred with our U.S. Iron Ore customers during 2011. This compares with an increase in Product revenues of $960.7 million and a reduction to Product revenues of $28.2 million, respectively, for the years ended December 31, 2010 and 2009 related to estimated forward price settlements for shipments to our Asia Pacific Iron Ore, U.S. Iron Ore and Eastern Canadian Iron Ore customers until prices actually settled.
As of December 31, 2011, we have recorded approximately $1.2 million as current Derivative assets and $19.5 million Other current liabilities, respectively, in the Statements of Consolidated Financial Position related to our estimate of final pricing in 2011 with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. This amount represents the difference between the provisional price agreed upon with our customers and our estimate of the ultimate price settlement in 2012. As of December 31, 2011, we also have derivatives of $83.8 million classified as Accounts receivable in the Statements of Consolidated Financial Position to reflect the amount we provisionally have agreed upon with certain of our U.S. Iron Ore and Eastern Canadian Iron Ore customers until a final price settlement is reached. It also represents the amount we have invoiced for shipments made to such customers and expect to collect in cash in the short term to fund operations. In 2010, the derivative instrument was settled in the fourth quarter upon the settlement of pricing provisions with some of our U.S. Iron Ore customers and therefore is not reflected in the Statements of Consolidated Financial Position at December 31, 2010.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009:
(In Millions) |
||||||||||||||
Derivative Not Designated as Hedging |
Location of Gain/(Loss) Recognized in Income on Derivative |
Amount of Gain/(Loss) Recognized in Income on Derivative |
||||||||||||
Year ended December 31, | ||||||||||||||
2011 | 2010 | 2009 | ||||||||||||
Foreign Exchange Contracts |
Product Revenues | $ | 1.0 | $ | 11.1 | $ | 5.4 | |||||||
Foreign Exchange Contracts |
Other Income (Expense) | 101.9 | 39.8 | 85.7 | ||||||||||
Customer Supply Agreements |
Product Revenues | 178.0 | 120.2 | 22.2 | ||||||||||
Provisional Pricing Arrangements |
Product Revenues | 809.1 | 960.7 | (28.2 | ) | |||||||||
United Taconite Purchase Provision |
Product Revenues | — | — | 106.5 | ||||||||||
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|
|
|
|
|
|||||||||
Total |
$ | 1,090.0 | $ | 1,131.8 | $ | 191.6 | ||||||||
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Refer to NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information
In the normal course of business, we enter into forward contracts designated as normal purchases for the purchase of commodities, primarily natural gas and diesel fuel, which are used in our U.S. Iron Ore and Eastern Canadian Iron Ore operations. Such contracts are in quantities expected to be delivered and used in the production process and are not intended for resale or speculative purposes.
|
NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS
Acquisitions
We allocate the cost of acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. Any excess of cost over the fair value of the net assets acquired is recorded as goodwill.
Consolidated Thompson
On May 12, 2011, we completed our acquisition of Consolidated Thompson by acquiring all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt, pursuant to the terms of an arrangement agreement dated as of January 11, 2011. Upon the acquisition: (a) each outstanding Consolidated Thompson common share was acquired for a cash payment of C$17.25; (b) each outstanding option and warrant that was "in the money" was acquired for cancellation for a cash payment of C$17.25 less the exercise price per underlying Consolidated Thompson common share; (c) each outstanding performance share unit was acquired for cancellation for a cash payment of C$17.25; (d) all outstanding Quinto Mining Corporation rights to acquire common shares of Consolidated Thompson were acquired for cancellation for a cash payment of C$17.25 per underlying Consolidated Thompson common share; and (e) certain Consolidated Thompson management contracts were eliminated that contained certain change of control provisions for contingent payments upon termination. The acquisition date fair value of the consideration transferred totaled $4.6 billion. Our full ownership of Consolidated Thompson has been included in the consolidated financial statements since the acquisition date, and the subsidiary is reported as a component of our Eastern Canadian Iron Ore segment.
The acquisition of Consolidated Thompson reflects our strategy to build scale by owning expandable and exportable steelmaking raw material assets serving international markets. Through our acquisition of Consolidated Thompson, we now own and operate an iron ore mine and processing facility near Bloom Lake in Quebec, Canada that produces iron ore concentrate of high quality. WISCO is a 25 percent partner in the Bloom Lake mine. Bloom Lake is designed to achieve an initial production rate of 8.0 million metric tons of iron ore concentrate per year. During the second quarter of 2011 and in January 2012, additional capital investments were approved in order to increase the initial production rate to 16.0 million metric tons of iron ore concentrate per year. We also own two additional development properties, Lamêlée and Peppler Lake, in Quebec. All three of these properties are in proximity to our existing Canadian operations and will allow us to leverage our port facilities and supply this iron ore to the seaborne market. The acquisition also is expected to further diversify our existing customer base.
The following table summarizes the consideration paid for Consolidated Thompson and the estimated fair values of the assets and liabilities assumed at the acquisition date. We are in the process of finalizing the valuation of the assets acquired and liabilities assumed related to the acquisition, most notably, mineral rights, deferred taxes, required liabilities to minority parties and goodwill, and the final allocation will be made when completed. We expect to finalize the purchase price allocation for the acquisition of Consolidated Thompson early in 2012. Accordingly, the provisional measurements noted below are preliminary and subject to modification in the future.
(In Millions) | ||||||||||||
Initial Allocation |
Revised Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 4,554.0 | $ | 4,554.0 | $ | — | ||||||
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|
|||||||
Fair value of total consideration transferred |
$ | 4,554.0 | $ | 4,554.0 | $ | — | ||||||
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|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Cash |
$ | 130.6 | $ | 130.6 | $ | — | ||||||
Accounts receivable |
102.8 | 102.4 | (0.4 | ) | ||||||||
Product inventories |
134.2 | 134.2 | — | |||||||||
Other current assets |
35.1 | 35.1 | — | |||||||||
Mineral rights |
4,450.0 | 4,825.6 | 375.6 | |||||||||
Property, plant and equipment |
1,193.4 | 1,193.4 | — | |||||||||
Intangible assets |
2.1 | 2.1 | — | |||||||||
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|
|
|
|
|||||||
Total identifiable assets acquired |
6,048.2 | 6,423.4 | 375.2 | |||||||||
LIABILITIES: |
||||||||||||
Accounts payable |
(13.6 | ) | (13.6 | ) | — | |||||||
Accrued liabilities |
(130.0 | ) | (123.8 | ) | 6.2 | |||||||
Convertible debentures |
(335.7 | ) | (335.7 | ) | — | |||||||
Other current liabilities |
(41.8 | ) | (41.8 | ) | — | |||||||
Long-term deferred tax liabilities |
(831.5 | ) | (1,041.8 | ) | (210.3 | ) | ||||||
Senior secured notes |
(125.0 | ) | (125.0 | ) | — | |||||||
Capital lease obligations |
(70.7 | ) | (70.7 | ) | — | |||||||
Other long-term liabilities |
(25.1 | ) | (25.1 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(1,573.4 | ) | (1,777.5 | ) | (204.1 | ) | ||||||
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|
|
|
|
|
|||||||
Total identifiable net assets acquired |
4,474.8 | 4,645.9 | 171.1 | |||||||||
Noncontrolling interest in Bloom Lake |
(947.6 | ) | (1,075.4 | ) | (127.8 | ) | ||||||
Preliminary goodwill |
1,026.8 | 983.5 | (43.3 | ) | ||||||||
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|
|
|
|
|
|||||||
Total net assets acquired |
$ | 4,554.0 | $ | 4,554.0 | $ | — | ||||||
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|
In the months subsequent to the initial purchase price allocation for Consolidated Thompson, we further refined the fair values of the assets acquired and liabilities assumed. Based on this process, the acquisition date fair value of the Consolidated Thompson mineral rights, deferred tax liability and noncontrolling interest in Bloom Lake were adjusted to $4,825.6 million, $1,041.8 million and $1,075.4 million, respectively, in the revised purchase price allocation during the fourth quarter of 2011. The change in mineral rights was caused by further refinements to the valuation model, most specifically as it related to potential tax structures that have value from a market participant standpoint and the risk premium used in determining the discount rate. The change in the deferred tax liability primarily was a result of the movement in the mineral rights value and obtaining additional detail of the acquired tax basis in the acquired assets and liabilities. Finally, the change in the noncontrolling interest in Bloom Lake was due to the change in mineral rights and a downward adjustment to the discount for lack of control being used in the valuation. These adjustments resulted in additional depletion expense of $4.9 million and a gain of $10.8 million of remeasurement on foreign deferred tax liabilities recorded as Cost of goods sold and operating expenses and Income tax expense, respectively, in the Statements of Consolidated Operations for the year ended December 31, 2011. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting adjustments to Goodwill and Noncontrolling Interest back to the date of acquisition. Accordingly, such amounts are reflected in the Statements of Consolidated Operations for the year ended December 31, 2011, but have been excluded from the three months ended December 31, 2011 in the unaudited Quarterly Results of Operations in Note 20. A complete comparison of the initial and revised purchase price allocation has been provided in the table above.
The fair value of the noncontrolling interest in the assets acquired and liabilities assumed in Bloom Lake has been allocated proportionately, based upon WISCO's 25 percent interest in Bloom Lake. We then reduced the allocated fair value of WISCO's ownership interest in Bloom Lake to reflect the noncontrolling interest discount.
The $983.5 million of preliminary goodwill resulting from the acquisition has been assigned to our Eastern Canadian Iron Ore business segment through the Bloom Lake reporting unit. The preliminary goodwill recognized primarily is attributable to the proximity to our existing Canadian operations, which will allow us to leverage our port facilities and supply iron ore to the seaborne market. None of the preliminary goodwill is expected to be deductible for income tax purposes. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
Acquisition-related costs in the amount of $25.4 million have been charged directly to operations and are included within Consolidated Thompson acquisition costs in the Statements of Consolidated Operations for the year ended December 31, 2011. In addition, we recognized $15.7 million of deferred debt issuance costs, net of accumulated amortization of $1.9 million, associated with issuing and registering the debt required to fund the acquisition as of December 31, 2011. Of these costs, $1.7 million and $14.0 million, respectively, have been recorded in Other current assets and Other non-current assets in the Statements of Consolidated Financial Position at December 31, 2011. Upon the termination of the bridge credit facility that we entered into to provide a portion of the financing for Consolidated Thompson, $38.3 million of related debt issuance costs were recognized in Interest expense in the Statements of Consolidated Operations for the year ended December 31, 2011.
The Statements of Consolidated Operations for the year ended December 31, 2011 include incremental revenue of $571.0 million and income of $143.7 million related to the acquisition of Consolidated Thompson since the date of acquisition. Income during the period includes the impact of expensing an additional $59.8 million of costs due to stepping up the value of inventory in purchase accounting through Cost of goods sold and operating expenses for the year ended December 31, 2011.
The following unaudited consolidated pro forma information summarizes the results of operations for the years ended December 31, 2011 and 2010, as if the Consolidated Thompson acquisition and the related financing had been completed as of January 1, 2010. The pro forma information gives effect to actual operating results prior to the acquisition. The unaudited consolidated pro forma information does not purport to be indicative of the results that actually would have been obtained if the acquisition of Consolidated Thompson had occurred as of the beginning of the periods presented or that may be obtained in the future.
(In Millions, Except Per Common Share) |
||||||||
2011 | 2010 | |||||||
REVENUES FROM PRODUCT SALES AND SERVICES |
$ | 7,002.7 | $ | 4,982.9 | ||||
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS |
$ | 1,612.3 | $ | 912.5 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS — BASIC |
$ | 11.50 | $ | 6.74 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS — DILUTED |
$ | 11.43 | $ | 6.70 |
The 2011 pro forma Net Income Attributable to Cliffs Shareholders was adjusted to exclude $69.6 million of Cliffs and Consolidated Thompson acquisition-related costs and $59.8 million of non-recurring inventory purchase accounting adjustments incurred during the year ended December 31, 2011. The 2010 pro forma Net Income Attributable to Cliffs Shareholders was adjusted to include the $59.8 million of non-recurring inventory purchase accounting adjustments.
Wabush
On February 1, 2010, we acquired entities from our former partners that held their respective interests in Wabush, thereby increasing our ownership interest to 100 percent. Our full ownership of Wabush has been included in the consolidated financial statements since that date. The acquisition date fair value of the consideration transferred totaled $103.0 million, which consisted of a cash purchase price of $88.0 million and a working capital adjustment of $15.0 million. With Wabush's 5.5 million tons of production capacity, acquisition of the remaining interest has increased our Eastern Canadian Iron Ore equity production capacity by approximately 4.0 million tons and has added more than 50 million tons of additional reserves. Furthermore, acquisition of the remaining interest has provided us additional access to the seaborne iron ore markets serving steelmakers in Europe and Asia.
Prior to the acquisition date, we accounted for our 26.8 percent interest in Wabush as an equity-method investment. We initially recognized an acquisition date fair value of the previous equity interest of $39.7 million, and a gain of $47.0 million as a result of remeasuring our prior equity interest in Wabush held before the business combination. The gain was recognized in the first quarter of 2010 and was included in Gain on acquisition of controlling interests in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2010.
In the months subsequent to the initial purchase price allocation, we further refined the fair values of the assets acquired and liabilities assumed. Additionally, we also continued to ensure our existing interest in Wabush was incorporating all of the book basis, including amounts recorded in Accumulated other comprehensive income (loss). Based on this process, the acquisition date fair value of the previous equity interest was adjusted to $38.0 million. The changes required to finalize the U.S. and Canadian deferred tax valuations and to incorporate additional information on assumed asset retirement obligations offset to a net decrease of $1.7 million in the fair value of the equity interest from the initial purchase price allocation. Thus, the gain resulting from the remeasurement of our prior equity interest, net of amounts previously recorded in Accumulated other comprehensive income (loss) of $20.3 million, was adjusted to $25.1 million for the period ended December 31, 2010.
Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively have recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill and Gain on acquisition of controlling interests, made during the second half of 2010, back to the date of acquisition. Accordingly, such amounts are reflected in the Statements of Consolidated Operations for the year ended December 31, 2010, and have been excluded from the three months ended September 30, 2010 and December 31, 2010, respectively, in the unaudited Quarterly Results of Operations in Note 20. We finalized the purchase price allocation for the acquisition of Wabush during the fourth quarter of 2010. A comparison of the initial and final purchase price allocation has been provided in the following table.
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 88.0 | $ | 88.0 | $ | — | ||||||
Working capital adjustments |
15.0 | 15.0 | — | |||||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
103.0 | 103.0 | — | |||||||||
Fair value of Cliffs' equity interest in Wabush held prior to acquisition of remaining interest |
39.7 | 38.0 | (1.7 | ) | ||||||||
|
|
|
|
|
|
|||||||
$ | 142.7 | $ | 141.0 | $ | (1.7 | ) | ||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
In-process inventories |
$ | 21.8 | $ | 21.8 | $ | — | ||||||
Supplies and other inventories |
43.6 | 43.6 | — | |||||||||
Other current assets |
13.2 | 13.2 | — | |||||||||
Mineral rights |
85.1 | 84.4 | (0.7 | ) | ||||||||
Plant and equipment |
146.3 | 147.8 | 1.5 | |||||||||
Intangible assets |
66.4 | 66.4 | — | |||||||||
Other assets |
16.3 | 19.3 | 3.0 | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
392.7 | 396.5 | 3.8 | |||||||||
LIABILITIES: |
||||||||||||
Current liabilities |
(48.1 | ) | (48.1 | ) | — | |||||||
Pension and OPEB obligations |
(80.6 | ) | (80.6 | ) | — | |||||||
Mine closure obligations |
(39.6 | ) | (53.4 | ) | (13.8 | ) | ||||||
Below-market sales contracts |
(67.7 | ) | (67.7 | ) | — | |||||||
Deferred taxes |
(20.5 | ) | — | 20.5 | ||||||||
Other liabilities |
(8.9 | ) | (8.8 | ) | 0.1 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(265.4 | ) | (258.6 | ) | 6.8 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
127.3 | 137.9 | 10.6 | |||||||||
Goodwill |
15.4 | 3.1 | (12.3 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 142.7 | $ | 141.0 | $ | (1.7 | ) | |||||
|
|
|
|
|
|
The significant changes to the final purchase price allocation from the initial allocation primarily were due to the allocation of deferred taxes between the existing equity interest in Wabush and the acquired portion, and additional asset retirement obligations noted related to the Wabush operations.
Of the $66.4 million of acquired intangible assets, $54.7 million was assigned to the value of a utility contract that provides favorable rates compared with prevailing market rates and is being amortized on a straight-line basis over the five-year remaining life of the contract. The remaining $11.7 million was assigned to the value of an easement agreement that is anticipated to provide a fee to Wabush for rail traffic moving over Wabush lands and is being amortized over a 30-year period.
The $3.1 million of goodwill resulting from the acquisition was assigned to our Eastern Canadian Iron Ore business segment. The goodwill recognized primarily is attributable to the mine's port access and proximity to the seaborne iron ore markets. None of the goodwill is expected to be deductible for income tax purposes.
Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
Freewest
During 2009, we acquired 29 million shares, or 12.4 percent, of Freewest, a Canadian-based mineral exploration company focused on acquiring, exploring and developing high-quality chromite, gold and base- metal properties in Canada. On January 27, 2010, we acquired all of the remaining outstanding shares of Freewest for C$1.00 per share, including its interest in the Ring of Fire properties in Northern Ontario Canada, which comprise three premier chromite deposits. As a result of the transaction, our ownership interest in Freewest increased from 12.4 percent as of December 31, 2009 to 100 percent as of the acquisition date. Our full ownership of Freewest has been included in the consolidated financial statements since the acquisition date. The acquisition of Freewest is consistent with our strategy to broaden our geographic and mineral diversification and allows us to apply our expertise in open-pit mining and mineral processing to a chromite ore resource base that could form the foundation of North America's only ferrochrome production operation. Assuming favorable results from pre-feasibility and feasibility studies and receipt of all applicable approvals, the planned mine is expected to allow us to produce 600 thousand metric tons of ferrochrome and to produce one million metric tons of chromite concentrate annually. Total purchase consideration for the remaining interest in Freewest was approximately $185.9 million, comprised of the issuance of 0.0201 of our common shares for each Freewest share, representing a total of 4.2 million common shares or $173.1 million, and $12.8 million in cash. The acquisition date fair value of the consideration transferred was determined based upon the closing market price of our common shares on the acquisition date.
Prior to the acquisition date, we accounted for our 12.4 percent interest in Freewest as an available-for-sale equity security. The acquisition date fair value of the previous equity interest was $27.4 million, which was determined based upon the closing market price of the 29 million previously owned shares on the acquisition date. We recognized a gain of $13.6 million in the first quarter of 2010 as a result of remeasuring our ownership interest in Freewest held prior to the business acquisition. The gain is included in Gain on acquisition of controlling interests in the Statements of Consolidated Operations for the year ended December 31, 2010.
The following table summarizes the consideration paid for Freewest and the fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the fourth quarter of 2010. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively have recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill, made during the fourth quarter of 2010, back to the date of acquisition. We adjusted the initial purchase price allocation for the acquisition of Freewest in the fourth quarter of 2010 as follows:
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Equity instruments (4.2 million Cliffs common shares) |
$ | 173.1 | $ | 173.1 | $ | — | ||||||
Cash |
12.8 | 12.8 | — | |||||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
185.9 | 185.9 | — | |||||||||
Fair value of Cliffs' ownership interest in Freewest held prior to acquisition of remaining interest |
27.4 | 27.4 | — | |||||||||
|
|
|
|
|
|
|||||||
$ | 213.3 | $ | 213.3 | $ | — | |||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Cash |
$ | 7.7 | $ | 7.7 | $ | — | ||||||
Other current assets |
1.4 | 1.4 | — | |||||||||
Mineral rights |
252.8 | 244.0 | (8.8 | ) | ||||||||
Marketable securities |
12.1 | 12.1 | — | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
274.0 | 265.2 | (8.8 | ) | ||||||||
LIABILITIES: |
||||||||||||
Accounts payable |
(3.3 | ) | (3.3 | ) | — | |||||||
Long-term deferred tax liabilities |
(57.4 | ) | (54.3 | ) | 3.1 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(60.7 | ) | (57.6 | ) | 3.1 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
213.3 | 207.6 | (5.7 | ) | ||||||||
Goodwill |
— | 5.7 | 5.7 | |||||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 213.3 | $ | 213.3 | $ | — | ||||||
|
|
|
|
|
|
The significant changes to the final purchase price allocation from the initial allocation primarily were due to changes to the fair value adjustment for mineral rights that resulted from the finalization of certain assumptions used in the valuation models utilized to determine the fair values.
The $5.7 million of goodwill resulting from the finalization of the purchase price allocation was assigned to our Ferroalloys operating segment. The goodwill recognized primarily is attributable to obtaining a controlling interest in Freewest. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
Spider
During the second quarter of 2010, we commenced a formal cash offer to acquire all of the outstanding common shares of Spider, a Canadian-based mineral exploration company, for C$0.19 per share. As of June 30, 2010, we held 27.4 million shares of Spider, representing approximately four percent of its issued and outstanding shares. On July 6, 2010, all of the conditions to acquire the remaining common shares of Spider had been satisfied or waived, and we consequently acquired all of the common shares that validly were tendered as of that date. When combined with our prior ownership interest, the additional shares acquired increased our ownership percentage to 52 percent on the date of acquisition, representing a majority of the common shares outstanding on a fully diluted basis. Our 52 percent ownership of Spider was included in the consolidated financial statements since the July 6, 2010 acquisition date, and Spider was included as a component of our Ferroalloys operating segment. The acquisition date fair value of the consideration transferred totaled a cash purchase price of $56.9 million. Subsequent to the acquisition date, we extended the cash offer to permit additional shares to be tendered and taken up, thereby increasing our ownership percentage in Spider to 85 percent as of July 26, 2010. Effective October 6, 2010, we completed the acquisition of the remaining shares of Spider through an amalgamation, bringing our ownership percentage to 100 percent as of December 31, 2010. As noted above, through our acquisition of Freewest during the first quarter of 2010, we acquired an interest in the Ring of Fire properties in Northern Ontario, which comprise three premier chromite deposits. The Spider acquisition allowed us to obtain majority ownership of the "Big Daddy" chromite deposit, based on Spider's ownership percentage in this deposit of 26.5 percent at the time of the closing acquisition date.
Prior to the July 6, 2010 acquisition date, we accounted for our four percent interest in Spider as an available-for-sale equity security. The acquisition date fair value of the previous equity interest was $4.9 million, which was determined based upon the closing market price of the 27.4 million previously owned shares on the acquisition date. The acquisition date fair value of the 48 percent noncontrolling interest in Spider was estimated to be $51.9 million, which was determined based upon the closing market price of the 290.5 million shares of noncontrolling interest on the acquisition date.
The following table summarizes the consideration paid for Spider and the fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the fourth quarter of 2010. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively have recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill, made during the fourth quarter of 2010, back to the date of acquisition. We adjusted the initial purchase price allocation for the acquisition of Spider in the fourth quarter of 2010 as follows:
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 56.9 | $ | 56.9 | $ | — | ||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
56.9 | 56.9 | — | |||||||||
Fair value of Cliffs' ownership interest in Spider held prior to acquisition of remaining interest |
4.9 | 4.9 | — | |||||||||
|
|
|
|
|
|
|||||||
$ | 61.8 | $ | 61.8 | $ | — | |||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Cash |
$ | 9.0 | $ | 9.0 | $ | — | ||||||
Other current assets |
4.5 | 4.5 | — | |||||||||
Mineral rights |
31.0 | 35.3 | 4.3 | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
44.5 | 48.8 | 4.3 | |||||||||
LIABILITIES: |
||||||||||||
Other current liabilities |
(5.2 | ) | (5.2 | ) | — | |||||||
Long-term deferred tax liabilities |
(2.7 | ) | (5.1 | ) | (2.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(7.9 | ) | (10.3 | ) | (2.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
36.6 | 38.5 | 1.9 | |||||||||
Goodwill |
77.1 | 75.2 | (1.9 | ) | ||||||||
Noncontrolling interest in Spider |
(51.9 | ) | (51.9 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 61.8 | $ | 61.8 | $ | — | ||||||
|
|
|
|
|
|
The significant changes to the final purchase price allocation from the initial allocation primarily were due to changes to the fair value adjustment for mineral rights that resulted from the finalization of certain assumptions used in the valuation models utilized to determine the fair values.
The $75.2 million of goodwill resulting from the acquisition was assigned to our Ferroalloys operating segment. The goodwill recognized primarily is attributable to obtaining majority ownership of the "Big Daddy" chromite deposit. When combined with the interest we acquired in the Ring of Fire properties through our acquisition of Freewest, we now control three premier chromite deposits in Northern Ontario, Canada. None of the goodwill is expected to be deductible for income tax purposes. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
CLCC
On July 30, 2010, we acquired the coal operations of privately owned INR and since that date, the operations acquired from INR have been conducted through our wholly owned subsidiary known as CLCC. Our full ownership of CLCC has been included in the consolidated financial statements since the acquisition date, and the subsidiary is reported as a component of our North American Coal segment. The acquisition date fair value of the consideration transferred totaled $775.9 million, which consisted of a cash purchase price of $757 million and a working capital adjustment of $18.9 million.
CLCC is a producer of high-volatile metallurgical and thermal coal located in southern West Virginia. CLCC's operations include two underground continuous mining method metallurgical coal mines and one open surface thermal coal mine. The acquisition includes a metallurgical and thermal coal mining complex with a coal preparation and processing facility as well as a large, long-life reserve base with an estimated 59 million tons of metallurgical coal and 62 million tons of thermal coal. This reserve base increases our total global reserve base to over 166 million tons of metallurgical coal and over 67 million tons of thermal coal. This acquisition represented an opportunity for us to add complementary high-quality coal products and provided certain advantages, including among other things, long-life mine assets, operational flexibility and new equipment.
The following table summarizes the consideration paid for CLCC and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. We finalized the purchase price allocation in the second quarter of 2011. Under the business combination guidance in ASC 805, prior periods, beginning with the period of acquisition, are required to be revised to reflect changes to the original purchase price allocation. In accordance with this guidance, we retrospectively have recorded the adjustments to the fair value of the acquired assets and assumed liabilities and the resulting Goodwill back to the date of acquisition. We adjusted the initial purchase price allocation for the acquisition of CLCC as follows:
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 757.0 | $ | 757.0 | — | |||||||
Working capital adjustments |
17.5 | 18.9 | 1.4 | |||||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Product inventories |
$ | 20.0 | $ | 20.0 | $ | — | ||||||
Other current assets |
11.8 | 11.8 | — | |||||||||
Land and mineral rights |
640.3 | 639.3 | (1.0 | ) | ||||||||
Plant and equipment |
111.1 | 112.3 | 1.2 | |||||||||
Deferred taxes |
16.5 | 15.9 | (0.6 | ) | ||||||||
Intangible assets |
7.5 | 7.5 | — | |||||||||
Other non-current assets |
0.8 | 0.8 | — | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
808.0 | 807.6 | (0.4 | ) | ||||||||
LIABILITIES: |
||||||||||||
Current liabilities |
(22.8 | ) | (24.1 | ) | (1.3 | ) | ||||||
Mine closure obligations |
(2.8 | ) | (2.8 | ) | — | |||||||
Below-market sales contracts |
(32.6 | ) | (32.6 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(58.2 | ) | (59.5 | ) | (1.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
749.8 | 748.1 | (1.7 | ) | ||||||||
Goodwill |
24.7 | 27.8 | 3.1 | |||||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
|
|
|
|
|
|
As our fair value estimates remain materially unchanged from 2010, there were no significant changes to the purchase price allocation from the initial allocation reported during the third quarter of 2010.
Of the $7.5 million of acquired intangible assets, $5.4 million was assigned to the value of in-place permits and will be amortized on a straight-line basis over the life of the mine. The remaining $2.1 million was assigned to the value of favorable mineral leases and will be amortized on a straight-line basis over the corresponding mine life.
The $27.8 million of goodwill resulting from the acquisition was assigned to our North American Coal business segment. The goodwill recognized primarily is attributable to the addition of complementary high-quality coal products to our existing operations and operational flexibility. None of the goodwill was expected to be deductible for income tax purposes. After performing our annual goodwill impairment test in the fourth quarter of 2011, we determined that the goodwill resulting from the acquisition was impaired as the carrying value exceeded its fair value. The impairment charge was recorded as Impairment of Goodwill in the Statements of Consolidated Operations for the year ended December 31, 2011. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
With regard to each of the 2010 acquisitions discussed above, pro forma results of operations have not been presented because the effects of these business combinations, individually and in the aggregate, were not material to our consolidated results of operations.
|
NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies and is not subject to amortization. We assign goodwill arising from acquired companies to the reporting units that are expected to benefit from the synergies of the acquisition. Our reporting units are either at the operating segment level or a component one level below our operating segments that constitutes a business for which management generally reviews production and financial results of that component. Decisions are often made as to capital expenditures, investments and production plans at the component level as part of the ongoing management of the related operating segment. We have determined that our Asia Pacific Iron Ore and Ferroalloys operating segments constitute separate reporting units, that our Bloom Lake and Wabush mines within our Eastern Canadian Iron Ore operating segment constitute reporting units, that CLCC within our North American Coal operating segment constitutes a reporting unit and that our Northshore mine within our U.S. Iron Ore operating segment constitutes a reporting unit. Goodwill is allocated among and evaluated for impairment at the reporting unit level in the fourth quarter of each year or as circumstances occur that potentially indicate that the carrying amount of these assets may not be recoverable. There were no such events or changes in circumstances during 2011.
After performing our annual goodwill impairment test in the fourth quarter of 2011, we determined that $27.8 million of goodwill associated with our CLCC reporting unit was impaired as the carrying value with this reporting unit exceeded its fair value. The fair value was determined using a combination of a discounted cash flow model and valuations of comparable businesses. The impairment charge for the CLCC reporting unit was driven by our overall outlook on coal pricing in light of economic conditions, increases in our anticipated costs to bring the Lower War Eagle mine into production and increases in our anticipated sustaining capital cost for the lives of the CLCC mines that are currently operating. No impairment charges were identified in connection with our annual goodwill impairment test with respect to our other identified reporting units. The following table summarizes changes in the carrying amount of goodwill allocated by operating segment during 2011 and 2010:
(In Millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | |||||||||||||||||||||||||||||||||||||
Beginning Balance |
$ | 2.0 | $ | 3.1 | $ | 27.9 | $ | 82.6 | $ | 80.9 | $ | 196.5 | $ | 2.0 | $ | — | $ | — | $ | 72.6 | $ | — | $ | 74.6 | ||||||||||||||||||||||||
Arising in business combinations |
— | 983.5 | (0.1 | ) | — | — | 983.4 | — | 3.1 | 27.9 | — | 80.9 | 111.9 | |||||||||||||||||||||||||||||||||||
Impairment |
— | — | (27.8 | ) | — | — | (27.8 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Impact of foreign currency translation |
— | — | — | 0.4 | — | 0.4 | — | — | — | 10.0 | — | 10.0 | ||||||||||||||||||||||||||||||||||||
Other |
— | (0.4 | ) | — | — | — | (0.4 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
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Ending Balance |
$ | 2.0 | $ | 986.2 | $ | — | $ | 83.0 | $ | 80.9 | $ | 1,152.1 | $ | 2.0 | $ | 3.1 | $ | 27.9 | $ | 82.6 | $ | 80.9 | $ | 196.5 | ||||||||||||||||||||||||
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The increase in the balance of goodwill as of December 31, 2011 is due to the assignment of $983.5 million to Goodwill during 2011 based on preliminary purchase price allocation for the acquisition of Consolidated Thompson. The balance of $1,152.1 million and $196.5 million as of December 31, 2011 and 2010, respectively, is presented as Goodwill in the Statements of Consolidated Financial Position. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for additional information.
Other Intangible Assets and Liabilities
Following is a summary of intangible assets and liabilities at December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||
Classification |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
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Definite lived intangible assets: |
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Permits |
Intangible assets, net | $ | 134.3 | $ | (23.2 | ) | $ | 111.1 | $ | 132.4 | $ | (16.3 | ) | $ | 116.1 | |||||||||||
Utility contracts |
Intangible assets, net | 54.7 | (21.3 | ) | 33.4 | 54.7 | (10.2 | ) | 44.5 | |||||||||||||||||
Easements (1) |
Intangible assets, net | — | — | — | 11.7 | (0.4 | ) | 11.3 | ||||||||||||||||||
Leases |
Intangible assets, net | 5.5 | (3.0 | ) | 2.5 | 5.2 | (2.9 | ) | 2.3 | |||||||||||||||||
Unpatented technology (2) |
Intangible assets, net | — | — | — | 4.0 | (2.4 | ) | 1.6 | ||||||||||||||||||
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Total intangible assets |
$ | 194.5 | $ | (47.5 | ) | $ | 147.0 | $ | 208.0 | $ | (32.2 | ) | $ | 175.8 | ||||||||||||
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Below-market sales contracts |
Below-market sales contracts - current | $ | (77.0 | ) | $ | 24.3 | $ | (52.7 | ) | $ | (77.0 | ) | $ | 19.9 | $ | (57.1 | ) | |||||||||
Below-market sales contracts |
Below-market sales contracts | (252.3 | ) | 140.5 | (111.8 | ) | (252.3 | ) | 87.9 | (164.4 | ) | |||||||||||||||
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Total below-market sales contracts |
$ | (329.3 | ) | $ | 164.8 | $ | (164.5 | ) | $ | (329.3 | ) | $ | 107.8 | $ | (221.5 | ) | ||||||||||
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(1) | Upon the acquistion of Consolidated Thompson, this intangible asset is now eliminated through intercompany eliminations. The easement agreement is between Wabush and Consolidated Thompson. |
(2) | Upon recording the renewaFUEL operations as discontinued operations, this intangible asset was written down in the resulting impairment charge recorded during the third quarter of 2011. |
The intangible assets are subject to periodic amortization on a straight-line basis over their estimated useful lives as follows:
Intangible Asset |
Useful Life (years) | |
Permits |
15 - 28 | |
Utility contracts |
5 | |
Leases |
1.5 - 4.5 |
Amortization expense relating to intangible assets was $17.7 million, $18.8 million and $8.2 million, respectively, for the years ended December 31, 2011, 2010 and 2009, and is recognized in Cost of goods sold and operating expenses in the Statements of Consolidated Operations. The estimated amortization expense relating to intangible assets for each of the five succeeding fiscal years is as follows:
(In Millions) | ||||
Amount | ||||
Year Ending December 31 |
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2012 |
$ | 18.0 | ||
2013 |
17.9 | |||
2014 |
17.9 | |||
2015 |
6.0 | |||
2016 |
6.0 | |||
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Total |
$ | 65.8 | ||
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The below-market sales contracts are classified as a liability and recognized over the terms of the underlying contracts, which range from 3.5 to 8.5 years. For the years ended December 31, 2011, 2010 and 2009, we recognized $57.0 million, $62.4 million and $30.3 million, respectively, in Product revenues related to the below-market sales contracts. The following amounts will be recognized in Product revenues for each of the five succeeding fiscal years:
(In Millions) | ||||
Amount | ||||
Year Ending December 31 |
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2012 |
$ | 48.8 | ||
2013 |
45.3 | |||
2014 |
23.0 | |||
2015 |
23.0 | |||
2016 |
23.1 | |||
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Total |
$ | 163.2 | ||
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NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
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: |
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Cash equivalents |
$ | 351.2 | $ | — | $ | — | $ | 351.2 | ||||||||
Derivative assets |
— | — | 157.9 | (1) | 157.9 | |||||||||||
International marketable securities |
27.1 | — | — | 27.1 | ||||||||||||
Foreign exchange contracts |
— | 8.0 | — | 8.0 | ||||||||||||
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Total |
$ | 378.3 | $ | 8.0 | $ | 157.9 | $ | 544.2 | ||||||||
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Liabilities: |
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Derivative liabilites |
$ | — | $ | — | $ | 19.5 | $ | 19.5 | ||||||||
Foreign exchange contracts |
— | 3.5 | — | 3.5 | ||||||||||||
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Total |
$ | — | $ | 3.5 | $ | 19.5 | $ | 23.0 | ||||||||
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(1) | Derivative assets includes $83.8 million classifed as Accounts receivable on the Statement of Consolidated Financial Position as of December 31, 2011. Refer to NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information. |
(In Millions) | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
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: |
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Cash equivalents |
$ | 1,307.2 | $ | — | $ | — | $ | 1,307.2 | ||||||||
Derivative assets |
— | — | 45.6 | 45.6 | ||||||||||||
U.S. marketable securities |
22.0 | — | — | 22.0 | ||||||||||||
International marketable securities |
63.9 | — | — | 63.9 | ||||||||||||
Foreign exchange contracts |
— | 39.0 | — | 39.0 | ||||||||||||
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Total |
$ | 1,393.1 | $ | 39.0 | $ | 45.6 | $ | 1,477.7 | ||||||||
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There were no financial instruments measured at fair value that were in a liability position at December 31, 2010.
Financial assets classified in Level 1 at December 31, 2011 and 2010 include money market funds and available-for-sale marketable securities. The valuation of these instruments is determined using a market approach, taking into account current interest rates, creditworthiness and liquidity risks in relation to current market conditions, and 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 for substantially the full term of the financial instrument. Level 2 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At December 31, 2011 and 2010, 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 December 31, 2011 and 2010 include an embedded 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 mark this provision to fair value as a revenue adjustment 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 December 31, 2011 also consisted of freestanding derivatives related to certain supply agreements with our U.S. Iron Ore and Eastern Canadian Iron Ore customers. In 2011, we reached final pricing settlement with a majority of our U.S. Iron Ore customers. However, in some cases we still are working to revise components of the pricing calculations referenced within our supply agreements to incorporate new pricing mechanisms as a result of the changes to historical benchmark pricing. As a result, we have recorded certain shipments made during 2011 on a provisional basis until final settlement is reached. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once the product is shipped. The derivative instrument, which is settled and billed once final pricing settlement is reached, is marked to fair value as a revenue adjustment each reporting period.
In the second quarter of 2011 and the third quarter of 2010, we revised the inputs used to determine the fair value of these derivatives to include 2011 published pricing indices and settlements realized by other companies in the industry. Prior to this change, the fair value primarily was determined based on significant unobservable inputs to develop the forward price expectation of the final price settlement for 2011. Based on these changes to the determination of the fair value, we transferred $20.0 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy in the second quarter of 2011. A similar revision to the inputs used to determine the fair value of these derivatives was made in the third quarter of 2010 and, based on the changes, we transferred $161.8 million of derivative assets from a Level 3 classification to a Level 2 classification within the fair value hierarchy at that time.
Due to pending revisions to the terms of certain of our customer supply agreements that were initiated during the fourth quarter of 2011, the fair value determination for these derivatives has again been primarily based on significant unobservable inputs to develop the forward price expectation of the final price settlement for 2011. Based on these changes to the determination of the fair value, we transferred $49.0 million of derivative assets from a Level 2 classification to a Level 3 classification within the fair value hierarchy in the fourth quarter of 2011. The fair value of our derivatives is determined using a market approach and takes into account current market conditions and other risks, including nonperformance risk.
Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value. We had no financial assets and liabilities measured at fair value on a non-recurring basis at December 31, 2011 and 2010.
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 year ended December 31, 2011. As noted above, there was a transfer from Level 3 to Level 2 in each of the second quarter of 2011 and the third quarter of 2010, and a transfer from Level 2 to Level 3 in the fourth quarter of 2011, as reflected in the table below. 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 years ended December 31, 2011 and 2010.
(In Millions) | ||||||||
Derivative Assets (Level 3) | ||||||||
Year Ended December 31, |
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2011 | 2010 | |||||||
Beginning balance — January 1 |
$ | 45.6 | $ | 63.2 | ||||
Total gains |
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Included in earnings |
403.0 | 851.7 | ||||||
Included in other comprehensive income |
— | — | ||||||
Settlements |
(319.7 | ) | (707.5 | ) | ||||
Transfers into Level 3 |
49.0 | — | ||||||
Transfers out of Level 3 |
(20.0 | ) | (161.8 | ) | ||||
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Ending balance — December 31 |
$ | 157.9 | $ | 45.6 | ||||
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Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date |
$ | 403.0 | $ | 120.2 | ||||
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(In Millions) | ||||||||
Derivative Liabilities (Level 3) | ||||||||
Year Ended December 31, |
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2011 | 2010 | |||||||
Beginning balance — January 1 |
$ | — | $ | — | ||||
Total losses |
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Included in earnings |
(19.5 | ) | — | |||||
Included in other comprehensive income |
— | — | ||||||
Settlements |
— | — | ||||||
Transfers into Level 3 |
— | — | ||||||
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Ending balance — December 31 |
$ | (19.5 | ) | $ | — | |||
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Total losses for the period included in earnings attributable to the change in unrealized losses on assets still held at the reporting date |
$ | (19.5 | ) | $ | — | |||
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Gains and losses included in earnings are reported in Product revenue in the Statements of Consolidated Operations for the years ended December 31, 2011 and 2010.
The carrying amount and fair value of our long-term receivables and long-term debt at December 31, 2011 and 2010 were as follows:
(In Millions) | ||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
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Long-term receivables: |
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Customer supplemental payments |
$ | 22.3 | $ | 20.8 | $ | 22.3 | $ | 19.5 | ||||||||
ArcelorMittal USA — Receivable |
26.5 | 30.7 | 32.8 | 38.9 | ||||||||||||
Other |
10.0 | 10.0 | 8.1 | 8.1 | ||||||||||||
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Total long-term receivables (1) |
$ | 58.8 | $ | 61.5 | $ | 63.2 | $ | 66.5 | ||||||||
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Long-term debt: |
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Term loan — $1.25 billion |
$ | 897.2 | $ | 897.2 | $ | — | $ | — | ||||||||
Senior notes — $700 million |
699.3 | 726.4 | — | — | ||||||||||||
Senior notes — $1.3 billion |
1,289.2 | 1,399.4 | 990.3 | 972.5 | ||||||||||||
Senior notes — $400 million |
398.0 | 448.8 | 397.8 | 422.8 | ||||||||||||
Senior notes — $325 million |
325.0 | 348.7 | 325.0 | 355.6 | ||||||||||||
Customer Borrowings |
5.1 | 5.1 | 4.0 | 4.0 | ||||||||||||
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Total long-term debt |
$ | 3,613.8 | $ | 3,825.6 | $ | 1,717.1 | $ | 1,754.9 | ||||||||
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(1) | Includes current portion. |
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 2013, 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 December 31, 2011 and 2010, a receivable of $22.3 million had been recorded in Other non-current assets in the Statement of Consolidated Financial Position reflecting the terms of this deferred payment arrangement. The fair value of the receivable of $20.8 million and $19.5 million at December 31, 2011 and 2010, respectively, is based on a discount rate of 4.5 percent, 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 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 $26.5 million and $32.8 million at December 31, 2011 and 2010, respectively. The fair value of the receivable of $30.7 million and $38.9 million at December 31, 2011 and 2010, respectively, is based on a discount rate of 2.58 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest and approximate fair value. See NOTE 7 — DEBT AND CREDIT FACILITIES for further information.
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NOTE 7 — DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of December 31, 2011 and 2010:
($ in Millions) | ||||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt | |||||||||||||||||
$1.25 Billion Term Loan |
Variable | 1.40 | % | 2016 | $ | 972.0 | (6) | $ | 897.2 | (6) | ||||||||||||
$700 Million 4.875% 2021 Senior Notes |
Fixed | 4.88 | % | 2021 | 700.0 | 699.3 | (5) | |||||||||||||||
$1.3 Billion Senior Notes: |
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$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 | % | 2020 | 500.0 | 499.1 | (4) | |||||||||||||||
$800 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 | % | 2040 | 800.0 | 790.1 | (3) | |||||||||||||||
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 | % | 2020 | 400.0 | 398.0 | (2) | |||||||||||||||
$325 Million Private Placement Senior Notes: |
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Series 2008A — Tranche A |
Fixed | 6.31 | % | 2013 | 270.0 | 270.0 | ||||||||||||||||
Series 2008A — Tranche B |
Fixed | 6.59 | % | 2015 | 55.0 | 55.0 | ||||||||||||||||
$1.75 Billion Credit Facility: |
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Revolving Loan |
Variable | — | 2016 | 1,750.0 | — | (1) | ||||||||||||||||
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Total |
$ | 5,447.0 | $ | 3,608.7 | ||||||||||||||||||
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December 31, 2010 | ||||||||||||||||||||||
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt | |||||||||||||||||
$1 Billion Senior Notes: |
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$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 | % | 2020 | $ | 500.0 | $ | 499.0 | (4) | |||||||||||||
$500 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 | % | 2040 | 500.0 | 491.3 | (3) | |||||||||||||||
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 | % | 2020 | 400.0 | 397.8 | (2) | |||||||||||||||
$325 Million Private Placement Senior Notes: |
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Series 2008A — Tranche A |
Fixed | 6.31 | % | 2013 | 270.0 | 270.0 | ||||||||||||||||
Series 2008A — Tranche B |
Fixed | 6.59 | % | 2015 | 55.0 | 55.0 | ||||||||||||||||
$600 Million Credit Facility: |
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Revolving Loan |
Variable | — | 2012 | 600.0 | — | (1) | ||||||||||||||||
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Total |
$ | 2,325.0 | $ | 1,713.1 | ||||||||||||||||||
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(1) | As of December 31, 2011 and December 31, 2010, no revolving loans were drawn under the credit facility and the principal amount of letter of credit obligations totaled $23.5 million and $64.7 million, respectively, thereby reducing available borrowing capacity to $1,726.5 million and $535.3 million, respectively. |
(2) | As of December 31, 2011 and December 31, 2010, the $400 million 5.90 percent senior notes were recorded at a par value of $400 million less unamortized discounts of $2.0 million and $2.2 million, respectively, based on an imputed interest rate of 5.98 percent. |
(3) | As of December 31, 2011 and December 31, 2010, the $800 million and $500 million 6.25 percent senior notes were recorded at par values of $800 million and $500 million, respectively, less unamortized discounts of $9.9 million and $8.7 million, respectively, based on an imputed interest rate of 6.38 percent. |
(4) | As of December 31, 2011 and December 31, 2010, the $500 million 4.80 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $0.9 million and $1.0 million, respectively, based on an imputed interest rate of 4.83 percent. |
(5) | As of December 31, 2011, the $700 million 4.875 percent senior notes were recorded at a par value of $700 million less unamortized discounts of $0.7 million, based on an imputed interest rate of 4.89 percent. |
(6) | As of December 31, 2011, $278.0 million had been paid down on the original $1.25 billion term loan and of the remaining term loan $74.8 million was classified as Current portion of term loan. The current classification is based upon the principal payment terms of the arrangement requiring principal payments on each three-month anniversary following the funding of the term loan. |
Credit Facility
On August 11, 2011, we entered into a five-year unsecured amended and restated multicurrency credit agreement, or amended credit agreement, with a syndicate of financial institutions in order to amend the terms of our existing multicurrency credit agreement. The former $800 million multicurrency credit agreement consisted of a $600 million revolving credit facility and a $200 million term loan. The $200 million term loan was paid in its entirety in March 2010, reducing the multicurrency credit agreement to a $600 million revolving credit facility. The amended credit agreement provides for, among other things, a $1.75 billion revolving credit facility and allows for the designation of certain foreign subsidiaries as borrowers under the amended credit agreement, if certain conditions are satisfied. Borrowings under the amended credit agreement bear interest at a floating rate based upon a base rate or the LIBOR rate plus a margin based upon our leverage ratio. Certain of our material domestic subsidiaries have guaranteed our obligations and the obligations of other borrowers under the amended credit agreement. Previously, we had amended the terms of our $800 million multicurrency credit agreement, effective October 29, 2009. The 2009 amendment resulted in, among other things, an increase in the sub-limit for letters of credit from $50 million to $150 million, the addition of multi-currency letters of credit, and more liberally defined financial covenants and debt restrictions. An increase of 50 basis points to the annual LIBOR margin resulted from this 2009 amendment.
Proceeds from the amended credit agreement are used to refinance existing indebtedness, to finance general working capital needs and for other general corporate purposes, including the funding of acquisitions. We have the ability to request an increase in available revolving credit borrowings under the amended credit agreement by an additional amount of up to $250 million by obtaining the agreement of the existing financial institutions to increase their lending commitments or by adding additional lenders.
As a condition of agreeing to the amended credit agreement terms, $250 million was drawn against the revolving credit facility on August 11, 2011, in order to pay down a portion of the term loan. All amounts outstanding under the revolving credit facility were repaid in full on December 12, 2011. The weighted average annual interest rate under the revolving credit facility during the time the borrowings were outstanding was 1.84 percent.
Loans are drawn with a choice of interest rates and maturities, subject to the terms of the agreement. Under the amended credit agreement described above, interest rates are either (a) (1) a range from LIBOR plus 0.75 percent to LIBOR plus 2.00 percent based on the leverage ratio, or (2) the highest of the prime rate, (b) the Federal Funds Effective Rate plus 0.50 percent, or (c) the one-month LIBOR rate, plus 1.0 percent based on the leverage ratio.
The amended credit agreement has two 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 million private placement senior notes due 2013 remain outstanding, or otherwise (ii) the then applicable maximum multiple under the $270 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). Prior to the amendment to our multicurrency credit agreement in August 2011, the debt to earnings ratio of Total Funded Debt to Consolidated EBITDA for the preceding four quarters could not exceed 3.25 to 1.0 on the last day of any fiscal quarter. Prior to the amendment to our multicurrency credit agreement in October 2009, the interest coverage ratio was calculated based on Consolidated EBIT to Interest Expense for the preceding four quarters and could not be less than 3.0 to 1.0 on the last day of any fiscal quarter. The amended credit agreement provided for more flexible financial covenants and debt restrictions through the amendment of certain customary covenants. As of December 31, 2011 and 2010, we were in compliance with the financial covenants in the amended credit agreement.
$1 Billion Senior Notes — 2011 Offering
On March 23, 2011 and April 1, 2011, respectively, we completed a $1 billion public offering of senior notes consisting of two tranches: a 10-year tranche of $700 million aggregate principal amount at 4.875 percent senior notes due April 1, 2021, and an additional issuance of $300 million aggregate principal amount of our 6.25 percent senior notes due October 1, 2040, of which $500 million aggregate principal amount previously was issued during September 2010. Interest is fixed and is payable on April 1 and October 1 of each year, beginning on October 1, 2011, for both series of senior notes until maturity. The senior notes are unsecured obligations and rank equally in right of payment with all our other existing and future unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal amounts. The net proceeds from the senior notes offering were used to fund a portion of the acquisition of Consolidated Thompson and to pay the related fees and expenses.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after prior notice is sent to the holders of the applicable series of notes. The senior notes are redeemable at a redemption price equal to the greater of (1) 100 percent of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis at the treasury rate plus 25 basis points with respect to the 2021 senior notes and 40 basis points with respect to the 2040 senior notes, plus, in each case, accrued and unpaid interest to the date of redemption. However, if the 2021 senior notes are redeemed on or after the date that is three months prior to their maturity date, the 2021 senior notes will be redeemed at a redemption price equal to 100 percent of the principal amount of the notes to be redeemed plus accrued and unpaid interest to the date of redemption.
In addition, if a change of control triggering event occurs with respect to the senior notes, as defined in the agreement, we will be required to offer to purchase the notes of the applicable series at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
$1 Billion Senior Notes — 2010 Offering
On September 20, 2010, we completed a $1 billion public offering of senior notes consisting of two tranches: a 10-year tranche of $500 million aggregate principal amount at 4.80 percent due October 1, 2020, and a 30-year tranche of $500 million aggregate principal amount at 6.25 percent due October 1, 2040. Interest is fixed and is payable on April 1 and October 1 of each year, beginning on April 1, 2011, for both series of senior notes until maturity. The senior notes are unsecured obligations and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal amounts.
A portion of the net proceeds from the senior notes offering was used on September 22, 2010 to repay $350 million outstanding under our credit facility. The net proceeds were used for general corporate purposes, including funding of capital expenditures and were used to fund a portion of the acquisition of Consolidated Thompson and related expenses.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after prior notice is sent to the holders of the applicable series of notes. The senior notes are redeemable at a redemption price equal to the greater of (1) 100 percent of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis at the treasury rate plus 35 basis points with respect to the 2020 senior notes and 40 basis points with respect to the 2040 senior notes, plus, in each case, accrued and unpaid interest to the date of redemption. In addition, if a change of control triggering event occurs with respect to the notes, we will be required to offer to purchase the notes at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest to the date of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
$400 Million Senior Notes Offering
On March 17, 2010, we completed a $400 million public offering of senior notes due March 15, 2020. Interest at a fixed rate of 5.90 percent is payable on March 15 and September 15 of each year, beginning on September 15, 2010, until maturity on March 15, 2020. The senior notes are unsecured obligations and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness. There are no subsidiary guarantees of the interest and principal amounts.
A portion of the net proceeds from the senior notes offering was used on March 31, 2010 to repay our $200 million term loan under our credit facility, as well as to repay on May 27, 2010 our share of Amapá's remaining debt outstanding of $100.8 million. In addition, we used the remainder of the net proceeds to help fund the acquisitions of Spider and CLCC during the third quarter of 2010.
The senior notes may be redeemed any time at our option not less than 30 days nor more than 60 days after prior notice is sent to the holders of the applicable series of notes. The senior notes are redeemable at a redemption price equal to the greater of (1) 100 percent of the principal amount of the notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed, discounted to the redemption date on a semi-annual basis, plus accrued and unpaid interest to the date of redemption. In addition, if a change of control triggering event occurs, we will be required to offer to purchase the notes at a purchase price equal to 101 percent of the principal amount, plus accrued and unpaid interest to the date of purchase.
The terms of the senior notes contain certain customary covenants; however, there are no financial covenants.
$325 Million Private Placement Senior Notes
On June 25, 2008, we entered into a $325 million private placement consisting of $270 million of 6.31 percent Five-Year Senior Notes due June 15, 2013, and $55 million of 6.59 percent Seven-Year Senior Notes due June 15, 2015. Interest is paid on the notes for both tranches on June 15 and December 15 until their respective maturities. The notes are unsecured obligations with interest and principal amounts guaranteed by certain of our domestic subsidiaries. The notes and guarantees were not required to be registered under the Securities Act of 1933, as amended, and were placed with qualified institutional investors. We used the proceeds to repay senior unsecured indebtedness and for general corporate purposes.
The terms of the private placement senior notes contain customary covenants that require compliance with certain financial covenants based on: (1) debt to earnings ratio (Total Funded Debt to Consolidated EBITDA, as those terms are defined in the note purchase agreement, for the preceding four quarters cannot exceed 3.25 to 1.0 on the last day of any fiscal quarter) and (2) interest coverage ratio (Consolidated EBITDA to Interest Expense, as those terms are defined in the note purchase 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 of December 31, 2011 and 2010, we were in compliance with the financial covenants in the note purchase agreement.
Bridge Credit Agreement
On March 4, 2011, we entered into an unsecured bridge credit agreement with a syndicate of banks in order to provide a portion of the financing for the acquisition of Consolidated Thompson. The bridge credit agreement provided for a bridge credit facility with an original maturity date of May 10, 2012. On May 10, 2011, we borrowed $750 million under the bridge credit facility to fund a portion of the cash required upon the consummation of the acquisition of Consolidated Thompson. The borrowings under the bridge credit facility were repaid using a portion of the net proceeds obtained from the public offering of our common shares that was completed on June 13, 2011, and the bridge credit facility was terminated. The borrowings under the bridge credit facility bore interest at a floating rate based upon a base rate or the LIBOR rate plus a margin determined by our credit rating and the length of time the borrowings were outstanding. The weighted average annual interest rate under the bridge credit facility during the time the borrowings were outstanding was 2.56 percent. Refer to NOTE 13 — CAPITAL STOCK for additional information on the public offering of our common shares.
Term Loan
On March 4, 2011, we entered into an unsecured term loan agreement with a syndicate of banks in order to provide a portion of the financing for the acquisition of Consolidated Thompson. The term loan agreement provided for a $1.25 billion term loan. The term loan has a maturity date of five years from the date of funding and requires principal payments on each three-month anniversary of the date following the funding. On May 10, 2011, we borrowed $1.25 billion under the term loan agreement to fund a portion of the cash required upon the consummation of the acquisition of Consolidated Thompson. Effective August 11, 2011, we amended the term loan agreement to modify certain definitions, representations, warranties and covenants, including the financial covenants, to conform to certain provisions under the amended credit agreement. In addition, a portion of the $1.75 billion revolving credit facility, provided for under the amended credit agreement, was used to repay $250 million of the outstanding term loan, as discussed above. The $250 million payment was in addition to two scheduled quarterly principal payments totaling $28.0 million, reducing the total outstanding amount under the term loan to $972.0 million, of which $897.2 million is characterized as long-term debt as of December 31, 2011. Borrowings under the term loan bear interest at a floating rate based upon a base rate or the LIBOR rate plus a margin depending on the leverage ratio.
Short-Term Facilities
On March 31, 2010, Cliffs Natural Resources Pty Ltd entered into a A$40 million ($40.8 million) bank contingent instrument facility and cash advance facility to replace the then existing A$40 million multi-option facility, which was extended through June 30, 2011 and subsequently renewed until June 30, 2012. The facility, which is renewable annually at the bank's discretion, provides A$40 million 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 December 31, 2011, the outstanding bank guarantees under this facility totaled A$24.7 million ($25.2 million), thereby reducing borrowing capacity to A$15.3 million ($15.6 million). We have provided a guarantee of the facility, along with certain of our Australian subsidiaries. The facility agreement contains customary covenants that require compliance with certain financial covenants: (1) debt to earnings ratio and (2) interest coverage ratio, both based on the financial performance of the Company on a consolidated basis. As of December 31, 2011 and 2010, we were in compliance with these financial covenants.
Consolidated Thompson Senior Secured Notes
The Consolidated Thompson senior secured notes were included among the liabilities assumed in the acquisition of Consolidated Thompson. On April 13, 2011, we purchased the outstanding Consolidated Thompson senior secured notes directly from the note holders for $125 million, including accrued and unpaid interest. The senior secured notes had a face amount of $100 million, a stated interest rate of 8.5 percent and were scheduled to mature in 2017. The transaction initially was recorded as an investment in Consolidated Thompson senior secured notes during the second quarter of 2011. However, upon the completion of the acquisition of Consolidated Thompson and consolidation into our financial statements, the Consolidated Thompson senior secured notes and our investment in the notes were eliminated as intercompany transactions. During August 2011, Consolidated Thompson, our wholly owned subsidiary, provided for the redemption and release of the Consolidated Thompson senior secured notes, resulting in the cancellation of the notes. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for additional information.
Consolidated Thompson Convertible Debentures
Included among the liabilities assumed in the acquisition of Consolidated Thompson were the Consolidated Thompson convertible debentures, which, as a result of the acquisition, were able to be converted by their holders into cash in accordance with the cash change-of-control provision of the convertible debenture indenture. The convertible debentures allowed the debenture holders to convert at a premium conversion ratio beginning on the 10th trading day prior to the closing of the acquisition and ending on the 30th day subsequent to the mailing of an offer to purchase the convertible debentures, which was the cash change-of-control conversion period as defined by the convertible debenture indenture. On May 12, 2011, following the closing of the acquisition, Consolidated Thompson commenced the offer to purchase all of the outstanding convertible debentures in accordance with its obligations under the convertible debenture indenture by mailing the offer to purchase to the debenture holders. Additionally, on May 13, 2011, Consolidated Thompson gave notice that it was exercising its right to redeem any convertible debentures that remained outstanding on June 13, 2011, after giving effect to any conversions that occurred during the cash change-of-control conversion period. As previously disclosed, Consolidated Thompson received sufficient consents from the debenture holders, pursuant to a consent solicitation, to amend the convertible debenture indenture to give Consolidated Thompson such a redemption right. As a result of these events, no convertible debentures remain outstanding. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for additional information.
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 December 31, 2011, these letter of credit obligations totaled $95.0 million. All of these standby letters of credit are outside of the letters of credit provided for under the amended credit agreement.
Debt Maturities
Maturities of debt instruments based on the principal amounts outstanding at December 31, 2011, total approximately $74.8 million in 2012, $369.7 million in 2013, $124.6 million in 2014, $428.8 million in 2015, $299.1 million in 2016 and $2.4 billion thereafter.
Refer to NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.
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NOTE 8 — 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 $26.3 million, $24.2 million and $25.5 million in 2011, 2010 and 2009, respectively. Capital lease assets were $406.0 million and $283.2 million at December 31, 2011 and 2010, respectively. Corresponding accumulated amortization of capital leases included in respective allowances for depreciation were $110.6 million and $92.7 million at December 31, 2011 and 2010, respectively.
In October 2011, our North American Coal segment entered into the second phase of the sale-leaseback arrangement initially executed in December 2010 for the sale of the new longwall plow system at our Pinnacle mine in West Virginia. The first and second phases of the leaseback arrangement are for a period of five years. The 2010 sale-leaseback arrangement was specific to the assets at the time of the agreement and did not include the longwall plow system assets. Both phases of the leaseback arrangement have been accounted for as a capital lease. We recorded assets and liabilities under the capital lease of $75.9 million, reflecting the lower of the present value of the minimum lease payments or the fair value of the asset.
Future minimum payments under capital leases and non-cancellable operating leases at December 31, 2011 are as follows:
(In Millions) | ||||||||
Capital Leases |
Operating Leases |
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2012 |
$ | 87.1 | $ | 24.2 | ||||
2013 |
60.2 | 23.9 | ||||||
2014 |
55.2 | 18.9 | ||||||
2015 |
44.0 | 12.0 | ||||||
2016 |
28.9 | 7.8 | ||||||
2017 and thereafter |
73.4 | 25.0 | ||||||
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Total minimum lease payments |
$ | 348.8 | $ | 111.8 | ||||
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Amounts representing interest |
64.2 | |||||||
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Present value of net minimum lease payments |
$ | 284.6 | (1) | |||||
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(1) | The total is comprised of $71.8 million and $212.8 million classified as Other current liabilities and Other liabilities, respectively, on the Statements of Consolidated Financial Position at December 31, 2011. |
Total minimum capital lease payments of $348.8 million include $161.0 million for our Asia Pacific Iron Ore segment, $105.5 million for our Eastern Canadian Iron Ore Segment, $71.6 million for our North American Coal segment, $9.7 million for our U.S. Iron Ore segment and $1.0 million for our Corporate segment, respectively. Total minimum operating lease payments of $111.8 million include $40.4 million for our U.S. Iron Ore segment, $22.0 million for our Asia Pacific Iron Ore segment, $38.7 million for Corporate and $10.7 million for our Eastern Canadian Iron Ore, North American Coal and Other segments.
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NOTE 9 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $235.7 million and $199.1 million at December 31, 2011 and 2010, respectively. Payments in 2011 were $1.9 million compared with $10.6 million in 2010. The following is a summary of the obligations at December 31, 2011 and 2010:
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Environmental |
$ | 15.5 | $ | 13.7 | ||||
Mine closure |
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LTVSMC |
16.5 | 17.1 | ||||||
Operating mines: |
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U.S Iron Ore |
74.3 | 62.7 | ||||||
Eastern Canadian Iron Ore |
68.0 | 49.3 | ||||||
North American Coal |
36.3 | 34.7 | ||||||
Asia Pacific Iron Ore |
16.3 | 15.4 | ||||||
Other |
8.8 | 6.2 | ||||||
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Total mine closure |
220.2 | 185.4 | ||||||
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Total environmental and mine closure obligations |
235.7 | 199.1 | ||||||
Less current portion |
13.7 | 14.2 | ||||||
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Long term environmental and mine closure obligations |
$ | 222.0 | $ | 184.9 | ||||
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Environmental
Our mining and exploration activities are subject to various laws and regulations governing the protection of the environment. We conduct our operations to protect the public health and environment and believe our operations are in compliance with applicable laws and regulations in all material respects. Our environmental liabilities of $15.5 million and $13.7 million at December 31, 2011 and 2010, respectively, including obligations for known environmental remediation exposures at various active and closed mining operations and other sites, have been recognized based on the estimated cost of investigation and remediation at each site. If the cost only can be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements readily are known. Potential insurance recoveries have not been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed.
As discussed in further detail below, the environmental liability recorded at December 31, 2011 and 2010 primarily is comprised of remediation obligations related to the Rio Tinto mine site in Nevada where we are named as a PRP.
The Rio Tinto Mine Site
The Rio Tinto Mine Site is a historic underground copper mine located near Mountain City, Nevada, where tailings were placed in Mill Creek, a tributary to the Owyhee River. Site investigation and remediation work is being conducted in accordance with a Consent Order between the Nevada DEP and the RTWG composed of Cliffs, Atlantic Richfield Company, Teck Cominco American Incorporated, and E. I. du Pont de Nemours and Company. The Consent Order provides for technical review by the U.S. Department of the Interior Bureau of Indian Affairs, the U.S. Fish & Wildlife Service, U.S. Department of Agriculture Forest Service, the NDEP and the Shoshone-Paiute Tribes of the Duck Valley Reservation (collectively, "Rio Tinto Trustees"). The Consent Order is currently projected to continue with the objective of supporting the selection of the final remedy for the site. Costs are shared pursuant to the terms of a Participation Agreement between the parties of the RTWG, who have reserved the right to renegotiate any future participation or cost sharing following the completion of the Consent Order.
The Rio Tinto Trustees have made available for public comment their plans for the assessment of NRD. The RTWG commented on the plans and also are in discussions with the Rio Tinto Trustees informally about those plans. The notice of plan availability is a step in the damage assessment process. The studies presented in the plan may lead to a NRD claim under CERCLA. There is no monetized NRD claim at this time.
The focus of the RTWG has been on development of alternatives for remediation of the mine site. A draft of the alternative studies was reviewed with NDEP, the EPA and the Rio Tinto Trustees, and such alternatives have been reduced to the following: (1) tailings stabilization and long-term water treatment; and (2) removal of the tailings. As of December 31, 2011, the estimated costs of the available remediation alternatives currently range from approximately $10.0 million to $30.5 million in total for all potentially responsible parties. In recognition of the potential for an NRD claim, the parties are actively pursuing a global settlement that would include the EPA and encompass both the remedial action and the NRD issues. We are working to finalize the Consent Decree and the remaining documents. While a global settlement with the EPA has not been finalized, we expect an agreement will be reached in early 2012.
On May 29, 2009, the RTWG entered into a Rio Tinto Mine Site Work and Cost Allocation Agreement (the "Allocation Agreement") to resolve differences over the allocation of any negotiated remedy. The Allocation Agreement contemplates that the RTWG will enter into an insured fixed-price cleanup or IFC, pursuant to which a contractor would assume responsibility for the implementation and funding of the remedy in exchange for a fixed price. We are obligated to fund 32.5 percent of the IFC. In the event an IFC is not implemented, the RTWG has agreed on allocation percentages in the Allocation Agreement, with Cliffs being committed to fund 32.5 percent of any remedy. We have an environmental liability of $10.0 million and $9.2 million in the Statements of Consolidated Financial Position as of December 31, 2011 and 2010, respectively, related to this issue.
Mine Closure
Our mine closure obligation of $220.2 million and $185.4 million at December 31, 2011 and 2010, respectively, includes our four consolidated U.S. operating iron ore mines, our two Eastern Canadian operating iron ore mines, our six operating North American coal mines, our Asia Pacific operating iron ore mines, the coal mine at Sonoma and a closed operation formerly known as LTVSMC.
Management periodically performs an assessment of the obligation to determine the adequacy of the liability in relation to the closure activities still required at the LTVSMC site. The LTVSMC closure liability was $16.5 million and $17.1 million at December 31, 2011 and 2010, respectively.
The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. We performed a detailed assessment of our asset retirement obligations related to our active mining locations most recently in 2011, expect for Asia Pacific Iron Ore, in accordance with our accounting policy, which requires us to perform an in-depth evaluation of the liability every three years in addition to routine annual assessments. The assessment for Asia Pacific Iron Ore was delayed until 2012 due to new legislation in Australia. For the assessments performed in 2011, we determined the obligations based on detailed estimates adjusted for factors that a market participant would consider (i.e., inflation, overhead and profit), escalated at an assumed 3.5 percent rate of inflation to the estimated closure dates, and then discounted using the current credit-adjusted risk-free interest rate based on the corresponding life of mine. The estimate also incorporates incremental increases in the closure cost estimates and changes in estimates of mine lives. The closure date for each location was determined based on the exhaustion date of the remaining iron ore reserves. 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 years ended December 31, 2011 and 2010:
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Asset retirement obligation at beginning of period |
$ | 168.3 | $ | 103.9 | ||||
Accretion expense |
16.1 | 13.1 | ||||||
Exchange rate changes |
0.1 | 2.5 | ||||||
Revision in estimated cash flows |
5.9 | 1.0 | ||||||
Payments |
(0.7 | ) | (8.4 | ) | ||||
Acquired through business combinations |
14.0 | 56.2 | ||||||
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Asset retirement obligation at end of period |
$ | 203.7 | $ | 168.3 | ||||
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NOTE 10 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total compensation and benefits program. This includes employees of CLCC who became employees of the Company through the July 2010 acquisition. Upon the acquisition of the remaining 73.2 percent interest in Wabush in February 2010, we fully consolidated the related Canadian plans into our pension and OPEB obligations. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations. The defined benefit pension plans largely are noncontributory and benefits generally are based on employees' years of service and average earnings for a defined period prior to retirement or a minimum formula.
On October 6, 2008, the USW ratified four-year labor contracts, which replaced the labor agreements that expired on September 1, 2008. The agreements cover approximately 2,400 USW-represented employees at our Empire and Tilden mines in Michigan and our United Taconite and Hibbing mines in Minnesota, or 32 percent of our total workforce. The changes enhanced the minimum pension formula by increasing the benefit dollar multipliers and renewed the lump sum special payments for certain employees retiring in the near future. The changes also included renewal of payments to surviving spouses of certain retirees. These agreements are effective through August 31, 2012.
In addition, we currently provide various levels of retirement health care and OPEB to most full-time employees who meet certain length of service and age requirements (a portion of which are pursuant to collective bargaining agreements). Most plans require retiree contributions and have deductibles, co-pay requirements and benefit limits. Most bargaining unit plans require retiree contributions and co-pays for major medical and prescription drug coverage. There is an annual limit on our cost for medical coverage under the U.S. salaried plans. The annual limit applies to each covered participant and equals $7,000 for coverage prior to age 65 and $3,000 for coverage after age 65, with the retiree's participation adjusted based on the age at which the retiree's benefits commence. For participants at our Northshore operation, the annual limit ranges from $4,020 to $4,500 for coverage prior to age 65, and equals $2,000 for coverage after age 65. Covered participants pay an amount for coverage equal to the excess of (i) the average cost of coverage for all covered participants, over (ii) the participant's individual limit, but in no event will the participant's cost be less than 15 percent of the average cost of coverage for all covered participants. For Northshore participants, the minimum participant cost is a fixed dollar amount. We do not provide OPEB for most U.S. salaried employees hired after January 1, 1993. OPEB are provided through programs administered by insurance companies whose charges are based on benefits paid.
Our North American Coal segment is required under an agreement with the UMWA to pay amounts into the UMWA pension trusts based principally on hours worked by UMWA-represented employees. This agreement covers 810 UMWA-represented employees at our Pinnacle Complex in West Virginia and our Oak Grove mine in Alabama, or 11 percent of our total workforce. These multi-employer pension trusts provide benefits to eligible retirees through a defined benefit plan. The UMWA 1993 Benefit Plan is a defined contribution plan that was created as the result of negotiations for the NBCWA of 1993. The plan provides healthcare insurance to orphan UMWA retirees who are not eligible to participate in the UMWA Combined Benefit Fund or the 1992 Benefit Fund or whose last employer signed the 1993 or later NBCWA and who subsequently goes out of business. Contributions to the trust were at rates of $6.50, $6.42 and $5.27 per hour worked in 2011, 2010 and 2009, respectively. These amounted to $9.5 million, $10.3 million and $6.1 million in 2011, 2010 and 2009, respectively.
Pursuant to the four-year labor agreements reached with the USW for U.S. employees, effective January 1, 2009, negotiated plan changes removed the cap on our share of future bargaining unit retirees' healthcare premiums and provided a maximum on the amount retirees will contribute for health care benefits during the term of the respective agreement. The agreements also provide that we and our partners fund an estimated $90 million into bargaining unit pension plans and VEBAs during the term of the agreements.
In December 2003, The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was enacted. This act introduced a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that at least actuarially is equivalent to Medicare Part D. Our measures of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost as of December 31, 2004 and for periods thereafter reflect amounts associated with the subsidy. We elected to adopt the retroactive transition method for recognizing the OPEB cost reduction in 2004. The following table summarizes the annual costs related to the retirement plans for 2011, 2010 and 2009:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Defined benefit pension plans |
$ | 37.8 | $ | 45.6 | $ | 50.8 | ||||||
Defined contribution pension plans |
5.7 | 4.2 | 2.1 | |||||||||
Other postretirement benefits |
26.8 | 24.2 | 25.5 | |||||||||
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Total |
$ | 70.3 | $ | 74.0 | $ | 78.4 | ||||||
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The following tables and information provide additional disclosures for our consolidated plans.
Obligations and Funded Status
The following tables and information provide additional disclosures for the years ended December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
Change in benefit obligations: |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Benefit obligations — beginning of year |
$ | 1,022.3 | $ | 750.8 | $ | 440.2 | $ | 333.0 | ||||||||
Service cost (excluding expenses) |
23.6 | 18.5 | 11.1 | 7.5 | ||||||||||||
Interest cost |
51.4 | 52.9 | 22.3 | 22.0 | ||||||||||||
Plan amendments |
— | 3.7 | — | — | ||||||||||||
Actuarial loss |
117.3 | 57.5 | 36.5 | 43.6 | ||||||||||||
Benefits paid |
(67.3 | ) | (67.0 | ) | (25.5 | ) | (28.2 | ) | ||||||||
Participant contributions |
— | — | 4.6 | 6.2 | ||||||||||||
Federal subsidy on benefits paid |
— | — | 0.9 | 0.9 | ||||||||||||
Exchange rate gain |
(5.9 | ) | 10.2 | (1.7 | ) | 2.9 | ||||||||||
Acquired through business combinations |
— | 195.7 | — | 52.3 | ||||||||||||
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Benefit obligations — end of year |
$ | 1,141.4 | $ | 1,022.3 | $ | 488.4 | $ | 440.2 | ||||||||
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Change in plan assets: |
||||||||||||||||
Fair value of plan assets — beginning of year |
$ | 734.3 | $ | 483.4 | $ | 174.2 | $ | 136.7 | ||||||||
Actual return on plan assets |
10.8 | 87.1 | 1.9 | 20.1 | ||||||||||||
Participant contributions |
— | — | 1.6 | 1.6 | ||||||||||||
Employer contributions |
70.1 | 45.6 | 23.2 | 23.7 | ||||||||||||
Asset transfers |
— | — | — | — | ||||||||||||
Benefits paid |
(67.3 | ) | (67.0 | ) | (7.4 | ) | (7.9 | ) | ||||||||
Exchange rate gain |
(3.8 | ) | 8.9 | — | — | |||||||||||
Acquired through business combinations |
— | 176.3 | — | — | ||||||||||||
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Fair value of plan assets — end of year |
$ | 744.1 | $ | 734.3 | $ | 193.5 | $ | 174.2 | ||||||||
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Funded status at December 31: |
||||||||||||||||
Fair value of plan assets |
$ | 744.1 | $ | 734.3 | $ | 193.5 | $ | 174.2 | ||||||||
Benefit obligations |
(1,141.4 | ) | (1,022.3 | ) | (488.4 | ) | (440.2 | ) | ||||||||
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Funded status (plan assets less benefit obligations) |
$ | (397.3 | ) | $ | (288.0 | ) | $ | (294.9 | ) | $ | (266.0 | ) | ||||
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Amount recognized at December 31 |
$ | (397.3 | ) | $ | (288.0 | ) | $ | (294.9 | ) | $ | (266.0 | ) | ||||
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Amounts recognized in Statements of Financial Position: |
||||||||||||||||
Current liabilities |
$ | (2.6 | ) | $ | (3.1 | ) | $ | (23.8 | ) | $ | (22.9 | ) | ||||
Noncurrent liabilities |
(394.7 | ) | (284.9 | ) | (271.1 | ) | (243.1 | ) | ||||||||
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Net amount recognized |
$ | (397.3 | ) | $ | (288.0 | ) | $ | (294.9 | ) | $ | (266.0 | ) | ||||
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Amounts recognized in accumulated other comprehensive income: |
||||||||||||||||
Net actuarial loss |
$ | 409.1 | $ | 269.3 | $ | 182.9 | $ | 152.3 | ||||||||
Prior service cost |
18.8 | 24.2 | 8.1 | 11.8 | ||||||||||||
Transition asset |
— | — | (3.0 | ) | (5.7 | ) | ||||||||||
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Net amount recognized |
$ | 427.9 | $ | 293.5 | $ | 188.0 | $ | 158.4 | ||||||||
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The estimated amounts that will be amortized from accumulated other |
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Net actuarial loss |
$ | 29.5 | $ | 11.4 | ||||||||||||
Prior service cost |
3.9 | 3.0 | ||||||||||||||
Transition asset |
— | (3.0 | ) | |||||||||||||
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Net amount recognized |
$ | 33.4 | $ | 11.4 | ||||||||||||
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(In Millions) | ||||||||||||||||||||||||||||||||
2011 | ||||||||||||||||||||||||||||||||
Pension Plans | Other Benefits | |||||||||||||||||||||||||||||||
Salaried | Hourly | Mining | SERP | Total | Salaried | Hourly | Total | |||||||||||||||||||||||||
Fair value of plan assets |
$ | 289.1 | $ | 451.8 | $ | 3.2 | $— | $ | 744.1 | $ | — | $ | 193.5 | $ | 193.5 | |||||||||||||||||
Benefit obligation |
(419.3 | ) | (708.0 | ) | (5.3 | ) | (8.8 | ) | (1,141.4 | ) | (70.7 | ) | (417.7 | ) | (488.4 | ) | ||||||||||||||||
Funded status |
$ | (130.2 | ) | $ | (256.2 | ) | $ | (2.1 | ) | $ | (8.8 | ) | $ | (397.3 | ) | $ | (70.7 | ) | $ | (224.2 | ) | $ | (294.9 | ) | ||||||||
2010 | ||||||||||||||||||||||||||||||||
Pension Plans | Other Benefits | |||||||||||||||||||||||||||||||
Salaried | Hourly | Mining | SERP | Total | Salaried | Hourly | Total | |||||||||||||||||||||||||
Fair value of plan assets |
$ | 275.3 | $ | 456.7 | $ | 2.3 | $— | $ | 734.3 | $ | — | $ | 174.2 | $ | 174.2 | |||||||||||||||||
Benefit obligation |
(373.8 | ) | (635.3 | ) | (4.4 | ) | (8.8 | ) | (1,022.3 | ) | (63.7 | ) | (376.5 | ) | (440.2 | ) | ||||||||||||||||
Funded status |
$ | (98.5 | ) | $ | (178.6 | ) | $ | (2.1 | ) | $ | (8.8 | ) | $ | (288.0 | ) | $ | (63.7 | ) | $ | (202.3 | ) | $ | (266.0 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $1,114.7 million and $997.2 million at December 31, 2011 and 2010, respectively. The increase in the accumulated benefit obligation primarily is a result of a decrease in the discount rates and actual asset returns lower than the previously assumed rate.
Components of Net Periodic Benefit Cost
(In Millions) | ||||||||||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Service cost |
$ | 23.6 | $ | 18.5 | $ | 14.3 | $ | 11.1 | $ | 7.5 | $ | 5.4 | ||||||||||||
Interest cost |
51.4 | 52.9 | 42.6 | 22.3 | 22.0 | 18.9 | ||||||||||||||||||
Expected return on plan assets |
(61.2 | ) | (53.3 | ) | (37.1 | ) | (16.1 | ) | (12.9 | ) | (9.1 | ) | ||||||||||||
Amortization: |
||||||||||||||||||||||||
Net asset |
— | — | — | (3.0 | ) | (3.0 | ) | (3.0 | ) | |||||||||||||||
Prior service costs (credits) |
4.4 | 4.4 | 4.2 | 3.7 | 1.7 | 1.8 | ||||||||||||||||||
Net actuarial loss |
19.6 | 23.1 | 26.8 | 8.8 | 8.9 | 11.5 | ||||||||||||||||||
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Net periodic benefit cost |
$ | 37.8 | $ | 45.6 | $ | 50.8 | $ | 26.8 | $ | 24.2 | $ | 25.5 | ||||||||||||
Acquired through business combinations |
— | 17.7 | — | — | 2.4 | — | ||||||||||||||||||
Current year actuarial (gain)/loss |
165.3 | (3.1 | ) | 12.1 | 46.8 | 34.6 | 2.2 | |||||||||||||||||
Amortization of net loss |
(19.6 | ) | (23.1 | ) | (26.8 | ) | (8.8 | ) | (8.9 | ) | (11.5 | ) | ||||||||||||
Current year prior service cost |
— | 3.7 | 3.0 | — | — | — | ||||||||||||||||||
Amortization of prior service (cost) credit |
(4.4 | ) | (4.4 | ) | (4.2 | ) | (3.7 | ) | (1.7 | ) | (1.8 | ) | ||||||||||||
Amortization of transition asset |
— | — | — | 3.0 | 3.0 | 3.0 | ||||||||||||||||||
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Total recognized in other comprehensive income |
$ | 141.3 | $ | (9.2 | ) | $ | (15.9 | ) | $ | 37.3 | $ | 29.4 | $ | (8.1 | ) | |||||||||
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Total recognized in net periodic cost and other comprehensive income |
$ | 179.1 | $ | 36.4 | $ | 34.9 | $ | 64.1 | $ | 53.6 | $ | 17.4 | ||||||||||||
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Additional Information
(In Millions) | ||||||||||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Effect of change in mine ownership & noncontrolling interest |
$ | 53.3 | $ | 49.9 | $ | 50.9 | $ | 12.5 | $ | 10.7 | $ | 10.1 | ||||||||||||
Actual return on plan assets |
10.8 | 87.1 | 63.0 | 1.9 | 20.1 | 27.8 |
Assumptions
For our U.S. plans, we used a discount rate as of December 31, 2011 of 4.28 percent, compared with a discount rate of 5.11 percent as of December 31, 2010. The U.S. discount rates are determined by matching the projected cash flows used to determine the PBO and APBO to a projected yield curve of over 425 Aa graded bonds in the 10th to 90th percentiles. These bonds are either noncallable or callable with make-whole provisions. The duration matching produced rates ranging from 4.12 percent to 4.43 percent for our plans. Based upon these results, we selected a December 31, 2011 discount rate of 4.28 percent for our plans.
For our Canadian plans, we used a discount rate as of December 31, 2011 of 4.00 percent for the pension plans and 4.25 percent for the other postretirement benefit plans. Similar to the U.S. plans, the Canadian discount rates are determined by matching the projected cash flows used to determine the PBO and APBO to a projected yield curve of over 225 corporate bonds in the 10th to 90th percentiles. The corporate bonds are either Aa graded, or (for maturities of 10 or more years) A or Aaa graded with an appropriate credit spread adjustment. These bonds are either noncallable or callable with make whole provisions.
Weighted-average assumptions used to determine benefit obligations at December 31 were:
Pension Benefits | Other Benefits | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. plan discount rate |
4.28 | % | 5.11 | % | 4.28 | % | 5.11 | % | ||||||||
Canadian plan discount rate |
4.00 | 5.00 | 4.25 | 5.00 | ||||||||||||
Rate of compensation increase |
4.00 | 4.00 | 4.00 | 4.00 | ||||||||||||
U.S. expected return on plan assets |
8.25 | 8.50 | 8.25 | 8.50 | ||||||||||||
Canadian expected return on plan assets |
7.25 | 7.50 | 7.25 | 7.50 |
Weighted-average assumptions used to determine net benefit cost for the years 2011, 2010 and 2009 were:
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
U.S. plan discount rate |
5.11 | % | 5.66 | % | 6.00 | % | 5.11 | % | 5.66 | % | 6.00 | % | ||||||||||||
Canadian plan discount rate |
5.00 | 5.75/5.50 | (2) | (1 | ) | 5.00 | 6.00/5.75 | (3) | (1 | ) | ||||||||||||||
U.S. expected return on plan assets |
8.50 | 8.50 | 8.50 | 8.50 | 8.50 | 8.50 | ||||||||||||||||||
Canadian expected return on plan assets |
7.50 | 7.50 | (1 | ) | 7.50 | 7.50 | (1 | ) | ||||||||||||||||
Rate of compensation increase |
4.00 | 4.00 | 4.00 | 4.00 | 4.00 | 4.00 |
(1) | The Canadian plans were not consolidated into our pension and OPEB obligations prior to the acquisition of the remaining 73.2 percent interest in Wabush in February 2010. |
(2) | 5.75% from January 1, 2010 through January 31, 2010, and 5.50% from February 1, 2010 through December 31, 2010. |
(3) | 6.00% from January 1, 2010 through January 31, 2010, and 5.75% from February 1, 2010 through December 31, 2010. |
Assumed health care cost trend rates at December 31 were:
2011 | 2010 | |||||||
U.S. plan health care cost trend rate assumed for next year |
7.50 | % | 8.00 | % | ||||
Canadian plan health care cost trend rate assumed for next year |
8.00 | 8.50 | ||||||
Ultimate health care cost trend rate |
5.00 | 5.00 | ||||||
U.S. plan year that the ultimate rate is reached |
2017 | 2017 | ||||||
Canadian plan year that the ultimate rate is reached |
2018 | 2018 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A change of one percentage point in assumed health care cost trend rates would have the following effects:
(In Millions) | ||||||||
Increase | Decrease | |||||||
Effect on total of service and interest cost |
$ | 5.7 | $ | (4.4 | ) | |||
Effect on postretirement benefit obligation |
60.0 | (48.3 | ) |
Plan Assets
Our financial objectives with respect to our pension and VEBA plan assets are to fully fund the actuarial accrued liability for each of the plans, to maximize investment returns within reasonable and prudent levels of risk, and to maintain sufficient liquidity to meet benefit obligations on a timely basis.
Our investment objective is to outperform the expected Return on Asset ("ROA") assumption used in the plans' actuarial reports over a full market cycle, which is considered a period during which the U.S. economy experiences the effects of both an upturn and a downturn in the level of economic activity. In general, these periods tend to last between three and five years. The expected ROA takes into account historical returns and estimated future long-term returns based on capital market assumptions applied to the asset allocation strategy.
The asset allocation strategy is determined through a detailed analysis of assets and liabilities by plan, which defines the overall risk that is acceptable with regard to the expected level and variability of portfolio returns, surplus (assets compared to liabilities), contributions and pension expense.
The asset allocation review process involves simulating the effect of financial market performance for various asset allocation scenarios and factoring in the current funded status and likely future funded status levels by taking into account expected growth or decline in the contributions over time. The modeling is then adjusted by simulating unexpected changes in inflation and interest rates. The process also includes quantifying the effect of investment performance and simulated changes to future levels of contributions, determining the appropriate asset mix with the highest likelihood of meeting financial objectives and regularly reviewing our asset allocation strategy.
The asset allocation strategy varies by plan. The following table reflects the actual asset allocations for pension and VEBA plan assets as of December 31, 2011 and 2010, as well as the 2012 weighted average target asset allocations as of December 31, 2011. Equity investments include securities in large-cap, mid-cap and small-cap companies located in the U.S. and worldwide. Fixed income investments primarily include corporate bonds and government debt securities. Alternative investments include hedge funds, private equity, structured credit and real estate.
Pension Assets | VEBA Assets | |||||||||||||||||||||||
Asset Category |
2012 Target Allocation |
Percentage of Plan Assets at December 31, |
2012 Target Allocation |
Percentage of Plan Assets at December 31, |
||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
Equity securities |
43.1 | % | 41.7 | % | 42.0 | % | 41.8 | % | 42.0 | % | 44.4 | % | ||||||||||||
Fixed income |
30.2 | 31.1 | 30.6 | 32.1 | 33.5 | 37.4 | ||||||||||||||||||
Hedge funds |
13.8 | 13.5 | 14.4 | 14.9 | 14.6 | 13.8 | ||||||||||||||||||
Private equity |
5.3 | 5.2 | 5.0 | 6.2 | 4.5 | 4.3 | ||||||||||||||||||
Structured credit |
3.8 | 6.0 | 5.4 | — | — | — | ||||||||||||||||||
Real estate |
3.8 | 2.2 | 2.1 | 5.0 | 5.3 | — | ||||||||||||||||||
Cash |
— | 0.3 | 0.5 | — | 0.1 | 0.1 | ||||||||||||||||||
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Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
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Pension
The fair values of our pension plan assets at December 31, 2011 and 2010 by asset category are as follows:
(In Millions) | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 191.1 | $ | — | $ | — | $ | 191.1 | ||||||||
U.S. small/mid-cap |
29.2 | — | — | 29.2 | ||||||||||||
International |
90.0 | — | — | 90.0 | ||||||||||||
Fixed income |
231.1 | — | — | 231.1 | ||||||||||||
Hedge funds |
— | — | 100.7 | 100.7 | ||||||||||||
Private equity |
8.6 | — | 30.1 | 38.7 | ||||||||||||
Structured credit |
— | — | 44.9 | 44.9 | ||||||||||||
Real estate |
— | — | 16.5 | 16.5 | ||||||||||||
Cash |
1.9 | — | — | 1.9 | ||||||||||||
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Total |
$ | 551.9 | $ | — | $ | 192.2 | $ | 744.1 | ||||||||
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(In Millions) | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 122.4 | $ | — | $ | — | $ | 122.4 | ||||||||
U.S. small/mid-cap |
21.7 | — | — | 21.7 | ||||||||||||
International |
164.5 | — | — | 164.5 | ||||||||||||
Fixed income |
224.7 | — | — | 224.7 | ||||||||||||
Hedge funds |
— | — | 105.8 | 105.8 | ||||||||||||
Private equity |
11.8 | — | 25.0 | 36.8 | ||||||||||||
Structured credit |
— | — | 39.7 | 39.7 | ||||||||||||
Real estate |
— | — | 15.5 | 15.5 | ||||||||||||
Cash |
3.2 | — | — | 3.2 | ||||||||||||
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Total |
$ | 548.3 | $ | — | $ | 186.0 | $ | 734.3 | ||||||||
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Following is a description of the inputs and valuation methodologies used to measure the fair value of our plan assets.
Equity Securities
Equity securities classified as Level 1 investments include U.S. large, small and mid-cap investments and international equity. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets.
Fixed Income
Fixed income securities classified as Level 1 investments include bonds and government debt securities. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets.
Hedge Funds
Hedge funds are alternative investments comprised of direct or indirect investment in offshore hedge funds of funds with an investment objective to achieve an attractive risk-adjusted return with moderate volatility and moderate directional market exposure over a full market cycle. The valuation techniques used to measure fair value attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. Considerable judgment is required to interpret the factors used to develop estimates of fair value. Valuations of the underlying investment funds are obtained and reviewed. The securities that are valued by the funds are interests in the investment funds and not the underlying holdings of such investment funds. Thus, the inputs used to value the investments in each of the underlying funds may differ from the inputs used to value the underlying holdings of such funds.
In determining the fair value of a security, the fund managers may consider any information that is deemed relevant, which may include one or more of the following factors regarding the portfolio security, if appropriate: type of security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or compatible companies and other relevant matters; changes in interest rates; observations from financial institutions; domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing portfolio securities.
Hedge fund investments in the SEI Opportunity Collective Fund are valued monthly and recorded on a one-month lag; investments in the SEI Special Situations Fund are valued quarterly. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Share repurchases for the SEI Opportunity Collective Fund are available quarterly with notice of 65 business days. For the SEI Special Situations Fund, redemption requests are considered semi-annually subject to notice of 95 days; however, share repurchases are not permitted for a two-year lock-up period following investment, which will expire in April 2012 for the plans' initial investments.
Private Equity Funds
Private equity funds are alternative investments that represent direct or indirect investments in partnerships, venture funds or a diversified pool of private investment vehicles (fund of funds).
Investment commitments are made in private equity funds of funds based on an asset allocation strategy, and capital calls are made over the life of the funds to fund the commitments. Until commitments are funded, the committed amount is reserved and invested in a selection of public equity mutual funds, including U.S. large-, small- and mid-cap investments and international equity, designed to approximate overall equity market returns. As of December 31, 2011, remaining commitments total $13.0 million, of which $10.5 million is reserved for both our pension and other benefits. Refer to the valuation methodologies for equity securities above for further information.
The valuation of investments in private equity funds of funds initially is performed by the underlying fund managers. In determining the fair value, the fund managers may consider any information that is deemed relevant, which may include: type of security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or compatible companies and other relevant matters; changes in interest rates; observations from financial institutions; domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing portfolio securities.
The valuations are obtained from the underlying fund managers, and the valuation methodology and process is reviewed for consistent application and adherence to policies. Considerable judgment is required to interpret the factors used to develop estimates of fair value.
Private equity investments are valued quarterly and recorded on a one-quarter lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Capital distributions for the funds do not occur on a regular frequency. Liquidation of these investments would require sale of the partnership interest.
Structured Credit
Structured credit investments are alternative investments comprised of collateralized debt obligations and other structured credit investments that are priced based on valuations provided by independent, third-party pricing agents, if available. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value structured credit investments at an evaluated bid price by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value of such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available are valued at the last quoted sale price on the primary exchange or market on which they are traded. Debt obligations with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
Structured credit investments are valued monthly and recorded on a one-month lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Redemption requests are considered quarterly subject to notice of 90 days.
Real Estate
The real estate portfolio for the pension plans is an alternative investment comprised of three funds with strategic categories of real estate investments. All real estate holdings are appraised externally at least annually, and appraisals are conducted by reputable, independent appraisal firms that are members of the Appraisal Institute. All external appraisals are performed in accordance with the Uniform Standards of Professional Appraisal Practices. The property valuations and assumptions of each property are reviewed quarterly by the investment advisor and values are adjusted if there has been a significant change in circumstances relating to the property since the last external appraisal. The valuation methodology utilized in determining the fair value is consistent with the best practices prevailing within the real estate appraisal and real estate investment management industries, including the Real Estate Information Standards, and standards promulgated by the National Council of Real Estate Investment Fiduciaries, the National Association of Real Estate Investment Fiduciaries, and the National Association of Real Estate Managers. In addition, the investment advisor may cause additional appraisals to be performed. Two of the funds' fair values are updated monthly, and there is no lag in reported values. Redemption requests for these two funds are considered on a quarterly basis, subject to notice of 45 days.
Effective October 1, 2009, one of the real estate funds began an orderly wind-down over a three to four year period. The decision to wind down the fund primarily was driven by real estate market factors that adversely affected the availability of new investor capital. Third-party appraisals of this fund's assets were eliminated; however, internal valuation updates for all assets and liabilities of the fund are prepared quarterly. The fund's asset values are recorded on a one-quarter lag, and current market information is reviewed for any material changes in values at the reporting date. Distributions from sales of properties will be made on pro-rata basis. Repurchase requests will not be honored during the wind-down period.
During 2011, a new real estate fund of funds investment was added for the Empire, Tilden, Hibbing and United Taconite VEBA plans as a result of the asset allocation review process. This fund invests in pooled investment vehicles that in turn invest in commercial real estate properties. Valuations are performed quarterly and financial statements are prepared on a semi-annual basis, with annual audited statements. Asset values for this fund are reported with a one-quarter lag and current market information is reviewed for any material changes in values at the reporting date. In most cases, values are based on valuations reported by underlying fund managers or other independent third-party sources, but the fund has discretion to use other valuation methods, subject to compliance with ERISA. Valuations are typically estimates only and subject to upward or downward revision based on each underlying fund's annual audit. Withdrawals are permitted on the last business day of each quarter subject to a 65-day prior written notice.
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the years ended December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||||||
Year Ended December 31, 2011 | ||||||||||||||||||||
Hedge Funds | Private Equity Funds |
Structured Credit Fund |
Real Estate |
Total | ||||||||||||||||
Beginning balance — January 1, 2011 |
$ | 105.8 | $ | 25.0 | $ | 39.7 | $ | 15.5 | $ | 186.0 | ||||||||||
Actual return on plan assets: |
||||||||||||||||||||
Relating to assets still held at the reporting date |
(2.4 | ) | 2.6 | 5.2 | 1.6 | 7.0 | ||||||||||||||
Relating to assets sold during the period |
0.5 | 3.0 | — | 0.5 | 4.0 | |||||||||||||||
Purchases |
35.8 | 4.4 | — | — | 40.2 | |||||||||||||||
Sales |
(39.0 | ) | (4.9 | ) | — | (1.1 | ) | (45.0 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance — December 31, 2011 |
$ | 100.7 | $ | 30.1 | $ | 44.9 | $ | 16.5 | $ | 192.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In Millions) | ||||||||||||||||||||
Year Ended December 31, 2010 | ||||||||||||||||||||
Hedge Funds | Private Equity Funds |
Structured Credit Fund |
Real Estate |
Total | ||||||||||||||||
Beginning balance — January 1, 2010 |
$ | 71.4 | $ | 18.2 | $ | 39.1 | $ | 14.4 | $ | 143.1 | ||||||||||
Acquired through business combination |
17.0 | — | — | — | 17.0 | |||||||||||||||
Actual return on plan assets: |
||||||||||||||||||||
Relating to assets still held at the reporting date |
2.4 | 3.4 | 0.5 | 1.5 | 7.8 | |||||||||||||||
Relating to assets sold during the period |
— | 0.1 | — | — | 0.1 | |||||||||||||||
Purchases, sales and settlements |
15.0 | 3.3 | 0.1 | (0.4 | ) | 18.0 | ||||||||||||||
Transfers in (out) of Level 3 |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance — December 31, 2010 |
$ | 105.8 | $ | 25.0 | $ | 39.7 | $ | 15.5 | $ | 186.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The expected return on plan assets takes into account historical returns and the weighted average of estimated future long-term returns based on capital market assumptions for each asset category. The expected return is net of investment expenses paid by the plans.
VEBA
Assets for other benefits include VEBA trusts pursuant to bargaining agreements that are available to fund retired employees' life insurance obligations and medical benefits. The fair values of our other benefit plan assets at December 31, 2011 and 2010 by asset category are as follows:
(In Millions) | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 46.5 | $ | — | $ | — | $ | 46.5 | ||||||||
U.S. small/mid-cap |
7.9 | — | — | 7.9 | ||||||||||||
International |
26.8 | — | — | 26.8 | ||||||||||||
Fixed income |
64.9 | — | — | 64.9 | ||||||||||||
Hedge funds |
— | — | 28.3 | 28.3 | ||||||||||||
Private equity |
1.9 | — | 6.8 | 8.7 | ||||||||||||
Real estate |
— | — | 10.2 | 10.2 | ||||||||||||
Cash |
0.2 | — | — | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 148.2 | $ | — | $ | 45.3 | $ | 193.5 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
(In Millions) | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 38.5 | $ | — | $ | — | $ | 38.5 | ||||||||
U.S. small/mid-cap |
11.7 | — | — | 11.7 | ||||||||||||
International |
27.2 | — | — | 27.2 | ||||||||||||
Fixed income |
65.2 | — | — | 65.2 | ||||||||||||
Hedge funds |
— | — | 24.0 | 24.0 | ||||||||||||
Private equity |
2.5 | — | 4.9 | 7.4 | ||||||||||||
Cash |
0.2 | — | — | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 145.3 | $ | — | $ | 28.9 | $ | 174.2 | ||||||||
|
|
|
|
|
|
|
|
Refer to the pension asset discussion above for further information regarding the inputs and valuation methodologies used to measure the fair value of each respective category of plan assets.
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the year ended December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||
Year Ended December 31, 2011 | ||||||||||||||||
Hedge Funds | Private Equity Funds |
Real Estate |
Total | |||||||||||||
Beginning balance — January 1 |
$ | 24.0 | $ | 4.9 | $ | — | $ | 28.9 | ||||||||
Actual return on plan assets: |
||||||||||||||||
Relating to assets still held at the reporting date |
(0.4 | ) | 1.4 | 0.4 | 1.4 | |||||||||||
Purchases |
7.7 | 0.9 | 9.8 | 18.4 | ||||||||||||
Sales |
(3.0 | ) | (0.4 | ) | — | (3.4 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance — December 31 |
$ | 28.3 | $ | 6.8 | $ | 10.2 | $ | 45.3 | ||||||||
|
|
|
|
|
|
|
|
(In Millions) | ||||||||||||
Year Ended December 31, 2010 | ||||||||||||
Hedge Funds | Private Equity Funds |
Total | ||||||||||
Beginning balance — January 1 |
$ | 14.6 | $ | 3.1 | $ | 17.7 | ||||||
Actual return on plan assets: |
||||||||||||
Relating to assets still held at the reporting date |
0.1 | 1.0 | 1.1 | |||||||||
Purchases, sales and settlements |
9.3 | 0.8 | 10.1 | |||||||||
|
|
|
|
|
|
|||||||
Ending balance — December 31 |
$ | 24.0 | $ | 4.9 | $ | 28.9 | ||||||
|
|
|
|
|
|
The expected return on plan assets takes into account historical returns and the weighted average of estimated future long-term returns based on capital market assumptions for each asset category. The expected return is net of investment expenses paid by the plans.
Contributions
Annual contributions to the pension plans are made within income tax deductibility restrictions in accordance with statutory regulations. In the event of plan termination, the plan sponsors could be required to fund additional shutdown and early retirement obligations that are not included in the pension obligations. The Company currently has no intention to shutdown, terminate or withdraw from any of its employee benefit plans.
(In Millions) | ||||||||||||||||
Pension Benefits |
Other Benefits | |||||||||||||||
Company Contributions |
VEBA | Direct Payments |
Total | |||||||||||||
2010 |
45.6 | 17.4 | 21.1 | 38.5 | ||||||||||||
2011 |
70.1 | 17.4 | 20.0 | 37.4 | ||||||||||||
2012 (Expected)* |
66.3 | 17.4 | 23.8 | 41.2 |
* | Pursuant to the bargaining agreement, benefits can be paid from VEBA trusts that are at least 70 percent funded (no VEBA trusts are 70 percent funded at December 31, 2011). |
VEBA plans are not subject to minimum regulatory funding requirements. Amounts contributed are pursuant to bargaining agreements.
Contributions by participants to the other benefit plans were $4.6 million and $6.2 million for years ended December 31, 2011 and 2010, respectively.
Estimated Cost for 2012
For 2012, we estimate net periodic benefit cost as follows:
(In Millions) | ||||
Defined benefit pension plans |
$ | 54.5 | ||
Other postretirement benefits |
29.4 | |||
|
|
|||
Total |
$ | 83.9 | ||
|
|
Estimated Future Benefit Payments
(In Millions) | ||||||||||||||||
Pension Benefits |
Other Benefits | |||||||||||||||
Gross Company Benefits |
Less Medicare Subsidy |
Net Company Payments |
||||||||||||||
2012 |
$ | 73.3 | $ | 24.8 | $ | 1.0 | $ | 23.8 | ||||||||
2013 |
76.9 | 25.8 | 1.1 | 24.7 | ||||||||||||
2014 |
75.0 | 27.3 | 1.2 | 26.1 | ||||||||||||
2015 |
76.8 | 28.6 | 1.3 | 27.3 | ||||||||||||
2016 |
77.1 | 29.5 | 1.4 | 28.1 | ||||||||||||
2017-2021 |
396.4 | 152.7 | 9.6 | 143.1 |
Other Potential Benefit Obligations
While the foregoing reflects our obligation, our total exposure in the event of non-performance is potentially greater. Following is a summary comparison of the total obligation:
(In Millions) | ||||||||
December 31, 2011 | ||||||||
Defined Benefit Pensions |
Other Benefits |
|||||||
Fair value of plan assets |
$ | 744.1 | $ | 193.5 | ||||
Benefit obligation |
1,141.4 | 488.4 | ||||||
|
|
|
|
|||||
Underfunded status of plan |
$ | (397.3 | ) | $ | (294.9 | ) | ||
|
|
|
|
|||||
Additional shutdown and early retirement benefits |
$ | 40.0 | $ | 19.3 | ||||
|
|
|
|
|
NOTE 11 — STOCK COMPENSATION PLANS
At December 31, 2011, we have two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $15.9 million, $15.5 million and $12.2 million in 2011, 2010 and 2009, respectively, which primarily was recorded in Selling, general and administrative expenses in the Statements of Consolidated Operations. The total income tax benefit recognized in the Statements of Consolidated Operations for share-based compensation arrangements was $5.6 million, $5.4 million and $4.3 million for 2011, 2010 and 2009, respectively. Cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense are classified as financing cash flows. Accordingly, we classified $4.5 million, $3.3 million and $3.5 million in excess tax benefits as cash from financing activities rather than cash from operating activities on our Statements of Consolidated Cash Flows for the years ended December 31, 2011, 2010 and 2009, respectively.
Employees' Plans
On May 11, 2010, our shareholders approved and adopted an amendment and restatement of the ICE Plan to increase the authorized number of shares available for issuance under the plan and to provide an annual limitation on the number of shares available to grant to any one participant in any fiscal year of 500,000 common shares. As of December 31, 2011, our ICE Plan authorized up to 11,000,000 of our common shares to be issued as stock options, SARs, restricted shares, restricted share units, retention units, deferred shares and performance shares or performance units. Any of the foregoing awards may be made subject to attainment of performance goals over a performance period of one or more years. Each stock option and SAR will reduce the common shares available under the ICE Plan by one common share. Each other award will reduce the common shares available under the ICE Plan by two common shares. The performance shares and performance share units are intended to meet the requirements of section 162(m) of the Internal Revenue Code for deduction.
For the outstanding plan year agreements, each performance share or performance share unit, if earned, entitles the holder to receive a number of common shares, or cash based on Cliffs' common share price on the date of vesting, within the range between a threshold and maximum number of 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 Committee of the Board of Directors. The restricted share units and retention units are subject to continued employment, will vest at the end of the performance period for the performance shares and performance share units, or at a different vesting period specified by the Compensation Committee, and are payable in shares or cash for the 2009, 2010 and 2011 plan years at a time determined by the Compensation Committee at its discretion.
The performance share grants vest over a period of three years and are intended to be paid out in common shares. Performance is measured on the basis of two factors: 1) relative TSR for the period, as measured against a predetermined peer group of mining and metals companies, and 2) three-year cumulative free cash flow. The final payout for the 2011 to 2013 performance period varies from zero to 200 percent of the original grant, compared to the 2009 and 2010 plan year agreements where the maximum payout is 150 percent of the performance shares awarded.
Upon the occurrence of a change in control, all performance shares, restricted share units, restricted stock and retention units granted to a participant will vest and become nonforfeitable and will be paid out in cash.
Following is a summary of our Performance Share Award Agreements currently outstanding:
Performance Share Plan Year |
Performance Shares Outstanding |
Forfeitures (1) | Grant Date | Performance Period | ||||||||||||
2011 |
169,632 | 18,848 | March 8, 2011 | 1/1/2011-12/31/2013 | ||||||||||||
2011 |
2,090 | — | April 14, 2011 | 1/1/2011-12/31/2013 | ||||||||||||
2011 |
1,290 | — | May 2, 2011 | 1/1/2011-12/31/2013 | ||||||||||||
2010 |
209,853 | 23,317 | March 8, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
12,480 | (2) | — | March 8, 2010 | 1/1/2010-12/31/2012 | |||||||||||
2010 |
480 | — | April 6, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
590 | — | April 12, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
2,130 | — | April 26, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
12,080 | — | May 3, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
550 | — | June 14, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
670 | — | August 16, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2009 |
372,881 | 22,089 | March 9, 2009 | 1/1/2009-12/31/2011 | ||||||||||||
2009 |
3,825 | — | August 31, 2009 | 1/1/2009-12/31/2011 | ||||||||||||
2009 |
44,673 | (2) | — | December 17, 2009 | 1/1/2009-12/31/2011 |
(1) | The 2011 and 2010 awards are based on assumed forfeitures. The 2009 awards reflect actual forfeitures. |
(2) | Represents the target payout as of December 31, 2011 related to the 67,009 shares awarded on December 17, 2009 and the 18,720 shares awarded on March 8, 2010 based upon the Compensation Committee's ability to exercise negative discretion. For accounting purposes, a grant date has not yet been determined for these awards. |
Throughout 2011, the Committee approved grants under our shareholder-approved ICE Plan for the performance period of 2011 to 2013. A total of 307,940 shares were granted, consisting of performance shares, restricted share units, and restricted stock.
The performance shares awarded under the ICE Plan to the Company's Chief Executive Officer on December 17, 2009 and March 8, 2010 of 67,009 shares and 18,720 shares, respectively, met the aggregate value-added performance objective under the award terms as of December 31, 2010. The number of shares paid out under these particular awards at the end of each incentive period will be determined by the Compensation Committee based upon the achievement of certain other performance factors evaluated solely at the Compensation Committee's discretion and may be reduced from the 67,009 shares and 18,720 shares granted. Based on the Compensation Committee's ability to exercise negative discretion, the targeted payout for the awards was 44,673 shares and 12,480 shares, respectively, as of December 31, 2011. These other performance factors are in addition to the aggregate value-added performance objective. As a result of this uncertainty, a grant date has not yet been determined for this award for purposes of measuring and recognizing compensation cost.
Nonemployee Directors
The Directors' Plan authorizes us to issue up to 800,000 common shares to nonemployee Directors. Under the Share Ownership Guidelines in effect for 2011, or Guidelines, a Director is required by the end of five years from date of election or September 1, 2010, whichever is later, to hold common shares with a market value of at least $250,000. If, as of December 1 annually, the nonemployee Director does not meet the Guidelines, the nonemployee Director must take a portion of the annual retainer in common shares with a market value of $24,000 ("Required Retainer") until such time as the nonemployee Director reaches the ownership required by the Guidelines. Once the nonemployee Director meets the Guidelines, the nonemployee Director may elect to receive the Required Retainer in cash.
The Directors' Plan also provides for an Annual Equity Grant or Equity Grant. The Equity Grant is awarded at our annual meeting each year to all nonemployee Directors elected or re-elected by the shareholders. The value of the Equity Grant is payable in restricted shares with a three-year vesting period from the date of grant. The closing market price of our common shares on our annual meeting date is divided into the Equity Grant to determine the number of restricted shares awarded. Effective April 1, 2011, nonemployee Directors receive an annual retainer fee of $60,000 and effective May 17, 2011, an annual equity award of $80,000. In July 2009, the Directors' annual retainer fee was reduced by 10 percent in conjunction with the Company's compensation reductions across the organization. Such reductions were reinstated to their previous levels effective January 1, 2010. The Directors' Plan offers the nonemployee Director the opportunity to defer all or a portion of the Directors' annual retainer, chair retainers, meeting fees, and the Equity Grant into the Directors' Plan. A Director who is 69 or older at the Equity Grant date will receive common shares with no restrictions.
For the last three years, Equity Grant shares have been awarded to elected or re-elected Directors as follows:
Year of Grant |
Unrestricted Equity Grant Shares |
Restricted Equity Grant Shares |
Deferred Equity Grant Shares |
|||||||||
2009 |
7,788 | 15,118 | 2,596 | |||||||||
2010 |
3,963 | 7,926 | 1,321 | |||||||||
2011 |
1,850 | 6,475 | 1,850 |
Other Information
We adopted the fair value recognition provisions of ASC 718 effective January 1, 2006 using the modified prospective transition method. The following table summarizes the share-based compensation expense that we recorded for continuing operations in 2011, 2010 and 2009:
(In Millions, except per share amount) |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Cost of goods sold and operating expenses |
$ | 2.7 | $ | 2.8 | $ | 1.2 | ||||||
Selling, general and administrative expenses |
13.2 | 12.7 | 11.0 | |||||||||
Reduction of operating income from continuing operations before income taxes and equity income (loss) from ventures |
15.9 | 15.5 | 12.2 | |||||||||
Income tax benefit |
(5.6 | ) | (5.4 | ) | (4.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Reduction of net income attributable to Cliffs shareholders |
$ | 10.3 | $ | 10.1 | $ | 7.9 | ||||||
|
|
|
|
|
|
|||||||
Reduction of earnings per share attributable to Cliffs shareholders: |
||||||||||||
Basic |
$ | 0.07 | $ | 0.07 | $ | 0.06 | ||||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 0.07 | $ | 0.07 | $ | 0.06 | ||||||
|
|
|
|
|
|
Determination of Fair Value
The fair value of each 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 its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan year agreements. We estimated the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.
The following assumptions were utilized to estimate the fair value for the 2011 performance share grants:
Period (1) |
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) |
|||||||||||||||||
First Quarter |
$96.70 | 2.81 | 94.4 | % | 1.17 | % | 0.58 | % | $77.90 | 80.60 | % | |||||||||||||
Second Quarter |
$93.85 | 2.81 | 94.4 | % | 1.17 | % | 0.58 | % | $75.64 | 80.60 | % |
(1) | Performance shares were granted during the first quarter of 2011 on March 8, 2011 and during the second quarter of 2011 on April 14, 2011 and May 2, 2011. |
The fair value of the restricted share units is determined based on the closing price of the Company's common shares on the grant date. The restricted share units granted under the ICE Plan vest over a period of three years.
Stock options, restricted stock, deferred stock allocation and performance share activity under our long-term equity plans and Directors' Plans are as follows:
2011 | 2010 | 2009 | ||||||||||||||||||||||
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
|||||||||||||||||||
Stock options: |
||||||||||||||||||||||||
Options outstanding at beginning of year |
— | — | — | — | 2,500 | $ | 5.42 | |||||||||||||||||
Granted during the year |
— | — | — | |||||||||||||||||||||
Exercised |
— | — | — | — | (2,500 | ) | 5.42 | |||||||||||||||||
Cancelled or expired |
— | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Options outstanding at end of year |
— | — | — | — | — | — | ||||||||||||||||||
Options exercisable at end of year |
— | — | — | — | — | — | ||||||||||||||||||
Restricted awards: |
||||||||||||||||||||||||
Outstanding and restricted at beginning of year |
371,712 | 290,702 | 315,684 | |||||||||||||||||||||
Granted during the year |
125,059 | 133,666 | 184,904 | |||||||||||||||||||||
Vested |
(61,330 | ) | (50,156 | ) | (201,486 | ) | ||||||||||||||||||
Cancelled |
(10,275 | ) | (2,500 | ) | (8,400 | ) | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding and restricted at end of year |
425,166 | 371,712 | 290,702 | |||||||||||||||||||||
Performance shares: |
||||||||||||||||||||||||
Outstanding at beginning of year |
843,238 | 823,393 | 594,115 | |||||||||||||||||||||
Granted during the year (1) |
263,816 | 376,524 | 555,046 | |||||||||||||||||||||
Issued (2) |
(215,870 | ) | (343,321 | ) | (312,336 | ) | ||||||||||||||||||
Forfeited/cancelled |
(13,749 | ) | (13,358 | ) | (13,432 | ) | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding at end of year |
877,435 | 843,238 | 823,393 | |||||||||||||||||||||
Vested or expected to vest as of December 31, 2011 |
833,224 | |||||||||||||||||||||||
Directors' retainer and voluntary shares: |
||||||||||||||||||||||||
Outstanding at beginning of year |
2,509 | 4,596 | 2,183 | |||||||||||||||||||||
Granted during the year |
1,815 | 2,075 | 4,602 | |||||||||||||||||||||
Vested |
(1,713 | ) | (4,162 | ) | (2,189 | ) | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding at end of year |
2,611 | 2,509 | 4,596 | |||||||||||||||||||||
Reserved for future grants or awards at end of year: |
||||||||||||||||||||||||
Employee plans |
6,760,871 | |||||||||||||||||||||||
Directors' plans |
115,189 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Total |
6,876,060 | |||||||||||||||||||||||
|
|
(1) | The shares granted during the year include 71,956 shares, 114,371 shares and 99,958 shares for each year presented, respectively, related to the 50 percent payout associated with the prior-year pool as actual payout exceeded target. |
(2) | For each year presented, the shares vested on December 31, 2010, December 31, 2009 and December 31, 2008, respectively, and were valued on February 14, 2011, February 19, 2010 and February 27, 2009, respectively. |
A summary of our outstanding share-based awards as of December 31, 2011 is shown below:
Shares | Weighted Average Grant Date Fair Value |
|||||||
Outstanding, beginning of year |
1,217,459 | $ | 26.03 | |||||
Granted |
390,690 | $ | 88.60 | |||||
Vested |
(278,913 | ) | $ | 42.73 | ||||
Forfeited/expired |
(24,024 | ) | $ | 61.61 | ||||
|
|
|||||||
Outstanding, end of year |
1,305,212 | $ | 43.19 | |||||
|
|
The total compensation cost related to outstanding awards not yet recognized is $26.0 million at December 31, 2011. The weighted average remaining period for the awards outstanding at December 31, 2011 is approximately 2.0 years.
|
NOTE 12 — INCOME TAXES
Income from Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures includes the following components:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
United States |
$ | 1,506.5 | $ | 602.1 | $ | 136.6 | ||||||
Foreign |
735.0 | 700.9 | 159.9 | |||||||||
|
|
|
|
|
|
|||||||
$ | 2,241.5 | $ | 1,303.0 | $ | 296.5 | |||||||
|
|
|
|
|
|
The components of the provision (benefit) for income taxes on continuing operations consist of the following:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Current provision (benefit): |
||||||||||||
United States federal |
$ | 246.8 | $ | 109.6 | $ | (44.5 | ) | |||||
United States state & local |
2.8 | 2.6 | 3.4 | |||||||||
Foreign |
237.1 | 166.1 | 2.8 | |||||||||
|
|
|
|
|
|
|||||||
486.7 | 278.3 | (38.3 | ) | |||||||||
Deferred provision (benefit): |
||||||||||||
United States federal |
23.8 | 61.1 | 13.2 | |||||||||
United States state & local |
4.7 | 5.2 | (6.1 | ) | ||||||||
Foreign |
(95.1 | ) | (51.1 | ) | 53.7 | |||||||
|
|
|
|
|
|
|||||||
(66.6 | ) | 15.2 | 60.8 | |||||||||
|
|
|
|
|
|
|||||||
Total provision on continuing operations |
$ | 420.1 | $ | 293.5 | $ | 22.5 | ||||||
|
|
|
|
|
|
Reconciliation of our income tax attributable to continuing operations computed at the U.S. federal statutory rate is as follows:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Tax at U.S. statutory rate of 35 percent |
$ | 784.5 | $ | 456.0 | $ | 103.8 | ||||||
Increase (decrease) due to: |
||||||||||||
Foreign exchange remeasurement |
(62.6 | ) | — | — | ||||||||
Non-taxable income related to noncontrolling interests |
(63.6 | ) | — | — | ||||||||
Impact of tax law change |
— | 16.1 | — | |||||||||
Percentage depletion in excess of cost depletion |
(153.4 | ) | (103.1 | ) | (66.2 | ) | ||||||
Impact of foreign operations |
(49.4 | ) | (89.1 | ) | (44.3 | ) | ||||||
Legal entity restructuring |
— | (87.4 | ) | — | ||||||||
Income not subject to tax |
(67.5 | ) | — | — | ||||||||
Non-taxable hedging income |
(32.4 | ) | — | — | ||||||||
State taxes, net |
7.5 | 3.1 | (2.1 | ) | ||||||||
Manufacturer's deduction |
(11.9 | ) | — | (0.1 | ) | |||||||
Valuation allowance |
49.5 | 83.3 | 39.0 | |||||||||
Tax uncertainties |
17.7 | — | — | |||||||||
Other items — net |
1.7 | 14.6 | (7.6 | ) | ||||||||
|
|
|
|
|
|
|||||||
Income tax expense |
$ | 420.1 | $ | 293.5 | $ | 22.5 | ||||||
|
|
|
|
|
|
The components of income taxes for other than continuing operations consisted of the following:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Other comprehensive (income) loss: |
||||||||||||
Minimum pension/OPEB liability |
$ | (60.2 | ) | $ | 14.0 | $ | (4.7 | ) | ||||
Mark-to-market adjustments |
(17.7 | ) | 1.7 | (12.3 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | (77.9 | ) | $ | 15.7 | $ | (17.0 | ) | |||||
Paid in capital — stock based compensation |
$ | (4.6 | ) | $ | (4.0 | ) | $ | 3.5 | ||||
Discontinued Operations |
$ | (9.2 | ) | $ | (1.5 | ) | $ | (1.7 | ) |
Significant components of our deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:
(In Millions) | ||||||||
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
Pensions |
$ | 154.8 | $ | 108.5 | ||||
Postretirement benefits other than pensions |
109.8 | 92.0 | ||||||
Alternative minimum tax credit carryforwards |
228.5 | 153.4 | ||||||
Capital loss carryforwards |
3.8 | 1.3 | ||||||
Development |
— | 0.9 | ||||||
Asset retirement obligations |
42.9 | 42.0 | ||||||
Operating loss carryforwards |
260.7 | 134.2 | ||||||
Product inventories |
30.1 | 21.0 | ||||||
Properties |
44.8 | 38.7 | ||||||
Lease liabilities |
38.8 | 36.9 | ||||||
Other liabilities |
149.3 | 85.4 | ||||||
|
|
|
|
|||||
Total deferred tax assets before valuation allowance |
1,063.5 | 714.3 | ||||||
Deferred tax asset valuation allowance |
223.9 | 172.7 | ||||||
|
|
|
|
|||||
Net deferred tax assets |
839.6 | 541.6 | ||||||
Deferred tax liabilities: |
||||||||
Properties |
1,345.0 | 222.6 | ||||||
Investment in ventures |
155.9 | 72.7 | ||||||
Intangible assets |
13.5 | 14.8 | ||||||
Income tax uncertainties |
56.7 | 37.5 | ||||||
Financial derivatives |
1.3 | 11.7 | ||||||
Deferred revenue |
— | 45.3 | ||||||
Other assets |
98.2 | 58.3 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
1,670.6 | 462.9 | ||||||
|
|
|
|
|||||
Net deferred tax (liabilities) assets |
$ | (831.0 | ) | $ | 78.7 | |||
|
|
|
|
The deferred tax amounts are classified in the Statements of Consolidated Financial Position as current or long-term in accordance with the asset or liability to which they relate. Following is a summary:
(In Millions) | ||||||||
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
United States |
||||||||
Current |
$ | 17.7 | $ | 2.1 | ||||
Long-term |
162.8 | 134.5 | ||||||
|
|
|
|
|||||
Total United States |
180.5 | 136.6 | ||||||
Foreign |
||||||||
Current |
4.2 | — | ||||||
Long-term |
46.7 | 5.8 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
231.4 | 142.4 | ||||||
Deferred tax liabilities: |
||||||||
Foreign |
||||||||
Long-term |
1,062.4 | 63.7 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
1,062.4 | 63.7 | ||||||
|
|
|
|
|||||
Net deferred tax (liabilities) assets |
$ | (831.0 | ) | $ | 78.7 | |||
|
|
|
|
The PPACA and the Reconciliation Act were signed into law in March 2010. As a result of these two acts, tax benefits available to employers that receive the Medicare Part D subsidy related to qualified postretirement drug benefit are reduced beginning in years ending after December 31, 2012. The income tax effect related to the acts for the year ended December 31, 2010 was a reduction of $16.1 million to deferred tax asset related to the postretirement prescription drug benefits computed after the elimination of the deduction for the Medicare Part D subsidy beginning in taxable years ending after December 31, 2012.
We completed a legal entity restructuring during 2010 that resulted in a change to deferred tax liabilities of $78.0 million on certain foreign investments to a deferred tax asset of $9.4 million for tax basis in excess of book basis on foreign investments as of December 31, 2010. A valuation allowance of $9.4 million was recorded against this asset due to the uncertainty of realization.
At December 31, 2011 and 2010, we had $228.5 million and $153.4 million, respectively, of deferred tax assets related to U.S. alternative minimum tax credits that can be carried forward indefinitely.
We had gross state and foreign net operating loss carry forwards of $147.1 million, and $780.5 million, respectively, at December 31, 2011. We acquired $211.0 million of foreign net operating loss carryforwards as a result of the acquisition of Consolidated Thompson stock in 2011. We had U.S. federal, state and foreign net operating loss carry forwards at December 31, 2010 of $87.6 million, $338.9 million and $234.4 million, respectively. State net operating losses will begin to expire in 2022, and the foreign net operating losses will begin to expire in 2026. We had foreign tax credit carryforwards of $5.8 million at December 31, 2011 and December 31, 2010. The foreign tax credit carryforwards will begin to expire in 2020.
We had a $51.2 million change in the valuation allowance of certain deferred tax assets where management believes that realization of the related deferred tax assets is not more likely than not. Of this amount, $41.1 million increase relates to ordinary losses of certain foreign and state operations for which future utilization is currently uncertain and $10.1 million increase relates to certain foreign assets where tax basis exceeds book basis.
At December 31, 2011 and 2010, cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings amounted to $1.7 billion and $1.0 billion, respectively. These earnings are indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practical to estimate the amount of income taxes that would have to be provided if we were to conclude that such earnings will be remitted in the foreseeable future.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Unrecognized tax benefits balance as of January 1 |
$ | 79.8 | $ | 75.2 | $ | 53.7 | ||||||
Increases for tax positions in prior years |
42.1 | 1.9 | 23.8 | |||||||||
Increases for tax positions in current year |
29.5 | — | 2.5 | |||||||||
Increase due to foreign exchange |
— | 0.7 | 4.7 | |||||||||
Settlements |
(3.5 | ) | — | (9.1 | ) | |||||||
Lapses in statutes of limitations |
(45.8 | ) | — | (0.4 | ) | |||||||
Other |
— | 2.0 | — | |||||||||
|
|
|
|
|
|
|||||||
Unrecognized tax benefits balance as of December 31 |
$ | 102.1 | $ | 79.8 | $ | 75.2 | ||||||
|
|
|
|
|
|
At December 31, 2011 and 2010, we had $102.1 million and $79.8 million, respectively, of unrecognized tax benefits recorded in Other liabilities in the Statements of Consolidated Financial Position. During the third quarter of 2011, we recognized a $39.0 million tax benefit for the reduction in the amount of unrecognized tax benefits to reflect the closure of the U.S. federal audit for the years 2007 and 2008. Additionally, we recognized a tax benefit of $5.7 million for previously recorded uncertain tax positions to reflect the expiration of the statute of limitations in a foreign jurisdiction. If the $102.1 million were recognized, the full amount would impact the effective tax rate. We do not expect that the amount of unrecognized tax benefits will change significantly within the next twelve months. We recognized potential accrued interest and penalties of $4.1 million and $2.1 million related to unrecognized tax benefits in income tax expense in 2011 and 2010, respectively. At December 31, 2011 and 2010, we had $2.5 million and $11.6 million, respectively, of accrued interest and penalties related to the unrecognized tax benefits recorded in Other liabilities in the Statements of Consolidated Financial Position.
Tax years that remain subject to examination are years 2009 and forward for the U.S., 1993 and forward for Canada, and 2007 and forward for Australia.
|
NOTE 13 — CAPITAL STOCK
Share Repurchase Plan
On August 15, 2011, our Board of Directors approved a new share repurchase plan that authorized us to purchase up to four million of our outstanding common shares. The new share repurchase plan replaced the previously existing share repurchase plan and allowed for the purchase of common shares from time to time in open market purchases or privately negotiated transactions. During the second half of 2011, all of the common shares were repurchased at a cost of approximately $289.8 million in the aggregate, or an average price of approximately $72.44 per share, thus terminating the plan.
Public Offering
On June 13, 2011, we completed a public offering of our common shares. The total number of shares sold was 10.35 million, comprised of the 9.0 million share offering and the exercise of an underwriters' over-allotment option to purchase an additional 1.35 million shares. The offering resulted in an increase in the number of our common shares issued and outstanding as of December 31, 2011. We received net proceeds of approximately $854 million at a closing price of $85.63 per share.
Dividends
On May 11, 2010, our Board of Directors increased our quarterly common share dividend from $0.0875 to $0.14 per share. The increased cash dividend was paid on June 1, 2010, September 1, 2010, and December 1, 2010 to shareholders on record as of May 14, 2010, August 13, 2010, and November 19, 2010, respectively. In addition, the increased cash dividend was paid on March 1, 2011 and June 1, 2011 to shareholders on record as of February 15, 2011 and April 29, 2011, respectively. On July 12, 2011, our Board of Directors increased the quarterly common share dividend by 100 percent to $0.28 per share. The increased cash dividend was paid on September 1, 2011 and December 1, 2011 to shareholders on record as of the close of business on August 15, 2011 and November 18, 2011, respectively.
Amendment to the Second Amended Articles of Incorporation
On May 25, 2011, our shareholders approved an amendment to our Second Amended Articles of Incorporation to increase the number of authorized Common Shares from 224,000,000 to 400,000,000, which resulted in an increase in the total number of authorized shares from 231,000,000 to 407,000,000. The total number of authorized shares includes 3,000,000 and 4,000,000 shares, respectively, of Class A and Class B preferred stock, none of which are issued and outstanding.
|
NOTE 14 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of Accumulated other comprehensive income (loss) within Cliffs shareholders' equity and related tax effects allocated to each are shown below as of December 31, 2011, 2010 and 2009:
(In Millions) | ||||||||||||
Pre-tax Amount |
Tax Benefit (Provision) |
After-tax Amount |
||||||||||
As of December 31, 2009: |
||||||||||||
Postretirement benefit liability |
$ | (451.9 | ) | $ | 132.8 | $ | (319.1 | ) | ||||
Foreign currency translation adjustments |
163.1 | — | 163.1 | |||||||||
Unrealized net gain on derivative financial instruments |
5.7 | (1.7 | ) | 4.0 | ||||||||
Unrealized loss on securities |
43.1 | (13.7 | ) | 29.4 | ||||||||
|
|
|
|
|
|
|||||||
$ | (240.0 | ) | $ | 117.4 | $ | (122.6 | ) | |||||
|
|
|
|
|
|
|||||||
As of December 31, 2010: |
||||||||||||
Postretirement benefit liability |
$ | (452.0 | ) | $ | 146.9 | $ | (305.1 | ) | ||||
Foreign currency translation adjustments |
329.9 | (15.2 | ) | 314.7 | ||||||||
Unrealized net gain on derivative financial instruments |
3.9 | (1.2 | ) | 2.7 | ||||||||
Unrealized gain on securities |
46.9 | (13.3 | ) | 33.6 | ||||||||
|
|
|
|
|
|
|||||||
$ | (71.3 | ) | $ | 117.2 | $ | 45.9 | ||||||
|
|
|
|
|
|
|||||||
As of December 31, 2011: |
||||||||||||
Postretirement benefit liability |
$ | (615.9 | ) | $ | 207.0 | $ | (408.9 | ) | ||||
Foreign currency translation adjustments |
312.5 | — | 312.5 | |||||||||
Unrealized net gain on derivative financial instruments |
1.7 | (0.5 | ) | 1.2 | ||||||||
Unrealized gain on securities |
2.5 | 0.1 | 2.6 | |||||||||
|
|
|
|
|
|
|||||||
$ | (299.2 | ) | $ | 206.6 | $ | (92.6 | ) | |||||
|
|
|
|
|
|
The following table reflects the changes in Accumulated other comprehensive income (loss) related to Cliffs shareholders' equity for 2011, 2010 and 2009:
Postretirement Benefit Liability |
Unrealized Net Gain (Loss) on Securities |
Foreign Currency Translation |
Interest Rate Swap |
Net Gain (Loss) on Derivative Financial Instruments |
Accumulated Other Comprehensive Income (Loss) |
|||||||||||||||||||
Balance December 31, 2008 |
$ | (343.3 | ) | $ | (0.1 | ) | $ | (68.6 | ) | $ | (1.7 | ) | $ | 19.1 | $ | (394.6 | ) | |||||||
Change during 2009 |
24.2 | 29.5 | 231.7 | 1.7 | (15.1 | ) | 272.0 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance December 31, 2009 |
(319.1 | ) | 29.4 | 163.1 | — | 4.0 | (122.6 | ) | ||||||||||||||||
Change during 2010 |
14.0 | 4.2 | 151.6 | — | (1.3 | ) | 168.5 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance December 31, 2010 |
(305.1 | ) | 33.6 | 314.7 | — | 2.7 | 45.9 | |||||||||||||||||
Change during 2011 |
(103.8 | ) | (31.0 | ) | (2.2 | ) | — | (1.5 | ) | (138.5 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance December 31, 2011 |
$ | (408.9 | ) | $ | 2.6 | $ | 312.5 | $ | — | $ | 1.2 | $ | (92.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16 — COMMITMENTS AND CONTINGENCIES
We have total contractual obligations and binding commitments of approximately $11.0 billion as of December 31, 2011 compared with $5.7 billion as of December 31, 2010, primarily related to purchase commitments, principal and interest payments on long-term debt, lease obligations, pension and OPEB funding minimums, and mine closure obligations. Such future commitments total approximately $1.4 billion in 2012, $1.0 billion in 2013, $0.6 billion in 2014, $0.9 billion in 2015, $0.6 billion in 2016 and $6.5 billion thereafter.
Purchase Commitments
In 2011, we incurred capital commitments related to the expansion of our Bloom Lake mine. The expansion project requires a capital investment of over $1.3 billion for the expansion of the mine and the mine's processing capabilities in order to ramp-up production capacity from 8.0 million to 16.0 million metric tons of iron ore concentrate per year. The capital investment also includes the common infrastructure necessary to support the mine's future production levels. As of December 31, 2011, approximately $445 million of the total capital investment required for the Bloom Lake expansion project has been committed, of which approximately $165 million had been expended during 2011. Of the remaining committed capital, expenditures of approximately $280 million are expected to be made during the 2012.
As a result of the significant tornado damage to the above-ground operations at our Oak Grove mine during the second quarter of 2011, we incurred capital commitments to repair the damage done to the preparation plant and the overland conveyor system. As of December 31, 2011, the project requires a capital investment of approximately $52 million, all of which has been committed. As of December 31, 2011, $46 million in capital expenditures had been expended related to this commitment. Of the committed capital, expenditures of $6 million are scheduled to be made during 2012.
In March 2011, we incurred capital commitments related to bringing Lower War Eagle, a high volatile metallurgical coal mine in West Virginia, into production. The project requires a capital investment of approximately $97 million, of which $55 million has been committed as of December 31, 2011. Capital expenditures related to this commitment were approximately $40 million as of December 31, 2011. Of the committed capital, expenditures of approximately $15 million are scheduled to be made during 2012.
In 2010, our Board of Directors approved a capital project at our Koolyanobbing Operation in Western Australia. The project is expected to increase the production capacity at the Koolyanobbing Operation to approximately 11 million metric tons annually. The improvements consist of enhancements to the existing rail infrastructure and upgrades to various other existing operational constraints. The expansion project requires a capital investment of approximately $275 million, of which approximately $259 million has been committed, that will be required to meet the timing of the proposed expansion. As of December 31, 2011, $202 million in capital expenditures had been expended related to this commitment. Of the committed capital, expenditures of $57 million are scheduled to be made during 2012.
In 2011, the rail service provider for one of the rail lines used by our Koolyanobbing operations entered into an agreement to upgrade the existing rail line. The upgrade is being performed to enhance safety and improve functionality of the rail. The improvements include the replacement of 62 miles of rail and associated parts. As a result, our portion of the related purchase commitment is approximately $33 million for replacements and improvements to the rail structure. As of December 31, 2011, our capital expenditures related to this purchase were approximately $25 million. Remaining expenditures of approximately $8 million are expected to be made in 2012.
We incurred capital commitments related to an expansion project at our Empire and Tilden mines in Michigan's Upper Peninsula in 2010. The expansion project requires a capital investment of approximately $264 million, of which $178 million has been committed as of December 31, 2011, and is expected to allow for production capacity at the Empire mine to produce at three million tons annually through 2014 and increase Tilden mine production capacity by an additional two million tons annually. As of December 31, 2011, capital expenditures related to this commitment were approximately $142 million. Of the committed capital, expenditures of approximately $36 million are scheduled to be made during 2012.
Contingencies
Litigation
We are currently a party to various claims and legal proceedings incidental to our operations. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material effect on our financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material impact on the financial position and results of operations of the period in which the ruling occurs, or future periods. However, we believe that any pending litigation will not result in a material liability in relation to our consolidated financial statements.
Environmental Matters
We had environmental liabilities of $15.5 million and $13.7 million at December 31, 2011 and 2010, respectively, including obligations for known environmental remediation exposures at active and closed mining operations and other sites. These amounts have been recognized based on the estimated cost of investigation and remediation at each site, and include site studies, design and implementation of remediation plans, legal and consulting fees, and post-remediation monitoring and related activities. If the cost can only be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements are readily known. Potential insurance recoveries have not been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed. The amount of our ultimate liability with respect to these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the extent to which other responsible parties contribute. Refer to NOTE 9 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. Refer to NOTE 12 — INCOME TAXES for further information.
|
NOTE 17 — CASH FLOW INFORMATION
A reconciliation of capital additions to cash paid for capital expenditures for the years ended December 31, 2011, 2010 and 2009 is as follows:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Capital additions |
$ | 960.9 | $ | 275.8 | $ | 168.2 | ||||||
Cash paid for capital expenditures (1) |
862.1 | 209.6 | 116.3 | |||||||||
|
|
|
|
|
|
|||||||
Difference |
$ | 98.8 | $ | 66.2 | $ | 51.9 | ||||||
|
|
|
|
|
|
|||||||
Non-cash accruals |
$ | 60.1 | $ | 8.9 | $ | 3.0 | ||||||
Capital leases |
38.7 | 57.3 | 48.9 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 98.8 | $ | 66.2 | $ | 51.9 | ||||||
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(1) | Cash paid for capital expenditures for 2011 and 2010 has been shown net of cash proceeds of $18.6 and $57.3 million, respectively, from the Pinnacle longwall sale- leaseback that was completed in October 2011 and December 2010. The adjustment was necessary in 2011 and 2010 due to the timing of the cash payments i related to the longwall. |
Cash payments for interest and income taxes in 2011, 2010 and 2009 are as follows:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Taxes paid on income |
$ | 275.3 | $ | 208.3 | $ | 64.8 | ||||||
Interest paid on debt obligations |
175.1 | 34.2 | 25.3 |
Non-cash investing activities as of December 31, 2010 include the issuance of 4.2 million of our common shares valued at $173.1 million as part of the purchase consideration for the acquisition of the remaining interest in Freewest. Non-cash items as of December 31, 2010 also include gains of $38.6 million primarily related to the remeasurement of our previous ownership interest in Freewest and Wabush held prior to each business acquisition. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for further information.
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NOTE 18 — RELATED PARTIES
We co-own three of our five U.S. iron ore mines and one of our two Eastern Canadian iron ore mines with various joint venture partners that are integrated steel producers or their subsidiaries. We are the manager of each of the mines we co-own and rely on our joint venture partners to make their required capital contributions and to pay for their share of the iron ore pellets that we produce. The joint venture partners are also our customers. The following is a summary of the mine ownership of these iron ore mines at December 31, 2011:
Mine |
Cliffs Natural Resources |
ArcelorMittal | U. S. Steel Canada |
WISCO | ||||||||||||
Empire |
79.0 | 21.0 | — | — | ||||||||||||
Tilden |
85.0 | — | 15.0 | — | ||||||||||||
Hibbing |
23.0 | 62.3 | 14.7 | — | ||||||||||||
Bloom Lake |
75.0 | — | — | 25.0 |
ArcelorMittal has a unilateral right to put its interest in the Empire Mine to us, but has not exercised this right to date.
Product revenues to related parties were as follows:
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Product revenues to related parties |
$ | 2,192.4 | $ | 1,165.5 | $ | 593.8 | ||||||
Total product revenues |
6,551.7 | 4,416.8 | 2,216.2 | |||||||||
Related party product revenue as a percent of total product revenue |
33.5 | % | 26.4 | % | 26.8 | % |
Amounts due from related parties recorded in Accounts receivable and Derivative assets, including customer supply agreements and provisional pricing arrangements, were $180.4 million and $52.4 million at December 31, 2011 and 2010, respectively. Amounts due to related parties recorded in Other current liabilities, including provisional pricing arrangements and liabilities to minority parties, were $43.0 million at December 31, 2011.
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 percent in exchange for 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 $26.5 million and $32.8 million at December 31, 2011 and 2010, respectively. Of these amounts, $16.5 million and $22.8 million were classified as Other non-current assets at December 31, 2011 and 2010, respectively, with the balances current, over the 12-year life of the supply agreement.
Supply agreements with one of our customers include provisions for supplemental revenue or refunds based on the customer's annual steel pricing for the year the product is consumed in the customer's blast furnace. The supplemental pricing is characterized as an embedded derivative. Refer to NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
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NOTE 19 — SUBSEQUENT EVENTS
Canadian Dollar Foreign Exchange Contracts
In January 2012, in accordance with our policy, we began to enter into Canadian dollar foreign currency exchange contracts in the form of forward contracts that qualify for hedge accounting. Subsequent to December 31, 2011, we have entered into contracts with a notional amount of approximately C$200 million with varying maturity dates.
We have evaluated subsequent events through the date of financial statement issuance.
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NOTE 20 – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The sum of quarterly EPS may not equal EPS for the year due to discrete quarterly calculations.
(In Millions, Except Per Share Amounts) | |||||||||||||||||||||
2011 | |||||||||||||||||||||
Quarters | |||||||||||||||||||||
First | Second | Third | Fourth | Year | |||||||||||||||||
Revenues from product sales and services |
$ | 1,183.2 | $ | 1,805.8 | $ | 2,142.8 | $ | 1,662.5 | $ | 6,794.3 | |||||||||||
Sales margin |
599.5 | 731.6 | 861.3 | 496.2 | 2,688.6 | ||||||||||||||||
Net Income from Continuing Operations attributable to Cliffs shareholders |
$ | 423.8 | $ | 409.8 | $ | 618.7 | $ | 185.3 | $ | 1,637.6 | |||||||||||
Loss from Discontinued Operations |
(0.4 | ) | (0.7 | ) | (17.5 | ) | 0.1 | (18.5 | ) | ||||||||||||
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Net Income Attributable to Cliffs Shareholders |
$ | 423.4 | $ | 409.1 | $ | 601.2 | $ | 185.4 | $ | 1,619.1 | |||||||||||
Earnings per common share attributable to Cliffs shareholders — Basic: |
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Continuing Operations |
$ | 3.12 | $ | 2.95 | $ | 4.29 | $ | 1.30 | $ | 11.68 | |||||||||||
Discontinued Operations |
— | (0.01 | ) | (0.12 | ) | — | (0.13 | ) | |||||||||||||
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$ | 3.12 | $ | 2.94 | $ | 4.17 | $ | 1.30 | $ | 11.55 | ||||||||||||
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Earnings per common share attributable to Cliffs shareholders — Diluted: |
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Continuing Operations |
$ | 3.11 | $ | 2.93 | $ | 4.27 | $ | 1.30 | $ | 11.61 | |||||||||||
Discontinued Operations |
— | (0.01 | ) | (0.12 | ) | — | (0.13 | ) | |||||||||||||
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$ | 3.11 | $ | 2.92 | $ | 4.15 | $ | 1.30 | $ | 11.48 | ||||||||||||
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2010 | ||||||||||||||||||||
Quarters | ||||||||||||||||||||
First | Second | Third | Fourth | Year | ||||||||||||||||
Revenues from product sales and services |
$ | 727.7 | $ | 1,184.3 | $ | 1,346.0 | $ | 1,424.1 | $ | 4,682.1 | ||||||||||
Sales margin |
150.5 | 415.2 | 477.3 | 483.5 | 1,526.5 | |||||||||||||||
Net Income from Continuing Operations attributable to Cliffs shareholders |
$ | 78.0 | $ | 261.5 | $ | 298.3 | $ | 385.2 | $ | 1,023.0 | ||||||||||
Loss from Discontinued Operations |
(0.6 | ) | (0.7 | ) | (0.7 | ) | (1.1 | ) | (3.1 | ) | ||||||||||
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Net Income Attributable to Cliffs Shareholders |
$ | 77.4 | $ | 260.8 | $ | 297.6 | $ | 384.1 | $ | 1,019.9 | ||||||||||
Earnings per common share attributable to Cliffs shareholders — Basic: |
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Continuing Operations |
$ | 0.58 | $ | 1.93 | $ | 2.20 | $ | 2.85 | $ | 7.56 | ||||||||||
Discontinued Operations |
— | — | (0.01 | ) | (0.01 | ) | (0.02 | ) | ||||||||||||
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$ | 0.58 | $ | 1.93 | $ | 2.19 | $ | 2.84 | $ | 7.54 | |||||||||||
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Earnings per common share attributable to Cliffs shareholders — Diluted: |
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Continuing Operations |
$ | 0.57 | $ | 1.92 | $ | 2.19 | $ | 2.83 | $ | 7.51 | ||||||||||
Discontinued Operations |
— | — | (0.01 | ) | (0.01 | ) | (0.02 | ) | ||||||||||||
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$ | 0.57 | $ | 1.92 | $ | 2.18 | $ | 2.82 | $ | 7.49 |
Immaterial Errors
The accounting for our 79 percent interest in the Empire mine previously was based upon the assessment that the mining venture functions as a captive cost company, supplying product only to the venture partners effectively on a cost basis. Upon the execution of the partnership arrangement in 2002, the underlying notion of the arrangement was for the partnership to provide pellets to the venture partners at an agreed upon rate to cover operating and capital costs. Furthermore, any gains or losses generated by the mining venture throughout the life of the partnership were expected to be minimal and the mine has historically been in a net loss position. The partnership arrangement provides that the venture partners share profits and losses on an ownership percentage basis of 79 percent and 21 percent, with the noncontrolling interest partner limited on the losses produced by the mining venture to its equity interest. Therefore, the noncontrolling interest partner cannot have a negative ownership interest in the mining venture. Under our captive cost company arrangements, the noncontrolling interests' revenue amounts are stated at an amount that is offset entirely by an equal amount included in Cost of goods sold and operating expenses, resulting in no sales margin attributable to noncontrolling interest participants. In addition, under the Empire partnership arrangement, the noncontrolling interest net losses historically were recorded in the Statements of Unaudited Condensed Consolidated Operations through Cost of goods sold and operating expenses. This was based on the assumption that the partnership would operate in a net liability position, and as mentioned, the noncontrolling partner is limited on the partnership losses that can be allocated to its ownership interest. Due to a change in the partnership pricing arrangement to align with the industry's shift towards shorter-term pricing arrangements linked to the spot market, the partnership began to generate profits. The change in partnership pricing was a result of the negotiated settlement with ArcelorMittal USA effective beginning for the three months ended March 31, 2011. The modification of the pricing mechanism changed the nature of our cost sharing arrangement, and we determined that we should have been recording a noncontrolling interest adjustment in accordance with ASC 810 in the Statements of Unaudited Condensed Consolidated Operations and in the Statements of Unaudited Condensed Consolidated Financial Position to the extent that the partnership was in a net asset position, beginning in the first quarter of 2011.
In accordance with applicable GAAP, management has quantitatively and qualitatively evaluated the materiality of the error and has determined the error to be immaterial to the quarterly reports previously filed for the periods ended March 31, 2011 and June 30, 2011, and also immaterial for the quarterly report for the period ended September 30, 2011. Accordingly, all of the resulting adjustments were recorded prospectively in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011 and the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011. The adjustment to record the noncontrolling interest related to the Empire mining venture of $84.0 million, resulted in an increase to Income From Continuing Operations of $16.1 million, as a result of reductions in income tax expenses, and a decrease to Net Income Attributable To Cliffs Shareholders of $67.9 million in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. The adjustments resulted in a decrease to basic and diluted earnings per common share of $0.47 per common share for the three months ended September 30, 2011, and $0.49 and $0.48 per common share for the nine months ended September 30, 2011. In addition, Retained Earnings was decreased by $67.9 million and Noncontrolling Interest was increased by $84.0 million in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2011.
In addition to the noncontrolling interest adjustment, the application of consolidation accounting for the Empire partnership arrangement also resulted in several financial statement line item reclassifications in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. Under the captive cost company accounting, we historically recorded the reimbursements for our venture partners' cost through Freight and venture partners' cost reimbursements, with a corresponding offset in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. Accordingly, we have reclassified $46.0 million of revenues from Freight and venture partners' cost reimbursements to Product Revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011. We also reclassified $54.1 million related to the ArcelorMittal USA price re-opener settlement recorded during the first quarter of 2011 from Cost of goods sold and operating expenses to Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2011.
The impact of the prospective adjustments in the Statements of Unaudited Condensed Consolidated Operations for each of the prior interim periods of 2011 have been included within the table below. The prior period amounts included within the accompanying Consolidated Financial Statements have not been retrospectively adjusted for these impacts due to management's materiality assessment as discussed above.
(In Millions, Except Per Share Amounts) | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
March 31, 2011 | June 30, 2011 | June 30, 2011 | ||||||||||
Revenues from Product Sales and Services |
||||||||||||
Product |
$ | 54.1 | $ | 46.0 | $ | 100.1 | ||||||
Freight and venture partners' cost reimbursements |
— | (46.0 | ) | (46.0 | ) | |||||||
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54.1 | — | 54.1 | ||||||||||
Cost of Goods Sold and Operating Expenses |
(54.1 | ) | — | (54.1 | ) | |||||||
Income from Continuing Operations |
8.4 | 7.7 | 16.1 | |||||||||
LESS: Income Attributable to Noncontrolling Interest |
45.9 | 38.1 | 84.0 | |||||||||
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Net Income Attributable to Cliffs Shareholders |
$ | (37.5 | ) | $ | (30.4 | ) | $ | (67.9 | ) | |||
Earnings per Common Share Attributable to Cliffs Shareholders - Basic and Diluted |
$ | (0.28 | ) | $ | (0.22 | ) | $ | (0.49 | ) |
Retrospective Adjustments
During the fourth quarter of 2011, we retrospectively recorded adjustments to the Consolidated Thompson purchase price allocation back to the date of acquisition that occurred during the second quarter of 2011. The financial statements for the three and six months ended June 30, 2011 have been retrospectively adjusted for these changes, resulting in a decrease to Income From Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures of $0.5 million and an increase to Net Income Attributable to Cliffs Shareholders in the Statements of Unaudited Condensed Consolidated Operations of $1.4 million. The adjustments resulted in an increase to basic and diluted earnings per common share of $0.01 per common share. In addition, the financial statements for the three and nine months ended September 30, 2011 have been retrospectively adjusted, resulting in a decrease to Income From Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures of $2.0 million and $2.5 million, respectively, and an increase to Net Income Attributable to Cliffs Shareholders in the Statements of Unaudited Condensed Consolidated Operations of $11.7 million and $13.1 million, respectively. The adjustments resulted in an increase to basic and diluted earnings per common share of $0.08 per common share for the three months ended September 30, 2011 and an increase to basic and diluted earnings per common share $0.09 per common share for the nine months ended September 30, 2011. Accordingly, such amounts are reflected in the consolidated financial statements as of and for the year ended December 31, 2011. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for additional information.
During the second half of 2010, we retrospectively recorded adjustments to the Wabush purchase price allocation back to the date of acquisition that occurred during the first quarter of 2010. Therefore, the financial statements for the three months ended March 31, 2010 have been retrospectively adjusted for these changes, resulting in a decrease to Income From Continuing Operations Before Income Taxes and Equity Income (Loss) from Ventures of $22.0 million and a decrease to Net Income Attributable to Cliffs Shareholders of $16.1 million, respectively, in the Statements of Unaudited Condensed Consolidated Operations. The adjustments resulted in a decrease to basic and diluted earnings per common share of $0.12 per common share, respectively. In addition, Retained Earnings in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2010 has been decreased by $16.1 million for the effect of these retrospective adjustments. Accordingly, such amounts are reflected in the consolidated financial statements as of and for the period ended December 31, 2010.
As a result of acquiring the remaining ownership interests in Freewest and Wabush during the first quarter of 2010, our first quarter results were impacted by realized gains of $38.6 million primarily related to the increase in fair value of our previous ownership interest in each investment held prior to the business acquisitions. The fair value of our previous 12.4 percent interest in Freewest was $27.4 million on January 27, 2010, the date of acquisition, resulting in a gain of $13.6 million being recognized in 2010. The fair value of our previous 26.8 percent equity interest in Wabush was $38.0 million on February 1, 2010, resulting in a gain of $25.0 million also being recognized in 2010. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for additional information.
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Cliffs Natural Resources Inc. and Subsidiaries
Schedule II — Valuation and Qualifying Accounts
(Dollars in Millions)
Additions | ||||||||||||||||||||||||
Classification |
Balance at Beginning of Year |
Charged to Cost and Expenses |
Charged to Other Accounts |
Acquisition | Deductions | Balance at End of Year |
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Year Ended December 31, 2011: |
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Deferred Tax Valuation Allowance |
$ | 172.7 | $ | 49.1 | $ | 2.1 | $ | — | $ | — | $ | 223.9 | ||||||||||||
Year Ended December 31, 2010: |
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Deferred Tax Valuation Allowance |
$ | 89.4 | $ | 94.3 | $ | — | $ | — | $ | 11.0 | $ | 172.7 | ||||||||||||
Year Ended December 31, 2009: |
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Deferred Tax Valuation Allowance |
$ | 17.6 | $ | 53.8 | $ | 1.7 | $ | 16.8 | $ | 0.5 | $ | 89.4 |
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Use of Estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. On an ongoing basis, management reviews estimates. Changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.
Basis of Consolidation
The consolidated financial statements include our accounts and the accounts of our wholly owned and majority-owned subsidiaries, including the following subsidiaries:
Name |
Location |
Ownership Interest | Operation | |||||||
Northshore |
Minnesota | 100.0 | % | Iron Ore | ||||||
United Taconite |
Minnesota | 100.0 | % | Iron Ore | ||||||
Wabush |
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 | ||||||
Freewest |
Ontario, Canada | 100.0 | % | Chromite | ||||||
Spider |
Ontario, Canada | 100.0 | % | Chromite |
Intercompany transactions and balances are eliminated upon consolidation.
On May 12, 2011, we acquired all of the outstanding common shares of Consolidated Thompson for C$17.25 per share in an all-cash transaction, including net debt. The consolidated financial statements as of and for the year ended December 31, 2011 reflect our 100 percent interest in Consolidated Thompson since that date. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for further information.
Discontinued Operations
On September 27, 2011, we announced our plans to cease and dispose of the operations at the renewaFUEL biomass production facility in Michigan. As we continue to successfully grow our core iron ore mining business, the decision to sell our interest in the renewaFUEL operations was made to allow our management focus and allocation of capital resources to be deployed where we believe we can have the most impact for our stakeholders. On January 4, 2012, we entered into an agreement to sell the renewaFUEL assets to RNFL Acquisition LLC. The results of operations of the renewaFUEL operations are reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. We recorded $18.5 million, net of $9.2 million in tax benefits as Loss From Discontinued Operations in the Statements of Consolidated Operations for the year ended December 31, 2011, including a $16.0 million impairment charge, net of $8.0 million in tax benefits to write the renewaFUEL asset down to fair value. This compares to losses of $3.1 million, net of $1.5 million of tax benefits, and $3.4 million, net of $1.7 million in tax benefits, respectively, for years ended December 31, 2010 and 2009.
The impairment charge taken in the third quarter of 2011 was based on an internal assessment around the recovery of the renewaFUEL assets, primarily property, plant and equipment. The assessment considered several factors including the unique industry, the highly customized nature of the related property, plant and equipment and the fact that the plant had not performed up to design capacity. Given these points of consideration, it was determined that the expected recovery values on the renewaFUEL assets were low. The renewaFUEL total assets have been recorded at fair value in the Statements of Consolidated Financial Position as of December 31, 2011, and primarily are comprised of property, plant and equipment. The renewaFUEL operations were previously included in Other within our reportable segments.
Cash Equivalents
Cash and cash equivalents include cash on hand and in the bank as well as all short-term securities held for the primary purpose of general liquidity. We consider investments in highly liquid debt instruments with an original maturity of three months or less from the date of acquisition to be cash equivalents. We routinely monitor and evaluate counterparty credit risk related to the financial institutions by which our short-term investment securities are held.
Inventories
The following table presents the detail of our Inventories in the Statements of Consolidated Financial Position at December 31, 2011 and 2010:
(In Millions) | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Segment |
Finished Goods |
Work-in Process |
Total Inventory |
Finished Goods |
Work-in Process |
Total Inventory |
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U.S. Iron Ore |
$ | 100.2 | $ | 8.5 | $ | 108.7 | $ | 101.1 | $ | 9.7 | $ | 110.8 | ||||||||||||
Eastern Canadian Iron Ore |
96.2 | 43.0 | 139.2 | 43.5 | 21.2 | 64.7 | ||||||||||||||||||
North American Coal |
19.7 | 110.5 | 130.2 | 16.1 | 19.8 | 35.9 | ||||||||||||||||||
Asia Pacific Iron Ore |
57.2 | 21.6 | 78.8 | 34.7 | 20.4 | 55.1 | ||||||||||||||||||
Other |
18.0 | 0.8 | 18.8 | 2.6 | 0.1 | 2.7 | ||||||||||||||||||
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Total |
$ | 291.3 | $ | 184.4 | $ | 475.7 | $ | 198.0 | $ | 71.2 | $ | 269.2 | ||||||||||||
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U.S. Iron Ore
U.S. Iron Ore product inventories are stated at the lower of cost or market. Cost of iron ore inventories is determined using the LIFO method. The excess of current cost over LIFO cost of iron ore inventories was $117.1 million and $112.4 million at December 31, 2011 and 2010, respectively. As of December 31, 2011, the product inventory balance for U.S. Iron Ore declined, resulting in liquidation of LIFO layers in 2011. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $15.2 million in the Statements of Consolidated Operations for the year ended December 31, 2011. As of December 31, 2010, the product inventory balance for U.S. Iron Ore declined, resulting in liquidation of LIFO layers in 2010. The effect of the inventory reduction was a decrease in Cost of goods sold and operating expenses of $4.6 in the Statements of Consolidated Operations for the year ended December 31, 2010.
We had approximately 1.2 million tons and 0.8 million tons of finished goods stored at ports and customer facilities on the lower Great Lakes to service customers at December 31, 2011 and 2010, respectively. We maintain ownership of the inventories until title has transferred to the customer, usually when payment is made. Maintaining ownership of the iron ore products at ports on the lower Great Lakes reduces risk of non-payment by customers, as we retain title to the product until payment is received from the customer. We track the movement of the inventory and verify the quantities on hand.
Eastern Canadian Iron Ore
Iron ore pellet inventories are stated at the lower of cost or market. Similar to U.S. Iron Ore product inventories, the cost is determined using the LIFO method. The excess of current cost over LIFO cost of iron ore inventories was $21.9 million and $2.5 million at December 31, 2011 and 2010, respectively. As of December 31, 2011, the iron ore pellet inventory balance for Eastern Canadian Iron Ore increased to $47.1 million, resulting in an additional LIFO layer being added. As of December 31, 2010, the product inventory balance for Eastern Canadian Iron Ore increased to $43.5 million, resulting in an additional LIFO layer being added during the year. We primarily maintain ownership of these inventories until loading of the product at the port.
Iron ore concentrate inventories are stated at the lower of cost or market. The cost of iron ore concentrate inventories is determined using weighted average cost. As of December 31, 2011, the iron ore concentrate inventory balance for Eastern Canadian Iron Ore was $49.1 million as a result of the Consolidated Thompson acquisition. For the majority of the iron ore concentrate inventories, we maintain ownership of the inventories until title passes on the bill of lading date, which is upon the loading of the product at the port.
North American Coal
North American Coal product inventories are stated at the lower of cost or market. Cost of coal inventories includes labor, supplies and operating overhead and related costs and is calculated using the average production cost. We maintain ownership until coal is loaded into rail cars at the mine for domestic sales and until loaded in the vessels at the terminal for export sales. We recorded lower-of-cost-or-market inventory charges of $6.6 million and $26.1 million in Cost of goods sold and operating expenses in the Statements of Consolidated Operations for the years ended December 31, 2011 and 2010, respectively. These charges were a result of operational and geological issues at our Pinnacle and Oak Grove mines during the periods.
Asia Pacific Iron Ore
Asia Pacific Iron Ore product inventories are stated at the lower of cost or market. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to the inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a weighted average basis. We maintain ownership of the inventories until title has transferred to the customer at the F.O.B. point, which is generally when the product is loaded into the vessel.
Derivative Financial Instruments
We are exposed to certain risks related to the ongoing operations of our business, including those caused by changes in commodity prices, interest rates and foreign currency exchange rates. We have established policies and procedures, including the use of certain derivative instruments, to manage such risks. Refer to NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
U.S. Iron Ore and Eastern Canadian Iron Ore
U.S. Iron Ore and Eastern Canadian Iron Ore properties are stated at cost. Depreciation of plant and equipment is computed principally by the straight-line method based on estimated useful lives, not to exceed the mine lives. Northshore, United Taconite, Empire, Tilden and Wabush use the double declining balance method of depreciation for certain mining equipment. Depreciation is provided over the following estimated useful lives:
Asset Class |
Basis |
Life | ||
Buildings |
Straight line | 45 Years | ||
Mining equipment |
Straight line/Double declining balance | 10 to 20 Years | ||
Processing equipment |
Straight line | 15 to 45 Years | ||
Information technology |
Straight line | 2 to 7 Years |
Depreciation is not curtailed when operations are temporarily idled.
North American Coal
North American Coal properties are stated at cost. Depreciation is provided over the estimated useful lives, not to exceed the mine lives and is calculated by the straight-line method. Depreciation is provided over the following estimated useful lives:
Asset Class |
Basis |
Life | ||
Buildings |
Straight line | 30 Years | ||
Mining equipment |
Straight line | 2 to 22 Years | ||
Processing equipment |
Straight line | 2 to 30 Years | ||
Information technology |
Straight line | 2 to 3 Years |
Asia Pacific Iron Ore
Our Asia Pacific Iron Ore properties are stated at cost. Depreciation is calculated by the straight-line method or production output basis provided over the following estimated useful lives:
Asset Class |
Basis |
Life | ||
Plant and equipment |
Straight line | 5 - 10 Years | ||
Plant and equipment and mine assets |
Production output | 10 Years | ||
Motor vehicles, furniture & equipment |
Straight line | 3 - 5 Years |
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of December 31, 2011 and 2010:
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Land rights and mineral rights |
$ | 7,918.9 | $ | 3,019.9 | ||||
Office and information technology |
67.0 | 60.4 | ||||||
Buildings |
132.2 | 107.6 | ||||||
Mining equipment |
1,323.8 | 628.5 | ||||||
Processing equipment |
1,441.8 | 658.8 | ||||||
Railroad equipment |
164.3 | 122.9 | ||||||
Electric power facilities |
57.9 | 54.4 | ||||||
Port facilities |
64.1 | 64.0 | ||||||
Interest capitalized during construction |
22.5 | 19.4 | ||||||
Land improvements |
30.4 | 25.0 | ||||||
Other |
43.2 | 36.0 | ||||||
Construction in progress |
615.4 | 140.0 | ||||||
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11,881.5 | 4,936.9 | |||||||
Allowance for depreciation and depletion |
(1,356.9 | ) | (957.7 | ) | ||||
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$ | 10,524.6 | $ | 3,979.2 | |||||
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We recorded depreciation expense of $237.8 million, $165.4 million and $120.6 million in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009, respectively.
The costs capitalized and classified as Land rights and mineral rights represent lands where we own the surface and/or mineral rights. The value of the land rights is split between surface only, surface and minerals, and minerals only.
Our North American Coal operation leases coal mining rights from third parties through lease agreements. The lease agreements are for varying terms and extend through the earlier of their lease termination date or until all merchantable and mineable coal has been extracted. Our interest in coal reserves and resources was valued using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from coal operations over the life of the reserves.
Our Asia Pacific Iron Ore, Bloom Lake, Wabush, and United Taconite operation's interest in iron ore reserves and resources was valued using a discounted cash flow method. The fair value was estimated based upon the present value of the expected future cash flows from iron ore operations over the economic lives of the mines.
The net book value of the land rights and mineral rights as of December 31, 2011 and 2010 is as follows:
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Land rights |
$ | 37.3 | $ | 36.8 | ||||
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Mineral rights: |
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Cost |
$ | 7,881.6 | $ | 2,983.1 | ||||
Less depletion |
533.9 | 376.4 | ||||||
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Net mineral rights |
$ | 7,347.7 | $ | 2,606.7 | ||||
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Accumulated depletion relating to mineral rights, which was recorded using the unit-of-production method, is included in Allowance for depreciation and depletion. We recorded depletion expense of $159.7 million, $95.5 million and $68.1 million in the Statements of Consolidated Operations for the years ended December 31, 2011, 2010 and 2009, respectively.
We review iron ore and coal reserves based on current expectations of revenues and costs, which are subject to change. Iron ore and coal reserves include only proven and probable quantities which can be economically and legally mined and processed utilizing existing technology.
Investments in Ventures
The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified in the Statements of Consolidated Financial Position. Parentheses indicate a net liability.
(In Millions) | ||||||||||||||
Investment |
Classification | Interest Percentage |
December 31, 2011 |
December 31, 2010 |
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Amapá |
Investments in ventures | 30 | $ | 498.6 | $ | 461.3 | ||||||||
AusQuest |
Investments in ventures | 30 | 3.7 | 24.1 | ||||||||||
Cockatoo (1) |
Other liabilities | 50 | (15.0 | ) | 10.5 | |||||||||
Hibbing |
Other liabilities | 23 | (6.8 | ) | (5.8 | ) | ||||||||
Other |
Investments in ventures | 24.3 | 18.9 | |||||||||||
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$ | 504.8 | $ | 509.0 | |||||||||||
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(1) | Recorded as Investments in ventures at December 31, 2010. |
Amapá
Our 30 percent ownership interest in Amapá, in which we do not have control but have the ability to exercise significant influence over operating and financial policies, is accounted for under the equity method. Accordingly, our share of the results from Amapá is reflected as Equity Income (Loss) from Ventures in the Statements of Consolidated Operations. The financial information of Amapá included in our financial statements is for the periods ended November 30, 2011, 2010 and 2009 and as of November 30, 2011 and 2010. The earlier cut-off is to allow for sufficient time needed by Amapá to properly close and prepare complete financial information, including consolidating and eliminating entries, conversion to U.S. GAAP and review by the Company. There were no intervening transactions or events that materially affected Amapá's financial position or results of operations that were not reflected in our year-end financial statements.
AusQuest
Our 30 percent ownership interest in AusQuest, in which we do not have control but have the ability to exercise significant influence over operating and financial policies, is accounted for under the equity method. Accordingly, our share of the results from AusQuest is reflected as Equity Income (Loss) from Ventures in the Statements of Consolidated Operations. The financial information of AusQuest included in our financial statements is for the periods ended November 30, 2011, 2010 and 2009 and as of November 30, 2011 and 2010. The earlier cut-off is to allow for sufficient time needed by AusQuest to properly close and prepare complete financial information, including consolidating and eliminating entries, conversion to U.S. GAAP and review and approval by the Company. There were no intervening transactions or events that materially affected AusQuest's financial position or results of operations that were not reflected in our year-end financial statements.
Hibbing and Cockatoo Island
Investments in certain joint ventures (Cockatoo Island and Hibbing) in which our ownership is 50 percent or less, or in which we do not have control but have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Our share of equity income (loss) is eliminated against consolidated product inventory upon production, and against Cost of goods sold and operating expenses when sold. This effectively reduces our cost for our share of the mining venture's production to its cost, reflecting the cost-based nature of our participation in unconsolidated ventures.
In August 2011, we entered into a term sheet with our joint venture partner, HWE Cockatoo Pty Ltd., to sell our beneficial interest in the mining tenements and certain infrastructure of Cockatoo Island to Pluton Resources. As consideration for the acquisition, Pluton Resources will be responsible for the environmental rehabilitation of Cockatoo Island when it concludes its mining. As of December 31, 2011, our portion of the current estimated cost of the rehabilitation is approximately $20 million. The potential transaction is expected to occur at the end of the current stage of mining, Phase 3, which is anticipated to be complete in late 2012. Due diligence has been completed and the definitive sale agreement is being drafted and negotiated. The definitive sale agreement will be conditional on the receipt of regulatory and third-party consents and the satisfaction of other customary closing conditions.
Sonoma
Through various interrelated arrangements, we achieve a 45 percent economic interest in the collective operations of Sonoma, despite the ownership percentages of the individual components of Sonoma. We own 100 percent of CAWO, 8.33 percent of the exploration permits and applications for mining leases for the real estate that is involved in Sonoma ("Mining Assets") and 45 percent of the infrastructure, including the rail loop and related equipment ("Non-Mining Assets"). The following substantive legal entities exist within the Sonoma structure:
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CAC, a wholly owned Cliffs subsidiary, is the conduit for Cliffs' investment in Sonoma. |
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CAWO, a wholly owned subsidiary of CAC, owns the washplant and receives 40 percent of Sonoma coal production in exchange for providing coal washing services to the remaining Sonoma participants. |
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SMM is the appointed operator of the mine assets, non-mine assets and the washplant.We own a 45 percent interest in SMM. |
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Sonoma Sales, a wholly owned subsidiary of QCoal, is the sales agent for the participants of the coal extracted and processed in the Sonoma Project. |
The objective of Sonoma is to mine and process coking and thermal coal for the benefit of the participants. In 2011, 2010 and 2009, we invested an additional $3.1 million, $3.3 million and $8.6 million, respectively, in the project, for a total investment of approximately $147.9 million.
While the individual components of our investment are disproportionate to the overall economics of the investment, the total investment is the same as if we had acquired a 45 percent interest in the Mining Assets and had committed to funding 45 percent of the cost of developing the Non-Mining Assets and the washplant. In particular, the terms of the interrelated agreements under which we obtain our 45 percent interest provide that, we, through a wholly owned subsidiary, constructed and hold title to the washplant. We wash all of the coal produced by the Sonoma Project for a fee based upon a cost to wash plus an arrangement such that we only bear 45 percent of the cost of owning and operating the washplant. In addition, we have committed to purchasing certain amounts of coal from the other participants such that we take title to 45 percent of the coal mined. In addition, several agreements were entered into which provide for the allocation of mine and washplant reclamation obligations such that we are responsible for 45 percent of the reclamation costs. Lastly, management agreements were entered into that allocates the costs of operating the mine to each participant based upon their respective ownership interests in SMM, 45 percent in our case. Once the coal is washed, each participant then engages Sonoma Sales to sell their coal to third parties for which Sonoma Sales earns a fee under an agreement with fixed and variable elements.
The legal entities were each evaluated under the guidelines for consolidation of a VIE as follows:
CAWO — CAC owns 100 percent of the legal equity in CAWO; however, CAC is limited in its ability to make significant decisions about CAWO because the significant decisions are made by, or subject to approval of, the Operating Committee of the Sonoma Project, of which CAC is only entitled to 45 percent of the vote. As a result, we determined that CAWO is a VIE and that CAC should consolidate CAWO as the primary beneficiary because it absorbs greater than 50 percent of the residual returns and expected losses.
Sonoma Sales — We, including our related parties, do not have voting rights with respect to Sonoma Sales and are not party to any contracts that represent significant variable interests in Sonoma Sales. Therefore, even if Sonoma Sales were a VIE, it has been determined that we are not the primary beneficiary and therefore would not consolidate Sonoma Sales.
SMM — SMM does not have sufficient equity at risk and is therefore a VIE. Through CAC, we have a 45 percent voting interest in SMM and a contractual requirement to reimburse SMM for 45 percent of the costs that it incurs in connection with managing the Sonoma Project. However, we, along with our related parties, do not have any contracts that would cause us to absorb greater than 50 percent of SMM's expected losses, and therefore, we are not considered to be the primary beneficiary of SMM. Thus, we account for our investment in SMM in accordance with the equity method rather than consolidate the entity. The effect of SMM on our financial statements is determined to be minimal.
Mining and Non-Mining Assets — Since we have an undivided interest in these assets and Sonoma is in an extractive industry, we have pro rata consolidated our share of these assets and costs.
Goodwill
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. We had goodwill of $1,152.1 million and $196.5 million recorded in the Statements of Consolidated Financial Position at December 31, 2011 and 2010, respectively. In accordance with the provisions of ASC 350, we compare the fair value of the respective reporting unit to its carrying value on an annual basis to determine if there is potential goodwill impairment. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value of its goodwill.
Goodwill is allocated among and evaluated for impairment at the reporting unit level in the fourth quarter of each year or as circumstances occur that potentially indicate that the carrying amount of these assets may not be recoverable. Based on the assessment performed, we concluded that there were no such events or changes in circumstances during 2011. After performing our annual goodwill impairment test in the fourth quarter of 2011, we determined that $27.8 million of goodwill associated with our CLCC reporting unit included in the North American Coal operating segment was impaired as the carrying value with this reporting unit exceeded its fair value. No impairment charges were identified in connection with our annual goodwill impairment test with respect to our other identified reporting units. Refer to NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES for further information.
Asset Impairment
Long-Lived Assets and Intangible Assets
We monitor conditions that may affect the carrying value of our long-lived and intangible assets when events and circumstances indicate that the carrying value of the asset groups may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available. An impairment loss exists when projected undiscounted cash flows are less than the carrying value of the assets. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the assets. Fair value can be determined using a market approach, income approach or cost approach. We did not record any such impairment charges in 2011, 2010 or 2009 except for as discussed above in Discontinued Operations.
Equity Investments
We evaluate the loss in value of our equity method investments each reporting period to determine whether the loss is other than temporary. The primary factors that we consider in evaluating the impairment include the extent and time the fair value of each investment has been below cost, the financial condition and near-term prospects of the investment, and our intent and ability to hold the investment to recovery. If a decline in fair value is judged other than temporary, the basis of the investment is written down to fair value as a new cost basis, and the amount of the write-down is included as a realized loss.
Our investment in Amapá resulted in equity income of $32.4 million in 2011 compared with equity income of $17.2 million in 2010 and equity loss of $62.2 million in 2009. In 2011, the investment's equity income was a result of operations for the year. In 2010, the investment's equity income was a result of nearly break-even operating results during the year combined with the reversal of the debt guarantee, upon repayment of total project debt outstanding, and the reversal of certain accruals. The equity losses in 2009 resulted from start-up costs and production delays resulting in the determination that indicators of impairment may exist relative to our investment in Amapá. Although Amapá's results improved throughout 2011 and 2010, we continued to perform an assessment of the potential impairment of our investment, most recently in the fourth quarter of 2011, using a discounted cash flow model to determine the fair value of our investment in relation to its carrying value at each reporting period. Based upon the analyses performed, we have determined that our investment is not impaired as of December 31, 2011. In assessing the recoverability of our investment in Amapá, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the investment must be made, including among other things, estimates related to pricing, volume and resources. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for our investment in the period such determination is made. We will continue to evaluate our investment on a periodic basis and as circumstances arise that indicate the investment is not recoverable.
During 2011, we recorded impairment charges of $19.1 million related to the decline in the fair value of our 30 percent ownership interest in AusQuest, which was determined to be other than temporary. We evaluated the severity of the decline in the fair value of the investment as compared to our historical carrying amount, considering the broader macroeconomic conditions and the status of current exploration prospects, and could not reasonably assert that the impairment period would be temporary. As of December 31, 2011, our investment in AusQuest had a fair value of $3.7 million based upon the closing market price of the 68.3 million shares held as of December 31, 2011. As we account for this investment as an equity method investment, we recorded the impairment charge as a component of Equity Income (Loss) from Ventures in the Statements of Consolidated Operations for the year ended December 31, 2011.
Fair Value Measurements
Valuation Hierarchy
ASC 820 establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below:
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Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets. |
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Level 2 — Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
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Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement. |
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Valuation methodologies used for assets and liabilities measured at fair value are as follows:
Cash Equivalents
Where quoted prices are available in an active market, cash equivalents are classified within Level 1 of the valuation hierarchy. Cash equivalents classified in Level 1 at December 31, 2011 and 2010 include money market funds. The valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. In these instances, the valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for substantially the full term of the financial instrument and the related financial instrument is therefore classified within Level 2 of the valuation hierarchy. Level 2 securities include short-term investments for which the value of each investment is a function of the purchase price, purchase yield and maturity date.
Marketable Securities
Where quoted prices are available in an active market, marketable securities are classified within Level 1 of the valuation hierarchy. Marketable securities classified in Level 1 at December 31, 2011 and 2010 include available-for-sale securities. The valuation of these instruments is determined using a market approach and is based upon unadjusted quoted prices for identical assets in active markets.
Derivative Financial Instruments
Derivative financial instruments valued using financial models that use as their basis readily observable market parameters are classified within Level 2 of the valuation hierarchy. Such derivative financial instruments include substantially all of our foreign currency exchange contracts and derivative financial instruments that are valued based upon published pricing settlements realized by other companies in the industry. Derivative financial instruments that are valued based upon models with significant unobservable market parameters and are normally traded less actively, are classified within Level 3 of the valuation hierarchy.
Non-Financial Assets and Liabilities
We adopted the provisions of ASC 820 effective January 1, 2009 with respect to our non-financial assets and liabilities. The initial measurement provisions of ASC 820 have been applied to our asset retirement obligations, guarantees, assets and liabilities acquired through business combinations, and certain other items, and are reflected as such in our consolidated financial statements. Effective January 1, 2009, we also adopted the fair value provision with respect to our pension and other postretirement benefit plan assets. No transition adjustment was necessary upon adoption.
In January 2010, we adopted the amended guidance on fair value to add new disclosures about transfers into and out of Levels 1 and 2. Our policy is to recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels.
Refer to NOTE 6 — FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 10 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Pensions and Other Postretirement Benefits
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in North America as part of a total compensation and benefits program. This includes employees of CLCC who became employees of the Company through the July 2010 acquisition. Upon the acquisition of the remaining 73.2 percent interest in Wabush in February 2010, we fully consolidated the related Canadian plans into our pension and OPEB obligations. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations.
We recognize the funded status of our postretirement benefit obligations on our December 31, 2011 and 2010 Statements of Consolidated Financial Position based on the market value of plan assets and the actuarial present value of our retirement obligations on that date. For each plan, we determine if the plan assets exceed the benefit obligations or vice-versa. If the plan assets exceed the retirement obligations, the amount of the surplus is recorded as an asset; if the retirement obligations exceed the plan assets, the amount of the underfunded obligations are recorded as a liability. Year-end balance sheet adjustments to postretirement assets and obligations are charged to Accumulated other comprehensive income (loss).
The market value of plan assets is measured at the year-end balance sheet date. The PBO is determined based upon an actuarial estimate of the present value of pension benefits to be paid to current employees and retirees. The APBO represents an actuarial estimate of the present value of OPEB benefits to be paid to current employees and retirees.
The actuarial estimates of the PBO and APBO retirement obligations incorporate various assumptions including the discount rates, the rates of increases in compensation, healthcare cost trend rates, mortality, retirement timing and employee turnover. For the U.S. plans, the discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration matching the expected cash flow timing of the benefit payments from the various plans. For the Canadian plans, the discount rate is determined by calculating the single level discount rate that, when applied to a particular cash flow pattern, produces the same present value as discounting the cash flow pattern using spot rates generated from a high-quality corporate bond yield curve. The remaining assumptions are based on our estimates of future events incorporating historical trends and future expectations. The amount of net periodic cost that is recorded in the Statements of Consolidated Operations consists of several components including service cost, interest cost, expected return on plan assets, and amortization of previously unrecognized amounts. Service cost represents the value of the benefits earned in the current year by the participants. Interest cost represents the cost associated with the passage of time. In addition, the net periodic cost is affected by the anticipated income from the return on invested assets, as well as the income or expense resulting from the recognition of previously deferred items. Certain items, such as plan amendments, gains and/or losses resulting from differences between actual and assumed results for demographic and economic factors affecting the obligations and assets of the plans, and changes in plan assumptions are subject to deferred recognition for income and expense purposes. The expected return on plan assets is determined utilizing the weighted average of expected returns for plan asset investments in various asset categories based on historical performance, adjusted for current trends. See NOTE 10 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
Asset Retirement Obligations
Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The fair value of the liability is determined as the discounted value of the expected future cash flow. The asset retirement obligation is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset's carrying value and amortized over the life of the related asset. Reclamation costs are adjusted periodically to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. We review, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site in accordance with the provisions of ASC 410. We perform an in-depth evaluation of the liability every three years in addition to routine annual assessments, most recently performed in 2011.
Future remediation costs for inactive mines are accrued based on management's best estimate at the end of each period of the costs expected to be incurred at a site. Such cost estimates include, where applicable, ongoing maintenance and monitoring costs. Changes in estimates at inactive mines are reflected in earnings in the period an estimate is revised. See NOTE 9 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Revenue Recognition and Cost of Goods Sold and Operating Expenses
U.S. Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our U.S. Iron Ore term supply agreements provide that title and risk of loss transfer to the customer when payment is received.
We recognize revenue based on the gross amount billed to a customer as we earn revenue from the sale of the goods or services. Revenue from product sales also includes reimbursement for freight charges paid on behalf of customers in Freight and venture partners' cost reimbursements separate from product revenue.
Costs of goods sold and operating expenses represents all direct and indirect costs and expenses applicable to the sales and revenues of our mining operations. Operating expenses within this line item primarily represent the portion of the Tilden mining venture costs for which we do not own; that is, the costs attributable to the share of the mine's production owned by the other joint venture partner in the Tilden mine. The mining venture functions as a captive cost company; it supplies product only to its owners effectively on a cost basis. Accordingly, the noncontrolling interests' revenue amounts are stated at cost of production and are offset in entirety by an equal amount included in Cost of goods sold and operating expenses resulting in no sales margin reflected in the noncontrolling interest participant. As we are responsible for product fulfillment, we retain the risks and rewards of a principal in the transaction and accordingly record revenue under these arrangements on a gross basis.
The following table is a summary of reimbursements in our U.S. Iron Ore operations for the years ended December 31, 2011, 2010 and 2009:
(In Millions) | ||||||||||||
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Reimbursements for: |
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Freight |
$ | 128.4 | $ | 83.6 | $ | 22.4 | ||||||
Venture partners' cost |
95.9 | 139.8 | 71.3 | |||||||||
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Total reimbursements |
$ | 224.3 | $ | 223.4 | $ | 93.7 | ||||||
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As of December 31, 2011, Product revenues and Costs of goods sold and operating expenses in the Statements of Consolidated Operations reflect consolidation of the Empire mining venture and recognition of a noncontrolling interest. A subsidiary of ArcelorMittal USA is a 21 percent partner in the Empire mining venture, resulting in a noncontrolling interest adjustment for ArcelorMittal USA's ownership percentage to Net income attributable to noncontrolling interest in the Statements of Consolidated Operations. The accounting for our interest in the Empire mine previously was based upon the assessment that the mining venture functioned as a captive cost company, supplying product only to the venture partners effectively on a cost basis. Upon the execution of the partnership arrangement in 2002, the underlying notion of the arrangement was for the partnership to provide pellets to the venture partners at an agreed-upon rate to cover operating and capital costs. Furthermore, any gains or losses generated by the mining venture throughout the life of the partnership were expected to be minimal and the mine historically has been in a net loss position. The partnership arrangement provides that the venture partners share profits and losses on an ownership percentage basis of 79 percent and 21 percent, with the noncontrolling interest partner limited on the losses produced by the mining venture to its equity interest. Therefore, the noncontrolling interest partner cannot have a negative ownership interest in the mining venture. Under our captive cost company arrangements, the noncontrolling interests' revenue amounts are stated at an amount that is offset entirely by an equal amount included in Cost of goods sold and operating expenses, resulting in no sales margin attributable to noncontrolling interest participants. In addition, under the Empire partnership arrangement, the noncontrolling interest net losses historically were recorded in the Statements of Consolidated Operations through Cost of goods sold and operating expenses. This was based on the assumption that the partnership would operate in a net liability position, and as mentioned, the noncontrolling partner is limited on the partnership losses that can be allocated to its ownership interest. Due to a change in the partnership pricing arrangement to align with the industry's shift towards shorter-term pricing arrangements linked to the spot market, the partnership began to generate profits in 2011. The change in partnership pricing was a result of the negotiated settlement with ArcelorMittal USA effective beginning for the three months ended March 31, 2011. The modification of the pricing mechanism changed the nature of our cost sharing arrangement and we determined that we should have been recording a noncontrolling interest adjustment in accordance with ASC 810 in the Statements of Unaudited Condensed Consolidated Operations and in the Statements of Unaudited Condensed Consolidated Financial Position to the extent that the partnership was in a net asset position, beginning in the first quarter of 2011. Refer to NOTE 20 — QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) for additional information regarding this prospective change.
Under certain term supply agreements, we ship the product to ports on the lower Great Lakes or to the customer's facilities prior to the transfer of title. Our rationale for shipping iron ore products to certain customers and retaining title until payment is received for these products is to minimize credit risk exposure. In addition, certain supply agreements with one customer include provisions for supplemental revenue or refunds based on the customer's annual steel pricing for the year the product is consumed in the customer's blast furnaces. We account for this provision as a derivative instrument at the time of sale and record this provision at fair value until the year the product is consumed and the amounts are settled as an adjustment to revenue.
Where we are joint venture participants in the ownership of a mine, our contracts entitle us to receive royalties and/or management fees, which we earn as the pellets are produced. Revenue is recognized on the sale of services when the services are performed.
Eastern Canadian Iron Ore
Revenue is recognized on the sale of products when title to the product has transferred to the customer in accordance with the specified provisions of each term supply agreement and all applicable criteria for revenue recognition have been satisfied. Most of our Eastern Canadian Iron Ore term supply agreements provide that title and risk of loss transfer to the customer upon loading of the product at the port.
Since the acquisition date of Consolidated Thompson, Product revenues and Costs of goods sold and operating expenses in the Statements of Consolidated Operations reflect our 100 percent ownership interest in Consolidated Thompson. WISCO is a 25 percent partner in the Bloom Lake mine, resulting in a noncontrolling interest adjustment for WISCO's ownership percentage to Net income attributable to noncontrolling interest in the Statements of Consolidated Operations.
North American Coal
We recognize revenue when title passes to the customer. For domestic coal sales, this generally occurs when coal is loaded into rail cars at the mine. For export coal sales, this generally occurs when coal is loaded into the vessels at the terminal. Revenue from product sales in 2011, 2010 and 2009 included reimbursement for freight charges paid on behalf of customers of $18.3 million, $41.9 million and $32.1 million, respectively.
Asia Pacific Iron Ore
Sales revenue is recognized at the F.O.B. point, which generally is when the product is loaded into the vessel.
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 2013, with the option to defer a portion of the 2009 monthly amount in exchange for interest payments until the deferred amount is repaid in 2013. Installment amounts received under this arrangement in excess of sales are classified as Deferred revenue in the Statement of Consolidated Financial Position upon receipt of payment. Revenue is recognized over the life of the supply agreement upon shipment of the pellets. As of December 31, 2011 and 2010, installment amounts received in excess of sales totaled $91.7 million and $58.1 million, respectively, which were recorded as Deferred revenue in the Statement of Consolidated Financial Position.
In 2011 and 2010, certain customers purchased and paid for 0.2 million tons and 2.4 million tons of pellets that were not delivered by year-end, respectively. In 2011, the customer purchases were made in order to secure the 2011 pricing on shipments that will occur in early 2012, and in 2010, the purchases were made in order to meet minimum contractual purchase requirements under the terms of take-or-pay contracts. In 2011 and 2010, the inventory was stored at our facilities in upper Great Lakes stockpiles. At the request of the customers, the ore was not shipped. We considered whether revenue should be recognized on these sales under the "bill and hold" guidance provided by the SEC Staff; however, based upon the assessment performed, revenue recognition on these transactions totaling $15.8 million and $155.3 million, respectively, was deferred on the December 31, 2011 and 2010 Statements of Consolidated Financial Position. As of December 31, 2011, 0.1 million tons remain of the 2.4 million tons that were deferred at the end of 2010, resulting in the related revenue of $15.1 million being deferred into 2012.
Repairs and Maintenance
Repairs, maintenance and replacement of components are expensed as incurred. The cost of major power plant overhauls is capitalized and depreciated over the estimated useful life, which is the period until the next scheduled overhaul, generally five years. All other planned and unplanned repairs and maintenance costs are expensed when incurred.
Share-Based Compensation
We adopted the fair value recognition provisions of ASC 718 effective January 1, 2006 using the modified prospective transition method. The fair value of each grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. Consistent with the guidelines of ASC 718, a correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan year agreements. We estimated the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds, with a term commensurate with the remaining life of the performance plans.
Cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense are classified as financing cash flows. Refer to NOTE 11 — STOCK COMPENSATION PLANS for additional information.
Income Taxes
Income taxes are based on income for financial reporting purposes calculated using tax rates by jurisdiction and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes. Any interest or penalties on income tax are recognized as a component of income tax expense.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results of operations. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
Accounting for uncertainty in income taxes recognized in the financial statements requires that a tax benefit from an uncertain tax position be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on technical merits. See NOTE 12 — INCOME TAXES for further information.
Earnings Per Share
We present both basic and diluted EPS amounts. Basic EPS are calculated by dividing income attributable to Cliffs common shareholders by the weighted average number of common shares outstanding during the period presented. Diluted EPS are calculated by dividing Net Income Attributable to Cliffs Shareholders by the weighted average number of common shares, common share equivalents and convertible preferred stock outstanding during the period, utilizing the treasury share method for employee stock plans. Common share equivalents are excluded from EPS computations in the periods in which they have an anti-dilutive effect. See NOTE 15 — EARNINGS PER SHARE for further information.
Foreign Currency Translation
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of the Company's Australian subsidiaries is the Australian Dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive income (loss). Where the U.S. dollar is the functional currency, translation adjustments are recorded in the Statements of Consolidated Operations. Income taxes generally are not provided for foreign currency translation adjustments.
Recent Accounting Pronouncements
In January 2010, the FASB amended the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The amendment also revises the guidance on employers' disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The amended guidance was effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the provisions of guidance required for the period beginning January 1, 2011. Refer to NOTE 10 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.
In December 2010, the FASB issued amended guidance on business combinations in order to clarify the disclosure requirements around pro forma revenue and earnings. The update was issued in response to the diversity in practice about the interpretation of such requirements. The amendment specifies that pro forma revenue and earnings of the combined entity be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The new guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted the amended guidance upon our acquisition of Consolidated Thompson. Refer to NOTE 4 — ACQUISITIONS AND OTHER INVESTMENTS for further information.
In May 2011, the FASB amended the guidance on fair value as a result of the joint efforts by the FASB and the IASB to develop a single, converged fair value framework. The converged fair value framework provides converged guidance on how to measure fair value and on what disclosures to provide about fair value measurements. The significant amendments to the fair value measurement guidance and the new disclosure requirements include: (1) the highest and best use and valuation premise for nonfinancial assets; (2) the application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risks; (3) premiums or discounts in fair value measurement; (4) fair value of an instrument classified in a reporting entity's shareholders' equity; (5) for Level 3 measurements, a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and a narrative description of the sensitivity of the fair value to changes in the unobservable inputs and interrelationships between those inputs; and (6) the level in the fair value hierarchy of items that are not measured at fair value in the Statement of Financial Position but whose fair value must be disclosed. The new guidance is effective for interim and annual periods beginning after December 15, 2011. We currently are evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income in order to improve comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in OCI. The update also facilitates the convergence of GAAP and IFRS. The amendment eliminates the presentation options under ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. In either presentation option, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statements where the components of net income and the components of OCI are presented. The amendment does not change the items that must be reported in other comprehensive income. After the issuance of the amended guidance on the presentation of comprehensive income, stakeholders raised concerns that the new presentation requirements about reclassifications of items out of accumulated OCI would be difficult for preparers and may add unnecessary complexity to financial statements. In addition, it is difficult for some stakeholders to change systems in time to gather the information for the new presentation requirements by the effective date prescribed in ASU 2011-05. Given these issues, and in order to defer only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments, in December 2011, FASB issued amended guidance on the presentation of comprehensive income to supersede guidance in ASU 2011-05 related to reclassifications out of accumulated OCI. FASB determined a reassessment of the costs and benefits of the provisions in ASU 2011-05 related to reclassifications out of accumulated OCI is necessary. Due to the time required to properly make such a reassessment and to evaluate alternative presentation formats, FASB decided in the December 2011 amended guidance, to indefinitely defer the requirements related to reclassification out of accumulated OCI until further deliberation and to reinstate the requirements for the presentation of reclassifications out of accumulated OCI that were in place before the issuance of ASU 2011-05. All other requirements in ASU 2011-05 are not affected by this December 2011 amended guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We have early adopted this new guidance which requires retrospective application as of December 31, 2011. As this guidance only amends the presentation of the components of comprehensive income, the adoption does not have an impact on our Statements of Consolidated Financial Position or Statements of Consolidated Operations.
In September 2011, the FASB issued amended guidance in order to simplify how entities test goodwill for impairment under ASC 350. The revised guidance provides entities testing goodwill for impairment with the option of performing a qualitative assessment before calculating the fair value of the reporting unit as required in step 1 of the goodwill impairment test. If the qualitative assessment provides the basis that the fair value of the reporting unit is more likely than not less than the carrying amount, then step 1 of the impairment test is required. The amended guidance does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the revised guidance does not amend the requirement to test goodwill for impairment between annual tests if certain events or circumstances warrant that such a test be performed. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We currently are evaluating the impact that the adoption of this amendment will have on our annual goodwill impairment test and do not expect that this amendment will have a material impact on our consolidated financial statements.
In September 2011, the FASB issued amended guidance to increase the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension and other postretirement benefits. The objective of the amended guidance is to enhance the transparency of disclosures about: (1) the significant multiemployer plans in which an employer participates, including the plan names and identifying numbers; (2) the level of the employer's participation in those plans; (3) the financial health of the plans; and (4) the nature of the employer's commitments to the plans. For plans for which additional public information outside of the employer's financial statements is not available, the amended guidance requires additional disclosures, including: (1) a description of the nature of the plan benefits; (2) a qualitative description of the extent to which the employer could be responsible for the obligation of the plan; and (3) other information to help users understand the financial information about the plan, to the extent available. The new guidance is effective for fiscal years ending after December 15, 2011, with early adoption permitted, and the amendments are required to be applied retrospectively for all prior periods presented. We adopted the amended guidance for the year ended December 31, 2011; however, adoption of this amendment did not have a material impact on our consolidated financial statements. To determine no material impact on our consolidated financial statements, we evaluated each of our multiemployer plans and found none to be individually significant.
In December 2011, the FASB issued amended guidance to increase the disclosure requirements about the nature of an entity's rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective of this amended guidance is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The amended guidance will enhance disclosures required by U.S. GAAP by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of rights of setoff associated with certain financial and derivative instruments in the scope of this amended guidance. The new guidance is effective for annual and interim reporting periods beginning on or after January 1, 2013, and the amendments are required to be applied retrospectively for all prior periods presented. We currently are evaluating the impact that the adoption of this amendment will have on our consolidated financial statements.
|
Name |
Location |
Ownership Interest | Operation | |||||||
Northshore |
Minnesota | 100.0 | % | Iron Ore | ||||||
United Taconite |
Minnesota | 100.0 | % | Iron Ore | ||||||
Wabush |
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 | ||||||
Freewest |
Ontario, Canada | 100.0 | % | Chromite | ||||||
Spider |
Ontario, Canada | 100.0 | % | Chromite |
(In Millions) | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Segment |
Finished Goods |
Work-in Process |
Total Inventory |
Finished Goods |
Work-in Process |
Total Inventory |
||||||||||||||||||
U.S. Iron Ore |
$ | 100.2 | $ | 8.5 | $ | 108.7 | $ | 101.1 | $ | 9.7 | $ | 110.8 | ||||||||||||
Eastern Canadian Iron Ore |
96.2 | 43.0 | 139.2 | 43.5 | 21.2 | 64.7 | ||||||||||||||||||
North American Coal |
19.7 | 110.5 | 130.2 | 16.1 | 19.8 | 35.9 | ||||||||||||||||||
Asia Pacific Iron Ore |
57.2 | 21.6 | 78.8 | 34.7 | 20.4 | 55.1 | ||||||||||||||||||
Other |
18.0 | 0.8 | 18.8 | 2.6 | 0.1 | 2.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 291.3 | $ | 184.4 | $ | 475.7 | $ | 198.0 | $ | 71.2 | $ | 269.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Land rights and mineral rights |
$ | 7,918.9 | $ | 3,019.9 | ||||
Office and information technology |
67.0 | 60.4 | ||||||
Buildings |
132.2 | 107.6 | ||||||
Mining equipment |
1,323.8 | 628.5 | ||||||
Processing equipment |
1,441.8 | 658.8 | ||||||
Railroad equipment |
164.3 | 122.9 | ||||||
Electric power facilities |
57.9 | 54.4 | ||||||
Port facilities |
64.1 | 64.0 | ||||||
Interest capitalized during construction |
22.5 | 19.4 | ||||||
Land improvements |
30.4 | 25.0 | ||||||
Other |
43.2 | 36.0 | ||||||
Construction in progress |
615.4 | 140.0 | ||||||
|
|
|
|
|||||
11,881.5 | 4,936.9 | |||||||
Allowance for depreciation and depletion |
(1,356.9 | ) | (957.7 | ) | ||||
|
|
|
|
|||||
$ | 10,524.6 | $ | 3,979.2 | |||||
|
|
|
|
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Land rights |
$ | 37.3 | $ | 36.8 | ||||
|
|
|
|
|||||
Mineral rights: |
||||||||
Cost |
$ | 7,881.6 | $ | 2,983.1 | ||||
Less depletion |
533.9 | 376.4 | ||||||
|
|
|
|
|||||
Net mineral rights |
$ | 7,347.7 | $ | 2,606.7 | ||||
|
|
|
|
(In Millions) | ||||||||||||||
Investment |
Classification | Interest Percentage |
December 31, 2011 |
December 31, 2010 |
||||||||||
Amapá |
Investments in ventures | 30 | $ | 498.6 | $ | 461.3 | ||||||||
AusQuest |
Investments in ventures | 30 | 3.7 | 24.1 | ||||||||||
Cockatoo (1) |
Other liabilities | 50 | (15.0 | ) | 10.5 | |||||||||
Hibbing |
Other liabilities | 23 | (6.8 | ) | (5.8 | ) | ||||||||
Other |
Investments in ventures | 24.3 | 18.9 | |||||||||||
|
|
|
|
|||||||||||
$ | 504.8 | $ | 509.0 | |||||||||||
|
|
|
|
(1) | Recorded as Investments in ventures at December 31, 2010. |
(In Millions) | ||||||||||||
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Reimbursements for: |
||||||||||||
Freight |
$ | 128.4 | $ | 83.6 | $ | 22.4 | ||||||
Venture partners' cost |
95.9 | 139.8 | 71.3 | |||||||||
|
|
|
|
|
|
|||||||
Total reimbursements |
$ | 224.3 | $ | 223.4 | $ | 93.7 | ||||||
|
|
|
|
|
|
Asset Class |
Basis |
Life | ||
Buildings |
Straight line | 45 Years | ||
Mining equipment |
Straight line/Double declining balance | 10 to 20 Years | ||
Processing equipment |
Straight line | 15 to 45 Years | ||
Information technology |
Straight line | 2 to 7 Years |
Asset Class |
Basis |
Life | ||
Buildings |
Straight line | 30 Years | ||
Mining equipment |
Straight line | 2 to 22 Years | ||
Processing equipment |
Straight line | 2 to 30 Years | ||
Information technology |
Straight line | 2 to 3 Years |
Asset Class |
Basis |
Life | ||
Plant and equipment |
Straight line | 5 - 10 Years | ||
Plant and equipment and mine assets |
Production output | 10 Years | ||
Motor vehicles, furniture & equipment |
Straight line | 3 - 5 Years |
|
(In Millions) | ||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||
Revenues from product sales and services: |
||||||||||||||||||||||||
U.S Iron Ore |
$ | 3,509.9 | 52 | % | $ | 2,443.7 | 52 | % | $ | 1,211.6 | 52 | % | ||||||||||||
Eastern Canadian Iron Ore |
1,178.1 | 17 | % | 477.7 | 10 | % | 236.2 | 10 | % | |||||||||||||||
North American Coal |
512.1 | 8 | % | 438.2 | 9 | % | 207.2 | 9 | % | |||||||||||||||
Asia Pacific Iron Ore |
1,363.5 | 20 | % | 1,123.9 | 24 | % | 542.1 | 23 | % | |||||||||||||||
Other |
230.7 | 3 | % | 198.6 | 4 | % | 144.9 | 6 | % | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total revenues from product sales and services for reportable segments |
$ | 6,794.3 | 100 | % | $ | 4,682.1 | 100 | % | $ | 2,342.0 | 100 | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Sales margin: |
||||||||||||||||||||||||
U.S. Iron Ore |
$ | 1,679.3 | $ | 788.4 | $ | 213.2 | ||||||||||||||||||
Eastern Canadian Iron Ore |
290.9 | 133.6 | 62.3 | |||||||||||||||||||||
North American Coal |
(58.4 | ) | (28.6 | ) | (71.9 | ) | ||||||||||||||||||
Asia Pacific Iron Ore |
699.5 | 566.2 | 87.2 | |||||||||||||||||||||
Other |
77.3 | 66.9 | 20.9 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Sales margin |
2,688.6 | 1,526.5 | 311.7 | |||||||||||||||||||||
Other operating expense |
(340.0 | ) | (256.3 | ) | (75.6 | ) | ||||||||||||||||||
Other income (expense) |
(107.1 | ) | 32.8 | 60.4 | ||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Income from continuing operations before income taxes and equity income (loss) from ventures |
$ | 2,241.5 | $ | 1,303.0 | $ | 296.5 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Depreciation, depletion and amortization: |
||||||||||||||||||||||||
U.S. Iron Ore |
$ | 86.2 | $ | 61.7 | $ | 67.4 | ||||||||||||||||||
Easten Canadian Iron Ore |
124.6 | 41.9 | 6.9 | |||||||||||||||||||||
North American Coal |
86.5 | 60.4 | 38.2 | |||||||||||||||||||||
Asia Pacific Iron Ore |
100.9 | 133.9 | 110.6 | |||||||||||||||||||||
Other |
28.7 | 24.4 | 13.5 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total depreciation, depletion and amortization |
$ | 426.9 | $ | 322.3 | $ | 236.6 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Capital additions (1): |
||||||||||||||||||||||||
U.S. Iron Ore |
$ | 191.4 | $ | 84.7 | $ | 42.6 | ||||||||||||||||||
Eastern Canadian Iron Ore |
303.1 | 18.8 | — | |||||||||||||||||||||
North American Coal |
181.0 | 89.5 | 20.8 | |||||||||||||||||||||
Asia Pacific Iron Ore |
262.0 | 53.6 | 96.2 | |||||||||||||||||||||
Other |
23.4 | 29.2 | 8.6 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total capital additions |
$ | 960.9 | $ | 275.8 | $ | 168.2 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Assets: |
||||||||||||||||||||||||
U.S. Iron Ore |
$ | 1,691.8 | $ | 1,537.1 | ||||||||||||||||||||
Eastern Canadian Iron Ore |
7,973.1 | 629.6 | ||||||||||||||||||||||
North American Coal |
1,814.4 | 1,623.8 | ||||||||||||||||||||||
Asia Pacific Iron Ore |
1,511.2 | 1,195.3 | ||||||||||||||||||||||
Other |
1,017.6 | 1,257.8 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total segment assets |
14,008.1 | 6,243.6 | ||||||||||||||||||||||
Corporate |
533.6 | 1,534.6 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 14,541.7 | $ | 7,778.2 | ||||||||||||||||||||
|
|
|
|
(1) | Includes capital lease additions. |
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Revenue (1) |
||||||||||||
United States |
$ | 2,774.1 | $ | 1,966.3 | $ | 1,049.5 | ||||||
China |
2,123.4 | 1,262.0 | 711.5 | |||||||||
Canada |
914.3 | 696.5 | 236.6 | |||||||||
Japan |
460.4 | 311.1 | 157.4 | |||||||||
Other countries |
522.1 | 446.2 | 187.0 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
$ | 6,794.3 | $ | 4,682.1 | $ | 2,342.0 | ||||||
|
|
|
|
|
|
|||||||
Property, Plant and Equipment, Net |
||||||||||||
United States |
$ | 2,684.9 | $ | 2,498.8 | ||||||||
Australia |
1,138.3 | 973.7 | ||||||||||
Canada |
6,701.4 | 506.7 | ||||||||||
|
|
|
|
|||||||||
Total Property, Plant and Equipment, Net |
$ | 10,524.6 | $ | 3,979.2 | ||||||||
|
|
|
|
(1) | Revenue is attributed to countries based on the location of the customer and includes both Product sales and services. |
2011 | 2010 | 2009 | ||||||||||
Revenue Category |
||||||||||||
Iron ore |
85 | % | 81 | % | 81 | % | ||||||
Coal |
11 | 13 | 14 | |||||||||
Freight and venture partners' cost reimbursements |
4 | 6 | 5 | |||||||||
|
|
|
|
|
|
|||||||
Total revenue |
100 | % | 100 | % | 100 | % | ||||||
|
|
|
|
|
|
|
(In Millions) | ||||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | December 31, 2011 | December 31, 2010 | |||||||||||||||||||||
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 (current) |
$ | 5.2 | Derivative assets (current) |
$ | 2.8 | Other current liabilities |
$ | 3.5 | $ | — | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivatives designated as hedging instruments under ASC 815 |
$ | 5.2 | $ | 2.8 | $ | 3.5 | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Derivatives not designated as hedging instruments under ASC 815: |
||||||||||||||||||||||||
Foreign Exchange Contracts |
Derivative assets (current) |
$ | 2.8 | Derivative assets (current) |
$ | 34.2 | $ | — | $ | — | ||||||||||||||
Other non- current assets |
— | Other non- current assets |
2.0 | — | — | |||||||||||||||||||
Customer Supply Agreements |
Derivative assets (current) |
72.9 | Derivative assets (current) |
45.6 | — | — | ||||||||||||||||||
Provisional Pricing Arrangements |
Derivative assets (current) |
1.2 | Other current liabilities |
19.5 | — | |||||||||||||||||||
Accounts receivable |
83.8 | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivatives not designated as hedging instruments under ASC 815 |
$ | 160.7 | $ | 81.8 | $ | 19.5 | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total derivatives |
$ | 165.9 | $ | 84.6 | $ | 23.0 | $ | — | ||||||||||||||||
|
|
|
|
|
|
|
|
(In Millions) | ||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships |
Amount of Gain Recognized in OCI on Derivative (Effective Portion) |
Location of Gain Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion) |
|||||||||||||||||||||||
Year ended December 31, |
Year ended December 31, |
|||||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||
Australian Dollar Foreign Exchange Contracts |
$ | 1.8 | $ | 1.9 | $ | — | Product revenue | $ | 2.6 | $ | — | $ | — | |||||||||||||
Australian Dollar Foreign Exchange Contracts |
— | — | — | Product revenue | 0.7 | 3.2 | 15.1 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 1.8 | $ | 1.9 | $ | — | $ | 3.3 | $ | 3.2 | $ | 15.1 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) |
||||||||||||||
Derivative Not Designated as Hedging |
Location of Gain/(Loss) Recognized in Income on Derivative |
Amount of Gain/(Loss) Recognized in Income on Derivative |
||||||||||||
Year ended December 31, | ||||||||||||||
2011 | 2010 | 2009 | ||||||||||||
Foreign Exchange Contracts |
Product Revenues | $ | 1.0 | $ | 11.1 | $ | 5.4 | |||||||
Foreign Exchange Contracts |
Other Income (Expense) | 101.9 | 39.8 | 85.7 | ||||||||||
Customer Supply Agreements |
Product Revenues | 178.0 | 120.2 | 22.2 | ||||||||||
Provisional Pricing Arrangements |
Product Revenues | 809.1 | 960.7 | (28.2 | ) | |||||||||
United Taconite Purchase Provision |
Product Revenues | — | — | 106.5 | ||||||||||
|
|
|
|
|
|
|||||||||
Total |
$ | 1,090.0 | $ | 1,131.8 | $ | 191.6 | ||||||||
|
|
|
|
|
|
|
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 88.0 | $ | 88.0 | $ | — | ||||||
Working capital adjustments |
15.0 | 15.0 | — | |||||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
103.0 | 103.0 | — | |||||||||
Fair value of Cliffs' equity interest in Wabush held prior to acquisition of remaining interest |
39.7 | 38.0 | (1.7 | ) | ||||||||
|
|
|
|
|
|
|||||||
$ | 142.7 | $ | 141.0 | $ | (1.7 | ) | ||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
In-process inventories |
$ | 21.8 | $ | 21.8 | $ | — | ||||||
Supplies and other inventories |
43.6 | 43.6 | — | |||||||||
Other current assets |
13.2 | 13.2 | — | |||||||||
Mineral rights |
85.1 | 84.4 | (0.7 | ) | ||||||||
Plant and equipment |
146.3 | 147.8 | 1.5 | |||||||||
Intangible assets |
66.4 | 66.4 | — | |||||||||
Other assets |
16.3 | 19.3 | 3.0 | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
392.7 | 396.5 | 3.8 | |||||||||
LIABILITIES: |
||||||||||||
Current liabilities |
(48.1 | ) | (48.1 | ) | — | |||||||
Pension and OPEB obligations |
(80.6 | ) | (80.6 | ) | — | |||||||
Mine closure obligations |
(39.6 | ) | (53.4 | ) | (13.8 | ) | ||||||
Below-market sales contracts |
(67.7 | ) | (67.7 | ) | — | |||||||
Deferred taxes |
(20.5 | ) | — | 20.5 | ||||||||
Other liabilities |
(8.9 | ) | (8.8 | ) | 0.1 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(265.4 | ) | (258.6 | ) | 6.8 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
127.3 | 137.9 | 10.6 | |||||||||
Goodwill |
15.4 | 3.1 | (12.3 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 142.7 | $ | 141.0 | $ | (1.7 | ) | |||||
|
|
|
|
|
|
(In Millions) | ||||||||||||
Initial Allocation |
Revised Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 4,554.0 | $ | 4,554.0 | $ | — | ||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
$ | 4,554.0 | $ | 4,554.0 | $ | — | ||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Cash |
$ | 130.6 | $ | 130.6 | $ | — | ||||||
Accounts receivable |
102.8 | 102.4 | (0.4 | ) | ||||||||
Product inventories |
134.2 | 134.2 | — | |||||||||
Other current assets |
35.1 | 35.1 | — | |||||||||
Mineral rights |
4,450.0 | 4,825.6 | 375.6 | |||||||||
Property, plant and equipment |
1,193.4 | 1,193.4 | — | |||||||||
Intangible assets |
2.1 | 2.1 | — | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
6,048.2 | 6,423.4 | 375.2 | |||||||||
LIABILITIES: |
||||||||||||
Accounts payable |
(13.6 | ) | (13.6 | ) | — | |||||||
Accrued liabilities |
(130.0 | ) | (123.8 | ) | 6.2 | |||||||
Convertible debentures |
(335.7 | ) | (335.7 | ) | — | |||||||
Other current liabilities |
(41.8 | ) | (41.8 | ) | — | |||||||
Long-term deferred tax liabilities |
(831.5 | ) | (1,041.8 | ) | (210.3 | ) | ||||||
Senior secured notes |
(125.0 | ) | (125.0 | ) | — | |||||||
Capital lease obligations |
(70.7 | ) | (70.7 | ) | — | |||||||
Other long-term liabilities |
(25.1 | ) | (25.1 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(1,573.4 | ) | (1,777.5 | ) | (204.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
4,474.8 | 4,645.9 | 171.1 | |||||||||
Noncontrolling interest in Bloom Lake |
(947.6 | ) | (1,075.4 | ) | (127.8 | ) | ||||||
Preliminary goodwill |
1,026.8 | 983.5 | (43.3 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 4,554.0 | $ | 4,554.0 | $ | — | ||||||
|
|
|
|
|
|
(In Millions, Except Per Common Share) |
||||||||
2011 | 2010 | |||||||
REVENUES FROM PRODUCT SALES AND SERVICES |
$ | 7,002.7 | $ | 4,982.9 | ||||
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS |
$ | 1,612.3 | $ | 912.5 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS — BASIC |
$ | 11.50 | $ | 6.74 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS — DILUTED |
$ | 11.43 | $ | 6.70 |
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Equity instruments (4.2 million Cliffs common shares) |
$ | 173.1 | $ | 173.1 | $ | — | ||||||
Cash |
12.8 | 12.8 | — | |||||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
185.9 | 185.9 | — | |||||||||
Fair value of Cliffs' ownership interest in Freewest held prior to acquisition of remaining interest |
27.4 | 27.4 | — | |||||||||
|
|
|
|
|
|
|||||||
$ | 213.3 | $ | 213.3 | $ | — | |||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Cash |
$ | 7.7 | $ | 7.7 | $ | — | ||||||
Other current assets |
1.4 | 1.4 | — | |||||||||
Mineral rights |
252.8 | 244.0 | (8.8 | ) | ||||||||
Marketable securities |
12.1 | 12.1 | — | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
274.0 | 265.2 | (8.8 | ) | ||||||||
LIABILITIES: |
||||||||||||
Accounts payable |
(3.3 | ) | (3.3 | ) | — | |||||||
Long-term deferred tax liabilities |
(57.4 | ) | (54.3 | ) | 3.1 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(60.7 | ) | (57.6 | ) | 3.1 | |||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
213.3 | 207.6 | (5.7 | ) | ||||||||
Goodwill |
— | 5.7 | 5.7 | |||||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 213.3 | $ | 213.3 | $ | — | ||||||
|
|
|
|
|
|
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 56.9 | $ | 56.9 | $ | — | ||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
56.9 | 56.9 | — | |||||||||
Fair value of Cliffs' ownership interest in Spider held prior to acquisition of remaining interest |
4.9 | 4.9 | — | |||||||||
|
|
|
|
|
|
|||||||
$ | 61.8 | $ | 61.8 | $ | — | |||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Cash |
$ | 9.0 | $ | 9.0 | $ | — | ||||||
Other current assets |
4.5 | 4.5 | — | |||||||||
Mineral rights |
31.0 | 35.3 | 4.3 | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
44.5 | 48.8 | 4.3 | |||||||||
LIABILITIES: |
||||||||||||
Other current liabilities |
(5.2 | ) | (5.2 | ) | — | |||||||
Long-term deferred tax liabilities |
(2.7 | ) | (5.1 | ) | (2.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(7.9 | ) | (10.3 | ) | (2.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
36.6 | 38.5 | 1.9 | |||||||||
Goodwill |
77.1 | 75.2 | (1.9 | ) | ||||||||
Noncontrolling interest in Spider |
(51.9 | ) | (51.9 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 61.8 | $ | 61.8 | $ | — | ||||||
|
|
|
|
|
|
(In Millions) | ||||||||||||
Initial Allocation |
Final Allocation |
Change | ||||||||||
Consideration |
||||||||||||
Cash |
$ | 757.0 | $ | 757.0 | — | |||||||
Working capital adjustments |
17.5 | 18.9 | 1.4 | |||||||||
|
|
|
|
|
|
|||||||
Fair value of total consideration transferred |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
|
|
|
|
|
|
|||||||
Recognized amounts of identifiable assets acquired and liabilities assumed |
||||||||||||
ASSETS: |
||||||||||||
Product inventories |
$ | 20.0 | $ | 20.0 | $ | — | ||||||
Other current assets |
11.8 | 11.8 | — | |||||||||
Land and mineral rights |
640.3 | 639.3 | (1.0 | ) | ||||||||
Plant and equipment |
111.1 | 112.3 | 1.2 | |||||||||
Deferred taxes |
16.5 | 15.9 | (0.6 | ) | ||||||||
Intangible assets |
7.5 | 7.5 | — | |||||||||
Other non-current assets |
0.8 | 0.8 | — | |||||||||
|
|
|
|
|
|
|||||||
Total identifiable assets acquired |
808.0 | 807.6 | (0.4 | ) | ||||||||
LIABILITIES: |
||||||||||||
Current liabilities |
(22.8 | ) | (24.1 | ) | (1.3 | ) | ||||||
Mine closure obligations |
(2.8 | ) | (2.8 | ) | — | |||||||
Below-market sales contracts |
(32.6 | ) | (32.6 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Total identifiable liabilities assumed |
(58.2 | ) | (59.5 | ) | (1.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Total identifiable net assets acquired |
749.8 | 748.1 | (1.7 | ) | ||||||||
Goodwill |
24.7 | 27.8 | 3.1 | |||||||||
|
|
|
|
|
|
|||||||
Total net assets acquired |
$ | 774.5 | $ | 775.9 | $ | 1.4 | ||||||
|
|
|
|
|
|
|
(In Millions) | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||||||||||||||||||
U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | U.S. Iron Ore |
Eastern Canadian Iron Ore |
North American Coal |
Asia Pacific Iron Ore |
Other | Total | |||||||||||||||||||||||||||||||||||||
Beginning Balance |
$ | 2.0 | $ | 3.1 | $ | 27.9 | $ | 82.6 | $ | 80.9 | $ | 196.5 | $ | 2.0 | $ | — | $ | — | $ | 72.6 | $ | — | $ | 74.6 | ||||||||||||||||||||||||
Arising in business combinations |
— | 983.5 | (0.1 | ) | — | — | 983.4 | — | 3.1 | 27.9 | — | 80.9 | 111.9 | |||||||||||||||||||||||||||||||||||
Impairment |
— | — | (27.8 | ) | — | — | (27.8 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Impact of foreign currency translation |
— | — | — | 0.4 | — | 0.4 | — | — | — | 10.0 | — | 10.0 | ||||||||||||||||||||||||||||||||||||
Other |
— | (0.4 | ) | — | — | — | (0.4 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Ending Balance |
$ | 2.0 | $ | 986.2 | $ | — | $ | 83.0 | $ | 80.9 | $ | 1,152.1 | $ | 2.0 | $ | 3.1 | $ | 27.9 | $ | 82.6 | $ | 80.9 | $ | 196.5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions) | ||||||||||||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||
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 | $ | 134.3 | $ | (23.2 | ) | $ | 111.1 | $ | 132.4 | $ | (16.3 | ) | $ | 116.1 | |||||||||||
Utility contracts |
Intangible assets, net | 54.7 | (21.3 | ) | 33.4 | 54.7 | (10.2 | ) | 44.5 | |||||||||||||||||
Easements (1) |
Intangible assets, net | — | — | — | 11.7 | (0.4 | ) | 11.3 | ||||||||||||||||||
Leases |
Intangible assets, net | 5.5 | (3.0 | ) | 2.5 | 5.2 | (2.9 | ) | 2.3 | |||||||||||||||||
Unpatented technology (2) |
Intangible assets, net | — | — | — | 4.0 | (2.4 | ) | 1.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total intangible assets |
$ | 194.5 | $ | (47.5 | ) | $ | 147.0 | $ | 208.0 | $ | (32.2 | ) | $ | 175.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Below-market sales contracts |
Below-market sales contracts - current | $ | (77.0 | ) | $ | 24.3 | $ | (52.7 | ) | $ | (77.0 | ) | $ | 19.9 | $ | (57.1 | ) | |||||||||
Below-market sales contracts |
Below-market sales contracts | (252.3 | ) | 140.5 | (111.8 | ) | (252.3 | ) | 87.9 | (164.4 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total below-market sales contracts |
$ | (329.3 | ) | $ | 164.8 | $ | (164.5 | ) | $ | (329.3 | ) | $ | 107.8 | $ | (221.5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset |
Useful Life (years) | |
Permits |
15 - 28 | |
Utility contracts |
5 | |
Leases |
1.5 - 4.5 |
(In Millions) | ||||
Amount | ||||
Year Ending December 31 |
||||
2012 |
$ | 18.0 | ||
2013 |
17.9 | |||
2014 |
17.9 | |||
2015 |
6.0 | |||
2016 |
6.0 | |||
|
|
|||
Total |
$ | 65.8 | ||
|
|
(In Millions) | ||||
Amount | ||||
Year Ending December 31 |
||||
2012 |
$ | 48.8 | ||
2013 |
45.3 | |||
2014 |
23.0 | |||
2015 |
23.0 | |||
2016 |
23.1 | |||
|
|
|||
Total |
$ | 163.2 | ||
|
|
|
(In Millions) | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
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 |
$ | 351.2 | $ | $ | $ | 351.2 | ||||||||||
Derivative assets |
157.9 | (1) | 157.9 | |||||||||||||
International marketable securities |
27.1 | 27.1 | ||||||||||||||
Foreign exchange contracts |
8.0 | 8.0 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 378.3 | $ | 8.0 | $ | 157.9 | $ | 544.2 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Derivative liabilites |
$ | $ | $ | 19.5 | $ | 19.5 | ||||||||||
Foreign exchange contracts |
3.5 | 3.5 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | $ | 3.5 | $ | 19.5 | $ | 23.0 | |||||||||
|
|
|
|
|
|
|
|
(1) | Derivative assets includes $83.8 million classifed as Accounts receivable on the Statement of Consolidated Financial Position as of December 31, 2011. Refer to NOTE 3 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information. |
(In Millions) | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
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 |
$ | 1,307.2 | $ | $ | $ | 1,307.2 | ||||||||||
Derivative assets |
45.6 | 45.6 | ||||||||||||||
U.S. marketable securities |
22.0 | 22.0 | ||||||||||||||
International marketable securities |
63.9 | 63.9 | ||||||||||||||
Foreign exchange contracts |
39.0 | 39.0 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,393.1 | $ | 39.0 | $ | 45.6 | $ | 1,477.7 | ||||||||
|
|
|
|
|
|
|
|
There were no financial instruments measured at fair value that were in a liability position at December 31, 2010.
(In Millions) | ||||||||||||||||
December 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
Long-term receivables: |
||||||||||||||||
Customer supplemental payments |
$ | 22.3 | $ | 20.8 | $ | 22.3 | $ | 19.5 | ||||||||
ArcelorMittal USA — Receivable |
26.5 | 30.7 | 32.8 | 38.9 | ||||||||||||
Other |
10.0 | 10.0 | 8.1 | 8.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total long-term receivables (1) |
$ | 58.8 | $ | 61.5 | $ | 63.2 | $ | 66.5 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Long-term debt: |
||||||||||||||||
Term loan — $1.25 billion |
$ | 897.2 | $ | 897.2 | $ | — | $ | — | ||||||||
Senior notes — $700 million |
699.3 | 726.4 | — | — | ||||||||||||
Senior notes — $1.3 billion |
1,289.2 | 1,399.4 | 990.3 | 972.5 | ||||||||||||
Senior notes — $400 million |
398.0 | 448.8 | 397.8 | 422.8 | ||||||||||||
Senior notes — $325 million |
325.0 | 348.7 | 325.0 | 355.6 | ||||||||||||
Customer Borrowings |
5.1 | 5.1 | 4.0 | 4.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total long-term debt |
$ | 3,613.8 | $ | 3,825.6 | $ | 1,717.1 | $ | 1,754.9 | ||||||||
|
|
|
|
|
|
|
|
(In Millions) | ||||||||
Derivative Assets (Level 3) | ||||||||
Year Ended December 31, |
||||||||
2011 | 2010 | |||||||
Beginning balance — January 1 |
$ | 45.6 | $ | 63.2 | ||||
Total gains |
||||||||
Included in earnings |
403.0 | 851.7 | ||||||
Included in other comprehensive income |
— | — | ||||||
Settlements |
(319.7 | ) | (707.5 | ) | ||||
Transfers into Level 3 |
49.0 | — | ||||||
Transfers out of Level 3 |
(20.0 | ) | (161.8 | ) | ||||
|
|
|
|
|||||
Ending balance — December 31 |
$ | 157.9 | $ | 45.6 | ||||
|
|
|
|
|||||
Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date |
$ | 403.0 | $ | 120.2 | ||||
|
|
|
|
|
($ in Millions) | ||||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt | |||||||||||||||||
$1.25 Billion Term Loan |
Variable | 1.40 | % | 2016 | $ | 972.0 | (6) | $ | 897.2 | (6) | ||||||||||||
$700 Million 4.875% 2021 Senior Notes |
Fixed | 4.88 | % | 2021 | 700.0 | 699.3 | (5) | |||||||||||||||
$1.3 Billion Senior Notes: |
||||||||||||||||||||||
$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 | % | 2020 | 500.0 | 499.1 | (4) | |||||||||||||||
$800 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 | % | 2040 | 800.0 | 790.1 | (3) | |||||||||||||||
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 | % | 2020 | 400.0 | 398.0 | (2) | |||||||||||||||
$325 Million Private Placement Senior Notes: |
||||||||||||||||||||||
Series 2008A — Tranche A |
Fixed | 6.31 | % | 2013 | 270.0 | 270.0 | ||||||||||||||||
Series 2008A — Tranche B |
Fixed | 6.59 | % | 2015 | 55.0 | 55.0 | ||||||||||||||||
$1.75 Billion Credit Facility: |
||||||||||||||||||||||
Revolving Loan |
Variable | — | 2016 | 1,750.0 | — | (1) | ||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total |
$ | 5,447.0 | $ | 3,608.7 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||||
Debt Instrument |
Type | Average Annual Interest Rate |
Final Maturity |
Total Face Amount |
Total Long-term Debt | |||||||||||||||||
$1 Billion Senior Notes: |
||||||||||||||||||||||
$500 Million 4.80% 2020 Senior Notes |
Fixed | 4.80 | % | 2020 | $ | 500.0 | $ | 499.0 | (4) | |||||||||||||
$500 Million 6.25% 2040 Senior Notes |
Fixed | 6.25 | % | 2040 | 500.0 | 491.3 | (3) | |||||||||||||||
$400 Million 5.90% 2020 Senior Notes |
Fixed | 5.90 | % | 2020 | 400.0 | 397.8 | (2) | |||||||||||||||
$325 Million Private Placement Senior Notes: |
||||||||||||||||||||||
Series 2008A — Tranche A |
Fixed | 6.31 | % | 2013 | 270.0 | 270.0 | ||||||||||||||||
Series 2008A — Tranche B |
Fixed | 6.59 | % | 2015 | 55.0 | 55.0 | ||||||||||||||||
$600 Million Credit Facility: |
||||||||||||||||||||||
Revolving Loan |
Variable | — | 2012 | 600.0 | — | (1) | ||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total |
$ | 2,325.0 | $ | 1,713.1 | ||||||||||||||||||
|
|
|
|
(1) | As of December 31, 2011 and December 31, 2010, no revolving loans were drawn under the credit facility and the principal amount of letter of credit obligations totaled $23.5 million and $64.7 million, respectively, thereby reducing available borrowing capacity to $1,726.5 million and $535.3 million, respectively. |
(2) | As of December 31, 2011 and December 31, 2010, the $400 million 5.90 percent senior notes were recorded at a par value of $400 million less unamortized discounts of $2.0 million and $2.2 million, respectively, based on an imputed interest rate of 5.98 percent. |
(3) | As of December 31, 2011 and December 31, 2010, the $800 million and $500 million 6.25 percent senior notes were recorded at par values of $800 million and $500 million, respectively, less unamortized discounts of $9.9 million and $8.7 million, respectively, based on an imputed interest rate of 6.38 percent. |
(4) | As of December 31, 2011 and December 31, 2010, the $500 million 4.80 percent senior notes were recorded at a par value of $500 million less unamortized discounts of $0.9 million and $1.0 million, respectively, based on an imputed interest rate of 4.83 percent. |
(5) | As of December 31, 2011, the $700 million 4.875 percent senior notes were recorded at a par value of $700 million less unamortized discounts of $0.7 million, based on an imputed interest rate of 4.89 percent. |
(6) | As of December 31, 2011, $278.0 million had been paid down on the original $1.25 billion term loan and of the remaining term loan $74.8 million was classified as Current portion of term loan. The current classification is based upon the principal payment terms of the arrangement requiring principal payments on each three-month anniversary following the funding of the term loan. |
|
(In Millions) | ||||||||
Capital Leases |
Operating Leases |
|||||||
2012 |
$ | 87.1 | $ | 24.2 | ||||
2013 |
60.2 | 23.9 | ||||||
2014 |
55.2 | 18.9 | ||||||
2015 |
44.0 | 12.0 | ||||||
2016 |
28.9 | 7.8 | ||||||
2017 and thereafter |
73.4 | 25.0 | ||||||
|
|
|
|
|||||
Total minimum lease payments |
$ | 348.8 | $ | 111.8 | ||||
|
|
|||||||
Amounts representing interest |
64.2 | |||||||
|
|
|||||||
Present value of net minimum lease payments |
$ | 284.6 | (1) | |||||
|
|
|
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Environmental |
$ | 15.5 | $ | 13.7 | ||||
Mine closure |
||||||||
LTVSMC |
16.5 | 17.1 | ||||||
Operating mines: |
||||||||
U.S Iron Ore |
74.3 | 62.7 | ||||||
Eastern Canadian Iron Ore |
68.0 | 49.3 | ||||||
North American Coal |
36.3 | 34.7 | ||||||
Asia Pacific Iron Ore |
16.3 | 15.4 | ||||||
Other |
8.8 | 6.2 | ||||||
|
|
|
|
|||||
Total mine closure |
220.2 | 185.4 | ||||||
|
|
|
|
|||||
Total environmental and mine closure obligations |
235.7 | 199.1 | ||||||
Less current portion |
13.7 | 14.2 | ||||||
|
|
|
|
|||||
Long term environmental and mine closure obligations |
$ | 222.0 | $ | 184.9 | ||||
|
|
|
|
(In Millions) | ||||||||
December 31, | ||||||||
2011 | 2010 | |||||||
Asset retirement obligation at beginning of period |
$ | 168.3 | $ | 103.9 | ||||
Accretion expense |
16.1 | 13.1 | ||||||
Exchange rate changes |
0.1 | 2.5 | ||||||
Revision in estimated cash flows |
5.9 | 1.0 | ||||||
Payments |
(0.7 | ) | (8.4 | ) | ||||
Acquired through business combinations |
14.0 | 56.2 | ||||||
|
|
|
|
|||||
Asset retirement obligation at end of period |
$ | 203.7 | $ | 168.3 | ||||
|
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|
|
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Defined benefit pension plans |
$ | 37.8 | $ | 45.6 | $ | 50.8 | ||||||
Defined contribution pension plans |
5.7 | 4.2 | 2.1 | |||||||||
Other postretirement benefits |
26.8 | 24.2 | 25.5 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 70.3 | $ | 74.0 | $ | 78.4 | ||||||
|
|
|
|
|
|
(In Millions) | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
Change in benefit obligations: |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Benefit obligations — beginning of year |
$ | 1,022.3 | $ | 750.8 | $ | 440.2 | $ | 333.0 | ||||||||
Service cost (excluding expenses) |
23.6 | 18.5 | 11.1 | 7.5 | ||||||||||||
Interest cost |
51.4 | 52.9 | 22.3 | 22.0 | ||||||||||||
Plan amendments |
— | 3.7 | — | — | ||||||||||||
Actuarial loss |
117.3 | 57.5 | 36.5 | 43.6 | ||||||||||||
Benefits paid |
(67.3 | ) | (67.0 | ) | (25.5 | ) | (28.2 | ) | ||||||||
Participant contributions |
— | — | 4.6 | 6.2 | ||||||||||||
Federal subsidy on benefits paid |
— | — | 0.9 | 0.9 | ||||||||||||
Exchange rate gain |
(5.9 | ) | 10.2 | (1.7 | ) | 2.9 | ||||||||||
Acquired through business combinations |
— | 195.7 | — | 52.3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Benefit obligations — end of year |
$ | 1,141.4 | $ | 1,022.3 | $ | 488.4 | $ | 440.2 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets — beginning of year |
$ | 734.3 | $ | 483.4 | $ | 174.2 | $ | 136.7 | ||||||||
Actual return on plan assets |
10.8 | 87.1 | 1.9 | 20.1 | ||||||||||||
Participant contributions |
— | — | 1.6 | 1.6 | ||||||||||||
Employer contributions |
70.1 | 45.6 | 23.2 | 23.7 | ||||||||||||
Asset transfers |
— | — | — | — | ||||||||||||
Benefits paid |
(67.3 | ) | (67.0 | ) | (7.4 | ) | (7.9 | ) | ||||||||
Exchange rate gain |
(3.8 | ) | 8.9 | — | — | |||||||||||
Acquired through business combinations |
— | 176.3 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Fair value of plan assets — end of year |
$ | 744.1 | $ | 734.3 | $ | 193.5 | $ | 174.2 | ||||||||
|
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|
|
|
|
|||||||||
Funded status at December 31: |
||||||||||||||||
Fair value of plan assets |
$ | 744.1 | $ | 734.3 | $ | 193.5 | $ | 174.2 | ||||||||
Benefit obligations |
(1,141.4 | ) | (1,022.3 | ) | (488.4 | ) | (440.2 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Funded status (plan assets less benefit obligations) |
$ | (397.3 | ) | $ | (288.0 | ) | $ | (294.9 | ) | $ | (266.0 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Amount recognized at December 31 |
$ | (397.3 | ) | $ | (288.0 | ) | $ | (294.9 | ) | $ | (266.0 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Amounts recognized in Statements of Financial Position: |
||||||||||||||||
Current liabilities |
$ | (2.6 | ) | $ | (3.1 | ) | $ | (23.8 | ) | $ | (22.9 | ) | ||||
Noncurrent liabilities |
(394.7 | ) | (284.9 | ) | (271.1 | ) | (243.1 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net amount recognized |
$ | (397.3 | ) | $ | (288.0 | ) | $ | (294.9 | ) | $ | (266.0 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Amounts recognized in accumulated other comprehensive income: |
||||||||||||||||
Net actuarial loss |
$ | 409.1 | $ | 269.3 | $ | 182.9 | $ | 152.3 | ||||||||
Prior service cost |
18.8 | 24.2 | 8.1 | 11.8 | ||||||||||||
Transition asset |
— | — | (3.0 | ) | (5.7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net amount recognized |
$ | 427.9 | $ | 293.5 | $ | 188.0 | $ | 158.4 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
The estimated amounts that will be amortized from accumulated other |
||||||||||||||||
Net actuarial loss |
$ | 29.5 | $ | 11.4 | ||||||||||||
Prior service cost |
3.9 | 3.0 | ||||||||||||||
Transition asset |
— | (3.0 | ) | |||||||||||||
|
|
|
|
|||||||||||||
Net amount recognized |
$ | 33.4 | $ | 11.4 | ||||||||||||
|
|
|
|
(In Millions) | ||||||||||||||||||||||||||||||||
2011 | ||||||||||||||||||||||||||||||||
Pension Plans | Other Benefits | |||||||||||||||||||||||||||||||
Salaried | Hourly | Mining | SERP | Total | Salaried | Hourly | Total | |||||||||||||||||||||||||
Fair value of plan assets |
$ | 289.1 | $ | 451.8 | $ | 3.2 | $— | $ | 744.1 | $ | — | $ | 193.5 | $ | 193.5 | |||||||||||||||||
Benefit obligation |
(419.3 | ) | (708.0 | ) | (5.3 | ) | (8.8 | ) | (1,141.4 | ) | (70.7 | ) | (417.7 | ) | (488.4 | ) | ||||||||||||||||
Funded status |
$ | (130.2 | ) | $ | (256.2 | ) | $ | (2.1 | ) | $ | (8.8 | ) | $ | (397.3 | ) | $ | (70.7 | ) | $ | (224.2 | ) | $ | (294.9 | ) | ||||||||
2010 | ||||||||||||||||||||||||||||||||
Pension Plans | Other Benefits | |||||||||||||||||||||||||||||||
Salaried | Hourly | Mining | SERP | Total | Salaried | Hourly | Total | |||||||||||||||||||||||||
Fair value of plan assets |
$ | 275.3 | $ | 456.7 | $ | 2.3 | $— | $ | 734.3 | $ | — | $ | 174.2 | $ | 174.2 | |||||||||||||||||
Benefit obligation |
(373.8 | ) | (635.3 | ) | (4.4 | ) | (8.8 | ) | (1,022.3 | ) | (63.7 | ) | (376.5 | ) | (440.2 | ) | ||||||||||||||||
Funded status |
$ | (98.5 | ) | $ | (178.6 | ) | $ | (2.1 | ) | $ | (8.8 | ) | $ | (288.0 | ) | $ | (63.7 | ) | $ | (202.3 | ) | $ | (266.0 | ) |
(In Millions) | ||||||||||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Service cost |
$ | 23.6 | $ | 18.5 | $ | 14.3 | $ | 11.1 | $ | 7.5 | $ | 5.4 | ||||||||||||
Interest cost |
51.4 | 52.9 | 42.6 | 22.3 | 22.0 | 18.9 | ||||||||||||||||||
Expected return on plan assets |
(61.2 | ) | (53.3 | ) | (37.1 | ) | (16.1 | ) | (12.9 | ) | (9.1 | ) | ||||||||||||
Amortization: |
||||||||||||||||||||||||
Net asset |
— | — | — | (3.0 | ) | (3.0 | ) | (3.0 | ) | |||||||||||||||
Prior service costs (credits) |
4.4 | 4.4 | 4.2 | 3.7 | 1.7 | 1.8 | ||||||||||||||||||
Net actuarial loss |
19.6 | 23.1 | 26.8 | 8.8 | 8.9 | 11.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net periodic benefit cost |
$ | 37.8 | $ | 45.6 | $ | 50.8 | $ | 26.8 | $ | 24.2 | $ | 25.5 | ||||||||||||
Acquired through business combinations |
— | 17.7 | — | — | 2.4 | — | ||||||||||||||||||
Current year actuarial (gain)/loss |
165.3 | (3.1 | ) | 12.1 | 46.8 | 34.6 | 2.2 | |||||||||||||||||
Amortization of net loss |
(19.6 | ) | (23.1 | ) | (26.8 | ) | (8.8 | ) | (8.9 | ) | (11.5 | ) | ||||||||||||
Current year prior service cost |
— | 3.7 | 3.0 | — | — | — | ||||||||||||||||||
Amortization of prior service (cost) credit |
(4.4 | ) | (4.4 | ) | (4.2 | ) | (3.7 | ) | (1.7 | ) | (1.8 | ) | ||||||||||||
Amortization of transition asset |
— | — | — | 3.0 | 3.0 | 3.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recognized in other comprehensive income |
$ | 141.3 | $ | (9.2 | ) | $ | (15.9 | ) | $ | 37.3 | $ | 29.4 | $ | (8.1 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total recognized in net periodic cost and other comprehensive income |
$ | 179.1 | $ | 36.4 | $ | 34.9 | $ | 64.1 | $ | 53.6 | $ | 17.4 | ||||||||||||
|
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(In Millions) | ||||||||||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
Effect of change in mine ownership & noncontrolling interest |
$ | 53.3 | $ | 49.9 | $ | 50.9 | $ | 12.5 | $ | 10.7 | $ | 10.1 | ||||||||||||
Actual return on plan assets |
10.8 | 87.1 | 63.0 | 1.9 | 20.1 | 27.8 |
2011 | 2010 | |||||||
U.S. plan health care cost trend rate assumed for next year |
7.50 | % | 8.00 | % | ||||
Canadian plan health care cost trend rate assumed for next year |
8.00 | 8.50 | ||||||
Ultimate health care cost trend rate |
5.00 | 5.00 | ||||||
U.S. plan year that the ultimate rate is reached |
2017 | 2017 | ||||||
Canadian plan year that the ultimate rate is reached |
2018 | 2018 |
(In Millions) | ||||||||
Increase | Decrease | |||||||
Effect on total of service and interest cost |
$ | 5.7 | $ | (4.4 | ) | |||
Effect on postretirement benefit obligation |
60.0 | (48.3 | ) |
Pension Assets | VEBA Assets | |||||||||||||||||||||||
Asset Category |
2012 Target Allocation |
Percentage of Plan Assets at December 31, |
2012 Target Allocation |
Percentage of Plan Assets at December 31, |
||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
Equity securities |
43.1 | % | 41.7 | % | 42.0 | % | 41.8 | % | 42.0 | % | 44.4 | % | ||||||||||||
Fixed income |
30.2 | 31.1 | 30.6 | 32.1 | 33.5 | 37.4 | ||||||||||||||||||
Hedge funds |
13.8 | 13.5 | 14.4 | 14.9 | 14.6 | 13.8 | ||||||||||||||||||
Private equity |
5.3 | 5.2 | 5.0 | 6.2 | 4.5 | 4.3 | ||||||||||||||||||
Structured credit |
3.8 | 6.0 | 5.4 | — | — | — | ||||||||||||||||||
Real estate |
3.8 | 2.2 | 2.1 | 5.0 | 5.3 | — | ||||||||||||||||||
Cash |
— | 0.3 | 0.5 | — | 0.1 | 0.1 | ||||||||||||||||||
|
|
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|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
|
|
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|
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(In Millions) | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 191.1 | $ | — | $ | — | $ | 191.1 | ||||||||
U.S. small/mid-cap |
29.2 | — | — | 29.2 | ||||||||||||
International |
90.0 | — | — | 90.0 | ||||||||||||
Fixed income |
231.1 | — | — | 231.1 | ||||||||||||
Hedge funds |
— | — | 100.7 | 100.7 | ||||||||||||
Private equity |
8.6 | — | 30.1 | 38.7 | ||||||||||||
Structured credit |
— | — | 44.9 | 44.9 | ||||||||||||
Real estate |
— | — | 16.5 | 16.5 | ||||||||||||
Cash |
1.9 | — | — | 1.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 551.9 | $ | — | $ | 192.2 | $ | 744.1 | ||||||||
|
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|
|||||||||
(In Millions) | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 122.4 | $ | — | $ | — | $ | 122.4 | ||||||||
U.S. small/mid-cap |
21.7 | — | — | 21.7 | ||||||||||||
International |
164.5 | — | — | 164.5 | ||||||||||||
Fixed income |
224.7 | — | — | 224.7 | ||||||||||||
Hedge funds |
— | — | 105.8 | 105.8 | ||||||||||||
Private equity |
11.8 | — | 25.0 | 36.8 | ||||||||||||
Structured credit |
— | — | 39.7 | 39.7 | ||||||||||||
Real estate |
— | — | 15.5 | 15.5 | ||||||||||||
Cash |
3.2 | — | — | 3.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 548.3 | $ | — | $ | 186.0 | $ | 734.3 | ||||||||
|
|
|
|
|
|
|
|
(In Millions) | ||||||||||||||||||||
Year Ended December 31, 2011 | ||||||||||||||||||||
Hedge Funds | Private Equity Funds |
Structured Credit Fund |
Real Estate |
Total | ||||||||||||||||
Beginning balance — January 1, 2011 |
$ | 105.8 | $ | 25.0 | $ | 39.7 | $ | 15.5 | $ | 186.0 | ||||||||||
Actual return on plan assets: |
||||||||||||||||||||
Relating to assets still held at the reporting date |
(2.4 | ) | 2.6 | 5.2 | 1.6 | 7.0 | ||||||||||||||
Relating to assets sold during the period |
0.5 | 3.0 | — | 0.5 | 4.0 | |||||||||||||||
Purchases |
35.8 | 4.4 | — | — | 40.2 | |||||||||||||||
Sales |
(39.0 | ) | (4.9 | ) | — | (1.1 | ) | (45.0 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance — December 31, 2011 |
$ | 100.7 | $ | 30.1 | $ | 44.9 | $ | 16.5 | $ | 192.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In Millions) | ||||||||||||||||||||
Year Ended December 31, 2010 | ||||||||||||||||||||
Hedge Funds | Private Equity Funds |
Structured Credit Fund |
Real Estate |
Total | ||||||||||||||||
Beginning balance — January 1, 2010 |
$ | 71.4 | $ | 18.2 | $ | 39.1 | $ | 14.4 | $ | 143.1 | ||||||||||
Acquired through business combination |
17.0 | — | — | — | 17.0 | |||||||||||||||
Actual return on plan assets: |
||||||||||||||||||||
Relating to assets still held at the reporting date |
2.4 | 3.4 | 0.5 | 1.5 | 7.8 | |||||||||||||||
Relating to assets sold during the period |
— | 0.1 | — | — | 0.1 | |||||||||||||||
Purchases, sales and settlements |
15.0 | 3.3 | 0.1 | (0.4 | ) | 18.0 | ||||||||||||||
Transfers in (out) of Level 3 |
— | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance — December 31, 2010 |
$ | 105.8 | $ | 25.0 | $ | 39.7 | $ | 15.5 | $ | 186.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(In Millions) | ||||
Defined benefit pension plans |
$ | 54.5 | ||
Other postretirement benefits |
29.4 | |||
|
|
|||
Total |
$ | 83.9 | ||
|
|
(In Millions) | ||||||||||||||||
Pension Benefits |
Other Benefits | |||||||||||||||
Gross Company Benefits |
Less Medicare Subsidy |
Net Company Payments |
||||||||||||||
2012 |
$ | 73.3 | $ | 24.8 | $ | 1.0 | $ | 23.8 | ||||||||
2013 |
76.9 | 25.8 | 1.1 | 24.7 | ||||||||||||
2014 |
75.0 | 27.3 | 1.2 | 26.1 | ||||||||||||
2015 |
76.8 | 28.6 | 1.3 | 27.3 | ||||||||||||
2016 |
77.1 | 29.5 | 1.4 | 28.1 | ||||||||||||
2017-2021 |
396.4 | 152.7 | 9.6 | 143.1 |
(In Millions) | ||||||||
December 31, 2011 | ||||||||
Defined Benefit Pensions |
Other Benefits |
|||||||
Fair value of plan assets |
$ | 744.1 | $ | 193.5 | ||||
Benefit obligation |
1,141.4 | 488.4 | ||||||
|
|
|
|
|||||
Underfunded status of plan |
$ | (397.3 | ) | $ | (294.9 | ) | ||
|
|
|
|
|||||
Additional shutdown and early retirement benefits |
$ | 40.0 | $ | 19.3 | ||||
|
|
|
|
(In Millions) | ||||||||||||||||
Pension Benefits |
Other Benefits | |||||||||||||||
Company Contributions |
VEBA | Direct Payments |
Total | |||||||||||||
2010 |
45.6 | 17.4 | 21.1 | 38.5 | ||||||||||||
2011 |
70.1 | 17.4 | 20.0 | 37.4 | ||||||||||||
2012 (Expected)* |
66.3 | 17.4 | 23.8 | 41.2 |
Pension Benefits | Other Benefits | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
U.S. plan discount rate |
4.28 | % | 5.11 | % | 4.28 | % | 5.11 | % | ||||||||
Canadian plan discount rate |
4.00 | 5.00 | 4.25 | 5.00 | ||||||||||||
Rate of compensation increase |
4.00 | 4.00 | 4.00 | 4.00 | ||||||||||||
U.S. expected return on plan assets |
8.25 | 8.50 | 8.25 | 8.50 | ||||||||||||
Canadian expected return on plan assets |
7.25 | 7.50 | 7.25 | 7.50 |
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||
U.S. plan discount rate |
5.11 | % | 5.66 | % | 6.00 | % | 5.11 | % | 5.66 | % | 6.00 | % | ||||||||||||
Canadian plan discount rate |
5.00 | 5.75/5.50 | (2) | (1 | ) | 5.00 | 6.00/5.75 | (3) | (1 | ) | ||||||||||||||
U.S. expected return on plan assets |
8.50 | 8.50 | 8.50 | 8.50 | 8.50 | 8.50 | ||||||||||||||||||
Canadian expected return on plan assets |
7.50 | 7.50 | (1 | ) | 7.50 | 7.50 | (1 | ) | ||||||||||||||||
Rate of compensation increase |
4.00 | 4.00 | 4.00 | 4.00 | 4.00 | 4.00 |
(In Millions) | ||||||||||||||||
December 31, 2011 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 46.5 | $ | — | $ | — | $ | 46.5 | ||||||||
U.S. small/mid-cap |
7.9 | — | — | 7.9 | ||||||||||||
International |
26.8 | — | — | 26.8 | ||||||||||||
Fixed income |
64.9 | — | — | 64.9 | ||||||||||||
Hedge funds |
— | — | 28.3 | 28.3 | ||||||||||||
Private equity |
1.9 | — | 6.8 | 8.7 | ||||||||||||
Real estate |
— | — | 10.2 | 10.2 | ||||||||||||
Cash |
0.2 | — | — | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 148.2 | $ | — | $ | 45.3 | $ | 193.5 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
(In Millions) | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap |
$ | 38.5 | $ | — | $ | — | $ | 38.5 | ||||||||
U.S. small/mid-cap |
11.7 | — | — | 11.7 | ||||||||||||
International |
27.2 | — | — | 27.2 | ||||||||||||
Fixed income |
65.2 | — | — | 65.2 | ||||||||||||
Hedge funds |
— | — | 24.0 | 24.0 | ||||||||||||
Private equity |
2.5 | — | 4.9 | 7.4 | ||||||||||||
Cash |
0.2 | — | — | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 145.3 | $ | — | $ | 28.9 | $ | 174.2 | ||||||||
|
|
|
|
|
|
|
|
|
Performance Share Plan Year |
Performance Shares Outstanding |
Forfeitures (1) | Grant Date | Performance Period | ||||||||||||
2011 |
169,632 | 18,848 | March 8, 2011 | 1/1/2011-12/31/2013 | ||||||||||||
2011 |
2,090 | — | April 14, 2011 | 1/1/2011-12/31/2013 | ||||||||||||
2011 |
1,290 | — | May 2, 2011 | 1/1/2011-12/31/2013 | ||||||||||||
2010 |
209,853 | 23,317 | March 8, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
12,480 | (2) | — | March 8, 2010 | 1/1/2010-12/31/2012 | |||||||||||
2010 |
480 | — | April 6, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
590 | — | April 12, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
2,130 | — | April 26, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
12,080 | — | May 3, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
550 | — | June 14, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2010 |
670 | — | August 16, 2010 | 1/1/2010-12/31/2012 | ||||||||||||
2009 |
372,881 | 22,089 | March 9, 2009 | 1/1/2009-12/31/2011 | ||||||||||||
2009 |
3,825 | — | August 31, 2009 | 1/1/2009-12/31/2011 | ||||||||||||
2009 |
44,673 | (2) | — | December 17, 2009 | 1/1/2009-12/31/2011 |
Year of Grant |
Unrestricted Equity Grant Shares |
Restricted Equity Grant Shares |
Deferred Equity Grant Shares |
|||||||||
2009 |
7,788 | 15,118 | 2,596 | |||||||||
2010 |
3,963 | 7,926 | 1,321 | |||||||||
2011 |
1,850 | 6,475 | 1,850 |
(In Millions, except per share amount) |
||||||||||||
2011 | 2010 | 2009 | ||||||||||
Cost of goods sold and operating expenses |
$ | 2.7 | $ | 2.8 | $ | 1.2 | ||||||
Selling, general and administrative expenses |
13.2 | 12.7 | 11.0 | |||||||||
Reduction of operating income from continuing operations before income taxes and equity income (loss) from ventures |
15.9 | 15.5 | 12.2 | |||||||||
Income tax benefit |
(5.6 | ) | (5.4 | ) | (4.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Reduction of net income attributable to Cliffs shareholders |
$ | 10.3 | $ | 10.1 | $ | 7.9 | ||||||
|
|
|
|
|
|
|||||||
Reduction of earnings per share attributable to Cliffs shareholders: |
||||||||||||
Basic |
$ | 0.07 | $ | 0.07 | $ | 0.06 | ||||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 0.07 | $ | 0.07 | $ | 0.06 | ||||||
|
|
|
|
|
|
Period (1) |
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) |
|||||||||||||||||
First Quarter |
$96.70 | 2.81 | 94.4 | % | 1.17 | % | 0.58 | % | $77.90 | 80.60 | % | |||||||||||||
Second Quarter |
$93.85 | 2.81 | 94.4 | % | 1.17 | % | 0.58 | % | $75.64 | 80.60 | % |
2011 | 2010 | 2009 | ||||||||||||||||||||||
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
|||||||||||||||||||
Stock options: |
||||||||||||||||||||||||
Options outstanding at beginning of year |
— | — | — | — | 2,500 | $ | 5.42 | |||||||||||||||||
Granted during the year |
— | — | — | |||||||||||||||||||||
Exercised |
— | — | — | — | (2,500 | ) | 5.42 | |||||||||||||||||
Cancelled or expired |
— | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Options outstanding at end of year |
— | — | — | — | — | — | ||||||||||||||||||
Options exercisable at end of year |
— | — | — | — | — | — | ||||||||||||||||||
Restricted awards: |
||||||||||||||||||||||||
Outstanding and restricted at beginning of year |
371,712 | 290,702 | 315,684 | |||||||||||||||||||||
Granted during the year |
125,059 | 133,666 | 184,904 | |||||||||||||||||||||
Vested |
(61,330 | ) | (50,156 | ) | (201,486 | ) | ||||||||||||||||||
Cancelled |
(10,275 | ) | (2,500 | ) | (8,400 | ) | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding and restricted at end of year |
425,166 | 371,712 | 290,702 | |||||||||||||||||||||
Performance shares: |
||||||||||||||||||||||||
Outstanding at beginning of year |
843,238 | 823,393 | 594,115 | |||||||||||||||||||||
Granted during the year (1) |
263,816 | 376,524 | 555,046 | |||||||||||||||||||||
Issued (2) |
(215,870 | ) | (343,321 | ) | (312,336 | ) | ||||||||||||||||||
Forfeited/cancelled |
(13,749 | ) | (13,358 | ) | (13,432 | ) | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding at end of year |
877,435 | 843,238 | 823,393 | |||||||||||||||||||||
Vested or expected to vest as of December 31, 2011 |
833,224 | |||||||||||||||||||||||
Directors' retainer and voluntary shares: |
||||||||||||||||||||||||
Outstanding at beginning of year |
2,509 | 4,596 | 2,183 | |||||||||||||||||||||
Granted during the year |
1,815 | 2,075 | 4,602 | |||||||||||||||||||||
Vested |
(1,713 | ) | (4,162 | ) | (2,189 | ) | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Outstanding at end of year |
2,611 | 2,509 | 4,596 | |||||||||||||||||||||
Reserved for future grants or awards at end of year: |
||||||||||||||||||||||||
Employee plans |
6,760,871 | |||||||||||||||||||||||
Directors' plans |
115,189 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Total |
6,876,060 | |||||||||||||||||||||||
|
|
Shares | Weighted Average Grant Date Fair Value |
|||||||
Outstanding, beginning of year |
1,217,459 | $ | 26.03 | |||||
Granted |
390,690 | $ | 88.60 | |||||
Vested |
(278,913 | ) | $ | 42.73 | ||||
Forfeited/expired |
(24,024 | ) | $ | 61.61 | ||||
|
|
|||||||
Outstanding, end of year |
1,305,212 | $ | 43.19 | |||||
|
|
|
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
United States |
$ | 1,506.5 | $ | 602.1 | $ | 136.6 | ||||||
Foreign |
735.0 | 700.9 | 159.9 | |||||||||
|
|
|
|
|
|
|||||||
$ | 2,241.5 | $ | 1,303.0 | $ | 296.5 | |||||||
|
|
|
|
|
|
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Current provision (benefit): |
||||||||||||
United States federal |
$ | 246.8 | $ | 109.6 | $ | (44.5 | ) | |||||
United States state & local |
2.8 | 2.6 | 3.4 | |||||||||
Foreign |
237.1 | 166.1 | 2.8 | |||||||||
|
|
|
|
|
|
|||||||
486.7 | 278.3 | (38.3 | ) | |||||||||
Deferred provision (benefit): |
||||||||||||
United States federal |
23.8 | 61.1 | 13.2 | |||||||||
United States state & local |
4.7 | 5.2 | (6.1 | ) | ||||||||
Foreign |
(95.1 | ) | (51.1 | ) | 53.7 | |||||||
|
|
|
|
|
|
|||||||
(66.6 | ) | 15.2 | 60.8 | |||||||||
|
|
|
|
|
|
|||||||
Total provision on continuing operations |
$ | 420.1 | $ | 293.5 | $ | 22.5 | ||||||
|
|
|
|
|
|
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Tax at U.S. statutory rate of 35 percent |
$ | 784.5 | $ | 456.0 | $ | 103.8 | ||||||
Increase (decrease) due to: |
||||||||||||
Foreign exchange remeasurement |
(62.6 | ) | — | — | ||||||||
Non-taxable income related to noncontrolling interests |
(63.6 | ) | — | — | ||||||||
Impact of tax law change |
— | 16.1 | — | |||||||||
Percentage depletion in excess of cost depletion |
(153.4 | ) | (103.1 | ) | (66.2 | ) | ||||||
Impact of foreign operations |
(49.4 | ) | (89.1 | ) | (44.3 | ) | ||||||
Legal entity restructuring |
— | (87.4 | ) | — | ||||||||
Income not subject to tax |
(67.5 | ) | — | — | ||||||||
Non-taxable hedging income |
(32.4 | ) | — | — | ||||||||
State taxes, net |
7.5 | 3.1 | (2.1 | ) | ||||||||
Manufacturer's deduction |
(11.9 | ) | — | (0.1 | ) | |||||||
Valuation allowance |
49.5 | 83.3 | 39.0 | |||||||||
Tax uncertainties |
17.7 | — | — | |||||||||
Other items — net |
1.7 | 14.6 | (7.6 | ) | ||||||||
|
|
|
|
|
|
|||||||
Income tax expense |
$ | 420.1 | $ | 293.5 | $ | 22.5 | ||||||
|
|
|
|
|
|
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Other comprehensive (income) loss: |
||||||||||||
Minimum pension/OPEB liability |
$ | (60.2 | ) | $ | 14.0 | $ | (4.7 | ) | ||||
Mark-to-market adjustments |
(17.7 | ) | 1.7 | (12.3 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | (77.9 | ) | $ | 15.7 | $ | (17.0 | ) | |||||
Paid in capital — stock based compensation |
$ | (4.6 | ) | $ | (4.0 | ) | $ | 3.5 | ||||
Discontinued Operations |
$ | (9.2 | ) | $ | (1.5 | ) | $ | (1.7 | ) |
(In Millions) | ||||||||
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
Pensions |
$ | 154.8 | $ | 108.5 | ||||
Postretirement benefits other than pensions |
109.8 | 92.0 | ||||||
Alternative minimum tax credit carryforwards |
228.5 | 153.4 | ||||||
Capital loss carryforwards |
3.8 | 1.3 | ||||||
Development |
— | 0.9 | ||||||
Asset retirement obligations |
42.9 | 42.0 | ||||||
Operating loss carryforwards |
260.7 | 134.2 | ||||||
Product inventories |
30.1 | 21.0 | ||||||
Properties |
44.8 | 38.7 | ||||||
Lease liabilities |
38.8 | 36.9 | ||||||
Other liabilities |
149.3 | 85.4 | ||||||
|
|
|
|
|||||
Total deferred tax assets before valuation allowance |
1,063.5 | 714.3 | ||||||
Deferred tax asset valuation allowance |
223.9 | 172.7 | ||||||
|
|
|
|
|||||
Net deferred tax assets |
839.6 | 541.6 | ||||||
Deferred tax liabilities: |
||||||||
Properties |
1,345.0 | 222.6 | ||||||
Investment in ventures |
155.9 | 72.7 | ||||||
Intangible assets |
13.5 | 14.8 | ||||||
Income tax uncertainties |
56.7 | 37.5 | ||||||
Financial derivatives |
1.3 | 11.7 | ||||||
Deferred revenue |
— | 45.3 | ||||||
Other assets |
98.2 | 58.3 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
1,670.6 | 462.9 | ||||||
|
|
|
|
|||||
Net deferred tax (liabilities) assets |
$ | (831.0 | ) | $ | 78.7 | |||
|
|
|
|
(In Millions) | ||||||||
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
United States |
||||||||
Current |
$ | 17.7 | $ | 2.1 | ||||
Long-term |
162.8 | 134.5 | ||||||
|
|
|
|
|||||
Total United States |
180.5 | 136.6 | ||||||
Foreign |
||||||||
Current |
4.2 | — | ||||||
Long-term |
46.7 | 5.8 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
231.4 | 142.4 | ||||||
Deferred tax liabilities: |
||||||||
Foreign |
||||||||
Long-term |
1,062.4 | 63.7 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
1,062.4 | 63.7 | ||||||
|
|
|
|
|||||
Net deferred tax (liabilities) assets |
$ | (831.0 | ) | $ | 78.7 | |||
|
|
|
|
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Unrecognized tax benefits balance as of January 1 |
$ | 79.8 | $ | 75.2 | $ | 53.7 | ||||||
Increases for tax positions in prior years |
42.1 | 1.9 | 23.8 | |||||||||
Increases for tax positions in current year |
29.5 | — | 2.5 | |||||||||
Increase due to foreign exchange |
— | 0.7 | 4.7 | |||||||||
Settlements |
(3.5 | ) | — | (9.1 | ) | |||||||
Lapses in statutes of limitations |
(45.8 | ) | — | (0.4 | ) | |||||||
Other |
— | 2.0 | — | |||||||||
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Unrecognized tax benefits balance as of December 31 |
$ | 102.1 | $ | 79.8 | $ | 75.2 | ||||||
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(In Millions) | ||||||||||||
Pre-tax Amount |
Tax Benefit (Provision) |
After-tax Amount |
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As of December 31, 2009: |
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Postretirement benefit liability |
$ | (451.9 | ) | $ | 132.8 | $ | (319.1 | ) | ||||
Foreign currency translation adjustments |
163.1 | — | 163.1 | |||||||||
Unrealized net gain on derivative financial instruments |
5.7 | (1.7 | ) | 4.0 | ||||||||
Unrealized loss on securities |
43.1 | (13.7 | ) | 29.4 | ||||||||
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$ | (240.0 | ) | $ | 117.4 | $ | (122.6 | ) | |||||
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As of December 31, 2010: |
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Postretirement benefit liability |
$ | (452.0 | ) | $ | 146.9 | $ | (305.1 | ) | ||||
Foreign currency translation adjustments |
329.9 | (15.2 | ) | 314.7 | ||||||||
Unrealized net gain on derivative financial instruments |
3.9 | (1.2 | ) | 2.7 | ||||||||
Unrealized gain on securities |
46.9 | (13.3 | ) | 33.6 | ||||||||
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$ | (71.3 | ) | $ | 117.2 | $ | 45.9 | ||||||
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As of December 31, 2011: |
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Postretirement benefit liability |
$ | (615.9 | ) | $ | 207.0 | $ | (408.9 | ) | ||||
Foreign currency translation adjustments |
312.5 | — | 312.5 | |||||||||
Unrealized net gain on derivative financial instruments |
1.7 | (0.5 | ) | 1.2 | ||||||||
Unrealized gain on securities |
2.5 | 0.1 | 2.6 | |||||||||
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$ | (299.2 | ) | $ | 206.6 | $ | (92.6 | ) | |||||
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Postretirement Benefit Liability |
Unrealized Net Gain (Loss) on Securities |
Foreign Currency Translation |
Interest Rate Swap |
Net Gain (Loss) on Derivative Financial Instruments |
Accumulated Other Comprehensive Income (Loss) |
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Balance December 31, 2008 |
$ | (343.3 | ) | $ | (0.1 | ) | $ | (68.6 | ) | $ | (1.7 | ) | $ | 19.1 | $ | (394.6 | ) | |||||||
Change during 2009 |
24.2 | 29.5 | 231.7 | 1.7 | (15.1 | ) | 272.0 | |||||||||||||||||
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Balance December 31, 2009 |
(319.1 | ) | 29.4 | 163.1 | — | 4.0 | (122.6 | ) | ||||||||||||||||
Change during 2010 |
14.0 | 4.2 | 151.6 | — | (1.3 | ) | 168.5 | |||||||||||||||||
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Balance December 31, 2010 |
(305.1 | ) | 33.6 | 314.7 | — | 2.7 | 45.9 | |||||||||||||||||
Change during 2011 |
(103.8 | ) | (31.0 | ) | (2.2 | ) | — | (1.5 | ) | (138.5 | ) | |||||||||||||
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Balance December 31, 2011 |
$ | (408.9 | ) | $ | 2.6 | $ | 312.5 | $ | — | $ | 1.2 | $ | (92.6 | ) | ||||||||||
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(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Capital additions |
$ | 960.9 | $ | 275.8 | $ | 168.2 | ||||||
Cash paid for capital expenditures (1) |
862.1 | 209.6 | 116.3 | |||||||||
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Difference |
$ | 98.8 | $ | 66.2 | $ | 51.9 | ||||||
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Non-cash accruals |
$ | 60.1 | $ | 8.9 | $ | 3.0 | ||||||
Capital leases |
38.7 | 57.3 | 48.9 | |||||||||
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Total |
$ | 98.8 | $ | 66.2 | $ | 51.9 | ||||||
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(1) | Cash paid for capital expenditures for 2011 and 2010 has been shown net of cash proceeds of $18.6 and $57.3 million, respectively, from the Pinnacle longwall sale- leaseback that was completed in October 2011 and December 2010. The adjustment was necessary in 2011 and 2010 due to the timing of the cash payments i related to the longwall. |
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Taxes paid on income |
$ | 275.3 | $ | 208.3 | $ | 64.8 | ||||||
Interest paid on debt obligations |
175.1 | 34.2 | 25.3 |
|
Mine |
Cliffs Natural Resources |
ArcelorMittal | U. S. Steel Canada |
WISCO | ||||||||||||
Empire |
79.0 | 21.0 | — | — | ||||||||||||
Tilden |
85.0 | — | 15.0 | — | ||||||||||||
Hibbing |
23.0 | 62.3 | 14.7 | — | ||||||||||||
Bloom Lake |
75.0 | — | — | 25.0 |
(In Millions) | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Product revenues to related parties |
$ | 2,192.4 | $ | 1,165.5 | $ | 593.8 | ||||||
Total product revenues |
6,551.7 | 4,416.8 | 2,216.2 | |||||||||
Related party product revenue as a percent of total product revenue |
33.5 | % | 26.4 | % | 26.8 | % |
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(In Millions, Except Per Share Amounts) | |||||||||||||||||||||
2011 | |||||||||||||||||||||
Quarters | |||||||||||||||||||||
First | Second | Third | Fourth | Year | |||||||||||||||||
Revenues from product sales and services |
$ | 1,183.2 | $ | 1,805.8 | $ | 2,142.8 | $ | 1,662.5 | $ | 6,794.3 | |||||||||||
Sales margin |
599.5 | 731.6 | 861.3 | 496.2 | 2,688.6 | ||||||||||||||||
Net Income from Continuing Operations attributable to Cliffs shareholders |
$ | 423.8 | $ | 409.8 | $ | 618.7 | $ | 185.3 | $ | 1,637.6 | |||||||||||
Loss from Discontinued Operations |
(0.4 | ) | (0.7 | ) | (17.5 | ) | 0.1 | (18.5 | ) | ||||||||||||
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Net Income Attributable to Cliffs Shareholders |
$ | 423.4 | $ | 409.1 | $ | 601.2 | $ | 185.4 | $ | 1,619.1 | |||||||||||
Earnings per common share attributable to Cliffs shareholders — Basic: |
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Continuing Operations |
$ | 3.12 | $ | 2.95 | $ | 4.29 | $ | 1.30 | $ | 11.68 | |||||||||||
Discontinued Operations |
— | (0.01 | ) | (0.12 | ) | — | (0.13 | ) | |||||||||||||
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$ | 3.12 | $ | 2.94 | $ | 4.17 | $ | 1.30 | $ | 11.55 | ||||||||||||
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Earnings per common share attributable to Cliffs shareholders — Diluted: |
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Continuing Operations |
$ | 3.11 | $ | 2.93 | $ | 4.27 | $ | 1.30 | $ | 11.61 | |||||||||||
Discontinued Operations |
— | (0.01 | ) | (0.12 | ) | — | (0.13 | ) | |||||||||||||
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$ | 3.11 | $ | 2.92 | $ | 4.15 | $ | 1.30 | $ | 11.48 | ||||||||||||
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2010 | ||||||||||||||||||||
Quarters | ||||||||||||||||||||
First | Second | Third | Fourth | Year | ||||||||||||||||
Revenues from product sales and services |
$ | 727.7 | $ | 1,184.3 | $ | 1,346.0 | $ | 1,424.1 | $ | 4,682.1 | ||||||||||
Sales margin |
150.5 | 415.2 | 477.3 | 483.5 | 1,526.5 | |||||||||||||||
Net Income from Continuing Operations attributable to Cliffs shareholders |
$ | 78.0 | $ | 261.5 | $ | 298.3 | $ | 385.2 | $ | 1,023.0 | ||||||||||
Loss from Discontinued Operations |
(0.6 | ) | (0.7 | ) | (0.7 | ) | (1.1 | ) | (3.1 | ) | ||||||||||
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Net Income Attributable to Cliffs Shareholders |
$ | 77.4 | $ | 260.8 | $ | 297.6 | $ | 384.1 | $ | 1,019.9 | ||||||||||
Earnings per common share attributable to Cliffs shareholders — Basic: |
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Continuing Operations |
$ | 0.58 | $ | 1.93 | $ | 2.20 | $ | 2.85 | $ | 7.56 | ||||||||||
Discontinued Operations |
— | — | (0.01 | ) | (0.01 | ) | (0.02 | ) | ||||||||||||
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$ | 0.58 | $ | 1.93 | $ | 2.19 | $ | 2.84 | $ | 7.54 | |||||||||||
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Earnings per common share attributable to Cliffs shareholders — Diluted: |
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Continuing Operations |
$ | 0.57 | $ | 1.92 | $ | 2.19 | $ | 2.83 | $ | 7.51 | ||||||||||
Discontinued Operations |
— | — | (0.01 | ) | (0.01 | ) | (0.02 | ) | ||||||||||||
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$ | 0.57 | $ | 1.92 | $ | 2.18 | $ | 2.82 | $ | 7.49 |
(In Millions, Except Per Share Amounts) | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
March 31, 2011 | June 30, 2011 | June 30, 2011 | ||||||||||
Revenues from Product Sales and Services |
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Product |
$ | 54.1 | $ | 46.0 | $ | 100.1 | ||||||
Freight and venture partners' cost reimbursements |
— | (46.0 | ) | (46.0 | ) | |||||||
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54.1 | — | 54.1 | ||||||||||
Cost of Goods Sold and Operating Expenses |
(54.1 | ) | — | (54.1 | ) | |||||||
Income from Continuing Operations |
8.4 | 7.7 | 16.1 | |||||||||
LESS: Income Attributable to Noncontrolling Interest |
45.9 | 38.1 | 84.0 | |||||||||
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Net Income Attributable to Cliffs Shareholders |
$ | (37.5 | ) | $ | (30.4 | ) | $ | (67.9 | ) | |||
Earnings per Common Share Attributable to Cliffs Shareholders - Basic and Diluted |
$ | (0.28 | ) | $ | (0.22 | ) | $ | (0.49 | ) |
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CLCC is a producer of high-volatile metallurgical and thermal coal located in southern West Virginia. CLCC's operations include two underground continuous mining method metallurgical coal mines and one open surface thermal coal mine. The acquisition includes a metallurgical and thermal coal mining complex with a coal preparation and processing facility as well as a large, long-life reserve base with an estimated 59 million tons of metallurgical coal and 62 million tons of thermal coal. This reserve base increases our total global reserve base to over 166 million tons of metallurgical coal and over 67 million tons of thermal coal. This acquisition represented an opportunity for us to add complementary high-quality coal products and provided certain advantages, including among other things, long-life mine assets, operational flexibility and new equipment.
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In October 2011, our North American Coal segment entered into the second phase of the sale-leaseback arrangement initially executed in December 2010 for the sale of the new longwall plow system at our Pinnacle mine in West Virginia. The first and second phases of the leaseback arrangement are for a period of five years. The 2010 sale-leaseback arrangement was specific to the assets at the time of the agreement and did not include the longwall plow system assets. Both phases of the leaseback arrangement have been accounted for as a capital lease. We recorded assets and liabilities under the capital lease of $75.9 million, reflecting the lower of the present value of the minimum lease payments or the fair value of the asset.
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