CLIFFS NATURAL RESOURCES INC., 10-K filed on 2/18/2010
Annual Report
Statement Of Financial Position Classified (USD $)
In Millions
Dec. 31, 2009
Dec. 31, 2008
ASSETS
 
 
CURRENT ASSETS
 
 
Cash and cash equivalents
$ 502.7 
$ 179.0 
Accounts receivable
103.5 
68.5 
Inventories
272.5 
265.4 
Supplies and other inventories
102.7 
101.2 
Deferred and refundable taxes
61.4 
54.8 
Derivative assets
51.5 
76.9 
Other current assets
66.9 
115.9 
TOTAL CURRENT ASSETS
1,161.2 
861.7 
PROPERTY, PLANT AND EQUIPMENT, NET
2,592.6 
2,456.1 
OTHER ASSETS
 
 
Marketable securities
88.1 
25.4 
Investments in ventures
315.1 
305.3 
Goodwill
74.6 
2.0 
Intangible assets, net
114.8 
109.6 
Long-term receivables
49.8 
33.4 
Deferred income taxes
151.1 
251.2 
Deposits and miscellaneous
92.0 
66.4 
TOTAL OTHER ASSETS
885.5 
793.3 
TOTAL ASSETS
4,639.3 
4,111.1 
LIABILITIES
 
 
CURRENT LIABILITIES
 
 
Accounts payable
178.9 
201.0 
Accrued employment costs
78.4 
98.9 
Income taxes payable
6.1 
99.3 
State and local taxes payable
35.1 
45.5 
Below-market sales contracts - current
30.3 
30.3 
Accrued expenses
77.4 
46.1 
Deferred revenue
105.1 
86.8 
Derivative liabilities
0.0 
194.3 
Other current liabilities
59.1 
42.7 
TOTAL CURRENT LIABILITIES
570.4 
844.9 
POSTEMPLOYMENT BENEFIT LIABILITIES
 
 
Pensions
267.3 
250.1 
Other postretirement benefits
178.5 
197.9 
TOTAL POSTEMPLOYMENT BENEFIT LIABILITIES
445.8 
448.0 
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
124.3 
104.9 
DEFERRED INCOME TAXES
70.8 
67.3 
SENIOR NOTES
325.0 
325.0 
TERM LOAN
200.0 
200.0 
BELOW-MARKET SALES CONTRACTS
153.3 
183.6 
OTHER LIABILITIES
212.7 
183.4 
TOTAL LIABILITIES
2,102.3 
2,357.1 
3.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK - ISSUED 172,500 SHARES, 205 SHARES OUTSTANDING IN 2008
0.0 
0.2 
EQUITY
 
 
CLIFFS SHAREHOLDERS' EQUITY
 
 
Common Shares - par value $0.125 per share Authorized - 224,000,000 shares; Issued - 134,623,528 shares (2008 - 134,623,528 shares); Outstanding - 130,971,470 shares (2008 - 113,508,990 shares)
16.8 
16.8 
Capital in excess of par value of shares
695.4 
442.2 
Retained Earnings
1,973.1 
1,799.9 
Cost of 3,652,058 common shares in treasury (2008 - 21,114,538 shares)
(19.9)
(113.8)
Accumulated other comprehensive loss
(122.6)
(394.6)
TOTAL CLIFFS SHAREHOLDERS' EQUITY
2,542.8 
1,750.5 
NONCONTROLLING INTEREST
(5.8)
3.3 
TOTAL EQUITY
2,537.0 
1,753.8 
COMMITMENTS AND CONTINGENCIES
 
 
TOTAL LIABILITIES AND EQUITY
$ 4,639.3 
$ 4,111.1 
Statement Of Financial Position Classified (Parenthetical) (USD $)
Dec. 31, 2009
Dec. 31, 2008
3.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, ISSUED
172,500 
3.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, OUTSTANDING
205 
Preferred stock, no par value
Common Shares, par value
0.125 
0.125 
Common Shares, Authorized
224,000,000 
224,000,000 
Common Shares, Issued
134,623,528 
134,623,528 
Common Shares, Outstanding
130,971,470 
113,508,990 
Common shares in treasury
3,652,058 
21,114,538 
Class A Preferred stock
 
 
Preferred stock, shares authorized
3,000,000 
3,000,000 
Preferred stock, shares unissued
3,000,000 
3,000,000 
Class B Preferred stock
 
 
Preferred stock, shares authorized
4,000,000 
4,000,000 
Preferred stock, shares unissued
4,000,000 
4,000,000 
Statements of Consolidated Operations (USD $)
In Millions, except Share data in Thousands and Per Share data
Year Ended
Dec. 31,
2009
2008
2007
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$ 2,216.2 
$ 3,294.8 
$ 1,997.3 
Freight and venture partners' cost reimbursements
125.8 
314.3 
277.9 
Revenues, Total
2,342.0 
3,609.1 
2,275.2 
COST OF GOODS SOLD AND OPERATING EXPENSES
(2,033.1)
(2,449.4)
(1,813.2)
SALES MARGIN
308.9 
1,159.7 
462.0 
OTHER OPERATING INCOME (EXPENSE)
 
 
 
Royalties and management fee revenue
4.8 
21.7 
14.5 
Selling, general and administrative expenses
(120.7)
(188.6)
(114.2)
Terminated acquisition costs
0.0 
(90.1)
0.0 
Gain on sale of other assets - net
13.2 
22.8 
18.4 
Casualty recoveries
0.0 
10.5 
3.2 
Miscellaneous - net
24.0 
2.9 
(2.3)
Operating Expenses
(78.7)
(220.8)
(80.4)
OPERATING INCOME
230.2 
938.9 
381.6 
OTHER INCOME (EXPENSE)
 
 
 
Changes in fair value of foreign currency contracts, net
85.7 
(188.2)
0.0 
Interest income
10.8 
26.2 
20.0 
Interest expense
(39.0)
(39.8)
(22.6)
Impairment of securities
0.0 
(25.1)
0.0 
Other non-operating income
2.9 
4.3 
1.7 
Nonoperating Income (Expense), Total
60.4 
(222.6)
(0.9)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY LOSS FROM VENTURES
290.6 
716.3 
380.7 
INCOME TAX EXPENSE
(20.8)
(144.2)
(84.1)
EQUITY LOSS FROM VENTURES
(65.5)
(35.1)
(11.2)
INCOME FROM CONTINUING OPERATIONS
204.3 
537.0 
285.4 
INCOME FROM DISCONTINUED OPERATIONS (net of tax of $0.2 in 2007)
0.0 
0.0 
0.2 
NET INCOME
204.3 
537.0 
285.6 
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST (net of tax of $0.3, $9.1, and $4.7 in 2009, 2008 and 2007)
(0.8)
21.2 
15.6 
NET INCOME ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
205.1 
515.8 
270.0 
PREFERRED STOCK DIVIDENDS
0.0 
(1.1)
(5.2)
INCOME ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
205.1 
514.7 
264.8 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
1.64 
5.07 
3.19 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
1.63 
4.76 
2.57 
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
Basic
124,998 
101,471 
82,988 
Diluted
125,751 
108,288 
105,026 
CASH DIVIDENDS PER SHARE
$ 0.26 
$ 0.35 
$ 0.25 
Statements of Consolidated Operations (Parenthetical) (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
INCOME FROM DISCONTINUED OPERATIONS, tax
$ 0.0 
$ 0.0 
$ 0.2 
NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST, tax
$ 0.3 
$ 9.1 
$ 4.7 
Statement Of Cash Flows Indirect (USD $)
In Millions
Year Ended
Dec. 31,
2009
2008
2007
CASH FLOW FROM CONTINUING OPERATIONS
 
 
 
OPERATING ACTIVITIES
 
 
 
Net income
$ 204.3 
$ 537.0 
$ 285.6 
Income from discontinued operations
0.0 
0.0 
(0.2)
Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
236.6 
201.1 
107.2 
Derivatives and currency hedges
(204.5)
58.4 
(15.4)
Foreign exchange gains
(28.1)
0.0 
0.0 
Share-based compensation
10.1 
21.4 
11.8 
Equity loss in ventures (net of tax)
65.5 
35.1 
11.2 
Pensions and other postretirement benefits
27.3 
(32.9)
(35.4)
Deferred income taxes
60.8 
(88.5)
(33.1)
Changes in deferred revenue and below-market sales contracts
(33.4)
58.0 
(34.2)
Impairment of securities
0.0 
25.1 
0.0 
Property damage recoveries
0.0 
(10.5)
0.0 
Other
4.6 
6.7 
(15.0)
Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
(24.2)
(55.4)
18.0 
Product inventories
7.7 
(44.6)
3.2 
Payables and accrued expenses
(141.0)
142.3 
(14.8)
Net cash from operating activities
185.7 
853.2 
288.9 
INVESTING ACTIVITIES
 
 
 
Purchase of PinnOak
0.0 
0.0 
(343.8)
Purchase of noncontrolling interests
0.0 
(589.5)
0.0 
Purchase of property, plant and equipment
(116.3)
(182.5)
(199.5)
Investments in ventures
(81.8)
(62.7)
(180.6)
Investment in marketable securities
(14.9)
(30.4)
(85.3)
Redemption of marketable securities
5.4 
17.8 
40.6 
Proceeds from sale of assets
28.3 
41.2 
23.2 
Proceeds from property damage insurance recoveries
0.0 
10.5 
0.0 
Net cash used by investing activities
(179.3)
(795.6)
(745.4)
FINANCING ACTIVITIES
 
 
 
Net proceeds from issuance of common shares
347.3 
0.0 
0.0 
Borrowings under credit facility
279.7 
540.0 
1,195.0 
Repayments under credit facility
(276.4)
(780.0)
(755.0)
Repayment of PinnOak debt
0.0 
0.0 
(159.6)
Borrowings under senior notes
0.0 
325.0 
0.0 
Common stock dividends
(31.9)
(36.1)
(20.9)
Preferred stock dividends
0.0 
(1.1)
(5.5)
Repayment of other borrowings
(9.7)
(8.4)
(6.9)
Contributions by (to) joint ventures, net
(8.3)
(10.5)
1.9 
Other financing activities
3.6 
3.5 
1.1 
Net cash from financing activities
304.3 
32.4 
250.1 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
13.0 
(68.1)
11.8 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
323.7 
21.9 
(194.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
179.0 
157.1 
351.7 
CASH AND CASH EQUIVALENTS AT END OF YEAR
$ 502.7 
$ 179.0 
$ 157.1 
Statement Of Shareholders Equity And Other Comprehensive Income (USD $)
In Millions, except Share data
Common Shares
Capital in Excess of Par Value of Shares
Retained Earnings
Common Shares in Treasury
Accumulated Other Comprehensive Income (Loss)
Non-Controlling Interest
Total
1/1/2007 - 12/31/2007
 
 
 
 
 
 
 
Beginning Balance (in shares)
81,800,000 
 
 
 
 
 
 
Beginning Balance
16.8 
103.2 
1,078.5 
(282.8)
(169.9)
85.8 
831.6 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
270.0 
 
 
15.6 
285.6 
Other comprehensive income
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
38.8 
3.1 
41.9 
Unrealized net gain (loss) on marketable securities
 
 
 
 
0.6 
 
0.6 
Unrealized net gain (loss) on foreign currency translation
 
 
 
 
86.9 
6.8 
93.7 
Unrealized gain (loss) on interest rate swap
 
 
 
 
(0.9)
 
(0.9)
Unrealized gain (loss) on derivative instruments
 
 
 
 
14.2 
3.5 
17.7 
Total comprehensive income
 
 
 
 
 
29.0 
438.6 
Effect of implementing provisions of ASC 740 related to accounting for income tax uncertainties
 
 
(7.7)
 
 
(1.8)
(9.5)
Equity purchase of noncontrolling interest (in shares)
 
 
 
 
 
 
 
Equity purchase of noncontrolling interest
 
 
 
 
 
 
 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
 
 
Undistributed earnings (losses) to noncontrolling interest
 
 
 
 
 
4.8 
4.8 
Stock options exercised
 
 
 
0.2 
 
 
0.2 
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
 
 
PinnOak settlement (in shares)
 
 
 
 
 
 
 
Issuance of common shares (in shares)
 
 
 
 
 
 
 
PinnOak settlement
 
 
 
 
 
 
 
Issuance of common shares
 
 
 
 
 
 
 
Purchase of additional noncontrolling interest
 
 
 
 
 
 
 
Stock and other incentive plans (in shares)
400,000 
 
 
 
 
 
 
Stock and other incentive plans
 
4.1 
 
2.5 
 
 
6.6 
Repurchases of common stock
 
 
 
(2.2)
 
 
(2.2)
Conversion of preferred stock (in shares)
5,000,000 
 
 
 
 
 
 
Conversion of preferred stock
 
9.3 
1.6 
26.7 
 
 
37.6 
Preferred stock dividends
 
 
(5.3)
 
 
 
(5.3)
Common stock dividends
 
 
(20.9)
 
 
 
(20.9)
Ending Balance (in shares)
87,200,000 
 
 
 
 
 
 
Ending Balance
16.8 
116.6 
1,316.2 
(255.6)
(30.3)
117.8 
1,281.5 
1/1/2008 - 12/31/2008
 
 
 
 
 
 
 
Beginning Balance (in shares)
87,200,000 
 
 
 
 
 
 
Beginning Balance
16.8 
116.6 
1,316.2 
(255.6)
(30.3)
117.8 
1,281.5 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
515.8 
 
 
21.2 
537.0 
Other comprehensive income
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
(188.5)
(8.0)
(196.5)
Unrealized net gain (loss) on marketable securities
 
 
 
 
(10.3)
(1.4)
(11.7)
Unrealized net gain (loss) on foreign currency translation
 
 
 
 
(165.1)
(13.7)
(178.8)
Unrealized gain (loss) on interest rate swap
 
 
 
 
(0.8)
 
(0.8)
Unrealized gain (loss) on derivative instruments
 
 
 
 
0.4 
0.8 
1.2 
Total comprehensive income
 
 
 
 
 
(1.1)
150.4 
Effect of implementing provisions of ASC 740 related to accounting for income tax uncertainties
 
 
 
 
 
 
 
Equity purchase of noncontrolling interest (in shares)
4,300,000 
 
 
 
 
 
 
Equity purchase of noncontrolling interest
 
141.8 
 
23.2 
 
 
165.0 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
(111.2)
(111.2)
Undistributed earnings (losses) to noncontrolling interest
 
 
 
 
 
(2.9)
(2.9)
Stock options exercised
 
 
 
 
 
 
 
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
0.7 
0.7 
PinnOak settlement (in shares)
4,000,000 
 
 
 
 
 
 
Issuance of common shares (in shares)
 
 
 
 
 
 
 
PinnOak settlement
 
131.5 
 
21.5 
 
 
153.0 
Issuance of common shares
 
 
 
 
 
 
 
Purchase of additional noncontrolling interest
 
 
 
 
 
 
 
Stock and other incentive plans (in shares)
 
 
 
 
 
 
 
Stock and other incentive plans
 
19.2 
 
0.8 
 
 
20.0 
Repurchases of common stock
 
 
 
 
 
 
 
Conversion of preferred stock (in shares)
18,000,000 
 
 
 
 
 
 
Conversion of preferred stock
 
33.1 
5.1 
96.3 
 
 
134.5 
Preferred stock dividends
 
 
(1.1)
 
 
 
(1.1)
Common stock dividends
 
 
(36.1)
 
 
 
(36.1)
Ending Balance (in shares)
113,500,000 
 
 
 
 
 
113,508,990 
Ending Balance
16.8 
442.2 
1,799.9 
(113.8)
(394.6)
3.3 
1,753.8 
1/1/2009 - 12/31/2009
 
 
 
 
 
 
 
Beginning Balance (in shares)
113,500,000 
 
 
 
 
 
113,508,990 
Beginning Balance
16.8 
442.2 
1,799.9 
(113.8)
(394.6)
3.3 
1,753.8 
Comprehensive income
 
 
 
 
 
 
 
Net income
 
 
205.1 
 
 
(0.8)
204.3 
Other comprehensive income
 
 
 
 
 
 
 
Pension and OPEB liability
 
 
 
 
24.2 
(2.4)
21.8 
Unrealized net gain (loss) on marketable securities
 
 
 
 
29.5 
 
29.5 
Unrealized net gain (loss) on foreign currency translation
 
 
 
 
231.7 
 
231.7 
Unrealized gain (loss) on interest rate swap
 
 
 
 
1.7 
 
1.7 
Unrealized gain (loss) on derivative instruments
 
 
 
 
(15.1)
 
(15.1)
Total comprehensive income
 
 
 
 
 
(3.2)
473.9 
Effect of implementing provisions of ASC 740 related to accounting for income tax uncertainties
 
 
 
 
 
 
 
Equity purchase of noncontrolling interest (in shares)
 
 
 
 
 
 
 
Equity purchase of noncontrolling interest
 
 
 
 
 
 
 
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
0.1 
0.1 
Undistributed earnings (losses) to noncontrolling interest
 
 
 
 
 
(6.7)
(6.7)
Stock options exercised
 
 
 
 
 
 
 
Capital contribution by noncontrolling interest to subsidiary
 
 
 
 
 
0.7 
0.7 
PinnOak settlement (in shares)
 
 
 
 
 
 
 
Issuance of common shares (in shares)
17,300,000 
 
 
 
 
 
 
PinnOak settlement
 
 
 
 
 
 
 
Issuance of common shares
 
254.5 
 
92.8 
 
 
347.3 
Purchase of additional noncontrolling interest
 
(5.4)
 
 
 
 
(5.4)
Stock and other incentive plans (in shares)
200,000 
 
 
 
 
 
 
Stock and other incentive plans
 
4.1 
 
0.9 
 
 
5.0 
Repurchases of common stock
 
 
 
 
 
 
 
Conversion of preferred stock (in shares)
 
 
 
 
 
 
 
Conversion of preferred stock
 
 
 
0.2 
 
 
0.2 
Preferred stock dividends
 
 
 
 
 
 
 
Common stock dividends
 
 
(31.9)
 
 
 
(31.9)
Ending Balance (in shares)
131,000,000 
 
 
 
 
 
130,971,470 
Ending Balance
$ 16.8 
$ 695.4 
$ 1,973.1 
$ (19.9)
$ (122.6)
$ (5.8)
$ 2,537.0 
BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 — BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES

Business Summary

We are an international mining and natural resources company, the largest producer of iron ore pellets in North America, a major supplier of direct-shipping lump and fines iron ore out of Australia, and a significant producer of metallurgical coal. In North America, we operate six iron ore mines in Michigan, Minnesota and Eastern Canada, and two coking coal mining complexes located in West Virginia and Alabama. 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. Our company’s operations are organized and managed according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore.

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. All common shares and per share amounts have been adjusted retroactively to reflect the two-for-one stock split effective May 15, 2008.

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 significant subsidiaries:

 

Name

  

Location

   Ownership Interest     Operation

Northshore

   Minnesota    100.0   Iron Ore

United Taconite

   Minnesota    100.0   Iron Ore

Pinnacle

   West Virginia    100.0   Coal

Oak Grove

   Alabama    100.0   Coal

Asia Pacific Iron Ore

   Western Australia    100.0   Iron Ore

Tilden

   Michigan    85.0   Iron Ore

Empire

   Michigan    79.0   Iron Ore

Intercompany transactions and balances are eliminated upon consolidation.

We previously adopted, effective January 1, 2009, the amended provisions of FASB ASC 810 related to noncontrolling interests in consolidated financial statements, which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amendment clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The amended provisions are effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and have been applied prospectively as of January 1, 2009, except for the presentation and disclosure requirements, which have been applied retrospectively for all periods presented. The impact of adoption is reflected in our consolidated financial statements included herein for the years ended December 31, 2009, 2008 and 2007 and as of December 31, 2009 and 2008.

Our noncontrolling interests primarily relate to majority-owned subsidiaries within our North American Iron Ore business segment. The mining ventures function as captive cost companies, as they supply products only to their owners effectively on a cost basis. Accordingly, the noncontrolling interests’ revenue amounts are stated at cost of production and are offset entirely by an equal amount included in cost of goods sold and operating expenses, resulting in no sales margin reflected in noncontrolling interest participants. As a result, the adoption of the amendments to FASB ASC 810 did not have a material impact on our consolidated results of operations with respect to these subsidiaries.

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 on the Statements of Consolidated Financial Position at December 31, 2009 and 2008:

 

     (In Millions)
     2009    2008

Segment

   Finished
Goods
   Work-in
Process
   Total
Inventory
   Finished
Goods
   Work-in
Process
   Total
Inventory

North American Iron Ore

   $ 172.7    $ 18.4    $ 191.1    $ 135.3    $ 13.5    $ 148.8

North American Coal

     14.9      1.4      16.3      15.0      6.7      21.7

Asia Pacific Iron Ore

     28.6      31.7      60.3      30.6      55.1      85.7

Other

     1.6      3.2      4.8      6.6      2.6      9.2
                                         

Total

   $ 217.8    $ 54.7    $ 272.5    $ 187.5    $ 77.9    $ 265.4
                                         

North American Iron Ore

North American 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 $81.4 million and $84.5 million at December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, the product inventory balance for North American Iron Ore increased to $172.7 million and $135.3 million, respectively, resulting in an additional LIFO layer being added in each year.

We had approximately 1.2 million tons and 0.4 million tons of finished goods stored at ports on the lower Great Lakes to service customers at December 31, 2009 and 2008, 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.

 

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.

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 the market value of equity investments, 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.

Property, Plant and Equipment

North American Iron Ore

North American 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 estimated economic iron ore reserves. Northshore, United Taconite and our mines in Michigan 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    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, 2009 and 2008:

 

     (In Millions)  
     December 31,  
     2009     2008  

Land rights and mineral rights

   $ 1,877.3      $ 1,731.0   

Office and information technology

     53.7        37.8   

Buildings

     77.3        65.3   

Mining equipment

     381.0        248.5   

Processing equipment

     499.5        421.6   

Railroad equipment

     92.2        70.9   

Electric power facilities

     60.0        57.1   

Port facilities

     52.5        87.5   

Interest capitalized during construction

     18.9        19.7   

Land improvements

     22.4        20.4   

Other

     41.6        25.4   

Construction in progress

     81.7        120.0   
                
     3,258.1        2,905.2   

Allowance for depreciation and depletion

     (665.5     (449.1
                
   $ 2,592.6      $ 2,456.1   
                

We recorded depreciation expense of $120.6 million, $113.5 million and $69.3 million on the Statements of Consolidated Operations for the years ended December 31, 2009, 2008 and 2007, 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 a third party through lease agreements that extend through the earlier of July 1, 2023 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 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, 2009 and 2008 is as follows:

 

     (In Millions)
     December 31,
     2009    2008

Land rights

   $ 29.0    $ 29.0
             

Mineral rights:

     

Cost

   $ 1,848.3    $ 1,702.0

Less depletion

     243.8      139.3
             

Net mineral rights

   $ 1,604.5    $ 1,562.7
             

Accumulated depletion relating to mineral rights, which was recorded using the unit-of-production method, is included in Allowances for depreciation and depletion. We recorded depletion expense of $68.1 million, $66.6 million and $37.9 million on the Statements of Consolidated Operations for the years ended December 31, 2009, 2008 and 2007, 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 minimus 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.

Marketable Securities

Our marketable securities consist of debt and equity instruments and are classified as either held-to-maturity or available-for-sale. Securities investments that we have the intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Investments in marketable equity securities that are being held for an indefinite period are classified as available-for-sale. We determine the appropriate classification of debt and equity securities at the time of purchase and re-evaluate such designation as of each balance sheet date. In addition, we review our investments on an ongoing basis for indications of possible impairment. Once identified, the determination of whether the impairment is temporary or other-than-temporary requires significant judgment. The primary factors that we consider in classifying the impairment include the extent and time the fair value of each investment has been below cost, and the existence of a credit loss in relation to our debt securities. If a decline in fair value is judged other than temporary, the basis of the individual security is written down to fair value as a new cost basis, and the amount of the write-down is included as a realized loss. For our held-to-maturity debt securities, if the fair value is less than cost, and we do not expect to recover the entire amortized cost basis of the security, the other-than-temporary impairment is separated into the amount representing the credit loss, which is recognized in earnings, and the amount representing all other factors, which is recognized in other comprehensive income. Refer to NOTE 4 — MARKETABLE SECURITIES for additional information.

 

Investments in Ventures

The following table presents the detail of our investments in unconsolidated ventures and where those investments are classified on the Statements of Consolidated Financial Position. Parentheses indicate a net liability. Refer to NOTE 6 — FINANCIAL INFORMATION OF EQUITY AFFILIATES for additional information.

 

Investment

   Classification    Interest
Percentage
   (In Millions)  
         December 31,
2009
    December 31,
2008
 

Amapá

   Investments in ventures    30    $ 272.4      $ 266.3   

AusQuest

   Investments in ventures    30      22.7        19.2   

Cockatoo (1)

   Investments in ventures    50      9.1        (13.5

Wabush (2)(3)

   Other liabilities    27      (11.4     12.1   

Hibbing

   Other liabilities    23      (11.6     (22.1

Other

   Investments in ventures         10.9        7.7   
                      
         $ 292.1      $ 269.7   
                      

 

(1) Recorded as Other liabilities at December 31, 2008.

 

(2) Recorded as Investments in ventures at December 31, 2008.

 

(3) On October 12, 2009, we exercised our right of first refusal to acquire U.S. Steel Canada’s 44.6 percent interest and ArcelorMittal Dofasco’s 28.6 percent interest in Wabush, thereby increasing our ownership stake in Wabush Mines to 100 percent. Ownership transfer to Cliffs was completed on February 1, 2010. Refer to NOTE 5 — ACQUISTIONS & OTHER INVESTMENTS for further information.

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 loss from ventures on the Statements of Consolidated Operations. The financial information of Amapá included in our financial statements is as of and for the periods ended November 30, 2009 and 2008. 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 which materially affect Amapá’s financial position or results of operations that were not reflected in our year-end financial statements.

AusQuest

On September 11, 2008, we announced a strategic alliance and subscription and option agreement with AusQuest, a diversified Australian exploration company. Under the agreement, we acquired a 30 percent fully diluted interest in AusQuest through a staged issuance of shares and options. 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 loss from ventures on the Statements of Consolidated Operations. The financial information of AusQuest included in our financial statements is as of and for the periods ended November 30, 2009 and 2008 since the date of acquisition. 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 which materially affect AusQuest’s financial position or results of operations that were not reflected in our year-end financial statements.

 

Hibbing, Wabush and Cockatoo

Investments in certain joint ventures (Wabush, Cockatoo Island, 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. Refer to NOTE 5 — ACQUISITIONS AND OTHER INVESTMENTS, for further information regarding the exercise of our right of first refusal in October 2009 to acquire the remaining interest in Wabush.

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 construction of a rail loop and related equipment (“Non-Mining Assets”). The following substantive legal entities exist within the Sonoma structure:

 

   

CAC, a wholly owned Cliffs subsidiary, is the conduit for Cliffs’ investment in Sonoma.

 

   

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.

 

   

SMM is the appointed operator of the mine assets, non-mine assets, and the Washplant. We own a 45 percent interest in SMM.

 

   

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. Pursuant to the terms of the agreements that comprise the Sonoma Project, at the time of investment in 2007, Cliffs through CAC paid $34.9 million for an 8.33 percent undivided interest in the Mining Assets and a 45 percent undivided interest in the Non-Mining Assets and other expenditures, and paid $85.2 million to construct the Washplant. In 2009 and 2008, we invested an additional $8.6 million and $12.8 million, respectively, in the project, for a total investment of approximately $141.5 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 allocate 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 $74.6 million and $2.0 million recorded on the Statements of Consolidated Financial Position at December 31, 2009 and 2008, 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.

For purposes of our goodwill impairment testing, we define a reporting unit as an operating segment. We evaluate goodwill for impairment in the fourth quarter each year. In addition to the annual impairment test required under U.S. GAAP, we assess whether events or circumstances occurred 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 2009. We determined that the fair value of the reporting units was in excess of our carrying value as of December 31, 2009, and that we did not have any reporting units that were at risk of failing the first step of the goodwill impairment test. Consequently, no goodwill impairment charges were recorded in 2009.

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 assets may be impaired. We determine impairment based on the asset’s ability to generate cash flow greater than the carrying value of the asset, using an undiscounted probability-weighted analysis. If projected undiscounted cash flows are less than the carrying value of the asset, the asset is adjusted to its fair value. We did not record any such impairment charges in 2009, 2008 or 2007.

 

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 an equity loss of $62.2 million in 2009 compared with a loss of $35.1 million in 2008. Based upon the increase in equity losses resulting from start-up costs and production delays, which continued into 2009, we determined that indicators of impairment may exist relative to our investment in Amapá. Accordingly, we performed a quarterly assessment of the potential impairment of our investment, most recently in the fourth quarter of 2009, 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, 2009. 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 the results of our investment on a quarterly basis while monitoring the potential impact on our business as a result of the recent economic downturn in the industry.

Fair Value Measurements

Valuation Hierarchy

ASC 820 establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below:

 

   

Level 1 – Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Valuation methodologies used for assets and liabilities measured at fair value are as follows:

Cash Equivalents

Where quoted prices are available in an active market, cash equivalents are classified within Level 1 of the valuation hierarchy. Cash equivalents classified in Level 1 at December 31, 2009 and 2008 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, 2009 and 2008 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 interest rate swap agreements. Derivative financial instruments that are valued based upon models with significant unobservable market parameters, and that 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.

Refer to NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS and NOTE 12 — 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 PinnOak, who became employees of the Company through the July 2007 acquisition. 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, 2009 and 2008 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 other comprehensive income.

 

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. The discount rate is determined based on the prevailing year-end rates for high-grade corporate bonds with a duration matching the expected cash flow timing of the benefit payments from the various plans. The remaining assumptions are based on our estimates of future events incorporating historical trends and future expectations. The amount of net periodic cost that is recorded in the Consolidated Statements of 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 12 — 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 periodically adjusted 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.

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 11 — 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 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 can be reasonably 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 11 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.

Revenue Recognition and Cost of Goods Sold and Operating Expenses

North American 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 North American Iron Ore term supply agreements provide that title and risk of loss transfer to the customer when payment is received. This is a practice utilized to reduce our financial risk due to customer insolvency but is not believed to be widely used throughout the industry.

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 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 partners. The mining ventures function as captive cost companies; they supply product only to their 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 noncontrolling interest participants. 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 North American Iron Ore operations for the years ended December 31, 2009, 2008 and 2007:

 

     (In Millions)
     Year Ended December 31,
     2009    2008    2007

Reimbursements for:

        

Freight

   $ 22.4    $ 98.5    $ 78.3

Venture partners’ cost

     71.3      170.8      197.3
                    

Total reimbursements

   $ 93.7    $ 269.3    $ 275.6
                    

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.

 

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 2009, 2008 and 2007 included reimbursement for freight charges paid on behalf of customers of $32.1 million, $45.0 million and $2.3 million, respectively. Amounts reported for 2007 are for the five months ended December 31, 2007 since the July 31, 2007 date of acquisition.

Asia Pacific Iron Ore

Sales revenue is recognized at the F.O.B. point, which is generally when the product is loaded into the vessel.

Deferred Revenue

The terms of one of our North American 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 on 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, 2009, installment amounts received in excess of sales totaled $23.2 million, which was recorded as Deferred revenue on the Statement of Consolidated Financial Position.

In 2009 and 2008, certain customers purchased and paid for 0.9 million tons and 1.2 million tons of pellets, respectively, in order to meet minimum contractual purchase requirements for each year under the terms of take-or-pay contracts. The inventory was stored at our facilities in upper 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 $81.9 million and $82.9 million, respectively, was deferred on the December 31, 2009 and 2008 Statements of Consolidated Financial Position. As of December 31, 2009, all of the 1.2 million tons that were deferred at the end of 2008 were delivered, resulting in the related revenue being recognized in 2009 upon shipment. Furthermore, the supply agreement with one of our customers requires the customer to pay for any tons remaining under its 2009 nomination in addition to certain stockpile payments by December 31, 2009. There were approximately 1.7 million unshipped tons remaining under the customer’s 2009 nomination and 0.8 million tons related to December 2009 shipments, for which payment of $147.5 million was due on December 31, 2009 per the terms of the contract. The customer did not remit payment of this amount until January 4, 2010. As a result, such amounts are not reflected in our 2009 consolidated financial statements.

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. Under existing restricted stock plans awarded prior to January 1, 2006, we continue to recognize compensation cost for awards to retiree-eligible employees without substantive forfeiture risk over the nominal vesting period. This recognition method differs from the requirements for immediate recognition for awards granted with similar provisions after the January 1, 2006 adoption.

 

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. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed.

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 stock 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 13 — 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 14 — 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 17 — EARNINGS PER SHARE for further information.

 

Foreign Currency Translation

The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive loss. Where the U.S. dollar is the functional currency, translation adjustments are recorded in the Statements of Consolidated Operations. Income taxes are generally not provided for foreign currency translation adjustments.

Recent Accounting Pronouncements

Effective July 1, 2009, we adopted the FASB Accounting Standards Codification™ (“Codification”). The Codification is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The content of the Codification carries the same level of authority, thereby modifying the previous GAAP hierarchy to include only two levels of GAAP: authoritative and nonauthoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Adoption of the Codification did not result in a change in current accounting practice.

Effective January 1, 2009, we adopted the amendments to FASB ASC 815 regarding disclosures about derivative instruments and hedging activities, which revised and expanded the disclosure requirements to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under U.S. GAAP, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The new requirements apply to derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under FASB ASC 815 and are effective for fiscal years and interim periods beginning after November 15, 2008. Refer to NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.

We previously adopted, effective January 1, 2009, the amended provisions of FASB ASC 810 related to noncontrolling interests in consolidated financial statements, which established accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amendment clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The amended provisions are effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008 and have been applied prospectively as of January 1, 2009, except for the presentation and disclosure requirements, which have been applied retrospectively for all periods presented.

As of the adoption date, our noncontrolling interests are primarily comprised of majority-owned subsidiaries within our North American Iron Ore business segment. The mining ventures function as captive cost companies, as they supply products only to their owners effectively on a cost basis. Accordingly, the noncontrolling interests’ revenue amounts are stated at cost of production and are offset entirely by an equal amount included in cost of goods sold and operating expenses, resulting in no sales margin reflected in noncontrolling interest participants. As a result, the adoption of the amendments to FASB ASC 810 did not have a material impact on our consolidated results of operations with respect to these subsidiaries.

We adopted the revised provisions of FASB ASC 805 related to business combinations effective January 1, 2009. The amended guidance establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date fair value. Information is required to be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The amendment applies prospectively to 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, 2008. The adoption of this amendment did not have a material impact on our consolidated financial statements.

 

In April 2009, the FASB issued an update to ASC 805 to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination. Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value can not be determined, companies should typically account for the acquired contingencies using existing guidance. The guidance is effective for business combinations whose acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We adopted the revised provisions of FASB ASC 805 effective January 1, 2009. The adoption of this amendment did not have a material impact on our consolidated financial statements.

Effective January 1, 2009, we adopted the updated provisions of FASB ASC 808 related to accounting for collaborative arrangements. The guidance defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The updated guidance is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption of this amendment did not have a material impact on our consolidated financial statements.

Effective January 1, 2009, we adopted the updated provisions of FASB ASC 260 related to the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance was issued in order to address whether instruments granted in share-based payment transactions are considered participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The updated guidance is effective for fiscal years beginning after December 15, 2008 and for interim periods within such years. The adoption of this amendment did not have a material impact on our consolidated financial statements.

In November 2008, the FASB updated ASC 323 to address certain matters associated with the accounting for equity method investments including initial recognition and measurement and subsequent measurement considerations. The guidance indicates, among other things, that transaction costs for an investment should be included in the cost of the equity method investment, and shares subsequently issued by the equity method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. The amendments are effective, on a prospective basis, for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The implementation of this guidance did not have a material impact on our consolidated results of operations or financial condition.

In April 2009, the FASB updated ASC 820 to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased, including guidance on identifying circumstances that indicate a transaction is not orderly. The updated guidance emphasizes that the objective of a fair value measurement remains the same even if there has been a significant decrease in the volume and level of activity for the asset or liability and amends certain reporting requirements for interim and annual periods related to disclosure of major security types and the inputs and valuation techniques used in determining fair value. The amendment is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted and applied the updated provisions of FASB ASC 820 prospectively upon the effective date beginning with the interim period ending June 30, 2009. The adoption of this amendment did not have a material impact on our consolidated financial statements. Refer to NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.

In August 2009, the FASB issued ASU No. 2009-05 which amends ASC 820-10-35 to provide further guidance concerning the measurement of a liability at fair value when there is a lack of observable market information, particularly in relation to a liability whose transfer is contractually restricted. The amendment provides additional guidance on the use of an appropriate valuation technique that reflects the quoted price of an identical or similar liability when traded as an asset and clarifies the circumstances under which adjustments to such price may be required in estimating the fair value of the liability. The guidance provided in this update is effective for the first reporting period beginning after issuance, with early application permitted. The amendment was adopted for the annual reporting period ended December 31, 2009; however, it did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued ASU No. 2009-02 which updated ASC 320 to amend the existing other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The new guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The amendment shifts the focus from an entity’s intent to hold a debt security until recovery to its intent to sell and changes the amount of an other-than-temporary impairment loss recognized in earnings when the impairment is recorded because of a credit loss. It also expands disclosure requirements related to the types of securities held, the reasons that a portion of an other-than-temporary impairment of a debt security was not recognized in earnings, and the methodology and significant inputs used to calculate the portion of the total other-than-temporary impairment that was recognized in earnings. The updated guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this amendment beginning with the interim period ending June 30, 2009. Refer to NOTE 4 — MARKETABLE SECURITIES for further information.

In April 2009, the FASB issued an update to ASC 825, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements, including significant assumptions used to estimate the fair value of financial instruments and changes in methods and significant assumptions, if any, during the period. The new guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this amendment upon its effective date beginning with the interim period ending June 30, 2009.

In May 2009, the FASB issued ASC 855 related to subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Although there is new terminology, the guidance is based on the same principles as those that currently exist in the auditing standards. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. We adopted the provisions of ASC 855 beginning with the interim period ending June 30, 2009. Refer to NOTE 21 — SUBSEQUENT EVENTS for further information.

In June 2009, the FASB amended the guidance on transfers of financial assets in order to address practice issues highlighted most recently by events related to the economic downturn. The amendments include: (1) eliminating the qualifying special-purpose entity concept, (2) a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifications and changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) a change to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) extensive new disclosures. The new guidance will be effective January 1, 2010 for calendar year-end companies. We do not expect the adoption of this amendment to have a material impact on our consolidated financial statements.

In June 2009, the FASB amended the consolidation guidance for variable-interest entities. The amendment was issued in response to perceived shortcomings in the consolidation model that were highlighted by recent market events, including concerns about the ability to structure transactions under the current guidance to avoid consolidation, balanced with the need for more relevant, timely, and reliable information about an enterprise’s involvement in a variable-interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable- interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. The new guidance will be effective January 1, 2010 for calendar year-end companies. We do not expect the adoption of this amendment to have a material impact on our consolidated financial statements.

In December 2008, the FASB issued an update to ASC 715 regarding employers’ disclosures about postretirement benefit plan assets. The amended guidance requires disclosure of additional information about investment allocation, fair values of major categories of assets, the development of fair value measurements, and concentrations of risk. The amendment is effective for fiscal years ending after December 15, 2009; however, earlier application is permitted. We adopted the amendment upon its effective date and have reported the required disclosures for our fiscal year ending December 31, 2009. Refer to NOTE 12 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS for further information.

On September 30, 2009 the FASB issued ASU 2009-12 to provide guidance on measuring the fair value of certain alternative investments. The ASU amends ASC 820 to offer investors a practical expedient for measuring the fair value of investments in certain entities that calculate net asset value per share (NAV). The ASU is effective for the first reporting period ending after December 15, 2009; however, early adoption is permitted. We adopted this amendment for the annual reporting period ended December 31, 2009 in relation to the valuation of our postretirement benefit plan assets; however, the disclosure requirements of this amendment do not apply to employers’ postretirement benefit plan assets for which disclosures are required by other GAAP.

In January 2010, the FASB issued ASU 2010-06, which amends 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 ASU also amends 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 new guidance is 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 will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We will adopt this amendment upon its effective date and will report the required disclosures beginning with the interim period ended March 31, 2010.

SEGMENT REPORTING
SEGMENT REPORTING

NOTE 2 — SEGMENT REPORTING

Our company’s operations are organized and managed according to product category and geographic location: North American Iron Ore, North American Coal, Asia Pacific Iron Ore, Asia Pacific Coal and Latin American Iron Ore. The North American Iron Ore segment is comprised of our interests in six North American mines that provide iron ore to the integrated steel industry. The North American Coal segment is comprised of our two North American coking coal mining complexes that provide metallurgical coal primarily to the integrated steel 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, which is in the early stages of production. The Asia Pacific Coal and Latin American Iron Ore 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, 2009, 2008 and 2007, including a reconciliation of segment sales margin to income from continuing operations before income taxes and equity loss from ventures:

 

     (In Millions)  
     2009     2008     2007  

Revenues from product sales and services:

            

North American Iron Ore

   $ 1,447.8      62   $ 2,369.6      66   $ 1,745.4      77

North American Coal

     207.2      9     346.3      10     85.2      4

Asia Pacific Iron Ore

     542.1      23     769.8      21     444.6      19

Other

     144.9      6     123.4      3     —        0
                              

Total revenues from product sales and services for reportable segments

   $ 2,342.0      100 %    $ 3,609.1      100   $ 2,275.2      100
                              

Sales margin:

            

North American Iron Ore

   $ 275.5        $ 804.3        $ 397.9     

North American Coal

     (71.9       (46.4       (31.7  

Asia Pacific Iron Ore

     87.2          348.6          95.8     

Other

     18.1          53.2          —       
                              

Sales margin

     308.9          1,159.7          462.0     

Other operating expense

     (78.7       (220.8       (80.4  

Other income (expense)

     60.4          (222.6       (0.9  
                              

Income from continuing operations before income taxes and equity loss from ventures

   $ 290.6        $ 716.3        $ 380.7     
                              

Depreciation, depletion and amortization:

            

North American Iron Ore

   $ 74.3        $ 66.0        $ 40.7     

North American Coal

     38.2          51.5          17.9     

Asia Pacific Iron Ore

     110.6          73.7          48.6     

Other

     13.5          9.9          —       
                              

Total depreciation, depletion and amortization

   $ 236.6        $ 201.1        $ 107.2     
                              

Capital additions (1):

            

North American Iron Ore

   $ 42.6        $ 53.3        $ 64.4     

North American Coal

     20.8          96.6          11.1     

Asia Pacific Iron Ore

     96.2          67.8          39.3     

Other

     8.6          14.9          120.3     
                              

Total capital additions

   $ 168.2        $ 232.6        $ 235.1     
                              

Assets (2):

            

North American Iron Ore

   $ 1,478.9        $ 1,409.8         

North American Coal

     765.0          773.7         

Asia Pacific Iron Ore

     1,388.2          1,210.9         

Other

     300.0          308.0         
                        

Total segment assets

     3,932.1          3,702.4         

Corporate

     707.2          408.7         
                        

Total assets

   $ 4,639.3        $ 4,111.1         
                        

 

(1) Includes capital lease additions.

 

(2) We have corrected the classification of certain Corporate assets that were previously included within North American Iron Ore assets in 2008.

 

Included in the consolidated financial statements are the following amounts relating to geographic locations:

 

     (In Millions)
     2009    2008    2007

Revenue (1)

        

United States

   $ 1,049.5    $ 1,617.0    $ 1,271.1

China

     711.5      774.2      419.9

Canada

     236.6      573.6      382.0

Japan

     157.4      263.4      135.7

Other countries

     187.0      380.9      66.5
                    

Total revenue

   $ 2,342.0    $ 3,609.1    $ 2,275.2
                    

Long-lived assets

        

Australia

   $ 906.4    $ 763.5   

United States

     1,686.2      1,692.6   
                

Total long-lived assets

   $ 2,592.6    $ 2,456.1   
                

 

(1) Revenue is attributed to countries based on the location of the customer and includes both Product sales and services. The 2007 amounts previously included Royalties and management fees of $14.5 million.

Concentrations in Revenue

We have two customers which individually account for more than 10 percent of our consolidated product revenue in 2009. Total revenue from these customers represents approximately $0.8 billion, $1.6 billion, and $1.1 billion of our total consolidated product revenue in 2009, 2008 and 2007, respectively, and is attributable to our North American 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 2009, 2008 and 2007:

 

     2009     2008     2007  

Revenue Category

      

Iron ore

   81   79   84

Coal

   14      12      4   

Freight and venture partners’ cost reimbursements

   5      9      12   
                  

Total revenue

   100   100   100
                  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The following table presents the fair value of our derivative instruments and the classification of each on the Statements of Consolidated Financial Position as of December 31, 2009 and 2008:

 

    (In Millions)
    Derivative Assets   Derivative Liabilities
    December 31, 2009   December 31, 2008   December 31, 2009   December 31, 2008

Derivative Instrument

  Balance Sheet
Location
  Fair
  Value  
  Balance Sheet
Location
  Fair
  Value  
  Balance Sheet
Location
  Fair
  Value  
  Balance Sheet
Location
  Fair
  Value  

Derivatives designated as hedging instruments under ASC 815:

               

Interest Rate Swap

    $ —       $ —     Derivative liabilities
(current)
  $  —     Derivative liabilities
(current)
  $ 2.6
                               

Total derivatives designated as hedging instruments under ASC 815

    $ —       $ —       $  —       $ 2.6
                               

Derivatives not designated as hedging instruments under ASC 815:

               

Foreign Exchange Contracts

  Derivative assets
(current)
  $ 4.2   Derivative assets
(current)
  $ 0.3   Derivative liabilities
(current)
  $  —     Derivative liabilities
(current)
  $ 77.5
  Deposits and
miscellaneous
    —     Deposits and
miscellaneous
    0.6   Derivative liabilities
(long-term)
    —     Derivative liabilities
(long-term)
    34.3

Customer Supply Agreements

  Derivative assets
(current)
    47.3   Derivative assets
(current)
    76.6       —         —  
  Deposits and
miscellaneous
    15.9   Deposits and
miscellaneous
    —         —         —  

Benchmark Pricing Provision

      —         —     Derivative liabilities
(current)
    —     Derivative liabilities
(current)
    7.7

United Taconite Purchase Provision

      —         —     Derivative liabilities
(current)
    —     Derivative liabilities
(current)
    106.5
                               

Total derivatives not designated as hedging instruments under ASC 815

    $ 67.4     $ 77.5     $  —       $ 226.0
                               

Total derivatives

    $ 67.4     $ 77.5     $  —       $ 228.6
                               

Derivatives Designated as Hedging Instruments

Cash Flow Hedges

Effective October 19, 2007, we entered into a $100 million fixed interest rate swap to convert a portion of our floating rate debt to fixed rate debt. Interest on borrowings under our credit facility is based on a floating rate, dependent in part on the LIBOR rate, exposing us to the effects of interest rate changes. The objective of the hedge was to eliminate the variability of cash flows in interest payments for forecasted floating rate debt, attributable to changes in benchmark LIBOR interest rates. With the swap agreement, we paid a fixed three-month LIBOR rate for $100 million of our floating rate borrowings. The changes in the cash flows of the interest rate swap were expected to offset the changes in the cash flows attributable to fluctuations in benchmark LIBOR interest rates for forecasted floating rate debt. The interest rate swap terminated in October 2009 and qualified as a cash flow hedge. Based on the current interest rate environment and the mix of fixed and variable interest rates that apply to our outstanding debt, we have no plans at this time to replace the interest rate swap.

To support hedge accounting, we designated floating-to-fixed interest rate swaps as cash flow hedges of the variability of future cash flows at the inception of the swap contract. The fair value of our outstanding hedges was recorded as an asset or liability on the consolidated statement of financial position. Ineffectiveness was measured quarterly based on the “hypothetical derivative” method. Accordingly, the calculation of ineffectiveness involved a comparison of the fair value of the interest rate swap and the fair value of a hypothetical swap, which has terms that are identical to the hedged item. The effective portion of the cash flow hedge was recorded in Other comprehensive income, and any ineffectiveness was recognized immediately in income. The amount charged to Other comprehensive income for 2009, 2008 and 2007 was $1.6 million, $(1.2) million and $(0.9) million, respectively. Derivative liabilities of $2.6 million were recorded on the Statements of Consolidated Financial Position as of December 31, 2008. There was no ineffectiveness recorded for the interest rate swap during 2009, 2008 or 2007.

The following summarizes the effect of our derivatives designated as hedging instruments on Other comprehensive income and the Statements of Consolidated Operations for the years ended December 31, 2009, 2008 and 2007:

 

     (In Millions)  

Derivatives in Cash Flow
Hedging Relationships

  Amount of
Gain/(Loss)
Recognized in
OCI on
Derivative
(Effective Portion)
    Location of
Gain/(Loss)
Reclassified from
Accumulated

OCI into Income
(Effective Portion)
  Amount of
Gain/(Loss)
Reclassified from
Accumulated

OCI into Income
(Effective Portion)
  Location of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective Portion)
  Amount of
Gain/(Loss)
Recognized in
Income on
Derivative

(Ineffective Portion)
 
    Year ended
December 31,
        Year ended
December 31,
      Year ended
December 31,
 
    2009   2008     2007         2009     2008   2007       2009   2008     2007  

Interest Rate Swap

  $ 1.0   $ (0.8   $ (0.9   Interest
Income/(Expense)
  $ (0.7   $ —     $ —     Non-Operating
Income/(Expense)
  $  —     $ —        $ —     

Foreign Exchange Contracts (prior to de-designation)

    —       32.1        34.4      Product Revenue     15.1        35.5     16.1   Miscellaneous - net     —       (8.6     (17.0
                                                                   

Total

  $ 1.0   $ 31.3      $ 33.5        $ 14.4      $ 35.5   $ 16.1     $  —     $ (8.6   $ (17.0
                                                                   

Derivatives Not Designated as Hedging Instruments

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 our reporting currency is the United States dollar. Our Asia Pacific operations receive funds in United States currency for their iron ore and coal sales. We use forward exchange contracts, call options, collar options and convertible collar options to hedge our foreign currency exposure for a portion of our sales receipts. United States 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 United States currency exchange rates and to protect against undue adverse movement in these exchange rates. Effective July 1, 2008, we discontinued hedge accounting for these derivatives, but continue to hold these instruments as economic hedges to manage currency risk.

During 2009, we sold approximately $270 million of the outstanding contracts and recognized a net realized loss of $3.3 million in Product revenues on the Statements of Consolidated Operations for the year ended December 31, 2009 based upon the difference between the contract rates and the spot rates on the date each contract was sold. At December 31, 2009, we had outstanding exchange rate contracts with a notional amount of $108.5 million in the form of call options, collar options, and convertible collar options with varying maturity dates ranging from January 2010 to October 2010. This compares with outstanding exchange rate contracts with a notional amount of $869.0 as of December 31, 2008.

As a result of discontinuing hedge accounting, the instruments are prospectively marked to fair value each reporting period through Changes in fair value of foreign currency contracts, net on the Statements of Consolidated Operations. For the year ended December 31, 2009, the mark-to-market adjustments resulted in a net unrealized gain of $85.7 million, respectively, based on the Australian to U.S. dollar spot rate of 0.90 at December 31, 2009. For the year ended December 31, 2008, the mark-to-market adjustments resulted in a net unrealized loss of $188.2 million, based on the Australian to U.S. dollar spot rate of 0.69 at December 31, 2008. The amounts that were previously recorded as a component of Other comprehensive income are reclassified to earnings and a corresponding realized gain or loss is recognized upon settlement of the related contracts. For the year ended December 31, 2009, we reclassified gains of $15.1 million from Accumulated other comprehensive loss related to contracts that settled during the year, and recorded the amounts as Product revenues on the Statements of Consolidated Operations. In 2008, gains of $25.0 million were reclassified to earnings since the July 1, 2008 date of de-designation. For the years ended December 31, 2008 and 2007, ineffectiveness resulted in a loss of $8.6 million and $17.0 million, respectively, which was recorded as Miscellaneous — net on the Statements of Consolidated Operations. As of December 31, 2009, approximately $3.9 million of gains remains in Accumulated other comprehensive loss related to the effective cash flow hedge contracts prior to de-designation. Of this amount, we estimate $3.6 million will be reclassified to Product revenues in the next 12 months upon settlement of the related contracts.

Customer Supply Agreements

Most of our North American 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 North American 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 an embedded derivative and is required to be accounted for separately from the base contract price. The embedded 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 $22.2 million, $225.5 million and $98.3 million as Product revenues on the Statements of Consolidated Operations for the years ended December 31, 2009, 2008 and 2007, respectively, related to the supplemental payments. Derivative assets, representing the fair value of the pricing factors, were $63.2 million and $76.6 million, respectively, on the December 31, 2009 and 2008 Statements of Consolidated Financial Position.

Benchmark Pricing Provision

Certain supply agreements primarily with our Asia Pacific Iron Ore customers provide for revenue or refunds based on the ultimate settlement of annual international benchmark pricing. The pricing provisions are characterized as freestanding derivatives and are required to be accounted for separately once iron ore is shipped. The derivative instrument, which is settled and billed once the annual international benchmark price is settled, is marked to fair value as a revenue adjustment each reporting period based upon the estimated forward settlement until the benchmark is actually settled. We recognized approximately $26.4 million as a reduction to Product revenues on the Statement of Consolidated Operations for the year ended December 31, 2009 under these pricing provisions, compared with Product revenues of $160.6 million for the year ended December 31, 2008. The derivative instrument was settled in the fourth quarter of 2009 upon settlement of the pricing provisions with each of our customers, and is therefore not reflected on the Statement of Consolidated Financial Position at December 31, 2009.

In 2008, the derivative instrument was settled during the second quarter of 2008 upon settlement of annual benchmark prices. However, in the fourth quarter of 2008, we negotiated additional sales with certain of our Asia Pacific Iron Ore customers who had previously fulfilled their purchase commitments under 2008 contracts and required additional tonnage. In response to the economic downturn and its impact on the global steel industry, we agreed that the provisional pricing for these shipments would be at a discount to 2008 benchmark prices to reflect the decline in steel demand and prices, with final pricing being based upon 2009 benchmark prices once they were settled. The discount pricing provisions were characterized as freestanding derivatives and were required to be accounted for separately once the iron ore is shipped. The derivative instrument, which was settled and billed once the 2009 international benchmark price settled, was marked to fair value as a revenue adjustment each reporting period based upon the estimated forward settlement until the benchmark actually settled. We recognized a reduction of approximately $7.7 million in Product revenues on the Statement of Consolidated Operations for the year ended December 31, 2008, related to the shipment of approximately 0.4 million tonnes under these pricing provisions. As of December 31, 2008, the 2009 international benchmark prices had not yet settled. Therefore, we had recorded approximately $7.7 million as current Derivative liabilities on the Statement of Consolidated Financial Position at December 31, 2008. The derivative instrument was settled in the fourth quarter of 2009 upon settlement of the pricing provisions with each of our customers, and is therefore not reflected on the Statement of Consolidated Financial Position at December 31, 2009.

United Taconite Purchase Provision

The purchase agreement for the acquisition of the remaining 30 percent interest in United Taconite in 2008 contained a penalty provision in the event the 1.2 million tons of pellets included as part of the purchase consideration were not delivered by December 31, 2009. The penalty provision, which was not a fixed amount or a fixed amount per unit, was a net settlement feature in this arrangement, and therefore required the obligation to be accounted for as a derivative instrument, which was based on the future Eastern Canadian pellet price. The instrument was marked to fair value each reporting period until the pellets were delivered and the amounts were settled. A derivative liability of $106.5 million, representing the fair value of the pellets that had not yet been delivered, was recorded as current Derivative liabilities on the Statement of Consolidated Financial Position as of December 31, 2008. As of December 31, 2009 the entire 1.2 million tons of pellets have been delivered, thereby resulting in settlement of the derivative liability.

The following summarizes the effect of our derivatives that are not designated as hedging instruments, on the Statements of Consolidated Operations for the years ended December 31, 2009, 2008 and 2007:

 

(In Millions)

 

Derivative Not Designated as Hedging
Instruments

  Location of Gain/(Loss)
Recognized in Income on
Derivative
  Amount of Gain/(Loss)
Recognized in Income on
Derivative
 
        Year ended December 31,  
        2009     2008     2007  

Foreign Exchange Contracts

  Product Revenues   $ 5.4      $ 32.6      $ 23.0   

Foreign Exchange Contracts

  Other Income (Expense)     85.7        (188.2     —     

Foreign Exchange Contracts

  Miscellaneous - net     —          (8.6     (17.0

Customer Supply Agreements

  Product Revenues     22.2        225.5        98.3   

Benchmark Pricing Provision

  Product Revenues     (28.2     (7.7     —     

United Taconite Purchase Provision

  Product Revenues     106.5        74.8        —     
                         

Total

    $ 191.6      $ 128.4      $ 104.3   
                         

 

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 North American 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.

MARKETABLE SECURITIES
MARKETABLE SECURITIES

NOTE 4 — MARKETABLE SECURITIES

At December 31, 2009 and 2008, we had $99.3 million and $30.2 million, respectively, of marketable securities as follows:

 

     (In Millions)
     December 31,
     2009    2008

Held to maturity — current

   $ 11.2    $ 4.8

Held to maturity — non-current

     7.1      14.2
             
     18.3      19.0

Available for sale — non-current

     81.0      11.2
             

Total

   $ 99.3    $ 30.2
             

Marketable securities classified as held-to-maturity are measured and stated at amortized cost. The amortized cost, gross unrealized gains and losses and fair value of investment securities held-to-maturity at December 31, 2009 and 2008 are summarized as follows:

 

     December 31, 2009 (In Millions)
     Amortized
Cost
   Gross Unrealized     Fair
Value
        Gains    Losses    

Asset backed securities

   $ 2.7    $ —      $ (1.2   $ 1.5

Floating rate notes

     15.6      —        (0.2     15.4
                            

Total

   $ 18.3    $ —      $ (1.4   $ 16.9
                            
     December 31, 2008 (In Millions)
     Amortized
Cost
   Gross Unrealized     Fair
Value
        Gains    Losses    
          

Asset backed securities

   $ 2.1    $ —      $ (0.6   $ 1.5

Floating rate notes

     16.9      —        (1.1     15.8
                            

Total

   $ 19.0    $  —      $ (1.7   $ 17.3
                            

 

Investment securities held-to-maturity at December 31, 2009 and 2008 have contractual maturities as follows:

 

     (In Millions)
     December 31,
     2009    2008

Asset backed securities:

     

Within 1 year

   $ —      $ —  

1 to 5 years

     2.7      2.1
             
   $ 2.7    $ 2.1
             

Floating rate notes:

     

Within 1 year

   $ 11.2    $ 4.8

1 to 5 years

     4.4      12.1
             
   $ 15.6    $ 16.9
             

The following table shows our gross unrealized losses and fair value of securities classified as held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008:

 

     Less than 12 months (In Millions)
     December 31, 2009    December 31, 2008
     Unrealized
Losses
   Fair
Value
   Unrealized
Losses
    Fair
Value

Asset backed securities

   $ —      $ —      $ —        $ —  

Floating rate notes

     —        —        (0.1     1.7
                            
   $  —      $  —      $ (0.1   $ 1.7
                            

 

     12 months or longer (In Millions)
     December 31, 2009    December 31, 2008
     Unrealized
Losses
    Fair
Value
   Unrealized
Losses
    Fair
Value

Asset backed securities

   $ (1.2   $ 1.5    $ (0.6   $ 1.5

Floating rate notes

     (0.2     13.2      (1.0     14.1
                             
   $ (1.4   $ 14.7    $ (1.6   $ 15.6
                             

We believe that the unrealized losses on the held-to-maturity portfolio at December 31, 2009 are temporary and are related to market interest rate fluctuations and not to deterioration in the creditworthiness of the issuers. We expect to recover the entire amortized cost basis of the held-to-maturity debt securities, and we intend to hold these investments until maturity.

 

Marketable securities classified as available-for-sale are stated at fair value, with unrealized holding gains and losses included in Other comprehensive income. The cost, gross unrealized gains and losses and fair value of securities classified as available-for-sale at December 31, 2009 and 2008 are summarized as follows:

 

     (In Millions)
     December 31, 2009
     Cost    Gross Unrealized     Fair
Value
        Gains    Losses    

Equity securities

(without contractual maturity)

   $ 35.6    $ 46.1    $ (0.7   $ 81.0
     (In Millions)
     December 31, 2008
     Cost    Gross Unrealized     Fair
Value
        Gains    Losses    

Equity securities

(without contractual maturity)

   $ 12.0    $ —      $ (0.8   $ 11.2

Freewest

During 2009, we acquired 29 million shares of Freewest, a Canadian-based mineral exploration company focused on acquiring, exploring and developing high-quality chromite, gold and base-metal properties in Eastern Canada. The investment is consistent with our mineral diversification strategy. Our ownership in Freewest represented approximately 12.4 percent of its outstanding shares at December 31, 2009. We did not exercise significant influence over Freewest as of the reporting date, and the investment is classified as an available-for-sale security. Accordingly, we record unrealized mark-to-market changes in the fair value of the investment through Other comprehensive income each reporting period, unless the loss is deemed to be other than temporary. On November 23, 2009, we entered into a definitive arrangement to acquire the remaining interest in Freewest. The transaction closed on January 27, 2010. Refer to NOTE 5 — ACQUISITIONS AND OTHER INVESTMENTS for further information.

Pluton Resources

In October 2009, Asia Pacific Iron Ore completed the sale of its 50 percent interest in the Irvine Island iron ore project to its joint venture partner, Pluton Resources. The consideration received consisted of a cash payment of approximately $5 million and the issuance of 19.4 million shares in Pluton Resources, all of which resulted in recognition of a gain on sale amounting to $12.1 million. Our interest in Pluton Resources is approximately 12.5 percent at December 31, 2009. We do not exercise significant influence over Pluton as of the reporting date, and the investment is classified as an available-for-sale security. Accordingly, we record unrealized mark-to-market changes in the fair value of the investment through Other comprehensive income each reporting period, unless the loss is deemed to be other than temporary.

PolyMet

We own 9.2 million shares of PolyMet common stock, representing 6.7 percent of issued shares as a result of the sale of certain land, crushing and concentrating and other ancillary facilities located at our Cliffs Erie site (formerly owned by LTVSMC) to PolyMet. We have the right to participate in up to 6.7 percent of any future financing, and PolyMet has the first right to acquire or place our shares should we choose to sell. We classify the shares as available-for-sale and record unrealized mark-to-market changes in the fair value of the shares through Other comprehensive income each reporting period, unless the loss is deemed to be other than temporary.

 

Golden West

During 2008, we acquired 24.3 million shares of Golden West, a Western Australia iron ore exploration company. Golden West owns the Wiluna West exploration ore project in Western Australia, containing a resource of 126 million metric tons of ore. The investment provides Asia Pacific Iron Ore a strategic interest in Golden West and Wiluna West. Our ownership in Golden West represents approximately 17 percent of its outstanding shares at December 31, 2009 and 2008. Acquisition of the shares represented an original investment of approximately $22 million. We do not exercise significant influence, and at December 31, 2009 and 2008, the investment is classified as an available-for-sale security. Accordingly, we record unrealized mark-to-market changes in the fair value of the investment through Other comprehensive income each reporting period, unless the loss is deemed to be other than temporary.

ACQUISITIONS AND OTHER INVESTMENTS
ACQUISITIONS AND OTHER INVESTMENTS

NOTE 5 — 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. There were no new acquisitions that closed in 2009; however, as discussed in further detail below, we finalized the purchase price allocation for two prior year acquisitions during the current year and announced two new acquisitions that closed in 2010.

United Taconite

Effective July 1, 2008, we acquired the remaining 30 percent interest in United Taconite. Upon consummation of the purchase, our ownership interest increased from 70 percent to 100 percent. The acquisition of the remaining noncontrolling interest was completed in order to strengthen our core North American Iron Ore business.

The aggregate acquisition price for the remaining interest in United Taconite was approximately $450.7 million, which included cash in the amount of $104.4 million, approximately $165 million of our common shares, and approximately 1.2 million tons of iron ore pellets, valued at $181.3 million, to be provided throughout 2008 and 2009. The value of the iron ore pellets was determined based on estimated iron unit content of 65 percent at the 2008 Eastern Canadian pellet price of approximately $2.33 per iron unit on July 10, 2008.

The Statements of Consolidated Financial Position as of December 31, 2009 and 2008 reflect the acquisition of the remaining interest in United Taconite, effective July 1, 2008, under the purchase method of accounting. The transaction constituted a step acquisition of a noncontrolling interest. As of the date of the step acquisition of the noncontrolling interest, the then historical cost basis of the noncontrolling interest balance was eliminated, and the increased ownership obtained was accounted for by increasing United Taconite’s basis from historical cost to fair value for the portion of the assets acquired and liabilities assumed based on the 30 percent additional ownership acquired.

 

We finalized the purchase price allocation in the second quarter of 2009 as follows:

 

     (In Millions)  

Carrying value of net assets acquired

   $ 25.3   
        

Fair value adjustments:

  

ASSETS

  

Land

     7.6   

Plant and equipment

     90.8   

Mineral reserves

     480.6   

Intangible assets

     75.4   

LIABILITIES

  

Below market sales contracts

     (229.0
        

Fair value of net assets acquired

   $ 450.7   
        

Purchase price

   $ 450.7   
        

There were no significant changes to the purchase price allocation from the initial allocation performed in 2008.

Portman Share Repurchase and Buyout

In 2008, we acquired the remaining noncontrolling interest in Asia Pacific Iron Ore (formerly known as Portman Limited) through a series of step acquisitions. In the second quarter of 2008, our ownership interest increased from 80.4 percent to 85.2 percent as a result of a share repurchase in which we did not participate. In the fourth quarter of 2008, we completed a second step acquisition to acquire the remaining noncontrolling interest in Asia Pacific Iron Ore. We have accounted for the acquisition of the noncontrolling interest under the purchase method. We finalized the purchase price allocation in 2009 for both the share repurchase and the buyout. A comparison of the initial allocation and final purchase price allocation is as follows:

 

     (In Millions)  
     Finalized
Allocation
   Initial
Allocation
   Change  

Carrying value of net assets acquired

   $ 85.6    $ 85.6    $ —     
                      

Fair value adjustments:

        

Inventory

     79.6      59.1      20.5   

Plant and equipment

     17.3      18.6      (1.3

Mineral reserves

     173.2      238.2      (65.0

Intangible assets

     42.1      40.1      2.0   

Deferred taxes

     27.6      58.3      (30.7
                      

Fair value of net assets acquired

     425.4      499.9      (74.5
                      

Goodwill

     68.3      —        68.3   
                      

Purchase price

   $ 493.7    $ 499.9    $ (6.2
                      

The adjustment to the purchase price reflects changes to direct acquisition costs resulting from adjustments to the stamp duty assessment. Changes to the fair value adjustments for acquired tangible and intangible assets resulted from the finalization of certain assumptions used in the valuation models utilized to determine their fair values. Changes to the fair value adjustments for mineral reserves resulted primarily from the finalization of pricing assumptions and do not reflect changes in the quality of the related ore body. Changes to the fair value adjustments for deferred taxes resulted from the finalization of our step-up in tax base of Asia Pacific Iron Ore’s net assets triggered by our ownership of 100 percent of the entity. Goodwill reflects the residual value of the purchase price, less the fair value of the net assets acquired, based on exchange rates in effect at the time of the share repurchase, buyout and final allocation.

Pending Transactions

Wabush

On October 9, 2009, Consolidated Thompson Iron Mines Ltd. (“Consolidated Thompson”) announced an agreement with Wabush’s other joint venture partners to acquire their ownership interests for approximately $88 million, subject to certain working capital adjustments. Under the terms of the Wabush partnership agreement, we had a right of first refusal to acquire each of U.S. Steel Canada’s and ArcelorMittal Dofasco’s interest. By exercising our right of first refusal, we were entitled to receive the same terms and conditions contained in the agreement with Consolidated Thompson and thus increase our ownership stake in Wabush to 100 percent. On October 12, 2009, we exercised our right of first refusal to acquire U.S. Steel Canada’s 44.6 percent interest and ArcelorMittal Dofasco’s 28.6 percent interest in Wabush. With Wabush’s 5.5 million tons of rated capacity, acquisition of the remaining interest will increase our North American Iron Ore rated equity production capacity by approximately 4.0 million tons. Ownership transfer to Cliffs was completed on February 1, 2010. Refer to NOTE 21 — SUBSEQUENT EVENTS for further information. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the acquisition, most notably, inventory, mineral rights, and property, plant and equipment. Accordingly, the initial accounting for the transaction, including allocation of the purchase price has not yet been completed.

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 Eastern Canada. On November 23, 2009, we entered into a definitive arrangement to acquire the remaining interest in Freewest, including its interests in the Ring of Fire properties, which comprise three premier chromite deposits. The acquisition is consistent with our strategy to broaden our mineral diversification and will allow us to apply our expertise in open-pit mining and mineral processing to a chromite ore resource base which would form the foundation of North America’s only ferrochrome production operation. The planned mine is expected to produce 1 to 2 million tonnes of high-grade chromite ore annually, which will be further processed into 400 to 800 thousand tonnes of ferrochrome.

On January 25, 2010, we obtained shareholder approval to acquire all of the outstanding shares of Freewest for C$1.00 per share, court approval was received on January 26, 2010, and the transaction closed on January 27, 2010. We issued 0.0201 of our common shares for each Freewest share, a total of 4.2 million common shares, representing total purchase consideration of approximately $174 million. We are in the process of conducting a valuation of the assets acquired and liabilities assumed related to the acquisition, most notably, inventory, mineral rights, and property, plant and equipment. Accordingly, the initial accounting for the transaction, including allocation of the purchase price has not yet been completed. Refer to NOTE 21 — SUBSEQUENT EVENTS for additional information.

FINANCIAL INFORMATION OF EQUITY AFFILIATES
FINANCIAL INFORMATION OF EQUITY AFFILIATES

NOTE 6 — FINANCIAL INFORMATION OF EQUITY AFFILIATES

For the year ended December 31, 2009, our investment in Amapá qualifies as a significant equity method investment as defined under Regulation S-X. Summarized financial information for Amapá and our other equity method investments as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 is as follows:

 

     Amapá (1)  
    

(In Millions)

         (In Millions)  
    

December 31,

         Year Ended December 31,  

Balance Sheet Information

  

2009

   

2008

   

Income Statement Information

       2009             2008             2007      

Current assets

   $ 124.5      $ 75.6      Revenues    $ 123.0      $ 52.2      $ 1.3   

Non-current assets

     616.6        565.5      Sales margin      (46.8     (46.0     (26.6

Current liabilities

     (632.8     (276.1  

Loss from continuing
operations before
extraordinary items and cumulative effect of a change in accounting

     (195.2     (111.0     (34.4

Non-current liabilities

     (4.8     (289.9   Net loss      (195.2     (111.0     (34.4

 

(1) The financial information of Amapá is recorded one month in arrears and is presented in accordance with U.S. GAAP. The information presented in the table represents 100% of Amapá’s results.

 

     Other Equity Method Investments (2)
    

(In Millions)

         (In Millions)
    

December 31,

         Year Ended December 31, (3)

Balance Sheet Information

  

2009

   

2008

   

Income Statement Information

     2009         2008        2007  

Current assets

   $ 133.0      $ 175.6      Revenues    $ 450.7      $ 810.3    $ 714.9

Non-current assets

     1,006.3        944.7      Sales margin      (0.1     43.0      41.8

Current liabilities

     (130.0     (125.3  

Income (Loss) from
continuing operations before extraordinary items and cumulative effect of a change in accounting

     (15.0     35.2      41.1

Non-current liabilities

     (275.3     (285.5   Net income (loss)      (15.0     35.2      41.1

 

(2) Other equity method investments include Wabush, Hibbing, Cockatoo, AusQuest (acquired in November 2008) and KWG (acquired in April 2009). The financial information of each equity method investment is presented in accordance with U.S. GAAP. The information presented in the table represents 100% of the investees’ results on an aggregated basis.
(3) Wabush and Hibbing function as a captive cost companies, as they supply products only to their owners effectively on a cost basis. Accordingly, revenue amounts are stated at cost of production and are offset entirely by an equal amount included in cost of goods sold, resulting in no sales margin. Refer to NOTE 1 — BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES for additional information.
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES

NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES

Goodwill

The following table summarizes changes in the carrying amount of goodwill allocated by reporting unit during 2009 and 2008:

 

     (In Millions)
     December 31, 2009    December 31, 2008
     North American
Iron Ore
   Asia Pacific
Iron Ore
   Total    North American
Iron Ore

Beginning Balance — January 1

   $ 2.0    $ —      $ 2.0    $ 2.0

Arising in business combinations

     —        68.3      68.3      —  

Impact of foreign currency translation

     —        4.3      4.3      —  
                           

Ending Balance — December 31

   $ 2.0    $ 72.6    $ 74.6    $ 2.0
                           

We had goodwill of $2.0 million as of December 31, 2008 related to our North American Iron Ore segment, which was previously reported as a non-current asset within Deposits and miscellaneous on the Statements of Consolidated Financial Position. Goodwill increased in 2009 based on finalization of the purchase price allocation related to the Asia Pacific Iron Ore share repurchase and buyout. The balance of $74.6 million and $2.0 million at December 31, 2009 and 2008, respectively, is presented as Goodwill on the Statements of Consolidated Financial Position. Refer to NOTE 5 — ACQUISITIONS AND OTHER INVESTMENTS for additional information.

Goodwill is not subject to amortization and is tested for impairment annually or when events or circumstances indicate that impairment may have occurred.

Other Intangible Assets and Liabilities

Following is a summary of intangible assets and liabilities at December 31, 2009 and 2008:

 

          (In Millions)
          December 31, 2009    December 31, 2008
     Classification    Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount

Definite lived intangible assets:

                    

Permits

   Intangible assets    $ 120.3    $ (8.2)    $ 112.1    $ 109.3    $ (1.8)    $ 107.5

Leases

   Intangible assets      3.1      (2.8)      0.3      3.1      (1.0)      2.1

Unpatented technology

   Intangible assets      4.0      (1.6)      2.4      —        —        —  
                                            

Total intangible assets

      $ 127.4    $ (12.6)    $ 114.8    $ 112.4    $ (2.8)    $ 109.6
                                            

Below-market sales contracts

   Current liabilities    $ (30.3)    $ —      $ (30.3)    $ (30.3)    $ —      $ (30.3)

Below-market sales contracts

   Long-term liabilities      (198.7)      45.4      (153.3)      (198.7)      15.1      (183.6)
                                            

Total below-market sales contracts

      $  (229.0)    $ 45.4    $ (183.6)    $ (229.0)    $ 15.1    $ (213.9)
                                            

 

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

Leases

   1.5 - 4.5

Unpatented technology

   5

Amortization expense relating to intangible assets was $9.8 million and $2.8 million, respectively, for the years ended December 31, 2009 and 2008, and is recognized in Cost of goods sold and operating expenses on 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

  

2010

   $ 6.6

2011

     6.6

2012

     6.6

2013

     5.7

2014

     5.7
      

Total

   $ 31.2
      

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, 2009 and 2008, we recognized $30.3 million and $15.1 million, respectively, in Product revenues related to the below-market sales contracts. The following amounts will be recognized in earnings for each of the five succeeding fiscal years:

 

     (In Millions)
     Amount

Year Ending December 31

  

2010

   $ 30.3

2011

     30.3

2012

     27.0

2013

     27.0

2014

     23.0
      

Total

   $ 137.6
      

 

FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The following represents the assets and liabilities of the Company measured at fair value at December 31, 2009 and 2008:

 

     (In Millions)
     December 31, 2009

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

   $ 376.0    $ —      $ —      $ 376.0

Derivative assets

     —        —        63.2      63.2

Marketable securities

     81.0      —        —        81.0

Foreign exchange contracts

     —        4.2      —        4.2
                           

Total

   $ 457.0    $ 4.2    $ 63.2    $ 524.4
                           

We had no financial instruments measured at fair value that were in a liability position at December 31, 2009.

 

     (In Millions)
     December 31, 2008

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

   $ 40.4    $ —      $ —      $ 40.4

Derivative assets

     —        —        76.6      76.6

Marketable securities

     10.9      0.3      —        11.2

Foreign exchange contracts

     —        0.9      —        0.9
                           

Total

   $ 51.3    $ 1.2    $ 76.6    $ 129.1
                           

Liabilities:

           

Interest rate swap

   $ —      $ 2.6    $ —      $ 2.6

Foreign exchange contracts

     —        111.8      —        111.8

Derivative liabilities

     —        —        114.2      114.2
                           

Total

   $ —      $ 114.4    $ 114.2    $ 228.6
                           

Financial assets classified in Level 1 at December 31, 2009 and 2008 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, 2009 and 2008, such derivative financial instruments include substantially all of our foreign exchange hedge contracts. As of December 31, 2008, such derivative instruments also included our interest rate swap agreement, which terminated in October 2009. The fair value of the interest rate swap and foreign exchange hedge contracts is based on a forward LIBOR curve and forward market prices, respectively, and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account current interest rates, creditworthiness, nonperformance risk, and liquidity risks associated with current market conditions.

The derivative financial asset classified within Level 3 is an embedded derivative instrument included in certain supply agreements with one of our 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 record this provision at fair value, based on an income approach when the product is consumed and the amounts are settled, as an adjustment to revenue. The fair value of the instrument is determined using an income 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 derivative liabilities classified within Level 3 at December 31, 2008 were comprised of two instruments. One of the instruments was a derivative included in the purchase agreement for the acquisition of the remaining 30 percent interest in United Taconite in 2008. The agreement contained a penalty provision in the event the 1.2 million tons of pellets included as part of the purchase consideration were not delivered by December 31, 2009. The penalty provision, which was not a fixed amount or a fixed amount per unit, was a net settlement feature in this arrangement, and therefore required the obligation to be accounted for as a derivative instrument, which was based on the future Eastern Canadian pellet price. The instrument was marked to fair value each reporting period until the pellets were delivered and the amounts were settled. A derivative liability of $106.5 million, representing the fair value of the pellets that had not yet been delivered, was recorded as current Derivative liabilities on the Statement of Consolidated Financial Position as of December 31, 2008. As of December 31, 2009 the entire 1.2 million tons of pellets have been delivered, thereby resulting in settlement of the derivative liability.

The Level 3 derivative liabilities at December 31, 2008 also consisted of freestanding derivatives related to certain supply agreements primarily with our Asia Pacific customers that provided for discounts on December 2008 shipments based on the ultimate settlement of the 2009 international benchmark pricing provisions. The discount provisions were characterized as freestanding derivatives and were required to be accounted for separately once the iron ore was shipped. The derivative instrument, which was settled and billed once the annual international benchmark price was settled, was marked to fair value as a revenue adjustment each reporting period based upon the estimated forward settlement until the benchmark was actually settled. The fair value of the instrument was determined based on the forward price expectation of the 2009 annual international benchmark price and took into account current market conditions and other risks, including nonperformance risk. As of December 31, 2008, the 2009 international benchmark prices had not yet settled. Therefore, we had recorded approximately $7.7 million as current Derivative liabilities on the Statement of Consolidated Financial Position at December 31, 2008. The derivative instrument was settled in the fourth quarter of 2009 upon settlement of the pricing provisions with each of our customers, and is therefore not reflected on the Statement of Consolidated Financial Position at December 31, 2009.

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, 2009 and 2008.

 

The following 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, 2009 and 2008.

 

     (In Millions)  
     Derivative Assets     Derivative Liabilities  
     Year Ended
December 31,
    Year Ended
December 31,
 
     2009     2008     2009     2008  

Beginning balance—January 1

   $ 76.6      $ 53.8      $ (114.2   $ —     

Total gains (losses)

        

Included in earnings

     22.2        386.0        78.3        50.6   

Included in other comprehensive income

     —          —          —          —     

Settlements

     (35.6 )      (363.2     35.9        24.2   

Transfers in to Level 3

     —          —          —          (189.0
                                

Ending balance—December 31

   $ 63.2      $ 76.6      $ —        $ (114.2
                                

Total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses on assets and liabilities still held at the reporting date

   $ 22.2      $ 225.5      $ —        $ 50.6   
                                

Gains and losses included in earnings are reported in Product revenue on the Statements of Consolidated Operations for the years ended December 31, 2009 and 2008.

The carrying amount and fair value of our long-term receivables and long-term debt at December 31, 2009 and 2008 were as follows:

 

     (In Millions)
     December 31, 2009    December 31, 2008
     Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value

Long-term receivables:

           

Customer supplemental payments

   $ 21.4    $ 17.5    $ —      $ —  

ArcelorMittal USA—Ispat receivable

     38.3      45.7      43.2      46.1

Asia Pacific rail credit receivable

     —        —        0.2      0.2
                           

Total long-term receivables (1)

   $ 59.7    $ 63.2    $ 43.4    $ 46.3
                           

Long-term debt:

           

Senior notes

   $ 325.0    $ 332.9    $ 325.0    $ 277.9

Term loan

     200.0      200.0      200.0      200.0

Customer borrowings

     4.6      4.6      5.4      5.2
                           

Total long-term debt

   $ 529.6    $ 537.5    $ 530.4    $ 483.1
                           

 

(1) Includes current portion.

The terms of one of our North American 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 beginning in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of December 31, 2009, we have a receivable of $21.4 million recorded in Long-term receivables on the Statement of Consolidated Financial Position reflecting the terms of this deferred payment arrangement. The fair value of the receivable of $17.5 million at December 31, 2009 is based on a discount rate of 6.2 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 million, recorded at a present value of $38.3 million and $43.2 million at December 31, 2009 and 2008, respectively. The fair value of the receivable of $45.7 million and $46.1 million at December 31, 2009 and 2008, respectively, is based on a discount rate of 5.0 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 9 — DEBT AND CREDIT FACILITIES for further information.

DEBT AND CREDIT FACILITIES
DEBT AND CREDIT FACILITIES

NOTE 9 — DEBT AND CREDIT FACILITIES

The following represents a summary of our long-term debt as of December 31, 2009 and 2008:

 

     ($ in Millions)  
     December 31, 2009  

Debt Instrument

   Type    Average
Annual
Interest Rate
    Final
Maturity
   Total
Borrowing
Capacity
   Total
Principal
Outstanding
 

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

Credit Facility:

             

Term loan

   Variable    1.43 %(1)    2012      200.0      (200.0

Revolving loan

   Variable    —   %(1)    2012      600.0      —   (2) 
                       

Total

           $ 1,125.0    $ (525.0
                       
     December 31, 2008  

Debt Instrument

   Type    Average
Annual
Interest Rate
    Final
Maturity
   Total
Borrowing
Capacity
   Total
Principal
Outstanding
 

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

Credit Facility:

             

Term loan

   Variable    5.02 %(1)    2012      200.0      (200.0

Revolving loan

   Variable    —   %(1)    2012      600.0      —   (2) 
                       

Total

           $ 1,125.0    $ (525.0
                       

 

(1) After the effect of interest rate hedging, the average annual borrowing rate for outstanding revolving and term loans was 1.43% and 5.10% as of December 31, 2009 and 2008, respectively.

 

(2) As of December 31, 2009 and 2008, no revolving loans were drawn under the credit facility; however, the principal amount of letter of credit obligations totaled $31.4 million and $21.5 million, respectively, reducing available borrowing capacity to $568.6 million and $578.5 million, respectively.

 

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 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 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, 2009 and 2008, we were in compliance with the financial covenants in the note purchase agreement.

Credit Facility

On August 17, 2007, we entered into a five-year unsecured credit facility with a syndicate of 13 financial institutions. The facility provides $800 million in borrowing capacity, comprised of $200 million in term loans and $600 million in revolving loans, swing loans and letters of credit. Effective October 29, 2009, we amended the terms of our $800 million credit facility. The 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 amendment.

Loans are drawn with a choice of interest rates and maturities, subject to the terms of the agreement. Pursuant to the amendment described above, interest rates are either (1) a range from LIBOR plus 0.95 percent to LIBOR plus 1.625 percent based on debt and earnings levels, or (2) the highest of the Federal Funds Rate plus 0.50 percent, the prime rate plus a range of 0 to 0.625 percent, or the one-month LIBOR rate plus 1.0 percent based on debt and earnings levels.

The credit facility has two financial covenants based on: (1) debt to earnings ratio (Total Funded Debt to Consolidated EBITDA, as those terms are defined in the 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 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 October 29, 2009 credit facility amendment 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 amendment provides more liberally defined financial covenants. As of December 31, 2009 and 2008, we were in compliance with the financial covenants in the credit agreement.

Short-term Facilities

On February 9, 2009, Asia Pacific Iron Ore amended its A$40 million ($35.7 million) multi-option facility to include an additional A$80 million ($71.4 million) cash facility, which expired on August 31, 2009. The remaining A$40 million multi-option facility provides credit for contingent instruments, such as performance bonds, and expires on February 28, 2010. The outstanding bank commitments on the multi-option facility totaled A$20.4 million ($18.2 million) and A$27.2 million ($18.8 million) in performance bonds, reducing borrowing capacity to A$19.6 million ($17.5 million) and A$12.8 million ($8.8 million) at December 31, 2009 and 2008, respectively. The facility agreement contains financial covenants as follows: (1) debt to earnings ratio and (2) interest coverage ratio. As of December 31, 2009 and 2008, we were in compliance with the financial covenants of the credit facility agreement. We have provided a guarantee of the facility, along with certain of our Australian subsidiaries.

Latin America

At December 31, 2009 and 2008, Amapá had total project debt outstanding of approximately $530 million and $493 million, respectively, for which we have provided a several guarantee on our 30 percent share. Our estimate of the aggregate fair value of the outstanding guarantee is $6.7 million as of December 31, 2009 and 2008, which is reflected in Other Liabilities on the Statements of Consolidated Financial Position. The fair value was estimated using a discounted cash flow model based upon the spread between guaranteed and non-guaranteed debt over the period the debt is expected to be outstanding. On October 1, 2009, $20.9 million of short-term debt was repaid. An additional $180.5 million of short-term debt was due and repaid on February 17, 2010.

Amapá is currently in violation of certain operating and financial loan covenants contained in the debt agreements. However, Amapá and its lenders have agreed to waive these covenants through May 31, 2010 related to the remaining debt outstanding. If Amapá is unable to either renegotiate the terms of the debt agreements or obtain further extension of the compliance waivers, violation of the operating and financial loan covenants may result in the lenders calling the debt, thereby requiring us to recognize and repay our share of the debt in accordance with the provisions of the guarantee arrangement.

Debt Maturities

Maturities of debt instruments based on the principal amounts outstanding at December 31, 2009, total $5 million in 2010, $0 million in 2011, $200 million in 2012, $270 million in 2013, $0 million in 2014 and $55 million thereafter.

Refer to NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS for further information.

LEASE OBLIGATIONS
LEASE OBLIGATIONS

NOTE 10 — LEASE OBLIGATIONS

We lease certain mining, production and other equipment under operating and capital leases. The leases are for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the terms. Our operating lease expense was $25.5 million, $20.8 million and $14.7 million in 2009, 2008 and 2007, respectively. Capital lease assets were $167.1 million and $73.9 million at December 31, 2009 and 2008, respectively. Corresponding accumulated amortization of capital leases included in respective allowances for depreciation were $41.5 million and $18.3 million at December 31, 2009 and 2008, respectively.

In January 2009, Asia Pacific Iron Ore entered into a sale-leaseback arrangement. Under the arrangement, we sold 420 rail cars and leased them back for a period of 10 years. The leaseback has been accounted for as a capital lease. We recorded assets and liabilities under the capital lease of $42.7 million, reflecting the lower of the present value of the minimum lease payments or the fair value of the asset. No material gain or loss was realized as a result of the transaction.

 

Future minimum payments under capital leases and non-cancellable operating leases at December 31, 2009 are as follows:

 

     (In Millions)
     Capital
Leases
    Operating
Leases

2010

   $ 24.3      $ 22.4

2011

     23.8        18.6

2012

     23.4        14.7

2013

     22.1        15.4

2014

     21.6        11.0

2015 and thereafter

     68.0        12.2
              

Total minimum lease payments

     183.2      $ 94.3
        

Amounts representing interest

     49.7     
          

Present value of net minimum lease payments

   $ 133.5 (1)   
          

 

(1) The total is comprised of $14.2 million and $119.3 million classified as Other current liabilities and Other liabilities, respectively, on the Statements of Consolidated Financial Position at December 31, 2009.

Total minimum capital lease payments of $183.2 million include $16.3 million and $166.9 million, for our North American Iron Ore segment and Asia Pacific Iron Ore segment, respectively. Total minimum operating lease payments of $94.3 million include $84.4 million for our North American Iron Ore segment, $6.1 million for our Asia Pacific Iron Ore segment, and $3.8 million for our North American Coal segment.

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS

NOTE 11 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS

We had environmental and mine closure liabilities of $132.3 million and $117.1 million at December 31, 2009 and 2008, respectively. Payments in 2009 were $1.6 million compared with $6.2 million in 2008. The following is a summary of the obligations at December 31, 2009 and 2008:

 

     (In Millions)
     December 31,
     2009    2008

Environmental

   $ 14.5    $ 16.4

Mine closure

     

LTVSMC

     13.9      13.9

Operating mines:

     

North American Iron Ore

     56.9      44.1

North American Coal

     30.3      31.1

Asia Pacific Iron Ore

     11.4      7.8

Other

     5.3      3.8
             

Total mine closure

     117.8      100.7
             

Total environmental and mine closure obligations

     132.3      117.1

Less current portion

     8.0      12.2
             

Long term environmental and mine closure obligations

   $ 124.3    $ 104.9
             

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 $14.5 million and $16.4 million at December 31, 2009 and 2008, 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 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.

As discussed in further detail below, the environmental liability recorded at December 31, 2009 and 2008 is primarily 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, 2009, 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.

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 $9.5 million and $10.7 million on the Statements of Consolidated Financial Position as of December 31, 2009 and 2008, respectively, related to this issue. We believe our current reserve is adequate to fund our anticipated portion of the IFC. While a global settlement with the EPA has not been finalized, we expect an agreement will be reached in 2010.

 

Mine Closure

Our mine closure obligation of $117.8 million and $100.7 million at December 31, 2009 and 2008, respectively, includes our four consolidated North American operating iron ore mines, our two operating North American coal mining complexes, 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 $13.9 million at December 31, 2009 and 2008.

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 2008 in accordance with our Company’s accounting policy, which requires us to perform an in-depth evaluation of the liability every three years in addition to routine annual assessments. 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, 2009 and 2008:

 

     (In Millions)  
     December 31,  
     2009    2008  

Asset retirement obligation at beginning of period

   $ 86.8    $ 96.0   

Accretion expense

     6.8      7.3   

Reclassification adjustments

     —        1.0   

Exchange rate changes

     3.6      (3.1

Revision in estimated cash flows

     6.7      (14.4
               

Asset retirement obligation at end of period

   $ 103.9    $ 86.8   
               
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
PENSIONS AND OTHER POSTRETIREMENT BENEFITS

NOTE 12 — 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 PinnOak, who became employees of the Company through the July 2007 acquisition. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations. The defined benefit pension plans are largely noncontributory and benefits are generally 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 a four-year labor contract, which replaced the labor agreement that expired on September 1, 2008. The agreement covers approximately 2,300 USW-represented workers at our Empire and Tilden mines in Michigan, and our United Taconite and Hibbing mines in Minnesota. 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.

 

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 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. 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 Combined 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 are at a rate of $5.27 per hour worked in 2009 and 2008 and amounted to $6.1 million in 2009 and $9.8 million in 2008.

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 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 contracts.

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 is at least actuarially 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. As a result, OPEB expense for 2009, 2008 and 2007 reflect estimated cost reductions of $3.8 million, $2.8 million and $2.5 million, respectively. 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 2009, 2008 and 2007:

 

     (In Millions)
     2009    2008    2007

Defined benefit pension plans

   $ 50.8    $ 20.3    $ 17.4

Defined contribution pension plans

     2.1      7.2      5.1

Other postretirement benefits

     25.5      8.6      4.4
                    

Total

   $ 78.4    $ 36.1    $ 26.9
                    

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, 2009 and 2008:

 

     (In Millions)  
     Pension Benefits     Other Benefits  

Change in benefit obligations:

   2009     2008     2009     2008  

Benefit obligations — beginning of year

   $ 706.6      $ 680.8      $ 307.4      $ 252.7   

Service cost (excluding expenses)

     14.3        12.6        5.4        3.4   

Interest cost

     42.6        41.4        18.9        16.3   

Plan amendments

     3.0        6.7        —          33.7   

Actuarial loss (gain)

     38.6        11.7        19.5        16.2   

Benefits paid

     (54.3     (46.6     (22.8     (19.7

Participant contributions

     —          —          3.7        3.6   

Federal subsidy on benefits paid

     —          —          0.9        1.2   
                                

Benefit obligations — end of year

   $ 750.8      $ 706.6      $ 333.0      $ 307.4   
                                

Change in plan assets:

                        

Fair value of plan assets — beginning of year

   $ 456.0      $ 596.3      $ 91.6      $ 126.7   

Actual return on plan assets

     63.0        (118.2     27.8        (39.8

Employer contributions

     18.5        24.9        17.4        4.8   

Asset transfers

     0.2        (0.4     —          —     

Benefits paid

     (54.3     (46.6     (0.1     (0.1
                                

Fair value of plan assets — end of year

   $ 483.4      $ 456.0      $ 136.7      $ 91.6   
                                

Funded status at December 31:

                        

Fair value of plan assets

   $ 483.4      $ 456.0      $ 136.7      $ 91.6   

Benefit obligations

     (750.8     (706.6     (333.0     (307.4
                                

Funded status (plan assets less benefit obligations)

   $ (267.4   $ (250.6   $ (196.3   $ (215.8
                                

Amount recognized at December 31

   $ (267.4   $ (250.6   $ (196.3   $ (215.8
                                

Amounts recognized in Statements of Financial Position:

                        

Current liabilities

   $ (0.1   $ (0.5   $ (17.8   $ (17.9

Noncurrent liabilities

     (267.3     (250.1     (178.5     (197.9
                                

Net amount recognized

   $ (267.4   $ (250.6   $ (196.3   $ (215.8
                                

Amounts recognized in accumulated other comprehensive income:

                        

Net actuarial loss

   $ 313.7      $ 327.8      $ 120.9      $ 131.3   

Prior service (credit) cost

     23.9        25.2        13.5        15.3   

Transition asset

     —          —          (9.1     (12.1
                                

Net amount recognized

   $ 337.6      $