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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.
|
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 | % | |||
|
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 |
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 |
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.
|
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.
|
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.
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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 |
(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 |
(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. |
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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 | |
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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 $46.1 million at December 31, 2009 and 2008, respectively, is based on a discount rate of 5.0 percent, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest and approximate fair value. See NOTE 9 — DEBT AND CREDIT FACILITIES for further information.
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NOTE 9 — DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of December 31, 2009 and 2008:
($ 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.
|
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.
|
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 | |||
|
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 | $ | 353.0 | $ | 125.3 | $ | 134.5 | ||||||||
The
estimated amounts that will be amortized from accumulated
other |
||||||||||||||||
Net actuarial loss |
$ | 23.8 | $ | 9.7 | ||||||||||||
Prior service cost |
4.2 | 1.7 | ||||||||||||||
Transition asset |
— | (3.0 | ) | |||||||||||||
Net amount recognized |
$ | 28.0 | $ | 8.4 | ||||||||||||
(In Millions) | ||||||||||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||||||||||
Pension Plans | Other Benefits | |||||||||||||||||||||||||||||||
Salaried | Hourly | Mining | SERP | Total | Salaried | Hourly | Total | |||||||||||||||||||||||||
Fair value of plan assets |
$ | 177.4 | $ | 305.0 | $ | 1.0 | $ | — | $ | 483.4 | $ | — | $ | 136.7 | $ | 136.7 | ||||||||||||||||
Benefit obligation |
(261.3 | ) | (480.1 | ) | (3.6 | ) | (5.8 | ) | (750.8 | ) | (50.4 | ) | (282.6 | ) | (333.0 | ) | ||||||||||||||||
Funded status |
$ | (83.9 | ) | $ | (175.1 | ) | $ | (2.6 | ) | $ | (5.8 | ) | $ | (267.4 | ) | $ | (50.4 | ) | $ | (145.9 | ) | $ | (196.3 | ) | ||||||||
2008 | ||||||||||||||||||||||||||||||||
Pension Plans | Other Benefits | |||||||||||||||||||||||||||||||
Salaried | Hourly | Mining | SERP | Total | Salaried | Hourly | Total | |||||||||||||||||||||||||
Fair value of plan assets |
$ | 178.2 | $ | 277.6 | $ | 0.2 | $ | — | $ | 456.0 | $ | — | $ | 91.6 | $ | 91.6 | ||||||||||||||||
Benefit obligation |
(250.4 | ) | (449.2 | ) | (2.0 | ) | (5.0 | ) | (706.6 | ) | (52.4 | ) | (255.0 | ) | (307.4 | ) | ||||||||||||||||
Funded status |
$ | (72.2 | ) | $ | (171.6 | ) | $ | (1.8 | ) | $ | (5.0 | ) | $ | (250.6 | ) | $ | (52.4 | ) | $ | (163.4 | ) | $ | (215.8 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $733.1 million and $693.2 million at December 31, 2009 and 2008, respectively.
Components of Net Periodic Benefit Cost
(In Millions) | ||||||||||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
Service cost |
$ | 14.3 | $ | 12.6 | $ | 11.4 | $ | 5.4 | $ | 3.4 | $ | 2.1 | ||||||||||||
Interest cost |
42.6 | 41.4 | 38.9 | 18.9 | 16.3 | 14.5 | ||||||||||||||||||
Expected return on plan assets |
(37.1 | ) | (48.3 | ) | (47.1 | ) | (9.1 | ) | (10.4 | ) | (10.1 | ) | ||||||||||||
Amortization: |
||||||||||||||||||||||||
Net asset |
— | — | — | (3.0 | ) | (3.0 | ) | (3.0 | ) | |||||||||||||||
Prior service costs (credits) |
4.2 | 4.0 | 3.8 | 1.8 | (3.8 | ) | (5.6 | ) | ||||||||||||||||
Net actuarial loss |
26.8 | 10.6 | 10.4 | 11.5 | 6.1 | 6.5 | ||||||||||||||||||
Net periodic benefit cost |
$ | 50.8 | $ | 20.3 | $ | 17.4 | $ | 25.5 | $ | 8.6 | $ | 4.4 | ||||||||||||
Current year actuarial (gain)/loss |
12.1 | 178.2 | (24.0 | ) | 2.2 | 66.6 | (24.5 | ) | ||||||||||||||||
Amortization of net loss |
(26.8 | ) | (10.6 | ) | (10.4 | ) | (11.5 | ) | (6.1 | ) | (6.5 | ) | ||||||||||||
Current year prior service cost |
3.0 | 6.7 | — | — | 33.7 | — | ||||||||||||||||||
Amortization of prior service (cost) credit |
(4.2 | ) | (4.0 | ) | (3.8 | ) | (1.8 | ) | 3.8 | 5.6 | ||||||||||||||
Amortization of transition asset |
— | — | — | 3.0 | 3.0 | 3.0 | ||||||||||||||||||
Total recognized in other comprehensive income |
$ | (15.9 | ) | $ | 170.3 | $ | (38.2 | ) | $ | (8.1 | ) | $ | 101.0 | $ | (22.4 | ) | ||||||||
Total recognized in net periodic cost and other comprehensive income |
$ | 34.9 | $ | 190.6 | $ | (20.8 | ) | $ | 17.4 | $ | 109.6 | $ | (18.0 | ) | ||||||||||
Additional Information
(In Millions) | ||||||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||
Effect of change in mine ownership & noncontrolling interest |
$ | 50.9 | $ | 50.4 | $ | 45.8 | $ | 10.1 | $ | 8.6 | $ | 5.4 | ||||||||
Actual return on plan assets |
63.0 | (118.2 | ) | 41.5 | 27.8 | (39.8 | ) | 6.6 |
Assumptions
We used a discount rate in 2009 of 5.66 percent, compared with a discount rate of 6.00 percent in 2008. The U.S. discount rates are determined by matching the projected cash flows used to determine the PBO and APBO to a projected yield curve of over 400 Aa graded bonds in the 10th to 90th percentiles. These bonds are either noncallable or callable with make-whole provisions. The duration matching produced rates ranging from 5.49 percent to 5.80 percent for our plans. Based upon these results, we selected a December 31, 2009 discount rate of 5.66 percent for our plans.
Weighted-average assumptions used to determine benefit obligations at December 31 were:
Pension Benefits | Other Benefits | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Discount rate |
5.66 | % | 6.00 | % | 5.66 | % | 6.00 | % | ||||
Rate of compensation increase |
4.00 | 4.00 | 4.00 | 4.00 |
Weighted-average assumptions used to determine net benefit cost for the years 2009, 2008 and 2007 were:
Pension Benefits | Other Benefits | |||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||
Discount rate |
6.00 | % | 6.00/7.00 | % | 5.75 | % | 6.00 | % | 6.00 | % | 5.75 | % | ||||||
Expected return on plan assets |
8.50 | 8.50 | 8.50 | 8.50 | 8.50 | 8.50 | ||||||||||||
Rate of compensation increase |
4.00 | 4.13 | 4.16 | 4.00 | 4.50 | 4.50 |
Assumed health care cost trend rates at December 31 were:
2009 | 2008 | |||||
Health care cost trend rate assumed for next year |
8.00 | % | 6.50 | % | ||
Ultimate health care cost trend rate |
5.00 | 5.00 | ||||
Year that the ultimate rate is reached |
2016 | 2012 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A change of one percentage point in assumed health care cost trend rates would have the following effects:
(In Millions) | |||||||
Increase | Decrease | ||||||
Effect on total of service and interest cost |
$ | 3.4 | $ | (2.7 | ) | ||
Effect on postretirement benefit obligation |
35.0 | (28.9 | ) |
Plan Assets
The Company’s financial objectives with respect to our pension and VEBA plan assets are to fully fund the actuarial accrued liability for each of the plans, to maximize investment returns within reasonable and prudent levels of risk, and to maintain sufficient liquidity to meet benefit obligations on a timely basis.
Our investment objective is to outperform the expected Return on Asset (“ROA”) assumption used in the plans’ actuarial reports over a full market cycle, which is considered a period during which the U.S. economy experiences the effects of both an upturn and a downturn in the level of economic activity. In general, these periods tend to last between three and five years. The expected ROA takes into account historical returns and estimated future long-term returns based on capital market assumptions applied to the asset allocation strategy.
The asset allocation strategy is determined through a detailed analysis of assets and liabilities by plan which defines the overall risk that is acceptable with regard to the expected level and variability of portfolio returns, surplus (assets compared to liabilities), contributions, and pension expense.
The asset allocation process involves simulating the effect of financial market performance for various asset allocation scenarios and factoring in the current funded status and likely future funded status levels by taking into account expected growth or decline in the contributions over time. The modeling is then adjusted by simulating unexpected changes in inflation and interest rates. The process also includes quantifying the effect of investment performance and simulated changes to future levels of contributions, determining the appropriate asset mix with the highest likelihood of meeting financial objectives, and regularly reviewing our asset allocation strategy.
The asset allocation strategy varies by plan. The following table reflects the actual asset allocations for pension and VEBA plan assets as of December 31, 2009 and 2008, as well as the 2010 weighted average target asset allocations as of December 31, 2009. Equity investments include securities in large-cap, mid-cap and small-cap companies located in the U.S. and worldwide. Fixed income investments primarily include corporate bonds and government debt securities. Alternative investments include hedge funds, private equity, structured credit and real estate.
Pension Assets | VEBA Assets | |||||||||||||||||
Asset Category | 2010 Target Allocation |
Percentage of Plan Assets at December 31, |
2010 Target Allocation |
Percentage of Plan Assets at December 31, |
||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||
Equity Securities |
37.0 | % | 37.5 | % | 35.8 | % | 42.0 | % | 46.4 | % | 41.8 | % | ||||||
Fixed Income |
30.0 | 29.9 | 32.8 | 35.0 | 38.3 | 36.6 | ||||||||||||
Hedge Funds |
15.0 | 14.8 | 15.2 | 15.0 | 10.7 | 14.8 | ||||||||||||
Private Equity |
9.0 | 6.6 | 7.4 | 8.0 | 4.4 | 6.6 | ||||||||||||
Structured Credit |
5.0 | 8.1 | 3.5 | — | — | — | ||||||||||||
Real Estate |
4.0 | 3.0 | 5.2 | — | — | — | ||||||||||||
Cash |
— | 0.1 | 0.1 | — | 0.2 | 0.2 | ||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Pension
The fair values of our pension plan assets at December 31, 2009 by asset category are as follows:
(In Millions) | ||||||||||||
December 31, 2009 | ||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||
Equity securities: |
||||||||||||
U.S. large-cap |
$ | 88.1 | $ | — | $ | — | $ | 88.1 | ||||
U.S. small/mid-cap |
35.1 | — | — | 35.1 | ||||||||
International |
57.8 | — | — | 57.8 | ||||||||
Fixed income |
144.8 | — | — | 144.8 | ||||||||
Hedge funds |
— | — | 71.4 | 71.4 | ||||||||
Private equity |
13.6 | 18.2 | 31.8 | |||||||||
Structured credit |
— | — | 39.1 | 39.1 | ||||||||
Real estate |
— | — | 14.4 | 14.4 | ||||||||
Cash |
0.9 | — | — | 0.9 | ||||||||
Total |
$ | 340.3 | $ | — | $ | 143.1 | $ | 483.4 | ||||
Following is a description of the inputs and valuation methodologies used to measure the fair value of our plan assets.
Equity Securities
Equity securities classified as Level 1 investments include U.S. large, small and mid-cap investments and international equity. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets.
Fixed Income
Fixed income securities classified as Level 1 investments include bonds and government debt securities. These investments are comprised of securities listed on an exchange, market or automated quotation system for which quotations are readily available. The valuation of these securities is determined using a market approach, and is based upon unadjusted quoted prices for identical assets in active markets.
Hedge Funds
Hedge funds are alternative investments comprised of direct or indirect investment in offshore hedge funds of funds with an investment objective to achieve an attractive risk-adjusted return with moderate volatility and moderate directional market exposure over a full market cycle. The valuation techniques used to measure fair value attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. Considerable judgment is required to interpret the factors used to develop estimates of fair value. Valuations of the underlying investment funds are obtained and reviewed. The securities that are valued by the funds are interests in the investment funds and not the underlying holdings of such investment funds. Thus, the inputs used to value the investments in each of the underlying funds may differ from the inputs used to value the underlying holdings of such funds.
In determining the fair value of a security, the fund managers may consider any information that is deemed relevant, which may include one or more of the following factors regarding the portfolio security, if appropriate: type of security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or compatible companies and other relevant matters; changes in interest rates; observations from financial institutions; domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing portfolio securities.
Hedge fund investments are valued monthly and recorded on a one-month lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Share repurchases are available quarterly with notice of 65 business days.
Private Equity Funds
The private equity fund is an alternative investment that represents direct or indirect investments in partnerships, venture funds or a diversified pool of private investment vehicles (fund of funds).
Investment commitments are made in private equity funds of funds based on an asset allocation strategy, and capital calls are made over the life of the funds to fund the commitments. Until commitments are funded, the committed amount is reserved and invested in a selection of public equity mutual funds, including U.S. large, small and mid-cap investments and international equity, designed to approximate overall equity market returns. As of December 31, 2009, remaining commitments total $23.4 million, of which $16.5 million is reserved. Refer to the valuation methodologies for equity securities above for further information.
The valuation of investments in private equity funds of funds is initially performed by the underlying fund managers. In determining the fair value, the fund managers may consider any information that is deemed relevant, which may include: type of security or asset; cost at the date of purchase; size of holding; last trade price; most recent valuation; fundamental analytical data relating to the investment in the security; nature and duration of any restriction on the disposition of the security; evaluation of the factors that influence the market in which the security is purchased or sold; financial statements of the issuer; discount from market value of unrestricted securities of the same class at the time of purchase; special reports prepared by analysts; information as to any transactions or offers with respect to the security; existence of merger proposals or tender offers affecting the security; price and extent of public trading in similar securities of the issuer or compatible companies and other relevant matters; changes in interest rates; observations from financial institutions; domestic or foreign government actions or pronouncements; other recent events; existence of shelf registration for restricted securities; existence of any undertaking to register the security; and other acceptable methods of valuing portfolio securities.
The valuations are obtained from the underlying fund managers, and the valuation methodology and process is reviewed for consistent application and adherence to policies. Considerable judgment is required to interpret the factors used to develop estimates of fair value.
Private equity investments are valued quarterly and recorded on a one-quarter lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Capital distributions for the funds do not occur on a regular frequency. Liquidation of these investments would require sale of the partnership interest.
Structured Credit
Structured credit investments are alternative investments comprised of collateralized debt obligations and other structured credit investments that are priced based on valuations provided by independent, third-party pricing agents, if available. Such values generally reflect the last reported sales price if the security is actively traded. The third-party pricing agents may also value structured credit investments at an evaluated bid price by employing methodologies that utilize actual market transactions, broker-supplied valuations, or other methodologies designed to identify the market value of such securities. Such methodologies generally consider such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. Securities listed on a securities exchange, market or automated quotation system for which quotations are readily available are valued at the last quoted sale price on the primary exchange or market on which they are traded. Debt obligations with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
Structured credit investments are valued monthly and recorded on a one-month lag. For alternative investment values reported on a lag, current market information is reviewed for any material changes in values at the reporting date. Redemption requests are considered quarterly subject to notice of 90 days; however, share repurchases are not permitted for a two-year lock-up period following each investment, which will expire in September 2010 for the plans’ initial investments.
Real Estate
The real estate portfolio is an alternative investment comprised of three funds with strategic categories of real estate investments. All real estate holdings are externally appraised at least annually, and appraisals are conducted by reputable, independent appraisal firms that are members of the Appraisal Institute. All external appraisals are performed in accordance with the Uniform Standards of Professional Appraisal Practices. The property valuations and assumptions of each property are reviewed quarterly by the investment advisor and values are adjusted if there has been a significant change in circumstances relating to the property since the last external appraisal. The valuation methodology utilized in determining the fair value is consistent with the best practices prevailing within the real estate appraisal and real estate investment management industries, including the Real Estate Information Standards, and standards promulgated by the National Council of Real Estate Investment Fiduciaries, the National Association of Real Estate Investment Fiduciaries, and the National Association of Real Estate Managers. In addition, the investment advisor may cause additional appraisals to be performed. Two of the funds’ fair values are updated monthly, and there is no lag in reported values. Redemption requests for these two funds are considered on a quarterly basis, subject to notice of 45 days.
Effective October 1, 2009, one of the real estate funds began an orderly wind-down over the next three to four years. The decision to wind down the fund was driven primarily by real estate market factors that adversely affected the availability of new investor capital. Third-party appraisals of this fund’s assets will be eliminated; however, internal valuation updates for all assets and liabilities of the fund will be prepared quarterly. The fund’s asset values are recorded on a one-quarter lag, and current market information is reviewed for any material changes in values at the reporting date. Distributions from sales of properties will be made on pro-rata basis. Repurchase requests will not be honored during the wind-down period.
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the year ended December 31, 2009:
(In Millions) | |||||||||||||||||
Year Ended December 31, 2009 | |||||||||||||||||
Hedge Funds | Private Equity Funds |
Structured Credit Fund |
Real Estate |
Total | |||||||||||||
Beginning balance—January 1, 2009 |
$ | 69.3 | $ | 21.0 | $ | 15.9 | $ | 23.5 | $ | 129.7 | |||||||
Actual return on plan assets: |
|||||||||||||||||
Relating to assets still held at the reporting date |
2.1 | (5.6 | ) | 23.2 | (9.5 | ) | 10.2 | ||||||||||
Relating to assets sold during the period |
— | (0.5 | ) | — | 0.6 | 0.1 | |||||||||||
Purchases, sales and settlements |
— | 3.3 | — | (0.2 | ) | 3.1 | |||||||||||
Transfers in (out) of Level 3 |
— | — | — | — | — | ||||||||||||
Ending balance—December 31, 2009 |
$ | 71.4 | $ | 18.2 | $ | 39.1 | $ | 14.4 | $ | 143.1 | |||||||
The pension plan assets and asset allocation at December 31, 2008 were as follows:
Asset Category (1) |
(In Millions) Assets at December 31, |
Percentage of Plan Assets at December 31, |
||||
2008 | 2008 | |||||
Equity securities |
$ | 163.3 | 35.8 | % | ||
Fixed income |
149.6 | 32.8 | ||||
Hedge funds |
69.2 | 15.2 | ||||
Private equity |
33.9 | 7.4 | ||||
Structured credit |
15.8 | 3.5 | ||||
Real estate |
23.5 | 5.2 | ||||
Cash |
0.7 | 0.1 | ||||
Total |
$ | 456.0 | 100.0 | % | ||
(1) | The 2008 presentation has been conformed in accordance with the asset categories presented for 2009. |
The expected return on plan assets takes into account the weighted average of expected returns for each asset category. Expected returns are determined based on historical performance, adjusted for current trends. The expected return is net of investment expenses.
VEBA
Assets for other benefits include VEBA trusts pursuant to bargaining agreements that are available to fund retired employees’ life insurance obligations and medical benefits. The fair values of our other benefit plan assets at December 31, 2009 by asset category are as follows:
(In Millions) | ||||||||||||
December 31, 2009 | ||||||||||||
Asset Category |
Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||
Equity securities: |
||||||||||||
U.S. large-cap |
$ | 32.8 | $ | — | $ | — | $ | 32.8 | ||||
U.S. small/mid-cap |
12.6 | — | — | 12.6 | ||||||||
International |
18.1 | — | — | 18.1 | ||||||||
Fixed income |
52.4 | — | — | 52.4 | ||||||||
Hedge funds |
— | — | 14.6 | 14.6 | ||||||||
Private equity |
2.9 | — | 3.1 | 6.0 | ||||||||
Cash |
0.2 | — | — | 0.2 | ||||||||
Total |
$ | 119.0 | $ | — | $ | 17.7 | $ | 136.7 | ||||
Refer to the pension asset discussion above for further information regarding the inputs and valuation methodologies used to measure the fair value of each respective category of plan assets.
The following represents the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the year ended December 31, 2009:
(In Millions) | |||||||||||
Year Ended December 31, 2009 | |||||||||||
Hedge Funds | Private Equity Funds |
Total | |||||||||
Beginning balance—January 1, 2009 |
$ | 13.6 | $ | 3.0 | $ | 16.6 | |||||
Actual return on plan assets: |
|||||||||||
Relating to assets still held at the reporting date |
0.5 | (0.9 | ) | (0.4 | ) | ||||||
Relating to assets sold during the period |
— | — | — | ||||||||
Purchases, sales and settlements |
0.5 | 1.0 | 1.5 | ||||||||
Transfers in (out) of Level 3 |
— | — | — | ||||||||
Ending balance—December 31, 2009 |
$ | 14.6 | $ | 3.1 | $ | 17.7 | |||||
The other benefit plan assets and weighted average asset allocation at December 31, 2008 were as follows:
(In Millions) Assets at December 31, |
Percentage of Plan Assets at December 31, |
|||||
Asset Category (1) |
2008 | 2008 | ||||
Equity securities |
$ | 38.3 | 41.8 | % | ||
Fixed Income |
33.5 | 36.6 | ||||
Hedge funds |
13.6 | 14.8 | ||||
Private Equity |
6.0 | 6.6 | ||||
Cash |
0.2 | 0.2 | ||||
Total |
$ | 91.6 | 100.0 | % | ||
(1) | The 2008 presentation has been conformed in accordance with the asset categories presented for 2009. |
The expected return on plan assets takes into account the weighted average of expected returns for each asset category. Expected returns are determined based on historical performance, adjusted for current trends. The expected return is net of investment expenses.
Contributions
Annual contributions to the pension plans are made within income tax deductibility restrictions in accordance with statutory regulations. In the event of plan termination, the plan sponsors could be required to fund additional shutdown and early retirement obligations that are not included in the pension obligations.
(In Millions) | ||||||||||||
Company Contributions |
Pension Benefits |
Other Benefits | ||||||||||
VEBA | Direct Payments |
Total | ||||||||||
2008 |
$ | 24.9 | $ | 4.8 | $ | 14.9 | $ | 19.7 | ||||
2009 |
18.5 | 17.4 | 18.3 | 35.7 | ||||||||
2010 (Expected)* |
45.9 | 17.4 | 17.8 | 35.2 |
* | Pursuant to the bargaining agreement, benefits can be paid from VEBA trusts that are at least 70 percent funded (no VEBA trusts are 70 percent funded at December 31, 2009). |
VEBA plans are not subject to minimum regulatory funding requirements. Amounts contributed are pursuant to bargaining agreements.
Contributions by participants to the other benefit plans were $3.7 million and $3.6 million for years ended December 31, 2009 and 2008, respectively.
Estimated Cost for 2010
For 2010, we estimate net periodic benefit cost as follows:
(In Millions) | |||
Defined benefit pension plans |
$ | 45.4 | |
Other postretirement benefits |
20.0 | ||
Total |
$ | 65.4 | |
Estimated Future Benefit Payments
(In Millions) | ||||||||||||
Pension Benefits |
Other Benefits | |||||||||||
Gross Company Benefits |
Less Medicare Subsidy |
Net Company Payments |
||||||||||
2010 |
$ | 52.5 | $ | 18.7 | $ | 0.9 | $ | 17.8 | ||||
2011 |
55.7 | 20.2 | 0.9 | 19.3 | ||||||||
2012 |
57.9 | 21.5 | 1.0 | 20.5 | ||||||||
2013 |
56.9 | 22.4 | 1.1 | 21.3 | ||||||||
2014 |
58.2 | 23.8 | 1.3 | 22.5 | ||||||||
2015-2019 |
309.8 | 130.2 | 8.6 | 121.6 |
Other Potential Benefit Obligations
While the foregoing reflects our obligation, our total exposure in the event of non-performance is potentially greater. Following is a summary comparison of the total obligation:
(In Millions) | ||||||||
December 31, 2009 | ||||||||
Defined Benefit Pensions |
Other Benefits |
|||||||
Fair value of plan assets |
$ | 483.4 | $ | 136.7 | ||||
Benefit obligation |
750.8 | 333.0 | ||||||
Underfunded status of plan |
$ | (267.4 | ) | $ | (196.3 | ) | ||
Additional shutdown and early retirement benefits |
$ | 54.4 | $ | 16.4 | ||||
|
NOTE 13 — STOCK COMPENSATION PLANS
At December 31, 2009, we have two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $12.2 million, $22.5 million, and $12.4 million in 2009, 2008 and 2007, respectively, which was recorded primarily in Selling, general and administrative expenses on the Statements of Consolidated Operations. The total income tax benefit recognized in the Statements of Consolidated Operations for share-based compensation arrangements was $4.3 million, $7.9 million and $4.3 million for 2009, 2008 and 2007, respectively. Cash flows resulting from the tax benefits for tax deductions in excess of the compensation expense are classified as financing cash flows. Accordingly, we classified $3.5 million, $3.5 million and $4.3 million in excess tax benefits as cash from financing activities rather than cash from operating activities on our Statements of Consolidated Cash Flows for the years ended December 31, 2009, 2008 and 2007, respectively.
Employees’ Plans
The Company’s 2007 ICE Plan (“Plan”) authorizes up to 4,000,000 of our common shares to be issued as stock options, SAR’s, restricted shares, restricted share units, retention units, deferred shares, and performance shares or performance units. Any of the foregoing awards may be made subject to attainment of performance goals over a performance period of one or more years. Each stock option and SAR will reduce the common shares available under the 2007 ICE Plan by one common share. Each other award will reduce the common shares available under the 2007 ICE Plan by two common shares. No participant in any fiscal year can be granted in the aggregate of a number of Shares having a Fair Market Value on the Date of Grant equal to more than $5 million. The performance shares are intended to meet the requirements of Internal Revenue code section 162(m) for deduction while the retention units are not.
For the outstanding plan year agreements, each performance share, if earned, entitles the holder to receive a number of common shares within the range between a threshold and maximum number of shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Committee. The restricted share units are subject to continued employment, are retention based, will vest at the end of the performance period for the performance shares, and are payable in cash for the 2007 plan year and shares for the 2008 and 2009 plan years at a time determined by the Committee at its discretion.
The performance share grants vest over a period of three years. For the 2007 plan year agreement, performance is measured on the basis of relative TSR for the period, as measured against a predetermined peer group of mining and metals companies, three-year cumulative free cash flow and/or pre-tax RONA. Awards are intended to be paid out in common shares. The final payout for all three plan year agreements vary from zero to 150 percent of the performance shares awarded.
Upon the occurrence of a change in control, all performance shares and restricted share units granted to a participant will vest and become nonforfeitable and will be paid out in cash.
Following is a summary of our Performance Share Award Agreements currently outstanding:
Performance Share Plan Year |
Performance Shares Outstanding |
Forfeitures (1) | Grant Date |
Performance Period | |||||
2009 |
365,868 | 40,722 | March 9, 2009 | 1/1/2009-12/31/2011 | |||||
2009 |
3,825 | — | August 31, 2009 | 1/1/2009-12/31/2011 | |||||
2009 |
44,673 | (2) | — | December 17, 2009 | 1/1/2009-12/31/2011 | ||||
2008 |
143,252 | 15,948 | March 10, 2008 | 1/1/2008-12/31/2010 | |||||
2008 |
350 | — | August 29, 2008 | 1/1/2008-12/31/2010 | |||||
2007 |
215,160 | 53,790 | July 27, 2007 | 1/1/2007-12/31/2009 | |||||
2007 |
3,740 | — | October 1, 2007 | 1/1/2007-12/31/2009 |
(1) | The 2009, 2008 and 2007 Plans are based on assumed forfeitures. |
(2) | Represents the target payout as of December 31, 2009 related to the 67,009 shares awarded on December 17, 2009 based upon the Committee’s ability to exercise negative discretion. For accounting purposes, a grant date has not yet been determined for this award. |
Throughout 2009, the Compensation and Organization Committee (“Committee”) of the Board of Directors approved grants under our shareholder approved Plan for the performance period 2009-2011. A total of 573,100 shares were granted, consisting of performance shares and units, restricted share units, retention units and restricted stock. An additional 67,009 shares were awarded under the Plan on December 17, 2009. The number of shares paid out under this particular award will be determined by the Committee based upon the achievement of certain performance factors evaluated solely at the Committee’s discretion and may be reduced from the 67,009 shares. As a result of this uncertainty, a grant date has not yet been determined for this award for purposes of measuring and recognizing compensation cost.
Nonemployee Directors
The Directors’ Plan authorizes us to issue up to 800,000 common shares to Nonemployee Directors. The Directors’ Plan provides for Director Share Ownership Guidelines (“Guidelines”). A Director is required by the end of a four-year period to own either (i) a total of at least 8,000 common shares, or (ii) hold common shares with a market value of at least $100,000. If the Nonemployee Director does not meet the Guidelines assessed December 1, annually, the Nonemployee Director must take a portion of the annual retainer in common shares (“Required Retainer”) until such time the Nonemployee Director reaches the Guidelines. Once the Nonemployee Director meets the Guidelines, the Nonemployee Director may elect to receive the Required Retainer in cash. Effective May 1, 2008, Nonemployee Directors not meeting the Guidelines must take $20,000 of the annual retainer of $50,000 in common shares.
The Directors’ Plan also provides for an Annual Equity Grant (“Equity Grant”). The Equity Grant is awarded at our Annual Meeting each year to all Nonemployee Directors elected or re-elected by the shareholders. The value of the Equity Grant is payable in restricted shares with a three-year vesting period from the date of grant. The closing market price of our common shares on our Annual Meeting Date is divided into the Equity Grant to determine the number of restricted shares awarded. Effective May 1, 2008, Nonemployee Directors receive an annual retainer fee of $50,000 and an annual equity award of $75,000. Effective July 1, 2009, the Directors’ annual retainer fee was reduced by 10 percent in conjunction with the Company’s compensation reductions across the organization. Such reductions were reinstated to their previous levels effective January 1, 2010. The Directors’ Plan offers the Nonemployee Director the opportunity to defer all or a portion of the Annual Directors’ Retainer fees, Chair retainers, meeting fees, and the Equity Grant into the Compensation Plan. A Director who is 69 or older at the Equity Grant date will receive common shares with no restrictions.
For the last three years, Equity Grant shares have been awarded to elected or re-elected Directors as follows:
Year of Grant |
Unrestricted Equity Grant Shares |
Restricted Equity Grant Shares |
Deferred Equity Grant Shares |
|||
2007 |
— | 7,488 | 936 | |||
2008 |
804 | 4,824 | 804 | |||
2009 |
7,788 | 15,118 | 2,596 |
Other Information
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 following table summarizes the share-based compensation expense that we recorded for continuing operations in 2009, 2008 and 2007:
(In Millions, except EPS) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cost of goods sold and operating expenses |
$ | 1.2 | $ | 2.1 | $ | 0.4 | ||||||
Selling, general and administrative expenses |
11.0 | 20.4 | 12.0 | |||||||||
Reduction of operating income from continuing operations before income taxes and equity loss from ventures |
12.2 | 22.5 | 12.4 | |||||||||
Income tax benefit |
(4.3 | ) | (7.9 | ) | (4.3 | ) | ||||||
Reduction of net income attributable to Cliffs shareholders |
$ | 7.9 | $ | 14.6 | $ | 8.1 | ||||||
Reduction of earnings per share attributable to Cliffs shareholders: |
||||||||||||
Basic |
$ | 0.06 | $ | 0.14 | $ | 0.10 | ||||||
Diluted |
$ | 0.06 | $ | 0.13 | $ | 0.08 | ||||||
Determination of Fair Value
The fair value of each grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and its predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved. 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.
The following assumptions were utilized to estimate the fair value for the 2009 performance share grants:
Grant Date Market Price |
Average Expected Term (Years) |
Expected Volatility |
Risk-Free Interest Rate |
Dividend Yield |
Fair Value |
Fair Value |
||||||||||
$12.96 - $25.31 |
2.81 | 85.8 | % | 1.43 | % | 2.72 | % | $ | 4.90 | 19.36% -37.83% |
The fair value of the restricted share units is determined based on the closing price of the Company’s shares on the grant date. The restricted share units granted under the Plan vest over a period of three years.
Stock options, restricted stock, deferred stock allocation and performance share activity under our Incentive Equity Plans and Nonemployee Directors’ Compensation Plans are as follows:
2009 | 2008 | 2007 | ||||||||||||||||
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
Shares | Weighted- Average Exercise Price |
|||||||||||||
Stock options: |
||||||||||||||||||
Options outstanding at beginning of year |
2,500 | $ | 5.42 | 11,800 | $ | 5.42 | 23,600 | $ | 5.04 | |||||||||
Granted during the year |
— | — | — | |||||||||||||||
Exercised |
(2,500 | ) | 5.42 | (9,300 | ) | 6.47 | (11,800 | ) | 4.66 | |||||||||
Cancelled or expired |
— | — | — | |||||||||||||||
Options outstanding at end of year |
— | — | 2,500 | 5.42 | 11,800 | 5.42 | ||||||||||||
Options exercisable at end of year |
— | — | 2,500 | 5.42 | 11,800 | 5.42 | ||||||||||||
Restricted awards: |
||||||||||||||||||
Outstanding and restricted at beginning of year |
315,684 | 514,714 | 649,324 | |||||||||||||||
Granted during the year |
184,904 | 62,672 | 164,692 | |||||||||||||||
Vested |
(201,486 | ) | (261,702 | ) | (299,302 | ) | ||||||||||||
Cancelled |
(8,400 | ) | — | — | ||||||||||||||
Outstanding and restricted at end of year |
290,702 | 315,684 | 514,714 | |||||||||||||||
Performance shares: |
||||||||||||||||||
Outstanding at beginning of year |
594,115 | 723,544 | 861,672 | |||||||||||||||
Granted during the year |
555,046 | 194,881 | 390,888 | |||||||||||||||
Vested |
(312,336 | ) | (236,520 | ) | (529,016 | ) | ||||||||||||
Forfeited/cancelled |
(13,432 | ) | (87,790 | ) | — | |||||||||||||
Outstanding at end of year |
823,393 | 594,115 | 723,544 | |||||||||||||||
Vested or expected to vest at |
||||||||||||||||||
December 31, 2009 |
776,868 | |||||||||||||||||
Directors’ retainer and voluntary shares: |
||||||||||||||||||
Outstanding at beginning of year |
2,183 | 1,100 | 1,100 | |||||||||||||||
Granted during the year |
4,602 | 2,772 | — | |||||||||||||||
Vested |
(2,189 | ) | (1,689 | ) | — | |||||||||||||
Outstanding at end of year |
4,596 | 2,183 | 1,100 | |||||||||||||||
Reserved for future grants or awards at end of year: |
||||||||||||||||||
Employee plans |
1,458,438 | |||||||||||||||||
Directors’ plans |
146,428 | |||||||||||||||||
Total |
1,604,866 | |||||||||||||||||
A summary of our outstanding share-based awards as of December 31, 2009 is shown below:
Shares | Weighted Average Grant Date Fair Value |
|||||
Outstanding, beginning of year |
911,982 | $ | 27.37 | |||
Granted |
644,594 | 8.01 | ||||
Vested |
(416,053 | ) | 46.18 | |||
Forfeited/expired |
(21,832 | ) | 20.12 | |||
Outstanding, end of year |
1,118,691 | $ | 13.60 | |||
The total compensation cost related to outstanding awards not yet recognized is $9.3 million at December 31, 2009. The weighted average remaining period for the awards outstanding at December 31, 2009 is approximately 1.5 years.
|
NOTE 14 — INCOME TAXES
Income from continuing operations before income taxes and equity loss from ventures includes the following components:
(In Millions) | |||||||||
2009 | 2008 | 2007 | |||||||
United States |
$ | 130.7 | $ | 566.6 | $ | 312.3 | |||
Foreign |
159.9 | 149.7 | 68.4 | ||||||
$ | 290.6 | $ | 716.3 | $ | 380.7 | ||||
The components of the provision (benefit) for income taxes on continuing operations consist of the following:
(In Millions) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current provision (benefit): |
||||||||||||
United States federal |
$ | (46.2 | ) | $ | 151.4 | $ | 67.7 | |||||
United States state & local |
3.4 | 3.7 | 1.0 | |||||||||
Foreign |
2.8 | 77.6 | 48.5 | |||||||||
(40.0 | ) | 232.7 | 117.2 | |||||||||
Deferred provision (benefit): |
||||||||||||
United States federal |
13.2 | (54.1 | ) | (12.7 | ) | |||||||
United States state & local |
(6.1 | ) | (4.1 | ) | (2.9 | ) | ||||||
Foreign |
53.7 | (30.3 | ) | (17.5 | ) | |||||||
60.8 | (88.5 | ) | (33.1 | ) | ||||||||
Total provision on continuing operations |
$ | 20.8 | $ | 144.2 | $ | 84.1 | ||||||
Reconciliation of our income tax attributable to continuing operations computed at the United States federal statutory rate is as follows:
(In Millions) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Tax at U.S. statutory rate of 35 percent |
$ | 101.7 | $ | 250.6 | $ | 133.3 | ||||||
Increase (decrease) due to: |
||||||||||||
Percentage depletion in excess of cost depletion |
(66.2 | ) | (101.1 | ) | (46.9 | ) | ||||||
Tax effect of foreign operations |
(44.3 | ) | (6.5 | ) | (6.6 | ) | ||||||
State taxes, net |
(2.1 | ) | (0.7 | ) | (2.4 | ) | ||||||
Manufacturer’s deduction |
(0.1 | ) | (6.9 | ) | (4.3 | ) | ||||||
Valuation allowance |
39.0 | (0.8 | ) | 13.0 | ||||||||
Other items — net |
(7.2 | ) | 9.6 | (2.0 | ) | |||||||
Income tax expense |
$ | 20.8 | $ | 144.2 | $ | 84.1 | ||||||
We had a $39.0 million increase in the valuation allowance of certain deferred tax assets. Of this amount, $24.5 million relates to certain foreign operating losses and $14.5 million relates to certain foreign assets where tax basis exceeds book basis.
The components of income taxes for other than continuing operations consisted of the following:
(In Millions) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Discontinued operations |
$ | — | $ | — | $ | 0.2 | ||||||
Other comprehensive (income) loss: |
||||||||||||
Minimum pension/OPEB liability |
(4.7 | ) | (99.8 | ) | 20.1 | |||||||
Mark-to-market adjustments |
(12.3 | ) | (1.4 | ) | 7.1 | |||||||
(17.0 | ) | (101.2 | ) | 27.2 | ||||||||
Paid in capital — stock based compensation |
3.5 | (3.5 | ) | (4.3 | ) |
Significant components of our deferred tax assets and liabilities as of December 31, 2009 and 2008 are as follows:
(In Millions) | ||||||
2009 | 2008 | |||||
Deferred tax assets: |
||||||
Pensions |
$ | 114.7 | $ | 114.8 | ||
Postretirement benefits other than pensions |
75.0 | 77.9 | ||||
Alternative minimum tax credit carryforwards |
74.3 | 67.6 | ||||
Capital loss carryforwards |
1.2 | — | ||||
Development |
0.1 | 15.1 | ||||
Asset retirement obligations |
27.1 | 22.8 | ||||
Operating loss carryforwards |
112.4 | 11.1 | ||||
Product inventories |
22.8 | 31.6 | ||||
Properties |
16.2 | 39.4 | ||||
Lease liabilities |
36.2 | — | ||||
Financial derivatives |
— | 33.5 | ||||
Other liabilities |
64.4 | 75.5 | ||||
Total deferred tax assets before valuation allowance |
544.4 | 489.3 | ||||
Deferred tax asset valuation allowance |
89.4 | 17.6 | ||||
Net deferred tax assets |
455.0 | 471.7 | ||||
Deferred tax liabilities: |
||||||
Properties |
90.1 | 86.7 | ||||
Investment in ventures |
143.9 | 102.6 | ||||
Intangible assets |
13.1 | — | ||||
Income tax uncertainties |
38.7 | 14.1 | ||||
Other assets |
26.8 | 32.6 | ||||
Total deferred tax liabilities |
312.6 | 236.0 | ||||
Net deferred tax assets |
$ | 142.4 | $ | 235.7 | ||
The deferred tax amounts are classified on the Statements of Consolidated Financial Position as current or long-term in accordance with the asset or liability to which they relate. Following is a summary:
(In Millions) | ||||||
2009 | 2008 | |||||
Deferred tax assets: |
||||||
United States |
||||||
Current |
$ | 41.1 | $ | 28.0 | ||
Long-term |
140.3 | 178.2 | ||||
Total United States |
181.4 | 206.2 | ||||
Foreign |
||||||
Current |
21.0 | 23.8 | ||||
Long-term |
10.8 | 73.0 | ||||
Total deferred tax assets |
213.2 | 303.0 | ||||
Deferred tax liabilities: |
||||||
Foreign |
||||||
Long-term |
70.8 | 67.3 | ||||
Total deferred tax liabilities |
70.8 | 67.3 | ||||
Net deferred tax assets |
$ | 142.4 | $ | 235.7 | ||
At December 31, 2009 and 2008, we had $74.3 million and $67.6 million, respectively, of deferred tax assets related to United States alternative minimum tax credits that can be carried forward indefinitely.
We had gross United States federal, state and foreign net operating loss carry forwards of $149.3 million, $192.9 million and $206.0 million, respectively, at December 31, 2009. We had state and foreign net operating loss carry forwards at December 31, 2008 of $85.4 million and $38.9 million, respectively. The federal net operating loss expires in 2029. State net operating losses will begin to expire in 2022, and the foreign net operating loss can be carried forward indefinitely.
Deferred tax assets before valuation allowance as of December 31, 2009 and 2008 have been reduced by $89.4 million and $17.6 million, respectively, to amounts that are considered more-likely-than-not to be realized. At December 31, 2009 our valuation allowance maintained against certain deferred tax assets increased by $71.8 million, of which $42.7 million primarily relates to tax basis greater than book basis on certain foreign assets, and $24.3 million relates to certain foreign operating losses. Of the $71.8 million, $16.8 million was reflected through goodwill.
At December 31, 2009, cumulative undistributed earnings of foreign subsidiaries included in consolidated retained earnings amounted to $487.5 million. These earnings are indefinitely reinvested in international operations. Accordingly, no provision has been made for deferred taxes related to a future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we were to conclude that such earnings will be remitted in the foreseeable future.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(In Millions) | ||||||||
2009 | 2008 | |||||||
Unrecognized tax benefits balance as of January 1 |
$ | 53.7 | $ | 15.2 | ||||
Increases for tax positions in prior years |
23.8 | 19.9 | ||||||
Increases for tax positions in current year |
2.5 | 24.9 | ||||||
Increase (decrease) due to foreign exchange |
4.7 | (1.6 | ) | |||||
Settlements |
(9.1 | ) | (4.7 | ) | ||||
Lapses in statutes of limitations |
(0.4 | ) | — | |||||
Unrecognized tax benefits balance as of December 31 |
$ | 75.2 | $ | 53.7 | ||||
At December 31, 2009 and 2008, we had $75.2 million and $53.7 million, respectively, of unrecognized tax benefits recorded in Other liabilities on the Statements of Consolidated Financial Position. If the $75.2 million were recognized, $74.2 million would impact the effective tax rate. It is reasonably possible that unrecognized tax benefits will significantly decrease within the next 12 months due to expected settlements with the taxing authorities. An estimate of the range of the possible change cannot be reasonably determined at this time. We recognized potential accrued interest and penalties of $3.4 million and $5.8 million related to unrecognized tax benefits in income tax expense in 2009 and 2008, respectively. At December 31, 2009 and 2008, we had $15.2 million and $11.6 million, respectively, of accrued interest and penalties related to the unrecognized tax benefits recorded in Other liabilities on the Statements of Consolidated Financial Position.
Tax years that remain subject to examination are years 2007 and forward for the United States, 1993 and forward for Canada, and 1994 and forward for Australia.
|
NOTE 15 — CAPITAL STOCK
Common Shares
Public Offering
On May 19, 2009, we completed a public offering of our common shares. The total number of shares sold was 17.25 million, comprised of a 15 million share offering and the exercise of an underwriters’ over-allotment option to purchase an additional 2.25 million common shares. The common shares sold were out of treasury stock, and the sale did not result in an increase in the number of shares authorized or the number of shares issued. A registration statement relating to these securities was filed with and declared effective by the SEC. Net proceeds at a price of $21.00 per share were approximately $348 million.
Dividends
On May 12, 2009, our board of directors enacted a 55 percent reduction in our quarterly common share dividend to $0.04 from $0.0875 for the second and third quarters of 2009 in order to enhance financial flexibility. The $0.04 common share dividends were paid on June 1, 2009 and September 1, 2009 to shareholders of record as of May 22, 2009 and August 14, 2009, respectively. In the fourth quarter of 2009, the dividend was reinstated to its previous level.
Euronext Listing
In March 2009, we listed our common shares on the Professional Compartment of NYSE Euronext Paris (“Euronext”). On March 31, 2009, the French Autorité des marchés financiers (AMF) approved the prospectus and correspondingly granted a visa number for admission of our common shares to listing and trading on Euronext. Our shares began trading on Euronext on April 6, 2009 under the symbol “CLF” and are denominated in Euros on the Paris venue. The cross listing does not result in changes to our capital structure, share count, or current stock-listings and is intended to promote additional liquidity for investors as well as provide greater access to our shares in Euro-zone markets and currencies.
Preferred Stock
In January 2004, we completed an offering of $172.5 million of redeemable cumulative convertible perpetual preferred stock, without par value, issued at $1,000 per share. The preferred stock paid quarterly cash dividends at a rate of 3.25 percent per annum, had a liquidation preference of $1,000 per share and was convertible into our common shares at an adjusted rate of 133.0646 common shares per share of preferred stock.
The preferred stock is classified for accounting purposes as “temporary equity” reflecting certain provisions of the agreement that could, under remote circumstances (the delisting of our common stock on a U.S. national securities exchange or quotation thereof in an inter-dealer quotation system of any registered U.S. national securities association), require us to redeem the preferred stock for cash. If we were in a default in the payment of six quarterly dividends on the preferred stock, the holders of the preferred stock would thereafter be entitled to elect two directors until all accrued and unpaid dividends were paid.
On January 13, 2009, we announced that the trading price condition for the conversion right of our 3.25 percent redeemable cumulative convertible perpetual preferred stock had been satisfied and, as a result, holders could surrender their shares for conversion at any time. The trading price condition for the preferred shares was satisfied because the closing share price of our common shares for at least 20 of the last 30 trading days of the fiscal 2008 fourth quarter exceeded 110 percent of the then applicable conversion price of the preferred stock. The preferred stock was also convertible during each of the previous 16 fiscal quarters due to the satisfaction of the trading price condition during the applicable periods of the relevant preceding fiscal quarters.
In addition to announcing the convertibility of the shares, on January 13, 2009, we also provided the required notice of our intent to redeem the 205 convertible preferred shares that remained outstanding at December 31, 2008. As a result, holders of the preferred stock could elect to convert their shares in lieu of having them redeemed, provided that surrender for conversion occurred on or prior to February 11, 2009. The conversion rate of 133.0646 common shares per share of preferred stock equates to a conversion price of approximately $7.52 per common share, subject to adjustment in certain circumstances, including payment of dividends on the common shares.
As of February 11, 2009, all remaining preferred shares had been converted to 27,278 common shares at a conversion rate of 133.0646. Total common shares were issued out of treasury.
Shareholder Rights Plan
On October 8, 2008, our Board of Directors adopted a shareholder rights plan. Under the rights plan, the rights initially trade together with the common shares and are not exercisable. In the absence of further action by our Board of Directors, the rights will become exercisable and allow the holder to acquire common shares at a discounted price if a person or group acquires 10 percent or more of the outstanding common shares (or any additional common shares in the case of a person or group that already beneficially owns 10 percent or more of our outstanding common shares on October 13, 2008) without the prior approval of our Board of Directors. Rights held by persons who exceed the applicable threshold will be void. Under certain circumstances, the rights will entitle the holder to buy shares in an acquiring entity at a discounted price.
The rights plan also includes an exchange option. In general, after the rights become exercisable, our Board of Directors may, at its option, effect an exchange of part or all of the rights (other than rights that have become void) at a ratio of one common share for each right, subject to adjustment in certain circumstances. The rights are redeemable at any time prior to the time that they become exercisable for $0.001 per right, subject to adjustment in certain circumstances. Unless earlier amended, redeemed or exchanged, the rights will expire on October 29, 2011.
The issuance of the rights was not a taxable event, does not affect our reported financial condition or results of operations, including our earnings per share, and does not change the manner in which our common shares are currently traded.
|
NOTE 16 — ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated other comprehensive loss within Cliffs shareholders’ equity and related tax effects allocated to each are shown below as of December 31, 2009, 2008 and 2007:
(In Millions) | ||||||||||||
Pre-tax Amount |
Tax Benefit (Provision) |
After-tax Amount |
||||||||||
As of December 31, 2007: |
||||||||||||
Postretirement benefit liability |
$ | (192.5 | ) | $ | 37.7 | $ | (154.8 | ) | ||||
Foreign currency translation adjustments |
96.5 | — | 96.5 | |||||||||
Unrealized net gain on derivative financial instruments |
26.7 | (8.0 | ) | 18.7 | ||||||||
Unrealized loss on interest rate swap |
(1.4 | ) | 0.5 | (0.9 | ) | |||||||
Unrealized gain on securities |
15.7 | (5.5 | ) | 10.2 | ||||||||
$ | (55.0 | ) | $ | 24.7 | $ | (30.3 | ) | |||||
As of December 31, 2008: |
||||||||||||
Postretirement benefit liability |
$ | (480.8 | ) | $ | 137.5 | $ | (343.3 | ) | ||||
Foreign currency translation adjustments |
(68.6 | ) | — | (68.6 | ) | |||||||
Unrealized net gain on derivative financial instruments |
27.3 | (8.2 | ) | 19.1 | ||||||||
Unrealized loss on interest rate swap |
(2.6 | ) | 0.9 | (1.7 | ) | |||||||
Unrealized loss on securities |
(0.2 | ) | 0.1 | (0.1 | ) | |||||||
$ | (524.9 | ) | $ | 130.3 | $ | (394.6 | ) | |||||
As of December 31, 2009: |
||||||||||||
Postretirement benefit liability |
$ | (451.9 | ) | $ | 132.8 | $ | (319.1 | ) | ||||
Foreign currency translation adjustments |
163.1 | — | 163.1 | |||||||||
Unrealized net gain on derivative financial instruments |
5.7 | (1.7 | ) | 4.0 | ||||||||
Unrealized gain on securities |
43.1 | (13.7 | ) | 29.4 | ||||||||
$ | (240.0 | ) | $ | 117.4 | $ | (122.6 | ) | |||||
The following table reflects the changes in Accumulated other comprehensive loss related to Cliffs shareholders’ equity for 2009, 2008 and 2007:
(In Millions) | ||||||||||||||||||||||||||||
Postretirement Benefit Liability |
Adoption of Certain Provisions of ASC 715 |
Unrealized Net Gain (Loss) on Securities |
Foreign Currency Translation |
Unrealized (Loss) on Interest Rate Swap |
Unrealized Net Gain (Loss) on Derivative Financial Instruments |
Accumulated Other Comprehensive Gain (Loss) |
||||||||||||||||||||||
Balance December 31, 2006 |
$ | (82.9 | ) | $ | (110.7 | ) | $ | 9.6 | $ | 9.6 | $ | — | $ | 4.5 | $ | (169.9 | ) | |||||||||||
Change during 2007 |
(71.9 | ) | 110.7 | 0.6 | 86.9 | (0.9 | ) | 14.2 | 139.6 | |||||||||||||||||||
Balance December 31, 2007 |
(154.8 | ) | — | 10.2 | 96.5 | (0.9 | ) | 18.7 | (30.3 | ) | ||||||||||||||||||
Change during 2008 |
(188.5 | ) | — | (10.3 | ) | (165.1 | ) | (0.8 | ) | 0.4 | (364.3 | ) | ||||||||||||||||
Balance December 31, 2008 |
(343.3 | ) | — | (0.1 | ) | (68.6 | ) | (1.7 | ) | 19.1 | (394.6 | ) | ||||||||||||||||
Change during 2009 |
24.2 | — | 29.5 | 231.7 | 1.7 | (15.1 | ) | 272.0 | ||||||||||||||||||||
Balance December 31, 2009 |
$ | (319.1 | ) | $ | — | $ | 29.4 | $ | 163.1 | $ | — | $ | 4.0 | $ | (122.6 | ) | ||||||||||||
|
NOTE 17 — EARNINGS PER SHARE
The following table summarizes the computation of basic and diluted earnings per share attributable to Cliffs shareholders:
(In Millions, Except per Share) | ||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||
Amount | Per Share |
Amount | Per Share |
Amount | Per Share |
|||||||||||||||||
Income from continuing operations attributable to Cliffs shareholders |
$ | 205.1 | $ | 1.64 | $ | 515.8 | $ | 5.08 | $ | 269.8 | $ | 3.25 | ||||||||||
Preferred dividends |
— | — | (1.1 | ) | (.01 | ) | (5.2 | ) | (.06 | ) | ||||||||||||
Income from continuing operations attributable to Cliffs common shareholders |
205.1 | 1.64 | 514.7 | 5.07 | 264.6 | 3.19 | ||||||||||||||||
Discontinued operations |
— | — | — | — | 0.2 | — | ||||||||||||||||
Income attributable to
Cliffs common shareholders |
205.1 | $ | 1.64 | 514.7 | $ | 5.07 | 264.8 | $ | 3.19 | |||||||||||||
Dilutive effect preferred dividend |
— | 1.1 | 5.2 | |||||||||||||||||||
Income attributable to Cliffs common shareholders plus assumed conversions — diluted |
$ | 205.1 | $ | 1.63 | $ | 515.8 | $ | 4.76 | $ | 270.0 | $ | 2.57 | ||||||||||
Average number of shares (in thousands) |
||||||||||||||||||||||
Basic |
124,998 | 101,471 | 82,988 | |||||||||||||||||||
Employee stock plans |
753 | 1,485 | 528 | |||||||||||||||||||
Convertible preferred stock |
— | 5,332 | 21,510 | |||||||||||||||||||
Diluted |
125,751 | 108,288 | 105,026 | |||||||||||||||||||
|
NOTE 18 — COMMITMENTS AND CONTINGENCIES
We have total contractual obligations and binding commitments of approximately $2.7 billion as of December 31, 2009 compared with $2.5 billion as of December 31, 2008, primarily related to purchase commitments, principal and interest payments on long-term debt, lease obligations, pension and OPEB funding minimums, and mine closure obligations. Such future commitments total $661.0 million in 2010, $314.9 million in 2011, $429.7 million in 2012, $470.0 million in 2013, $183.4 million in 2014 and $597.4 million thereafter.
Purchase Commitments
In 2008, we incurred a capital commitment for the purchase of a new longwall plow system for our Pinnacle mine in West Virginia. The system, which requires a capital investment of approximately $83 million, will replace the current longwall plow system in an effort to reduce maintenance costs and increase production at the mine. As of December 31, 2009, capital expenditures related to this purchase were approximately $29 million. Remaining expenditures of approximately $40 million and $14 million are scheduled to be made in 2010 and 2011, respectively, based upon revised payment and delivery terms negotiated with the supplier.
Contingencies
Litigation
We are currently a party to various claims and legal proceedings incidental to our operations. If management believes that a loss arising from these matters is probable and can reasonably be estimated, we record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of these matters, individually and in the aggregate, will not have a material adverse effect on our financial position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which the ruling occurs, or future periods. However, we believe that any pending litigation will not result in a material liability in relation to our consolidated financial statements. Refer to Part 1 — Item 3, Legal Proceedings, for additional information.
Environmental Matters
We had 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 active and closed mining operations and other sites. These amounts have been recognized based on the estimated cost of investigation and remediation at each site, and include site studies, design and implementation of remediation plans, legal and consulting fees, and post-remediation monitoring and related activities. If the cost can only be estimated as a range of possible amounts with no specific amount being more likely, the minimum of the range is accrued. Future expenditures are not discounted unless the amount and timing of the cash disbursements are readily known. Potential insurance recoveries have not been reflected. Additional environmental obligations could be incurred, the extent of which cannot be assessed. The amount of our ultimate liability with respect to these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the extent to which other responsible parties contribute. Refer to NOTE 11 — ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS for further information.
Tax Matters
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
Guarantees
We are party to financing arrangements under which we issue guarantees on behalf of certain of our unconsolidated subsidiaries. In the event of non-payment, we are obligated to make payment in accordance with the provisions of the guarantee arrangement. At December 31, 2009 and 2008, Amapá had total project debt outstanding of approximately $530 million and $493 million, respectively. We have provided several guarantees on our 30 percent share of the total debt outstanding, or $160 million and $148 million, at December 31, 2009 and 2008, respectively. Our estimate of the aggregate fair value of the outstanding guarantees 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. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we could attempt to recover some or all of that amount from guaranteed parties. We hold no collateral in respect of the guarantees.
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.
|
NOTE 19 — CASH FLOW INFORMATION
A reconciliation of capital additions to cash paid for capital expenditures for the years ended December 31, 2009, 2008 and 2007 is as follows:
(In Millions) | |||||||||
2009 | 2008 | 2007 | |||||||
Capital additions |
$ | 168.2 | $ | 232.6 | $ | 235.1 | |||
Cash paid for capital expenditures |
116.3 | 182.5 | 199.5 | ||||||
Difference |
$ | 51.9 | $ | 50.1 | $ | 35.6 | |||
Non-cash accruals |
$ | 3.0 | $ | 25.7 | $ | 4.7 | |||
Capital leases |
48.9 | 24.4 | 30.9 | ||||||
Total |
$ | 51.9 | $ | 50.1 | $ | 35.6 | |||
Cash payments for interest and income taxes in 2009, 2008 and 2007 are as follows:
(In Millions) | |||||||||
2009 | 2008 | 2007 | |||||||
Taxes paid on income |
$ | 64.8 | $ | 175.5 | $ | 123.6 | |||
Interest paid on debt obligations |
25.3 | 26.3 | 16.6 |
|
NOTE 20 — RELATED PARTIES
We co-own four of our six North American iron ore mines with various joint venture partners that are integrated steel producers or their subsidiaries. We are the manager of each of the mines we co-own and rely on our joint venture partners to make their required capital contributions and to pay for their share of the iron ore pellets that we produce. The joint venture partners are also our customers. The following is a summary of the mine ownership of these four North American iron ore mines at December 31, 2009:
Percent ownership | ||||||
Mine |
Cliffs Natural Resources |
ArcelorMittal | U. S. Steel Canada |
|||
Empire |
79.0 | 21.0 | — | |||
Tilden |
85.0 | — | 15.0 | |||
Hibbing |
23.0 | 62.3 | 14.7 | |||
Wabush (1) |
26.8 | 28.6 | 44.6 |
(1) | 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. |
ArcelorMittal has a unilateral right to put its interest in the Empire Mine to us, but has not exercised this right to date.
Product revenues to related parties were as follows:
(In Millions) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Product revenues to related parties |
$ | 593.8 | $ | 1,020.5 | $ | 754.3 | ||||||
Total product revenues |
2,216.2 | 3,294.8 | 1,997.3 | |||||||||
Related party product revenue as a percent of total product revenue |
26.8 | % | 31.0 | % | 37.8 | % |
Accounts receivable from related parties were $1.8 million and $2.9 million at December 31, 2009 and 2008, respectively.
In 2002, we entered into an agreement with Ispat that restructured the ownership of the Empire mine and increased our ownership from 46.7 percent to 79 percent in exchange for assumption of all mine liabilities. Under the terms of the agreement, we indemnified Ispat from obligations of Empire in exchange for certain future payments to Empire and to us by Ispat of $120.0 million, recorded at a present value of $38.3 million and $43.2 million at December 31, 2009 and 2008, respectively. Of these amounts, $28.3 million and $33.2 million were classified as Long-term receivable at December 31, 2009 and 2008, respectively, with the balances current, over the 12-year life of the supply agreement.
Supply agreements with one of our customers include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing for the year the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as an embedded derivative. Refer to NOTE 3 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
|
NOTE 21 — SUBSEQUENT EVENTS
Freewest Acquisition
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.
Wabush Acquisition
On January 26, 2010, we obtained the remaining regulatory approvals required to obtain full ownership of Wabush. Ownership transfer to Cliffs of U.S. Steel Canada’s 44.6 percent interest and ArcelorMittal Dofasco’s 28.6 percent interest in Wabush was completed on February 1, 2010. Total purchase consideration for the acquisition was approximately $88 million, subject to certain working capital adjustments.
Ratification of New Labor Agreement at Wabush
In February 2010, we entered into a new five-year labor agreement with the USW for our Wabush mine. The agreement provides for a 15 percent increase in labor costs over the five-year term of the agreement, inclusive of benefits.
We have evaluated subsequent events through February 18, 2010, which represents the date of financial statement issuance.
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NOTE 22 — QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The sum of quarterly EPS may not equal EPS for the year due to discrete quarterly calculations.
(In Millions, Except Per Common Share) | |||||||||||||||||
2009 | |||||||||||||||||
Quarters | Year | ||||||||||||||||
First | Second | Third | Fourth | ||||||||||||||
Revenues from product sales and services |
$ | 464.8 | $ | 390.3 | $ | 666.4 | $ | 820.5 | $ | 2,342.0 | |||||||
Sales margin |
42.4 | (11.7 | ) | 103.2 | 175.0 | 308.9 | |||||||||||
Income (Loss) attributable to Cliffs before extraordinary gain and cumulative effect of accounting change |
(7.4 | ) | 45.5 | 58.8 | 108.2 | 205.1 | |||||||||||
Net income (loss) attributable to Cliffs shareholders |
(7.4 | ) | 45.5 | 58.8 | 108.2 | 205.1 | |||||||||||
Earnings (Loss) per common share attributable to Cliffs shareholders: |
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Basic |
$ | (0.07 | ) | $ | 0.36 | $ | 0.45 | $ | 0.83 | $ | 1.64 | ||||||
Diluted |
(0.07 | ) | 0.36 | 0.45 | 0.82 | 1.63 | |||||||||||
2008 | |||||||||||||||||
Quarters | Year | ||||||||||||||||
First | Second | Third | Fourth | ||||||||||||||
Revenues from product sales and services |
$ | 494.4 | $ | 1,008.6 | $ | 1,189.7 | $ | 916.4 | $ | 3,609.1 | |||||||
Sales margin |
82.4 | 426.3 | 365.0 | 286.0 | 1,159.7 | ||||||||||||
Income attributable to Cliffs before extraordinary gain and cumulative effect of accounting change |
16.7 | 270.2 | 174.9 | 54.0 | 515.8 | ||||||||||||
Net income attributable to Cliffs shareholders |
16.7 | 270.2 | 174.9 | 54.0 | 515.8 | ||||||||||||
Earnings per common share attributable to Cliffs shareholders: |
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Basic |
$ | 0.18 | $ | 2.75 | $ | 1.67 | $ | 0.48 | $ | 5.07 | |||||||
Diluted |
0.16 | 2.57 | 1.61 | 0.47 | 4.76 |
In the fourth quarter of 2008, we had certain non-recurring items which had a material impact on the quarterly results. In particular, on November 17, 2008, we announced the termination of the definitive merger agreement with Alpha Natural Resources, Inc., under which we would have acquired all outstanding shares of Alpha. Based upon the macroeconomic environment in 2008, uncertainty in the steel industry, shareholder dynamics, and the risks and costs of potential litigation, both our Board of Directors and Alpha’s Board of Directors determined that termination of the merger agreement was in the best interest of its equity holders. Under the terms of the settlement agreement, we were required to pay Alpha a $70 million termination fee, which was financed through our revolving credit facility and paid in November 2008. As a result, $90.1 million in termination fees and associated acquisition costs were expensed through Other Operating Income (Expense) on the Statement of Consolidated Operations in the fourth quarter of 2008 upon termination of the definitive merger agreement.
Additionally, in the fourth quarter of 2008, we recorded impairment charges of $25.1 million in Other income (expense) on the Statement of Consolidated Operations related to declines in the fair value of our available-for-sale securities which we concluded were other than temporary. As of December 31, 2008, our investments in PolyMet and Golden West had fair values totaling $6.2 million and $4.7 million, respectively, compared with a cost of $14.2 million and $21.8 million, respectively. The severity of the impairments in relation to the carrying amounts of the individual investments was consistent with the macroeconomic market and industry developments during 2008. However, we evaluated the near-term prospects of the issuers in relation to the severity and rapid decline in the fair value of each of these investments, and based upon that evaluation, we could not reasonably assert that the impairment period would be temporary primarily as a result of the global economic crisis and the corresponding uncertainties in the market.
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Cliffs Natural Resources Inc. and Subsidiaries
Schedule II — Valuation and Qualifying Accounts
(Dollars in Millions)
Classification |
Balance at Beginning of Year |
Additions | Deductions | Balance at End of Year |
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Charged to Cost and Expenses |
Charged to Other Accounts |
Acquisition | |||||||||||||||||
Year Ended December 31, 2009: |
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Deferred Tax Valuation Allowance |
$ | 17.6 | $ | 53.8 | $ | 1.7 | $ | 16.8 | $ | 0.5 | $ | 89.4 | |||||||
Year Ended December 31, 2008: |
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Deferred Tax Valuation Allowance |
$ | 26.3 | $ | 9.5 | $ | 8.1 | $ | (13.3 | ) | $ | 13.0 | $ | 17.6 | ||||||
Year Ended December 31, 2007: |
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Deferred Tax Valuation Allowance |
$ | 11.9 | $ | 13.0 | $ | 1.4 | $ | — | $ | — | $ | 26.3 |
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