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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number: 1-8944
clf-logoa01a01a06.jpg
CLEVELAND-CLIFFS INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio
 
34-1464672
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
200 Public Square, Cleveland, Ohio
 
44114-2315
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  ☒                                         NO  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES  ☒                                         NO  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
 
Accelerated filer
☐
Non-accelerated filer
☐
(Do not check if a smaller reporting company)
Smaller reporting company
☐
 
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  ☐                                         NO  ☒
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 296,510,023 as of October 20, 2017.


Table of Contents


TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Page Number
 
 
 
 
 
 
DEFINITIONS
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2017 and December 31, 2016
 
 
 
 
Statements of Unaudited Condensed Consolidated Operations for the Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Statements of Unaudited Condensed Consolidated Cash Flows for the Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 
 
 
Signatures
 
 
 
 
 
 

Table of Contents


DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cleveland-Cliffs Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” or "CAD" to Canadian currency and “$” to United States currency.
Abbreviation or acronym
 
Term
A&R 2015 Equity Plan
 
Amended and Restated Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan
ABL Facility
 
Syndicated Facility Agreement by and among Bank of America, N.A., as Administrative Agent and Australian Security Trustee, the Lenders that are parties hereto, Cleveland-Cliffs Inc., as Parent and a Borrower, and the Subsidiaries of Parent party hereto, as Borrowers dated as of March 30, 2015, as amended
Adjusted EBITDA
 
EBITDA excluding certain items such as extinguishment/restructuring of debt, foreign currency exchange remeasurement, impacts of discontinued operations, severance and contractor termination costs and intersegment corporate allocations of SG&A costs
ArcelorMittal
 
ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco, as well as, many other subsidiaries)
ALJ
 
Administrative Law Judge
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Updates
Bloom Lake Group
 
Bloom Lake General Partner Limited and certain of its affiliates, including Cliffs Quebec Iron Mining ULC
Canadian Entities
 
Bloom Lake Group, Wabush Group and certain other wholly-owned Canadian subsidiaries
CCAA
 
Companies' Creditors Arrangement Act (Canada)
Dodd-Frank Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
DR-grade
 
Direct Reduction-grade
EBITDA
 
Earnings before interest, taxes, depreciation and amortization
Empire
 
Empire Iron Mining Partnership
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
Fe
 
Iron
FERC
 
Federal Energy Regulatory Commission
FMSH Act
 
U.S. Federal Mine Safety and Health Act 1977, as amended
GAAP
 
Accounting principles generally accepted in the United States
HBI
 
Hot briquetted iron
Hibbing
 
Hibbing Taconite Company, an unincorporated joint venture
Koolyanobbing
 
Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling
Long ton
 
2,240 pounds
LTVSMC
 
LTV Steel Mining Company
Metric ton
 
2,205 pounds
MISO
 
Midcontinent Independent System Operator, Inc.
MMBtu
 
Million British Thermal Units
MSHA
 
U.S. Mine Safety and Health Administration
Monitor
 
FTI Consulting Canada Inc.
Net ton
 
2,000 pounds
Northshore
 
Northshore Mining Company
OPEB
 
Other postretirement employment benefits
Platts 62% Price
 
Platts IODEX 62% Fe Fines Spot Price
SEC
 
U.S. Securities and Exchange Commission
SG&A
 
Selling, general and administrative
Securities Act
 
Securities Act of 1933, as amended
SSR
 
System Support Resource
Tilden
 
Tilden Mining Company L.C.
TSR
 
Total Shareholder Return
United Taconite
 
United Taconite LLC
U.S.
 
United States of America
U.S. Steel
 
U.S Steel Corporation and all subsidiaries
Wabush Group
 
Wabush Iron Co. Limited and Wabush Resources Inc., and certain of its affiliates, including Wabush Mines (an unincorporated joint venture of Wabush Iron Co. Limited and Wabush Resources Inc.), Arnaud Railway Company and Wabush Lake Railway Company
2015 Equity Plan
 
Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan

1
Table of Contents


PART I
Item 1.
Financial Statements
Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
260.8

 
$
323.4

Accounts receivable, net
63.9

 
128.7

Inventories
207.7

 
178.4

Supplies and other inventories
92.5

 
91.4

Derivative assets
89.5

 
33.1

Loans to and accounts receivable from the Canadian Entities
51.9

 
48.6

Other current assets
24.8

 
21.0

TOTAL CURRENT ASSETS
791.1

 
824.6

PROPERTY, PLANT AND EQUIPMENT, NET
993.8

 
984.4

OTHER NON-CURRENT ASSETS
138.4

 
114.9

TOTAL ASSETS
$
1,923.3

 
$
1,923.9

(continued)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2
Table of Contents


Statements of Unaudited Condensed Consolidated Financial Position
Cleveland-Cliffs Inc. and Subsidiaries - (Continued)
 
(In Millions)
 
September 30,
2017
 
December 31,
2016
LIABILITIES
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
102.0

 
$
107.6

Accrued expenses
109.4

 
123.3

Accrued interest
21.7

 
40.2

Contingent claims
50.0

 
—

Derivative liabilities
9.3

 
0.5

Other current liabilities
125.1

 
119.5

TOTAL CURRENT LIABILITIES
417.5

 
391.1

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
254.3

 
280.5

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
205.4

 
193.9

LONG-TERM DEBT
1,689.4

 
2,175.1

OTHER LIABILITIES
189.8

 
213.8

TOTAL LIABILITIES
2,756.4

 
3,254.4

COMMITMENTS AND CONTINGENCIES (REFER TO NOTE 18)

 

EQUITY
 
 
 
CLIFFS SHAREHOLDERS' DEFICIT
 
 
 
Preferred Stock - no par value
 
 
 
Class A - 3,000,000 shares authorized
 
 
 
Class B - 4,000,000 shares authorized
 
 
 
Common Shares - par value $0.125 per share
 
 
 
Authorized - 600,000,000 shares (2016 - 400,000,000 shares);
 
 
 
Issued - 301,886,794 shares (2016 - 238,636,794 shares);
 
 
 
Outstanding - 296,503,284 shares (2016 - 233,074,091 shares)
37.7

 
29.8

Capital in excess of par value of shares
3,913.2

 
3,347.0

Retained deficit
(4,517.2
)
 
(4,574.3
)
Cost of 5,383,510 common shares in treasury (2016 - 5,562,703 shares)
(236.2
)
 
(245.5
)
Accumulated other comprehensive loss
(30.8
)
 
(21.3
)
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
(833.3
)
 
(1,464.3
)
NONCONTROLLING INTEREST
0.2

 
133.8

TOTAL DEFICIT
(833.1
)
 
(1,330.5
)
TOTAL LIABILITIES AND DEFICIT
$
1,923.3

 
$
1,923.9

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3
Table of Contents


Statements of Unaudited Condensed Consolidated Operations
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions, Except Per Share Amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
 
 
 
 
Product
$
627.5

 
$
508.6

 
$
1,552.3

 
$
1,237.0

Freight and venture partners' cost reimbursements
70.9

 
44.7

 
177.0

 
118.0


698.4

 
553.3

 
1,729.3

 
1,355.0

COST OF GOODS SOLD AND OPERATING EXPENSES
(538.2
)
 
(467.9
)
 
(1,328.3
)
 
(1,147.2
)
SALES MARGIN
160.2

 
85.4

 
401.0

 
207.8

OTHER OPERATING INCOME (EXPENSE)
 
 
 
 
 
 
 
Selling, general and administrative expenses
(24.6
)
 
(31.1
)
 
(77.8
)
 
(81.8
)
Miscellaneous - net
(5.9
)
 
(19.6
)
 
3.0

 
(16.9
)
 
(30.5
)
 
(50.7
)
 
(74.8
)
 
(98.7
)
OPERATING INCOME
129.7

 
34.7

 
326.2

 
109.1

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense, net
(28.9
)
 
(48.7
)
 
(103.1
)
 
(156.2
)
Gain (loss) on extinguishment/restructuring of debt
(88.6
)
 
(18.3
)
 
(165.4
)
 
164.1

Other non-operating income
0.8

 
0.1

 
2.3

 
0.4

 
(116.7
)
 
(66.9
)
 
(266.2
)
 
8.3

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
13.0

 
(32.2
)
 
60.0

 
117.4

INCOME TAX BENEFIT
7.6

 
7.1

 
6.8

 
1.7

INCOME (LOSS) FROM CONTINUING OPERATIONS
20.6

 
(25.1
)
 
66.8

 
119.1

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
32.3

 
(2.7
)
 
(13.6
)
 
(0.6
)
NET INCOME (LOSS)
52.9

 
(27.8
)
 
53.2

 
118.5

LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
0.5

 
2.0

 
3.9

 
(23.5
)
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
53.4

 
$
(25.8
)
 
$
57.1

 
$
95.0

EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
(0.11
)
 
$
0.25

 
$
0.51

Discontinued operations
0.11

 
(0.01
)
 
(0.05
)
 
—

 
$
0.18

 
$
(0.12
)
 
$
0.20

 
$
0.51

EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
(0.11
)
 
$
0.24

 
$
0.51

Discontinued operations
0.11

 
(0.01
)
 
(0.05
)
 
—

 
$
0.18

 
$
(0.12
)
 
$
0.19

 
$
0.51

AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
 
 
 
 
Basic
296,079

 
206,279

 
285,771

 
186,454

Diluted
301,075

 
206,279

 
290,512

 
188,471

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4
Table of Contents


Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss)
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
53.4

 
$
(25.8
)
 
$
57.1

 
$
95.0

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Changes in pension and other post-retirement benefits, net of tax
7.5

 
7.1

 
18.9

 
19.0

Unrealized net gain (loss) on foreign currency translation
0.5

 
0.9

 
(13.6
)
 
2.6

Unrealized net gain (loss) on derivative financial instruments, net of tax
—

 
0.7

 
—

 
(2.6
)
OTHER COMPREHENSIVE INCOME
8.0

 
8.7

 
5.3

 
19.0

OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
(5.7
)
 
(0.9
)
 
(1.1
)
 
(2.2
)
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
55.7

 
$
(18.0
)
 
$
61.3

 
$
111.8

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents


Statements of Unaudited Condensed Consolidated Cash Flows
Cleveland-Cliffs Inc. and Subsidiaries
 
(In Millions)
 
Nine Months Ended
September 30,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income
$
53.2

 
$
118.5

Adjustments to reconcile net income to net cash provided (used) by operating activities:
 
 
 
Depreciation, depletion and amortization
66.3

 
88.9

(Gain) loss on extinguishment/restructuring of debt
165.4

 
(164.1
)
(Gain) loss on deconsolidation
16.3

 
(3.2
)
Gain on derivatives
(47.5
)
 
(22.6
)
Other
19.0

 
31.6

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
68.9

 
137.5

Inventories
(26.1
)
 
21.6

Payables, accrued expenses and other liabilities
(108.8
)
 
(136.1
)
Net cash provided by operating activities
206.7

 
72.1

INVESTING ACTIVITIES
 
 
 
Purchase of property, plant and equipment
(78.9
)
 
(45.8
)
Other investing activities
(5.5
)
 
6.3

Net cash used by investing activities
(84.4
)
 
(39.5
)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of senior notes
1,057.8

 
—

Debt issuance costs
(12.0
)
 
(5.2
)
Net proceeds from issuance of common shares
661.3

 
287.6

Repurchase of debt
(1,720.7
)
 
(301.0
)
Repayment of equipment loans
—

 
(95.6
)
Borrowings under credit facilities
—

 
105.0

Repayment under credit facilities
—

 
(105.0
)
Acquisition of noncontrolling interest
(105.0
)
 
—

Distributions of partnership equity
(53.0
)
 
(52.5
)
Other financing activities
(17.0
)
 
(19.3
)
Net cash used by financing activities
(188.6
)
 
(186.0
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
3.7

 
0.4

DECREASE IN CASH AND CASH EQUIVALENTS
(62.6
)
 
(153.0
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
323.4

 
285.2

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
260.8

 
$
132.2

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Table of Contents


Cleveland-Cliffs Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.
We report our results from continuing operations in two reportable segments: U.S. Iron Ore and Asia Pacific Iron Ore.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, including the following operations as of September 30, 2017:
Name
 
Location
 
Ownership Interest
 
Operation
 
Status of Operations
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
Tilden1
 
Michigan
 
100.0%
 
Iron Ore
 
Active
Empire1
 
Michigan
 
100.0%
 
Iron Ore
 
Indefinitely Idled
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
 
Active
 
 
 
 
 
 
 
 
 
1 During the third quarter of 2017, our ownership interest in Tilden and Empire changed. Refer to the Noncontrolling Interests section below for additional information.
Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of September 30, 2017 and December 31, 2016, our investment in Hibbing was $6.1 million and $8.7 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Noncontrolling Interests
During the third quarter of 2017, our ownership interest in Empire increased to 100% as we reached an agreement to distribute the noncontrolling interest net assets for $132.7 million to ArcelorMittal, in exchange for its interest in Empire. The net assets were agreed to be distributed in three installments of approximately $44.2 million, the first of which was paid upon the execution of the agreement and the remaining distributions are due in August 2018 and August 2019. Upon payment of the first installment, we assumed ArcelorMittal's 21% interest and have reflected this ownership percentage change in our unaudited condensed consolidated financial statements as of and for the period ended September 30, 2017. We accounted for the increase in ownership as an equity transaction, which resulted in a $16.0 million decrease in equity attributable to Cliffs' shareholders and a $116.7 million decrease in Noncontrolling interest.
During the third quarter of 2017, we also acquired the remaining 15% equity interest in Tilden owned by U.S. Steel for $105.0 million. With the closing of this transaction, we now have 100% ownership of the mine. We accounted for the increase in ownership as an equity transaction, which resulted in an $89.1 million decrease in equity attributable to Cliffs' shareholders and a $15.9 million decrease in Noncontrolling interest.

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Table of Contents


Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of our Australian subsidiaries is the Australian dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of our Australian 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. Translation adjustments are recorded as Accumulated other comprehensive loss. Income taxes generally are not provided for foreign currency translation adjustments. To the extent that monetary assets and liabilities, including short-term intercompany loans, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Unaudited Condensed Consolidated Operations. Transaction gains and losses resulting from remeasurement of short-term intercompany loans are included in Miscellaneous - net in the Statements of Unaudited Condensed Consolidated Operations.
The following represents the transaction gains and losses resulting from remeasurement for the three and nine months ended September 30, 2017 and 2016:
 
 
(In Millions)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Remeasurement of short-term intercompany loans
 
$
0.1

 
$
0.2

 
$
16.7

 
$
0.5

Remeasurement of cash and cash equivalents
 
(1.1
)
 
(1.1
)
 
(2.8
)
 
0.3

Other remeasurement
 
(1.4
)
 
0.6

 
(2.7
)
 
(2.0
)
Net impact of transaction gains (losses) resulting from remeasurement
 
$
(2.4
)
 
$
(0.3
)
 
$
11.2

 
$
(1.2
)
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2016 included in our Annual Report on Form 10-K filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.

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Recent Accounting Pronouncements
Issued and Not Effective
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  The new standard simplifies hedge accounting through changes to both designation and measurement requirements.  For hedges that qualify as highly effective, the new standard eliminates the requirement to separately measure and record hedge ineffectiveness resulting in better alignment between the presentation of the effects of the hedging instrument and the hedged item in the financial statements.  ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update.  We are currently assessing the impact this ASU will have on the consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new standard requires the service cost component of pension and other postretirement benefit expenses to be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of net benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The guidance is effective for fiscal years beginning after December 15, 2017. The adoption of ASU No. 2017-07 in the first quarter of 2018 will impact the Statements of Unaudited Condensed Consolidated Operations by changing our classification of the components of pension and OPEB costs; however, it will not impact our Net Income (Loss). The following represents the estimated impact from the adoption of ASU No. 2017-07 for the nine months ended September 30, 2017:
 
 
($ in Millions)
 
 
Nine Months Ended
September 30, 2017
 
 
 
 
Estimate
Financial Statement Line Impacted
 
As Reported
 
Adoption of ASU No. 2017-07
 
As Adjusted
Cost of goods sold and operating expenses
 
$
(1,328.3
)
 
$
1.3

 
$
(1,327.0
)
Selling, general and administrative expenses
 
$
(77.8
)
 
$
(5.8
)
 
$
(83.6
)
Miscellaneous - net
 
$
3.0

 
$
(1.2
)
 
$
1.8

Operating income
 
$
326.2

 
$
(5.7
)
 
$
320.5

Other non-operating income
 
$
2.3

 
$
5.7

 
$
8.0

Net Income (Loss)
 
$
53.2

 
$
—

 
$
53.2

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases except for short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. We plan to adopt the standard on its effective date of January 1, 2019. The new standard must be adopted using a modified retrospective approach and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently finalizing our implementation plan, compiling an inventory of existing leases and evaluating the effect the updated standard will have on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenues from Contracts with Customers. The new revenue guidance broadly replaces the revenue guidance provided throughout the Codification. The core principle of the revenue guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Reporting entities must prepare new disclosures providing qualitative and quantitative information on the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. New disclosures also include qualitative and quantitative information on significant judgments, changes in judgments, and contract acquisition assets. We plan to adopt the standard on its effective date of January 1, 2018 using the modified retrospective transition method. As of September 30, 2017, we have completed the evaluation of the new standard and the related review and assessment of substantially all existing contracts with our customers. We determined that revenue will generally be recognized upon delivery for our U.S. Iron Ore customers, which is earlier than under the current guidance. Current guidance requires us to recognize revenue when title transfers which is generally the point at which we receive payment. However, the total amount of revenue recognized during the year should remain substantially the same as

9
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under current GAAP. We do not anticipate any significant changes in the timing and pattern of revenue recognition for our Asia Pacific Iron Ore contracts. Based on our analysis to date, we anticipate the primary impact of the adoption on our consolidated financial statements will be the additional required disclosures around revenue recognition in the notes to the consolidated financial statements.
NOTE 2 - SEGMENT REPORTING
Our continuing operations are organized and managed according to geographic location: U.S. Iron Ore and Asia Pacific Iron Ore. Our U.S. Iron Ore segment is a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. There were no intersegment revenues in the first nine months of 2017 or 2016.
We evaluate segment performance based on sales margin, defined as revenues less cost of goods sold and operating expenses identifiable to each segment. Additionally, we evaluate performance on a segment basis, as well as a consolidated basis, based on EBITDA and Adjusted EBITDA. These measures allow management and investors to focus on our ability to service our debt as well as illustrate how the business and each operating segment are performing.  Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these measures approximate the cash flows associated with operational earnings.
The following tables present a summary of our reportable segments for the three and nine months ended September 30, 2017 and 2016, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and a reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA:
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues from product sales and services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
596.7

 
85
%
 
$
428.3

 
77
%
 
$
1,354.2

 
78
%
 
$
975.5

 
72
%
Asia Pacific Iron Ore
101.7

 
15
%
 
125.0

 
23
%
 
375.1

 
22
%
 
379.5

 
28
%
Total revenues from product sales and services
$
698.4

 
100
%
 
$
553.3

 
100
%
 
$
1,729.3

 
100
%
 
$
1,355.0

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Iron Ore
$
157.2

 
 
 
$
66.5

 
 
 
$
349.8

 
 
 
$
149.7

 
 
Asia Pacific Iron Ore
3.0

 
 
 
18.9

 
 
 
51.2

 
 
 
58.1

 
 
Sales margin
160.2

 
 
 
85.4

 
 
 
401.0

 
 
 
207.8

 
 
Other operating expense
(30.5
)
 
 
 
(50.7
)
 
 
 
(74.8
)
 
 
 
(98.7
)
 
 
Other income (expense)
(116.7
)
 
 
 
(66.9
)
 
 
 
(266.2
)
 
 
 
8.3

 
 
Income (loss) from continuing operations before income taxes
$
13.0

 
 
 
$
(32.2
)
 
 
 
$
60.0

 
 
 
$
117.4

 
 

10
Table of Contents


 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net Income (Loss)
$
52.9

 
$
(27.8
)
 
$
53.2

 
$
118.5

Less:
 
 
 
 
 
 
 
Interest expense, net
(28.9
)
 
(48.7
)
 
(103.1
)
 
(156.2
)
Income tax benefit
7.6

 
7.1

 
6.8

 
1.7

Depreciation, depletion and amortization
(21.5
)
 
(26.8
)
 
(66.3
)
 
(88.9
)
EBITDA
$
95.7

 
$
40.6

 
$
215.8

 
$
361.9

Less:
 
 
 
 
 
 
 
Gain (loss) on extinguishment/restructuring of debt
$
(88.6
)
 
$
(18.3
)
 
$
(165.4
)
 
$
164.1

Foreign exchange remeasurement
(2.4
)
 
(0.3
)
 
11.2

 
(1.2
)
Impact of discontinued operations
32.3

 
(2.7
)
 
(13.6
)
 
(0.6
)
Severance and contractor termination costs
—

 
—

 
—

 
(0.1
)
Adjusted EBITDA
$
154.4

 
$
61.9

 
$
383.6

 
$
199.7

 
 
 
 
 
 
 
 
EBITDA
 
 
 
 
 
 
 
U.S. Iron Ore
$
168.9

 
$
61.1

 
$
381.8

 
$
196.6

Asia Pacific Iron Ore
2.3

 
21.2

 
54.9

 
69.6

Other
(75.5
)
 
(41.7
)
 
(220.9
)
 
95.7

Total EBITDA
$
95.7

 
$
40.6

 
$
215.8

 
$
361.9

 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
U.S. Iron Ore
$
174.2

 
$
65.3

 
$
399.8

 
$
208.6

Asia Pacific Iron Ore
4.9

 
23.7

 
61.7

 
73.2

Other
(24.7
)
 
(27.1
)
 
(77.9
)
 
(82.1
)
Total Adjusted EBITDA
$
154.4

 
$
61.9

 
$
383.6

 
$
199.7


11
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(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Depreciation, depletion and amortization:
 
 
 
 
 
 
 
U.S. Iron Ore
$
16.5

 
$
18.8

 
$
49.6

 
$
65.1

Asia Pacific Iron Ore
3.3

 
6.3

 
11.3

 
19.2

Other
1.7

 
1.7

 
5.4

 
4.6

Total depreciation, depletion and amortization
$
21.5

 
$
26.8

 
$
66.3

 
$
88.9

 
 
 
 
 
 
 
 
Capital additions:
 
 
 
 
 
 
 
U.S. Iron Ore
$
19.2

 
$
25.8

 
$
70.9

 
$
39.5

Asia Pacific Iron Ore
0.8

 
0.2

 
1.6

 
0.2

Other
7.1

 
0.4

 
7.1

 
4.8

Total capital additions1
$
27.1

 
$
26.4

 
$
79.6

 
$
44.5

 
 
 
 
 
 
 
 
1 Includes cash paid for capital additions of $78.9 million and $45.8 million and an increase in non-cash accruals of $0.7 million and a decrease in non-cash accruals of $1.3 million for the nine months ended September 30, 2017 and 2016, respectively.
A summary of assets by segment is as follows:
 
(In Millions)
 
September 30,
2017
 
December 31,
2016
Assets:
 
 
 
U.S. Iron Ore
$
1,467.2

 
$
1,372.5

Asia Pacific Iron Ore
139.4

 
155.1

Total segment assets
1,606.6

 
1,527.6

Corporate
316.7

 
396.3

Total assets
$
1,923.3

 
$
1,923.9

NOTE 3 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2017 and December 31, 2016:
 
(In Millions)
 
September 30, 2017
 
December 31, 2016
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in Process
 
Total
Inventory
U.S. Iron Ore
$
151.3

 
$
18.6

 
$
169.9

 
$
124.4

 
$
12.6

 
$
137.0

Asia Pacific Iron Ore
29.4

 
8.4

 
37.8

 
23.6

 
17.8

 
41.4

Total
$
180.7

 
$
27.0

 
$
207.7

 
$
148.0

 
$
30.4

 
$
178.4


12
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NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of September 30, 2017 and December 31, 2016:
 
(In Millions)
 
September 30,
2017
 
December 31,
2016
Land rights and mineral rights
$
500.7

 
$
500.5

Office and information technology
66.2

 
65.1

Buildings
80.0

 
67.9

Mining equipment
585.4

 
592.2

Processing equipment
607.9

 
552.0

Electric power facilities
57.0

 
49.4

Land improvements
23.7

 
23.5

Asset retirement obligation
19.6

 
19.8

Other
30.4

 
28.1

Construction in-progress
35.4

 
42.8

 
2,006.3

 
1,941.3

Allowance for depreciation and depletion
(1,012.5
)
 
(956.9
)
 
$
993.8

 
$
984.4

We recorded depreciation and depletion expense of $21.0 million and $64.8 million in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2017, respectively. This compares with depreciation and depletion expense of $25.6 million and $85.1 million for the three and nine months ended September 30, 2016, respectively.
NOTE 5 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of September 30, 2017 and December 31, 2016:
(In Millions)
September 30, 2017
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Unsecured Notes
 
 
 
 
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
$
88.9

 
$
(0.2
)
 
$
(0.2
)
 
$
88.5

$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
122.4

 
(0.3
)
 
(0.1
)
 
122.0

$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
138.4

 
(0.3
)
 
(0.1
)
 
138.0

$1.075 Billion 5.75% 2025 Senior Notes
 
5.75%
 
1,075.0

 
(11.2
)
 
(17.0
)
 
1,046.8

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.4
)
 
(3.4
)
 
292.6

ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 
—

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
1.5

Long-term debt
 
 
 
 
 
 
 
 
 
$
1,689.4


13
Table of Contents


(In Millions)
December 31, 2016
Debt Instrument
 
Annual Effective
Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Undiscounted Interest/
(Unamortized Discounts)
 
Total Debt
Secured Notes
 
 
 
 
 
 
 
 
 
 
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
$
540.0

 
$
(8.0
)
 
$
(25.7
)
 
$
506.3

$218.5 Million 8.00% 2020 1.5 Lien Notes
 
N/A
 
218.5

 
—

 
65.7

 
284.2

$544.2 Million 7.75% 2020 Second Lien Notes
 
15.55%
 
430.1

 
(5.8
)
 
(85.2
)
 
339.1

Unsecured Notes
 
 
 
 
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
225.6

 
(0.6
)
 
(0.5
)
 
224.5

$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
236.8

 
(0.7
)
 
(0.2
)
 
235.9

$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
309.4

 
(1.0
)
 
(0.2
)
 
308.2

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.5
)
 
(3.4
)
 
292.5

ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 
—

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
1.9

Total debt
 
 
 


 
 
 
 
 
$
2,192.6

Less current portion
 
 
 
 
 
 
 
 
 
17.5

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,175.1

$1.075 Billion 5.75% 2025 Senior Notes - 2017 Offering
On February 27, 2017, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the issuance of $500 million aggregate principal amount of 5.75% Senior Notes due 2025. On August 7, 2017, we issued an additional $575 million aggregate principal amount of our 5.75% Senior Notes due 2025 (together referred to as the "5.75% Senior Notes"). The 5.75% Senior Notes were issued in private transactions exempt from the registration requirements of the Securities Act. Pursuant to the registration rights agreement executed as part of this offering, we agreed to file a registration statement with the SEC with respect to a registered offer to exchange the 5.75% Senior Notes for publicly registered notes within 365 days of the closing date, with all significant terms and conditions remaining the same.
The 5.75% Senior Notes bear interest at a rate of 5.75% per annum, which is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2017. The 5.75% Senior Notes mature on March 1, 2025.
The 5.75% Senior Notes are general unsecured senior obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness and rank senior in right of payment to all of our existing and future subordinated indebtedness. The 5.75% Senior Notes are effectively subordinated to our existing or future secured indebtedness to the extent of the value of the assets securing such indebtedness. The 5.75% Senior Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the 5.75% Senior Notes.
The terms of the 5.75% Senior Notes are governed by an indenture, which contains customary covenants that, among other things, limit our and our subsidiaries' ability to create liens on property that secure indebtedness, enter into sale and leaseback transactions and merge, consolidate or amalgamate with another company. Upon the occurrence of a “change of control triggering event,” as defined in the indenture, we are required to offer to repurchase the 5.75% Senior Notes at 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem the 5.75% Senior Notes, in whole or in part, on or after March 1, 2020, at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, and prior to March 1, 2020, at a redemption price equal to 100% of the principal amount thereof plus a “make-whole”

14
Table of Contents


premium set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. We may also redeem up to 35% of the aggregate principal amount of the 5.75% Senior Notes on or prior to March 1, 2020 at a redemption price equal to 105.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption with the net cash proceeds of one or more equity offerings.
The 5.75% Senior Notes indenture contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other indebtedness, certain events of bankruptcy and insolvency and failure to pay certain judgments. An event of default under the indenture will allow either the trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding notes issued under the indenture to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the 5.75% Senior Notes. Debt issuance costs of $12.0 million were incurred related to the offering of the 5.75% Senior Notes, $11.2 million of which is included in Long-term debt in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2017.
Debt Extinguishment
The following is a summary of the debt extinguished during the nine months ended September 30, 2017 and the respective gain (loss) on extinguishment for the three and nine months ended September 30, 2017:
(In Millions)
 
 
 
 
Gain (Loss) on Extinguishment1
 
 
Debt Extinguished
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
Secured Notes
 
 
 
 
 
 
$540 Million 8.25% 2020 First Lien Notes
 
$
540.0

 
$
(88.6
)
 
$
(93.5
)
$218.5 Million 8.00% 2020 1.5 Lien Notes
 
218.5

 
—

 
45.1

$544.2 Million 7.75% 2020 Second Lien Notes
 
430.1

 
—

 
(104.5
)
Unsecured Notes
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
136.7

 
—

 
(7.8
)
$500 Million 4.80% 2020 Senior Notes
 
114.4

 
—

 
(1.9
)
$700 Million 4.875% 2021 Senior Notes
 
171.0

 
—

 
(2.8
)
 
 
$
1,610.7

 
$
(88.6
)
 
$
(165.4
)
 
 
 
 
 
 
 
1 This includes premiums paid related to the redemption of our notes of $62.4 million and $110.0 million for the three and nine months ended September 30, 2017, respectively.
Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings under the ABL Facility, based on the principal amounts outstanding at September 30, 2017:
 
(In Millions)
 
Maturities of Debt
2017 (October 1 - December 31)
$
—

2018
—

2019
—

2020
211.3

2021
138.4

2022
—

2023 and thereafter
1,373.4

Total maturities of debt
$
1,723.1


15
Table of Contents


ABL Facility
As of September 30, 2017 and December 31, 2016, no loans were drawn under the ABL Facility and we had total availability of $254.2 million and $333.0 million, respectively, as a result of borrowing base limitations. As of September 30, 2017 and December 31, 2016, the principal amount of letter of credit obligations totaled $45.0 million and $106.0 million, respectively, to support business obligations primarily related to workers compensation and environmental obligations, thereby further reducing available borrowing capacity on our ABL Facility to $209.2 million and $227.0 million, respectively.
NOTE 6 - FAIR VALUE MEASUREMENTS
The following represents the assets and liabilities of the Company measured at fair value at September 30, 2017 and December 31, 2016:
 
(In Millions)
 
September 30, 2017
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
$
40.0

 
$
37.0

 
$
—

 
$
77.0

Derivative assets
—

 
—

 
89.5

 
89.5

Total
$
40.0

 
$
37.0

 
$
89.5

 
$
166.5

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
—

 
$
9.3

 
$
9.3

Total
$
—

 
$
—

 
$
9.3

 
$
9.3

 
(In Millions)
 
December 31, 2016
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
$
177.0

 
$
—

 
$
—

 
$
177.0

Derivative assets
—

 
1.5

 
31.6

 
33.1

Total
$
177.0

 
$
1.5

 
$
31.6

 
$
210.1

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
—

 
$
0.5

 
$
0.5

Total
$
—

 
$
—

 
$
0.5

 
$
0.5


16
Table of Contents


Financial assets classified in Level 1 as of September 30, 2017 and December 31, 2016 include money market funds of $40.0 million and $177.0 million, respectively. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets or other inputs that are observable. Level 2 assets included $37.0 million of commercial paper at September 30, 2017 and $1.5 million of commodity hedge contracts at December 31, 2016.
The Level 3 assets include derivative assets that consist of freestanding derivative instruments related to certain supply agreements with one of our U.S Iron Ore customers and certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers.
The supply agreements included in our Level 3 assets/liabilities include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing or the average annual daily market price for hot-rolled coil steel at the time the product is consumed in the customer’s blast furnaces. We account for these provisions as derivative instruments at the time of sale and adjust these provisions to fair value as an adjustment to Product revenues each reporting period until the product is consumed and the amounts are settled. The fair value of the instruments are determined using a market approach with one supply agreement based on an estimate of the annual realized price of hot-rolled coil steel at the steelmaker’s facilities and the other supply agreement based on the estimate of the average annual daily market price for hot-rolled coil steel. Both estimates take into consideration current market conditions and nonperformance risk. We had assets of $84.8 million and $21.3 million at September 30, 2017 and December 31, 2016, respectively, related to supply agreements.
The provisional pricing arrangements included in our Level 3 assets/liabilities specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate to be based on market inputs at a specified point in time in the future, per the terms of the supply agreements. The difference between the estimated final revenue at the date of sale and the estimated final revenue rate at the measurement date is characterized as a derivative and is required to be accounted for separately once the revenue has been recognized. The derivative instrument is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rate is determined. We had assets of $4.7 million and $10.3 million at September 30, 2017 and December 31, 2016, respectively, related to provisional pricing arrangements. In addition, we had liabilities of $9.3 million and $0.5 million related to provisional pricing arrangements at September 30, 2017 and December 31, 2016, respectively.

17
Table of Contents


The following table illustrates information about quantitative inputs and assumptions for the assets and liabilities categorized in Level 3 of the fair value hierarchy:
Qualitative/Quantitative Information About Level 3 Fair Value Measurements
 
 
(In Millions)
Fair Value at September 30, 2017
 
Balance Sheet
Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate
(Weighted Average)
 
Provisional pricing arrangements
 
$
4.7

 
Derivative assets
 
Market Approach
 
Management's
Estimate of Platts 62% Price
per dry metric ton
 
$61 - $74
($73)
 
 
 
 
Market Hot-Rolled Coil Steel Estimate
per net ton
 
$580 - $660
($625)
Provisional pricing arrangements
 
$
9.3

 
Derivative liabilities
 
Market Approach
 
Management's
Estimate of Platts 62% Price
per dry metric ton
 
$61 - $74
($73)
Customer supply agreements
 
$
84.8

 
Derivative assets
 
Market Approach
 
Customer Hot-Rolled Steel Estimate
per net ton
 
$558 - $622
($565)
 
 
 
 
Market Hot-Rolled Coil Steel Estimate
per net ton
 
$580 - $660
($625)
The significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements are management’s estimates of Platts 62% Price based upon current market data, index pricing and the average annual daily steel market price for hot-rolled coil steel, each of which includes forward-looking estimates determined by management. Significant increases or decreases in these inputs would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable inputs used in the fair value measurement of our customer supply agreements are the customer's future hot-rolled coil steel price that is estimated based on projections provided by the customer, analysts' projections and estimates determined by management, and the average annual daily market price for hot-rolled coil steel, each of which include forward-looking estimates determined by management. Significant increases or decreases in these inputs would result in a significantly higher or lower fair value measurement, respectively.

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We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2017 and 2016. The following tables represent a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017 and 2016.
 
(In Millions)
 
Level 3 Assets
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
72.5

 
$
25.8

 
$
31.6

 
$
7.8

Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
60.6

 
14.6

 
156.0

 
62.6

Settlements
(43.6
)
 
(12.0
)
 
(98.1
)
 
(42.0
)
Ending balance - September 30
$
89.5

 
$
28.4

 
$
89.5

 
$
28.4

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
0.1

 
$
8.2

 
$
53.4

 
$
24.7

 
(In Millions)
 
Level 3 Liabilities
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
(20.9
)
 
$
(2.6
)
 
$
(0.5
)
 
$
(3.4
)
Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
(19.3
)
 
(2.9
)
 
(64.9
)
 
(12.8
)
Settlements
30.9

 
2.8

 
56.1

 
13.5

Ending balance - September 30
$
(9.3
)
 
$
(2.7
)
 
$
(9.3
)
 
$
(2.7
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
6.0

 
$
(2.7
)
 
$
(14.8
)
 
$
(2.7
)
Gains and losses from derivative assets and liabilities are included in earnings and are reported in Product revenues for the three and nine months ended September 30, 2017 and 2016.

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The carrying amount of certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Accrued expenses) approximates fair value and, therefore, has been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at September 30, 2017 and December 31, 2016 were as follows:
 
 
 
(In Millions)
 
 
 
September 30, 2017
 
December 31, 2016
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Secured Notes
 
 
 
 
 
 
 
 
 
First Senior Lien Notes —$540 million
Level 1
 
$
—

 
$
—

 
$
506.3

 
$
595.0

1.5 Senior Lien Notes —$218.5 million
Level 2
 
—

 
—

 
284.2

 
229.5

Second Senior Lien Notes —$544.2 million
Level 1
 
—

 
—

 
339.1

 
439.7

Unsecured Notes
 
 
 
 
 
 
 
 
 
Senior Notes—$1.075 billion
Level 1
 
1,046.8

 
1,032.0

 
—

 
—

Senior Notes—$400 million
Level 1
 
88.5

 
88.4

 
224.5

 
219.6

Senior Notes—$500 million
Level 1
 
122.0

 
116.9

 
235.9

 
221.1

Senior Notes—$700 million
Level 1
 
138.0

 
132.4

 
308.2

 
283.1

Senior Notes—$800 million
Level 1
 
292.6

 
249.0

 
292.5

 
234.7

ABL Facility
Level 2
 
—

 
—

 
—

 
—

Fair value adjustment to interest rate hedge
Level 2
 
1.5

 
1.5

 
1.9

 
1.9

Total long-term debt
 
 
$
1,689.4

 
$
1,620.2

 
$
2,192.6

 
$
2,224.6

The fair value of long-term debt was determined using quoted market prices based upon current borrowing rates.

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Items Measured at Fair Value on a Non-Recurring Basis
The following tables present information about the financial assets and liabilities that were measured on a fair value basis at September 30, 2017 and December 31, 2016 for the Canadian Entities. The tables also indicate the fair value hierarchy of the valuation techniques used to determine such fair value.
 
 
(In Millions)
 
 
September 30, 2017
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Year-to-Date Gains
Assets:
 
 
 
 
 
 
 
 
 
 
Loans to and accounts receivables from the Canadian Entities
 
$
—

 
$
—

 
$
51.9

 
$
51.9

 
$
3.3

Liabilities:
 
 
 
 
 
 
 
 
 
 
Guarantees
 
$
—

 
$
—

 
$
—

 
$
—

 
$
31.4

    
 
 
(In Millions)
 
 
December 31, 2016
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Year-to-Date Gains (Losses)
Assets:
 
 
 
 
 
 
 
 
 
 
Loans to and accounts receivables from the Canadian Entities
 
$
—

 
$
—

 
$
48.6

 
$
48.6

 
$
(17.5
)
Liabilities:
 
 
 
 
 
 
 
 
 
 
Guarantees
 
$
—

 
$
—

 
$
37.2

 
$
37.2

 
$
0.4

We determined the fair value and recoverability of our Canadian investments by comparing the estimated fair value of the remaining underlying assets of the Canadian Entities to remaining estimated liabilities. We recorded the Canadian denominated guarantees at book value, which best approximated fair value, and adjusted the carrying balance on a quarterly basis based on the change in foreign exchange rates.
We previously recorded liabilities of $37.2 million related to guarantees for certain environmental obligations of the Canadian Entities, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of December 31, 2016. During the three months ended September 30, 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings. As part of the transaction, we were required to fund the buyer's financial assurance shortfall of $7.7 million in order to complete the conveyance of the environmental remediation obligations to the buyer, which released us from our guarantees, and along with other current period activity, resulted in a net gain of $31.4 million included in Income (Loss) from Discontinued Operations, net of tax in the Statements of Unaudited Condensed Consolidated Operations.
To assess the fair value and recoverability of the accounts receivable from the Canadian Entities, we estimated the fair value of the underlying net assets of the Canadian Entities available for distribution to their creditors in relation to the estimated creditor claims and the priority of those claims. These underlying amounts are denominated primarily in Canadian dollars and are remeasured on a quarterly basis.
Our estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments made by the Canadian Entities. Our ultimate recovery is subject to the final liquidation value of the Canadian Entities. Further, the final liquidation value and ultimate recovery of the

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creditors of the Canadian Entities, including, if any, to Cliffs and various subsidiaries, may impact our estimates of liability exposure described previously.
NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and OPEB plans, primarily consisting of retiree healthcare benefits, to most employees in the United States as part of a total compensation and benefits program. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations. The defined benefit pension plans largely are noncontributory and benefits generally are based on a minimum formula or employees’ years of service and average earnings for a defined period prior to retirement.
The following are the components of defined benefit pension and OPEB costs and credits for the three and nine months ended September 30, 2017 and 2016:
Defined Benefit Pension Costs
 
(In Millions)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
3.4

 
$
4.2

 
$
12.9

 
$
13.2

Interest cost
7.9

 
7.8

 
22.9

 
22.7

Expected return on plan assets
(13.8
)
 
(13.6
)
 
(40.9
)
 
(41.0
)
Amortization:
 
 
 
 
 
 
 
Prior service costs
0.6

 
0.5

 
1.9

 
1.6

Net actuarial loss
6.1

 
5.4

 
16.7

 
15.9

Net periodic benefit cost
$
4.2

 
$
4.3