Quarterly report pursuant to Section 13 or 15(d)

DISCONTINUED OPERATIONS DISCONTINUED OPERATIONS

v3.3.0.814
DISCONTINUED OPERATIONS DISCONTINUED OPERATIONS
 9 Months Ended
Sep. 30, 2015
Discontinued Operations and Disposal Groups [Abstract]  
Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]
NOTE 14 - DISCONTINUED OPERATIONS
The information below sets forth selected financial information related to operating results of our businesses classified as discontinued operations. While the reclassification of revenues and expenses related to discontinued operations from prior periods have no impact upon previously reported net income, the Statements of Unaudited Condensed Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to discontinued operations and the Statements of Unaudited Condensed Consolidated Financial Position present the assets and liabilities that were reclassified from the specified line items to assets and liabilities of discontinued operations.
The chart below provides an asset group breakout for each financial statement line impacted by discontinued operations.
(In Millions)
 
 
 
 
Canadian Operations
 
 
 
 
 
North American Coal
 
Eastern Canadian Iron Ore
Other
Total Canadian Operations
 
Total of Discontinued Operations
Statements of Unaudited Condensed Consolidated Operations
Loss from Discontinued Operations, net of tax
QTD
September 30, 2015
$
(29.8
)
 
$
(14.1
)
$
—

$
(14.1
)
 
$
(43.9
)
Loss from Discontinued Operations, net of tax
QTD
September 30, 2014
$
(579.7
)
 
$
(5,782.5
)
$
(250.8
)
$
(6,033.3
)
 
$
(6,613.0
)
Loss from Discontinued Operations, net of tax
YTD
September 30, 2015
$
(137.0
)
 
$
(731.9
)
$
(0.1
)
$
(732.0
)
 
$
(869.0
)
Loss from Discontinued Operations, net of tax
YTD
September 30, 2014
$
(643.6
)
 
$
(5,930.4
)
$
(255.8
)
$
(6,186.2
)
 
$
(6,829.8
)
 
 
 
 
 
 
 
 
 
Statements of Unaudited Condensed Consolidated Financial Position
Short-term assets of discontinued operations
As of
September 30, 2015
$
141.4

 
$
—

$
—

$
—

 
$
141.4

Long-term assets of discontinued operations
As of
September 30, 2015
$
—

 
$
—

$
—

$
—

 
$
—

Short-term liabilities of discontinued operations
As of
September 30, 2015
$
182.2

 
$
—

$
—

$
—

 
$
182.2

Long-term liabilities of discontinued operations
As of
September 30, 2015
$
—

 
$
—

$
—

$
—

 
$
—

Short-term assets of discontinued operations
As of
December 31, 2014
$
143.8

 
$
183.5

$
3.3

$
186.8

 
$
330.6

Long-term assets of discontinued operations
As of
December 31, 2014
$
130.4

 
$
256.0

$
13.7

$
269.7

 
$
400.1

Short-term liabilities of discontinued operations
As of
December 31, 2014
$
81.3

 
$
316.3

$
3.0

$
319.3

 
$
400.6

Long-term liabilities of discontinued operations
As of
December 31, 2014
$
125.9

 
$
304.6

$
5.6

$
310.2

 
$
436.1

 
 
 
 
 
 
 
 
 
Non-Cash Operating and Investing Activities
Depreciation, depletion and amortization:
YTD
September 30, 2015
$
3.2

 
$
—

$
—

$
—

 
$
3.2

Purchase of property, plant and equipment
YTD
September 30, 2015
$
13.1

 
$
—

$
—

$
—

 
$
13.1

Impairment of goodwill and other long-lived assets
YTD
September 30, 2015
$
73.4

 
$
—

$
—

$
—

 
$
73.4

Depreciation, depletion and amortization:
YTD
September 30, 2014
$
92.1

 
$
126.4

$
0.3

$
126.7

 
$
218.8

Purchase of property, plant and equipment
YTD
September 30, 2014
$
25.8

 
$
160.9

$
—

$
160.9

 
$
186.7

Impairment of goodwill and other long-lived assets
YTD
September 30, 2014
$
—

 
$
6,307.3

$
259.5

$
6,566.8

 
$
6,566.8


North American Coal Operations
Background
As we continue to refine our strategy to one that focuses on strengthening our U.S. Iron Ore operations, management determined as of March 31, 2015 that our North American Coal operating segment met the criteria to be classified as held for sale under ASC 205 - Presentation of Financial Statements and continues to meet the criteria as of September 30, 2015. As such, all current and historical North American Coal operating segment results are included in our financial statement and classified within discontinued operations. Consistent with our strategy to extract maximum value from our current assets, we plan to sell the North American Coal assets within the next twelve months. In the first quarter of 2015, as part of the held for sale classification assigned to North American Coal, an impairment of $73.4 million was recorded. The impairment charge was to reduce the assets to their estimated fair value which was determined based on potential sales scenarios. No further impairment was recorded in the second or third quarters of 2015.
Loss on Discontinued Operations
Our planned sale of the Oak Grove and Pinnacle mine assets represents a strategic shift in our business. For this reason, our previously reported North American Coal operating segment results for all periods, prior to the March 31, 2015 held for sale determination, are classified as discontinued operations. This includes our CLCC assets, which were sold during the fourth quarter of 2014.
 
 
(In Millions)
 
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
Loss from Discontinued Operations
 
2015
 
2014
 
2015
 
2014
Revenues from product sales and services
 
$
78.8

 
$
170.5

 
$
338.1

 
$
515.8

Cost of goods sold and operating expenses
 
(102.9
)
 
(194.7
)
 
(377.2
)
 
(641.2
)
Sales margin
 
(24.1
)
 
(24.2
)
 
(39.1
)
 
(125.4
)
Other operating expense
 
(7.4
)
 
(5.6
)
 
(25.7
)
 
(15.2
)
Other expense
 
(0.4
)
 
(0.9
)
 
(1.4
)
 
(1.8
)
Loss from discontinued operations before income taxes
 
(31.9
)
 
(30.7
)
 
(66.2
)
 
(142.4
)
Impairment of long-lived assets
 
—

 
(827.8
)
 
(73.4
)
 
(827.8
)
Income tax benefit
 
2.1

 
278.8

 
2.6

 
326.6

Loss from discontinued operations, net of tax
 
$
(29.8
)
 
$
(579.7
)
 
$
(137.0
)
 
$
(643.6
)

Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the impairment charge on non-financial assets that was measured on a fair value basis at March 31, 2015 for the North American Coal operations. There were no financial and non-financial assets and liabilities that were measured on a non-recurring fair value basis at September 30, 2015 for the North American Coal operations. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value.
 
 
(In Millions)
 
 
March 31, 2015
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Losses
Assets:
 
 
 
 
 
 
 
 
 
 
Other long-lived assets - Property, plant and equipment and Mineral rights: North American Coal operating unit
 
$
—

 
$
—

 
$
20.4

 
$
20.4

 
$
73.4

 
 
$
—

 
$
—

 
$
20.4

 
$
20.4

 
$
73.4


In the first quarter of 2015, as part of the held for sale classification assigned to North American Coal, an impairment charge of $73.4 million was recorded. The impairment charge was to reduce the assets to their estimated fair value which was determined based on potential sales scenarios. We determined the fair value and recoverability of our North American Coal operating segment by comparing the estimated fair value of the underlying assets and liabilities to the estimated sales price of the operating segment held for sale. No further impairment was recorded in the second or third quarter of 2015.
Recorded Assets and Liabilities
 
 
(In Millions)
Assets and Liabilities of Discontinued Operations
 
September 30,
2015
 
December 31,
2014
Accounts receivable, net
 
$
35.8

 
$
44.8

Inventories
 
21.4

 
50.3

Supplies and other inventories
 
28.0

 
28.2

Other current assets
 
24.1

 
20.5

Property, plant and equipment, net
 
31.3

 
94.7

Other non-current assets
 
0.8

 
35.7

Total assets of discontinued operations
 
$
141.4

 
$
274.2

 
 
 
 
 
Accounts payable
 
$
18.6

 
$
22.4

Accrued liabilities
 
16.6

 
27.9

Other current liabilities
 
19.7

 
31.0

Pension and postemployment benefit liabilities1
 
59.5

 
55.8

Environmental and mine closure obligations
 
35.4

 
33.9

Other liabilities
 
32.4

 
36.2

Total liabilities of discontinued operations
 
$
182.2

 
$
207.2

1 This does not include a liability of approximately $330 million, which is the most recent estimate of Pinnacle and Oak Grove’s combined share of the underfunded liability under the UMWA 1974 Pension Plan.

Income Taxes
We have recognized a tax benefit of $2.1 million and $2.6 million for the three and nine months ended September 30, 2015, respectively, in Loss from Discontinued Operations, net of tax, related to a loss on our North American Coal investments. For the three and nine months ended September 30, 2014, we recognized a tax benefit of $278.8 million and $326.6 million, respectively, in Loss from Discontinued Operations, net of tax. This benefit is primarily the result of the impairment of long-lived assets in the third quarter of 2014.
Canadian Operations
Background
On November 30, 2013, we suspended indefinitely our Chromite Project in Northern Ontario. The Chromite Project remained suspended throughout 2014 and until final sale in 2015. Our Wabush Scully iron ore mine in Newfoundland and Labrador was idled by the end of the first quarter of 2014 and subsequently began to commence permanent closure in the fourth quarter of 2014. During 2014, we also limited exploration spending on the Labrador Trough South property in Québec. In November 2014, we announced that we were pursuing exit options for our Eastern Canadian Iron Ore operations. In December 2014, iron ore production at the Bloom Lake mine was suspended and the Bloom Lake mine was placed in "care-and-maintenance" mode. Together, the suspension of exploration efforts, shutdown of the Wabush Scully mine and the cessation of operations at our Bloom Lake mine represent a complete curtailment of our Canadian operations.
On January 27, 2015, we announced that the Bloom Lake Group commenced restructuring proceedings (the "Bloom Filing") under the CCAA with the Québec Superior Court (Commercial Division) in Montreal (the “Court”). At that time, the Bloom Lake Group was no longer generating revenues and was not able to meet its obligations as they came due. The Bloom Filing addressed the Bloom Lake Group's immediate liquidity issues and permits the Bloom Lake Group to preserve and protect its assets for the benefit of all stakeholders while restructuring and sale options are explored. As part of the CCAA process, the Court approved the appointment of a Monitor and certain other financial advisors.
Additionally, on May 20, 2015, we announced that the Wabush Group commenced restructuring proceedings (the "Wabush Filing") in the Court under the CCAA. As a result of this action, the CCAA protections granted to the Bloom Lake Group were extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. The Wabush Group was no longer generating revenues and was not able to meet its obligations as they came due. The inclusion of the Wabush Group in the existing Bloom Filing will facilitate a more comprehensive restructuring and sale process of both the Bloom Lake Group and the Wabush Group which collectively include mine, port and rail assets and will lead to a more effective and streamlined exit from Eastern Canada. The Wabush Filing will also mitigate various legacy related long-term liabilities associated with the Wabush Group. As part of the Wabush Filing, the Court approved the appointment of a Monitor and certain other financial advisors. The Monitor of the Wabush Group is also the Monitor of the Bloom Lake Group.
As a result of the Bloom Filing on January 27, 2015, we no longer have a controlling interest in the Bloom Lake Group. For that reason, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries effective January 27, 2015, which resulted in a pretax impairment loss on deconsolidation and other charges, totaling $818.7 million that was recorded in the first quarter of 2015. The pretax loss on deconsolidation includes the derecognition of the carrying amounts of the Bloom Lake Group and certain other wholly-owned subsidiaries assets, liabilities and accumulated other comprehensive loss and the recording of our remaining interests at fair value.
As a result of the Wabush Filing, we deconsolidated certain Wabush Group wholly-owned subsidiaries effective May 20, 2015. The certain wholly-owned subsidiaries that were deconsolidated effective May 20, 2015 are Wabush Group entities that were not deconsolidated as part of the deconsolidation effective January 27, 2015 as discussed previously in this section. This deconsolidation, effective May 20, 2015, resulted in a pretax gain on deconsolidation and other charges, totaling $134.7 million. The pretax gain on deconsolidation includes the derecognition of the carrying amounts of these certain deconsolidated Wabush Group wholly-owned subsidiaries' assets, liabilities and accumulated other comprehensive loss and the adjustment of our remaining interests in the Canadian Entities to fair value.
Subsequent to each of the deconsolidations discussed above, we utilized the cost method to account for our investment in the Bloom Lake Group, Wabush Group and certain other wholly-owned subsidiaries (collectively, the "Canadian Entities"), which has been reflected as zero in our Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2015 based on the estimated fair value of the Canadian Entities' net assets. Loans to and accounts receivable from the Canadian Entities are recorded at an estimated fair value of $84.5 million classified as Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position as of September 30, 2015.
Loss on Discontinued Operations
Our Canadian exit represents a strategic shift in our business. For this reason, our previously reported Eastern Canadian Iron Ore and Ferroalloys operating segment results for all periods prior to the respective deconsolidations as well as costs to exit are classified as discontinued operations.
 
 
(In Millions)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Loss from Discontinued Operations
 
2015
 
2014
 
2015
 
2014
Revenues from product sales and services
 
$
—

 
$
148.0

 
$
11.3

 
$
480.3

Cost of goods sold and operating expenses
 
—

 
(224.7
)
 
(11.1
)
 
(645.2
)
Eliminations with continuing operations
 
—

 
(27.6
)
 
—

 
(56.6
)
Sales margin
 
—

 
(104.3
)
 
0.2

 
(221.5
)
Other operating expense
 
—

 
(87.4
)
 
(33.8
)
 
(200.4
)
Other expense
 
—

 
(1.5
)
 
(1.0
)
 
(4.5
)
Loss from discontinued operations before income taxes
 
—

 
(193.2
)
 
(34.6
)
 
(426.4
)
Loss from deconsolidation
 
(13.4
)
 
—

 
(697.4
)
 
—

Impairment of long-lived assets
 
—

 
(6,566.8
)
 
—

 
(6,566.8
)
Income tax benefit (expense)
 
(0.7
)
 
726.7

 
—

 
807.0

Loss from discontinued operations, net of tax
 
$
(14.1
)
 
$
(6,033.3
)
 
$
(732.0
)
 
$
(6,186.2
)

Canadian Entities loss from deconsolidation totaled $13.4 million and $697.4 million for the three and nine months ended September 30, 2015, respectively, and included the following:
 
 
(In Millions)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2015
 
2015
Investment impairment on deconsolidation1
 
$
(13.9
)
 
$
(494.3
)
Contingent liabilities
 
0.5

 
(203.1
)
Total loss from deconsolidation
 
$
(13.4
)
 
$
(697.4
)
 
 
 
 
 
1 Includes the adjustment to fair value of our remaining interest in the Canadian Entities.

As a result of the deconsolidation we recorded accrued expenses for the estimated probable loss related to claims that may be asserted against us, primarily under guarantees of certain debt arrangements and leases for a loss on deconsolidation of $203.1 million, for the nine months ended September 30, 2015.
Investments in the Canadian Entities
Cliffs continues to indirectly own a majority of the interest in the Canadian Entities but has deconsolidated those entities because Cliffs no longer has a controlling interest as a result of the Bloom Filing and the Wabush Filing. At the respective date of deconsolidation, January 27, 2015 or May 20, 2015 and subsequently at each reporting period, we adjusted our investment in the Canadian Entities to fair value with a corresponding charge to Loss from Discontinued Operations, net of tax. As the estimated amount of the Canadian Entities' liabilities exceeded the estimated fair value of the assets available for distribution to its creditors, the fair value of Cliffs’ equity investment is approximately zero.
Amounts Receivable from the Canadian Entities
Prior to the deconsolidations, various Cliffs wholly-owned entities made loans to the Canadian Entities for the purpose of funding its operations and had accounts receivable generated in the ordinary course of business. The loans, corresponding interest and the accounts receivable were considered intercompany transactions and eliminated in our consolidated financial statements. Since the deconsolidations, the loans, associated interest and accounts receivable are considered related party transactions and have been recognized in our consolidated financial statements at their estimated fair value of $84.5 million classified as Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position at September 30, 2015.
Contingent Liabilities
Certain liabilities consisting primarily of equipment loans and environmental obligations of the Canadian Entities were secured through corporate guarantees and standby letters of credit. As of September 30, 2015, we have liabilities of $105.5 million and $37.4 million, respectively, in our consolidated results, classified as Other current liabilities and Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Contingencies
The recorded expenses include an accrual for the estimated probable loss related to claims that may be asserted against us, primarily under guarantees of certain debt arrangements and leases. The beneficiaries of those guarantees may seek damages or other related relief as a result of our exit from Canada. Our probable loss estimate is based on the expectation that claims will be asserted against us and negotiated settlements will be reached, and not on any determination that it is probable we would be found liable were these claims to be litigated. Given the early stage of our exit, the Bloom Filing on January 27, 2015 and the Wabush Filing on May 20, 2015, our estimates involve significant judgment. Our estimates are based on currently available information, an assessment of the validity of certain claims and estimated payments by the Canadian Entities. We are not able to reasonably estimate a range of possible losses in excess of the accrual because there are significant factual and legal issues to be resolved. We believe that it is reasonably possible that future changes to our estimates of loss and the ultimate amount paid on these claims could be material to our results of operations in future periods. Any such losses would be reported in discontinued operations.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the financial assets and liabilities that were measured on a fair value basis at September 30, 2015 for the Canadian Operations. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value.
 
 
(In Millions)
 
 
September 30, 2015
Description
 
Quoted Prices in Active
Markets for Identical Assets/
Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
 
Total Losses
Assets:
 
 
 
 
 
 
 
 
 
 
Loans to and accounts receivables from the Canadian Entities
 
$
—

 
$
—

 
$
84.5

 
$
84.5

 
$
494.3

Liabilities:
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
 
$
—

 
$
—

 
$
142.4

 
$
142.4

 
$
203.1


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 contingent liabilities at book value which best approximated fair value.
Outstanding liabilities include accounts payable and other liabilities, forward commitments, unsubordinated related party payables, lease liabilities and other potential claims. Potential claims include an accrual for the estimated probable loss related to claims that may be asserted against the Bloom Lake Group and Wabush Group under certain contracts. Claimants may seek damages or other related relief as a result of the Canadian Entities' exit from Canada. Based on our estimates, the fair value of liabilities exceeds the fair value of assets.
To assess the fair value and recoverability of the amounts 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.
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 creditors of the Canadian Entities, including Cliffs Natural Resources and various subsidiaries, may impact our estimates of contingent liability exposure described previously.
Recorded Assets and Liabilities
 
 
(In Millions)
Assets and Liabilities of Discontinued Operations
 
December 31,
2014
Cash and cash equivalents
 
$
19.7

Accounts receivable, net
 
37.9

Inventories
 
16.3

Supplies and other inventories
 
48.5

Income tax receivable
 
20.1

Other current assets
 
44.3

Property, plant and equipment, net
 
249.8

Other non-current assets
 
19.9

Total Assets
 
$
456.5

 
 
 
Accounts payable
 
$
83.6

Accrued expenses
 
200.0

Other current liabilities
 
35.7

Pension and postemployment benefit liabilities
 
79.8

Environmental and mine closure obligations
 
56.5

Other liabilities
 
173.9

Total Liabilities
 
$
629.5


DIP Financing
In connection with the Wabush Filing on May 20, 2015, the Court approved an agreement to provide a debtor-in-possession credit facility (the "DIP financing") to the Wabush Group, which provides for borrowings under the facility up to $10.0 million. As of September 30, 2015, there was $4.9 million drawn and outstanding under the DIP financing funded by Wabush Iron Co. Limited’s parent company, Cliffs Mining Company. The DIP financing is secured by a court-ordered charge over the assets of the Wabush Group.
Income Taxes
We recognized a tax expense of $0.7 million for three months ended September 30, 2015 in Loss from discontinued operations, net of tax. We recognized no tax benefit or expense for the nine months ended September 30, 2015 in Loss from discontinued operations, net of tax. For the three and nine months ended September 30, 2014, we recognized a tax benefit of $726.7 million and $807.0 million, respectively, in Loss from Discontinued Operations, net of tax. This benefit was the result of the impairment of long-lived assets in the third quarter of 2014 offset by the placement of a valuation allowance against the Canadian operations net deferred tax assets. Canadian deferred tax assets relating to both historical and current year net operating losses were included in our equity investment in the Canadian Subsidiaries that has been reduced to zero.