Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.5.0.2
FAIR VALUE OF FINANCIAL INSTRUMENTS
 9 Months Ended
Sep. 30, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENTS
NOTE 6 - FAIR VALUE MEASUREMENTS
We have various financial instruments that require fair value measurements classified as Level 1, Level 2 and Level 3 of the fair value hierarchy. The following discussion represents the assets and liabilities measured at fair value at September 30, 2016 and December 31, 2015.
There were no Level 1 financial assets as of September 30, 2016. Financial assets classified in Level 1 as of December 31, 2015, include money market funds of $30.0 million. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The derivative financial assets classified within Level 3 at September 30, 2016 and December 31, 2015 primarily relate to a freestanding derivative instrument related to certain supply agreements with one of our U.S. Iron Ore customers. The agreements include provisions for supplemental revenue or refunds based on the customer’s annual steel pricing at the time the product is consumed in the customer’s blast furnaces. We account for this provision as a derivative instrument at the time of sale and adjust this provision 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 instrument is determined using a market approach based on an estimate of the annual realized price of hot-rolled coil at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative assets and liabilities also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers at September 30, 2016 and December 31, 2015. These provisional pricing arrangements 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 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.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative 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, 2016
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate per dry metric ton
(Weighted Average)
 
Provisional pricing arrangements
 
$
0.4

 
Other current assets
 
Market Approach
 
Management's
Estimate of 62% Fe
 
$56
 
$
2.7

 
Other current liabilities
 
 
 
Customer supply agreement
 
$
28.0

 
Other current assets
 
Market Approach
 
Hot-Rolled Coil Estimate
 
$430 - $530 ($470)

The significant unobservable input used in the fair value measurement of our provisional pricing arrangements is management’s estimate of 62 percent Fe fines spot price based upon current market data, including historical seasonality and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable input used in the fair value measurement of our customer supply agreement is the future hot-rolled coil price that is estimated based on projections provided by the customer, current market data, analysts' projections and forward-looking estimates determined by management. Significant increases or decreases in this input would result in a significantly higher or lower fair value measurement, respectively.
We recognize any transfers between levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three and nine months ended September 30, 2016 or 2015. 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, 2016 and 2015.
 
(In Millions)
 
Derivative Assets (Level 3)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
25.8

 
$
7.7

 
$
7.8

 
$
63.2

Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
14.6

 
15.0

 
62.6

 
28.1

Settlements
(12.0
)
 
(12.3
)
 
(42.0
)
 
(80.9
)
Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Ending balance - September 30
$
28.4

 
$
10.4

 
$
28.4

 
$
10.4

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
8.2

 
$
12.2

 
$
24.7

 
$
22.7


 
(In Millions)
 
Derivative Liabilities (Level 3)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
(2.6
)
 
$
(8.0
)
 
$
(3.4
)
 
$
(9.5
)
Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
(2.9
)
 
(13.7
)
 
(12.8
)
 
(45.4
)
Settlements
2.8

 
20.9

 
13.5

 
54.1

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Ending balance - September 30
$
(2.7
)
 
$
(0.8
)
 
$
(2.7
)
 
$
(0.8
)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
(2.7
)
 
$
(0.5
)
 
$
(2.7
)
 
$
(0.8
)

Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and nine months ended September 30, 2016 and 2015.
The carrying amount for 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, 2016 and December 31, 2015 were as follows:
 
 
 
(In Millions)
 
 
 
September 30, 2016
 
December 31, 2015
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Senior Notes—$700 million
Level 1
 
$
324.3

 
$
260.6

 
$
410.6

 
$
69.4

Senior Notes—$1.3 billion
Level 1
 
536.4

 
400.7

 
787.9

 
137.4

Senior Notes—$400 million
Level 1
 
224.4

 
194.9

 
288.9

 
52.8

Senior Notes—$500 million
Level 1
 
—

 
—

 
309.1

 
87.1

Senior First Lien Notes —$540 million
Level 1
 
504.0

 
573.2

 
497.4

 
414.5

Senior 1.5 Lien Notes —$218.5 million
Level 2
 
288.5

 
210.9

 
—

 
—

Senior Second Lien Notes —$544.2 million
Level 1
 
333.8

 
402.8

 
403.2

 
134.7

ABL Facility
Level 2
 
—

 
—

 
—

 
—

Fair value adjustment to interest rate hedge
Level 2
 
2.0

 
2.0

 
2.3

 
2.3

Total long-term debt
 
 
$
2,213.4

 
$
2,045.1

 
$
2,699.4

 
$
898.2


The fair value of long-term debt was determined using quoted market prices based upon current borrowing rates. The ABL Facility is variable rate interest and approximates fair value. See NOTE 5 - DEBT AND CREDIT FACILITIES for further information.