Annual report pursuant to Section 13 and 15(d)

DISCONTINUED OPERATIONS

v3.6.0.2
DISCONTINUED OPERATIONS
 12 Months Ended
Dec. 31, 2016
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 Consolidated Operations present the revenues and expenses that were reclassified from the specified line items to 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 Consolidated Operations
 
 
 
 
 
 
 
Loss from Discontinued Operations, net of tax
YTD
December 31, 2016
$
(2.4
)
 
$
(17.5
)
$
—

$
(17.5
)
 
$
(19.9
)
Loss from Discontinued Operations, net of tax
YTD
December 31, 2015
$
(152.4
)
 
$
(638.7
)
$
(101.0
)
$
(739.7
)
 
$
(892.1
)
Loss from Discontinued Operations, net of tax
YTD
December 31, 2014
$
(1,134.5
)
 
$
(6,952.9
)
$
(280.6
)
$
(7,233.5
)
 
$
(8,368.0
)
 
 
 
 
 
 
 
 
 
Statements of Consolidated Financial Position
 
 
 
 
 
 
 
Other current liabilities
As of
December 31, 2016
$
6.0

 
$
—

$
—

$
—

 
$
6.0

Other current assets
As of
December 31, 2015
$
14.9

 
$
—

$
—

$
—

 
$
14.9

Other current liabilities
As of
December 31, 2015
$
6.9

 
$
—

$
—

$
—

 
$
6.9

 
 
 
 
 
 
 
 
 
Non-Cash Operating and Investing Activities
Depreciation, depletion and amortization
YTD
December 31, 2015
$
3.2

 
$
—

$
—

$
—

 
$
3.2

Purchase of property, plant and equipment
YTD
December 31, 2015
$
15.9

 
$
—

$
—

$
—

 
$
15.9

Impairment of goodwill and other long-lived assets
YTD
December 31, 2015
$
73.4

 
$
—

$
—

$
—

 
$
73.4

Depreciation, depletion and amortization
YTD
December 31, 2014
$
106.9

 
$
135.6

$
0.5

$
136.1

 
$
243.0

Purchase of property, plant and equipment
YTD
December 31, 2014
$
29.9

 
$
190.3

$
—

$
190.3

 
$
220.2

Impairment of goodwill and other long-lived assets
YTD
December 31, 2014
$
857.5

 
$
7,269.2

$
267.6

$
7,536.8

 
$
8,394.3


North American Coal Operations
Background
As of March 31, 2015, management determined that our North American Coal operating segment met the criteria to be classified as held for sale under ASC 205, Presentation of Financial Statements. The North American Coal segment continued to meet the criteria throughout 2015 until we sold our held for sale North American Coal operations during the fourth quarter of 2015. As such, all current and historical North American Coal operating segment results are included in our financial statements and classified within discontinued operations.
    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 2015.
We sold all the remaining North American Coal operations during the fourth quarter of 2015. On December 22, 2015, we closed the sale of our remaining North American Coal business, which included Pinnacle mine in West Virginia and Oak Grove mine in Alabama. Pinnacle mine and Oak Grove mine were sold to Seneca and the deal structure was a sale of equity interests of our remaining coal business. Additionally, Seneca may pay Cliffs an earn-out of up to $50 million contingent upon the terms of a revenue sharing agreement which extends through the year 2020. However, we have not recorded a gain contingency in relation to this earn-out. We recorded the results of this sale within Loss from Discontinued Operations, net of tax for the year ended December 31, 2015.
On December 31, 2014, we completed the sale of our CLCC assets in West Virginia to Coronado Coal II, LLC, an affiliate of Coronado Coal LLC, for $174.0 million in cash and the assumption of certain liabilities, of which $155.0 million was collected as of December 31, 2014. We recorded the results of this sale in our fourth quarter earnings within Loss from Discontinued Operations, net of tax as the transaction closed on December 31, 2014.
Loss on Discontinued Operations
The sale of our Oak Grove and Pinnacle mines on December 22, 2015 completed a strategic shift in our business. 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. Historical results also include our CLCC assets, which were sold during the fourth quarter of 2014.
 
 
(In Millions)
 
 
Year Ended
December 31,
Loss from Discontinued Operations
 
2016
 
2015
 
2014
Revenues from product sales and services
 
$
—

 
$
392.9

 
$
687.1

Cost of goods sold and operating expenses
 
—

 
(449.2
)
 
(822.9
)
Sales margin
 
—

 
(56.3
)
 
(135.8
)
Other operating expense
 
(4.5
)
 
(30.4
)
 
(20.8
)
Gain (loss) on sale of coal mines
 
2.1

 
9.3

 
(419.6
)
Other expense
 
—

 
(1.8
)
 
(3.0
)
Loss from discontinued operations before income taxes
 
(2.4
)
 
(79.2
)
 
(579.2
)
Impairment of long-lived assets
 
—

 
(73.4
)
 
(857.5
)
Income tax benefit
 
—

 
0.2

 
302.2

Loss from discontinued operations, net of tax
 
$
(2.4
)
 
$
(152.4
)
 
$
(1,134.5
)

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 December 31, 2016 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 2015.
Recorded Assets and Liabilities
 
 
(In Millions)
Assets and Liabilities of Discontinued Operations1
 
December 31,
2016
 
December 31,
2015
Other current assets
 
$
—

 
$
14.9

Total assets of discontinued operations
 
$
—

 
$
14.9

 
 
 
 
 
Accrued liabilities
 
$
1.1

 
$
—

Other current liabilities
 
4.9

 
6.9

Total liabilities of discontinued operations
 
$
6.0

 
$
6.9

 
 
 
 
 
1 At December 31, 2016 and 2015, we also recorded $2.1 million and $7.8 million, respectively, of contingent liabilities associated with our exit from the coal business recorded on our parent company.

As part of the CLCC asset sale during the fourth quarter of 2014, there was an amount placed in escrow to cover decreases in working capital, indemnity obligations and regulatory liabilities. During the year ended December 31, 2016, $10.3 million was released to us from escrow. There was no amount held in escrow at December 31, 2016 and $14.9 million at December 31, 2015 recorded within Other current assets on the Statements of Consolidated Financial Position.
Income Taxes
We have recognized no tax expense or benefit for the year ended December 31, 2016 in Loss from Discontinued Operations, net of tax, related to our North American Coal investments. For the years ended December 31, 2015 and 2014, we have recognized a tax benefit of $0.2 million and $302.2 million, respectively, in Loss from Discontinued Operations, net of tax, related to a loss on our North American Coal investments. The benefit for the year ended December 31, 2014 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 represented a complete curtailment of our Canadian operations.
On January 27, 2015, we announced the Bloom Filing under the CCAA with the Québec Court in Montreal. 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 permitted 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 the Wabush Filing with 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 facilitated a more comprehensive restructuring and sale process of both the Bloom Lake Group and the Wabush Group, which collectively included mine, port and rail assets. The Wabush Filing also mitigates 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 Canadian Entities, which has been reflected as zero in our Statements of Consolidated Financial Position as of December 31, 2016 and 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 $48.6 million and $72.9 million classified as Loans to and accounts receivables from the Canadian Entities in the Statements of Consolidated Financial Position as of December 31, 2016 and 2015, respectively. The Loans to and accounts receivables from the Canadian Entities balance reflects our current estimate. We continue to update the estimate as the CCAA proceedings progress. The December 31, 2016 balance reflects recent developments, including finalized liquidation values for completed asset sales and updates for the expected allocation of proceeds for those sales, updates for ongoing costs incurred by the estate that will be held back from the final distribution, and the repayment of the DIP financing.
Status of CCAA Proceedings
On March 8, 2016, certain of the Canadian Entities completed the sale of their port and rail assets located in Pointe-Noire, Quebec to Societe Ferroviaire et Portuaire de Pointe-Noire S.E.C., an affiliate of Investissement Quebec, for C$66.75 million in cash and the assumption of certain liabilities.
On April 11, 2016, certain of the Canadian Entities completed the sale of the Bloom Lake mine and Labrador Trough South mineral claims located in Quebec, as well as certain rail assets located in Newfoundland & Labrador, to Quebec Iron Ore Inc., an affiliate of Champion Iron Mines Limited, for C$10.5 million in cash and the assumption of certain liabilities.
As of December 31, 2016, the majority of assets available to the estate have been liquidated. The CCAA proceedings are still ongoing and the Monitor is evaluating all claims into the estate including our related party claims. Currently, there is uncertainty as to the amount of the distribution that will be made to the creditors of the estate, including, if any to Cliffs, and whether Cliffs could be held liable for claims that may be asserted by or on behalf of the Bloom Lake Group or the Wabush Group or by their respective representatives against non-debtor affiliates of the Bloom Lake Group and the Wabush Group.
After repayment of the DIP financing, payment of sales expenses, taxes and the costs of the CCAA proceedings to date, the net proceeds from these and certain other divestitures by the Canadian Entities are currently being held by the Monitor, on behalf of the Canadian Entities, to fund the accrued and ongoing costs of the CCAA proceedings and for eventual distribution to creditors of the Canadian Entities pending further order of the Montreal Court.
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)
 
 
Year Ended
December 31,
Loss from Discontinued Operations
 
2016
 
2015
 
2014
Revenues from product sales and services
 
$
—

 
$
11.3

 
$
563.5

Cost of goods sold and operating expenses
 
—

 
(11.1
)
 
(808.4
)
Eliminations with continuing operations
 
—

 
—

 
(53.6
)
Sales margin
 
—

 
0.2

 
(298.5
)
Other operating expense
 
—

 
(33.8
)
 
(306.3
)
Other expense
 
—

 
(1.0
)
 
(5.6
)
Loss from discontinued operations before income taxes
 
—

 
(34.6
)
 
(610.4
)
Loss from deconsolidation
 
(17.5
)
 
(710.9
)
 
—

Impairment of long-lived assets
 
—

 
—

 
(7,536.8
)
Income tax benefit
 
—

 
5.8

 
913.7

Loss from discontinued operations, net of tax
 
$
(17.5
)
 
$
(739.7
)
 
$
(7,233.5
)

Canadian Entities loss from deconsolidation totaled $17.5 million and $710.9 million for the year ended December 31, 2016 and 2015, respectively and included the following:
 
 
(In Millions)
 
 
Year Ended
December 31,
 
Year Ended
December 31,
 
 
2016
 
2015
Investment impairment on deconsolidation1
 
$
(17.5
)
 
$
(507.8
)
Guarantees and contingent liabilities
 
—

 
(203.1
)
Total loss from deconsolidation
 
$
(17.5
)
 
$
(710.9
)
 
 
 
 
 
1 Includes the adjustment to fair value of our remaining interest in the Canadian Entities.

We have no gain or loss from deconsolidation attributable to contingent liabilities for the year ended December 31, 2016 compared to a loss of $203.1 million for the year ended December 31, 2015. 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 year ended December 31, 2015.
Investments in the Canadian Entities
We continue to indirectly own a majority of the interest in the Canadian Entities but have deconsolidated those entities because we no longer have a controlling interest as a result of the Bloom Filing and the Wabush Filing. At the respective dates 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. Additionally, we procured funding subsequent to the deconsolidation through the DIP financing. 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 $48.6 million and $72.9 million classified as Loans to and accounts receivables from the Canadian Entities in the Statements of Consolidated Financial Position at December 31, 2016 and 2015, respectively.
Guarantees and 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 December 31, 2016, we have liabilities of $0.2 million and $37.0 million, respectively, in our consolidated results, classified as Guarantees and Other liabilities in the Statements of Consolidated Financial Position. As of December 31, 2015, we have liabilities of $96.5 million and $35.9 million, respectively, in our consolidated results, classified as Guarantees and Other liabilities in the Statements of Consolidated Financial Position.
Contingencies
The recorded expenses include an accrual for the estimated probable loss related to claims that may be asserted against us. 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 December 31, 2016 and 2015 for the Canadian Entities. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value.
 
 
(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 Losses
Assets:
 
 
 
 
 
 
 
 
 
 
Loans to and accounts receivables from the Canadian Entities
 
$
—

 
$
—

 
$
48.6

 
$
48.6

 
$
17.5

Liabilities:
 
 
 
 
 
 
 
 
 
 
Guarantees and contingent liabilities
 
$
—

 
$
—

 
$
37.2

 
$
37.2

 
$
—


 
 
(In Millions)
 
 
December 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:
 
 
 
 
 
 
 
 
 
 
Loans to and accounts receivables from the Canadian Entities
 
$
—

 
$
—

 
$
72.9

 
$
72.9

 
$
507.8

Liabilities:
 
 
 
 
 
 
 
 
 
 
Guarantees and contingent liabilities
 
$
—

 
$
—

 
$
132.4

 
$
132.4

 
$
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 guarantees and 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, if any, to Cliffs and various subsidiaries, may impact our estimates of contingent liability exposure described previously.
Pre-Petition Financing
Prior to the Wabush Filing on May 20, 2015, a secured credit facility (the "Pre-Petition financing") was put into place to provide support to the Wabush Group for ongoing business activities until the DIP financing was in place. There was a total of $7.2 million drawn and outstanding under the Pre-Petition financing funded by Wabush Iron Co. Limited’s parent company, Cliffs Mining Company as of December 31, 2016 and 2015.  Our estimated recovery of the Pre-Petition financing is included within the Loans to and accounts receivables from the Canadian Entities of $48.6 million. The Pre-Petition financing is secured by certain equipment of the Wabush Group.
DIP Financing
In connection with the Wabush Filing on May 20, 2015, the Montreal Court approved an agreement to provide the DIP financing to the Wabush Group, which provided for borrowings under the facility up to $10.0 million. As of December 31, 2015, there was $6.8 million drawn and outstanding under the DIP financing funded by Wabush Iron Co. Limited’s parent company, Cliffs Mining Company. During the three months ended March 31, 2016, the Wabush Group made an additional draw of $1.5 million. We subsequently received a repayment of $8.3 million and as a result, there was no outstanding balance due under the DIP financing arrangement from Wabush Iron Co. Limited’s parent company, Cliffs Mining Company as of December 31, 2016.
Income Taxes
We have recognized no tax expense or benefit for the year ended December 31, 2016 in Loss from Discontinued Operations, net of tax, related to our Canadian investments. For the years ended December 31, 2015 and 2014, we recognized a tax benefit of $5.8 million and $913.7 million, respectively, in Loss from Discontinued Operations, net of tax. The benefit for the year ended December 31, 2014 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.