Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

v3.7.0.1
DERIVATIVE INSTRUMENTS
 3 Months Ended
Mar. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 13 - DERIVATIVE INSTRUMENTS
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2017 and December 31, 2016:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Derivative Instrument
Balance Sheet Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Customer supply agreement
Other current assets
 
35.9

 
Other current assets
 
21.3

 
 
 
—

 
 
 
—

Provisional pricing arrangements
Other current assets
 
23.5

 
Other current assets
 
10.3

 
Other current liabilities
 
9.1

 
Other current liabilities
 
0.5

Commodity contracts
 
 
—

 
Other current assets
 
1.5

 
 
 
—

 
 
 
—

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
59.4

 
 
 
$
33.1

 
 
 
$
9.1

 
 
 
$
0.5


Derivatives Not Designated as Hedging Instruments
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors. The base price is the primary component of the purchase price for each contract. The indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based upon changes in the Platts 62% Price, along with pellet premiums, published Platts international indexed freight rates and changes in specified Producer Price Indices, including those for industrial commodities, fuel and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimated the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized. The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
A certain supply agreement with one U.S. Iron Ore customer provides for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing at the time the product is consumed in the customer’s blast furnace. The supplemental pricing is characterized as a freestanding derivative and is required to be accounted for separately once the product is shipped. The derivative instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled.
We recognized a $17.8 million net gain in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2017 related to the supplemental payments. This compares with a net loss in Product revenues of $0.1 million for the comparable period in 2016. Other current assets, representing the fair value of the pricing factors, were $35.9 million and $21.3 million in the March 31, 2017 and December 31, 2016 Statements of Unaudited Condensed Consolidated Financial Position, respectively.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore customer supply agreements 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 period in time in the future, per the terms of the supply agreements. U.S. Iron Ore sales revenue is primarily recognized when cash is received.  For U.S. Iron Ore sales, the difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a freestanding derivative and must be accounted for separately once the provisional revenue has been recognized.  Asia Pacific Iron Ore sales revenue is recorded initially at the provisionally agreed-upon price with the pricing provision embedded in the receivable.  The pricing provision is an embedded derivative that must be bifurcated and accounted for separately from the receivable.  Subsequently, the derivative instruments for both U.S. Iron Ore and Asia Pacific Iron Ore are 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. At March 31, 2017 and December 31, 2016, we recorded $23.5 million and $10.3 million, respectively, as Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of the final revenue rate with our U.S. Iron Ore and Asia Pacific Iron Ore customers. At March 31, 2017 and December 31, 2016, we recorded $9.1 million and $0.5 million, respectively, as Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of the final revenue rate with our U.S. Iron Ore and Asia Pacific Iron Ore customers. These amounts represent the difference between the provisional price agreed upon with our customers based on the supply agreement terms and our estimate of the final revenue rate based on the price calculations established in the supply agreements. As a result, we recognized a net increase of $15.7 million and a net decrease of $1.5 million in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2017 and 2016.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2017 and 2016:
(In Millions)
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in
Income on Derivative
Amount of Gain (Loss) Recognized in Income on Derivative
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Customer supply agreement
Product revenues
17.8

 
(0.1
)
Provisional pricing arrangements
Product revenues
15.7

 
(1.5
)
Commodity contracts
Cost of goods sold and operating expenses
(1.3
)
 
—

Total
 
$
32.2

 
$
(1.6
)

Refer to NOTE 6 - FAIR VALUE MEASUREMENTS for additional information.