Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

v3.7.0.1
DERIVATIVE INSTRUMENTS
 6 Months Ended
Jun. 30, 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 June 30, 2017 and December 31, 2016:
 
 
(In Millions)
 
 
Derivative Assets
 
Derivative Liabilities
 
 
June 30, 2017
 
December 31, 2016
 
June 30, 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 agreements
 
Other current assets
 
66.4

 
Other current assets
 
21.3

 
 
 
—

 
 
 
—

Provisional pricing arrangements
 
Other current assets
 
6.1

 
Other current assets
 
10.3

 
Other current liabilities
 
20.8

 
Other current liabilities
 
0.5

Commodity contracts
 
 
 
—

 
Other current assets
 
1.5

 
 
 
—

 
 
 
—

Total derivatives not designated as hedging instruments under ASC 815
 
 
 
$
72.5

 
 
 
$
33.1

 
 
 
$
20.8

 
 
 
$
0.5


Derivatives Not Designated as Hedging Instruments
Customer Supply Agreements
Certain supply agreements with one U.S. Iron Ore customer provide for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing or based on the average annual daily steel market price for hot-rolled coil steel 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 $51.4 million and $69.2 million net gain in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2017, respectively, related to the supplemental payments. This compares with a net gain in Product revenues of $19.5 million and $19.9 million for the comparable periods in 2016. Other current assets, representing the fair value of the supplemental revenue, were $66.4 million and $21.3 million as of June 30, 2017 and December 31, 2016 in the 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. The market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing mechanisms 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.
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 June 30, 2017, we recorded $6.1 million as Other current assets and $20.8 million as Other current liabilities related to our estimate of the final revenue rate with our U.S. Iron Ore and Asia Pacific Iron Ore customers in the Statements of Unaudited Condensed Consolidated Financial Position. At December 31, 2016, we recorded $10.3 million as Other current assets and $0.5 million as Other current liabilities related to our estimate of the final revenue rate with our U.S. Iron Ore and Asia Pacific Iron Ore customers in the Statements of Unaudited Condensed Consolidated Financial Position. 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 decrease of $35.4 million and $19.8 million in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three and six months ended June 30, 2017, respectively, related to these arrangements. This compares with a net increase of $1.8 million and $0.3 million in Product revenues for the comparable periods in 2016, respectively.
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 and six months ended June 30, 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
June 30,
 
Six Months Ended
June 30,
 
 
 
 
2017
 
2016
 
2017
 
2016
Customer Supply Agreements
 
Product revenues
 
51.9

 
19.5

 
69.6

 
19.9

Provisional Pricing Arrangements
 
Product revenues
 
(35.4
)
 
1.8

 
(19.8
)
 
0.3

Commodity Contracts
 
Cost of goods sold and operating expenses
 
—

 
—

 
(1.3
)
 
—

Total
 
 
 
$
16.5

 
$
21.3

 
$
48.5

 
$
20.2


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