Annual report pursuant to Section 13 and 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.8.0.1
FAIR VALUE OF FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at December 31, 2017 and 2016:
 
(In Millions)
 
December 31, 2017
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
66.3

 
$
550.6

 
$
—

 
$
616.9

Derivative assets
—

 
—

 
39.4

 
39.4

Total
$
66.3

 
$
550.6

 
$
39.4

 
$
656.3

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
0.3

 
$
2.4

 
$
2.7

Total
$
—

 
$
0.3

 
$
2.4

 
$
2.7

 
(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
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
177.0

 
$
—

 
$
—

 
$
177.0

Derivative assets
—

 
1.5

 
31.6

 
33.1

Total
$
177.0

 
$
1.5

 
$
31.6

 
$
210.1

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
—

 
$
0.5

 
$
0.5

Total
$
—

 
$
—

 
$
0.5

 
$
0.5


Financial assets classified in Level 1 as of December 31, 2017, include money market funds and treasury bonds of $66.3 million. Financial assets classified in Level 1 as of December 31, 2016, include money market funds of $177.0 million. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.    
The valuation of financial assets and liabilities classified in Level 2 is determined using a market approach based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable. Level 2 assets included $550.6 million of commercial paper and certificates of deposit at December 31, 2017 and $1.5 million of commodity hedge contracts at December 31, 2016. Level 2 liabilities included $0.3 million of commodity hedge contracts at December 31, 2017.
The Level 3 assets and liabilities include derivative assets that consist of freestanding derivative instruments related to certain supply agreements with one of our U.S. Iron Ore customers and derivative assets and liabilities related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers.
The supply agreements included in our Level 3 assets include provisions for supplemental revenue or refunds based on the average annual daily market price for hot-rolled coil steel at the time the product is consumed in the customer’s blast furnaces. We account for these provisions as derivative instruments at the time of sale and adjust these provisions 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 instruments are determined using a market approach based on the estimate of the average annual daily market price for hot-rolled coil steel. In the new contract that commenced in 2017, this supplemental revenue and refund data source changed from the customer's average annual steel price to an average annual daily market price for hot-rolled coil steel for one of our supply agreements. This estimate takes into consideration current market conditions and nonperformance risk. We had assets of $37.9 million and $21.3 million at December 31, 2017 and 2016, respectively, related to supply agreements.
The provisional pricing arrangements included in our Level 3 assets/liabilities 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 at the measurement date 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. We had assets of $1.5 million and $10.3 million at December 31, 2017 and 2016, respectively, related to provisional pricing arrangements. In addition, we had liabilities of $2.4 million and $0.5 million related to provisional pricing arrangements at December 31, 2017 and 2016, respectively.
The following table illustrates information about quantitative inputs and assumptions for the derivative assets and derivative liabilities categorized in Level 3 of the fair value hierarchy:
Qualitative/Quantitative Information About Level 3 Fair Value Measurements
($ in millions)
 
Fair Value at
December 31, 2017
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate
(Weighted Average)
 
Customer Supply Agreement
 
$
37.9

 
Derivative assets
 
Market Approach
 
Management's Estimate of Market Hot-Rolled Coil Steel per net ton
 
$655
Provisional Pricing Arrangements
 
$
1.5

 
Derivative assets
 
Market Approach
 
Management's
Estimate of Platts 62% Price per dry metric ton
 
$72 - $74 ($72)
Provisional Pricing Arrangements
 
$
2.4

 
Other current liabilities
 
Market Approach
 
Management's
Estimate of Platts 62% Price per dry metric ton
 
$72 - $74 ($72)

The significant unobservable input used in the fair value measurement of our customer supply agreement is an estimate determined by management including the forward-looking estimate for the average annual daily market price for hot-rolled coil steel.
The significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements are management’s estimates of Platts 62% Price based upon current market data and index pricing, of which includes forward-looking estimates determined by management.

We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2017 and 2016. 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 years ended December 31, 2017 and 2016:
 
(In Millions)
 
Derivative Assets (Level 3)
 
Derivative Liabilities
(Level 3)
 
Year Ended
December 31,
 
Year Ended
December 31,
 
2017
 
2016
 
2017
 
2016
Beginning balance - January 1
$
31.6

 
$
7.8

 
$
(0.5
)
 
$
(3.4
)
Total gains (losses)
 
 
 
 
 
 
 
Included in earnings
195.8

 
103.8

 
(91.1
)
 
(14.1
)
Settlements
(188.0
)
 
(80.0
)
 
89.2

 
17.0

Ending balance - December 31
$
39.4

 
$
31.6

 
$
(2.4
)
 
$
(0.5
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) on assets still held at the reporting date
$
39.4

 
$
23.7

 
$
(2.4
)
 
$
(0.5
)

Gains and losses included in earnings are reported in Product revenues in the Statements of Consolidated Operations for the years ended December 31, 2017 and 2016.
The carrying amount for certain financial instruments (e.g. Accounts receivable, net, Accounts payable and Accrued expenses) approximate 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 December 31, 2017 and 2016 is as follows:
 
 
 
(In Millions)
 
 
 
December 31, 2017
 
December 31, 2016
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair
Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Secured Notes
 
 
 
 
 
 
 
 
 
$400 Million 4.875% 2024 Senior Notes
Level 1
 
$
390.3

 
$
398.0

 
$
—

 
$
—

$540 Million 8.25% 2020 First Lien Notes
Level 1
 
—

 
—

 
506.3

 
595.0

$218.5 Million 8.00% 2020 1.5 Lien Notes
Level 2
 
—

 
—

 
284.2

 
229.5

$544.2 Million 7.75% 2020 Second Lien Notes
Level 1
 
—

 
—

 
339.1

 
439.7

Unsecured Notes
 
 
 
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
Level 1
 
88.6

 
88.0

 
224.5

 
219.6

$500 Million 4.80% 2020 Senior Notes
Level 1
 
122.0

 
118.8

 
235.9

 
221.1

$700 Million 4.875% 2021 Senior Notes
Level 1
 
138.0

 
130.8

 
308.2

 
283.1

$316.25 Million 1.50% 2025 Convertible Senior Notes
Level 1
 
224.1

 
352.9

 
—

 
—

$1.075 Billion 5.75% 2025 Senior Notes
Level 1
 
1,047.2

 
1,029.3

 
—

 
—

$800 Million 6.25% 2040 Senior Notes
Level 1
 
292.6

 
227.1

 
292.5

 
234.7

ABL Facility
Level 2
 
—

 
—

 
—

 
—

Fair Value Adjustment to Interest Rate Hedge
Level 2
 
1.4

 
1.4

 
1.9

 
1.9

Total long-term debt
 
 
$
2,304.2

 
$
2,346.3

 
$
2,192.6

 
$
2,224.6


The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates.