Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v2.4.0.6
FAIR VALUE OF FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities of the Company measured at fair value at March 31, 2013 and December 31, 2012:
 
(In Millions)
 
March 31, 2013
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
$
135.0

 
$
—

 
$
—

 
$
135.0

Derivative assets
—

 
—

 
53.3

 
53.3

Marketable securities
30.0

 
—

 
—

 
30.0

Foreign exchange contracts
—

 
13.1

 
—

 
13.1

Total
$
165.0

 
$
13.1

 
$
53.3

 
$
231.4

Liabilities:

 

 

 

Derivative liabilities
$
—

 
$
—

 
$
6.8

 
$
6.8

Foreign exchange contracts
—

 
8.5

 
—

 
8.5

Total
$
—

 
$
8.5

 
$
6.8

 
$
15.3

 
(In Millions)
 
December 31, 2012
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
$
100.0

 
$
—

 
$
—

 
$
100.0

Derivative assets
—

 
—

 
62.4

 
62.4

Marketable securities
27.0

 
—

 
—

 
27.0

Foreign exchange contracts
—

 
16.2

 
—

 
16.2

Total
$
127.0

 
$
16.2

 
$
62.4

 
$
205.6

Liabilities:

 

 

 

Derivative liabilities
$
—

 
$
—

 
$
11.3

 
$
11.3

Foreign exchange contracts
—

 
1.9

 
—

 
1.9

Total
$
—

 
$
1.9

 
$
11.3

 
$
13.2

Financial assets classified in Level 1 at March 31, 2013 and December 31, 2012 include money market funds and available-for-sale marketable securities. 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 securities primarily include derivative financial instruments valued using financial models that use as their basis readily observable market parameters. At March 31, 2013 and December 31, 2012, such derivative financial instruments included our existing foreign currency exchange contracts. The fair value of the foreign currency exchange contracts is based on forward market prices and represents the estimated amount we would receive or pay to terminate these agreements at the reporting date, taking into account creditworthiness, nonperformance risk and liquidity risks associated with current market conditions.
The derivative financial assets classified within Level 3 at March 31, 2013 and December 31, 2012 included 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 steel at the steelmaker’s facilities, and takes into consideration current market conditions and nonperformance risk.
The Level 3 derivative assets and liabilities at March 31, 2013 and December 31, 2012, also consisted of derivatives related to certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers at March 31, 2013 and our U.S. Iron Ore and Eastern Canadian Iron Ore customers at December 31, 2012. These provisional pricing arrangements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final sales price 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 provisionally agreed-upon price and the estimated final sales price 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 sales price 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
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
3/31/2013
Provisional Pricing Arrangements
$
3.9

 
Derivative assets
 
Market Approach
 
Managements
Estimate of 62% Fe
 
$137
 
$
6.8

 
Other current liabilities
 
 
 
 
 
 
Customer Supply Agreement
$
49.4

 
Derivative assets
 
Market Approach
 
Hot-Rolled Steel Estimate
 
$600 - $645 ($630)

The significant unobservable input used in the fair value measurement of the reporting entity’s provisional pricing arrangements is management’s estimate of 62 percent Fe 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 the reporting entity’s customer supply agreements is the future hot-rolled steel price that is estimated based on current market data, analysts' projections, projections provided by the customer 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.
These significant estimates are determined by a collaboration of our commercial, finance and treasury departments and are reviewed by management.
Substantially all of the financial assets and liabilities are carried at fair value or contracted amounts that approximate fair value.
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 of the fair value hierarchy during the three months ended March 31, 2013 and 2012. The following table represents 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 months ended March 31, 2013 and 2012.
 
(In Millions)
 
Derivative Assets
(Level 3)
 
Derivative Liabilities
(Level 3)
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2013
 
2012
 
2013
 
2012
Beginning balance - January 1
$
62.4

 
$
157.9

 
$
(11.3
)
 
$
(19.5
)
Total gains

 

 
 
 
 
Included in earnings
28.0

 
43.3

 
(6.8
)
 
(1.1
)
Included in other comprehensive income
—

 
—

 
—

 
—

Settlements
(37.1
)
 
(132.0
)
 
11.3

 
19.5

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Ending balance - March 31
$
53.3

 
$
69.2

 
$
(6.8
)
 
$
(1.1
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) on assets (liabilities) still held at the reporting date
$
28.0

 
$
43.3

 
$
(6.8
)
 
$
(1.1
)

Gains and losses included in earnings are reported in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2013 and 2012.
The carrying amount for certain financial instruments (e.g. Accounts receivable, net, Accounts payable and Accrued expenses) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at March 31, 2013 and December 31, 2012 were as follows:
 
 
 
(In Millions)
 
 
 
March 31, 2013
 
December 31, 2012
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Other receivables:
 
 
 
 
 
 
 
 
 
Customer supplemental payments
Level 2
 
$
16.7

 
$
16.1

 
$
22.3

 
$
21.3

ArcelorMittal USA—Receivable
Level 2
 
17.4

 
19.1

 
19.3

 
21.3

Other
Level 2
 
10.5

 
10.5

 
10.9

 
10.9

Total receivables
 
 
$
44.6

 
$
45.7

 
$
52.5

 
$
53.5

Long-term debt:
 
 
 
 
 
 
 
 
 
Term loan—$1.25 billion
Level 2
 
$
—

 
$
—

 
$
753.0

 
$
753.0

Senior notes—$700 million
Level 2
 
699.4

 
751.4

 
699.4

 
759.4

Senior notes—$1.3 billion
Level 2
 
1,289.4

 
1,513.2

 
1,289.4

 
1,524.7

Senior notes—$400 million
Level 2
 
398.3

 
458.8

 
398.2

 
464.3

Senior notes—$500 million
Level 2
 
495.9

 
527.7

 
495.7

 
528.4

Revolving loan
Level 2
 
550.0

 
550.0

 
325.0

 
325.0

Total long-term debt
 
 
$
3,433.0

 
$
3,801.1

 
$
3,960.7

 
$
4,354.8


The fair value of the receivables and debt are based on the fair market yield curves for the remainder of the term expected to be outstanding.
The terms of one of our U.S. Iron Ore pellet supply agreements require supplemental payments to be paid by the customer during the period 2009 through 2012, with the option to defer a portion of the 2009 monthly amount up to $22.3 million in exchange for interest payments until the deferred amount is repaid in 2013. Interest is payable by the customer quarterly and began in September 2009 at the higher of 9 percent or the prime rate plus 350 basis points. As of March 31, 2013 and December 31, 2012, the receivable of $16.7 million and $22.3 million, respectively, classified as current and was recorded in Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position as all supplemental payments to be paid by the customer are due by the end of 2013. The fair value of the receivable of $16.1 million and $21.3 million at March 31, 2013 and December 31, 2012, respectively, is based on a discount rate of 2.14 percent and 2.81 percent, respectively, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
In 2002, we entered into an agreement with Ispat that restructured the ownership of the Empire mine and increased our ownership from 46.7 percent to 79.0 percent in exchange for the assumption of all mine liabilities. Under the terms of the agreement, we indemnified Ispat from obligations of Empire in exchange for certain future payments to Empire and to us by Ispat of $120.0 million, recorded at a present value of $17.4 million and $19.3 million at March 31, 2013 and December 31, 2012, respectively, of which $10.0 million was recorded in Other current assets for each respective period. The fair value of the receivable of $19.1 million and $21.3 million at March 31, 2013 and December 31, 2012, respectively, is based on a discount rate of 2.24 percent and 2.85 percent, respectively, which represents the estimated credit-adjusted risk-free interest rate for the period the receivable is outstanding.
The fair value of long-term debt was determined using quoted market prices or discounted cash flows based upon current borrowing rates. The term loan and revolving loan are variable rate interest and approximate fair value. See NOTE 9 - DEBT AND CREDIT FACILITIES for further information.
Items Measured at Fair Value on a Non-Recurring Basis
The following table presents information about the impairment charges on both financial and nonfinancial assets that were measured on a fair value basis for the year ended December 31, 2012. The table also indicates the fair value hierarchy of the valuation techniques used to determine such fair value. We had no financial assets and liabilities measured at fair value on a non-recurring basis at March 31, 2013.
 
(In Millions)
 
December 31, 2012
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:
 
 
 
 
 
 
 
Investment in ventures impairment -
     Amapá
$
—

 
$
—

 
$
72.5

 
$
72.5


Financial Assets
On December 27, 2012, the board of directors approved the sale of our 30 percent investment in Amapá, which is recorded as an equity method investment in the Statements of Unaudited Condensed Consolidated Operations. The carrying value of the investment was reduced to fair value of $72.5 million as of December 31, 2012, resulting in an impairment charge of $365.4 million, which was recorded in the fourth quarter of 2012. We believe the sum of the sale proceeds approximates fair value. The fair value of the proceeds (and therefore the portion of the equity method investment measured at fair value) was determined using a probability-weighted cash flow approach.