Cleveland-Cliffs Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

12 Months Ended

Dec. 31, 2017

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 Discontinued Operations
Statements of Consolidated Operations
Gain (Loss) from Discontinued Operations, net of tax	YTD December 31, 2017	$	2.6		$	(21.3	)	$	—		$	(21.3	)	$	(18.7	)
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	)

Statements of Consolidated Financial Position
Other current liabilities	As of December 31, 2017	$	3.2		$	—		$	—		$	—		$	3.2
Other current liabilities	As of December 31, 2016	$	6.0		$	—		$	—		$	—		$	6.0

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 long-lived assets	YTD December 31, 2015	$	73.4		$	—		$	—		$	—		$	73.4

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 North American Coal operations during the fourth quarter of 2015. As such, all current and historical North American Coal operating segment results are classified as discontinued operations in our financial statements. Historical results also include our CLCC assets, which were sold during the fourth quarter of 2014.

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.

On December 22, 2015, we completed a strategic shift in our business by closing 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 us 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.



	(In Millions)
	Year Ended December 31,
Loss from Discontinued Operations	2017		2016			2015
Revenues from product sales and services	$	—	$	—		$	392.9
Cost of goods sold and operating expenses	—		—			(449.2		)
Sales margin	—		—			(56.3		)
Other operating income (expense)	0.5		(4.5		)	(30.4		)
Gain on sale of coal mines	2.1		2.1			9.3
Other expense	—		—			(1.8		)
Gain (loss) from discontinued operations before income taxes	2.6		(2.4		)	(79.2		)
Impairment of long-lived assets	—		—			(73.4		)
Income tax benefit	—		—			0.2
Gain (loss) from discontinued operations, net of tax	$	2.6	$	(2.4	)	$	(152.4	)

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, 2017 and 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, 2017		December 31, 2016
Accrued liabilities	$	—	$	1.1
Other current liabilities	3.2		4.9
Total liabilities of discontinued operations	$	3.2	$	6.0

¹At December 31, 2017, we had no contingent liabilities associated with our exit from the coal business recorded on our parent company compared to $2.1 million at December 31, 2016.

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, the final distribution of $10.3 million was released to us from escrow.

Income Taxes

We recognized no tax expense or benefit for the years ended December 31, 2017 and 2016 in Loss from Discontinued Operations, net of tax, related to our North American Coal investments. For the year ended December 31, 2015, we recognized a tax benefit of $0.2 million in Loss from Discontinued Operations, net of tax, related to a loss on our North American Coal investments.

Canadian Operations

Background

On January 27, 2015, we announced that the Bloom Lake Group commenced restructuring proceedings in Montreal, Quebec under the CCAA to address the Bloom Lake Group's immediate liquidity issues and to preserve and protect its assets for the benefit of all stakeholders while restructuring and/or sale options were explored. At that time, the Bloom Lake Group was no longer generating revenues and was not able to meet its obligations as they came due. As part of the CCAA process, the Court approved the appointment of a Monitor and certain other financial advisors.

Additionally, on May 20, 2015, the Wabush Group commenced restructuring proceedings in Montreal, Quebec under the CCAA. The Wabush Group was no longer generating revenues and was not able to meet its obligations as they came due. As a result of this action, the CCAA protection granted to the Bloom Lake Group was extended to include the Wabush Group to facilitate the reorganization of each of their businesses and operations. The Monitor appointed by the court in the CCAA proceeding for the Bloom Lake Group has also been appointed by the court as the Monitor in the CCAA proceeding for the Wabush Group.

As a result of the commencement of CCAA proceedings for the Bloom Lake Group 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 losses and the recording of our remaining interests at fair value.

As a result of the commencement of CCAA proceedings for the Wabush Group on May 20, 2015, we deconsolidated certain Wabush Group wholly-owned subsidiaries effective May 20, 2015. The 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 losses 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, 2017 and 2016 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 $51.6 million and $48.6 million classified as Loans to and accounts receivables from the Canadian Entities in the Statements of Consolidated Financial Position as of December 31, 2017 and 2016, 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, 2017 balance reflects developments since the January 27, 2015 and May 20, 2015 CCAA filings, 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 various estates that will be held back from the final distribution to creditors of the Bloom Lake Group and the Wabush Group and the repayment of DIP financing.

Status of CCAA Proceedings

As of December 31, 2017, CCAA proceedings are ongoing and the majority of the assets of each of the Bloom Lake Group and the Wabush Group have been liquidated. The net proceeds of sale of the assets of the Bloom Lake Group and the Wabush Group are currently being held by the Monitor. Certain of these funds will be utilized to fund the accrued and ongoing costs of the CCAA proceedings. The Monitor has conducted a claims process pursuant to which creditors, including the Company and its affiliates, have filed claims against the Bloom Lake Group and the Wabush Group. The Monitor is reviewing all claims filed as part of this claims process. Currently, there is uncertainty as to the amount of the distribution that will be made to the creditors of the Bloom Lake Group and the Wabush Group, including, if any, to us, and whether we 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.

During 2017, we became aware that it was probable the Monitor will assert a preference claim against us and/or certain of our affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We deny liability for any amount and will vigorously defend such claim. Refer to the Guarantees and Contingent Liabilities section below for additional information.

During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the Wabush Group. As part of the sale, the environmental remediation obligations were conveyed to the buyer and we were released from our guarantees. Refer to the Guarantees and Contingent Liabilities section below for additional information.

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	2017			2016			2015
Revenues from product sales and services	$	—		$	—		$	11.3
Cost of goods sold and operating expenses	—			—			(11.1		)
Sales margin	—			—			0.2
Other operating expense	—			—			(33.8		)
Other expense	—			—			(1.0		)
Loss from discontinued operations before income taxes	—			—			(34.6		)
Loss from deconsolidation	(21.3		)	(17.5		)	(710.9		)
Income tax benefit	—			—			5.8
Loss from discontinued operations, net of tax	$	(21.3	)	$	(17.5	)	$	(739.7	)

Canadian Entities loss from deconsolidation totaled $21.3 million and $17.5 million for the year ended December 31, 2017 and 2016, respectively and included the following:



	(In Millions)
	Year Ended December 31,			Year Ended December 31,			Year Ended December 31,
	2017			2016			2015
Investment impairment on deconsolidation¹	$	3.0		$	(17.5	)	$	(507.8	)
Guarantees and contingent liabilities	(24.3		)	—			(203.1		)
Total loss from deconsolidation	$	(21.3	)	$	(17.5	)	$	(710.9	)

¹Includes the adjustment to fair value of our remaining interest in the Canadian Entities.

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 CCAA proceedings commenced with respect to the Bloom Lake Group and the Wabush Group. At the respective dates of deconsolidation, January 27, 2015 and 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 their creditors, the fair value of our equity investment is approximately zero.

Amounts Receivable from the Canadian Entities

Prior to the deconsolidations, certain of our wholly-owned subsidiaries made loans to the Canadian Entities for the purpose of funding their 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. 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 $51.6 million and $48.6 million classified as Loans to and accounts receivables from the Canadian Entities in the Statements of Consolidated Financial Position at December 31, 2017 and 2016, respectively.

Pre-Petition Financing

Prior to the commencement of CCAA proceedings for the Wabush Group on May 20, 2015, a secured credit facility (the "Pre-Petition financing") was made available by Cliffs Mining Company to provide support to the Wabush Group for ongoing business activities. As of December 31, 2017 and 2016, the amount outstanding under the Pre-Petition financing was $7.2 million. Our estimated recovery of the Pre-Petition financing is included within the Loans to and accounts receivables from the Canadian Entities of $51.6 million. The Pre-Petition financing is secured by the proceeds of certain assets of the Wabush Group.

Guarantees and Contingent Liabilities

During 2017, we became aware that it was probable the Monitor will assert a preference claim against the Company and/or certain of its affiliates. Given that it is probable the claim will be asserted by the Monitor, we have recorded an estimated liability of $55.6 million, which includes the value of our related-party claims against the Bloom Lake Group and the Wabush Group, classified as Contingent claims in the Statements of Consolidated Financial Position as of December 31, 2017 and included within Loss from Discontinued Operations, net of tax in the Statements of Consolidated Operations for the year ended December 31, 2017. Should the Monitor proceed to assert the claim, we believe the Monitor will demand an amount in excess of the value of our related-party claims against the Bloom Lake Group and the Wabush Group. Thus, it is possible that a change in the estimated liability may occur in the future. We deny liability for any amount and will vigorously defend such claim.

We previously recorded liabilities of $37.2 million related to guarantees for certain environmental obligations of the Canadian Entities, classified as Other liabilities in the Statements of Consolidated Financial Position as of December 31, 2016. During 2017, the Wabush Scully Mine was sold as part of the ongoing CCAA proceedings for the Wabush Group. As part of this transaction, we were required to fund the buyer's financial assurance shortfall of $7.7 million in order to complete the conveyance of the environmental remediation obligations to the buyer, which released us from our guarantees and resulted in a net gain of $31.4 million included in Loss from Discontinued Operations, net of tax in the Statements of Consolidated Operations. Refer to the Items Measured at Fair Value on a Non-Recurring Basis section below for additional information.

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, 2017 and 2016 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, 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		Gains
Assets:
Loans to and accounts receivables from the Canadian Entities	$	—	$	—	$	51.6	$	51.6	$	3.0
Liabilities:
Guarantees and contingent liabilities	$	—	$	—	$	—	$	—	$	31.4



	(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		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	$	—

To assess the fair value and recoverability of the accounts 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. These underlying amounts are denominated primarily in Canadian dollars and are remeasured on a quarterly basis.

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 Canadian denominated guarantees at book value, which best approximated fair value.

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.

Income Taxes

We have recognized no tax expense or benefit for the years ended December 31, 2017 and 2016 in Loss from Discontinued Operations, net of tax, related to our Canadian investments. For the year ended December 31, 2015, we recognized a tax benefit of $5.8 million in Loss from Discontinued Operations, net of tax.