Annual report pursuant to Section 13 and 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.19.3.a.u2
FAIR VALUE OF FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following represents the assets and liabilities measured at fair value:
 
(In Millions)
 
December 31, 2019
 
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
$
—

 
$
187.6

 
$
—

 
$
187.6

Derivative assets
—

 
—

 
45.8

 
45.8

Total
$
—

 
$
187.6

 
$
45.8

 
$
233.4

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
3.2

 
$
1.1

 
$
4.3

Total
$
—

 
$
3.2

 
$
1.1

 
$
4.3

 
(In Millions)
 
December 31, 2018
 
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
$
0.8

 
$
542.6

 
$
—

 
$
543.4

Derivative assets
—

 
0.1

 
91.4

 
91.5

Total
$
0.8

 
$
542.7

 
$
91.4

 
$
634.9

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
3.7

 
$
—

 
$
3.7

Total
$
—

 
$
3.7

 
$
—

 
$
3.7


Financial assets classified in Level 1 included money market funds. 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 commercial paper at December 31, 2019 and commercial paper, certificates of deposit and commodity hedge contracts at December 31, 2018. Level 2 liabilities included commodity hedge contracts at December 31, 2019 and 2018.
The Level 3 assets and liabilities consist of a freestanding derivative instrument related to a certain supply agreement and derivative assets and liabilities related to certain provisional pricing arrangements with our customers.
The supply agreement included in our Level 3 assets contains provisions for supplemental revenue or refunds based on the hot-rolled coil steel price in the year the iron ore product is consumed in the customer’s blast furnaces. We account for these provisions as derivative instruments at the time of sale and adjust the derivative instruments to fair value through Revenues from product sales and services each reporting period until the product is consumed and the amounts are settled. We had assets of $44.5 million and $89.3 million at December 31, 2019 and 2018, respectively, related to this supply agreement.
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 rate 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 instruments are adjusted to fair value through Revenues from product sales and services each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rates are determined. At December 31, 2019, we had assets of $1.3 million and liabilities of $1.1 million related to provisional pricing arrangements. At December 31, 2018, we had assets of $2.1 million related to provisional pricing arrangements.
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
 
 
 
Fair Value at
December 31, 2019
(In Millions)
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Point Estimate
 
 
Customer supply agreement
 
$44.5
 
Derivative assets
 
Market Approach
 
Management's estimate of hot-rolled coil steel price per net ton
 
$650
 
Provisional pricing arrangements
 
$1.3
 
Derivative assets
 
Market Approach
 
Management's
estimate of Platts 62% price per dry metric ton
 
$76
 
Provisional pricing arrangements
 
$1.1
 
Other current liabilities
 
Market Approach
 
PPI estimates
 
197

The significant unobservable input used in the fair value measurement of our customer supply agreement is a forward-looking estimate of the hot-rolled coil steel price determined by management.
At December 31, 2019, the significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements were management's estimate of Platts 62% price based upon current market data and index pricing and estimates for PPI data, including those for industrial commodities, fuel and steel. During the year, significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements also included the Atlantic Basin pellet premium based upon current market data and index pricing, of which includes forward-looking estimates determined by management. Refer to NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for further information.
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):
 
(In Millions)
 
Derivative Assets
(Level 3)
 
Derivative Liabilities
(Level 3)
 
Year Ended
December 31,
 
Year Ended
December 31,
 
2019
 
2018
 
2019
 
2018
Beginning balance - January 1
$
91.4

 
$
49.5

 
$
—

 
$
(1.7
)
Total gains (losses) included in earnings
78.6

 
428.7

 
(71.1
)
 
(6.1
)
Settlements
(124.2
)
 
(386.8
)
 
70.0

 
7.8

Ending balance - December 31
$
45.8

 
$
91.4

 
$
(1.1
)
 
$
—

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
$
45.8

 
$
91.4

 
$
(1.1
)
 
$
—


The carrying values of certain financial instruments (e.g. Accounts receivable, net, Accounts payable and Other current liabilities) approximate fair value and, therefore, have been excluded from the table below. A summary of the carrying value and fair value of other financial instruments were as follows:
 
 
 
(In Millions)
 
 
 
December 31, 2019
 
December 31, 2018
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair
Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Secured Notes:
 
 
 
 
 
 
 
 
 
$400 Million 4.875% 2024 Senior Notes
Level 1
 
$
393.6

 
$
410.0

 
$
392.1

 
$
370.2

Unsecured Notes:
 
 
 
 
 
 
 
 
 
$700 Million 4.875% 2021 Senior Notes
Level 1
 
—

 
—

 
123.8

 
122.3

$316.25 Million 1.50% 2025 Convertible Senior Notes
Level 1
 
246.7

 
385.0

 
235.2

 
352.4

$1.075 Billion 5.75% 2025 Senior Notes
Level 1
 
464.2

 
473.3

 
1,048.8

 
962.0

$750 Million 5.875% 2027 Senior Notes
Level 1
 
716.4

 
718.5

 
—

 
—

$800 Million 6.25% 2040 Senior Notes
Level 1
 
292.9

 
250.2

 
292.8

 
232.8

ABL Facility
Level 2
 
—

 
—

 
—

 
—

Fair Value Adjustment to Interest Rate Hedge
Level 2
 
—

 
—

 
0.2

 
0.2

Total long-term debt
 
 
$
2,113.8

 
$
2,237.0

 
$
2,092.9

 
$
2,039.9


The fair value of long-term debt was determined using quoted market prices.