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

Annual report pursuant to Section 13 and 15(d)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Consolidated Financial Position:



	(In Millions)
	Derivative Assets						Derivative Liabilities
	December 31, 2019			December 31, 2018			December 31, 2019			December 31, 2018
Derivative Instrument	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments under ASC 815:
Commodity contracts		$	—	Derivative assets	$	0.1	Other current liabilities	$	3.2	Other current liabilities	$	3.7
Derivatives not designated as hedging instruments under ASC 815:
Customer supply agreement	Derivative assets	44.5		Derivative assets	89.3			—			—
Provisional pricing arrangements	Derivative assets	1.3		Derivative assets	2.1		Other current liabilities	1.1			—
Total derivatives not designated as hedging instruments under ASC 815:		$	45.8		$	91.4		$	1.1		$	—
Total derivatives		$	45.8		$	91.5		$	4.3		$	3.7

Derivatives Designated as Hedging Instruments - Cash Flow Hedges

Commodity Contracts

The following table presents our outstanding hedge contracts:

(Quantities in Millions)

December 31, 2019

December 31, 2018

Notional Amount

Unit of Measure

Varying Maturity Dates

Notional Amount

Unit of Measure

Varying Maturity Dates

Natural gas

20.1

MMBtu

January 2020 - December 2021

1.8

MMBtu

January 2019 - August 2019

Diesel

0.8

Gallons

January 2020

11.0

Gallons

January 2019 - December 2019

Derivatives Not Designated as Hedging Instruments

Customer Supply Agreement

A supply agreement with one customer provides for supplemental revenue or refunds to the customer based on the hot-rolled coil steel price at the time the iron ore 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 control transfers to the customer. The derivative instrument, which is finalized based on a future price, is 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 pellets are consumed and the amounts are settled.

Provisional Pricing Arrangements

Certain of our supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. 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, Atlantic Basin pellet premium, Platts international indexed freight rates and changes in specified PPI, 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. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host sales contract and are integral to the host sales contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.

Revenue is recognized generally upon delivery to our customers. Revenue is measured at the point that control transfers and represents the amount of consideration we expect to receive in exchange for transferring goods. Changes in the expected revenue rate from the date that control transfers through final settlement of contract terms is recorded in accordance with Topic 815 and is characterized as a derivative instrument and accounted for separately. Subsequently, 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 rate is determined.

The 2019 and 2018 amounts represent the difference between the amount we expected to receive when revenue was initially measured at the point control transfers and our subsequent estimate of the final revenue rate based on the price calculation established in the supply agreements. The 2017 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.

The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Consolidated Operations:



		(In Millions)
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Year Ended December 31,
		2019			2018			2017
Customer supply agreements	Revenues from product sales and services	$	78.1		$	425.8		$	163.3
Provisional pricing arrangements	Revenues from product sales and services	(70.6		)	(3.2		)	(42.7		)
Commodity contracts	Cost of goods sold and operating expenses	—			—			(1.3		)
Total		$	7.5		$	422.6		$	119.3

Refer to NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS for additional information.