Cleveland-Cliffs Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2020

The following represents the assets and liabilities measured at fair value:



	(In Millions)
	March 31, 2020
	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Other current assets:
Commodity contracts	$	—	$	1.6	$	—	$	1.6
Customer supply agreement	—		—		19.0		19.0
Provisional pricing arrangement	—		—		0.6		0.6
Total	$	—	$	1.6	$	19.6	$	21.2
Liabilities:
Other current liabilities:
Commodity contracts	$	—	$	26.5	$	—	$	26.5
Foreign exchange contracts	—		1.6		—		1.6
Other non-current liabilities:
Commodity contracts	—		3.4		—		3.4
Foreign exchange contracts	—		0.9		—		0.9
Total	$	—	$	32.4	$	—	$	32.4



	(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 - Commercial paper	$	—	$	187.6	$	—	$	187.6
Other current assets:
Customer supply agreement	—		—		44.5		44.5
Provisional pricing arrangement	—		—		1.3		1.3
Total	$	—	$	187.6	$	45.8	$	233.4
Liabilities:
Other current liabilities:
Commodity contracts	$	—	$	3.2	$	—	$	3.2
Provisional pricing arrangement	—		—		1.1		1.1
Total	$	—	$	3.2	$	1.1	$	4.3

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. Our foreign exchange contracts include Canadian dollars and euro, and our commodity hedge contracts primarily include those related to natural gas, electricity and zinc.

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 a derivative instrument at the time of sale and adjust the derivative instrument to fair value through Revenues each reporting period until the product is consumed and the amounts are settled. We had assets of $19.0 million and $44.5 million at March 31, 2020 and December 31, 2019, 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 each reporting period based upon current market data and forward-looking estimates provided by management until the final revenue rates are determined. We had assets of $0.6 million and no liabilities related to provisional pricing arrangements at March 31, 2020. At December 31, 2019, we had assets of $1.3 million and liabilities of $1.1 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 March 31, 2020

(In Millions)

Balance Sheet

Location

Valuation Technique

Unobservable Input

Point Estimate

Customer supply agreement

19.0

Other current assets

Market Approach

Management's estimate of hot-rolled coil steel price per net ton

$559

Provisional pricing arrangements

0.6

Other current assets

Market Approach

PPI Estimates

136.5

The significant unobservable input used in the fair value measurement of our customer supply agreement was a forward-looking estimate of the hot-rolled coil steel price determined by management.

The significant unobservable input used in the fair value measurement of our provisional pricing arrangements at March 31, 2020 was estimates for PPI data.

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)
	Level 3 Assets
	Three Months Ended March 31,
	2020			2019
Beginning balance - January 1	$	45.8		$	91.4
Total gains (losses) included in earnings	(26.2		)	15.3
Ending balance - March 31	$	19.6		$	106.7
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date	$	(25.3	)	$	15.3



	(In Millions)
	Level 3 Liabilities
	Three Months Ended March 31,
	2020			2019
Beginning balance - January 1	$	(1.1	)	$	—
Total losses included in earnings	(0.6		)	(9.8		)
Settlements	1.7			—
Ending balance - March 31	$	—		$	(9.8	)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date	$	—		$	(9.8	)

The carrying values of certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Other current liabilities) approximates 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)
		March 31, 2020				December 31, 2019
	Classification	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt:
Senior Notes	Level 1	$	3,455.3	$	2,712.8	$	2,113.8	$	2,237.0
IRBs due 2020 to 2028	Level 1	101.8		101.4		—		—
ABL Facility - outstanding balance	Level 2	800.0		800.0		—		—
Total long-term debt		$	4,357.1	$	3,614.2	$	2,113.8	$	2,237.0

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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