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EX-32.2 - EXHIBIT 32.2 - CLEVELAND-CLIFFS INC.clf-2016331ex322.htm
EX-10.2 - EXHIBIT 10.2 - CLEVELAND-CLIFFS INC.clf-2016331ex102.htm
EX-32.1 - EXHIBIT 32.1 - CLEVELAND-CLIFFS INC.clf-2016331ex321.htm
EX-4.1 - EXHIBIT 4.1 - CLEVELAND-CLIFFS INC.clf-2016331ex41.htm
EX-10.3 - EXHIBIT 10.3 - CLEVELAND-CLIFFS INC.clf-2016331ex103.htm
EX-31.1 - EXHIBIT 31.1 - CLEVELAND-CLIFFS INC.clf-2016331ex311.htm
EX-95 - EXHIBIT 95 - CLEVELAND-CLIFFS INC.clf-2016331ex95.htm
EX-31.2 - EXHIBIT 31.2 - CLEVELAND-CLIFFS INC.clf-2016331ex312.htm
EX-10.1 - EXHIBIT 10.1 - CLEVELAND-CLIFFS INC.clf-2016331ex101.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number: 1-8944
CLIFFS NATURAL RESOURCES INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio
 
34-1464672
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
200 Public Square, Cleveland, Ohio
 
44114-2315
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (216) 694-5700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  x                                         NO  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES  x                                         NO  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x             Accelerated filer  o    Non-accelerated filer   o    Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  o                                         NO  x
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 181,923,985 as of April 25, 2016.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
Page Number
 
 
 
 
 
 
DEFINITIONS
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2016 and December 31, 2015
 
 
 
 
Statements of Unaudited Condensed Consolidated Operations for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Statements of Unaudited Condensed Consolidated Cash Flows for the Three Months Ended March 31, 2016 and 2015
 
 
 
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 
 
 
Signatures
 
 
 
 
 
 




DEFINITIONS
The following abbreviations or acronyms are used in the text. References in this report to the “Company,” “we,” “us,” “our” and “Cliffs” are to Cliffs Natural Resources Inc. and subsidiaries, collectively. References to “A$” or “AUD” refer to Australian currency, “C$” or "CAD" to Canadian currency and “$” to United States currency.
Abbreviation or acronym
 
Term
ABL Facility
 
Syndicated Facility Agreement by and among Bank of America, N.A., as Administrative Agent and Australian Security Trustee, the Lenders that are parties hereto, Cliffs Natural Resources Inc., as Parent and a Borrower, and the Subsidiaries of Parent party hereto, as Borrowers dated as of March 30, 2015
ArcelorMittal
 
ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco, as well as, many other subsidiaries)
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Updates
Bloom Lake
 
The Bloom Lake Iron Ore Mine Limited Partnership
Bloom Lake Group
 
Bloom Lake General Partner Limited and certain of its affiliates, including Cliffs Quebec Iron Mining ULC
Canadian Entities
 
Bloom Lake Group, Wabush Group and certain other wholly-owned Canadian subsidiaries
CCAA
 
Companies' Creditors Arrangement Act (Canada)
CFR
 
Cost and freight
Chromite Project
 
Cliffs Chromite Ontario Inc.
CLCC
 
Cliffs Logan County Coal LLC
Dodd-Frank Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
DR-grade pellets
 
Direct Reduction pellets
EAF
 
Electric Arc Furnace
EBITDA
 
Earnings before interest, taxes, depreciation and amortization
Empire
 
Empire Iron Mining Partnership
Essar
 
Essar Steel Algoma Inc.
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
Fe
 
Iron
GAAP
 
Accounting principles generally accepted in the United States
Hibbing
 
Hibbing Taconite Company
Koolyanobbing
 
Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling
LTVSMC
 
LTV Steel Mining Company
MMBtu
 
Million British Thermal Units
Monitor
 
FTI Consulting Canada Inc.
Moody's
 
Moody's Investors Service, Inc., a subsidiary of Moody's Corporation, and its successors
Northshore
 
Northshore Mining Company
Oak Grove
 
Oak Grove Resources, LLC
OPEB
 
Other postretirement employment benefits
Pinnacle
 
Pinnacle Mining Company, LLC
Platts IODEX
 
Refers to the Platts daily iron ore assessment rate for “IODEX 62% Fe CFR North China” or seaborne traded iron ore fines as published in the McGraw-Hill Companies ‘Platts Steel Markets Daily’ report
Preferred Share
 
7.00 percent Series A Mandatory Convertible Preferred Stock, Class A, without par value
S&P
 
Standard & Poor's Rating Services, a division of Standard & Poor's Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc., and its successors
SEC
 
U.S. Securities and Exchange Commission
SG&A
 
Selling, general and administrative
Securities Act
 
Securities Act of 1933, as amended
Substitute Rating Agency
 
A "nationally recognized statistical rating organization" within the meaning of Section 3(a)(62) of the Exchange Act, selected by us (as certified by a certificate of officers confirming the decision of our Board of Directors) as a replacement agency of Moody's or S&P, or both of them, as the case may be
Tilden
 
Tilden Mining Company
TDR
 
Troubled debt restructuring
TSR
 
Total Shareholder Return
United Taconite
 
United Taconite LLC
U.S.
 
United States of America
Wabush
 
Wabush Mines Joint Venture
Wabush Group
 
Wabush Iron Co. Limited and Wabush Resources Inc., and certain of its affiliates, including Wabush Mines (an unincorporated joint venture of Wabush Iron Co. Limited and Wabush Resources Inc.), Arnaud Railway Company and Wabush Lake Railway Company
2015 Equity Plan
 
Cliffs Natural Resources Inc. 2015 Equity and Incentive Compensation Plan

1


PART I
Item 1.
Financial Statements
Statements of Unaudited Condensed Consolidated Financial Position
Cliffs Natural Resources Inc. and Subsidiaries
 
(In Millions)
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
59.9

 
$
285.2

Accounts receivable, net
41.9

 
40.2

Inventories
406.3

 
329.6

Supplies and other inventories
102.7

 
110.4

Short-term assets of discontinued operations
0.5

 
14.9

Loans to and accounts receivable from the Canadian Entities
69.9

 
72.9

Insurance coverage receivable
84.8

 
93.5

Other current assets
26.0

 
36.0

TOTAL CURRENT ASSETS
792.0

 
982.7

PROPERTY, PLANT AND EQUIPMENT, NET
1,009.6

 
1,059.0

OTHER ASSETS
 
 
 
Other non-current assets
84.7

 
93.8

TOTAL OTHER ASSETS
84.7

 
93.8

TOTAL ASSETS
$
1,886.3

 
$
2,135.5

(continued)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


Statements of Unaudited Condensed Consolidated Financial Position
Cliffs Natural Resources Inc. and Subsidiaries - (Continued)
 
(In Millions)
 
March 31,
2016
 
December 31,
2015
LIABILITIES
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
77.2

 
$
106.3

Accrued expenses
111.1

 
156.0

Short-term liabilities of discontinued operations
4.3

 
6.9

Guarantees
23.6

 
96.5

Insured loss
84.8

 
93.5

Other current liabilities
138.8

 
122.5

TOTAL CURRENT LIABILITIES
439.8

 
581.7

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
213.8

 
221.0

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
214.3

 
231.2

LONG-TERM DEBT
2,499.1

 
2,699.4

OTHER LIABILITIES
216.0

 
213.8

TOTAL LIABILITIES
3,583.0

 
3,947.1

COMMITMENTS AND CONTINGENCIES (SEE NOTE 20)

 

EQUITY
 
 
 
CLIFFS SHAREHOLDERS' DEFICIT
 
 
 
Preferred Stock - no par value
 
 
 
Class A - 3,000,000 shares authorized
 
 
 
7% Series A Mandatory Convertible, Class A, no par value and $1,000 per share liquidation preference
 
 
 
Issued and Outstanding - no shares (2015 - 731,223 shares)

 
731.3

Class B - 4,000,000 shares authorized
 
 
 
Common Shares - par value $0.125 per share
 
 
 
Authorized - 400,000,000 shares (2015 - 400,000,000 shares);
 
 
 
Issued - 187,822,349 shares (2015 - 159,546,224 shares);
 
 
 
Outstanding - 181,909,771 shares (2015 - 153,591,930 shares)
23.5

 
19.8

Capital in excess of par value of shares
3,032.5

 
2,298.9

Retained deficit
(4,640.4
)
 
(4,748.4
)
Cost of 5,912,578 common shares in treasury (2015 - 5,954,294 shares)
(262.7
)
 
(265.0
)
Accumulated other comprehensive loss
(12.3
)
 
(18.0
)
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
(1,859.4
)
 
(1,981.4
)
NONCONTROLLING INTEREST
162.7

 
169.8

TOTAL DEFICIT
(1,696.7
)
 
(1,811.6
)
TOTAL LIABILITIES AND DEFICIT
$
1,886.3

 
$
2,135.5

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


Statements of Unaudited Condensed Consolidated Operations
Cliffs Natural Resources Inc. and Subsidiaries
 
(In Millions, Except Per Share Amounts)
 
Three Months Ended
March 31,
 
2016
 
2015
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$
275.6

 
$
399.5

Freight and venture partners' cost reimbursements
29.9

 
46.5


305.5

 
446.0

COST OF GOODS SOLD AND OPERATING EXPENSES
(274.6
)
 
(365.2
)
SALES MARGIN
30.9

 
80.8

OTHER OPERATING INCOME (EXPENSE)
 
 
 
Selling, general and administrative expenses
(28.2
)
 
(29.1
)
Miscellaneous - net
(3.0
)
 
20.2

 
(31.2
)
 
(8.9
)
OPERATING INCOME (EXPENSE)
(0.3
)
 
71.9

OTHER INCOME (EXPENSE)
 
 
 
Interest expense, net
(56.8
)
 
(42.9
)
Gain on extinguishment/restructuring of debt
178.8

 
313.7

Other non-operating income (expense)
0.1

 
(0.8
)
 
122.1

 
270.0

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
121.8

 
341.9

INCOME TAX EXPENSE
(7.5
)
 
(175.1
)
INCOME FROM CONTINUING OPERATIONS
114.3

 
166.8

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
2.5

 
(928.5
)
NET INCOME (LOSS)
116.8

 
(761.7
)
(INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(8.8
)
 
1.9

(Three Months Ended March 31, 2016 - No loss related to Discontinued Operations, Three Months Ended March 31, 2015 - Loss of $7.7 million related to Discontinued Operations)
 
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
108.0

 
$
(759.8
)
PREFERRED STOCK DIVIDENDS

 
(12.8
)
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS COMMON SHAREHOLDERS
$
108.0

 
$
(772.6
)
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
Continuing operations
$
0.61

 
$
1.02

Discontinued operations
0.01

 
(6.06
)
 
$
0.62

 
$
(5.04
)
EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
Continuing operations
$
0.61

 
$
0.94

Discontinued operations
0.01

 
(5.20
)
 
$
0.62

 
$
(4.26
)
AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
Basic
171,677

 
153,185

Diluted
171,962

 
178,696

CASH DIVIDENDS DECLARED PER DEPOSITARY SHARE
$

 
$
0.44

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss)
Cliffs Natural Resources Inc. and Subsidiaries
 
(In Millions)
 
Three Months Ended
March 31,
 
2016
 
2015
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
108.0

 
$
(759.8
)
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Changes in pension and other post-retirement benefits, net of tax
5.4

 
28.8

Unrealized net gain on marketable securities, net of tax

 
0.8

Unrealized net gain on foreign currency translation
4.4

 
168.0

Unrealized net loss on derivative financial instruments, net of tax
(3.5
)
 
(0.8
)
OTHER COMPREHENSIVE INCOME
6.3

 
196.8

OTHER COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
(0.6
)
 
10.8

TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
113.7

 
$
(552.2
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


Statements of Unaudited Condensed Consolidated Cash Flows
Cliffs Natural Resources Inc. and Subsidiaries
 
(In Millions)
 
Three Months Ended
March 31,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
116.8

 
$
(761.7
)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
 
 
 
Depreciation, depletion and amortization
35.2

 
33.0

Impairment of long-lived assets

 
76.6

Deferred income taxes

 
165.8

Gain on extinguishment/restructuring of debt
(178.8
)
 
(313.7
)
(Gain) loss on deconsolidation, net of cash deconsolidated
(3.8
)
 
776.1

Other
18.5

 
31.6

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
38.5

 
71.7

Product inventories
(66.1
)
 
(154.9
)
Payables, accrued expenses and other current liabilities
(86.8
)
 
(152.7
)
Net cash used by operating activities
(126.5
)
 
(228.2
)
INVESTING ACTIVITIES
 
 
 
Purchase of property, plant and equipment
(10.4
)
 
(15.9
)
Other investing activities
5.5

 
0.2

Net cash used by investing activities
(4.9
)
 
(15.7
)
FINANCING ACTIVITIES
 
 
 
Repayment of equipment loans
(72.9
)
 

Distributions of partnership equity
(11.1
)
 

Debt issuance costs
(5.2
)
 
(33.1
)
Proceeds from first lien notes offering

 
503.5

Repurchase of debt

 
(133.3
)
Borrowings under credit facilities

 
295.0

Repayment under credit facilities

 
(295.0
)
Preferred stock dividends

 
(12.8
)
Other financing activities
(4.2
)
 
(14.3
)
Net cash provided (used) by financing activities
(93.4
)
 
310.0

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(0.5
)
 
(1.3
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(225.3
)
 
64.8

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
285.2

 
290.9

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
59.9

 
$
355.7

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
See NOTE 17 - CASH FLOW INFORMATION.

6


Cliffs Natural Resources Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC rules and regulations and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, the financial position, results of operations, comprehensive income and cash flows for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016 or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.
As more fully described in the Form 10-K for the year ended December 31, 2015, in January 2015, we announced that the Bloom Lake Group commenced CCAA proceedings (the "Bloom Filing") with the Quebec Superior Court (Commercial Division) in Montreal (the "Montreal Court"). Effective January 27, 2015, following the Bloom Filing, we deconsolidated the Bloom Lake Group and certain other wholly-owned subsidiaries comprising substantially all of our Canadian operations. Additionally, on May 20, 2015, the Wabush Group commenced CCAA proceedings (the "Wabush Filing") in the Montreal Court, which resulted in the deconsolidation of the remaining Wabush Group entities that were not previously deconsolidated. Financial results prior to the respective deconsolidations of the Bloom Lake and Wabush Groups and subsequent expenses directly associated with the Canadian Entities are included in our financial statements and classified within discontinued operations.
Also, for the majority of 2015, we operated two metallurgical coal operations in Alabama and West Virginia. In December 2015, we completed the sale of these two metallurgical coal operations, which marked our exit from the coal business. 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. As such, all presented North American Coal operating segment results are included and classified within discontinued operations in our financial statements.
Refer to NOTE 14 - DISCONTINUED OPERATIONS for further discussion of the Eastern Canadian Iron Ore and North American Coal segments discontinued operations.
We report our results from continuing operations in two reportable segments: U.S. Iron Ore and Asia Pacific Iron Ore.
Basis of Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned and majority-owned subsidiaries, including the following operations as of March 31, 2016:
Name
 
Location
 
Ownership Interest
 
Operation
 
Status of Operations
Northshore
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
United Taconite
 
Minnesota
 
100.0%
 
Iron Ore
 
Active
Tilden
 
Michigan
 
85.0%
 
Iron Ore
 
Active
Empire
 
Michigan
 
79.0%
 
Iron Ore
 
Active
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
 
Active
Intercompany transactions and balances are eliminated upon consolidation.

7


Equity Method Investments
Our 23 percent ownership interest in Hibbing is recorded as an equity method investment. As of March 31, 2016 and December 31, 2015, our investment in Hibbing was $1.7 million and $2.4 million, respectively, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
Foreign Currency
Our financial statements are prepared with the U.S. dollar as the reporting currency. The functional currency of our Australian subsidiaries is the Australian dollar. The functional currency of all other international subsidiaries is the U.S. dollar. The financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as Accumulated other comprehensive loss. Income taxes generally are not provided for foreign currency translation adjustments. To the extent that monetary assets and liabilities, inclusive of intercompany notes, are recorded in a currency other than the functional currency, these amounts are remeasured each reporting period, with the resulting gain or loss being recorded in the Statements of Unaudited Condensed Consolidated Operations. Transaction gains and losses resulting from remeasurement of short-term intercompany loans are included in Miscellaneous - net in our Statements of Unaudited Condensed Consolidated Operations.
For the three months ended March 31, 2016, net losses of $1.2 million related to the impact of transaction gains and losses resulting from remeasurement. Of these amounts, for the three months ended March 31, 2016, gains of $0.8 million and losses of $2.4 million, respectively, resulted from remeasurement of cash and cash equivalents and remeasurement of certain obligations. For the three months ended March 31, 2015, net gains of $13.5 million related to the impact of transaction gains and losses resulting from remeasurement. Of these transaction gains, for the three months ended March 31, 2015, gains of $12.4 million and gains of $1.5 million, respectively, resulted from remeasurement of short-term intercompany loans and cash and cash equivalents.
Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended December 31, 2015 included in our Annual Report on Form 10-K filed with the SEC. There have been no material changes in our significant accounting policies and estimates from those disclosed therein.
Recent Accounting Pronouncements
Issued and Not Effective
     In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires recognition of lease assets and lease liabilities for leases previously classified as operating leases. The guidance is effective for fiscal years beginning after December 15, 2018. We are currently reviewing the guidance and assessing the impact on our consolidated financial statements.
     In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation - Improvements to Employee Share-Based Payment Accounting. The new standard is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance is effective for fiscal years beginning after December 15, 2016, and early adoption is permitted. We are currently reviewing the guidance and assessing the potential impact on our consolidated financial statements.
NOTE 2 - SEGMENT REPORTING
Our continuing operations are organized and managed according to geographic location: U.S. Iron Ore and Asia Pacific Iron Ore. The U.S. Iron Ore segment is comprised of our interests in five U.S. mines that provide iron ore to the integrated steel industry. The Asia Pacific Iron Ore segment is located in Western Australia and provides iron ore to the seaborne market for Asian steel producers. There were no intersegment revenues in the first three months of 2016 or 2015.
We have historically evaluated segment performance based on sales margin, defined as revenues less cost of goods sold, and operating expenses identifiable to each segment. Additionally, we evaluate segment performance based on EBITDA, defined as net income (loss) before interest, income taxes, depreciation, depletion and amortization, and Adjusted EBITDA, defined as EBITDA excluding certain items such as impacts of discontinued operations, extinguishment/restructuring of debt, severance and contractor termination costs, foreign currency remeasurement, and intersegment corporate allocations of SG&A costs. We use and believe that investors benefit from referring to these

8


measures in evaluating operating and financial results, as well as in planning, forecasting and analyzing future periods as these financial measures approximate the cash flows associated with the operational earnings.
The following tables present a summary of our reportable segments for the three months ended March 31, 2016 and 2015, including a reconciliation of segment sales margin to Income from Continuing Operations Before Income Taxes and a reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA:
 
(In Millions)
 
Three Months Ended
March 31,
 
2016
 
2015
Revenues from product sales and services:
 
 
 
 
 
 
 
U.S. Iron Ore
$
185.5

 
61
%
 
$
311.8

 
70
%
Asia Pacific Iron Ore
120.0

 
39
%
 
134.2

 
30
%
Total revenues from product sales and services
$
305.5

 
100
%
 
$
446.0

 
100
%
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
U.S. Iron Ore
$
13.2

 
 
 
$
80.0

 
 
Asia Pacific Iron Ore
17.7

 
 
 
0.8

 
 
Sales margin
30.9

 
 
 
80.8

 
 
Other operating expense
(31.2
)
 
 
 
(8.9
)
 
 
Other income
122.1

 
 
 
270.0

 
 
Income from continuing operations before income taxes
$
121.8

 
 
 
$
341.9

 
 

9


 
(In Millions)
 
Three Months Ended
March 31,
 
2016
 
2015
Net Income (Loss)
$
116.8

 
$
(761.7
)
Less:
 
 
 
Interest expense, net
(56.8
)
 
(44.2
)
Income tax expense
(7.6
)
 
(175.0
)
Depreciation, depletion and amortization
(35.2
)
 
(33.0
)
EBITDA
$
216.4

 
$
(509.5
)
Less:
 
 
 
Impact of discontinued operations
2.6

 
(929.6
)
Gain on extinguishment/restructuring of debt
178.8

 
313.7

Severance and contractor termination costs
(0.1
)
 
(1.5
)
Foreign exchange remeasurement
(1.2
)
 
13.5

Adjusted EBITDA
$
36.3

 
$
94.4

 
 
 
 
EBITDA:
 
 
 
U.S. Iron Ore
$
41.4

 
$
101.6

Asia Pacific Iron Ore
22.3

 
18.0

Other
152.7

 
(629.1
)
Total EBITDA
$
216.4

 
$
(509.5
)
 
 
 
 
Adjusted EBITDA:
 
 
 
U.S. Iron Ore
$
46.1

 
$
105.1

Asia Pacific Iron Ore
23.0

 
5.7

Other
(32.8
)
 
(16.4
)
Total Adjusted EBITDA
$
36.3

 
$
94.4

 
(In Millions)
 
Three Months Ended
March 31,
 
2016
 
2015
Depreciation, depletion and amortization:
 
 
 
U.S. Iron Ore
$
26.9

 
$
21.7

Asia Pacific Iron Ore
6.8

 
6.3

Other
1.5

 
1.8

Total depreciation, depletion and amortization
$
35.2

 
$
29.8

 
 
 
 
Capital additions1:
 
 
 
U.S. Iron Ore
$
4.5

 
$
9.5

Asia Pacific Iron Ore

 
3.4

Other
2.3

 
0.4

Total capital additions
$
6.8

 
$
13.3

                                         
1    Includes capital lease additions and non-cash accruals. Refer to NOTE 17 - CASH FLOW INFORMATION.

10


A summary of assets by segment is as follows:
 
(In Millions)
 
March 31,
2016
 
December 31,
2015
Assets:
 
 
 
U.S. Iron Ore
$
1,475.1

 
$
1,476.4

Asia Pacific Iron Ore
180.6

 
202.5

Total segment assets
1,655.7

 
1,678.9

Corporate
230.1

 
441.7

Assets of Discontinued Operations
0.5

 
14.9

Total assets
$
1,886.3

 
$
2,135.5

NOTE 3 - INVENTORIES
The following table presents the detail of our Inventories in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2016 and December 31, 2015:
 
(In Millions)
 
March 31, 2016
 
December 31, 2015
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
312.3

 
$
25.0

 
$
337.3

 
$
252.3

 
$
11.7

 
$
264.0

Asia Pacific Iron Ore
22.1

 
46.9

 
69.0

 
20.8

 
44.8

 
65.6

Total
$
334.4

 
$
71.9

 
$
406.3

 
$
273.1

 
$
56.5

 
$
329.6


11


NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the value of each of the major classes of our consolidated depreciable assets as of March 31, 2016 and December 31, 2015:
 
(In Millions)
 
March 31,
2016
 
December 31,
2015
Land rights and mineral rights
$
500.5

 
$
500.5

Office and information technology
57.9

 
71.0

Buildings
60.5

 
60.4

Mining equipment
597.4

 
594.0

Processing equipment
519.4

 
516.8

Electric power facilities
47.3

 
46.4

Land improvements
24.8

 
24.8

Asset retirement obligation
67.1

 
87.9

Other
29.2

 
28.2

Construction in-progress
42.9

 
40.3

 
1,947.0

 
1,970.3

Allowance for depreciation and depletion
(937.4
)
 
(911.3
)
 
$
1,009.6

 
$
1,059.0

We recorded depreciation and depletion expense of $33.8 million and $28.7 million in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2016 and March 31, 2015, respectively.
NOTE 5 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of March 31, 2016 and December 31, 2015:
($ in Millions)
 
March 31, 2016
 
Debt Instrument
 
Annual Effective Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Undiscounted Interest/(Unamortized Discounts)
 
Total Debt
 
$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
$
336.2

 
$
(1.3
)
 
$
(0.2
)
 
$
334.7

(1)
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
261.9

 
(0.9
)
 
(0.3
)
 
260.7

(2)
$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.6
)
 
(3.5
)
 
292.3

(3)
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
225.6

 
(0.7
)
 
(0.6
)
 
224.3

(4)
$500 Million 3.95% 2018 Senior Notes
 
6.12%
 
283.6

 
(0.8
)
 
(0.9
)
 
281.9

(5)
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
540.0

 
(9.8
)
 
(30.5
)
 
499.7

 
$218.5 Million 8.00% 2020 1.5 Lien Notes
 
N/A
 
218.5

 

 
78.8

 
297.3

(6)
$544.2 Million 7.75% 2020 Second Lien Notes
 
15.55%
 
430.1

 
(7.1
)
 
(99.5
)
 
323.5

(7)
$550 Million ABL Facility:
 
 
 
 
 
 
 
 
 
 
 
ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 

(8)
Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
2.2

 
Total debt
 
 
 
$
3,144.3

 
 
 
 
 
$
2,516.6

 
Less: Current portion
 
 
 
 
 
 
 
 
 
17.5

 
Long-term debt
 
 
 
 
 
 
 
 
 
$
2,499.1

 

12


($ in Millions)
 
December 31, 2015
 
Debt Instrument
 
Annual Effective Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
 
$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
$
412.5

 
$
(1.7
)
 
$
(0.2
)
 
$
410.6

 
$1.3 Billion Senior Notes:
 
 
 
 
 
 
 
 
 
 
 
$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
306.7

 
(1.1
)
 
(0.4
)
 
305.2

 
$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
492.8

 
(4.3
)
 
(5.8
)
 
482.7

 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
290.8

 
(1.1
)
 
(0.8
)
 
288.9

 
$500 Million 3.95% 2018 Senior Notes
 
6.30%
 
311.2

 
(0.9
)
 
(1.2
)
 
309.1

 
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
540.0

 
(10.5
)
 
(32.1
)
 
497.4

 
$544.2 Million 7.75% 2020 Second Lien Notes
 
15.55%
 
544.2

 
(9.5
)
 
(131.5
)
 
403.2

 
$550 Million ABL Facility:
 
 
 
 
 
 
 
 
 
 
 
ABL Facility
 
N/A
 
550.0

 
N/A
 
N/A
 

(9)
Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
2.3

 
Total debt
 
 
 
$
3,448.2

 
 
 
 
 
$
2,699.4

 
(1)
On March 2, 2016, we exchanged as part of an exchange offer $76.3 million of the 4.875 percent senior notes for $30.5 million of the 8.00 percent 1.5 lien notes that are recorded at a carrying value of $41.5 million, including undiscounted interest payments as of March 31, 2016.
(2)
On March 2, 2016, we exchanged as part of an exchange offer $44.7 million of the 4.80 percent senior notes for $17.9 million of the 8.00 percent 1.5 lien notes that are recorded at a carrying value of $24.4 million, including undiscounted interest payments as of March 31, 2016.
(3)
On March 2, 2016, we exchanged as part of an exchange offer $194.4 million of the 6.25 percent senior notes for $75.8 million of the 8.00 percent 1.5 lien notes that are recorded at a carrying value of $103.0 million, including undiscounted interest payments as of March 31, 2016.
(4)
On March 2, 2016, we exchanged as part of an exchange offer $65.1 million of the 5.90 percent senior notes for $26.0 million of the 8.00 percent 1.5 lien notes that are recorded at a carrying value of $35.4 million, including undiscounted interest payments as of March 31, 2016.
(5)
On March 2, 2016, we exchanged as part of an exchange offer $17.6 million of the 3.95 percent senior notes for $11.4 million of the 8.00 percent 1.5 lien notes that are recorded at a carrying value of $15.5 million, including undiscounted interest payments as of March 31, 2016. Additionally, during the first quarter of 2016 we entered into a debt for equity exchange, see NOTE 15 - CAPITAL STOCK for further discussion of this transaction.
(6)
See the section entitled "$218.5 million 8.00 percent 2020 Senior Secured 1.5 Lien Notes - 2016 Exchange Offers" below for further discussion related to this instrument. As of March 31, 2016, $17.5 million of the undiscounted interest is recorded as current and classified as Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position.
(7)
On March 2, 2016, we exchanged as part of an exchange offer $114.1 million of the 7.75 percent senior notes for $57.0 million of the 8.00 percent 1.5 lien notes that are recorded at a carrying value of $77.5 million, including undiscounted interest payments as of March 31, 2016.
(8)
As of March 31, 2016, no loans were drawn under the ABL Facility and we had total availability of $368.9 million as a result of borrowing base limitations. As of March 31, 2016, the principal amount of letter of credit obligations totaled $110.3 million, thereby further reducing available borrowing capacity on our ABL Facility to $258.6 million.

13


(9)
As of December 31, 2015, no loans were drawn under the ABL Facility and we had total availability of $366.0 million as a result of borrowing base limitations. As of December 31, 2015, the principal amount of letter of credit obligations totaled $186.3 million and commodity hedge obligations totaled $0.5 million, thereby further reducing available borrowing capacity on our ABL Facility to $179.2 million.
$218.5 million 8.00 percent 2020 Senior Secured 1.5 Lien Notes - 2016 Exchange Offers
On March 2, 2016, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee and notes collateral agent, relating to our issuance of $218.5 million aggregate principal amount of 8.00 percent 1.5 Lien Senior Secured Notes due 2020 (the “1.5 Lien Notes”). The 1.5 Lien Notes were issued on March 2, 2016 in exchange offers for certain of our existing senior notes.
The 1.5 Lien Notes bear interest at a rate of 8.00 percent per annum. Interest on the 1.5 Lien Notes is payable semi-annually in arrears on March 31 and September 30 of each year, commencing on September 30, 2016. The 1.5 Lien Notes mature on September 30, 2020 and are secured senior obligations of the Company.
The 1.5 Lien Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of our material U.S. subsidiaries and are secured (subject in each case to certain exceptions and permitted liens) on (i) a junior first-priority basis by substantially all of our U.S. assets, other than the ABL collateral (the "Notes Collateral"), which secures the 8.25 percent senior first lien notes due 2020 (the "First Lien Notes") obligations on a senior first-priority basis, the 7.75 percent senior second lien notes due 2020 (the "Second Lien Notes") obligations on a second-priority basis and the ABL Facility obligations on a third-priority basis, and (ii) a junior second-priority basis by our ABL collateral, which secures our ABL obligations on a first-priority basis, the First Lien Notes obligations on a senior second-priority basis and the Second Lien Notes obligations on a third-priority basis.
The terms of the 1.5 Lien Notes are governed by the 1.5 Lien Notes indenture. The 1.5 Lien Notes indenture contains customary covenants that, among other things, limit our ability to incur certain secured indebtedness, create liens on principal property and the capital stock or debt of a subsidiary that owns a principal property, use proceeds of dispositions of collateral, enter into certain sale and leaseback transactions, merge or consolidate with another company and transfer or sell all or substantially all of our assets. Upon the occurrence of a “change of control triggering event,” as defined in the 1.5 Lien Notes indenture, we are required to offer to repurchase the 1.5 Lien Notes at 101 percent of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem any of the 1.5 Lien Notes beginning on September 30, 2017. The initial redemption price is 104 percent of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The redemption price will decline after September 30, 2017 and will be 100 percent of its principal amount, plus accrued interest, beginning on September 30, 2019. We may also redeem some or all of the 1.5 Lien Notes at any time and from time to time prior to September 30, 2017 at a price equal to 100 percent of the principal amount thereof plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time and from time to time on or prior to September 30, 2017, we may redeem in the aggregate up to 35 percent of the original aggregate principal amount of the 1.5 Lien Notes (calculated after giving effect to any issuance of additional 1.5 Lien Notes) with the net cash proceeds from certain equity offerings, at a redemption price of 108 percent, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, so long as at least 65 percent of the original aggregate principal amount of the 1.5 Lien Notes (calculated after giving effect to any issuance of additional 1.5 Lien Notes) issued under the 1.5 Lien Notes indenture remain outstanding after each such redemption.
The 1.5 Lien Notes indenture contains customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to pay or acceleration of certain other indebtedness, certain events of bankruptcy and insolvency and failure to pay certain judgments. An event of default under the 1.5 Lien Notes indenture will allow either the trustee or the holders of at least 25 percent in aggregate principal amount of the then-outstanding 1.5 Lien Notes issued under the 1.5 Lien Notes indenture to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the 1.5 Lien Notes.
We accounted for the 1.5 Lien Notes exchange as a TDR. For an exchange classified as TDR, if the future undiscounted cash flows of the newly issued debt are less than the net carrying value of the original debt, the carrying value of the newly issued debt is adjusted to the future undiscounted cash flow amount, a gain is recorded for the difference and no future interest expense is recorded. All future interest payments on the newly issued debt reduce the carrying value.  Accordingly, we recognized a gain of $174.3 million in the Gain on extinguishment/restructuring of debt in the Statements of Unaudited Condensed Consolidated Operations. As a result, our reported interest expense will be less than the contractual interest payments throughout the term of the 1.5 Lien Notes. Debt issuance costs

14


incurred of $5.2 million related to the notes exchange were expensed and were included in the Gain on extinguishment/restructuring of debt in the Statements of Unaudited Condensed Consolidated Operations as of March 31, 2016.
Letters of Credit
We issued standby letters of credit with certain financial institutions in order to support business obligations including, but not limited to, workers compensation and environmental obligations. As of March 31, 2016 and December 31, 2015, these letter of credit obligations totaled $110.3 million and $186.3 million, respectively.
Debt Maturities
The following represents a summary of our maturities of debt instruments, excluding borrowings on the ABL Facility, based on the principal amounts outstanding at March 31, 2016:
 
(In Millions)
 
Maturities of Debt
2016 (April 1 - December 31)
$

2017

2018
283.6

2019

2020
1,676.1

2021
336.2

2022 and thereafter
298.4

Total maturities of debt
$
2,594.3

NOTE 6 - FAIR VALUE MEASUREMENTS
We have various financial instruments that require fair value measurements classified as Level 1, Level 2 and Level 3 of the fair value hierarchy. The following discussion represents the assets and liabilities measured at fair value at March 31, 2016 and December 31, 2015.
There were no Level 1 financial assets as of March 31, 2016. Financial assets classified in Level 1 as of December 31, 2015, include money market funds of $30.0 million. The valuation of these instruments is based upon unadjusted quoted prices for identical assets in active markets.
The derivative financial assets classified within Level 3 at March 31, 2016 and December 31, 2015 primarily relate to 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 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, 2016 and December 31, 2015. These provisional pricing arrangements 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 at the date of sale and the estimated final revenue rate 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 revenue rate is determined.

15


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 March 31, 2016
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate per dry metric ton
(Weighted Average)
 
Provisional Pricing Arrangements
 
$
3.3

 
Other current assets
 
Market Approach
 
Management's
Estimate of 62% Fe
 
$54
 
$
6.2

 
Other current liabilities
 
 
 
Customer Supply Agreement
 
$
5.7

 
Other current assets
 
Market Approach
 
Hot-Rolled Steel Estimate
 
$405 - $450 ($430)
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 fines spot 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 agreement is the future hot-rolled steel price that is estimated based on projections provided by the customer, current market data, analysts' projections 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.
We recognize any transfers between levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2016 or 2015. 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) for the three months ended March 31, 2016 and 2015.
 
(In Millions)
 
Derivative Assets (Level 3)
 
Three Months Ended
March 31,
 
2016
 
2015
Beginning balance
$
7.8

 
$
63.2

Total gains (losses)
 
 
 
Included in earnings
11.2

 
10.1

Settlements
(10.0
)
 
(38.8
)
Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance - March 31
$
9.0

 
$
34.5

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
3.6

 
$
10.1


16


 
(In Millions)
 
Derivative Liabilities (Level 3)
 
Three Months Ended
March 31,
 
2016
 
2015
Beginning balance
$
(3.4
)
 
$
(9.5
)
Total gains (losses)
 
 
 
Included in earnings
(5.6
)
 
(16.2
)
Settlements
2.8

 
9.5

Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance - March 31
$
(6.2
)
 
$
(16.2
)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
(4.4
)
 
$
(16.2
)
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, 2016 and 2015.
The carrying amount for certain financial instruments (e.g., Accounts receivable, net, Accounts payable and Accrued expenses) approximates fair value and, therefore, has been excluded from the table below. A summary of the carrying amount and fair value of other financial instruments at March 31, 2016 and December 31, 2015 were as follows:
 
 
 
(In Millions)
 
 
 
March 31, 2016
 
December 31, 2015
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Senior Notes—$700 million
Level 1
 
$
334.7

 
$
98.0

 
$
410.6

 
$
69.4

Senior Notes—$1.3 billion
Level 1
 
553.0

 
165.2

 
787.9

 
137.4

Senior Notes—$400 million
Level 1
 
224.3

 
70.2

 
288.9

 
52.8

Senior Notes—$500 million
Level 1
 
281.9

 
138.0

 
309.1

 
87.1

Senior First Lien Notes —$540 million
Level 1
 
499.7

 
466.9

 
497.4

 
414.5

Senior 1.5 Lien Notes —$218.5 million
Level 2
 
297.3

 
94.0

 

 

Senior Second Lien Notes —$544.2 million
Level 1
 
323.5

 
141.9

 
403.2

 
134.7

ABL Facility
Level 2
 

 

 

 

Fair value adjustment to interest rate hedge
Level 2
 
2.2

 
2.2

 
2.3

 
2.3

Total long-term debt
 
 
$
2,516.6

 
$
1,176.4

 
$
2,699.4

 
$
898.2

The fair value of long-term debt was determined using quoted market prices based upon current borrowing rates. The ABL Facility is variable rate interest and approximates fair value. See NOTE 5 - DEBT AND CREDIT FACILITIES for further information.

17


NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and other postretirement benefit plans, primarily consisting of retiree healthcare benefits, to most employees in the United States as part of a total compensation and benefits program. We do not have employee retirement benefit obligations at our Asia Pacific Iron Ore operations. The defined benefit pension plans largely are noncontributory and benefits generally are based on employees’ years of service and average earnings for a defined period prior to retirement or a minimum formula.
Historically, we selected a single-weighted discount rate to be used for all pension and other postretirement benefit plans based on the 10th to 90th percentile results. Beginning January 1, 2016, we elected to select a separate discount rate for each plan, based on 40th to 90th percentile results. The discount rates are determined by matching the projected cash flows used to determine the projected benefit obligation and accumulated postretirement benefit obligation to a projected yield curve of 688 Aa graded bonds. These bonds are either noncallable or callable with make-whole provisions. We made this change in order to more precisely measure our service and interest costs, by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates.  As this change is treated as a change in estimate, the impact is reflected in the first quarter of the current fiscal year and prospectively, and historical measurements of service and interest cost were not affected.
This change in estimate is anticipated to reduce our current year annual net periodic benefit expense by approximately $8.4 million for our pension plans and by approximately $2.3 million for our other postretirement benefit plans. Accordingly, for the quarter ended March 31, 2016, total service cost and interest cost for the defined benefit pension and other postretirement benefit plans were $12.0 million and $2.7 million, respectively, a reduction of $2.1 million and $0.6 million, respectively, as a result of implementing the new approach.
The following are the components of defined benefit pension and OPEB expense for the three months ended March 31, 2016 and 2015:
Defined Benefit Pension Expense
 
(In Millions)
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Service cost
 
$
4.5

 
$
6.3

Interest cost
 
7.5

 
9.4

Expected return on plan assets
 
(13.7
)
 
(14.9
)
Amortization:
 
 
 
 
Prior service costs
 
0.5

 
0.6

Net actuarial loss
 
5.3

 
5.4

    Curtailments/settlements
 

 
0.3

Net periodic benefit cost to continuing operations
 
$
4.1

 
$
7.1


18


Other Postretirement Benefits Expense
 
(In Millions)
 
Three Months Ended
March 31,
 
2016
 
2015
Service cost
$
0.4

 
$
1.5

Interest cost
2.3

 
3.3

Expected return on plan assets
(4.3
)
 
(4.6
)
Amortization:
 
 
 
Prior service credits
(0.9
)
 
(0.9
)
Net actuarial loss
1.4

 
3.1

Net periodic benefit cost to continuing operations
$
(1.1
)
 
$
2.4

We made pension contributions of $0.3 million for the three months ended March 31, 2016, compared to pension contributions of $3.9 million for the three months ended March 31, 2015. OPEB contributions are typically made on an annual basis in the first quarter of each year, but due to plan funding requirements being met, no OPEB contributions were required or made for the three months ended March 31, 2016 and March 31, 2015.
NOTE 8 - STOCK COMPENSATION PLANS
Employees’ Plans
During the first quarter of 2016, the Compensation and Organization Committee of the Board of Directors approved grants under the 2015 Equity Plan of 3.4 million restricted share units to certain officers and employees with a grant date of February 23, 2016. The restricted share units granted under this award are subject to continued employment through the vesting date of December 31, 2018.
NOTE 9 - INCOME TAXES
Our 2016 estimated annual effective tax rate before discrete items is approximately 6.8 percent. The annual effective tax rate differs from the U.S. statutory rate of 35 percent primarily due to deductions for percentage depletion in excess of cost depletion related to U.S. operations and the placement of valuation allowances against deferred tax assets generated in the current year. A comparable annual effective tax rate has not been provided for the three months ended 2015 as our loss for the three months ended March 31, 2015 exceeded the anticipated ordinary loss for the full year and, therefore, our tax expense recorded was calculated using actual year-to-date amounts rather than an estimated annual effective tax rate.
There were discrete items booked in the first quarter of 2016 of approximately $0.2 million. These adjustments relate primarily to quarterly interest accrued on reserves for uncertain tax positions. There were discrete items booked in the first three months of 2015 of approximately $167.5 million. These items were largely related to the recording of valuation allowances against existing deferred tax assets as a result of the determination that these would no longer be realizable.

19


NOTE 10 - LEASE OBLIGATIONS
We lease certain mining, production and other equipment under operating and capital leases. The leases are for varying lengths, generally at market interest rates and contain purchase and/or renewal options at the end of the terms. Our operating lease expense was $2.4 million for the three months ended March 31, 2016, compared with $4.3 million for the same period in 2015.
Future minimum payments under capital leases and non-cancellable operating leases at March 31, 2016 are as follows:
 
(In Millions)
 
Capital Leases
 
Operating Leases
2016 (April 1 - December 31)
$
19.1

 
$
5.9

2017
23.3

 
7.3

2018
18.9

 
6.6

2019
10.4

 
4.8

2020
9.5

 
4.9

2021 and thereafter
9.5

 
5.0

Total minimum lease payments
$
90.7

 
$
34.5

Amounts representing interest
17.5

 
 
Present value of net minimum lease payments
$
73.2

(1) 
 
(1) 
The total is comprised of $18.9 million and $54.3 million classified as Other current liabilities and Other liabilities, respectively, in the Statements of Unaudited Condensed Consolidated Financial Position at March 31, 2016.
NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $216.9 million and $234.0 million at March 31, 2016 and December 31, 2015, respectively. The following is a summary of the obligations as of March 31, 2016 and December 31, 2015:
 
(In Millions)
 
March 31,
2016
 
December 31,
2015
Environmental
$
3.5

 
$
3.6

Mine closure
 
 
 
LTVSMC
24.5

 
24.1

Operating mines:
 
 
 
U.S. Iron Ore
171.4

 
189.9

Asia Pacific Iron Ore
17.5

 
16.4

Total mine closure
213.4

 
230.4

Total environmental and mine closure obligations
216.9

 
234.0

Less current portion
2.6

 
2.8

Long term environmental and mine closure obligations
$
214.3

 
$
231.2

Mine Closure
The accrued closure obligation for our active mining operations provides for contractual and legal obligations associated with the eventual closure of the mining operations. The accretion of the liability and amortization of the related asset is recognized over the estimated mine lives for each location.

20


The following represents a rollforward of our asset retirement obligation liability related to our active mining locations for the three months ended March 31, 2016 and for the year ended December 31, 2015:
 
(In Millions)
 
March 31,
2016
 
December 31,
2015 (1)
Asset retirement obligation at beginning of period
$
206.3

 
$
142.4

Accretion expense
2.5

 
6.5

Exchange rate changes
0.9

 
(1.1
)
Revision in estimated cash flows
(20.8
)
 
58.5

Asset retirement obligation at end of period
$
188.9

 
$
206.3

(1) Represents a 12-month rollforward of our asset retirement obligation at December 31, 2015.
The revisions in the estimated cash flows recorded during the three months ended March 31, 2016 relate primarily to revisions of the timing of the estimated cash flows related to one of our U.S. mines. For the year ended December 31, 2015, the revisions in estimated cash flows recorded during the year related primarily to revisions in the timing of the estimated cash flows and the technology associated with required storm water management systems expected to be implemented subsequent to the indefinite idling of one of our U.S. Iron Ore mines.
NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS AND LIABILITIES
Goodwill
The carrying amount of goodwill for the three months ended March 31, 2016 and the year ended December 31, 2015 was $2.0 million and related to our U.S. Iron Ore operating segment.
Other Intangible Assets and Liabilities
The following table is a summary of intangible assets and liabilities as of March 31, 2016 and December 31, 2015:
 
 
 
(In Millions)
 
 
 
March 31, 2016
 
December 31, 2015
 
Classification
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Permits
Other non-current assets
 
$
78.7

 
$
(21.6
)
 
$
57.1

 
$
78.4

 
$
(20.2
)
 
$
58.2

Total intangible assets
 
 
$
78.7

 
$
(21.6
)
 
$
57.1

 
$
78.4

 
$
(20.2
)
 
$
58.2

Below-market sales contracts
Other current liabilities
 
$
(23.1
)
 
$

 
$
(23.1
)
 
$
(23.1
)
 
$

 
$
(23.1
)
Below-market sales contracts
Other liabilities
 
(205.8
)
 
205.8

 

 
(205.8
)
 
205.8

 

Total below-market sales contracts
 
 
$
(228.9
)
 
$
205.8

 
$
(23.1
)
 
$
(228.9
)
 
$
205.8

 
$
(23.1
)

21


Amortization expense relating to intangible assets was $1.4 million for the three months ended March 31, 2016 and is recognized in Cost of goods sold and operating expenses in the Statements of Unaudited Condensed Consolidated Operations. Amortization expense relating to intangible assets was $1.1 million for the comparable period in 2015. The estimated amortization expense relating to intangible assets for the remainder of this year and each of the five succeeding years is as follows:

(In Millions)

Amount
Year Ending December 31,

2016 (remaining nine months)
$
3.2

2017
5.5

2018
2.5

2019
2.5

2020
2.5

2021
2.5

Total
$
18.7

The below-market sales contract is classified as a liability and recognized over the term of the underlying contract, which expires December 31, 2016. For the three months ended March 31, 2016 and March 31, 2015, there were no Product revenues related to the below-market sales contract due to the timing of the Great Lakes shipping season. The remaining $23.1 million is estimated to be recognized in Product revenues during the remainder of 2016.
NOTE 13 - DERIVATIVE INSTRUMENTS
The following table presents the fair value of our derivative instruments and the classification of each in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2016 and December 31, 2015:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
Derivative Instrument
Balance Sheet Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Commodity Contracts
 
 

 
 
 

 
 
 
$
0.2

 
Other current liabilities
 
$
0.6

Customer Supply Agreement
Other current assets
 
5.7

 
Other current assets
 
5.8

 
 
 

 
 
 

Provisional Pricing Arrangements
Other current assets
 
3.3

 
Other current assets
 
2.0

 
Other current liabilities
 
6.2

 
Other current liabilities
 
3.4

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
9.0

 
 
 
$
7.8

 
 
 
$
6.4

 
 
 
$
4.0

Derivatives Not Designated as Hedging Instruments
Customer Supply Agreements
Most of our U.S. Iron Ore long-term supply agreements are comprised of a base price with annual price adjustment factors. The base price is the primary component of the purchase price for each contract. The indexed price adjustment factors are integral to the iron ore supply contracts and vary based on the agreement, but typically include adjustments based upon changes in specified price indices, including those for industrial commodities, energy and cold rolled steel and changes in the Platts IODEX. 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. In most cases, these adjustment factors have not been finalized at the time our product is sold. In these cases, we historically have estimated the adjustment factors at each reporting period based upon the best third-party information available. The estimates are then adjusted to actual when the information has been finalized.

22


The price adjustment factors have been evaluated to determine if they contain embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host contract and are integral to the host contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments. Certain of our term supply agreements contain price collars, which typically limit the percentage increase or decrease in prices for our products during any given year.
A certain supply agreement with one U.S. Iron Ore customer provides for supplemental revenue or refunds to the customer based on the customer’s average annual steel pricing at the time the 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 the product is shipped. The derivative instrument, which is finalized based on a future price, is adjusted to fair value as a revenue adjustment each reporting period until the pellets are consumed and the amounts are settled.
We recognized a $0.1 million net loss in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2016, related to the supplemental payments. This compares with Product revenues of $10.1 million for the comparable period in 2015. Other current assets, representing the fair value of the pricing factors, were $5.7 million and $5.8 million in the March 31, 2016 and December 31, 2015 Statements of Unaudited Condensed Consolidated Financial Position, respectively.
Provisional Pricing Arrangements
Certain of our U.S. Iron Ore and Asia Pacific Iron Ore customer supply agreements 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 period in time in the future, per the terms of the supply agreements. U.S. Iron Ore sales revenue is primarily recognized when cash is received.  For U.S. Iron Ore sales, the difference between the provisionally agreed-upon price and the estimated final revenue rate is characterized as a freestanding derivative and must be accounted for separately once the provisional revenue has been recognized.  Asia Pacific Iron Ore sales revenue is initially recorded at the provisionally agreed-upon price with the pricing provision embedded in the receivable.  The pricing provision is an embedded derivative that must be bifurcated and accounted for separately from the receivable.  Subsequently, the derivative instruments for both U.S. Iron Ore and Asia Pacific Iron Ore are 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 revenue rate is determined. At March 31, 2016 and December 31, 2015, we recorded $3.3 million and $2.0 million, respectively, as Other current assets in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of the final revenue rate with our Asia Pacific Iron Ore customers. At March 31, 2016 and December 31, 2015, we recorded $6.2 million and $3.4 million, respectively, as Other current liabilities in the Statements of Unaudited Condensed Consolidated Financial Position related to our estimate of the final revenue rate with our U.S. Iron Ore and Asia Pacific Iron Ore customers. These 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. As a result, we recognized a net $1.5 million decrease and $16.2 million decrease in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2016 and March 31, 2015, respectively, related to these arrangements.

23


The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2016 and 2015:
(In Millions)
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in
Income on Derivative
Amount of Gain (Loss) Recognized in Income on Derivative
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Customer Supply Agreement
Product revenues
(0.1
)
 
10.1

Provisional Pricing Arrangements
Product revenues
(1.5
)
 
(16.2
)
Foreign Exchange Contracts
Other non-operating income (expense)

 
(5.9
)
Commodity Contracts
Cost of goods sold and operating expenses

 
(3.6
)
 
 
$
(1.6
)
 
$
(15.6
)
                                                                     
Refer to NOTE 6 - FAIR VALUE MEASUREMENTS for additional information.
NOTE 14 - DISCONTINUED OPERATIONS
The information below sets forth selected financial information related to operating results of our businesses classified as discontinued operations which include our former North American Coal and Canadian 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 of Discontinued Operations
Statements of Unaudited Condensed Consolidated Operations
Income (Loss) from Discontinued Operations, net of tax
YTD
March, 2016
$
(1.3
)
 
$
3.8

$

$
3.8

 
$
2.5

Income (Loss) from Discontinued Operations, net of tax
YTD
March 31, 2015
$
(75.7
)
 
$
(852.7
)
$
(0.1
)
$
(852.8
)
 
$
(928.5
)
 
 
 
 
 
 
 
 
 
Statements of Unaudited Condensed Consolidated Financial Position
Short-term assets of discontinued operations
As of
March 31, 2016
$
0.5

 
$

$

$

 
$
0.5

Short-term liabilities of discontinued operations
As of
March 31, 2016
$
4.3

 
$

$

$

 
$
4.3

Short-term assets of discontinued operations
As of
December 31, 2015
$
14.9

 
$

$

$

 
$
14.9

Short-term liabilities of discontinued operations
As of
December 31, 2015
$
6.9

 
$

$

$

 
$
6.9

 
 
 
 
 
 
 
 
 
Non-Cash Operating and Investing Activities
Depreciation, depletion and amortization:
YTD
March 31, 2015
$
3.2

 
$

$

$

 
$
3.2

Purchase of property, plant and equipment
YTD
March 31, 2015
$
2.5

 
$

$

$

 
$
2.5

Impairment of long-lived assets
YTD
March 31, 2015
$
73.4

 
$

$

$

 
$
73.4


24


North American Coal Operations
Loss on Discontinued Operations
Our previously reported North American Coal operating segment results are classified as discontinued operations for all periods presented. The closing of the sale of our Oak Grove and Pinnacle mines on December 22, 2015, completed a strategic shift in our business.
 
 
(In Millions)
 
 
Three Months Ended
March 31,
Loss from Discontinued Operations
 
2016
 
2015
Revenues from product sales and services
 
$

 
$
116.6

Cost of goods sold and operating expenses
 

 
(107.3
)
Sales margin
 

 
9.3

Other operating expense
 
(1.2
)
 
(11.3
)
Other expense
 

 
(0.4
)
Loss from discontinued operations before income taxes
 
(1.2
)
 
(2.4
)
Impairment of long-lived assets
 

 
(73.4
)
Income tax benefit (expense)
 
(0.1
)
 
0.1

Loss from discontinued operations, net of tax
 
$
(1.3
)
 
$
(75.7
)
Recorded Assets and Liabilities
 
 
(In Millions)
Assets and Liabilities of Discontinued Operations(1)
 
March 31,
2016
 
December 31,
2015
Other current assets
 
$
0.5

 
$
14.9

Total assets of discontinued operations
 
$
0.5

 
$
14.9

 
 
 
 
 
Accrued liabilities
 
$
0.1

 
$

Other current liabilities(1)
 
4.2

 
6.9

Total liabilities of discontinued operations
 
$
4.3

 
$
6.9

(1) At March 31, 2016 and December 31, 2015, we had $6.8 million and $7.8 million, respectively, of contingent liabilities associated with our exit from the coal business recorded on our parent company.
Income Taxes
We have recognized a tax expense of $0.1 million and a tax benefit of $0.1 million for the three months ended March 31, 2016 and March 31, 2015, respectively, in Income (Loss) from Discontinued Operations, net of tax, related to our North American Coal investments.
Canadian Operations
Status of CCAA Proceedings
On March 8, 2016, certain of the Canadian Entities completed the sale of their port and rail assets located in Pointe-Noire, Quebec to Societe Ferroviaire et Portuaire de Pointe-Noire S.E.C., an affiliate of Investissement Quebec, for CAD$66.75 million in cash and the assumption of certain liabilities.
On April 11, 2016, certain of the Canadian Entities completed the sale of the Bloom Lake Mine and Labrador Trough South mineral claims located in Quebec, as well as certain rail assets located in Newfoundland & Labrador, to Quebec Iron Ore Inc., an affiliate of Champion Iron Mines Limited, for CAD$10.5 million in cash and the assumption of certain liabilities.

25


After payment of sale expenses and taxes and repayment of the DIP financing, the net proceeds from these and certain other divestitures by the Canadian Entities are currently being held by the Monitor, on behalf of the Canadian Entities, to fund the costs of the CCAA proceedings and for eventual distribution to creditors of the Canadian Entities pending further order of the Montreal Court.

Gain (Loss) on Discontinued Operations
Our decision to exit Canada represented 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)
 
 
Three Months Ended
March 31,
Gain (Loss) from Discontinued Operations
 
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
 

 
(33.3
)
Other expense
 

 
(1.0
)
Loss from discontinued operations before income taxes
 

 
(34.1
)
Gain (loss) from deconsolidation
 
3.8

 
(818.7
)