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EX-95 - EXHIBIT 95 - CLEVELAND-CLIFFS INC.clf-2017331ex95.htm
EX-32.2 - EXHIBIT 32.2 - CLEVELAND-CLIFFS INC.clf-2017331ex322.htm
EX-32.1 - EXHIBIT 32.1 - CLEVELAND-CLIFFS INC.clf-2017331ex321.htm
EX-31.2 - EXHIBIT 31.2 - CLEVELAND-CLIFFS INC.clf-2017331ex312.htm
EX-31.1 - EXHIBIT 31.1 - CLEVELAND-CLIFFS INC.clf-2017331ex311.htm
EX-4.2 - EXHIBIT 4.2 - CLEVELAND-CLIFFS INC.clf-2017331ex42.htm
EX-4.1 - EXHIBIT 4.1 - CLEVELAND-CLIFFS INC.clf-2017331ex41.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
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
clf-logoa01a01a06.jpg
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                                           NO  
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                                           NO  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES                                           NO  
The number of shares outstanding of the registrant’s common shares, par value $0.125 per share, was 296,401,897 as of April 24, 2017.




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, 2017 and December 31, 2016
 
 
 
 
Statements of Unaudited Condensed Consolidated Operations for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
Statements of Unaudited Condensed Consolidated Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
Statements of Unaudited Condensed Consolidated Cash Flows for the Three Months Ended March 31, 2017 and 2016
 
 
 
 
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, as amended
ArcelorMittal
 
ArcelorMittal (as the parent company of ArcelorMittal Mines Canada, ArcelorMittal USA and ArcelorMittal Dofasco, as well as, many other subsidiaries)
ALJ
 
Administrative Law Judge
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)
Dodd-Frank Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
EAF
 
Electric Arc Furnace
EBITDA
 
Earnings before interest, taxes, depreciation and amortization
Empire
 
Empire Iron Mining Partnership
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
Fe
 
Iron
FERC
 
Federal Energy Regulatory Commission
FMSH Act
 
U.S. Federal Mine Safety and Health Act 1977, as amended
GAAP
 
Accounting principles generally accepted in the United States
Hibbing
 
Hibbing Taconite Company, an unincorporated joint venture
Koolyanobbing
 
Collective term for the operating deposits at Koolyanobbing, Mount Jackson and Windarling
LTVSMC
 
LTV Steel Mining Company
MISO
 
Midcontinent Independent System Operator, Inc.
MMBtu
 
Million British Thermal Units
MSHA
 
U.S. Mine Safety and Health Administration
Monitor
 
FTI Consulting Canada Inc.
Northshore
 
Northshore Mining Company
OPEB
 
Other postretirement employment benefits
Platts 62% Price
 
Platts IODEX 62% Fe Fines Spot Price
SEC
 
U.S. Securities and Exchange Commission
SG&A
 
Selling, general and administrative
Securities Act
 
Securities Act of 1933, as amended
SSR
 
System Support Resource
Tilden
 
Tilden Mining Company L.C.
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,
2017
 
December 31,
2016
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
295.3

 
$
323.4

Accounts receivable, net
61.1

 
128.7

Inventories
250.8

 
178.4

Supplies and other inventories
80.4

 
91.4

Loans to and accounts receivable from the Canadian Entities
49.0

 
48.6

Other current assets
76.6

 
54.1

TOTAL CURRENT ASSETS
813.2

 
824.6

PROPERTY, PLANT AND EQUIPMENT, NET
995.0

 
984.4

OTHER NON-CURRENT ASSETS
117.5

 
114.9

TOTAL ASSETS
$
1,925.7

 
$
1,923.9

(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,
2017
 
December 31,
2016
LIABILITIES
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
91.1

 
$
107.6

Accrued expenses
102.9

 
123.3

Accrued interest
19.7

 
40.2

Other current liabilities
95.6

 
120.0

TOTAL CURRENT LIABILITIES
309.3

 
391.1

PENSION AND POSTEMPLOYMENT BENEFIT LIABILITIES
279.1

 
280.5

ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
198.2

 
193.9

LONG-TERM DEBT
1,642.9

 
2,175.1

OTHER LIABILITIES
199.2

 
213.8

TOTAL LIABILITIES
2,628.7

 
3,254.4

COMMITMENTS AND CONTINGENCIES (SEE NOTE 18)

 

EQUITY
 
 
 
CLIFFS SHAREHOLDERS' DEFICIT
 
 
 
Preferred Stock - no par value
 
 
 
Class A - 3,000,000 shares authorized
 
 
 
Class B - 4,000,000 shares authorized
 
 
 
Common Shares - par value $0.125 per share
 
 
 
Authorized - 400,000,000 shares (2016 - 400,000,000 shares);
 
 
 
Issued - 301,886,794 shares (2016 - 238,636,794 shares);
 
 
 
Outstanding - 296,398,149 shares (2016 - 233,074,091 shares)
37.7

 
29.8

Capital in excess of par value of shares
4,000.1

 
3,347.0

Retained deficit
(4,602.4
)
 
(4,574.3
)
Cost of 5,488,645 common shares in treasury (2016 - 5,562,703 shares)
(241.2
)
 
(245.5
)
Accumulated other comprehensive loss
(24.3
)
 
(21.3
)
TOTAL CLIFFS SHAREHOLDERS' DEFICIT
(830.1
)
 
(1,464.3
)
NONCONTROLLING INTEREST
127.1

 
133.8

TOTAL DEFICIT
(703.0
)
 
(1,330.5
)
TOTAL LIABILITIES AND DEFICIT
$
1,925.7

 
$
1,923.9

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,
 
2017
 
2016
REVENUES FROM PRODUCT SALES AND SERVICES
 
 
 
Product
$
412.8

 
$
275.6

Freight and venture partners' cost reimbursements
48.8

 
29.9


461.6

 
305.5

COST OF GOODS SOLD AND OPERATING EXPENSES
(365.9
)
 
(274.6
)
SALES MARGIN
95.7

 
30.9

OTHER OPERATING INCOME (EXPENSE)
 
 
 
Selling, general and administrative expenses
(25.7
)
 
(28.2
)
Miscellaneous - net
11.9

 
(3.0
)
 
(13.8
)
 
(31.2
)
OPERATING INCOME (EXPENSE)
81.9

 
(0.3
)
OTHER INCOME (EXPENSE)
 
 
 
Interest expense, net
(42.8
)
 
(56.8
)
Gain (loss) on extinguishment/restructuring of debt
(71.9
)
 
178.8

Other non-operating income
0.7

 
0.1

 
(114.0
)
 
122.1

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(32.1
)
 
121.8

INCOME TAX BENEFIT (EXPENSE)
1.8

 
(7.5
)
INCOME (LOSS) FROM CONTINUING OPERATIONS
(30.3
)
 
114.3

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
0.5

 
2.5

NET INCOME (LOSS)
(29.8
)
 
116.8

LOSS (INCOME) ATTRIBUTABLE TO NONCONTROLLING INTEREST
1.7

 
(8.8
)
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
(28.1
)
 
$
108.0

EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - BASIC
 
 
 
Continuing operations
$
(0.11
)
 
$
0.61

Discontinued operations

 
0.01

 
$
(0.11
)
 
$
0.62

EARNINGS (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CLIFFS SHAREHOLDERS - DILUTED
 
 
 
Continuing operations
$
(0.11
)
 
$
0.61

Discontinued operations

 
0.01

 
$
(0.11
)
 
$
0.62

AVERAGE NUMBER OF SHARES (IN THOUSANDS)
 
 
 
Basic
265,164

 
171,677

Diluted
265,164

 
171,962

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,
 
2017
 
2016
NET INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
(28.1
)
 
$
108.0

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Changes in pension and other post-retirement benefits, net of tax
4.7

 
5.4

Unrealized net gain (loss) on foreign currency translation
(12.7
)
 
4.4

Unrealized net loss on derivative financial instruments, net of tax

 
(3.5
)
OTHER COMPREHENSIVE INCOME (LOSS)
(8.0
)
 
6.3

OTHER COMPREHENSIVE LOSS (INCOME) ATTRIBUTABLE TO THE NONCONTROLLING INTEREST
5.0

 
(0.6
)
TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CLIFFS SHAREHOLDERS
$
(31.1
)
 
$
113.7

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,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(29.8
)
 
$
116.8

Adjustments to reconcile net income (loss) to net cash used by operating activities:
 
 
 
Depreciation, depletion and amortization
23.2

 
35.2

(Gain) loss on extinguishment/restructuring of debt
71.9

 
(178.8
)
Other
(16.9
)
 
14.7

Changes in operating assets and liabilities:
 
 
 
Receivables and other assets
86.5

 
38.5

Inventories
(70.0
)
 
(66.1
)
Payables, accrued expenses and other liabilities
(90.0
)
 
(86.8
)
Net cash used by operating activities
(25.1
)
 
(126.5
)
INVESTING ACTIVITIES
 
 
 
Purchase of property, plant and equipment
(27.9
)
 
(10.4
)
Other investing activities
0.5

 
5.5

Net cash used by investing activities
(27.4
)
 
(4.9
)
FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of senior notes
500.0

 

Debt issuance costs
(8.5
)
 
(5.2
)
Net proceeds from issuance of common shares
661.3

 

Repurchase of debt
(1,115.5
)
 

Distributions of partnership equity
(8.7
)
 
(11.1
)
Repayment of equipment loans

 
(72.9
)
Other financing activities
(5.6
)
 
(4.2
)
Net cash provided (used) by financing activities
23.0

 
(93.4
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
1.4

 
(0.5
)
DECREASE IN CASH AND CASH EQUIVALENTS
(28.1
)
 
(225.3
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
323.4

 
285.2

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
295.3

 
$
59.9

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

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 (loss) 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, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017 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, 2016.
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, 2017:
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
 
Indefinitely Idled
Koolyanobbing
 
Western Australia
 
100.0%
 
Iron Ore
 
Active
Intercompany transactions and balances are eliminated upon consolidation.
Equity Method Investments
Our 23% ownership interest in Hibbing is recorded as an equity method investment. As of March 31, 2017 and December 31, 2016, our investment in Hibbing was $6.2 million and $8.7 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 short-term and certain long-term intercompany loans, 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 the Statements of Unaudited Condensed Consolidated Operations.

7


The following represents the transaction gains and losses resulting from remeasurement for the three months ended March 31, 2017 and 2016:
 
 
(In Millions)
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Remeasurement of intercompany loans
 
$
15.1

 
$
0.4

Remeasurement of cash and cash equivalents
 
(1.2
)
 
0.8

Other remeasurement
 
(0.3
)
 
(2.4
)
Net impact of transaction gains and (losses) resulting from remeasurement
 
13.6

 
(1.2
)
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, 2016 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 March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715). The new standard requires the service cost component of pension and other postretirement benefit expenses to be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of net benefit cost as defined by paragraphs 715-30-35-4 and 715-60-35-9 to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The guidance is effective for fiscal years beginning after December 15, 2017, and early adoption is permitted. The adoption of ASU 2017-07 will impact Statements of Unaudited Condensed Consolidated Operations by changing our classification of the components of pension cost; however, it will not impact our Net income (loss).
NOTE 2 - SEGMENT REPORTING
Our continuing operations are organized and managed according to geographic location: U.S. Iron Ore and Asia Pacific Iron Ore. Our U.S. Iron Ore segment is a major supplier of iron ore pellets to the North American steel industry from our mines and pellet plants located in Michigan and Minnesota. 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 2017 or 2016.
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 extinguishment/restructuring of debt, foreign currency exchange remeasurement, impacts of discontinued operations, severance and contractor termination costs and intersegment corporate allocations of SG&A costs. These measures allow management and investors to focus on our ability to service our debt as well as illustrate how the business and each operating segment are performing.  Additionally, EBITDA and Adjusted EBITDA assist management and investors in their analysis and forecasting as these measures approximate the cash flows associated with operational earnings.

8


The following tables present a summary of our reportable segments for the three months ended March 31, 2017 and 2016, including a reconciliation of segment sales margin to Income (Loss) 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,
 
2017
 
2016
Revenues from product sales and services:
 
 
 
 
 
 
 
U.S. Iron Ore
$
286.2

 
62
%
 
$
185.5

 
61
%
Asia Pacific Iron Ore
175.4

 
38
%
 
120.0

 
39
%
Total revenues from product sales and services
$
461.6

 
100
%
 
$
305.5

 
100
%
 
 
 
 
 
 
 
 
Sales margin:
 
 
 
 
 
 
 
U.S. Iron Ore
$
48.4

 
 
 
$
13.2

 
 
Asia Pacific Iron Ore
47.3

 
 
 
17.7

 
 
Sales margin
95.7

 
 
 
30.9

 
 
Other operating expense
(13.8
)
 
 
 
(31.2
)
 
 
Other income (expense)
(114.0
)
 
 
 
122.1

 
 
Income (loss) from continuing operations before income taxes
$
(32.1
)
 
 
 
$
121.8

 
 

9


 
(In Millions)
 
Three Months Ended
March 31,
 
2017
 
2016
Net Income (Loss)
$
(29.8
)
 
$
116.8

Less:
 
 
 
Interest expense, net
(42.8
)
 
(56.8
)
Income tax benefit (expense)
1.8

 
(7.6
)
Depreciation, depletion and amortization
(23.2
)
 
(35.2
)
EBITDA
$
34.4

 
$
216.4

Less:
 
 
 
Gain (loss) on extinguishment/restructuring of debt
(71.9
)
 
178.8

Foreign exchange remeasurement
13.6

 
(1.2
)
Impact of discontinued operations
0.5

 
2.6

Severance and contractor termination costs

 
(0.1
)
Adjusted EBITDA
$
92.2

 
$
36.3

 
 
 
 
EBITDA:
 
 
 
U.S. Iron Ore
$
57.9

 
$
41.4

Asia Pacific Iron Ore
51.4

 
22.3

Other
(74.9
)
 
152.7

Total EBITDA
$
34.4

 
$
216.4

 
 
 
 
Adjusted EBITDA:
 
 
 
U.S. Iron Ore
$
64.1

 
$
46.1

Asia Pacific Iron Ore
53.8

 
23.0

Other
(25.7
)
 
(32.8
)
Total Adjusted EBITDA
$
92.2

 
$
36.3


10


 
(In Millions)
 
Three Months Ended
March 31,
 
2017
 
2016
Depreciation, depletion and amortization:
 
 
 
U.S. Iron Ore
$
16.4

 
$
26.9

Asia Pacific Iron Ore
4.7

 
6.8

Other
2.1

 
1.5

Total depreciation, depletion and amortization
$
23.2

 
$
35.2

 
 
 
 
Capital additions:
 
 
 
U.S. Iron Ore
$
27.1

 
$
4.5

Asia Pacific Iron Ore
0.2

 

Other

 
2.3

Total capital additions1
$
27.3

 
$
6.8

 
 
 
 
1 Includes cash paid for capital additions of $27.9 million and $10.4 million and a decrease in non-cash accruals of $0.6 million and $3.6 million for the three months ended March 31, 2017 and 2016, respectively.
A summary of assets by segment is as follows:
 
(In Millions)
 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
U.S. Iron Ore
$
1,440.6

 
$
1,372.5

Asia Pacific Iron Ore
168.4

 
155.1

Total segment assets
1,609.0

 
1,527.6

Corporate
316.7

 
396.3

Total assets
$
1,925.7

 
$
1,923.9

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, 2017 and December 31, 2016:
 
(In Millions)
 
March 31, 2017
 
December 31, 2016
Segment
Finished Goods
 
Work-in Process
 
Total Inventory
 
Finished Goods
 
Work-in
Process
 
Total
Inventory
U.S. Iron Ore
$
194.6

 
$
26.3

 
$
220.9

 
$
124.4

 
$
12.6

 
$
137.0

Asia Pacific Iron Ore
14.6

 
15.3

 
29.9

 
23.6

 
17.8

 
41.4

Total
$
209.2

 
$
41.6

 
$
250.8

 
$
148.0

 
$
30.4

 
$
178.4


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, 2017 and December 31, 2016:
 
(In Millions)
 
March 31,
2017
 
December 31,
2016
Land rights and mineral rights
$
500.7

 
$
500.5

Office and information technology
65.8

 
65.1

Buildings
68.4

 
67.9

Mining equipment
595.8

 
592.2

Processing equipment
558.9

 
552.0

Electric power facilities
49.6

 
49.4

Land improvements
23.7

 
23.5

Asset retirement obligation
19.8

 
19.8

Other
28.4

 
28.1

Construction in-progress
69.8

 
42.8

 
1,980.9

 
1,941.3

Allowance for depreciation and depletion
(985.9
)
 
(956.9
)
 
$
995.0

 
$
984.4

We recorded depreciation and depletion expense of $22.6 million and $33.8 million in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2017 and March 31, 2016, respectively.
NOTE 5 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt as of March 31, 2017 and December 31, 2016:
($ in Millions)
March 31, 2017
Debt Instrument
 
Annual Effective Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Unamortized Discounts
 
Total Debt
Secured Notes
 
 
 
 
 
 
 
 
 
 
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
$
540.0

 
$
(7.4
)
 
$
(24.0
)
 
$
508.6

Unsecured Notes
 
 
 
 
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
88.9

 
(0.2
)
 
(0.2
)
 
88.5

$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
122.4

 
(0.3
)
 
(0.1
)
 
122.0

$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
138.4

 
(0.4
)
 
(0.1
)
 
137.9

$500 Million 5.75% 2025 Senior Notes
 
5.75%
 
500.0

 
(8.3
)
 

 
491.7

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.5
)
 
(3.4
)
 
292.5

ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
1.7

Long-term debt
 
 
 
 
 
 
 
 
 
$
1,642.9


12


($ in Millions)
December 31, 2016
Debt Instrument
 
Annual Effective Interest Rate
 
Total Principal Amount
 
Debt Issuance Costs
 
Undiscounted Interest/(Unamortized Discounts)
 
Total Debt
Secured Notes
 
 
 
 
 
 
 
 
 
 
$540 Million 8.25% 2020 First Lien Notes
 
9.97%
 
$
540.0

 
$
(8.0
)
 
$
(25.7
)
 
$
506.3

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

 

 
65.7

 
284.2

$544.2 Million 7.75% 2020 Second Lien Notes
 
15.55%
 
430.1

 
(5.8
)
 
(85.2
)
 
339.1

Unsecured Notes
 
 
 
 
 
 
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
5.98%
 
225.6

 
(0.6
)
 
(0.5
)
 
224.5

$500 Million 4.80% 2020 Senior Notes
 
4.83%
 
236.8

 
(0.7
)
 
(0.2
)
 
235.9

$700 Million 4.875% 2021 Senior Notes
 
4.89%
 
309.4

 
(1.0
)
 
(0.2
)
 
308.2

$800 Million 6.25% 2040 Senior Notes
 
6.34%
 
298.4

 
(2.5
)
 
(3.4
)
 
292.5

ABL Facility
 
N/A
 
550.0

 
N/A

 
N/A

 

Fair Value Adjustment to Interest Rate Hedge
 
 
 
 
 
 
 
 
 
1.9

Total debt
 
 
 


 
 
 
 
 
$
2,192.6

Less current portion
 
 
 
 
 
 
 
 
 
17.5

Long-term debt
 
 
 
 
 
 
 
 
 
$
2,175.1

$500 million 5.75% 2025 Senior Notes - 2017 Offering
On February 27, 2017, we entered into an indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee, relating to the issuance of $500 million aggregate principal amount of 5.75% Senior Notes due 2025 (the "5.75% Senior Notes"). The 5.75% Senior Notes were issued on February 27, 2017 in a private transaction exempt from the registration requirements of the Securities Act.
The 5.75% Senior Notes bear interest at a rate of 5.75% per annum, which is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2017. The 5.75% Senior Notes mature on March 1, 2025.
The 5.75% Senior Notes are general unsecured senior obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness and rank senior in right of payment to all of our existing and future subordinated indebtedness. The 5.75% Senior Notes are effectively subordinated to our existing or future secured indebtedness to the extent of the value of the assets securing such indebtedness. The 5.75% Senior Notes are guaranteed on a senior unsecured basis by our material direct and indirect wholly-owned domestic subsidiaries and, therefore, are structurally senior to any of our existing and future indebtedness that is not guaranteed by such guarantors and are structurally subordinated to all existing and future indebtedness and other liabilities of our subsidiaries that do not guarantee the 5.75% Senior Notes.
The terms of the 5.75% Senior Notes are governed by an indenture, which contains customary covenants that, among other things, limit our and our subsidiaries' ability to create liens on property that secure indebtedness, enter into sale and leaseback transactions and merge, consolidate or amalgamate with another company. Upon the occurrence of a “change of control triggering event,” as defined in the indenture, we are required to offer to repurchase the 5.75% Senior Notes at 101% of the aggregate principal amount thereof, plus any accrued and unpaid interest, if any, to, but excluding, the repurchase date.
We may redeem the 5.75% Senior Notes, in whole or in part, on or after March 1, 2020, at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, and prior to March 1, 2020, at a redemption price equal to 100% of the principal amount thereof plus a “make-whole” premium set forth in the indenture, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. We may also redeem up to 35% of the aggregate principal amount of the 5.75% Senior Notes on or prior to March 1, 2020 at a redemption price equal to 105.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption with the net cash proceeds of one or more equity offerings.

13


The 5.75% Senior 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 indenture will allow either the trustee or the holders of at least 25% in aggregate principal amount of the then-outstanding notes issued under the indenture to accelerate, or in certain cases, will automatically cause the acceleration of, the amounts due under the 5.75% Senior Notes. Debt issuance costs incurred of $8.5 million related to the offering of the 5.75% Senior Notes included in the Long-term debt in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2017.
Debt Extinguishment
The following is a summary of the debt extinguished during the three months ended March 31, 2017:
($ In Millions)
 
 
Debt Extinguished
 
Gain (Loss) on Extinguishment1
Secured Notes
 
 
 
 
$218.5 Million 8.00% 2020 1.5 Lien Notes
 
$
218.5

 
$
45.1

$544.2 Million 7.75% 2020 Second Lien Notes
 
430.1

 
(104.5
)
Unsecured Notes
 
 
 
 
$400 Million 5.90% 2020 Senior Notes
 
136.8

 
(7.8
)
$500 Million 4.80% 2020 Senior Notes
 
114.4

 
(1.9
)
$700 Million 4.875% 2021 Senior Notes
 
171.0

 
(2.8
)
 
 
$
1,070.8

 
$
(71.9
)
 
 
 
 
 
1 Includes write-off of undiscounted interest, unamortized discounts and debt issuance costs. In addition, we paid premiums of $44.7 million related to the redemption of our notes.
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, 2017:
 
(In Millions)
 
Maturities of Debt
2017 (April 1 - December 31)
$

2018

2019

2020
751.3

2021
138.4

2022

2023 and thereafter
798.4

Total maturities of debt
$
1,688.1

ABL Facility
As of March 31, 2017 and December 31, 2016, no loans were drawn under the ABL Facility and we had total availability of $256.3 million and $333.0 million, respectively, as a result of borrowing base limitations. As of March 31, 2017 and December 31, 2016, the principal amount of letter of credit obligations totaled $95.5 million and $106.0 million, respectively, to support business obligations primarily related to workers compensation and environmental obligations, thereby further reducing available borrowing capacity on our ABL Facility to $160.8 million and $227.0 million, respectively.

14


NOTE 6 - FAIR VALUE MEASUREMENTS
The following represents the assets and liabilities of the Company measured at fair value at March 31, 2017 and December 31, 2016:    
 
(In Millions)
 
March 31, 2017
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
90.0

 
$
45.0

 
$

 
$
135.0

Derivative assets

 

 
59.4

 
59.4

Loans to and accounts receivable from the Canadian Entities

 

 
49.0

 
49.0

Total
$
90.0

 
$
45.0

 
$
108.4

 
$
243.4

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$

 
$
9.1

 
$
9.1

Contingent liabilities

 

 
37.5

 
37.5

Total
$

 
$

 
$
46.6

 
$
46.6

 
(In Millions)
 
December 31, 2016
Description
Quoted Prices in Active
Markets for Identical Assets/Liabilities
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
177.0

 
$

 
$

 
$
177.0

Derivative assets

 
1.5

 
31.6

 
33.1

Loans to and accounts receivable from the Canadian Entities

 

 
48.6

 
48.6

Total
$
177.0

 
$
1.5

 
$
80.2

 
$
258.7

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$

 
$
0.5

 
$
0.5

Contingent liabilities

 

 
37.2

 
37.2

Total
$

 
$

 
$
37.7

 
$
37.7

Financial assets classified in Level 1 as of March 31, 2017 and December 31, 2016 include money market funds of $90.0 million and $177.0 million, respectively. 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 $45.0 million of commercial paper and $1.5 million of commodity hedge contracts at March 31, 2017 and December 31, 2016, respectively.

15


The Level 3 assets include amounts receivable from the Canadian Entities and derivative assets which consist of a freestanding derivative instrument related to certain supply agreements with one of our U.S Iron Ore customers and certain provisional pricing arrangements with our U.S. Iron Ore and Asia Pacific Iron Ore customers.
Prior to the deconsolidations, various Cliffs wholly-owned entities made loans to the Canadian Entities for the purpose of funding their operations and had accounts receivable generated in the ordinary course of business. The loans, corresponding interest and the accounts receivable were considered intercompany transactions and were eliminated from our consolidated financial statements. Since the deconsolidations, the loans, associated interest and accounts receivable are considered related party transactions and have been recognized in our consolidated financial statements at their estimated fair value of $49.0 million and $48.6 million in the Statements of Unaudited Condensed Consolidated Financial Position at March 31, 2017 and December 31, 2016, respectively, and are classified as Level 3 assets.
The supply agreements included in our Level 3 assets 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 coil steel at the steelmaker’s facilities and takes into consideration current market conditions and nonperformance risk. We had assets of $35.9 million and $21.3 million at March 31, 2017 and December 31, 2016, respectively, related to supply agreements.
The provisional pricing arrangements included in our Level 3 assets 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. We had assets of $23.5 million and $10.3 million at March 31, 2017 and December 31, 2016, respectively, related to provisional pricing arrangements.
Level 3 liabilities include guarantees backstopped by standby letters of credit for certain environmental obligations of the Canadian Entities. We have liabilities of $37.5 million and $37.2 million in our consolidated results, classified as Other liabilities in the Statements of Unaudited Condensed Consolidated Financial Position as of March 31, 2017 and December 31, 2016, respectively.
In addition, we have liabilities of $9.1 million and $0.5 million related to provisional pricing arrangements at March 31, 2017 and December 31, 2016, respectively.

16


The following table illustrates information about quantitative inputs and assumptions for the assets and 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, 2017
 
Balance Sheet Location
 
Valuation Technique
 
Unobservable Input
 
Range or Point Estimate per dry metric ton
(Weighted Average)
 
Provisional pricing arrangements
 
$
23.5

 
Other current assets
 
Market Approach
 
Management's
Estimate of Platts 62% Price
 
$79
 
 
 
 
Hot-Rolled Coil Steel Estimate
 
$651
Provisional pricing arrangements
 
$
9.1

 
Other current liabilities
 
Market Approach
 
Management's
Estimate of Platts 62% Price
 
$79
Customer supply agreement
 
$
35.9

 
Other current assets
 
Market Approach
 
Hot-Rolled Coil Steel Estimate
 
$520 - $630 ($575)
Loans to and accounts receivable from the Canadian Entities
 
$
49.0

 
Loans to and accounts receivable from the Canadian Entities
 
*
 
*
 
N/A
Contingent liabilities
 
$
37.5

 
Other liabilities
 
*
 
*
 
N/A
 
 
 
 
 
 
 
 
 
 
 
* To assess the fair value and recoverability of the amounts receivable from the Canadian Entities, we estimated the fair value of the underlying net assets of the Canadian Entities available for distribution to their creditors in relation to the estimated creditor claims and the priority of those claims. The recorded expenses include an accrual for the estimated probable loss related to claims that may be asserted against us. We are not able to estimate reasonably a range of possible losses in excess of the accrual because there are significant factual and legal issues to be resolved. Our estimates involve significant judgment. Our estimates are based on currently available information, an assessment of the validity of certain claims and estimated payments by the Canadian Entities.
The significant unobservable inputs used in the fair value measurement of our provisional pricing arrangements are management’s estimates of Platts 62% Price based upon current market data, index pricing, and the annual average steel pricing benchmark for hot-rolled coil, each of which include forward-looking estimates determined by management. Significant increases or decreases in these inputs would result in a significantly higher or lower fair value measurement, respectively.
The significant unobservable input used in the fair value measurement of our customer supply agreement is the customer's future hot-rolled coil steel price that is estimated based on current market data, analysts' projections, projections provided by the customer 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.

17


We recognize any transfers between levels as of the beginning of the reporting period, including both transfers into and out of levels. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2017 and 2016. 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, 2017 and 2016.
 
(In Millions)
 
Level 3 Assets
 
Three Months Ended
March 31,
 
2017
 
2016
Beginning balance
$
80.2

 
$
80.7

Total gains (losses)
 
 
 
Included in earnings
42.5

 
8.2

Settlements
(14.3
)
 
(10.0
)
Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance - March 31
$
108.4

 
$
78.9

Total gains for the period included in earnings attributable to the change in unrealized gains on assets still held at the reporting date
$
33.2

 
$
3.6

 
(In Millions)
 
Level 3 Liabilities
 
Three Months Ended
March 31,
 
2017
 
2016
Beginning balance
$
(37.7
)
 
$
(135.8
)
Total gains (losses)
 
 
 
Included in earnings
(8.9
)
 
(7.9
)
Settlements

 
75.7

Transfers into Level 3

 

Transfers out of Level 3

 

Ending balance - March 31
$
(46.6
)
 
$
(68.0
)
Total losses for the period included in earnings attributable to the change in unrealized losses on liabilities still held at the reporting date
$
(9.1
)
 
$
(0.8
)
Gains and losses from derivative assets and liabilities, contingent liabilities and accounts receivables from the Canadian Entities are included in earnings and are reported in Product revenues, Miscellaneous - net, and Income from Discontinued Operations, net of tax, respectively, for the three months ended March 31, 2017 and 2016.

18


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, 2017 and December 31, 2016 were as follows:
 
 
 
(In Millions)
 
 
 
March 31, 2017
 
December 31, 2016
 
Classification
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt:
 
 
 
 
 
 
 
 
 
Secured Notes
 
 
 
 
 
 
 
 
 
First Senior Lien Notes —$540 million
Level 1
 
$
508.6

 
$
583.9

 
$
506.3

 
$
595.0

1.5 Senior Lien Notes —$218.5 million
Level 2
 

 

 
284.2

 
229.5

Second Senior Lien Notes —$544.2 million
Level 1
 

 

 
339.1

 
439.7

Unsecured Notes
 
 
 
 
 
 
 
 
 
Senior Notes—$500 million
Level 1
 
491.7

 
486.3

 

 

Senior Notes—$400 million
Level 1
 
88.5

 
88.4

 
224.5

 
219.6

Senior Notes—$1.3 billion
Level 1
 
414.5

 
358.9

 
528.4

 
455.8

Senior Notes—$700 million
Level 1
 
137.9

 
134.3

 
308.2

 
283.1

ABL Facility
Level 2
 

 

 

 

Fair value adjustment to interest rate hedge
Level 2
 
1.7

 
1.7

 
1.9

 
1.9

Total long-term debt
 
 
$
1,642.9

 
$
1,653.5

 
$
2,192.6

 
$
2,224.6

The fair value of long-term debt was determined using quoted market prices based upon current borrowing rates.
NOTE 7 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and OPEB 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 a minimum formula or employees’ years of service and average earnings for a defined period prior to retirement.
The following are the components of defined benefit pension and OPEB costs and credits for the three months ended March 31, 2017 and 2016:
Defined Benefit Pension Costs
 
(In Millions)
 
Three Months Ended
March 31,
 
2017
 
2016
Service cost
$
4.8

 
$
4.5

Interest cost
7.5

 
7.5

Expected return on plan assets
(13.5
)
 
(13.7
)
Amortization:
 
 
 
Prior service costs
0.6

 
0.5

Net actuarial loss
5.3

 
5.3

Net periodic benefit cost to continuing operations
$
4.7

 
$
4.1


19


Other Postretirement Benefits Credit
 
(In Millions)
 
Three Months Ended
March 31,
 
2017
 
2016
Service cost
$
0.5

 
$
0.4

Interest cost
2.1

 
2.3

Expected return on plan assets
(4.4
)
 
(4.3
)
Amortization:
 
 
 
Prior service credits
(0.7
)
 
(0.9
)
Net actuarial loss
1.2

 
1.4

Net periodic benefit credit to continuing operations
$
(1.3
)
 
$
(1.1
)
We made no pension contributions for the three months ended March 31, 2017 compared to pension contributions of $0.3 million for the three months ended March 31, 2016. 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, 2017 and March 31, 2016.
NOTE 8 - STOCK COMPENSATION PLANS
Employees’ Plans
During the first quarter of 2017, the Compensation and Organization Committee of the Board of Directors approved grants under the 2015 Equity Plan to certain officers and employees for the 2017 to 2019 performance period. Shares granted under the awards consisted of 0.6 million restricted share units and 0.6 million performance shares.
The restricted share units are subject to continued employment, are retention based, will vest December 31, 2019, and are payable in common shares at a time determined by the Committee at its discretion.
The performance shares are subject to continued employment, and each performance share, if earned, entitles the holder to receive common shares or cash within a range between a threshold and maximum number of our common shares, with the actual number of common shares earned dependent upon whether the Company achieves certain objectives and performance goals as established by the Compensation and Organization Committee. The performance share grants vest over a period of three years and are intended to be paid out in common shares. The performance awards granted have a performance condition that is measured on the basis of relative TSR for the period of January 1, 2017 to December 31, 2019 and measured against the constituents of the S&P Metals and Mining ETF Index at the beginning of the relevant performance period. The final payouts will vary from zero to 200% of the original grant.
Determination of Fair Value
The fair value of each performance share grant is estimated on the date of grant using a Monte Carlo simulation to forecast relative TSR performance. A correlation matrix of historic and projected stock prices was developed for both the Company and our predetermined peer group of mining and metals companies. The fair value assumes that performance goals will be achieved.
The expected term of the grant represents the time from the grant date to the end of the service period for each of the three plan-year agreements. We estimate the volatility of our common shares and that of the peer group of mining and metals companies using daily price intervals for all companies. The risk-free interest rate is the rate at the grant date on zero-coupon government bonds with a term commensurate with the remaining life of the performance period.

20


The following assumptions were utilized to estimate the fair value for the first quarter of 2017 performance share grants:
Grant Date
 
Grant Date Market Price
 
Average Expected Term (Years)
 
Expected Volatility
 
Risk-Free Interest Rate
 
Dividend Yield
 
Fair Value
 
Fair Value (Percent of Grant Date Market Price)
February 21, 2017
 
$
11.67

 
2.86
 
92.1%
 
1.51%
 
—%
 
$
19.69

 
168.72%
NOTE 9 - INCOME TAXES
Our 2017 estimated annual effective tax rate before discrete items is approximately 5.4%. The annual effective tax rate differs from the U.S. statutory rate of 35% primarily due to the reversal of valuation allowance from operations in the current year and deductions for percentage depletion in excess of cost depletion related to U.S. operations. The 2016 estimated annual effective tax rate before discrete items at March 31, 2016 was 6.8%.
NOTE 10 - LEASE OBLIGATIONS
We lease certain mining, production and other equipment under operating and capital leases. The capital 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 $1.7 million for the three months ended March 31, 2017 compared with $2.4 million for the three months ended March 31, 2016.
Future minimum payments under capital leases and non-cancellable operating leases at March 31, 2017 are as follows:
 
(In Millions)
 
Capital Leases
 
Operating Leases
2017 (April 1 - December 31)
$
17.2

 
$
5.3

2018
18.8

 
5.8

2019
10.4

 
3.0

2020
9.4

 
2.9

2021
8.7

 
3.0

2022 and thereafter
1.4

 

Total minimum lease payments
$
65.9

 
$
20.0

Amounts representing interest
11.8

 
 
Present value of net minimum lease payments1
$
54.1

 
 
 
 
 
 
1 The total is comprised of $18.0 million and $36.1 million classified as Other current liabilities and Other liabilities, respectively, in the Statements of Unaudited Condensed Consolidated Financial Position at March 31, 2017.

21


NOTE 11 - ENVIRONMENTAL AND MINE CLOSURE OBLIGATIONS
We had environmental and mine closure liabilities of $211.0 million and $206.8 million at March 31, 2017 and December 31, 2016, respectively. The following is a summary of the obligations as of March 31, 2017 and December 31, 2016:
 
(In Millions)
 
March 31,
2017
 
December 31,
2016
Environmental
$
2.8

 
$
2.8

Mine closure
 
 
 
U.S. Iron Ore1
190.9

 
187.8

Asia Pacific Iron Ore
17.3

 
16.2

Total mine closure
208.2

 
204.0

Total environmental and mine closure obligations
211.0

 
206.8

Less current portion
12.8

 
12.9

Long-term environmental and mine closure obligations
$
198.2

 
$
193.9

 
 
 
 
1 U.S. Iron Ore includes our active operating mines, our indefinitely idled Empire mine and a closed mine formerly operating as LTVSMC.
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.
The following represents a roll forward of our asset retirement obligation liability for the three months ended March 31, 2017 and for the year ended December 31, 2016:
 
(In Millions)
 
March 31,
2017
 
December 31, 2016
Asset retirement obligation at beginning of period
$
204.0

 
$
230.4

Accretion expense
3.6

 
14.0

Remediation payments
(0.3
)
 
(2.2
)
Exchange rate changes
0.9

 
(0.2
)
Revision in estimated cash flows

 
(38.0
)
Asset retirement obligation at end of period
$
208.2

 
$
204.0

For the year ended December 31, 2016, the revisions in estimated cash flows recorded during the year related primarily to revisions in the timing of the estimated cash flows related to two of our U.S. mines. The Empire mine asset retirement obligation was reduced $29.6 million as a result of the further refinement of the timing of cash flows and a downward revision of estimated asset retirement costs related to technology associated with required storm water management systems expected to be implemented. Additionally, during 2016, a new economic reserve estimate was completed for United Taconite, increasing salable product reserves by 115 million long tons and consequently significantly increasing the life-of-mine plan, resulting in a $9.2 million decrease in the asset retirement obligation.

22


NOTE 12 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The carrying amount of goodwill as of March 31, 2017 and December 31, 2016 was $2.0 million and related to our U.S. Iron Ore operating segment.
Other Intangible Assets
The following table is a summary of intangible assets as of March 31, 2017 and December 31, 2016:
 
 
 
(In Millions)
 
 
 
March 31, 2017
 
December 31, 2016
 
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

 
$
(25.1
)
 
$
53.6

 
$
78.4

 
$
(24.6
)
 
$
53.8

Total intangible assets
 
 
$
78.7

 
$
(25.1
)
 
$
53.6

 
$
78.4

 
$
(24.6
)
 
$
53.8

Amortization expense relating to intangible assets was $0.6 million for the three months ended March 31, 2017 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 $1.4 million for the comparable period in 2016. Amortization expense of other intangible assets is expected to continue to be immaterial going forward.
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, 2017 and December 31, 2016:
 
(In Millions)
 
Derivative Assets
 
Derivative Liabilities
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Derivative Instrument
Balance Sheet Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Customer supply agreement
Other current assets
 
35.9

 
Other current assets
 
21.3

 
 
 

 
 
 

Provisional pricing arrangements
Other current assets
 
23.5

 
Other current assets
 
10.3

 
Other current liabilities
 
9.1

 
Other current liabilities
 
0.5

Commodity contracts
 
 

 
Other current assets
 
1.5

 
 
 

 
 
 

Total derivatives not designated as hedging instruments under ASC 815
 
 
$
59.4

 
 
 
$
33.1

 
 
 
$
9.1

 
 
 
$
0.5

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 the Platts 62% Price, along with pellet premiums, published Platts international indexed freight rates and changes in specified Producer Price Indices, 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

23


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. 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.
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 $17.8 million net gain in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2017 related to the supplemental payments. This compares with a net loss in Product revenues of $0.1 million for the comparable period in 2016. Other current assets, representing the fair value of the pricing factors, were $35.9 million and $21.3 million in the March 31, 2017 and December 31, 2016 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 recorded initially 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, 2017 and December 31, 2016, we recorded $23.5 million and $10.3 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 U.S. Iron Ore and Asia Pacific Iron Ore customers. At March 31, 2017 and December 31, 2016, we recorded $9.1 million and $0.5 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 increase of $15.7 million and a net decrease of $1.5 million in Product revenues in the Statements of Unaudited Condensed Consolidated Operations for the three months ended March 31, 2017 and 2016.

24


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, 2017 and 2016:
(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,
 
 
2017
 
2016
Customer supply agreement
Product revenues
17.8

 
(0.1
)
Provisional pricing arrangements
Product revenues
15.7

 
(1.5
)
Commodity contracts
Cost of goods sold and operating expenses
(1.3
)
 

Total
 
$
32.2

 
$
(1.6
)
Refer to NOTE 6 - FAIR VALUE MEASUREMENTS for additional information.

25


NOTE 14 - CAPITAL STOCK
Common Share Public Offering
On February 9, 2017, we issued 63.25 million common shares in an underwritten public offering. We received net proceeds of $661.3 million at a public offering price of $10.75 per common share. The net proceeds from the issuance of our common shares and our 5.75% Senior Notes were used to redeem in full all of our outstanding 8.00% 1.5 Lien Notes due 2020 and 7.75% Second Lien Notes due 2020. The aggregate principal amount outstanding of debt redeemed was $648.6 million. Additionally, through tender offers, we purchased $422.2 million in principal debt, excluding unamortized discounts and deferred charges, of our 5.90% Senior Notes due 2020, our 4.80% Senior Notes due 2020 and our 4.875% Senior Notes due 2021.
NOTE 15 - SHAREHOLDERS' DEFICIT
The following table reflects the changes in shareholders' deficit attributable to both Cliffs and the noncontrolling interests primarily related to Tilden and Empire of which Cliffs owns 85% and 79%, respectively, for the three months ended March 31, 2017 and March 31, 2016:
 
(In Millions)
 
Cliffs
Shareholders’
Equity (Deficit)
 
Noncontrolling
Interest (Deficit)
 
Total Equity (Deficit)
December 31, 2016
$
(1,464.3
)
 
$
133.8

 
$
(1,330.5
)
Comprehensive loss
 
 
 
 
 
Net loss
(28.1
)
 
(1.7
)
 
(29.8
)
Other comprehensive loss
(3.0
)
 
(5.0
)
 
(8.0
)
Total comprehensive loss
(31.1
)
 
(6.7
)
 
(37.8
)
Issuance of common shares
661.3

 

 
661.3

Stock and other incentive plans
4.0

 

 
4.0

March 31, 2017
$
(830.1
)
 
$
127.1

 
$
(703.0
)
 
(In Millions)
 
Cliffs
Shareholders’
Equity (Deficit)
 
Noncontrolling
Interest (Deficit)
 
Total Equity (Deficit)
December 31, 2015
$
(1,981.4
)
 
$
169.8

 
$
(1,811.6
)
Comprehensive income
 
 
 
 
 
Net income
108.0

 
8.8

 
116.8

Other comprehensive income
5.7

 
0.6

 
6.3

Total comprehensive income
113.7

 
9.4

 
123.1

Issuance of common shares
5.4

 

 
5.4

Stock and other incentive plans
2.9

 

 
2.9

Distributions of partnership equity

 
(17.0
)
 
(17.0
)
Undistributed losses to noncontrolling interest

 
0.5

 
0.5

March 31, 2016
$
(1,859.4
)
 
$
162.7

 
$
(1,696.7
)

26


The following table reflects the changes in Accumulated other comprehensive income (loss) related to Cliffs shareholders’ deficit for March 31, 2017 and March 31, 2016:
 
(In Millions)
 
Changes in Pension and Other Post-Retirement Benefits, net of tax
 
Unrealized Net Gain (Loss) on Foreign Currency Translation
 
Accumulated Other Comprehensive Income (Loss)
December 31, 2016
$
(260.6
)
 
$
239.3

 
$
(21.3
)
Other comprehensive income (loss) before reclassifications
3.3

 
(12.7
)
 
(9.4
)
Net loss reclassified from accumulated other comprehensive income (loss)
6.4

 

 
6.4

March 31, 2017
$
(250.9
)
 
$
226.6

 
$
(24.3
)
 
(In Millions)
 
Changes in Pension and Other Post-Retirement Benefits, net of tax
 
Unrealized Net Gain (Loss) on Securities, net of tax
 
Unrealized Net Gain (Loss) on Foreign Currency Translation
 
Net Unrealized Gain (Loss) on Derivative Financial Instruments, net of tax
 
Accumulated Other Comprehensive Income (Loss)
December 31, 2015
$
(241.4
)
 
$
0.1

 
$
220.7

 
$
2.6

 
$
(18.0
)
Other comprehensive income (loss) before reclassifications
(1.5
)
 
(0.1
)
 
4.4

 
(3.4