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Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

v3.19.2
DERIVATIVE INSTRUMENTS
6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] Ìý
DERIVATIVE INSTRUMENTS
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:
Ìý
Ìý
(In Millions)
Ìý
Ìý
Derivative Assets
Ìý
Derivative Liabilities
Ìý
Ìý
JuneÌý30, 2019
Ìý
DecemberÌý31, 2018
Ìý
JuneÌý30, 2019
Ìý
DecemberÌý31, 2018
Derivative Instrument
Ìý
Balance Sheet
Location
Ìý
Fair
Value
Ìý
Balance Sheet
Location
Ìý
Fair
Value
Ìý
Balance Sheet
Location
Ìý
Fair
Value
Ìý
Balance Sheet
Location
Ìý
Fair
Value
Derivatives designated as hedging instruments under ASC 815:
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Commodity contracts
Ìý
Derivative assets
Ìý
$
0.2

Ìý
Derivative assets
Ìý
$
0.1

Ìý
Other current liabilities
Ìý
$
2.6

Ìý
Other current liabilities
Ìý
$
3.7

Derivatives not designated as hedging instruments under ASC 815:
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Ìý
Customer supply agreement
Ìý
Derivative assets
Ìý
$
102.4

Ìý
Derivative assets
Ìý
$
89.3

Ìý
Ìý
Ìý
$
—

Ìý
Ìý
Ìý
$
—

Provisional pricing arrangements
Ìý
Derivative assets
Ìý
15.7

Ìý
Derivative assets
Ìý
2.1

Ìý
Ìý
Ìý
—

Ìý
Ìý
Ìý
—

Total derivatives not designated as hedging instruments under ASC 815
Ìý
Ìý
Ìý
$
118.1

Ìý
Ìý
Ìý
$
91.4

Ìý
Ìý
Ìý
$
—

Ìý
Ìý
Ìý
$
—

Total derivatives
Ìý
Ìý
Ìý
$
118.3

Ìý
Ìý
Ìý
$
91.5

Ìý
Ìý
Ìý
$
2.6

Ìý
Ìý
Ìý
$
3.7


Derivatives Designated as Hedging Instruments - Cash Flow Hedges
Commodity Contracts
The following table presents our outstanding hedge contracts:
Ìý
(In Millions)
Ìý
June 30, 2019
Ìý
December 31, 2018
Ìý
Notional Amount
Ìý
Unit of Measure
Ìý
Varying Maturity Dates
Ìý
Notional Amount
Ìý
Unit of Measure
Ìý
Varying Maturity Dates
Natural gas
9.0
Ìý
MMBtu
Ìý
July 2019 - November 2020
Ìý
1.8
Ìý
MMBtu
Ìý
January 2019 - August 2019
Diesel
5.0
Ìý
Gallons
Ìý
July 2019 - December 2019
Ìý
11.0
Ìý
Gallons
Ìý
January 2019 - December 2019

Derivatives Not Designated as Hedging Instruments
Customer Supply Agreement
A supply agreement with one customer provides for supplemental revenue or refunds to the customer based on the average annual daily steel market price for hot-rolled coil steel at the time the iron ore product is consumed in the customer’s blast furnaces. The supplemental pricing is characterized as a freestanding derivative instrument and is required to be accounted for separately once control transfers to the customer. The derivative instrument, which is finalized based on a future price, is adjusted to fair value through Product revenues each reporting period based upon current market data and forward-looking estimates provided by management until the pellets are consumed and the price is settled.
Provisional Pricing Arrangements
Certain of our supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing mechanisms typically include adjustments based upon changes in the Platts 62% Price, Atlantic Basin pellet premiums, Platts international indexed freight rates and changes in specified PPI, including those for industrial commodities, fuel and steel. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host sales contract and are integral to the host sales contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.
Revenue is recognized generally upon delivery to our customers. Revenue is measured at the point that control transfers and represents the amount of consideration we expect to receive in exchange for transferring goods. Changes in the expected revenue rate from the date that control transfers through final settlement of contract terms is recorded in accordance with Topic 815 and is characterized as a derivative instrument and accounted for separately.Ìý Subsequently, the derivative instruments 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.
The following summarizes the effect of our derivatives that are not designated as hedging instruments in the Statements of Unaudited Condensed Consolidated Operations:
(In Millions)
Derivatives Not Designated as Hedging Instruments
Ìý
Location of Gain (Loss) Recognized in Income on Derivatives
Ìý
Three Months Ended
June 30,
Ìý
Six Months Ended
June 30,
Ìý
Ìý
Ìý
2019
Ìý
2018
Ìý
2019
Ìý
2018
Customer supply agreements
Ìý
Product revenues
Ìý
$
57.5

Ìý
$
155.5

Ìý
$
74.6

Ìý
$
197.4

Provisional pricing arrangements
Ìý
Product revenues
Ìý
17.3

Ìý
(0.8
)
Ìý
5.7

Ìý
1.1

Total
Ìý
Ìý
Ìý
$
74.8

Ìý
$
154.7

Ìý
$
80.3

Ìý
$
198.5


Refer to NOTE 8 - FAIR VALUE MEASUREMENTS for additional information.