Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED FINANCIAL POSITION
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
(In millions, except share information) March 31,
2023 December 31,
2022
ASSETS
Current assets:
Cash and cash equivalents $ 59 $ 26
Accounts receivable, net 2,216 1,960
Inventories 4,923 5,130
Other current assets 246 306
Total current assets 7,444 7,422
Non-current assets:
Property, plant and equipment, net 8,950 9,070
Goodwill 1,130 1,130
Pension and OPEB, asset 370 356
Other non-current assets 758 777
TOTAL ASSETS $ 18,652 $ 18,755
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 2,173 $ 2,186
Accrued employment costs 388 429
Accrued expenses 271 383
Other current liabilities 628 551
Total current liabilities 3,460 3,549
Non-current liabilities:
Long-term debt 4,559 4,249
Pension liability, non-current 465 473
OPEB liability, non-current 572 585
Deferred income taxes 527 590
Other non-current liabilities 1,276 1,267
TOTAL LIABILITIES 10,859 10,713
Commitments and contingencies (See Note 17)
Equity:
Common shares - par value $ 0.125 per share
Authorized - 1,200,000,000 shares (2022 - 1,200,000,000 shares);
Issued - 531,051,530 shares (2022 - 531,051,530 shares);
Outstanding - 515,052,745 shares (2022 - 513,340,779 shares)
66 66
Capital in excess of par value of shares 4,832 4,871
Retained earnings 1,277 1,334
Cost of 15,998,785 common shares in treasury (2022 - 17,710,751 shares)
( 280 ) ( 310 )
Accumulated other comprehensive income 1,651 1,830
Total Cliffs shareholders' equity 7,546 7,791
Noncontrolling interest 247 251
TOTAL EQUITY 7,793 8,042
TOTAL LIABILITIES AND EQUITY $ 18,652 $ 18,755
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED OPERATIONS
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
Three Months Ended
March 31,
(In millions, except per share amounts) 2023 2022
Revenues $ 5,295 $ 5,955
Operating costs:
Cost of goods sold ( 5,196 ) ( 4,706 )
Selling, general and administrative expenses ( 127 ) ( 122 )
Miscellaneous – net ( 3 ) ( 33 )
Total operating costs ( 5,326 ) ( 4,861 )
Operating income (loss) ( 31 ) 1,094
Other income (expense):
Interest expense, net ( 77 ) ( 77 )
Loss on extinguishment of debt — ( 14 )
Net periodic benefit credits other than service cost component 50 49
Other non-operating income (expense) 2 ( 2 )
Total other expense ( 25 ) ( 44 )
Income (loss) from continuing operations before income taxes ( 56 ) 1,050
Income tax benefit (expense) 13 ( 237 )
Income (loss) from continuing operations ( 43 ) 813
Income from discontinued operations, net of tax 1 1
Net income (loss) ( 42 ) 814
Income attributable to noncontrolling interest ( 15 ) ( 13 )
Net income (loss) attributable to Cliffs shareholders $ ( 57 ) $ 801
Earnings (loss) per common share attributable to Cliffs shareholders - basic
Continuing operations $ ( 0.11 ) $ 1.54
Discontinued operations — —
$ ( 0.11 ) $ 1.54
Earnings (loss) per common share attributable to Cliffs shareholders - diluted
Continuing operations $ ( 0.11 ) $ 1.50
Discontinued operations — —
$ ( 0.11 ) $ 1.50
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
Three Months Ended
March 31,
(In millions) 2023 2022
Net income (loss) $ ( 42 ) $ 814
Other comprehensive income (loss):
Changes in pension and OPEB, net of tax ( 27 ) 1
Changes in derivative financial instruments, net of tax ( 152 ) 96
Total other comprehensive income (loss) ( 179 ) 97
Comprehensive income (loss) ( 221 ) 911
Comprehensive income attributable to noncontrolling interests ( 15 ) ( 13 )
Comprehensive income (loss) attributable to Cliffs shareholders $ ( 236 ) $ 898
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED CASH FLOWS
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
Three Months Ended
March 31,
(In millions) 2023 2022
OPERATING ACTIVITIES
Net income (loss) $ ( 42 ) $ 814
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation, depletion and amortization 242 301
Impairment of long-lived assets — 29
Deferred income taxes ( 4 ) 57
Pension and OPEB credits ( 40 ) ( 27 )
Loss on extinguishment of debt — 14
Other 39 25
Changes in operating assets and liabilities:
Accounts receivable, net ( 257 ) ( 512 )
Inventories 207 ( 372 )
Income taxes 15 180
Pension and OPEB payments and contributions ( 30 ) ( 60 )
Payables, accrued employment and accrued expenses ( 90 ) 109
Other, net ( 79 ) ( 25 )
Net cash provided (used) by operating activities ( 39 ) 533
INVESTING ACTIVITIES
Purchase of property, plant and equipment ( 188 ) ( 236 )
Other investing activities 3 1
Net cash used by investing activities ( 185 ) ( 235 )
FINANCING ACTIVITIES
Repurchase of common shares — ( 19 )
Repayments of debt — ( 360 )
Borrowings under credit facilities 1,646 1,715
Repayments under credit facilities ( 1,339 ) ( 1,609 )
Other financing activities ( 50 ) ( 38 )
Net cash provided (used) by financing activities 257 ( 311 )
Net increase (decrease) in cash and cash equivalents 33 ( 13 )
Cash and cash equivalents at beginning of period 26 48
Cash and cash equivalents at end of period $ 59 $ 35
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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STATEMENTS OF UNAUDITED CONDENSED CONSOLIDATED CHANGES IN EQUITY
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
(In millions) Number
of
Common
Shares Outstanding Par Value of
Common
Shares Issued Capital in
Excess of
Par Value
of Shares Retained
Earnings Common
Shares
in
Treasury AOCI Non-controlling Interests Total
December 31, 2022 513 $ 66 $ 4,871 $ 1,334 $ ( 310 ) $ 1,830 $ 251 $ 8,042
Comprehensive income (loss) — — — ( 57 ) — ( 179 ) 15 ( 221 )
Stock and other incentive plans 2 — ( 39 ) — 30 — — ( 9 )
Net distributions to noncontrolling interests — — — — — — ( 19 ) ( 19 )
March 31, 2023 515 $ 66 $ 4,832 $ 1,277 $ ( 280 ) $ 1,651 $ 247 $ 7,793
(In millions) Number
of
Common
Shares Outstanding Par Value of Common
Shares Issued Capital in
Excess of
Par Value
of Shares Retained
Earnings (Deficit) Common
Shares
in
Treasury AOCI Non-controlling Interests Total
December 31, 2021 500 $ 63 $ 4,892 $ ( 1 ) $ ( 82 ) $ 618 $ 284 $ 5,774
Comprehensive income — — — 801 — 97 13 911
Redemption of convertible debt 24 3 ( 28 ) — — — — ( 25 )
Stock and other incentive plans 2 — ( 16 ) — 11 — — ( 5 )
Common stock repurchases ( 1 ) — — — ( 19 ) — — ( 19 )
Net distributions to noncontrolling interests — — — — — — ( 28 ) ( 28 )
March 31, 2022 525 $ 66 $ 4,848 $ 800 $ ( 90 ) $ 715 $ 269 $ 6,608
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLEVELAND-CLIFFS INC. AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS, CONSOLIDATION AND PRESENTATION
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, cash flows and changes in equity 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, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023 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, 2022.
NATURE OF BUSINESS
We are the largest flat-rolled steel producer in North America. Founded in 1847 as a mine operator, we are also the largest manufacturer of iron ore pellets in North America. We are vertically integrated from mined raw materials, direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We are the largest supplier of steel to the automotive industry in North America and serve a diverse range of markets due to our comprehensive offering of flat-rolled steel products. Headquartered in Cleveland, Ohio, we employ approximately 27,000 people across our operations in the United States and Canada.
BUSINESS OPERATIONS
We are organized into four operating segments based on differentiated products, Steelmaking, Tubular, Tooling and Stamping, and European Operations. We primarily operate through one reportable segment – the Steelmaking segment.
BASIS OF CONSOLIDATION
The unaudited condensed consolidated financial statements consolidate our accounts and the accounts of our wholly owned subsidiaries, all subsidiaries in which we have a controlling interest and VIEs for which we are the primary beneficiary. All intercompany transactions and balances are eliminated upon consolidation.
INVESTMENTS IN AFFILIATES
We have investments in several businesses accounted for using the equity method of accounting. These investments are included within our Steelmaking segment. We review an investment for impairment when circumstances indicate that a loss in value below its carrying amount is other than temporary.
Our investment in affiliates of $ 134 million and $ 133 million as of March 31, 2023 and December 31, 2022, respectively, was classified in Other non-current assets.
SIGNIFICANT ACCOUNTING POLICIES
A detailed description of our significant accounting policies can be found in the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 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 ADOPTED
In September 2022, the FASB issued ASU No. 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations . This guidance requires annual and interim disclosure of the key terms of outstanding supplier finance programs and a roll-forward of the related obligations. The new standard does not affect the recognition, measurement or financial statement presentation of the supplier finance program obligations. We have adopted this standard, except for the amendment on roll-forward information, which is effective for fiscal years beginning after December 15, 2023. Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for further information.
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NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
ALLOWANCE FOR CREDIT LOSSES
The following is a roll-forward of our allowance for credit losses associated with Accounts receivable, net :
(In millions) 2023 2022
Allowance for credit losses as of January 1 $ ( 4 ) $ ( 4 )
Increase in allowance ( 1 ) —
Allowance for credit losses as of March 31 $ ( 5 ) $ ( 4 )
INVENTORIES
The following table presents the detail of our Inventories on the Statements of Unaudited Condensed Consolidated Financial Position:
(In millions) March 31,
2023 December 31,
2022
Product inventories
Finished and semi-finished goods $ 2,919 $ 2,971
Raw materials 1,626 1,794
Total product inventories 4,545 4,765
Manufacturing supplies and critical spares 378 365
Inventories $ 4,923 $ 5,130
SUPPLY CHAIN FINANCE PROGRAMS
We negotiate payment terms directly with our suppliers for the purchase of goods and services. We currently offer voluntary supply chain finance programs that enable our suppliers to sell their Cliffs receivables to financial intermediaries, at the sole discretion of both the suppliers and financial intermediaries. No guarantees are provided by us or our subsidiaries under the supply chain finance programs. The supply chain finance programs allow our suppliers to be paid by the financial intermediaries earlier than the due date on the applicable invoice. Supply chain finance programs that extend terms or provide us an economic benefit are classified as short-term financings. As of March 31, 2023 and December 31, 2022, we had $ 27 million and $ 19 million, respectively, deemed as short-term financings that are classified in Other current liabilities . Additionally , as of March 31, 2023 and December 31, 2022, we had $ 87 million and $ 112 million, respectively, classified as Accounts payable.
CASH FLOW INFORMATION
A reconciliation of capital additions to cash paid for capital expenditures is as follows:
Three Months Ended
March 31,
(In millions) 2023 2022
Capital additions $ 128 $ 181
Less:
Non-cash accruals ( 76 ) ( 55 )
Right-of-use assets - finance leases 16 —
Cash paid for capital expenditures including deposits $ 188 $ 236
Cash payments (receipts) for income taxes and interest are as follows:
Three Months Ended
March 31,
(In millions) 2023 2022
Taxes paid on income $ 1 $ 1
Income tax refunds ( 26 ) ( 1 )
Interest paid on debt obligations net of capitalized interest 1
79 65
1 Capitalized interest was $ 3 million and $ 2 million for the three months ended March 31, 2023 and 2022, respectively.
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NOTE 3 - REVENUES
We generate our revenue through product sales, in which shipping terms indicate when we have fulfilled our performance obligations and transferred control of products to our customer. Our revenue transactions consist of a single performance obligation to transfer promised goods. Our contracts with customers define the mechanism for determining the sales price, which is generally fixed upon transfer of control, but the contracts generally do not impose a specific quantity on either party. Quantities to be delivered to the customer are determined at a point near the date of delivery through purchase orders or other written instructions we receive from the customer. Spot market sales are made through purchase orders or other written instructions. We consider our performance obligation to be complete and recognize revenue when control transfers in accordance with shipping terms.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring product. We reduce the amount of revenue recognized for estimated returns and other customer credits, such as discounts and volume rebates, based on the expected value to be realized. Payment terms are consistent with terms standard to the markets we serve. Sales taxes collected from customers are excluded from revenues.
The following table represents our Revenues by market:
Three Months Ended
March 31,
(In millions) 2023 2022
Steelmaking:
Automotive $ 1,870 $ 1,607
Infrastructure and manufacturing 1,297 1,542
Distributors and converters 1,258 1,829
Steel producers
701 816
Total Steelmaking 5,126 5,794
Other Businesses:
Automotive 139 122
Infrastructure and manufacturing 10 15
Distributors and converters 20 24
Total Other Businesses 169 161
Total revenues $ 5,295 $ 5,955
The following tables represent our Revenues by product line:
Three Months Ended
March 31,
(In millions) 2023 2022
Steelmaking:
Hot-rolled steel $ 1,121 $ 1,194
Cold-rolled steel 639 984
Coated steel 1,617 1,775
Stainless and electrical steel 574 551
Plate 331 421
Slab and other steel products 327 334
Other 517 535
Total Steelmaking 5,126 5,794
Other Businesses:
Other 169 161
Total revenues $ 5,295 $ 5,955
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NOTE 4 - SEGMENT REPORTING
We are vertically integrated from mined raw materials and direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. We are organized into four operating segments based on our differentiated products – Steelmaking, Tubular, Tooling and Stamping, and European Operations. We have one reportable segment – Steelmaking. The operating segment results of our Tubular, Tooling and Stamping, and European Operations that do not constitute reportable segments are combined and disclosed in the Other Businesses category. Our Steelmaking segment operates as the largest flat-rolled steel producer supported by being the largest iron ore pellet producer as well as a leading prime scrap processor in North America, primarily serving the automotive, distributors and converters, and infrastructure and manufacturing markets. Our Other Businesses primarily include the operating segments that provide customer solutions with carbon and stainless steel tubing products, advanced-engineered solutions, tool design and build, hot- and cold-stamped steel components, and complex assemblies. All intersegment transactions were eliminated in consolidation.
We evaluate performance on an operating segment basis, as well as a consolidated basis, based on Adjusted EBITDA, which is a non-GAAP measure. This measure is used by management, investors, lenders and other external users of our financial statements to assess our operating performance and to compare operating performance to other companies in the steel industry. In addition, management believes Adjusted EBITDA is a useful measure to assess the earnings power of the business without the impact of capital structure and can be used to assess our ability to service debt and fund future capital expenditures in the business.
Our results by segment are as follows:
Three Months Ended
March 31,
(In millions) 2023 2022
Revenues:
Steelmaking $ 5,126 $ 5,794
Other Businesses 169 161
Total revenues $ 5,295 $ 5,955
Adjusted EBITDA:
Steelmaking $ 240 $ 1,424
Other Businesses 8 29
Eliminations ( 5 ) ( 1 )
Total Adjusted EBITDA $ 243 $ 1,452
The following table provides a reconciliation of our consolidated Net income (loss) to total Adjusted EBITDA:
Three Months Ended
March 31,
(In millions) 2023 2022
Net income (loss) $ ( 42 ) $ 814
Less:
Interest expense, net ( 77 ) ( 77 )
Income tax benefit (expense) 13 ( 237 )
Depreciation, depletion and amortization ( 242 ) ( 301 )
264 1,429
Less:
EBITDA of noncontrolling interests 1
23 22
Loss on extinguishment of debt — ( 14 )
Asset impairment — ( 29 )
Other, net ( 2 ) ( 2 )
Total Adjusted EBITDA $ 243 $ 1,452
1 EBITDA of noncontrolling interests includes the following:
Net income attributable to noncontrolling interests $ 15 $ 13
Depreciation, depletion and amortization 8 9
EBITDA of noncontrolling interests $ 23 $ 22
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The following summarizes our assets by segment:
(In millions) March 31,
2023 December 31,
2022
Assets:
Steelmaking $ 18,018 $ 18,070
Other Businesses 312 315
Total segment assets 18,330 18,385
Corporate/Eliminations 322 370
Total assets $ 18,652 $ 18,755
The following table summarizes our depreciation, depletion and amortization and capital additions by segment:
Three Months Ended
March 31,
(In millions) 2023 2022
Depreciation, depletion and amortization:
Steelmaking $ ( 231 ) $ ( 291 )
Other Businesses ( 11 ) ( 10 )
Total depreciation, depletion and amortization $ ( 242 ) $ ( 301 )
Capital additions 1 :
Steelmaking $ 127 $ 175
Other Businesses 1 6
Total capital additions $ 128 $ 181
1 Refer to NOTE 2 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION for additional information.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
The following table indicates the carrying value of each of the major classes of our depreciable assets:
(In millions) March 31,
2023 December 31,
2022
Land, land improvements and mineral rights $ 1,390 $ 1,388
Buildings 927 921
Equipment 9,359 9,289
Other 244 238
Construction in progress 580 552
Total property, plant and equipment 1
12,500 12,388
Allowance for depreciation and depletion ( 3,550 ) ( 3,318 )
Property, plant and equipment, net $ 8,950 $ 9,070
1 Includes right-of-use assets related to finance leases of $ 424 million and $ 408 million as of March 31, 2023 and December 31, 2022, respectively.
We recorded depreciation and depletion expense of $ 239 million and $ 298 million for the three months ended March 31, 2023 and 2022, respectively. Depreciation and depletion expense for the three months ended March 31, 2022 includes $ 68 million of accelerated depreciation related to the indefinite idle of the Indiana Harbor #4 blast furnace.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS AND LIABILITIES
GOODWILL
The following is a summary of Goodwill by segment:
(In millions) March 31,
2023 December 31,
2022
Steelmaking $ 956 $ 956
Other Businesses 174 174
Total goodwill $ 1,130 $ 1,130
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INTANGIBLE ASSETS AND LIABILITIES
The following is a summary of our intangible assets and liabilities:
March 31, 2023
December 31, 2022
(In millions) Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount
Intangible assets 1 :
Customer relationships $ 90 $ ( 15 ) $ 75 $ 90 $ ( 13 ) $ 77
Developed technology 60 ( 11 ) 49 60 ( 10 ) 50
Trade names and trademarks 18 ( 4 ) 14 18 ( 4 ) 14
Mining permits 72 ( 27 ) 45 72 ( 27 ) 45
Supplier relationships 29 ( 2 ) 27 29 ( 1 ) 28
Total intangible assets $ 269 $ ( 59 ) $ 210 $ 269 $ ( 55 ) $ 214
Intangible liabilities 2 :
Above-market supply contracts $ ( 71 ) $ 20 $ ( 51 ) $ ( 71 ) $ 19 $ ( 52 )
1 Intangible assets are classified as Other non-current assets. Amortization related to mining permits is recognized in Cost of goods sold . Amortization of all other intangible assets is recognized in Selling, general and administrative expenses.
2 Intangible liabilities are classified as Other non-current liabilities. Amortization of all intangible liabilities is recognized in Cost of goods sold .
Amortization expense related to intangible assets was $ 4 million for both the three months ended March 31, 2023 and 2022. Estimated future amortization expense is $ 9 million for the remainder of 2023 and $ 13 million annually for the years 2024 through 2028.
Income from amortization related to the intangible liabilities was $ 1 million for both the three months ended March 31, 2023 and 2022. Estimated future income from amortization is $ 4 million for the remainder of 2023 and $ 5 million annually for the years 2024 through 2028.
NOTE 7 - DEBT AND CREDIT FACILITIES
The following represents a summary of our long-term debt:
(In millions)
Debt Instrument Issuer 1
Annual Effective
Interest Rate March 31,
2023 December 31,
2022
Senior Secured Notes:
6.750 % 2026 Senior Secured Notes
Cliffs 6.99 % $ 829 $ 829
Senior Unsecured Notes:
7.000 % 2027 Senior Notes
Cliffs 9.24 % 73 73
7.000 % 2027 AK Senior Notes
AK Steel 9.24 % 56 56
5.875 % 2027 Senior Notes
Cliffs 6.49 % 556 556
4.625 % 2029 Senior Notes
Cliffs 4.63 % 368 368
4.875 % 2031 Senior Notes
Cliffs 4.88 % 325 325
6.250 % 2040 Senior Notes
Cliffs 6.34 % 235 235
ABL Facility Cliffs 2
Variable 3
2,171 1,864
Total principal amount 4,613 4,306
Unamortized discounts and issuance costs ( 54 ) ( 57 )
Total long-term debt $ 4,559 $ 4,249
1 Unless otherwise noted, references in this column and throughout this NOTE 7 - DEBT AND CREDIT FACILITIES to "Cliffs" are to Cleveland-Cliffs Inc., and references to "AK Steel" are to AK Steel Corporation (n/k/a Cleveland-Cliffs Steel Corporation).
2 Refers to Cleveland-Cliffs Inc. as borrower under our ABL Facility.
3 Our ABL Facility annual effective interest rate was 6.40 % and 5.60 %, respectively, as of March 31, 2023 and December 31, 2022.
Subsequent to the quarter ended March 31, 2023, we issued $ 750 million aggregate principal amount of 6.750 % 2030 Senior Notes. We used the net proceeds from the offering to repay a portion of the borrowings under our ABL Facility. Refer to NOTE 18 - SUBSEQUENT EVENTS for further information.
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ABL FACILITY
As of March 31, 2023, we were in compliance with the ABL Facility liquidity requirements and, therefore, the springing financial covenant requiring a minimum fixed charge coverage ratio of 1.0 to 1.0 was not applicable.
The following represents a summary of our borrowing capacity under the ABL Facility:
(In millions) March 31,
2023
Available borrowing base on ABL Facility 1
$ 4,500
Borrowings ( 2,171 )
Letter of credit obligations 2
( 147 )
Borrowing capacity available $ 2,182
1 As of March 31, 2023, the ABL Facility has a maximum available borrowing base of $ 4.5 billion. The borrowing base is determined by applying customary advance rates to eligible accounts receivable, inventory and certain mobile equipment.
2 We issued standby letters of credit with certain financial institutions in order to support business obligations, including, but not limited to, workers' compensation, employee severance, insurance, operating agreements and environmental obligations.
DEBT MATURITIES
The following represents a summary of our maturities of debt instruments based on the principal amounts outstanding at March 31, 2023 (in millions):
2023 2024 2025 2026 2027 Thereafter Total
$ — $ — $ 2,171 $ 829 $ 685 $ 928 $ 4,613
NOTE 8 - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
We offer defined benefit pension plans, defined contribution pension plans and OPEB plans to a significant portion of our employees and retirees. Benefits are also provided through multiemployer plans for certain union members.
The following are the components of defined benefit pension and OPEB costs (credits):
DEFINED BENEFIT PENSION COSTS (CREDITS)
Three Months Ended
March 31,
(In millions) 2023 2022
Service cost $ 8 $ 12
Interest cost 59 32
Expected return on plan assets ( 79 ) ( 92 )
Amortization:
Prior service costs 4 —
Net actuarial loss 1 4
Net periodic benefit credits $ ( 7 ) $ ( 44 )
OPEB COSTS (CREDITS)
Three Months Ended
March 31,
(In millions) 2023 2022
Service cost $ 2 $ 11
Interest cost 16 20
Expected return on plan assets ( 11 ) ( 10 )
Amortization:
Prior service credits ( 4 ) —
Net actuarial gain ( 36 ) ( 3 )
Net periodic benefit costs (credits) $ ( 33 ) $ 18
Based on funding requirements, we made no defined benefit pension contributions for the three months ended March 31, 2023 and March 31, 2022. Based on funding requirements, we made no contributions to our voluntary employee benefit association trust plans for the three months ended March 31, 2023. We made contributions of $ 28 million to our voluntary employee benefit association trust plans for the three months ended March 31, 2022.
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NOTE 9 - INCOME TAXES
Our 2023 estimated annual effective tax rate before discrete items as of March 31, 2023 is 22 %. The estimated annual effective tax rate exceeds the U.S. statutory rate of 21 %, as state income tax expense exceeds the percentage depletion in excess of cost depletion. The 2022 estimated annual effective tax rate before discrete items as of March 31, 2022 was 22 %.
NOTE 10 - ASSET RETIREMENT OBLIGATIONS
The accrued closure obligation provides for contractual and legal obligations related to our indefinitely idled and closed operations and for the eventual closure of our active operations. The closure date for each of our active mine sites was determined based on the exhaustion date of the remaining mineral reserves, and the amortization of the related asset and accretion of the liability is recognized over the estimated mine lives. The closure date and expected timing of the capital requirements to meet our obligations for our indefinitely idled or closed mines is determined based on the unique circumstances of each property. For indefinitely idled or closed mines, the accretion of the liability is recognized over the anticipated timing of remediation. As the majority of our asset retirement obligations at our steelmaking operations have indeterminate settlement dates, asset retirement obligations have been recorded at present values using estimated ranges of the economic lives of the underlying assets.
The following is a summary of our asset retirement obligations:
(In millions) March 31,
2023 December 31,
2022
Asset retirement obligations 1
$ 524 $ 520
Less: current portion 24 21
Long-term asset retirement obligations $ 500 $ 499
1 Includes $ 279 million and $ 277 million related to our active operations as of March 31, 2023 and December 31, 2022, respectively.
The following is a roll forward of our asset retirement obligation liability:
(In millions) 2023 2022
Asset retirement obligation as of January 1 $ 520 $ 449
Accretion expense 8 7
Revision in estimated cash flows — 7
Remediation payments ( 4 ) ( 3 )
Asset retirement obligation as of March 31 $ 524 $ 460
NOTE 11 - FAIR VALUE MEASUREMENTS
The carrying values of certain financial instruments (e.g., Accounts receivable, net , Accounts payable and Other current liabilities ) approximate fair value and, therefore, have been excluded from the table below. See NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING for information on our derivative instruments, which are accounted for at fair value on a recurring basis.
A summary of the carrying value and fair value of other financial instruments were as follows:
March 31, 2023 December 31, 2022
(In millions) Classification Carrying
Value Fair
Value Carrying
Value Fair
Value
Senior notes Level 1 $ 2,388 $ 2,356 $ 2,385 $ 2,311
ABL Facility - outstanding balance Level 2 2,171 2,171 1,864 1,864
Total $ 4,559 $ 4,527 $ 4,249 $ 4,175
The valuation of financial assets classified in Level 2 were determined using a market approach based upon quoted prices for similar assets in active markets or other inputs that were observable.
NOTE 12 - DERIVATIVE INSTRUMENTS AND HEDGING
We are exposed to fluctuations in market prices of raw materials and energy sources. We may use cash-settled commodity swaps to hedge the market risk associated with the purchase of certain of our raw materials and energy requirements. Our hedging strategy is to reduce the effect on earnings from the price volatility of these various commodity exposures, including timing differences between when we incur raw material commodity costs and when we receive sales surcharges from our customers based on those raw materials.
Our commodity contracts are designated as cash flow hedges for accounting purposes, and we record the gains and losses for the derivatives in Accumulated other comprehensive income until we reclassify them into Cost of goods sold when we recognize the associated underlying operating costs. Refer to NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME for further information.
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Our commodity contracts are classified as Level 2 as values were determined using a market approach based upon quoted prices for similar assets in active markets or other inputs that were observable.
The following table presents the notional amount of our outstanding hedge contracts:
Notional Amount
Commodity Contracts Unit of Measure Maturity Dates March 31,
2023 December 31,
2022
Natural Gas MMBtu April 2023 - November 2025 148,340,000 127,790,000
Electricity Megawatt hours April 2023 - January 2025 2,040,206 432,043
Tin Metric tons April 2023 - December 2023 135 180
The following table presents the fair value of our cash flow hedges and the classification in the Statements of Unaudited Condensed Consolidated Financial Position:
Balance Sheet Location (In millions) March 31,
2023 December 31,
2022
Other current assets $ 1 $ 15
Other non-current assets 11 30
Other current liabilities ( 141 ) ( 87 )
Other non-current liabilities ( 21 ) ( 10 )
NOTE 13 - CAPITAL STOCK
SHARE REPURCHASE PROGRAM
On February 10, 2022, our Board of Directors authorized a program to repurchase outstanding common shares in the open market or in privately negotiated transactions, which may include purchases pursuant to Rule 10b5-1 plans or accelerated share repurchases, up to a maximum of $ 1 billion. We are not obligated to make any purchases and the program may be suspended or discontinued at any time. The share repurchase program does not have a specific expiration date. During the three months ended March 31, 2023, we had no share buybacks. During the three months ended March 31, 2022, we repurchased 1 million common shares at a cost of $ 19 million in the aggregate. As of March 31, 2023, there was $ 760 million remaining under the authorization.
PREFERRED STOCK
We have 3 million shares of Serial Preferred Stock, Class A, without par value, authorized and 4 million shares of Serial Preferred Stock, Class B, without par value, authorized; no preferred shares are issued or outstanding.
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NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables reflect the changes in Accumulated other comprehensive income related to Cliffs shareholders’ equity:
Three Months Ended
March 31,
(In millions) 2023 2022
Foreign Currency Translation
Beginning balance $ ( 1 ) $ 1
Other comprehensive loss before reclassifications — —
Ending balance $ ( 1 ) $ 1
Derivative Instruments
Beginning balance $ ( 16 ) $ 68
Other comprehensive income (loss) before reclassifications ( 177 ) 168
Income tax 44 ( 39 )
Other comprehensive income (loss) before reclassifications, net of tax ( 133 ) 129
Gains reclassified from AOCI to net income (loss) 1
( 25 ) ( 42 )
Income tax expense 2
6 9
Net gains reclassified from AOCI to net income (loss) ( 19 ) ( 33 )
Ending balance $ ( 168 ) $ 164
Pension and OPEB
Beginning balance $ 1,847 $ 549
Losses (gains) reclassified from AOCI to net income (loss) 3
( 35 ) 1
Income tax expense 2
8 —
Net losses (gains) reclassified from AOCI to net income (loss) ( 27 ) 1
Ending balance $ 1,820 $ 550
Total AOCI Ending Balance $ 1,651 $ 715
1 Amounts recognized in Cost of goods sold in the Statements of Unaudited Condensed Consolidated Operations.
2 Amounts recognized in Income tax benefit (expense) in the Statements of Unaudited Condensed Consolidated Operations.
3 Amounts recognized in Net periodic benefit credits other than service cost component in the Statements of Unaudited Condensed Consolidated Operations.
NOTE 15 - VARIABLE INTEREST ENTITIES
SUNCOKE MIDDLETOWN
We purchase all the coke and electrical power generated from SunCoke Middletown’s plant under long-term supply agreements and have committed to purchase all the expected production from the facility through 2032. We consolidate SunCoke Middletown as a VIE because we are the primary beneficiary despite having no ownership interest in SunCoke Middletown. SunCoke Middletown had income before income taxes of $ 17 million and $ 15 million for the three months ended March 31, 2023 and 2022, respectively, that was included in our consolidated income before income taxes.
The assets of the consolidated VIE can only be used to settle the obligations of the consolidated VIE and not obligations of the Company. The creditors of SunCoke Middletown do not have recourse to the assets or general credit of the Company to satisfy liabilities of the VIE. The Statements of Unaudited Condensed Consolidated Financial Position includes the following amounts for SunCoke Middletown:
(In millions) March 31,
2023 December 31,
2022
Inventories $ 34 $ 28
Property, plant and equipment, net 285 288
Accounts payable ( 25 ) ( 19 )
Other assets (liabilities), net ( 26 ) ( 27 )
Noncontrolling interests ( 268 ) ( 270 )
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NOTE 16 - EARNINGS PER SHARE
The following table summarizes the computation of basic and diluted EPS:
Three Months Ended
March 31,
(In millions, except per share amounts) 2023 2022
Income (loss) from continuing operations $ ( 43 ) $ 813
Income from continuing operations attributable to noncontrolling interest ( 15 ) ( 13 )
Net income (loss) from continuing operations attributable to Cliffs shareholders ( 58 ) 800
Income from discontinued operations, net of tax 1 1
Net income (loss) attributable to Cliffs shareholders $ ( 57 ) $ 801
Weighted average number of shares:
Basic 515 521
Convertible senior notes — 7
Employee stock plans 1
— 4
Diluted 515 532
Earnings (loss) per common share attributable to Cliffs shareholders - basic:
Continuing operations $ ( 0.11 ) $ 1.54
Discontinued operations — —
$ ( 0.11 ) $ 1.54
Earnings (loss) per common share attributable to Cliffs shareholders - diluted:
Continuing operations $ ( 0.11 ) $ 1.50
Discontinued operations — —
$ ( 0.11 ) $ 1.50
1 For the three months ended March 31, 2023, we had 1 million shares related to employee stock plans that were excluded from the diluted EPS calculation as they were anti-dilutive.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
We purchase portions of the principal raw materials required for our steel manufacturing operations under annual and multi-year agreements, some of which have minimum quantity requirements. We also use large volumes of natural gas, electricity and industrial gases in our steel manufacturing operations. We negotiate most of our purchases of chrome, industrial gases and a portion of our electricity under multi-year agreements. Our purchases of coke are made under annual or multi-year agreements with periodic price adjustments. We typically purchase coal under annual fixed-price agreements. We also purchase certain transportation services under multi-year contracts with minimum quantity requirements.
CONTINGENCIES
We are currently the subject of, or party to, various claims and legal proceedings incidental to our current and historical operations. These claims and legal proceedings are subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, additional funding requirements or an injunction. If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on our financial position and results of operations for the period in which the ruling occurs or future periods. However, based on currently available information we do not believe that any pending claims or legal proceedings will result in a material adverse effect in relation to our consolidated financial statements.
ENVIRONMENTAL CONTINGENCIES
Although we believe our operating practices have been consistent with prevailing industry standards, hazardous materials may have been released at operating sites or third-party sites in the past, including operating sites that we no longer own. If we reasonably can, we estimate potential remediation expenditures for those sites where future remediation efforts are probable based on identified conditions, regulatory requirements, or contractual obligations arising from the sale of a business or facility. For sites involving government required investigations, we typically make an estimate of potential remediation expenditures only after the investigation is complete and when we better understand the nature and scope of the remediation. In general, the material factors in these estimates include the costs associated with investigations, delineations, risk assessments, remedial work, governmental response and oversight, site monitoring, and preparation of reports to the appropriate environmental agencies.
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The following is a summary of our environmental obligations:
(In millions) March 31,
2023 December 31,
2022
Environmental obligations $ 145 $ 141
Less: current portion 28 23
Long-term environmental obligations $ 117 $ 118
We cannot predict the ultimate costs for each site with certainty because of the evolving nature of the investigation and remediation process. Rather, to estimate the probable costs, we must make certain assumptions. The most significant of these assumptions is for the nature and scope of the work that will be necessary to investigate and remediate a particular site and the cost of that work. Other significant assumptions include the cleanup technology that will be used, whether and to what extent any other parties will participate in paying the investigation and remediation costs, reimbursement of past response costs and future oversight costs by governmental agencies, and the reaction of the governing environmental agencies to the proposed work plans. Costs for future investigation and remediation are not discounted to their present value, unless the amount and timing of the cash disbursements are readily known. To the extent that we have been able to reasonably estimate future liabilities, we do not believe that there is a reasonable possibility that we will incur a loss or losses that exceed the amounts we accrued for the environmental matters discussed below that would, either individually or in the aggregate, have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, since we recognize amounts in the consolidated financial statements in accordance with GAAP that exclude potential losses that are not probable or that may not be currently estimable, the ultimate costs of these environmental matters may be higher than the liabilities we currently have recorded in our consolidated financial statements.
Pursuant to RCRA, which governs the treatment, handling and disposal of hazardous waste, the EPA and authorized state environmental agencies may conduct inspections of RCRA-regulated facilities to identify areas where there have been releases of hazardous waste or hazardous constituents into the environment and may order the facilities to take corrective action to remediate such releases. Likewise, the EPA or the states may require closure or post-closure care of residual, industrial and hazardous waste management units. Environmental regulators have the authority to inspect all of our facilities. While we cannot predict the future actions of these regulators, it is possible that they may identify conditions in future inspections of these facilities that they believe require corrective action.
Pursuant to CERCLA, the EPA and state environmental authorities have conducted site investigations at some of our facilities and other third-party facilities, portions of which previously may have been used for disposal of materials that are currently regulated. The results of these investigations are still pending, and we could be directed to spend funds for remedial activities at the former disposal areas. Because of the uncertain status of these investigations, however, we cannot reasonably predict whether or when such spending might be required or its magnitude.
BURNS HARBOR WATER ISSUES
In August 2019, ArcelorMittal Burns Harbor LLC (n/k/a Cleveland-Cliffs Burns Harbor LLC) suffered a loss of the blast furnace cooling water recycle system, which led to the discharge of cyanide and ammonia in excess of the Burns Harbor plant's NPDES permit limits. Since that time, the facility has taken numerous steps to prevent recurrence and maintain compliance with its NPDES permit. We engaged in settlement discussions with the U.S. Department of Justice, the EPA and the State of Indiana to resolve any alleged violations of environmental laws or regulations arising out of the August 2019 event. Later stages of the settlement discussions included the Environmental Law and Policy Center (ELPC) and Hoosier Environmental Council (HEC), which had filed a lawsuit on December 20, 2019 in the U.S. District Court for the Northern District of Indiana alleging violations resulting from the August 2019 event and other Clean Water Act claims. On February 14, 2022, the United States and the State of Indiana filed a complaint and a proposed consent decree, and on April 21, 2022, the United States, with the consent of all of the parties, filed a motion seeking final approval of the consent decree from the court. The consent decree was approved by the court with an effective date of May 6, 2022. The consent decree requires specified enhancements to the mill's wastewater treatment systems and required us to pay a $ 3 million civil penalty, along with other terms and conditions. Other parties to the consent decree include the United States, the State of Indiana, ELPC and HEC. The ELPC/HEC civil litigation was dismissed with prejudice on May 12, 2022. In addition, ArcelorMittal Burns Harbor LLC was served with a subpoena on December 5, 2019, from the United States District Court for the Northern District of Indiana, relating to the August 2019 event and has responded to the subpoena requests, including follow-up requests. With the resolution of monetary sanctions and injunctive relief requirements under the consent decree, we do not believe that the costs to resolve any other third-party claims, including potential natural resource damages claims, that may arise out of the August 2019 event are likely to have, individually or in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or cash flows.
In addition to the foregoing matters, we are or may be involved in proceedings with various regulatory authorities that may require us to pay fines, comply with more rigorous standards or other requirements or incur capital and operating expenses for environmental compliance. We believe that the ultimate disposition of any such proceedings will not have, individually or in the aggregate, a material adverse effect on our consolidated financial condition, results of operations or cash flows.
TAX MATTERS
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. If
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we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained when challenged by the taxing authorities. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period could be materially affected. An unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
OTHER CONTINGENCIES
In addition to the matters discussed above, there are various pending and potential claims against us and our subsidiaries involving product liability, personal injury, commercial, employee benefits and other matters arising in the ordinary course of business. Because of the considerable uncertainties that exist for any claim, it is difficult to reliably or accurately estimate what the amount of a loss would be if a claimant prevails. If material assumptions or factual understandings we rely on to evaluate exposure for these contingencies prove to be inaccurate or otherwise change, we may be required to record a liability for an adverse outcome. If, however, we have reasonably evaluated potential future liabilities for all of these contingencies, including those described more specifically above, it is our opinion, unless we otherwise noted, that the ultimate liability from these contingencies, individually or in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
NOTE 18 - SUBSEQUENT EVENTS
On April 14, 2023, we issued $ 750 million aggregate principal amount of 6.750 % 2030 Senior Notes in an offering that was exempt from the registration requirements of the Securities Act. The notes were issued at par. We used the net proceeds from the notes offering to repay a portion of the borrowings under our ABL Facility.