Freeport-McMoRan 2008 Annual Report Download - page 25

Management’s Discussion and Analysis
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 23
Refer to Note 15 for further discussion of reclamation and
closure costs.
Environmental Obligations. Our mining, exploration,
production and historical operating activities are subject to
stringent laws and regulations governing the protection of the
environment, and compliance with those laws requires significant
expenditures. Environmental expenditures for closed facilities
and closed portions of operating facilities are expensed or
capitalized depending upon their future economic benefits. The
general guidance provided by U.S. GAAP requires that liabilities
for contingencies be recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated.
Refer to Note 1 for further discussion of our accounting policy for
environmental expenditures.
Accounting for environmental obligations represents a critical
accounting estimate because changes to environmental laws
and regulations and/or circumstances affecting our operations
could result in significant changes to our estimates, which could
have a significant impact on our results of operations. We
review changes in facts and circumstances associated with the
environmental obligations on a quarterly basis. Judgments and
estimates are based upon available facts, existing technology,
presently enacted laws and regulations, remediation experience,
whether or not we are a potentially responsible party (PRP), the
ability of other PRPs to pay their allocated portions and take into
consideration reasonably possible outcomes. Our estimates can
change substantially as additional information becomes available
regarding the nature or extent of site contamination, required
remediation methods and actions by or against governmental
agencies or private parties.
At December 31, 2008, environmental reserves recorded in our
consolidated balance sheets totaled approximately $1.4 billion,
which reflect obligations for environmental liabilities attributed to
the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) or analogous state programs and for
estimated future costs associated with environmental matters at
closed facilities and closed portions of certain operating facilities.
Following is a summary of changes in our estimated
environmental obligations for the years ended December 31, 2008
and 2007 (in millions):
2008 2007
Balance at beginning of year $ 1,268 $ –
Liabilities assumed in the acquisition of Phelps Dodge 117 1,334
Accretion expense
a
95 –
Additions 36 6
Reductions (1) (1)
Spending (114) (71)
Balance at end of year $ 1,401 $ 1,268
a. Represents accretion of the fair values of environmental obligations assumed in
the acquisition of Phelps Dodge, which were determined on a discounted cash
flow basis.
Refer to Note 15 for further discussion of environmental
obligations.
Deferred Taxes. In preparing our annual consolidated financial
statements, we estimate the actual amount of taxes currently
payable or receivable as well as deferred tax assets and liabilities
attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates and
laws is recognized in income in the period in which such changes
are enacted.
A valuation allowance is provided for those deferred tax assets
for which it is more likely than not that the related benefits will
not be realized. In determining the amount of the valuation
allowance, we consider estimated future taxable income as well
as feasible tax planning strategies in each jurisdiction. If we
determine that we will not realize all or a portion of our deferred
tax assets, we will increase our valuation allowance with a
charge to income tax expense. Conversely, if we determine that
we will ultimately be able to realize all or a portion of the related
benefits for which a valuation allowance has been provided, all or
a portion of the related valuation allowance will be reduced with
a credit to income tax expense.
At December 31, 2008, our valuation allowances totaled $1.8
billion and covered all of our U.S. foreign tax credit carryforwards,
U.S. minimum tax credit carryforwards, foreign net operating loss
carryforwards and U.S. state net operating loss carryforwards,
and also covered a portion of our net U.S. deferred tax assets. At
December 31, 2007, our valuation allowances totaled $1.2 billion
and covered all of our U.S. foreign tax credit carryforwards, a
portion of our foreign net operating loss carryforwards and a
portion of our U.S. state net operating loss carryforwards. The
$598 million increase in the valuation allowance during 2008 was
primarily the result of the declines in copper and molybdenum
prices and long-lived asset impairment charges recorded in
fourth-quarter 2008. Refer to Note 14 for further discussion.