Freeport-McMoRan 2008 Annual Report Download - page 85

Notes to Consolidated Financial Statements
2008 Annual Report FREEPORT-McMoRan COPPER & GOLD INC. 83
The 71
/ 8% Debentures due November 2027 bear interest payable
semiannually on May 1 and November 1. The debentures are
redeemable in whole or in part, at the option of FCX, at a make-
whole redemption price. In March 2007, in connection with the
acquisition of Phelps Dodge, FCX assumed these debentures with a
stated and fair value of $115 million. At December 31, 2008, the
outstanding principal amount of these debentures was $115 million.
In February 2003, FCX sold $575 million of 7% Convertible
Senior Notes due February 2011 for net proceeds of $559 million.
Interest on the notes is payable semiannually on March 1 and
September 1. The notes were initially convertible, at the option of
the holder, at any time on or prior to maturity into shares of FCX’s
common stock at a conversion price of $30.87 per share, which
was equal to a conversion rate of approximately 32.39 shares of
common stock per $1,000 principal amount of notes. The
conversion rate is adjustable when dividends over a twelve-
month period exceed a certain threshold. As a result of FCX’s
cumulative twelve-month dividends through February 2007, the
conversion price was adjusted to $30.16 per share, which is equal
to a conversion rate of approximately 33.16 shares of common
stock per $1,000 principal amount of notes. No further
adjustments to the conversion price have been required since
that time. In 2005, FCX privately negotiated transactions to
induce conversion of $251 million of these notes into 8.1 million
shares of FCX common stock, which resulted in a 2005 net charge
of $25 million ($23 million to net income or $0.11 per diluted
share). In 2006, FCX completed a tender offer and privately
negotiated transactions to induce conversions of $317 million of
these notes into 10.3 million shares of FCX common stock, which
resulted in a 2006 net charge of $31 million ($30 million to net
income or $0.13 per diluted share). In 2007, $6 million of these
notes were converted into 0.2 million shares of FCX common
stock and the balance at December 31, 2008, was $1 million.
In January 2003, FCX sold $500 million of 101
/ 8% Senior Notes
due 2010 for net proceeds of $487 million. In 2005, FCX purchased
in open-market transactions $216 million of these notes and
recorded transaction-related charges of $27 million ($17 million to
net income or $0.08 per diluted share). In 2006, FCX purchased in
an open-market transaction $11 million of these notes and
recorded transaction-related charges of $1 million ($1 million to
net income or less than $0.01 per diluted share). During 2007,
FCX purchased in an open-market transaction the remaining $273
million of these notes and recorded transaction-related charges of
$17 million ($10 million to net income or $0.02 per diluted share).
All of FCX’s senior notes are unsecured, except for the 67
/ 8%
Senior Notes.
Redeemable Preferred Stock. As discussed in Note 1, pursuant
to SFAS No. 150, mandatorily redeemable preferred stock is
classified as debt.
At December 31, 2005, FCX had outstanding 4.3 million
depositary shares representing 215,279 shares of its Gold-
Denominated Preferred Stock, Series II totaling $167 million. Each
depositary share had a cumulative quarterly cash dividend equal
to the value of 0.0008125 ounce of gold and was redeemed in
February 2006 for the cash value of 0.1 ounce of gold ($236
million). The mandatory redemption resulted in a $167 million
decrease in debt and a loss recognized in 2006 revenues of
$69 million ($37 million to net income or $0.17 per diluted share).
At December 31, 2005, FCX had outstanding 4.8 million
depositary shares representing 14,875 shares of its Silver-
Denominated Preferred Stock totaling $13 million. Each
depositary share had a cumulative quarterly cash dividend equal
to the value of 0.0051563 ounce of silver. On August 1, 2006, FCX
funded the last of eight scheduled annual redemption payments
on its Silver-Denominated Preferred Stock for $26 million, resulting
in a $13 million decrease in debt. The mandatory redemptions also
resulted in losses recognized in revenues totaling $13 million in
2006 ($7 million to net income or $0.03 per diluted share).
Restrictive Covenants. The senior credit facility, the $6.0 billion
of senior notes used to finance the acquisition of Phelps Dodge
and the 67
/ 8% Senior Notes contain covenants that limit FCX’s
ability to make certain payments. These restrictions vary among
the instruments, but generally limit FCX’s ability to pay certain
dividends on common and preferred stock, repurchase or redeem
common and preferred equity, prepay subordinated debt and make
certain investments. As a result of the upgrade of FCX’s unsecured
notes to investment grade, the restricted payment covenants
contained in its $6.0 billion of senior notes used to finance the
acquisition of Phelps Dodge and 67
/ 8% Senior Notes have been
suspended. To the extent the rating is downgraded below
investment grade, the covenants would again become effective. At
December 31, 2008, the most restrictive of these covenants allowed
for such payments up to a limit in excess of $5 billion.
Maturities. Maturities of debt instruments based on the
amounts and terms outstanding at December 31, 2008, total $67
million in 2009, $10 million in 2010, $135 million in 2011, $246
million in 2012, $14 million in 2013 and $6,879 million thereafter.
NOTE 12. EMPLOYEE BENEFITS
Pension Plans. Following is a discussion of FCX’s pension plans.
FMC Plans. As a result of the acquisition of Phelps Dodge, FCX
acquired trusteed, non-contributory pension plans covering
substantially all of FMC’s U.S. employees and some employees of its
international subsidiaries. The applicable FMC plan design
determines the manner in which benefits are calculated for any
particular group of employees. For certain of these plans, benefits
are calculated based on final average monthly compensation and
years of service. In the case of other plans, benefits are calculated
based on a fixed amount for each year of service. Participants in the
FMC plans generally vest in their accrued benefits after five years
of service. Non-bargained FMC employees hired after December 31,
2006, are not eligible to participate in the FMC U.S. pension plan.