Freeport-McMoRan 2013 Annual Report Download - page 100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
98 | FREEPORT-McMoRan
FCX’s policy for determining asset-mix targets for the Freeport-
McMoRan Corporation Defined Benefit Master Trust (Master
Trust) includes the periodic development of asset and liability
studies to determine expected long-term rates of return and
expected risk for various investment portfolios. FCX’s retirement
plan administration and investment committee considers these
studies in the formal establishment of asset-mix targets. FCX’s
investment objective emphasizes the need to maintain a well-
diversified investment program through both the allocation of the
Master Trust assets among asset classes and the selection of
investment managers whose various styles are fundamentally
complementary to one another and serve to achieve satisfactory
rates of return. Diversification, by asset class and by investment
manager, is FCX’s principal means of reducing volatility and
exercising prudent investment judgment. FCX’s present target
asset allocation approximates 57 percent equity investments
(primarily global equities), 33 percent fixed income (primarily
long-term treasury STRIPS or “separate trading or registered
interest and principal securities”; long-term U.S. treasury/agency
bonds; international fixed income securities; treasury inflation-
protection securities; long-term, high-credit quality corporate
bonds; high-yield and emerging markets fixed income securities;
and fixed income debt securities) and 10 percent alternative
investments (private real estate, real estate investment trusts and
private equity).
The expected rate of return on plan assets is evaluated at least
annually, taking into consideration asset allocation, historical
returns on the types of assets held in the Master Trust and the
current economic environment. Based on these factors, FCX
expects the pension assets will earn an average of 7.5 percent per
annum beginning January 1, 2014. The 7.5 percent estimation
was based on a passive return on a compound basis of 7.0 percent
and a premium for active management of 0.5 percent reflecting
the target asset allocation and current investment array.
For estimation purposes, FCX assumes the long-term asset mix
for these plans generally will be consistent with the current mix.
Changes in the asset mix could impact the amount of recorded
pension income or expense, the funded status of the plans and
the need for future cash contributions. A lower-than-expected
return on assets also would decrease plan assets and increase the
amount of recorded pension expense in future years. When
calculating the expected return on plan assets, FCX uses the market
value of assets.
Among the assumptions used to estimate the benefit obligation
is a discount rate used to calculate the present value of expected
future benefit payments for service to date. The discount rate
assumption for FCX’s U.S. plans is designed to reflect yields on
high-quality, fixed-income investments for a given duration. The
determination of the discount rate for these plans is based on
expected future benefit payments for service to date together
Restrictive Covenants. FCX’s term loan and revolving credit
facility contain customary affirmative covenants and
representations, and also contain a number of negative covenants
that, among other things, restrict, subject to certain exceptions,
the ability of FCX’s subsidiaries that are not borrowers or
guarantors to incur additional indebtedness (including guarantee
obligations) and FCX’s ability or the ability of FCX’s subsidiaries
to: create liens on assets; enter into sale and leaseback
transactions; engage in mergers, liquidations and dissolutions;
and sell all or substantially all of the assets of FCX and its
subsidiaries, taken as a whole. FCX’s term loan and revolving
credit facility also contain financial ratios governing maximum
total leverage and minimum interest coverage. FCX’s senior notes
contain limitations on liens that are generally typical for
investment grade companies. At December 31, 2013, FCX was in
compliance with all of its covenants.
Maturities. Maturities of debt instruments based on the
amounts and terms outstanding at December 31, 2013, total
$312 million in 2014, $1.1 billion in 2015, $751 million in 2016,
$700 million in 2017, $3.7 billion in 2018 and $13.5 billion thereafter.
NOTE 9. OTHER LIABILITIES, INCLUDING
EMPLOYEE BENEFITS
Information regarding other liabilities follows:
December 31, 2013 2012
Pension, postretirement, postemployment and
other employment benefits
a
$ 1,225 $ 1,340
Commodity derivative contracts 115 —
Reserve for uncertain tax benefits 87 107
Other 263 197
Total other liabilities $ 1, 69 0 $ 1, 64 4
a. Refer to Note 7 for current portion.
Pension Plans. Following is a discussion of FCX’s pension plans.
FMC Plans. FMC has trusteed, non-contributory pension plans
covering substantially all of its U.S. employees and some
employees of its international subsidiaries hired before 2007. The
applicable FMC plan design determines the manner in which
benefits are calculated for any particular group of employees.
Benefits are calculated based on final average monthly
compensation and years of service or 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.
FCX’s funding policy for these plans provides that contributions
to pension trusts shall be at least equal to the minimum funding
requirements of the Employee Retirement Income Security Act of
1974, as amended, for U.S. plans; or, in the case of international
plans, the minimum legal requirements that may be applicable in
the various countries. Additional contributions also may be made
from time to time.