Freeport-McMoRan 2007 Annual Report Download - page 90

FREEPORT-McMoRan COPPER & GOLD INC.
2007 Annual Report
88 Financial & Operating Information
Notes to Consolidated Financial Statements
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 and $5 million in 2005.
Restrictive Covenants. The senior credit facility, the $6.0 billion
of senior notes used to finance the acquisition of Phelps Dodge and the
6 7/8% 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. At
December 31, 2007, the most restrictive of these covenants allowed for
such payments up to a limit of $5.1 billion.
Maturities. Maturities of debt instruments based on the amounts
and terms outstanding at December 31, 2007, total $31 million in 2008,
$49 million in 2009, $22 million in 2010, $141 million in 2011, $74
million in 2012 and $6,894 million thereafter.
NOTE 12. EMPLOYEE BENEFITS
Pension Plans. Following is a discussion of FCX’s pension plans.
Phelps Dodge Plans. As a result of the acquisition of Phelps Dodge,
FCX acquired trusteed, non-contributory pension plans covering
substantially all of Phelps Dodge’s U.S. employees and some employees
of its international subsidiaries. The applicable Phelps Dodge 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 Phelps
Dodge plans generally vest in their accrued benefits after five years
of service. Non-bargained Phelps Dodge employees hired after
December 31, 2006, are not eligible to participate in the Phelps Dodge
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. At
the date of acquisition, Phelps Dodge had plans where the plan assets
exceeded the benefit obligations (overfunded plans) and plans where the
benefit obligations exceeded the plan assets (underfunded plans).
FCX’s policy for determining asset-mix targets for the Phelps Dodge
Corporation Defined Benefit Master Trust (Master Trust) includes the
periodic development of asset/liability studies to determine expected
long-term rates of return and expected risk for various investment
portfolios. Management considers these studies in the formal
establishment of asset-mix targets that are reviewed by FCX’s trust
investment committee. The expected rate of return on plan assets is
evaluated at least annually, taking into consideration its asset allocation,
historical returns on the types of assets held in the Master Trust, and
the current economic environment. For U.S. plans, the determination of
the expected long-term rate of return on plan assets is based on
expected future performance of the plan asset mix and active plan asset
management. Based on these factors, FCX expects the pension assets
will earn an average of 8.5 percent per annum during the 10 years
beginning January 1, 2008, with a standard deviation of 8.9 percent.
The 8.5 percent estimation was based on a passive return on a
compound basis of 8.0 percent and a premium for active management
of 0.5 percent reflecting the target asset allocation and current
investment array. On an arithmetic average basis, the passive return
would have been 8.4 percent with a premium for active management of
0.5 percent.
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 (or decrease recorded pension income) 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 with the Citibank Pension Discount
Curve. Changes in this assumption are reflected in FCX’s benefit