Freeport-McMoRan 2008 Annual Report Download - page 96

Notes to Consolidated Financial Statements
94 FREEPORT-McMoRan COPPER & GOLD INC. 2008 Annual Report
A summary of changes in environmental obligations for the
years ended December 31, 2008 and 2007, follows:
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
Less current portion (120) (166)
Long-term portion $ 1,281 $ 1,102
a. Represents accretion of the fair value of environmental obligations assumed in
the acquisition of Phelps Dodge, which were determined on a discounted cash
flow basis.
As a result of the acquisition of Phelps Dodge, FCX was required
to record Phelps Dodge’s environmental obligations at fair value
on the acquisition date in accordance with SFAS No. 141,
“Business Combinations.” At the acquisition date, Phelps
Dodge’s historical environmental obligations of $385 million,
before purchase accounting adjustments to fair value, were
based on accounting guidance provided by SFAS No. 5,
“Accounting for Contingencies,” and SOP 96-1, which require
that an estimated loss be recorded for a loss contingency if, prior
to the issuance of the financial statements, it is probable that a
liability had been incurred and the loss can be reasonably
estimated. Amounts recorded under this guidance are generally
not considered fair value. FCX has an environmental and legal
group dedicated to the ongoing review and monitoring of
environmental remediation sites. At the acquisition date, the
largest environmental remediation sites were undergoing studies
to evaluate the extent of the environmental damage and the
available remedies. Advancement of these studies and
consideration of alternative remedies and cost sharing
arrangements resulted in FCX’s calculation of the estimated fair
values being approximately $1.1 billion greater than the historical
Phelps Dodge estimates. FCX finalized the allocation of the
purchase price associated with the Phelps Dodge acquisition
in the first quarter of 2008. As a result, the fair value of the
environmental obligations was estimated at approximately $1.45
billion. Significant adjustments to these reserves could occur in
the future. New environmental obligations will be recorded in
accordance with SFAS No. 5 and SOP 96-1, as described in Note 1
under "Environmental Expenditures."
FCX believes that there may be other potential claims for
recovery from other third parties, including the U.S. government
and other PRPs. These potential recoveries are not recognized
unless realization is considered probable.
At December 31, 2008, the most significant environmental
obligations are associated with the Pinal Creek site, several
historical smelter sites principally located in Arizona, Kansas and
Oklahoma, and uranium mining sites in the western U.S. The
recorded environmental reserves for these sites totaled $954
million at December 31, 2008. A discussion of these sites follows.
Pinal Creek. FCX is a party to litigation entitled Pinal Creek
Group, et al. v. Newmont Mining Corporation, et al., United
States District Court, District of Arizona, Case No. CIV 91-1764
PHX DAE (LOA), filed on May 1, 1991. The Pinal Creek site
located near Miami, Arizona, was listed under the Arizona
Department of Environmental Quality (ADEQ) Water Quality
Assurance Revolving Fund program in 1989 for contamination in
the shallow alluvial aquifers within the Pinal Creek drainage
near Miami, Arizona. Since that time, environmental remediation
has been performed by the members of the Pinal Creek Group
(PCG), consisting of Phelps Dodge Miami, Inc. (Miami), a wholly
owned subsidiary of FMC, and two other companies. In 1998, the
District Court approved a Consent Decree between the PCG
members and the state of Arizona resolving all matters related
to an enforcement action contemplated by the state of Arizona
against the PCG members with respect to groundwater. The
Consent Decree committed the PCG members to complete the
remediation work outlined in the Consent Decree. That work
continues at this time pursuant to the Consent Decree and
consistent with state law and the National Contingency Plan
prepared by EPA under CERCLA.
Remediation has been proceeding pursuant to an interim
allocation of cost sharing among the members of the PCG,
with Miami’s interim allocation being approximately two-thirds;
however, there are significant disagreements among the
members of the PCG regarding the allocation of the cost of
remediation. Discovery disputes resulted in a sanctions order
against Miami that included significant evidentiary restrictions
on Miami’s case. The trial on the allocation issue will be
scheduled after the final determination of Miami’s pending
interlocutory appeal of a trial court ruling on the liability standard
that should apply to one of the remaining defendants on Miami’s
case. A final determination of the allocation, if different from the
interim allocation, would likely result in a “true up” payment
with respect to the remediation that has already been completed
from the party found to be responsible for a higher proportion
than the interim allocation and would establish the cost-sharing
proportions for the remainder of the cleanup. The overall cost
of the cleanup is expected to be significant.
Historical Smelter Sites. FMC and its predecessors at various
times owned or operated historical copper and zinc smelters
in several states, including Arizona, Kansas, Oklahoma and
Pennsylvania. For some of these smelter sites, certain FCX
subsidiaries have been advised by EPA or state agencies that
they may be liable for costs of investigating and, if appropriate,
remediating environmental conditions associated with the
smelters. At other sites, certain FCX subsidiaries have entered
into state voluntary remediation programs to investigate and,