Freeport-McMoRan 2012 Annual Report Download - page 32

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MANAGEMENT’S DISCUSSION AND ANALYSIS
Following is a summary of changes in our estimated
environmental obligations for the years ended December 31
(in millions):
2012 2011 2010
Balance at beginning of year $ 1, 45 3 $ 1,422 $ 1,464
Accretion expense
a
80 88 97
Additions 70 132 19
Reductions
b
(182) (68) —
Spending (199) (121) (158)
Balance at end of year $ 1, 2 2 2 $ 1,453 $ 1,422
a. Represents accretion of the fair value of environmental obligations assumed in the
acquisition of Freeport-McMoRan Corporation (FMC), which were determined on a
discounted cash flow basis.
b. Reductions primarily reflected adjustments for changes in the anticipated scope and
timing of environmental remediation projects and the settlement of environmental matters.
Refer to Note 13 for further discussion of environmental obligations.
Reclamation and Closure Costs. Reclamation is an ongoing
activity that occurs throughout the life of a mine. We record the
fair value of our estimated asset retirement obligations (AROs)
associated with tangible long-lived assets in the period incurred.
Fair value is measured as the present value of cash flow estimates
after considering inflation and then applying a market risk
premium. Our cost estimates are reflected on a third-party cost
basis and comply with our legal obligation to retire tangible
long-lived assets in the period incurred. These cost estimates may
differ from financial assurance cost estimates for reclamation
activities because of a variety of factors, including obtaining
updated cost estimates for reclamation activities, the timing of
reclamation activities, changes in scope and the exclusion of
certain costs not considered reclamation and closure costs. Refer
to Note 1 for further discussion of our accounting policy for
reclamation and closure costs.
Generally, ARO activities are specified by regulations or in
permits issued by the relevant governing authority, and
management judgment is required to estimate the extent and
timing of expenditures based on life-of-mine planning. Accounting
for reclamation and closure costs represents a critical accounting
estimate because (i) we will not incur most of these costs for a
number of years, requiring us to make estimates over a long
period, (ii) reclamation and closure laws and regulations could
change in the future and/or circumstances affecting our operations
could change, either of which could result in significant changes to
our current plans, (iii) calculating the fair value of our AROs
requires management to estimate projected cash flows, make
long-term assumptions about inflation rates, determine our
credit-adjusted, risk-free interest rates and determine market risk
premiums that are appropriate for our operations and (iv) given
the magnitude of our estimated reclamation and closure costs,
changes in any or all of these estimates could have a significant
impact on our results of operations.
At least annually, we review our ARO estimates for changes in
the projected timing of certain reclamation costs, changes in cost
estimates and additional AROs incurred during the period.
Following is a summary of changes in our AROs for the years
ended December 31 (in millions):
2012 2011 2010
Balance at beginning of year $ 921 $ 8 56 $ 731
Liabilities incurred 6 9 5
Revisions to cash flow estimates
a
211 48 105
Accretion expense 55 58 54
Spending (47) (49) (38)
Foreign currency translation adjustment — (1) (1)
Balance at end of year $ 1,146 $ 921 $ 856
a. Revisions to cash flow estimates are primarily related to updated closure plans that
included revised cost estimates and accelerated timing of certain closure activities.
Refer to Note 13 for further discussion of reclamation and
closure costs.
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 or
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. 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.
Our valuation allowances totaled $2.4 billion at December 31,
2012 and 2011, and covered all of our U.S. foreign tax credit
carryforwards, and a portion of our foreign net operating loss
carryforwards, U.S. state net operating loss carryforwards, U.S.
state deferred tax assets, U.S. capital loss carryforwards and
U.S. minimum tax credit carryforwards. These valuation allowances
include $82 million at December 31, 2012, and $80 million at
December 31, 2011, for tax benefits that, if recognized, would be
credited directly to other comprehensive income.
Refer to Note 12 for further discussion.