Freeport-McMoRan 2013 Annual Report Download - page 116

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
114 | FREEPORT-McMoRan
expected to be delivered in late 2014 and early 2015 for the
GOM drilling campaign ($1.5 billion), transportation services
($853 million), the procurement of copper concentrates
($800 million), electricity ($471 million) and deferred premium
costs and future interest expected to be accrued on crude oil
derivative contracts ($454 million), which is expected to be paid
once the options settle (refer to Note 14 for further discussion
of the amounts recorded at December 31, 2013). Some of FCX’s
unconditional purchase obligations are settled based on the
prevailing market rate for the service or commodity purchased.
In some cases, the amount of the actual obligation may change
over time because of market conditions. Drillship obligations
provide for an operating rate over the contractual term upon
delivery of the drillship. Transportation obligations are primarily
for South America and PT-FI contracted ocean freight. Obligations
for copper concentrates provide for deliveries of specified
volumes to Atlantic Copper at market-based prices. Electricity
obligations are primarily for contractual minimum demand at
the South America and Tenke mines.
FCX’s future commitments associated with unconditional
purchase obligations total $1.4 billion in 2014, $1.3 billion in 2015,
$863 million in 2016, $686 million in 2017, $142 million in 2018
and $327 million thereafter, of which $444 million was accrued at
December 31, 2013, related to deferred premiums and interest
on crude oil derivative contracts. During the three-year period
ended December 31, 2013, FCX fulfilled its minimum contractual
purchase obligations or negotiated settlements in those
situations in which it terminated an agreement containing an
unconditional obligation.
Mining Contracts — Indonesia. FCX is entitled to mine in Indonesia
under the Contract of Work between PT-FI and the Government
of Indonesia. The original Contract of Work was entered into in 1967
and was replaced with a new Contract of Work in 1991. The initial
term of the current Contract of Work expires in 2021 but can be
extended by PT-FI for two 10-year periods subject to Indonesian
government approval, which pursuant to the Contract of Work
cannot be withheld or delayed unreasonably. Given the importance
of contracts of work and PT-FI’s over 40 years of working with the
Indonesian government, which included entering into the Contract
of Work in 1991 well before the expiration of the 1967 Contract of
Work, PT-FI expects that the government will approve the
extensions as long as it continues to comply with the terms of the
Contract of Work.
In July 2004, FCX received a request from the Indonesian
Department of Energy and Mineral Resources that it offer to sell
shares in PT Indocopper Investama to Indonesian nationals at fair
market value. In response to this request and in view of the
potential benefits of having additional Indonesian ownership in
the operations, FCX agreed, at the time, to consider a potential
sale of an interest in PT Indocopper Investama at fair
market value. Neither its Contract of Work nor Indonesian law
requires FCX to divest any portion of its ownership in PT-FI or
bonds totaling $331 million at December 31, 2013, associated with
environmental and asset retirement obligations ($268 million),
self-insurance bonds primarily for workers’ compensation
($21 million) and other bonds ($42 million).
Insurance. FCX purchases a variety of insurance products to
mitigate potential losses. The various insurance products typically
have specified deductible amounts or self-insured retentions and
policy limits. FCX generally is self-insured for U.S. workers’
compensation, but purchases excess insurance up to statutory
limits. An actuarial analysis is performed twice a year on the
various casualty insurance programs covering FCX’s U.S. based
mining operations, including workers’ compensation, to estimate
expected losses. At December 31, 2013, expected losses under
these insurance programs totaled $52 million, which consisted of
a current portion of $8 million (included in accounts payable and
accrued liabilities) and a long-term portion of $44 million
(included in other liabilities).
FCX’s oil and gas operations are subject to all of the risks
normally incident to the exploration for and the production of oil
and gas, including well blowouts, cratering, explosions, oil spills,
releases of gas or well fluids, fires, pollution and releases of toxic
gas, each of which could result in damage to or destruction of oil
and gas wells, production facilities or other property or injury to
persons. Although FCX maintains insurance coverage considered
to be customary in the oil and gas industry, FCX is not fully
insured against all risks either because insurance is not available
or because of high premium costs. FCX is self-insured for named
windstorms in the GOM. FCX’s insurance policies provide limited
coverage for losses or liabilities relating to pollution, with broader
coverage for sudden and accidental occurrences.
FCX and its insurers entered into an agreement in December 2012
to settle an insurance claim for business interruption and property
damage relating to the 2011 incidents affecting PT-FI’s concentrate
pipelines. The insurers agreed to pay an aggregate of $63 million,
including PT-FI’s joint venture partner’s share. As a result of the
settlement, FCX recorded a gain of $59 million in 2012.
NOTE 13. COMMITMENTS AND GUARANTEES
Operating Leases. FCX leases various types of properties, including
offices, aircraft and equipment. Future minimum rentals under
non-cancelable leases at December 31, 2013, total $45 million in
2014, $42 million in 2015, $42 million in 2016, $40 million in 2017,
$35 million in 2018 and $132 million thereafter. Minimum payments
under operating leases have not been reduced by aggregate
minimum sublease rentals, which are minimal. Total aggregate
rental expense under operating leases was $96 million in 2013,
$77 million in 2012 and $70 million in 2011.
Contractual Obligations. Based on applicable prices at
December 31, 2013, FCX has unconditional purchase obligations
of $4.7 billion, primarily comprising minimum commitments
for two deepwater drillships currently under construction and