Freeport-McMoRan 2013 Annual Report Download - page 39

MANAGEMENT’S DISCUSSION AND ANALYSIS
2013 ANNUAL REPORT | 37
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. At least annually, we review
our ARO estimates for changes in the projected timing of certain
reclamation and closure/restoration costs, changes in cost
estimates and additional AROs incurred during the period. At
December 31, 2013, AROs recorded in our consolidated balance
sheet totaled $2.3 billion, including $1.1 billion associated with our
oil and gas operations. Refer to Notes 1 and 12 for further discussion
of reclamation and closure costs, including a summary of changes
in our AROs for the three years ended December 31, 2013.
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. Accounting for AROs 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) the methods used or
required to plug and abandon non-producing oil and gas well
bores, remove platforms, tanks, production equipment and flow
lines, and restore the wellsite could change, (iv) 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 (v) given the magnitude of our estimated
reclamation, mine closure and wellsite abandonment and
restoration costs, changes in any or all of these estimates could
have a significant impact on our results of operations.
Deferred Income Taxes. In preparing our annual consolidated
financial statements, we estimate the actual amount of income
taxes currently payable or receivable as well as deferred income
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 income 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.
Accordingly, we believe events negatively affecting crude oil and
natural gas prices or our estimates of oil and natural gas
reserves may indicate impairment of goodwill assigned to our
U.S. oil and gas reporting unit, and we could have an impairment
of goodwill in the future.
Environmental Obligations. Our current and historical operating
activities are subject to various national, state and local
environmental laws and regulations that govern the protection of
the environment, and compliance with those laws requires
significant expenditures. Environmental expenditures are expensed
or capitalized, depending upon their future economic benefits.
The guidance provided by U.S. GAAP requires that liabilities
for contingencies be recorded when it is probable that obligations
have been incurred and the cost can be reasonably estimated.
At December 31, 2013, environmental obligations recorded in our
consolidated balance sheet totaled $1.2 billion, which reflect
obligations for environmental liabilities attributed to the
Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA) or analogous state programs
and for estimated future costs associated with environmental
matters. Refer to Notes 1 and 12 for further discussion of
environmental obligations, including a summary of changes in
our estimated environmental obligations for the three years
ending December 31, 2013.
Accounting for environmental obligations represents a critical
accounting estimate because changes to environmental laws and
regulations and/or circumstances affecting our operations could
result in significant changes to our estimates, which could have a
significant impact on our results of operations. We perform a
comprehensive annual review of our environmental obligations
and also review changes in facts and circumstances associated
with these obligations at least quarterly. Judgments and
estimates are based upon available facts, existing technology,
presently enacted laws and regulations, remediation experience,
whether or not we are a potentially responsible party (PRP), the
ability of other PRPs to pay their allocated portions and take into
consideration reasonably possible outcomes. Our cost estimates
can change substantially as additional information becomes
available regarding the nature or extent of site contamination,
updated cost assumptions (including increases and decreases to
cost estimates), changes in the anticipated scope and timing of
remediation activities, the settlement of environmental matters,
required remediation methods and actions by or against
governmental agencies or private parties.
Asset Retirement Obligations. 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 a market risk premium. Our cost
estimates are reflected on a third-party cost basis and comply