Freeport-McMoRan 2013 Annual Report Download - page 94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
92 | FREEPORT-McMoRan
FCX deferred debt issuance costs of $96 million in connection with
the debt financings of the acquisitions (refer to Note 8 for further
discussion of the debt financings), which are included in other
assets in the consolidated balance sheet as of December 31, 2013.
Redeemable Noncontrolling Interest — PXP. In 2011, PXP
issued (i) 450,000 shares of Plains Offshore Operations Inc. (Plains
Offshore, a consolidated subsidiary) 8% Convertible Preferred
Stock (Preferred Stock) for gross proceeds of $450 million and
(ii) non-detachable warrants with an exercise price of $20 per
share to purchase in aggregate 9.1 million shares of Plains Offshore’s
common stock. In addition, Plains Offshore issued 87 million
shares of Plains Offshore Class A common stock, which will be
held in escrow until the conversion and cancellation of the
Preferred Stock or the exercise of the warrants. Plains Offshore
holds certain of FM O&G’s oil and gas properties and assets
located in the GOM in water depths of 500 feet or more, including
the Lucius oil field and the Phobos discovery, but excluding
the properties acquired by PXP in 2012 from BP Exploration &
Production Inc., BP America Production Company and Shell
Offshore Inc. The Preferred Stock represents a 20 percent equity
interest in Plains Offshore and is entitled to a dividend of
8 percent per annum, payable quarterly, of which 2 percent may
be deferred ($23 million of accumulated deferred dividends
as of December 31, 2013). The preferred holders are entitled to
vote on all matters on which Plains Offshore common
stockholders are entitled to vote. The shares of Preferred Stock
also fully participate, on an as-converted basis at four times, in
cash dividends distributed to any class of common stockholders
of Plains Offshore. Plains Offshore has not distributed any
dividends to its common stockholders.
The holders of the Preferred Stock (preferred holders) have
the right, at any time at their option, to convert any or all of such
holder’s shares of Preferred Stock and exercise any of
the associated non-detachable warrants into shares of Class A
common stock of Plains Offshore, at an initial conversion/
exercise price of $20 per share; the conversion price is subject to
adjustment as a result of certain events. Furthermore,
Plains Offshore has the right to convert all or a portion of the
outstanding shares of Preferred Stock if certain events occur
more than 180 days after an initial public offering or a qualified
public offering of Plains Offshore. FM O&G also has a right to
purchase shares of Plains Offshore preferred stock, common
stock and warrants under certain circumstances in order to permit
the consolidation of Plains Offshore for federal income tax
purposes. Additionally, at any time on or after November 17, 2016,
the fifth anniversary of the closing date, FM O&G may exercise a
call right to purchase all, but not less than all, of the outstanding
shares of Preferred Stock and associated non-detachable
warrants for cash, at a price equal to the liquidation preference
described below.
At any time after November 17, 2015, the fourth anniversary of
the closing date, a majority of the preferred holders may cause
recorded in connection with the acquisitions is not deductible for
income tax purposes.
The final valuation of assets acquired, liabilities assumed and
redeemable noncontrolling interest is not complete and the net
adjustments to those values may result in changes to goodwill and
other carrying amounts initially assigned to the assets, liabilities
and redeemable noncontrolling interest based on the preliminary
fair value analysis. The principal remaining items to be valued are
tax assets and liabilities, and any related valuation allowances,
which will be finalized in connection with the filing of related tax
returns. A summary of the 2013 adjustments to the initial fair
values assigned to assets acquired, liabilities assumed and
redeemable noncontrolling interest from the acquisitions follows:
PXP MMR Total
Increase in current assets (primarily
current deferred income tax asset) $ 183 $ 2 $ 185
Decreases in oil and gas properties –
full cost method:
Subject to amortization — (45) (45)
Not subject to amortization (234) (6) (240)
Increase in other assets (deferred income
tax asset) — 24 24
Net increase in deferred income tax liability (45) — (45)
Net decrease (increase) in other liabilities
(primarily warrants) 77 (4) 73
Decrease in redeemable noncontrolling
interest 41 — 41
(Decrease) increase in goodwill (17) 29 12
The fair value measurement of the oil and gas properties, asset
retirement obligations included in other liabilities (refer to Note 12
for further discussion) and redeemable noncontrolling interest
were based, in part, on significant inputs not observable in the
market (as discussed above) and thus represents a Level 3
measurement. The fair value measurement of long-term debt,
including the current portion, was based on prices obtained from
a readily available pricing source and thus represents a Level 2
measurement.
Goodwill arose on these acquisitions principally because of
limited drilling activities to date and the absence of production
history and material reserve data associated with the very large
geologic potential of an emerging trend targeting deep-seated
structures in the shallow waters of the GOM and onshore
analogous to large discoveries in the Deepwater GOM and other
proven basins’ prospects. In addition, goodwill also resulted from
the requirement to recognize deferred taxes on the difference
between the fair value and the tax basis of the acquired assets.
For the seven-month period from June 1, 2013, to December 31,
2013, FM O&G contributed revenue of $2.6 billion and operating
income of $450 million to FCX’s consolidated results. FCX’s
acquisition-related costs associated with the acquisitions of PXP
and MMR totaled $74 million for the year ended December 31, 2013,
which were included in selling, general and administrative
expenses in the consolidated statements of income. In addition,