Freeport-McMoRan 2014 Annual Report Download - page 119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 2014, expected losses under these insurance
programs totaled $64 million, which consisted of a current portion
of $8 million (included in accounts payable and accrued
liabilities) and a long-term portion of $56 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 paid 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, 2014, total $44 million in
2015, $44 million in 2016, $42 million in 2017, $36 million in 2018,
$23 million in 2019 and $165 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 2014,
$96 million in 2013 and $77 million in 2012.
Contractual Obligations. Based on applicable prices at
December 31, 2014, FCX has unconditional purchase obligations
of $4.3 billion, primarily comprising minimum commitments for
deepwater drillships to be utilized in the GOM drilling campaign
($1.8 billion), transportation services ($732 million), the
procurement of copper concentrates ($572 million), electricity
($316 million) and deferred premium costs and future interest on
crude oil derivative contracts ($231 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, 2014). 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 contracted ocean freight and FM O&G
contracted gathering. 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 mines.
FCX’s future commitments associated with unconditional
purchase obligations total $2.1 billion in 2015, $1.0 billion in 2016,
$707 million in 2017, $111 million in 2018, $119 million in 2019
and $204 million thereafter, of which $210 million was accrued
at December 31, 2014, related to deferred premiums and interest
on crude oil derivative contracts. During the three-year period
ended December 31, 2014, FCX fulfilled its minimum contractual
purchase obligations.
Mining Contracts — Indonesia. FCX is entitled to mine in
Indonesia under the COW between PT-FI and the Government of
Indonesia. The original COW was entered into in 1967 and was
replaced with the current COW in 1991. The initial term of the
current COW expires in 2021 but can be extended by PT-FI for two
10-year periods subject to Indonesian government approval,
which pursuant to the COW cannot be withheld or delayed
unreasonably. PT-FI is currently engaged in discussions with the
Indonesian government related to the amendment and extension
of its contractual and operating rights for the two 10-year
extension periods.
The copper royalty rate payable by PT-FI under its COW, prior to
modifications discussed below as a result of a recent Memorandum
of Understanding (MOU) entered into with the Indonesian
government, varied from 1.5 percent of copper net revenue at
a copper price of $0.90 or less per pound to 3.5 percent at a copper
price of $1.10 or more per pound. The COW royalty rate for gold
and silver sales was at a fixed rate of 1.0 percent.
A large part of the mineral royalties under Indonesian
government regulations is designated to the provinces from which
the minerals are extracted. In connection with its fourth
concentrator mill expansion completed in 1998, PT-FI agreed to
pay the Government of Indonesia additional royalties (royalties
not required by the COW) to provide further support to the local
governments and the people of the Indonesian province of Papua.
The additional royalties, prior to modifications discussed below
as a result of a recent MOU, were paid on production exceeding
specified annual amounts of copper, gold and silver generated
when PT-FI’s milling facilities operated above 200,000 metric tons
of ore per day. The additional royalty for copper equaled the
COW royalty rate, and for gold and silver equaled twice the COW