Freeport-McMoRan 2014 Annual Report Download - page 121

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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contracts. Among other changes to the amended ARMC, FCX’s
effective ownership interest in TFM was reduced from 57.75 percent
to 56 percent and $50 million of TFM’s stockholder loan payable
to a subsidiary of FMC was converted to equity.
Community Development Programs. FCX has adopted policies
that govern its working relationships with the communities where
it operates. These policies are designed to guide its practices
and programs in a manner that respects basic human rights and
the culture of the local people impacted by FCX’s operations.
FCX continues to make significant expenditures on community
development, education, training and cultural programs.
In 1996, PT-FI established the Freeport Partnership Fund for
Community Development (Partnership Fund) through which PT-FI
has made available funding and technical assistance to support
community development initiatives in the area of health,
education and economic development of the area. PT-FI has
committed through 2016 to provide one percent of its annual
revenue for the development of the local people in its area of
operations through the Partnership Fund. PT-FI charged $31
million in 2014, $41 million in 2013 and $39 million in 2012 to cost
of sales for this commitment.
TFM has committed to assist the communities living within its
concession area in the Katanga province of the DRC. TFM will
contribute 0.3 percent of net sales revenue from production to a
community development fund to assist the local communities
with development of local infrastructure and related services,
such as those pertaining to health, education and economic
development. TFM charged $4 million in each of the years 2014,
2013 and 2012 to cost of sales for this commitment.
Guarantees. FCX provides certain financial guarantees
(including indirect guarantees of the indebtedness of others)
and indemnities.
FCX’s venture agreement with Sumitomo at its Morenci mine in
Arizona (refer to Note 3 for further discussion) includes a put and
call option guarantee clause. FCX holds an 85 percent undivided
interest in the Morenci complex. Under certain conditions defined
in the venture agreement, Sumitomo has the right to sell its
15 percent share to FCX. Likewise, under certain conditions, FCX
has the right to purchase Sumitomo’s share of the venture. At
December 31, 2014, the maximum potential payment FCX is
obligated to make to Sumitomo upon exercise of the put option (or
FCX’s exercise of its call option) totaled approximately $354
million based on calculations defined in the venture agreement.
At December 31, 2014, FCX had not recorded any liability in its
consolidated financial statements in connection with this
guarantee as FCX does not believe, based on information
available, that it is probable that any amounts will be paid under
this guarantee as the fair value of Sumitomo’s 15 percent share is
in excess of the exercise price.
Prior to its acquisition by FCX, FMC and its subsidiaries have,
as part of merger, acquisition, divestiture and other transactions,
from time to time, indemnified certain sellers, buyers or other
parties related to the transaction from and against certain
liabilities associated with conditions in existence (or claims
associated with actions taken) prior to the closing date of the
transaction. As part of these transactions, FMC indemnified the
counterparty from and against certain excluded or retained
liabilities existing at the time of sale that would otherwise have
been transferred to the party at closing. These indemnity
provisions generally now require FCX to indemnify the party
against certain liabilities that may arise in the future from the
pre-closing activities of FMC for assets sold or purchased. The
indemnity classifications include environmental, tax and certain
operating liabilities, claims or litigation existing at closing and
various excluded liabilities or obligations. Most of these
indemnity obligations arise from transactions that closed many
years ago, and given the nature of these indemnity obligations,
it is not possible to estimate the maximum potential exposure.
Except as described in the following sentence, FCX does not
consider any of such obligations as having a probable likelihood
of payment that is reasonably estimable, and accordingly, has
not recorded any obligations associated with these indemnities.
With respect to FCX’s environmental indemnity obligations, any
expected costs from these guarantees are accrued when potential
environmental obligations are considered by management to be
probable and the costs can be reasonably estimated.
NOTE 14. FINANCIAL INSTRUMENTS
FCX does not purchase, hold or sell derivative financial instruments
unless there is an existing asset or obligation, or it anticipates a
future activity that is likely to occur and will result in exposure to
market risks, which FCX intends to offset or mitigate. FCX does
not enter into any derivative financial instruments for speculative
purposes, but has entered into derivative financial instruments in
limited instances to achieve specific objectives. These objectives
principally relate to managing risks associated with commodity
price changes, foreign currency exchange rates and interest rates.
Commodity Contracts. From time to time, FCX has entered into
derivatives contracts to hedge the market risk associated with
fluctuations in the prices of commodities it purchases and sells.
As a result of the acquisition of PXP, FCX assumed a variety of
crude oil and natural gas commodity derivatives to hedge the
exposure to the volatility of crude oil and natural gas commodity
prices. Derivative financial instruments used by FCX to manage its
risks do not contain credit risk-related contingent provisions. As
of December 31, 2014 and 2013, FCX had no price protection
contracts relating to its mine production. A discussion of FCX’s
derivative contracts and programs follows.