Freeport-McMoRan 2014 Annual Report Download - page 39

MANAGEMENT’S DISCUSSION AND ANALYSIS
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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
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 December 31, 2014,
AROs recorded in our consolidated balance sheet totaled
$2.8 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, 2014.
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
wellbores, 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.
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.
Our operations are in multiple jurisdictions where uncertainties
arise in the application of complex tax regulations. Some of these
tax regimes are defined by contractual agreements with the local
government, while others are defined by general tax laws and
regulations. We and our subsidiaries are subject to reviews of our
income tax filings and other tax payments, and disputes can arise
with the taxing authorities over the interpretation of our contracts
or laws. The final taxes paid may be dependent upon many
factors, including negotiations with taxing authorities. In certain
jurisdictions, we must pay a portion of the disputed amount to the
local government in order to formally appeal the assessment.
Such payment is recorded as a receivable if we believe the
amount is collectible.
A valuation allowance is provided for those deferred income
tax assets for which it is more likely than not that the related
benefits will not be realized. In determining the amount of the
valuation allowance, we consider estimated future taxable income
as well as feasible tax planning strategies in each jurisdiction. If
we determine that we will not realize all or a portion of our
deferred income tax assets, we will increase our valuation
allowance. Conversely, if we determine that we will ultimately be
able to realize all or a portion of the related benefits for which a
valuation allowance has been provided, all or a portion of the
related valuation allowance will be reduced.
Our valuation allowances totaled $2.4 billion at December 31,
2014, and covered a portion of our U.S. foreign tax credit
carryforwards, foreign net operating loss carryforwards, U.S.
state net operating loss carryforwards and U.S. state deferred tax
assets. Valuation allowances totaled $2.5 billion at December 31,
2013, and covered all of our U.S. foreign tax credit carryforwards,
and a portion of our foreign net operating loss carryforwards,
U.S. state net operating loss carryforwards, U.S. state deferred
tax assets and U.S. capital loss carryforwards. Refer to Note 11 for
further discussion.