Freeport-McMoRan 2014 Annual Report Download - page 96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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interests that were acquired by FCX and not considered part of
purchase consideration.
Prior to June 3, 2013, FCX owned 500,000 shares of MMR’s
5.75% Convertible Perpetual Preferred Stock, Series 2, which were
accounted for under the cost method and recorded on FCX’s
balance sheet at $432 million on May 31, 2013. Through its
acquisition of PXP on May 31, 2013, FCX acquired 51 million shares
of MMR’s common stock, which had a fair value of $848 million on
that date based upon the closing market price of MMR’s common
stock ($16.63 per share, i.e., Level 1 measurement). As a result
of FCX obtaining control of MMR on June 3, 2013, FCX remeasured
its ownership interests in MMR to a fair value of $1.4 billion,
resulting in a gain of $128 million that was recorded in 2013. Fair
value was calculated using the closing quoted market price
of MMR’s common stock on June 3, 2013, of $16.75 per share (i.e.,
Level 1 measurement) and a valuation model using observable
inputs (i.e., Level 2 measurement) for the preferred stock.
Following is a summary of the $3.1 billion purchase price for MMR:
Number of shares of MMR common stock acquired (millions) 112.362
a
Cash consideration of $14.75 per share $ 14.75
Cash consideration paid by FCX $ 1,657
Employee stock-based awards 63
Total 1,72 0
Fair value of FCX’s investment in 51 million shares
of MMR common stock acquired on
May 31, 2013, through the acquisition of PXP 854
Fair value of FCX’s investment in MMR’s 5.75%
Convertible Perpetual Preferred Stock, Series 2 554
Total purchase price $ 3,128
a. Excludes 51 million shares of MMR common stock owned by FCX through its acquisition
of PXP on May 31, 2013.
The following table summarizes the final purchase price allocations
for PXP and MMR:
PXP MMR Eliminations Total
Current assets $ 1,193 $ 98 $ — $ 1,291
Oil and gas properties – full cost method:
Subject to amortization 11,447 751 — 12,198
Not subject to amortization 9,401 1,711 — 11,112
Property, plant and equipment 261 1 — 262
Investment in MMR
a
848 — (848) —
Other assets 12 382 — 394
Current liabilities (906) (174) — (1,080)
Debt (current and long-term) (10,631) (620) — (11,251)
Deferred income taxes
b
(3,917) — — (3,917)
Other long-term liabilities (799) (262) — (1,061)
Redeemable noncontrolling interest (708) (259) — (967)
Total fair value, excluding goodwill 6,201 1,628 (848) 6,981
Goodwill 438 1,500 — 1,938
Total purchase price $ 6,639 $ 3,128 $ (848) $ 8,919
a. PXP owned 51 million shares of MMR common stock, which were eliminated in FCX’s consolidated balance sheet at the acquisition date of MMR.
b. Deferred income taxes have been recognized based on the estimated fair value adjustments to net assets using a 38 percent tax rate, which reflected a 35 percent federal statutory rate and
a 3 percent weighted-average of the applicable statutory state tax rates (net of federal benefit).
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.
During second-quarter 2014, FCX finalized the purchase price
allocations, which resulted in a decrease of $5 million to oil and
gas properties subject to amortization, an increase of $25 million
to oil and gas properties not subject to amortization, a net
decrease of $42 million to deferred income tax assets and an
increase of $22 million to goodwill.
In accordance with the acquisition method of accounting, the
purchase price from FCX’s acquisitions of both PXP and MMR has
been allocated to the assets acquired, liabilities assumed and
redeemable noncontrolling interest based on their estimated fair
values on the respective acquisition dates. The fair value estimates
were based on, but not limited to, quoted market prices, where
available; expected future cash flows based on estimated reserve
quantities; costs to produce and develop reserves; current
replacement cost for similar capacity for certain fixed assets; market
rate assumptions for contractual obligations; appropriate discount
rates and growth rates; and crude oil and natural gas forward
prices. The excess of the total consideration over the estimated fair
value of the amounts assigned to the identifiable assets acquired,
liabilities assumed and redeemable noncontrolling interest was
recorded as goodwill. Goodwill recorded in connection with the
acquisitions is not deductible for income tax purposes.