Item 3. Legal Proceedings - --------------------------
I. The Corporation is participating, either directly as a party or as a member of certain trade associations, in several legal challenges to air quality rules or guidance documents issued by EPA. This litigation primarily involves the establishment or amendment of national ambient air quality standards, the requirements for the construction or major modification of major sources of criteria pollutants, Title V operating permits, and the status of fugitive emissions under the Title V and federal hazardous air pollutants programs.
In August 1983, EPA proposed regulations (48 Fed. Reg. 38,742) which, if adopted, would have substantially implemented a February 1982 settlement agreement dealing with fugitive emissions, but on October 26, 1984, EPA promulgated final regulations inconsistent with the August 1983 proposal. In December 1984, the Corporation, the American Mining Congress and several mining and energy development companies filed a petition (No. 84-1609) in the U.S. Court of Appeals for the District of Columbia for review of the October 26, 1984, regulations, asserting that the terms of the settlement agreement, to which they were party, had not been carried out. The court stayed the petition pending the outcome of further EPA rulemakings.
The further EPA rulemakings also have been challenged by the American Mining Congress and others in federal court actions filed in 1989 and 1993. All of the pre-1993 cases are being held in abeyance at the request of the parties. Currently before the court in the 1993 case is a joint motion by the American Mining Congress and EPA to hold that case in abeyance while the parties engage in settlement discussions that could resolve some of the contested issues. Also, on October 7, 1993, the American Mining Congress filed with the Administrator of EPA a petition for reconsideration of yet another related rulemaking (58 Fed. Reg. 31,622). EPA's response to the petition also could resolve some of the contested issues in the stayed lawsuits.
II. Reference is made to Part I, Items 1 and 2 of this report for information regarding proceedings that pertain to water used by the Corporation's Morenci, Arizona operations.
A. The following state water rights adjudication proceedings are pending in Arizona Superior Court:
1. In re the General Adjudication of All Rights to Use Water in the Little Colorado River System and Source, No. 6417 (Superior Court of Arizona, Apache County).
(a) Petition was filed by the Corporation on or about February 17, 1978, and process has been served on all potential claimants. Virtually all statements of claimant have been filed.
(b) The principal parties, in addition to the Corporation, are the State of Arizona, the Navajo Tribe of Indians, the Hopi Indian Tribe, the San Juan Southern Paiute group of Indians and the United States on its own behalf and on behalf of those Indian tribes. In this adjudication and in the adjudications reported in items 2.(a), (b) and (c) below, the United States and the Indian tribes seek to have determined and quantified their rights to use water arising under federal law on the basis that, when the Indian reservations and other federal reservations were established by the United States, water was reserved from appropriation under state law for the use of those reservations.
(c) This proceeding could affect, among other things, the Corporation's rights to impound water in Show Low Lake and Blue Ridge Reservoir and to transport this water into the Salt River and Verde River watersheds for exchange with the Salt River Valley Water Users' Association. The Corporation has filed statements of claimant for these and other water claims. This litigation is stayed pending the outcome of current settlement negotiations. The Court has not set a final schedule of cases to go to trial, should the litigation resume.
2. In re the General Adjudication of All Rights to Use Water in the Gila River System and Source, Nos. W-1 (Salt River), W-2 (Verde River), W-3 (Gila River) and W-4 (San Pedro River) (Superior Court of Arizona, Maricopa County). As a result of consolidation proceedings, this action now includes general adjudication proceedings with respect to the following three principal river systems and sources:
(a) The Gila River System and Source Adjudication:
(i) Petition was filed by the Corporation on February 17, 1978. Process has been served on water claimants in the upper and lower reaches of the watershed and virtually all statements of claimant have been filed.
(ii) The principal parties, in addition to the Corporation, are the Gila Valley Irrigation District, the San Carlos Irrigation and Drainage District, the State of Arizona, the San Carlos Apache Tribe, the Gila River Indian Community and the United States on its own behalf and on behalf of the tribe and the community.
(iii) This proceeding could affect, among other things, the Corporation's claim to the approximately 3,000 acre-feet of water that it diverts annually from Eagle Creek, Chase Creek or the San Francisco River and its claims to percolating groundwater that is pumped from wells located north of its Morenci Branch operations in the Mud Springs and Bee Canyon areas and in the vicinity of the New Cornelia Branch at Ajo. The Corporation has filed statements of claimant with respect to waters that it diverts from these sources.
(iv) By a letter agreement dated September 7, 1990, the Corporation and the San Carlos Apache Tribe agreed upon principles to settle the water claims of that Tribe. Legislation authorizing that settlement was enacted into law on October 30, 1992. A comprehensive settlement agreement is presently being negotiated. Congress has approved a one year extension so that the settlement will become effective if it is approved by the Arizona Superior Court and certain conditions are met by December 31, 1995.
(b) The Salt River System and Source Adjudication:
(i) Petition was filed by the Salt River Valley Water Users' Association on or about April 25, 1974. Process has been served, and statements of claimant have been filed by virtually all claimants.
(ii) Principal parties, in addition to the Corporation, include the petitioner, the State of Arizona and the United States, on its own behalf and on behalf of various Indian tribes and communities including the White Mountain Apache Tribe, the San Carlos Apache Tribe, the Fort McDowell Mohave-Apache Indian Community, the Salt River Pima-Maricopa Indian Community and the Gila River Indian Community.
(iii) The Corporation has filed a statement of claimant to assert its interest in the water exchange agreement with the Salt River Valley Water Users' Association by virtue of which it diverts from the Black River water claimed by the Association and repays the Association with water impounded in Show Low Lake and Blue Ridge Reservoir on the Little Colorado River Watershed, and to assert its interest in "water credits" to which the Corporation is entitled as a result of its construction of the Horseshoe Dam on the Verde River.
(iv) The Salt River Pima-Maricopa Indian Community, Salt River Valley Water Users' Association, the principal Salt River Valley Cities, the State of Arizona and others have negotiated a settlement as among themselves for the Verde and Salt River system. The settlement has been approved by Congress, the President and the Arizona Superior Court. Under the settlement, the Salt River Pima-Maricopa Indian Community waived all water claims it has against all other water claimants (including the Corporation) in Arizona.
(v) Active proceedings with respect to other claimants have not yet commenced in this adjudication.
(c) The Verde River System and Source Adjudication:
(i) Petition was filed by the Salt River Valley Water Users' Association on or about February 24, 1976, and process has been served. Virtually all statements of claimant have been filed.
(ii) The principal parties, in addition to the Corporation, are the petitioner, the Fort McDowell Mohave-Apache Indian Community, the Payson Community of Yavapai Apache Indians, the Salt River Pima-Maricopa Indian Community, the Gila River Indian Community, the United States on its own behalf and on behalf of those Indian communities, and the State of Arizona.
(iii) This proceeding could affect, among other things, the Corporation's Horseshoe Dam "water credits" with the Salt River Valley Water Users' Association resulting from its construction of the Horseshoe Dam on the Verde River. (See the Black River water exchange referred to in Paragraph II.A. 2.(b)(iii) above.) The Corporation has filed statements of claimant with respect to Horseshoe Dam and water claims associated with the former operations of the United Verde Branch.
(iv) The Fort McDowell Mohave- Apache Indian Community, Salt River Valley Water Users' Association, the principal Salt River Valley Cities, the State of Arizona and others have negotiated a settlement as among themselves for the Verde River system. This settlement has been approved by Congress, the President and the Arizona Superior Court. Under this settlement, the Fort McDowell Mohave-Apache Indian Community waived all water claims it has against all other water claimants (including the Corporation) in Arizona.
B. The following proceedings involving water rights adjudication are pending in the U.S. District Court for the District of Arizona:
1. On June 29, 1988, the Gila River Indian Community filed a complaint-in-intervention in United States v. Gila Valley Irrigation District, et al., Globe Equity No. 59 (D. Ariz.). The underlying action was initiated by the United States in October 1925 to determine conflicting claims to water rights in certain portions of the Gila River watershed. Although the Corporation was named and served as a defendant in that action, it was dismissed without prejudice as a defendant in March 1935. In June 1935, the Court entered a decree setting forth the water rights of numerous parties, but not those of the Corporation. The Court retained, and still has, jurisdiction of the case. The complaint-in-intervention does not name the Corporation as a defendant; however, it does name the Gila Valley Irrigation District as a defendant. Therefore, the complaint-in-intervention could affect the approximately 3,000 acre-feet of water that the Corporation diverts annually from Eagle Creek, Chase Creek or the San Francisco River pursuant to the agreement between the Corporation and the Gila Valley Irrigation District. In April 1990, the Court entered Findings of Fact and Conclusions of Law on four of the counts in the complaint-in-intervention. Trial on additional issues (primarily issues raised by plaintiff-in-intervention San Carlos Apache Tribe) was conducted in November 1991. In November 1992, after submission of post-trial briefs, the Court entered a judgment on the additional issues. The Corporation believes that neither the Findings of Fact or the Conclusions of Law entered in 1990 nor the judgment entered in 1992 should affect the 3,000 acre-feet of water that the Corporation diverts annually pursuant to the agreement with the Gila Valley Irrigation District. An appeal of the 1992 judgment, however, has been noticed by the Gila Valley Irrigation District and others.
The major users on the mainstream of the Gila River (decreed right holders) had engaged in continuing mandatory settlement discussions under the supervision of the Court until those discussions terminated during the summer of 1994. Some remaining issues were tried in November, 1994. The Court has not yet ruled on those issues. If the Court limits its ruling to the issues as they were framed for the 1994 trial, there should be no direct impact on the Corporation.
Additional issues remain, some of which may go to trial during 1995.
2. On December 30, 1982, the Gila River Indian Community initiated an action styled Gila River Indian Community v. Gila Valley Irrigation District, et al., No. CIA 82-2185 (D. Ariz.), complaining about allegedly improper uses by approximately 17,000 named defendants of "water from within the Gila River watershed." The Corporation was named as a defendant in the complaint, but it has not yet been served with process. The complaint seeks an injunction restraining future uses of water that interfere with the alleged prior rights of the Gila River Indian Community as well as compensatory and punitive damages in an unspecified amount.
3. Prior to December 1982, various Indian tribes filed several suits in the U.S. District Court for the District of Arizona claiming prior and paramount rights to use waters which are presently being used by many water users, including the Corporation, and claiming damages for prior use in derogation of their allegedly paramount rights. These federal proceedings have been stayed pending final adjudication in the state courts.
III. Prior to the mid-1960s, a predecessor of Phelps Dodge Industries, Inc. (PDI), a subsidiary of the Corporation, manufactured and sold some cable and wire products that were insulated with material containing asbestos. PDI believes that the use of these products did not result in significant releases of airborne asbestos fibers. PDI and the Corporation are collectively referred to below as PDI.
Since the late 1980s, PDI has been served with complaints in asbestos-related actions filed on behalf of over 13,500 claimants. In these proceedings, plaintiffs have alleged bodily injury or death caused by purported exposure to asbestos and have claimed damages based on theories of strict liability and negligence. Over 12,500 of those claimants were participants in the Ingalls Shipyard asbestos litigation filed in Pascagoula, Mississippi. Each claimant in that litigation sought from $2 million to $20 million in compensatory and punitive damages from a group of approximately 100 to 150 defendants, which included PDI. During 1993 and 1994, PDI was successful in obtaining dismissal of all claims against it in Mississippi with the exception of one wrongful death claim.
A total of 2,802 claims against PDI were dismissed in 1994. During that year, 93 new asbestos-related claims were filed against PDI in eight states. As of December 31, 1994, a total of 336 asbestos-related claims were being defended by PDI in 14 jurisdictions. PDI is vigorously contesting and defending these asbestos-related claims.
IV. Claims under CERCLA and related state acts involving the Corporation have been raised with respect to the remediation of 36 waste disposal and other sites. Most are sites where the Corporation has received information requests or other indications that the Corporation may be a Potentially Responsible Party (PRP) under CERCLA. CERCLA is intended to expedite the remediation of hazardous substances without regard to fault. Responsible parties for each site include present and former owners, operators, transporters, and generators of the substances at the site. Liability is strict, joint and several. Because of the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of allocating the remediation costs among them, the uncertainty as to the most desirable remediation techniques and amount of remediation costs, and the time period during which such costs may be incurred, the Corporation is unable to reasonably estimate the full cost of compliance with CERCLA or equivalent state statutes.
With respect to these 36 sites, based on currently available information, which in many cases is preliminary and incomplete, the Corporation has no reason to believe that its ultimate responsibility for remediation costs will exceed $1.0 million at any site and believes most will be substantially under $0.1 million.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 1994 to a vote of security holders, through the solicitation of proxies or otherwise.
Executive Officers of Phelps Dodge Corporation - ----------------------------------------------
The executive officers of Phelps Dodge Corporation are elected to serve at the pleasure of its Board of Directors. As of March 1, 1995, the executive officers of Phelps Dodge Corporation were as follows:
Age at Officer of the Name 3/1/95 Position Corporation since ---- ------ -------- -----------------
Douglas C. Yearley 59 Chairman of the Board, President and Chief Executive Officer 1981
Manuel J. Iraola 46 Senior Vice President 1995
Patrick J. Ryan 58 Senior Vice President 1981
Thomas M. St. Clair 59 Senior Vice President and Chief Financial Officer 1989
J. Steven Whisler 40 Senior Vice President 1987
Except as stated below, all of the above have been officers of Phelps Dodge Corporation for the past five years.
Mr. Iraola was elected Senior Vice President in January 1995. Prior to his election, Mr. Iraola was President of Phelps Dodge International Corporation, the largest Phelps Dodge Industries' company, a position he held since 1992. Prior to that time, he was Senior Vice President and Chief Financial Officer of Columbian Chemicals Company, acquired by Phelps Dodge in 1986.
Part II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters - --------------------------------------------------------------------------
The information called for by Item 5 appears in Management's Discussion and Analysis in this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS - ---------------------------------------------
Phelps Dodge reported 1994 consolidated net income of $271.0 million, or $3.81 per common share. This amount included income of $362.7 million, or $5.10 per common share, less non-recurring after-tax charges in the fourth quarter of $91.7 million, or $1.29 per common share. The non-recurring charges included additional provisions of $98.7 million before taxes for estimated future costs associated with environmental matters comprising $88.9 million applicable to Phelps Dodge Mining Company, $8.6 million applicable to Phelps Dodge Industries and $1.2 million applicable to Corporate and other, and $41.5 million before taxes for estimated losses on the disposition of certain operating facilities. The non-recurring charge for asset dispositions included $36.0 million before taxes for Phelps Dodge Industries, comprising a provision of $20.0 million for the impairment of value of Hudson International Conductors, a loss of $7.0 million on the sale of the Corporation's 40 percent interest in its Mexican associate company (CONELEC S.A. de C.V.) and a provision of $9.0 million for the closure of Columbian Chemicals Company's carbon black plant in Hamburg, Germany. The non-recurring charge for asset dispositions also included $5.5 million before taxes for Phelps Dodge Mining Company issues.
The decision to take these charges was unrelated to management's outlook for copper or other market factors. The charges relating to the disposition of certain operating facilities resulted from management's efforts to assess all of the Corporation's operations relative to internationally competitive quality and cost criteria. The operations identified were peripheral to the Corporation's business and their disposition should not have any adverse effect on the company's future earnings potential. The charges relating to environmental matters resulted from a reassessment of future environmental obligations based on currently available facts, existing technology and presently enacted laws and regulations. These environmental charges resulted in part from an agreement between Chino Mines Company, which is two-thirds owned by Phelps Dodge Corporation, and the New Mexico Environment Department in late 1994 under which the Corporation's estimate of certain of its environmental obligations has become clearer. The identification of these charges is consistent with the Corporation's policy of recording environmental obligations in a timely manner. As a result of this 1994 environmental charge and balances remaining from previously provided charges for environmental costs, the Corporation's reserves for such costs totaled approximately $169 million at December 31, 1994. Notes 1 and 20 to the Consolidated Financial Statements contain further information to which reference should be made for a fuller understanding of the Corporation's policy for recording environmental obligations.
The Corporation reported 1993 consolidated net income of $187.9 million, or $2.66 per common share, including after-tax revenues of $26.0 million, or 37 cents per common share, from copper price protection arrangements. Net income in 1993 was adversely affected by the passage of the Omnibus Budget Reconciliation Act of 1993 in the third quarter that retroactively raised the maximum corporate income tax rate from 34 percent to 35 percent effective January 1, 1993. The Corporation raised its 1993 tax provision by approximately $9.0 million, or 13 cents per common share, including $3.0 million for the effect of the tax rate increase on 1993 earnings and an additional $6.0 million for prior years deferred taxes at December 31, 1992.
The Corporation reported 1992 income of $301.6 million, or $4.28 per common share, before the cumulative effect of accounting changes. This 1992 income included a non-taxable gain of $36.4 million, or 52 cents per common share, on a subsidiary's stock issuance in connection with two Sumitomo companies' acquisition of a 20 percent interest in the Candelaria copper project in Chile. Income taxes were not provided by Phelps Dodge on the $36.4 million book gain because the proceeds were indefinitely reinvested in the Chilean company. Consolidated net income for 1992 was $221.7 million, or $3.15 per common share, after recognizing the cumulative effect of accounting changes with respect to postretirement and postemployment benefits and income taxes.
All per share amounts in this report reflect average shares outstanding for the respective periods after giving effect to a two-for-one stock split in May 1992.
The Corporation's consolidated financial results for the last three years are summarized below (in millions except per common share amounts):
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A significant factor influencing the Corporation's 1994 results was the improved price of copper, the Corporation's principal product. Any material change in the price the Corporation receives for copper, or in its unit production costs, has a significant effect on the Corporation's results. The Corporation's present share of annual production is approximately 1.3 billion pounds of copper including 200 million pounds from Candelaria which began operations in the 1994 fourth quarter. Accordingly, each 1 cent per pound change in the average annual copper price received by the Corporation, or in average annual unit production costs, causes a variation in annual operating income before taxes of approximately $13 million. The Corporation's share of estimated annual copper production capacity will increase by approximately 130 million pounds as a result of the Southside expansion at the Corporation's Morenci mine in southeastern Arizona, with startup scheduled in 1995. This increase will add approximately $1.3 million to the variation in annual pre-tax operating income from each 1 cent per pound change in average realized copper prices or average unit production costs.
The New York Commodity Exchange (COMEX) spot price per pound of copper cathode, upon which the Corporation bases its selling price, averaged $1.07 in 1994, compared with 85 cents in 1993 and $1.03 in 1992. The COMEX price averaged $1.37 per pound for the first two months of 1995, and closed at that price on March 7, 1995.
The Corporation enters into price protection arrangements from time to time, depending on market circumstances, to ensure a minimum price for a portion of its expected future mine production. With respect to 1994 production, the Corporation entered into contracts with several financial institutions that provided for minimum 1994 quarterly average prices of 75 cents per pound for 244 million pounds of copper cathode, about 21 percent of 1994 production. These contracts were based on the average London Metal Exchange (LME) price each quarter and expired at December 31, 1994, without payment to Phelps Dodge. During 1993, the Corporation recognized revenues of $39.4 million before taxes ($26.0 million, or 37 cents per common share, after taxes) from similar arrangements.
With respect to 1995 production, as of December 31, 1994, the Corporation had entered into annual contracts with several financial institutions that provide for minimum 1995 quarterly average prices of 80 cents per pound for approximately 640 million pounds of copper cathode. These contracts are based on the average LME price each quarter. In addition, the Corporation had entered into annual contracts that effectively ensure minimum (approximately 95 cents) and maximum (approximately $1.33) prices per pound for approximately 650 million pounds of copper cathode. The minimum prices are based on quarterly average LME prices for approximately 370 million pounds and on the annual average LME price for the remainder. The maximum prices are based on the annual average LME price for all 650 million pounds. Approximately 95 percent of the Corporation's expected 1995 copper production has been protected under these contracts.
With respect to 1996 production, as of March 7, 1995, the Corporation had entered into contracts with several financial institutions that provide for a minimum 1996 first quarter average price of 95 cents per pound for approximately 170 million pounds of copper cathode. These contracts are based on the average LME price for the quarter. In addition, the Corporation had entered into contracts that effectively ensure minimum (approximately 95 cents) and maximum (approximately $1.47) prices per pound for the 1996 first quarter for approximately 65 million pounds of copper cathode. The minimum and maximum prices are based on the quarterly average LME price. Approximately 65 percent of the Corporation's expected 1996 first quarter copper production has been protected under these contracts.
The Corporation periodically enters into forward exchange contracts to hedge certain recorded transactions denominated in foreign currencies and enters into currency option contracts to hedge certain firm commitments and other anticipated foreign currency transactions. The Corporation does not hold these financial instruments for trading purposes. The objective of the Corporation's foreign currency hedging activities is to protect the Corporation from the risk that the eventual dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. During 1994, recorded and anticipated foreign currency transactions that the Corporation had hedged did not exceed $127 million and totaled $95 million at year end. Notes 1 and 21 to the Consolidated Financial Statements contain further information to which reference should be made for a fuller understanding of the Corporation's policy for hedging foreign currency transactions.
Consolidated 1994 revenues were $3,289.2 million, compared with $2,595.9 million in 1993. This increase principally resulted from higher average copper prices, higher sales volumes of copper (including copper purchased for resale), wheels and rims, wire and cable products (including magnet wire sales from two recently acquired U.S. plants) and carbon black. The increase in consolidated revenues from $2,579.3 million in 1992 to $2,595.9 million in 1993 primarily resulted from higher sales volumes of copper (including copper purchased for resale) and wheels and rims, and increased sales by the international wire and cable operations (principally reflecting a late 1992 acquisition in Venezuela). These sales volume increases more than offset an 18 cents per pound decrease in the average COMEX copper price from 1992 to 1993.
Three accounting standards adopted by the Corporation in the 1992 fourth quarter were treated as though they had been in effect since the beginning of that year. As a result of its decision to elect early adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," No. 109, "Accounting for Income Taxes," and No. 112, "Employers' Accounting for Postemployment Benefits," the Corporation recorded a non-recurring, after-tax transition charge of $79.9 million that was reflected in revised 1992 first quarter results. More information on the effects of these accounting standards is included later in Management's Discussion and Analysis, and in Notes 6, 17 and 18 to the Consolidated Financial Statements. The adoption of these standards had no effect on cash flow.
Phelps Dodge's results for 1994, 1993 and 1992 can be meaningfully compared by separate reference to its reporting segments, Phelps Dodge Mining Company and Phelps Dodge Industries. Phelps Dodge Mining Company includes the Corporation's worldwide copper operations from mining through rod production, marketing and sales, other mining operations and investments, and worldwide mineral exploration and development programs. Phelps Dodge Industries includes the Corporation's carbon black and synthetic iron oxide operations, its wheel and rim business, and its magnet wire, specialty conductor and cable operations.
Within each such segment, significant events and transactions have occurred which, as indicated in the separate discussions presented below, are material to an understanding of the particular year's results and to a comparison with results of the other periods. Note 22 to the Consolidated Financial Statements contains further information to which reference should be made for a fuller understanding of the following discussion and analysis. Statistics on reserves and production can be found in Part I, Items 1 and 2 of this report.
RESULTS OF PHELPS DODGE MINING COMPANY
Phelps Dodge Mining Company is an international business comprising a group of companies involved in vertically integrated copper operations including mining, concentrating, electrowinning, smelting and refining, rod production, marketing and sales, and related activities. Copper is sold primarily to others as rod, cathode or concentrates, and to the Phelps Dodge Industries segment. In addition, Phelps Dodge Mining Company at times smelts and refines copper and produces copper rod for others on a toll basis. Phelps Dodge Mining Company also produces gold, silver, molybdenum and copper chemicals, principally as by-products, and sulfuric acid from its air quality control facilities. This segment also includes the Corporation's other mining operations and investments (including fluorspar, silver, lead and zinc operations) and its worldwide mineral exploration and development programs.
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Phelps Dodge Mining Company recorded 1994 operating income of $420.8 million, which, after reflecting $94.4 million of fourth quarter non-recurring pre-tax charges applicable to its operations, was reduced to $326.4 million. This compares with $227.2 million in 1993 and $366.0 million in 1992. The increase in operating earnings in 1994 resulted from higher average copper prices and sales volumes of copper sold from mine production. Higher copper production and sales volumes and slightly lower unit production costs in 1994 included the effects of the commencement of production at the newest Phelps Dodge mine, Candelaria, in the 1994 fourth quarter. Earnings in 1993 compared with 1992 were affected by lower average realized copper prices and higher unit costs of copper production, offset in part by an increase in the volume of copper sold and the favorable effect of price protection arrangements.
The Candelaria mine is located near Copiapo in the Atacama Desert of northern Chile. Discovered in 1987 by the Phelps Dodge exploration group, Candelaria has estimated ore reserves of 399.1 million tons at an average grade of 1.1 percent copper and containing 3 million ounces of gold. Phelps Dodge owns an 80 percent interest in Candelaria and a jointly owned subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation, both of Japan, owns a 20 percent interest. Phelps Dodge Mining Company completed construction and commenced operations at Candelaria in October 1994, and anticipates full production in 1995. The project consists of an open-pit mine, concentrator, port and associated facilities. Candelaria, which is operated by Phelps Dodge, is expected to produce more than 130,000 tons of copper and 80,000 ounces of gold annually over the estimated 34-year mine life.
Copper unit production costs have been generally stable for the three-year period ended December 31, 1994, primarily as a result of high levels of production of low-cost cathode copper at solution extraction/electrowinning (SX/EW) plants in Morenci, Arizona; Tyrone, New Mexico; and Santa Rita, New Mexico; and as a result of the closure of the higher cost concentrator operations at Tyrone in February 1992. Copper produced by SX/EW accounted for 47 percent of the Corporation's total production in 1994, compared with 47 percent in 1993 and 45 percent in 1992. The SX/EW method of copper production results in lower unit costs than conventional concentrating, smelting and refining, and is a major factor in the Corporation's continuing efforts to maintain internationally competitive costs.
During 1994, Phelps Dodge Mining Company commenced engineering and construction activities related to a $200 million expansion (the Corporation's share will be $170 million with the remainder provided by its co-participant, Sumitomo Metal Mining Arizona, Inc.) of its Morenci mine in southeastern Arizona. This project, which will increase Phelps Dodge's share of annual electrowon copper production capacity by approximately 130 million pounds, is expected to be in production in 1995. The expansion involves the development of Southside, a mineral deposit adjacent to the existing open-pit mine at Morenci. Southside contains sulfide and oxide ore reserves of 150 million tons grading 0.39 percent copper. The expansion will include the construction of an electrowinning tankhouse, the expansion of existing solution extraction plants, the upgrading of infrastructure systems and the purchase of mining equipment.
Concentrate production at Tyrone, which historically approximated 100,000 tons of copper annually, was indefinitely suspended in February 1992 because the higher grade sulfide copper ore reserves were substantially depleted. However, in order to operate the Burro Chief SX/EW plant near Tyrone at capacity, the Corporation has undertaken mine-for-leach operations. In 1994, continuous mining resumed at Tyrone when the operation returned to a seven-day-a-week, 24-hour-a-day schedule. In early 1992, the Corporation completed a fourth expansion of the SX/EW plant, increasing its production capacity to 70,000 tons of cathode copper per year. The Corporation expects to operate the plant for the next 10 years or more.
The Corporation has additional sources of copper that could be placed in production should market circumstances warrant. Permitting and significant capital expenditures would be required, however, to develop such additional production capacity.
RESULTS OF PHELPS DODGE INDUSTRIES
Phelps Dodge Industries is a business segment comprising a group of international companies that manufacture engineered products principally for the transportation and electrical sectors. Its operations are characterized by products with significant market share, internationally competitive cost and quality, and specialized engineering capabilities. This business segment includes the Corporation's carbon black and synthetic iron oxide operations through Columbian Chemicals Company and its subsidiaries (Columbian Chemicals); its wheel and rim operations through Accuride Corporation and its subsidiaries (Accuride); its magnet wire operations through Phelps Dodge Magnet Wire Company and its subsidiaries; its international wire and cable manufacturing operations through Phelps Dodge International Corporation; and its U.S. specialty conductor operations through Hudson International Conductors (Hudson).
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1994 1993 1992 ---- ---- ---- (millions of dollars)
Sales and other operating revenues ........ $1,468.5 1,275.6 1,181.6 Operating income * ........................ 106.1 129.1 85.2 - ------------- * Beginning in 1994, minority interests in the income of consolidated subsidiaries have been excluded from operating income whereas prior to 1994 they were included therein. For comparative purposes, prior period amounts have been reclassified to conform to the current year presentation.
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Phelps Dodge Industries recorded 1994 operating income of $150.7 million which, after reflecting $44.6 million of non-recurring pre-tax charges applicable to its facilities, was reduced to $106.1 million. This compares with $129.1 million in 1993 and $85.2 million in 1992. Earnings increases in 1994 were attributable to the continuing economic recovery in North America, particularly in the automotive sector, as well as improved economic conditions in Europe. This resulted in higher sales volumes of wheels and rims, magnet wire and carbon black.
Columbian Chemicals' 1994 earnings were higher than in 1993 primarily because of higher sales in both North America, as overall capacity tightened in the industry, and Europe. European sales volumes and prices improved during the course of the year as European economies began to recover from the recent recession. The earnings increase was offset in part by a non-recurring pre-tax provision of approximately $9.0 million for the closure of its plant in Hamburg, Germany, reflecting that plant's high cost structure and environmental restrictions. This charge was included in the $157.7 million consolidated pre-tax provision discussed in Note 2 to the Consolidated Financial Statements. Columbian Chemicals' 1993 earnings were higher than in 1992 primarily because of higher margins in North America that more than offset weak sales volumes in Europe.
In December 1994, Columbian Chemicals, through its wholly owned subsidiary, Columbian Carbon Spain, S.A., acquired for approximately $25 million the assets of a carbon black plant in Santander, Spain, from Repsol Quimica S.A. The acquisition of this plant, which has a current annual production capacity of approximately 45,000 tons of carbon black, increases the presence of Phelps Dodge Industries in the European market and extends the ability of Columbian Chemicals to serve customers in Spain and Portugal.
In late 1993, Columbian Chemicals and its joint venture partner, Tiszai Vegyi Kombinat (TVK), began operation through Columbian Tiszai Carbon Ltd. (CTC) of the first carbon black manufacturing plant in Hungary. Located in the northeastern Hungarian city of Tiszaujvaros, CTC has an annual production capacity of 55,000 tons of carbon black, more than enough to supply the entire Hungarian carbon black market. The remaining production, nearly 70 percent, is exported. Financing for CTC was arranged through the Overseas Private Investment Corporation (OPIC) and the European Bank for Reconstruction and Development (EBRD). It is the first project in Hungary to benefit from a direct loan by OPIC. Columbian Chemicals holds a 60 percent interest in CTC; TVK, Hungary's largest petrochemical company, holds the remaining 40 percent interest.
Accuride increased its 1994 sales volume of wheels, rims and components by 16 percent over 1993 as a result of strong North American demand for light, medium and heavy trucks and trailers. Industry build rates for commercial light trucks, heavy trucks and trailers remained at near record levels for most of 1994. Accuride's 1993 earnings reflected both improved demand and improved productivity over the prior year. Accuride's 1993 sales of wheels and rims were up over 1992 sales by approximately 18 percent as the truck and trailer industry continued to recover from the 10-year lows experienced in 1991. Improved productivity primarily resulted from the company's $48 million modernization program initiated in 1990.
Phelps Dodge Magnet Wire Company's 1994 earnings exceeded its 1993 earnings as a result of sales volume increases and improved margins in North America. Demand in the housing, automotive and major home appliance industries allowed the company to operate at capacity throughout the year. Sales volumes benefited from the acquisition in early 1994 of two U.S. magnet wire facilities. Phelps Dodge Magnet Wire Company experienced steady volume growth during 1993 over 1992, and margins benefited from productivity gains and cost savings initiatives.
In March 1994, Phelps Dodge Magnet Wire Company acquired for approximately $52.0 million certain assets of a plant that manufactures fine-gauge magnet wire in Laurinburg, North Carolina, from Rea Magnet Wire Company, Inc. (Rea), and certain assets of a magnet wire manufacturing plant in El Paso, Texas, from Texas Magnet Wire Company, an affiliate of Rea and Fujikura International, Inc.
In response to strong demand by Japanese subsidiary companies located in North America, SPD Magnet Wire Company, a joint venture of Phelps Dodge Magnet Wire Company and Sumitomo Electric Industries, Ltd., each owning a 50 percent interest, expanded its plant in Edmonton, Kentucky. The capacity of this facility is expected to increase by 75 percent when the new equipment is installed in late 1995.
In March 1993, Phelps Dodge Magnet Wire Company expanded its international presence with the acquisition of Elektrodraht Mureck, Phelps Dodge Eldra GmbH. The magnet wire joint venture with Eldra Elektrodraht-Erzeugung GmbH, a leading European magnet wire manufacturer, is located in Mureck, Austria. Phelps Dodge holds a 51 percent interest in the company; Eldra Elektrodraht-Erzeugung GmbH holds the remaining 49 percent.
The 1994 earnings of Phelps Dodge International Corporation were lower than in 1993 primarily because of the financial crisis in Venezuela and economic slowdown in Mexico and Chile. These conditions resulted in additional costs associated with complying with strict foreign exchange controls instituted in June 1994 by the Venezuelan government, and a pre-tax loss of $7.0 million on the sale of the Corporation's 40 percent interest in its Mexican associate company, CONELEC S.A. de C.V. The loss on this sale is included in the $157.7 million consolidated pre-tax provision discussed in Note 2 to the Consolidated Financial Statements. The effect of these charges on earnings was offset in part by higher sales volumes, particularly in Thailand where earnings benefited from strong demand for telephone cables. In 1993, the Corporation's international wire and cable business experienced increased earnings over 1992, primarily from the integration of a group of Venezuelan wire and cable manufacturing companies acquired in late 1992, and the continued growth of telephone and power cable and commercial wire sales in other markets. These increases in 1993 earnings were offset in part by lower sales volumes in Thailand where certain large-scale utility projects were delayed by the Thai government. The 1992 results of the Corporation's majority-owned international wire and cable manufacturing companies benefited from volume improvements in Chile and Thailand and an expanding telephone service installation business in Central and South America. Some margin deterioration was experienced, however, resulting from tariff reductions and increased competition.
Phelps Dodge Industries' 1994 earnings also reflected a pre-tax provision of $20.0 million for the impairment of value of Hudson International Conductors, its wholly owned U.S. specialty conductor operations. This charge reflects the unfavorable change in market conditions for Hudson, particularly in the defense sector, that is now considered permanent. The Corporation is currently evaluating alternatives for the restructuring of Hudson.
In 1994, operations outside the United States provided 48 percent of Phelps Dodge Industries' sales, compared with 51 percent in 1993 and 48 percent in 1992. During the year, operations outside the United States contributed 52 percent of the segment's operating income, compared with 66 percent in 1993 and 87 percent in 1992.
OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS
The Corporation reported net interest expense in 1994 of $36.6 million, compared with $37.0 million in 1993 and $39.5 million in 1992. Reported net interest expense has remained relatively constant over the three-year period despite a $49.7 million increase in debt in 1994 and a $158.7 million increase in debt in 1993. This has resulted from the capitalization of interest charges (totaling $20.7 million in 1994, compared with $17.5 million in 1993 and $7.9 million in 1992) primarily relating to the construction and development of two major projects -- the Candelaria copper project in Chile and the carbon black project in Hungary. Capitalization of interest charges for Candelaria ceased in the 1994 fourth quarter as a result of substantial completion of construction and development of the project. Capitalization of interest charges for the carbon black plant in Hungary ceased at the end of 1993. Net interest expense in 1995 is expected to increase significantly with the cessation of capitalization on these projects.
The Corporation's 1994 miscellaneous income, net of miscellaneous expense, was $9.4 million, compared with $16.4 million in 1993 and $10.7 million in 1992. The decrease in 1994 principally reflected losses of $6.3 million from changes in currency exchange rates, especially in countries with highly inflationary economies (particularly Venezuela).
For the year ended December 31, 1994, the Corporation recorded a provision for taxes of $104.7 million (an effective rate of approximately 27.9 percent). This compares with a 1993 provision for taxes of $105.9 million (an effective rate of approximately 34.6 percent) and a 1992 provision of $114.4 million (an effective rate of approximately 26.7 percent). The 1994 effective rate was lower than 1993 primarily as a result of an increase in the tax benefit for percentage depletion resulting in large part from higher average realized copper prices. The 1993 effective rate was adversely affected by the passage of the Omnibus Budget Reconciliation Act of 1993 that retroactively raised the maximum U.S. corporate tax rate from 34 percent to 35 percent effective January 1, 1993. In addition to the effect of the increase in the maximum tax rate on 1993 earnings, the Corporation was required to provide an additional $6.0 million for deferred taxes on temporary differences existing at December 31, 1992. The lower 1992 effective rate reflected a non-taxable gain of $36.4 million on a subsidiary's stock issuance in connection with the acquisition of a 20 percent interest in the Candelaria project by two Sumitomo companies. (See Note 6 to the Consolidated Financial Statements for a reconciliation of the Corporation's effective tax rates to statutory rates.)
The Corporation's federal income tax returns for the years 1990 and 1991 are currently under examination. The Corporation has received proposed assessments from the Internal Revenue Service, relating to the Corporation's federal income tax liability for the years 1988 and 1989, and from the State of New Mexico relating to the Corporation's New Mexico state income tax liability for the years 1989 and 1990. The Corporation is contesting both of these proposals. Management believes that it has made adequate provision so that the final resolution of the issues involved, including application of those determinations to subsequent open years, will not have a material adverse effect on the consolidated financial condition or results of operations of the Corporation.
On January 25, 1993, the U.S. Supreme Court ruled in favor of the government in U.S. vs. Hill, U.S. Supreme Court, No. 91-1421, reversing a decision that had permitted a favorable approach to the computation of the depletion preference for purposes of determining the alternative minimum tax liability. As a result of this decision, the Corporation amended its 1991 tax return and paid additional federal income taxes of approximately $26.6 million in February 1993. This ruling does not affect the net income of the Corporation, but does affect the timing of its tax payments.
Under current financial accounting standards, any significant year-to-year movement in the rate of interest on long-term, high-quality corporate bonds necessitates a change in the discount rate used to calculate the actuarial present value of the Corporation's accumulated pension and other postretirement benefit obligations. As a result of the 1994 increase in long-term interest rates, the Corporation increased its discount rate from 7.25 percent at December 31, 1993, to 8.5 percent at December 31, 1994. The Corporation's estimated pension obligations decreased by a net $45 million primarily as a result of this discount rate increase. Other estimated postretirement benefit obligations of the Corporation decreased by a net $5 million. The effect of the increased discount rate on this estimated obligation was mostly offset by a 1 percentage point increase for each year in the assumed annual rate of increase in the per capita cost of covered health care benefits. The decreases in these estimated obligations did not affect the earnings reported by the Corporation in 1994. In accordance with applicable accounting standards, the Corporation will amortize such decreases beginning in 1995 and continuing in subsequent years. The combined incremental income will not be significant in 1995. For a further discussion of these issues, see Notes 16 and 17 to the Consolidated Financial Statements.
CHANGES IN FINANCIAL CONDITION; CAPITALIZATION
At the end of 1994, the Corporation had cash and short-term investments of $286.9 million, compared with $255.8 million at the beginning of the year. The Corporation's operating activities provided $542.6 million of cash during the year which was adequate to cover dividend payments on its common stock and its investing activities. The cash used for the Corporation's capital expenditures at its Candelaria copper project ($137.9 million) was partially provided by limited-recourse debt project financing ($67.3 million in 1994).
Investing activities during 1994 included capital expenditures of $355.0 million, compared with $387.2 million in 1993, and acquisitions and investments in subsidiaries of $77.3 million, compared with $3.8 million in 1993. The $32.2 million decrease in capital expenditures principally reflected higher 1993 spending on the Candelaria project, substantially completed in September 1994, and the Hungarian carbon black plant, completed in late 1993. These decreases in spending in 1994 were partially offset by increased spending on Phelps Dodge Mining Company's Southside expansion at its Morenci mine. Investments in subsidiaries in 1994 included the acquisition of two U.S. magnet wire facilities for approximately $52.0 million and the acquisition of a carbon black plant in Spain for approximately $25.0 million. Investing activities in 1994 also included cash proceeds of $15.0 million from the divestiture of the Corporation's 40 percent interest in its Mexican associate company, CONELEC S.A. de C.V., and $8.0 million from the issuance of shares of the Corporation's majority-owned affiliate in Venezuela. Investing activities in 1993 included cash proceeds of $6.7 million from the 1992 acquisition by two Sumitomo companies of a 20 percent interest in Candelaria; that transaction also resulted in $41.9 million of cash proceeds in 1992 (see Note 4 to the Consolidated Financial Statements). Investing activities in 1992 also included $58.6 million in investments in subsidiaries principally from the acquisition of a group of wire and cable manufacturing companies in Venezuela.
The Corporation's total debt was $696.9 million at December 31, 1994 (including $49.3 million of foreign short-term borrowings), compared with $647.2 million at the end of 1993 (including $82.7 million of foreign short-term borrowings). The increase in total debt during the year principally resulted from limited-recourse project financings for Candelaria of $67.3 million offset by payments on the Corporation's foreign long-term debt and short-term borrowings. The ratio of total debt to total capitalization was 23.6 percent at the end of 1994, compared with 23.7 percent at the end of 1993.
The $6.2 million increase in dividend payments on the Corporation's common shares, from $113.0 million in 1992 to $119.2 million in 1994, principally resulted from a 10 percent increase in the dividend rate in the 1992 second quarter (from a quarterly rate of 37.5 cents per common share to 41.25 cents per common share) and a 9 percent increase in the dividend rate in the 1994 fourth quarter (from 41.25 cents per common share to 45 cents per common share).
During the second quarter of 1993, final agreements were executed with a group of lenders for $290 million of 13-year debt financing for the Candelaria project. These borrowings are limited recourse to the Corporation prior to satisfaction of certain completion tests, and non-recourse thereafter. The $290 million includes $200 million of floating rate dollar denominated debt, $60 million of fixed rate dollar denominated debt, and $30 million of floating rate debt denominated in Chilean pesos. As of December 31, 1994, all $290 million available under the project financing agreements had been drawn down. The agreements provide for a nine and one-half year repayment period, which starts in 1997. As the Corporation consolidates its interest in majority owned mining joint ventures using the proportional consolidation method, only 80 percent of this debt and related financing charges have been reflected in the Corporation's consolidated financial statements. The Corporation also caused the project to enter into an interest rate protection agreement with certain financial institutions to limit the effect of increases in the cost of the $200 million of floating rate debt. Under the terms of the agreement, the project will receive payments from these institutions if the six-month London Interbank Offered Rate (LIBOR) exceeds 9 percent prior to December 31, 2001, and 11 percent during the two subsequent years ending December 31, 2003.
During 1993, the Corporation's 60 percent owned Hungarian subsidiary, Columbian Tiszai Carbon Ltd., borrowed $33.5 million under facilities from the Overseas Private Investment Corporation (OPIC) and the European Bank for Reconstruction and Development (EBRD) to finance construction of a carbon black manufacturing plant. Both facilities are with recourse to Columbian Chemicals Company prior to satisfaction of certain completion tests, and non-recourse thereafter. These completion tests had not yet been satisfied as of December 31, 1994. The OPIC facility is a $24.5 million fixed rate dollar borrowing bearing interest rates of between 8.01 percent and 9.15 percent, while the EBRD $9.0 million loan is a floating rate dollar borrowing. These borrowings mature in the years 1995 through 2001.
On January 19, 1994, the Corporation issued $81.1 million of 5.45 percent obligations due in 2009. The proceeds from the issue were used to retire the Corporation's 5.75 percent to 6.25 percent Series A and B notes due in the years 1994 through 2004.
In February 1993, the Corporation sold $90 million of 6.5 percent refunding bonds due April 1, 2013. The proceeds from the sale of these bonds were used in April 1993 to repay the Corporation's 7 percent Installment Sale Obligations due in the years 1993 through 2003.
The Corporation entered into a new revolving credit agreement with several lenders on June 30, 1993, at which time it terminated its then existing credit agreement. The agreement was amended on October 31, 1994. The new agreement, as amended, permits borrowings of up to $200 million from time to time until its maturity on October 31, 1999. Interest is payable at a fluctuating rate based on the agent bank's prime rate or a fixed rate, based on the Eurodollar Interbank Offered Rate or at fixed rates offered independently by the several lenders, for maturities of from seven to 360 days. This agreement provides for a facility fee of one-eighth of 1 percent of total commitments. The agreement requires the Corporation to maintain a minimum consolidated tangible net worth of $1.1 billion and limits indebtedness to 40 percent of total consolidated capitalization. There were no borrowings under the current or the previous agreement at either December 31, 1994, or December 31, 1993.
The Corporation has other lines of credit totaling $100.0 million at December 31, 1994, compared with $90.5 million at December 31, 1993. These facilities are subject to agreement as to availability, terms and amount. There were no borrowings outstanding under these lines of credit at either December 31, 1994, or December 31, 1993.
The Corporation had $49.3 million in short-term borrowings, all by its international operations, at December 31, 1994, compared with $82.7 million at December 31, 1993. The weighted average interest rate on this debt at December 31, 1994, and December 31, 1993 was 14.9 percent and 9.9 percent, respectively.
Accuride Canada Inc. has a revolving credit facility that permits borrowings of up to U.S. $25.0 million. Interest on these borrowings is payable at a fluctuating rate based on the agent bank's Base Rate Canada, or a fixed rate based on LIBOR, for maturities of one to six months. The commitment under this facility is determined using a specified borrowing base calculation. At December 31, 1994, there were no borrowings outstanding under this facility, compared with $6.0 million at the beginning of the year.
The current portion of the Corporation's long-term debt, scheduled for payment in 1995, is $25.3 million including $19.2 million for its international manufacturing operations, $2.4 million for its international mining operations and $3.7 million for other Corporate obligations.
During 1994, increases in current assets (exclusive of cash and short-term investments) outweighed increases in current liabilities (exclusive of current debt) by $36.0 million. This change in net working capital principally resulted from a $138.6 million increase in accounts receivable and a $35.4 million increase in inventories, partially offset by a $110.3 million increase in accounts payable and accrued expenses and a $32.2 million increase in accrued income taxes. The $138.6 million increase in accounts receivable was primarily the result of higher copper sales prices and volumes in 1994 and higher sales volumes of carbon black, magnet wire and wheels and rims. The $35.4 million increase in inventories was attributable to higher inventories of copper, silver and gold at Phelps Dodge Mining Company and higher inventories of aluminum and other raw materials at Phelps Dodge Industries, especially in Thailand. The $110.3 million increase in accounts payable and accrued expenses principally resulted from the timing of raw material and equipment purchases. The $32.2 million increase in accrued income taxes primarily resulted from higher pre-tax income in 1994 and a lower year-end balance at December 31, 1993 due to $26.6 million of additional federal income taxes paid during 1993 with the Corporation's amended 1991 income tax return.
During 1993, increases in current assets (exclusive of cash and short-term investments) together with decreases in current liabilities (exclusive of current debt) resulted in a $7.3 million change in net working capital. This change principally resulted from a $20.6 million decrease in accrued income taxes and a $2.8 million increase in deferred income tax assets, partially offset by a $16.1 million increase in accounts payable and accrued expenses. The $20.6 million decrease in accrued income taxes in 1993 was the result of approximately $26.6 million in additional federal income taxes paid with the Corporation's amended 1991 income tax return. The $16.1 million net increase in accounts payable and accrued expenses in 1993 principally resulted from improved vendor credit terms and increased accruals resulting from improved business in North America.
The Corporation expects capital outlays in 1995 to be approximately $250 million for Phelps Dodge Mining Company and approximately $100 million for Phelps Dodge Industries. These capital outlays will be funded from cash reserves and operating cash flow or, if necessary, from other borrowings.
The Corporation is subject to federal, state and local environmental laws, rules and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund), as amended by the Superfund Amendments and Reauthorization Act of 1986. Under Superfund, the Environmental Protection Agency (EPA) has identified approximately 35,000 sites throughout the United States for review, ranking and possible inclusion on the National Priorities List (NPL) for possible response. Among the sites identified, EPA has included 13 sites owned by the Corporation. The Corporation believes that most, if not all, of its sites so identified will not qualify for listing on the NPL.
In addition, the Corporation may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment associated with past disposal practices at sites not owned by the Corporation. The Corporation has received notice that it is a potentially responsible party from EPA and/or individual states under CERCLA or a state equivalent and is participating in environmental assessment and remediation activity at 36 sites. For further information about these proceedings, see Item 3. Legal Proceedings, Part IV.
The 1990 Amendments to the federal Clean Air Act require EPA to develop and implement many new requirements, and they allow states to establish new programs to implement some of the new requirements, such as the requirements for operating permits under Title V of the 1990 Amendments and hazardous air pollutants under Title III of the 1990 Amendments. Because EPA has not yet adopted or implemented all of the changes required by Congress, the air quality laws will continue to expand and change in coming years as EPA develops new requirements and then implements them or allows the states to implement them. Nevertheless, most states have made or are in the process of making certain required changes to their laws regarding Title V. In response to these new laws, several of the Corporation's subsidiaries already have submitted or are in the process of preparing applications for Title V operating permits. These programs will likely increase the Corporation's regulatory obligations and compliance costs. These costs could include implementation of maximum achievable control technology for any of the Corporation's facilities that is determined to be a major source of federal hazardous air pollutants. Until more of the implementing regulations are adopted, and more experience with the new programs is gained, it is not possible to determine the impact of the new requirements on the Corporation.
At December 31, 1994, the Corporation had reserves of $168.9 million for remediation of certain of the sites referred to above and other environmental costs in accordance with its policy to record liabilities for environmental expenditures when it is probable that obligations have been incurred and the costs can reasonably be estimated. The Corporation's estimates of these costs are based upon currently available facts, existing technology, and presently enacted laws and regulations. Where the available information is sufficient to estimate the amount of liability, that estimate has been used; where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used.
The amounts of the Corporation's liabilities for remedial activities are very difficult to estimate due to such factors as the unknown extent of the remedial actions that may be required and, in the case of sites not owned by the Corporation, the unknown extent of the Corporation's probable liability in proportion to the probable liability of other parties. The Corporation has probable environmental liabilities that in its judgment cannot reasonably be estimated, and losses attributable to remediation costs are reasonably possible at other sites. The Corporation cannot now estimate the total additional loss it may incur for such environmental liabilities, but such loss could be substantial.
The possibility of recovery of some of the environmental remediation costs from insurance companies or other parties exists; however, the Corporation does not recognize these recoveries in its financial statements until they become probable.
The Corporation's operations are subject to myriad environmental laws and regulations in jurisdictions both in the United States and in other countries in which it does business. For further discussion of these laws and regulations, please see "Environmental and Other Regulatory Matters" and "Environmental Matters" in Part I, Items 1 and 2 of this report. The estimates given in those discussions of the capital expenditures for programs to comply with applicable environmental laws and regulations in 1995 and 1996, and the expenditures for those programs in 1994, are separate from the reserves and estimates described above.
In 1994, legislation was introduced in both the U.S. House of Representatives and the U.S. Senate to amend the Mining Law of 1872. None of the 1994 bills was enacted into law. However, legislation to amend the Mining Law is expected to be introduced again in 1995. If enacted, the 1995 legislation is expected to impose royalties on minerals extracted from federal lands, to require fair market value for patenting federal lands, and to establish operation and reclamation standards for mining on federal lands. While the effect of such changes on Phelps Dodge's current operations and other currently owned mineral resources on private lands would be minimal, passage of such legislation would result in significant additional capital expenditures and operating expenses in the development and operation of new mines on federal lands. The resulting additional costs and delays in the development of such mines would seriously impact future exploration and development on federal lands in the United States.
On December 23, 1994, Chino Mines Company (CMC), which is two-thirds owned by Phelps Dodge Corporation and is located near Silver City, New Mexico, entered into an Administrative Order on Consent (AOC) with the New Mexico Environment Department that will require CMC to study the environmental impacts and potential health risks associated with portions of the CMC property affected by historical mining operations. Phelps Dodge acquired CMC at the end of 1986. Those studies will begin in 1995 and, until completed, it will not be possible to determine the nature, extent, cost, and timing of all remedial work which will be required under the AOC.
In 1993 and 1994, the New Mexico and Arizona legislatures passed laws requiring the reclamation of mined lands in those states. The New Mexico Mining Commission adopted rules for the New Mexico program during 1994, and the Corporation's operations began submitting the required permit applications in December 1994. The Arizona State Mine Inspector has been directed to adopt rules implementing the Arizona law by June 30, 1996. These laws and regulations will likely increase the Corporation's regulatory obligations and compliance costs with respect to mine closure and reclamation. At this time, it is not possible to quantify the impact of the new laws and regulations on the Corporation.
During 1994, the Corporation purchased 76,000 of its common shares under a 4 million common share buy-back program initiated in September 1989 (numbers of shares have been revised to give effect to the two-for-one stock split in May 1992). The Corporation purchased an additional 85,000 shares in 1995 through March 6, bringing total common shares purchased under this program to 2,534,000 at that date. These purchased shares have been restored to the treasury. There were 70,672,000 common shares outstanding at December 31, 1994.
On March 7, 1995, the Corporation announced that its Board of Directors had authorized a new common share buy-back program that supersedes the 1989 program. Under the new program, the Corporation has been authorized to purchase up to 5 million of its common shares. The Corporation will make purchases in the open market as circumstances warrant, and will also consider purchasing shares in privately negotiated transactions.
During 1992, the Corporation elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," No. 109, "Accounting for Income Taxes," and No. 112, "Employers' Accounting for Postemployment Benefits." All three standards have been treated as though they were in effect since January 1, 1992. The cumulative effects of the accounting changes required by these standards have been reflected in revised 1992 first quarter results. Adoption of the standards also requires recognition of certain ongoing operating costs in excess of those recorded under previously used accounting methods. For example, as a result of the new tax standard, Phelps Dodge increased the book value of certain purchased assets at Chino Mines Company, Columbian Chemicals Company, Accuride Corporation and Hudson International Conductors by $90.9 million as of January 1, 1992, with a corresponding increase in deferred tax liabilities. As a result, earnings from operations were reduced by $7.3 million for incremental 1992 depreciation and other expenses; net income was not affected because the tax provision was reduced by a corresponding amount.
The combined cumulative effect of accounting changes from the adoption of these three accounting standards was a one-time transition charge of $111.1 million before taxes ($79.9 million, or $1.13 per common share, after taxes). With respect to the Corporation's liability for postretirement benefits, if the Corporation's inflation assumptions prove to be incorrect, its estimates could be significantly different (for example, an increase in the medical inflation rate of 1 percent could result in an increase of as much as $13.0 million in the obligation). The adoption of these standards has had no effect on cash flow and has not affected adversely in any material respect the position of the Corporation under its debt agreements. The disclosures for these accounting changes are included in Note 17 for SFAS No. 106, Note 6 for SFAS No. 109 and Note 18 for SFAS No. 112.
CAPITAL OUTLAYS
The Corporation's capital outlays in each of the past three years are set forth in the following table. These capital outlays are exclusive of capitalized interest and the portions of the expenditures at Morenci, Chino and Candelaria payable by minority interest holders.
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1994 1993 1992 ---- ---- ---- (millions of dollars) Phelps Dodge Mining Company: Candelaria .............................. $137.9 189.8 53.6 Other ................................... 161.3 95.6 146.9 ------ ----- ----- 299.2 285.4 200.5 Phelps Dodge Industries ................... 55.1 101.2 69.7 Corporate and other ....................... 0.7 0.6 0.6 ------ ----- ----- $355.0 387.2 270.8 ====== ===== =====
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INFLATION
During the last three years, the principal impact of general inflation upon the financial results of the Corporation has been on unit production costs, especially energy and supply costs, at the Corporation's mining and industrial operations. In considering the impact of changing prices on the financial results of the Corporation, it is important to recognize that the selling price of the Corporation's principal product, copper, does not necessarily parallel the rate of inflation or deflation.
DIVIDENDS AND MARKET PRICE RANGES
Phelps Dodge's common shares are listed on the New York Stock Exchange, the principal market on which they are traded. At March 7, 1995, there were 9,245 holders of record of the Corporation's common shares. The Corporation paid quarterly dividends of 37.5 cents on each common share throughout 1991 and in the 1992 first quarter (dividend amounts have been revised to give effect to the May 1992 two-for-one stock split). In the 1992 second quarter, the quarterly dividend was increased 10 percent to 41.25 cents on each common share. In the 1994 fourth quarter, the quarterly dividend was increased 9 percent to 45 cents on each common share and has continued at that rate.
The table below sets forth the high and low prices per common share (composite quotation) in the periods indicated.
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Market Price Ranges* ---------------------------------------- 1994 1993 1992 ---- ---- ---- High Low High Low High Low ---- ---- ---- ---- ---- ---- First Quarter ........... $ 59.50 47.63 55.63 47.75 43.00 32.00 Second Quarter .......... 60.88 50.50 50.75 41.50 50.50 39.50 Third Quarter ........... 65.00 55.88 49.25 39.13 53.00 45.00 Fourth Quarter .......... 64.00 54.38 50.88 40.00 49.25 41.38
- --------------- * The market price ranges reflect actual share prices as reported for each day's trading; they have been revised for the respective periods to give effect to the May 1992 two-for-one stock split.
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QUARTERLY FINANCIAL DATA (In millions except per common share amounts)
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First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1994 (a) - --------
Sales and other operating revenues ..... $694.3 780.4 813.7 1,000.8
Operating income ....................... 81.1 94.5 139.1 85.7
Net income ............................. 48.6 64.6 94.2 63.6
Net income per common share ............ 0.69 0.91 1.33 0.89
Sales and other operating revenues ..... $666.7 629.8 646.7 652.7
Operating income (b) ................... 98.1 81.0 76.9 70.5
Net income ............................. 60.3 46.3 39.7 41.6
Net income per common share ............ 0.85 0.66 0.56 0.59
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(a) The 1994 fourth quarter includes a non-recurring pre-tax provision for environmental costs and asset dispositions of $140.2 million in operating income with an after-tax effect of $91.7 million, or $1.29 per common share, on net income. The 1994 second quarter operating income includes a non-recurring pre-tax provision of $17.5 million for the sale of the Corporation's interest in the Santa Gertrudis gold property in Mexico and the Olinghouse gold property in Nevada. The combined loss had an after-tax effect of $11.2 million, or 16 cents per common share, on net income.
(b) Beginning in 1994, minority interests in the income of consolidated subsidiaries have been excluded from operating income whereas prior to 1994 they were included therein. For comparative purposes, prior period amounts have been reclassified to conform to the current year presentation.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated balance sheet at December 31, 1994 and 1993, and the related consolidated statements of operations and of cash flows for each of the three years in the period ended December 31, 1994, and notes thereto, together with the report thereon of Price Waterhouse LLP dated January 23, 1995, follow. The additional financial data referred to below should be read in conjunction with these financial statements. Schedules not included with these additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. The individual financial statements of the Corporation have been omitted because the Corporation is primarily an operating company and all subsidiaries included in the consolidated financial statements, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than the Corporation or its consolidated subsidiaries in amounts which together exceed 5 percent of total consolidated assets at December 31, 1994. Separate financial statements of subsidiaries not consolidated and 50 percent or less owned persons accounted for by the equity method, other than those for which summarized financial information is provided in Note 3 to the Consolidated Financial Statements, have been omitted because, if considered in the aggregate, such subsidiaries and 50 percent or less owned persons would not constitute a significant subsidiary.
ADDITIONAL FINANCIAL DATA
Financial statement schedule for the years ended December 31, 1994, 1993 and 1992:
VIII - Valuation and qualifying accounts and reserves.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Phelps Dodge Corporation
Our audits of the consolidated financial statements referred to in our report dated January 23, 1995, appearing in this report also included an audit of the Financial Statement Schedule listed in the foregoing index titled "Additional Financial Data." In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Phoenix, Arizona January 23, 1995
REPORT OF MANAGEMENT
The management of Phelps Dodge Corporation is responsible for preparing the consolidated financial statements presented in this annual report and for their integrity and objectivity. The statements have been prepared in accordance with generally accepted accounting principles appropriate in the circumstances, and include amounts that are based on management's best estimates and judgments. Management has also prepared the other information in this annual report and is responsible for its accuracy and consistency with the financial statements.
Management maintains a system of internal controls, including internal accounting controls, which in management's opinion provides reasonable assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. The system includes formal policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. The system also includes the careful selection and training of qualified personnel, an organization that provides a segregation of responsibilities and a program of internal audits that independently assesses the effectiveness of internal controls and recommends possible improvements.
The Audit Committee, consisting of seven non-employee directors, meets at least three times a year to review, among other matters, internal control conditions and internal and external audit plans and results. It meets periodically with senior officers, internal auditors and independent accountants to review the adequacy and reliability of the Corporation's accounting, financial reporting and internal controls.
The consolidated financial statements have also been audited by Price Waterhouse LLP, our independent accountants, whose appointment was ratified by the shareholders. The Price Waterhouse LLP examination included a study and evaluation of internal accounting controls to establish a basis for reliance thereon in determining the nature, extent and timing of audit tests applied in the examination of the financial statements.
Management also recognizes its responsibility for fostering a strong ethical climate so that the Corporation's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Corporation's code of business ethics and policies, which is distributed throughout the Corporation. The code of conduct addresses, among other things, the necessity of ensuring open communication within the Corporation; potential conflicts of interest; compliance with all applicable laws, including those relating to financial disclosure; and the confidentiality of proprietary information. The Corporation maintains a systematic program to assess compliance with these policies.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Phelps Dodge Corporation
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of retained earnings and of cash flows present fairly, in all material respects, the financial position of Phelps Dodge Corporation and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As described in Note 1 to the Consolidated Financial Statements, the Corporation changed its method of accounting for postretirement and postemployment benefits and income taxes effective January 1, 1992.
PRICE WATERHOUSE LLP
Phoenix, Arizona January 23, 1995
CONSOLIDATED BALANCE SHEET - -------------------------- (In thousands except per share values) December December 31, 31, 1994 1993 ---- ---- ASSETS Current assets: Cash and short-term investments, at cost ....... $ 286,900 255,800 Accounts receivable, less allowance for doubtful accounts (1994 - $11,800; 1993 - $12,200) .............................. 489,500 354,400 Inventories .................................... 266,300 225,400 Supplies ....................................... 110,700 103,300 Prepaid expenses ............................... 15,900 13,100 Deferred income taxes .......................... 38,600 35,400 ----------- ----------- Current assets ................................ 1,207,900 987,400 Investments and long-term receivables .......... 82,000 115,400 Property, plant and equipment, net ............. 2,566,400 2,340,200 Other assets and deferred charges .............. 277,500 277,900 ----------- ----------- $ 4,133,800 3,720,900 =========== ===========
LIABILITIES Current liabilities: Short-term debt ................................ $ 49,300 82,700 Current portion of long-term debt .............. 25,300 17,200 Accounts payable and accrued expenses .......... 528,500 425,800 Income taxes ................................... 46,600 14,300 ----------- ----------- Current liabilities ........................... 649,700 540,000 Long-term debt ................................. 622,300 547,300 Deferred income taxes .......................... 243,600 286,000 Other liabilities and deferred credits ......... 365,300 263,300 ----------- ----------- 1,880,900 1,636,600 ----------- ----------- COMMITMENTS AND CONTINGENCIES (SEE NOTES 19 AND 20)
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES .. 65,300 62,200 ----------- ----------- COMMON SHAREHOLDERS' EQUITY Common shares, par value $6.25; 100,000 shares authorized; 70,672 outstanding (1993 - 70,531) after deducting 4,503 shares (1993 - 4,657) held in treasury ............... 441,700 440,800 Capital in excess of par value .................. 84,500 83,100 Retained earnings ............................... 1,770,300 1,618,500 Cumulative translation adjustments and other .... (108,900) (120,300) ----------- ----------- 2,187,600 2,022,100 ----------- ----------- $ 4,133,800 3,720,900 =========== ===========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------ (In thousands)
1994 1993 1992 ---------- ---------- ----------
OPERATING ACTIVITIES Net income .......................... $ 271,000 187,900 221,700 Adjustments to reconcile net income to cash flow from operations: Depreciation, depletion and amortization ...................... 195,300 187,100 162,300 Deferred income taxes .............. (28,300) 29,500 19,300 Equity earnings net of dividends received .......................... (4,400) 400 4,600 Provision for environmental costs and asset dispositions ............ 140,200 -- -- Cumulative effect of accounting changes ........................... -- -- 79,900 ---------- ---------- ---------- Cash flow from operations ........ 573,800 404,900 487,800 Adjustments to reconcile cash flow from operations to net cash provided by operating activities: Changes in current assets and liabilities: (Increase) decrease in accounts receivable ...................... (138,600) (600) (40,400) (Increase) decrease in inventories (35,400) (2,400) (6,700) (Increase) decrease in supplies .. 1,600 (1,100) (1,700) (Increase) decrease in prepaid expenses ........................ (3,400) 3,000 (6,500) (Increase) decrease in deferred income taxes .................... (3,200) (2,800) (1,300) Increase (decrease) in interest payable ......................... 500 1,100 2,600 Increase (decrease) in other accounts payable ................ 88,200 30,500 8,700 Increase (decrease) in income taxes ........................... 32,200 (20,600) 4,800 Increase (decrease) in other accrued expenses ................ 22,100 (14,400) 20,200 Gain from subsidiary's stock issuance .......................... (1,900) -- (36,400) Other adjustments, net ............. 6,700 (12,600) (400) ---------- ---------- ---------- Net cash provided by operating activities ...................... 542,600 385,000 430,700 ---------- ---------- ---------- INVESTING ACTIVITIES Capital outlays ..................... (355,000) (387,200) (270,800) Capitalized interest ................ (20,700) (17,500) (7,900) Investment in subsidiaries .......... (77,300) (3,800) (58,600) Proceeds from asset sales ........... 19,300 4,200 8,200 Proceeds from subsidiary's stock issuance ........................... 8,000 6,700 41,900 Other ............................... (800) (3,000) -- ---------- ---------- ---------- Net cash used in investing activities ...................... (426,500) (400,600) (287,200) ---------- ---------- ---------- FINANCING ACTIVITIES Increase in debt .................... 185,600 313,700 200,700 Payment of debt ..................... (137,100) (153,000) (187,500) Common dividends .................... (119,200) (116,100) (113,000) Debt issue costs .................... (7,500) (25,800) -- Purchase of common shares ........... (3,900) (5,600) -- Other ............................... (2,900) 7,000 25,000 ---------- ---------- ---------- Net cash provided by (used in) financing activities ............ (85,000) 20,200 (74,800) ---------- ---------- ---------- INCREASE IN CASH AND SHORT-TERM INVESTMENTS ......................... 31,100 4,600 68,700 CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR ................... 255,800 251,200 182,500 ---------- ---------- ---------- CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR ............................. $ 286,900 255,800 251,200 ========== ========== ==========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ (Dollar amounts in tables stated in thousands except as noted)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting and Reporting Changes. In 1992, the Corporation elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," No. 109, "Accounting for Income Taxes," and No. 112, "Employers' Accounting for Postemployment Benefits." All three standards were treated as though they were in effect since January 1, 1992. The cumulative effects of the accounting changes required by these standards were reflected in revised 1992 first quarter results. Adoption of the standards also required recognition of certain ongoing operating costs in excess of those recorded under previously used accounting methods. The adoption of these standards has had no effect on cash flow and has not affected adversely in any material respect the position of the Corporation under its debt agreements.
The combined cumulative effect of accounting changes from the adoption of these three accounting standards was a one-time transition charge of $111.1 million before taxes ($79.9 million, or $1.13 per common share, after taxes). The disclosures for these accounting changes are included in Note 17 for SFAS No. 106, Note 6 for SFAS No. 109 and Note 18 for SFAS No. 112.
On May 6, 1992, the Board of Directors declared a two-for-one stock split effected in the form of a 100 percent stock dividend payable June 8, 1992, to common shareholders of record at the close of business on May 18, 1992. As a result of the stock split, the Corporation's outstanding shares increased from approximately 35 million to approximately 70 million. This was reflected on the Consolidated Balance Sheet as an increase in "Common shares, par value $6.25" of approximately $219 million, with an offsetting charge to "Capital in excess of par value." Per share amounts and the average number of shares outstanding have been retroactively revised for all periods presented.
Basis of Consolidation. The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. Interests in mining joint ventures in which the Corporation owns more than 50 percent are reported using the proportional consolidation method. Interests in other majority-owned subsidiaries are reported using the full consolidation method; the consolidated financial statements include 100 percent of the assets and liabilities of these subsidiaries and the ownership interests of minority participants are recorded as "Minority interests in consolidated subsidiaries." All material intercompany balances and transactions are eliminated.
Investments in unconsolidated companies owned 20 percent or more are recorded on an equity basis. Investments in companies less than 20 percent owned are carried at cost.
Foreign Currency Translation. Except as noted below, the assets and liabilities of foreign subsidiaries are translated at current exchange rates while revenues and expenses are translated at average rates in effect for the period. The related translation gains and losses are included in a separate component of common shareholders' equity. For the translation of the financial statements of certain foreign subsidiaries dealing predominantly in U.S. dollars and for those affiliates operating in highly inflationary economies, assets and liabilities receivable or payable in cash are translated at current exchange rates, and inventories and other non-monetary assets and liabilities are translated at historical rates. Gains and losses resulting from translation of such financial statements are included in operating results, as are gains and losses incurred on foreign currency transactions.
Statement of Cash Flows. For the purpose of preparing the Consolidated Statement of Cash Flows, the Corporation considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories and Supplies. Inventories and supplies are stated at the lower of cost or market. Cost for substantially all inventories is determined by the last-in, first-out method (LIFO). Cost for substantially all supplies is determined by a moving-average method.
Property, Plant and Equipment. Property, plant and equipment are carried at cost. Cost of significant assets includes capitalized interest incurred during the construction and development period. Expenditures for replacements and betterments are capitalized; maintenance and repair expenditures are charged to operations as incurred.
The principal depreciation methods used are the units of production method for mining, smelting and refining operations and, for other operations, the straight-line method based upon the estimated lives of specific classes or groups of depreciable assets. Upon disposal of assets depreciated on a group basis, cost less salvage is charged to accumulated depreciation.
Values for mining properties represent mainly acquisition costs or pre-1932 engineering valuations. Depletion of mines is computed on the basis of an overall unit rate applied to the pounds of principal products sold from mine production.
Mine exploration costs and development costs to maintain production of operating mines are charged to operations as incurred. Mine development expenditures at new mines and major development expenditures at operating mines that are expected to benefit future production are capitalized and amortized on the units of production method over the estimated commercially recoverable minerals.
Environmental Expenditures. Environmental expenditures are expensed or capitalized depending upon their future economic benefits. Liabilities for such expenditures are recorded when it is probable that obligations have been incurred and the costs can be reasonably estimated. The Corporation's estimates of these costs are based upon currently available facts, existing technology, and presently enacted laws and regulations. Where the available information is sufficient to estimate the amount of liability, that estimate has been used; where the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. The possibility of recovery of some of these costs from insurance companies or other parties exists; however, the Corporation does not recognize these recoveries in its financial statements until they become probable.
Goodwill. Included in "Other assets and deferred charges" are costs in excess of the net assets of businesses acquired. These amounts are amortized on a straight-line basis over periods of 15 to 40 years. The Corporation evaluates its long-term assets and identifiable intangible assets for impairment when events or changes in economic circumstances indicate the carrying amount of such assets may not be recoverable.
Hedging Programs. The Corporation does not acquire, hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are used to manage well defined commodity price and foreign exchange risks.
The Corporation may periodically use various price protection programs to ameliorate the adverse effect of price fluctuations on a portion of its copper production. The costs of programs that guarantee a minimum price over a specified period are amortized on a straight-line basis over that period. Gains and losses from programs that effectively establish price ranges for future production are recognized in income during the periods affected. Any net premiums paid for programs that effectively establish price ranges for future production are amortized on a straight-line basis over the period the hedge is designed to protect.
The Corporation periodically enters into forward exchange contracts to hedge certain recorded transactions denominated in foreign currencies and enters into currency option contracts to hedge certain firm commitments and other anticipated foreign currency transactions. The objective of the Corporation's foreign currency hedging program is to protect the Corporation from the risk that the eventual dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. Deferred gains and losses on option contracts are recognized in income when the underlying hedged transaction is recognized or when a previously anticipated transaction is no longer expected to occur. Changes in market value of forward exchange contracts and certain option contracts protecting anticipated transactions are recognized in the period incurred.
The Corporation may enter into interest rate agreements to limit the effect of increases in the interest rates on any floating rate debt. The costs associated with such agreements are amortized to interest expense over the term of the agreement.
Income Taxes. In addition to charging income for taxes actually paid or payable, the provision for taxes reflects deferred income taxes resulting from changes in temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Pension Plans. The Corporation has trusteed, non-contributory pension plans covering substantially all of its U.S. employees and in some cases employees of international subsidiaries. The benefits are based on, in the case of certain plans, final average salary and years of service and, in the case of other plans, a fixed amount for each year of service. The Corporation's funding policy provides that payments to the pension trusts shall be at least equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 for U.S. plans or, in the case of international subsidiaries, the minimum legal requirements in that particular country. Additional payments may also be provided by the Corporation from time to time.
Postretirement Benefits Other Than Pensions. The Corporation has several postretirement health care and life insurance benefit plans covering most of its U.S. employees and in some cases employees of international subsidiaries. Postretirement benefits vary among plans and many plans require contributions from employees. Effective January 1, 1992, the Corporation began accounting for these benefits on an accrual basis. The Corporation's funding policy provides that payments shall be at least equal to its cash basis obligation, plus additional amounts that may be approved by the Corporation from time to time.
Postemployment Benefits. The Corporation has certain postemployment benefit plans covering most of its U.S. employees and in some cases employees of international subsidiaries. The benefit plans may provide severance, disability, supplemental health care, life insurance or other welfare benefits. Effective January 1, 1992, the Corporation began accounting for these benefits on an accrual basis. The Corporation's funding policy provides that payments shall be at least equal to its cash basis obligation, plus additional amounts that may be approved by the Corporation from time to time.
Earnings per Share. Earnings per share amounts are computed based on the weighted average number of shares actually outstanding during the period plus the shares that would be outstanding assuming the exercise of dilutive stock options, which are considered to be common stock equivalents. The number of equivalent shares that would be issued from the exercise of stock options is computed using the treasury stock method.
Reclassification. Beginning in 1994, minority interests in the income of consolidated subsidiaries have been excluded from operating income whereas prior to 1994 they were included therein. For comparative purposes, these and certain other prior year amounts have been reclassified to conform to the current year presentation.
2. PROVISION FOR ENVIRONMENTAL COSTS AND ASSET DISPOSITIONS In the 1994 fourth quarter, the Corporation recorded non-recurring pre-tax charges of $140.2 million reflecting additional provisions of $98.7 million before taxes for estimated future costs associated with environmental matters primarily in Phelps Dodge Mining Company and $41.5 million before taxes for estimated losses, primarily in Phelps Dodge Industries, on the disposition of certain operating facilities. These charges reduced net income by $91.7 million, or $1.29 per common share, after taxes.
The pre-tax charge of $98.7 million for estimated future costs associated with environmental matters comprised $88.9 million applicable to Phelps Dodge Mining Company, $8.6 million applicable to Phelps Dodge Industries and $1.2 million applicable to Corporate and other. As a result of these 1994 environmental charges and balances remaining from previously provided charges for environmental costs, the Corporation's reserves for such costs totaled $168.9 million at December 31, 1994 (see Note 1 to the Consolidated Financial Statements for further information concerning the Corporation's policy for recording environmental obligations).
The pre-tax charge of $41.5 million associated with the disposition of certain operating facilities included $36.0 million for Phelps Dodge Industries and $5.5 million for Phelps Dodge Mining Company issues. The portion of the charge attributable to Phelps Dodge Industries comprised a provision of $20.0 million for the impairment of value of Hudson International Conductors, a loss of $7.0 million on the sale of the Corporation's 40 percent interest in its Mexican associate company, CONELEC S.A. de C.V., and a provision of $9.0 million for the closure of Columbian Chemicals Company's plant in Hamburg, Germany.
Also included in the provision for environmental costs and asset dispositions for the full year 1994 was a second quarter provision for the sale of Phelps Dodge Mining Company's interest in its Santa Gertrudis gold property in Mexico and its Olinghouse gold property in Nevada. The combined net loss on the sale of these interests was $17.5 million before taxes. This charge reduced net income by $11.2 million, or 16 cents per common share, after taxes.
3. EQUITY EARNINGS AND INVESTMENTS AND LONG-TERM RECEIVABLES Equity earnings (losses) were as follows:
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1994 1993 1992 -------- -------- --------
International wire and cable manufacturers . $ 1,700 3,300 3,700 Black Mountain ............................. 6,000 (600) (1,600) Santa Gertrudis ............................ (600) (3,300) (700) Other ...................................... 1,500 600 (800) -------- -------- -------- $ 8,600 -- 600 ======== ======== ========
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Dividends were received as follows: - ----------------------------------------------------------------------------
1994 1993 1992 ------ ------ ------
Equity investments: International wire and cable manufacturers .................................. $1,400 400 5,300 Black Mountain .................................. 2,900 -- -- ------ ------ ------ $4,300 400 5,300 ====== ====== ====== Cost basis investments: Southern Peru Copper Corporation (16.25%) ....... $3,500 2,900 2,400 Other ........................................... 400 600 800 ------ ------ ------ $3,900 3,500 3,200 ====== ====== ======
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Investments and long-term receivables were as follows: - ----------------------------------------------------------------------------
1994 1993 1992 -------- -------- -------- Equity basis: International wire and cable manufacturers ............................... $ 18,500 38,300 35,500 Black Mountain ............................... 12,800 10,200 12,100 Santa Gertrudis .............................. -- 3,000 6,200 Other ........................................ 11,100 9,300 8,900 Cost basis: Southern Peru Copper Corporation (16.25%) .... 13,200 13,200 13,200 Other ........................................ 26,400 41,400 17,900 -------- -------- -------- $ 82,000 115,400 93,800 ======== ======== ========
- ---------------------------------------------------------------------------- Retained earnings of the Corporation include undistributed earnings of equity investments of (in millions): 1994 - $58.6; 1993 - $54.3; 1992 - $54.7.
Condensed financial information for companies in which the Corporation has equity basis investments together with majority-owned foreign subsidiaries previously accounted for on an equity basis is as follows:
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1994 1993 1992 --------- --------- ---------
Sales .......................... $ 637,200 637,200 567,300 Net income ..................... 46,000 36,700 36,100 - -------------------------------------------------------------------------------
Net current assets ............. $ 63,300 44,700 64,300 Fixed assets, net .............. 249,500 292,300 266,400 Long-term debt ................. (39,000) (64,900) (73,200) Other assets, net .............. (2,500) 27,500 37,700 --------- --------- --------- Net assets ..................... $ 271,300 299,600 295,200 ========= ========= =========
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4. GAIN FROM SUBSIDIARY'S STOCK ISSUANCE In May 1994, certain investors acquired an 8 percent interest in Alcave, the Corporation's majority-owned affiliate in Venezuela, for $8.0 million. As a result of this transaction, the Corporation's ownership interest in Alcave was reduced from 87 percent to approximately 80 percent. The Corporation recognized a book gain of $1.9 million from this transaction.
In September 1992, a subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation, both of Japan, acquired a 20 percent interest in Compania Contractual Minera Candelaria, the Chilean contractual mining company that holds the Candelaria project, for $52.8 million. Phelps Dodge, formerly the sole owner of the company, holds the remaining 80 percent interest. Phelps Dodge's share of the Sumitomo proceeds included a $40 million purchase price plus $1.9 million in closing adjustments. Deferred income taxes were not provided by Phelps Dodge on the $36.4 million book gain because the proceeds were indefinitely reinvested in the Chilean company to help fund construction and development of the project.
5. MISCELLANEOUS INCOME AND EXPENSE, NET Interest income totaled $11.0 million in 1994, principally from the Corporation's short-term investments, compared with $10.9 million and $10.4 million in 1993 and 1992, respectively. Miscellaneous income in 1994 also included a pre-tax $3.5 million dividend on its 16.25 percent minority interest in Southern Peru Copper Corporation, compared with $2.9 million and $2.4 million in 1993 and 1992, respectively. Losses from changes in currency exchange rates, especially in countries with highly inflationary economies (particularly Venezuela), amounted to $6.3 million in 1994, compared with a gain of $0.1 million in 1993 and a loss of $0.7 million in 1992.
6. INCOME TAXES As discussed in Note 1 to the Consolidated Financial Statements, the Corporation elected early adoption of SFAS No. 109, "Accounting for Income Taxes," as of January 1, 1992. SFAS No. 109 mandates an asset and liability approach for financial accounting and reporting of income taxes. One of the principal requirements of the standard is that changes in tax rates and laws be reflected in income from operations in the period such changes are enacted. Under the Corporation's previous accounting method, such changes were reflected over time. The new standard also requires balance sheet classification of deferred income taxes according to the balance sheet classification of the asset or liability to which the temporary difference is related. The cumulative effect on prior years of this change in accounting principle was a one-time transition charge of $10.0 million, or 14 cents per share. This charge was combined with the cumulative effect of other accounting changes (see Notes 17 and 18) and reported separately in the Consolidated Statement of Operations for the year ended December 31, 1992.
One of the more significant effects of the standard on the Corporation is the treatment of deferred income taxes resulting from prior business combinations. As a result of the standard, Phelps Dodge increased the book value of certain purchased assets at Chino Mines Company, Columbian Chemicals Company, Accuride Corporation and Hudson International Conductors by $90.9 million as of January 1, 1992, with a corresponding increase in deferred income tax liabilities.
Geographic sources of income before taxes, minority interests, equity in net earnings of affiliated companies, and cumulative effect of accounting changes for the years ended December 31 were as follows:
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1994 1993 1992 -------- -------- --------
United States ............... $298,900 258,200 352,500 Foreign ..................... 76,200 47,700 75,700 -------- -------- -------- $375,100 305,900 428,200 ======== ======== ========
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The provisions for income taxes for the years ended December 31 were as follows:
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1994 1993 1992 --------- --------- --------- Currently payable: Federal ................... $ 94,000 49,900 62,600 State ..................... 14,000 8,400 6,800 Foreign ................... 25,000 18,100 25,700 --------- --------- --------- 133,000 76,400 95,100 --------- --------- --------- Deferred: Federal ................... (27,100) 24,700 16,600 State ..................... (2,500) 2,700 4,900 Foreign ................... 1,300 2,100 (2,200) --------- --------- --------- (28,300) 29,500 19,300 --------- --------- --------- $ 104,700 105,900 114,400 ========= ========= =========
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A reconciliation of the U.S. statutory tax rate to the Corporation's effective tax rate is as follows:
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1994 1993 1992 ----- ----- -----
Statutory tax rate ............................... 35.0% 35.0 34.0 Depletion ........................................ (10.6) (4.7) (8.0) State and local income taxes ..................... 2.0 2.5 1.9 Rate increase effect on existing temporary differences ..................................... -- 2.0 -- Non-taxable gain ................................. -- -- (3.0) Other items, net ................................. 1.5 (0.2) 1.8 ----- ----- ----- Effective tax rate ............................... 27.9% 34.6 26.7 ===== ===== =====
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The Corporation paid federal, state, local and foreign income taxes of approximately $114 million in 1994, compared with approximately $113 million in 1993 and approximately $85 million in 1992. As of December 31, 1994, the Corporation had alternative minimum tax credits of approximately $119 million available for carryforward for federal income tax purposes. These credits can be carried forward indefinitely, but may only be used to the extent the regular tax exceeds the alternative minimum tax. The Corporation also has regular foreign tax credit and alternative minimum foreign tax credit carryforwards for federal income tax purposes of approximately $6 million and $31 million, which begin to expire in 1995.
The Corporation's federal income tax returns for the years 1990 and 1991 are currently under examination. The Corporation has received proposed assessments from the Internal Revenue Service, relating to the Corporation's federal income tax liability for the years 1988 and 1989, and from the State of New Mexico relating to the Corporation's New Mexico state income tax liability for the years 1989 and 1990. The Corporation is contesting both of these proposals. Management believes that it has made adequate provision so that the final resolution of the issues involved, including application of those determinations to subsequent open years, will not have a material adverse effect on the consolidated financial condition or results of operations of the Corporation.
Deferred income tax assets and (liabilities) comprised the following at December 31:
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1994 1993 ---------- ----------
Minimum tax credits ............................ $ 119,000 110,300 Postretirement and postemployment benefits ..... 49,300 46,200 Reserves ....................................... 85,800 41,300 Mining costs ................................... 19,800 -- Other .......................................... 13,100 8,200 ---------- ---------- Deferred tax assets .......................... 287,000 206,000 ---------- ---------- Depreciation ................................... (452,000) (426,000) Mining properties .............................. (13,500) (10,600) Exploration and mine development costs ......... (8,800) (10,100) Pensions ....................................... (15,500) (7,400) Inventories .................................... (2,200) (2,500) ---------- ---------- Deferred tax liabilities ..................... (492,000) (456,600) ---------- ---------- $ (205,000) (250,600) ========== ==========
- ---------------------------------------------------------------------------- Income taxes have not been provided on the Corporation's share ($236 million) of undistributed earnings of those manufacturing and mining interests abroad over which the Corporation has sufficient influence to control the distribution of such earnings and has determined that such earnings have been reinvested indefinitely. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were lent to the Corporation or a U.S. affiliate, or if the Corporation should sell its stock in the subsidiaries. It is not practicable to estimate the amount of additional U.S. tax that might be payable on the foreign earnings; however, the Corporation believes that U.S. foreign tax credits would largely eliminate any U.S. tax. Additional foreign withholding taxes which would be payable if all of the earnings were remitted as dividends are estimated to be $31.5 million.
7. INVENTORIES AND SUPPLIES Inventories are as follows (in millions):
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Phelps Phelps Dodge Dodge Mining Industries Total ------ ---------- -----
1994: Metals and other raw materials ............. $ 98.4 78.2 176.6 Work in process ............................ 2.1 13.2 15.3 Finished manufactured goods ................ -- 69.4 69.4 Other ...................................... 4.3 0.7 5.0 ------- ------ ------ $104.8 161.5 266.3 ====== ====== ======
1993: Metals and other raw materials ............. $ 73.0 69.2 142.2 Work in process ............................ 2.0 14.1 16.1 Finished manufactured goods ................ -- 62.4 62.4 Other ...................................... 4.7 -- 4.7 ------- ------ ------ $ 79.7 145.7 225.4 ======= ====== ======
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Inventories valued by the last-in, first-out method would have been greater if valued at current costs by approximately $111 million and $101 million at December 31, 1994 and 1993, respectively.
Supplies in the amount of $110.7 million and $103.3 million at December 31, 1994 and 1993, respectively, are stated net of a reserve for obsolescence of $14.0 million and $12.7 million, respectively.
8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment comprise the following (in millions):
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1994 1993 -------- --------
Buildings, machinery and equipment ................ $4,060.9 3,717.5 Mining properties ................................. 129.1 129.6 Capitalized mine development ...................... 283.9 267.7 Land and water rights ............................. 72.5 63.3 -------- -------- 4,546.4 4,178.1 Less accumulated depreciation, depletion and amortization ................................. 1,980.0 1,837.9 -------- -------- $2,566.4 2,340.2 ======== ========
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The net increases in property, plant and equipment of $226.2 million in 1994 and $231.6 million in 1993 are summarized below (in millions):
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1994 1993 -------- --------
Balance at beginning of year ...................... $2,340.2 2,108.6 -------- -------- Capital expenditures .............................. 355.0 387.2 Depreciation, depletion and amortization .......... (190.2) (181.6) Property, plant and equipment of acquired companies ........................................ 69.8 23.7 Currency translation adjustments and other ........ (8.4) 2.3 -------- -------- 226.2 231.6 -------- -------- Balance at end of year ............................ $2,566.4 2,340.2 ======== ========
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9. OTHER ASSETS AND DEFERRED CHARGES Other assets and deferred charges are as follows (in millions):
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1994 1993 ------ ------
Goodwill, less accumulated amortization (1994 - $30.1; 1993 - $29.8) * ..................... $125.2 142.1 Employee benefit plans .............................. 92.6 82.0 Debt issue costs .................................... 32.8 26.9 Intangible pension asset ............................ 18.0 17.0 Other intangible assets ............................. 4.1 4.5 Other ............................................... 4.8 5.4 ------ ------ $277.5 277.9 ====== ====== - ------------
* During 1994, goodwill was reduced by $13.7 million for the impairment of value of Hudson International Conductors (another $6.3 million was charged directly to fixed assets for a total write-down of $20.0 million). This charge reflects the unfavorable change in market conditions for Hudson, particularly in the defense sector, that is now considered permanent. The Corporation is currently evaluating alternatives for the restructuring of Hudson.
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10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses are as follows (in millions): - ----------------------------------------------------------------------------
1994 1993 ------ -----
Accounts payable .................................... $303.5 218.6 Employee benefit plans .............................. 39.5 38.9 Insurance and loss reserves ......................... 11.4 29.5 Salaries, wages and other compensation .............. 30.3 25.4 Environmental reserves .............................. 42.1 24.0 Smelting, refining and freight ...................... 15.1 16.2 Other accrued taxes ................................. 14.6 14.2 Shutdown, relocation and restructuring .............. 11.4 13.9 Interest * .......................................... 12.4 12.7 Candelaria development .............................. 6.8 8.0 Returnable containers ............................... 4.9 5.0 Other ............................................... 36.5 19.4 ------ ----- $528.5 425.8 ====== ===== - ------------
* Interest paid by the Corporation in 1994 was $58.5 million, compared with $54.9 million in 1993 and $44.1 million in 1992. - ----------------------------------------------------------------------------
11. OTHER LIABILITIES AND DEFERRED CREDITS Other liabilities and deferred credits are as follows (in millions):
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1994 1993 ------ -----
Postretirement and postemployment benefit plans (see Notes 17 and 18) .................................. $139.4 129.9 Other employee benefit plans ............................ 63.9 67.6 Environmental reserves .................................. 124.9 50.0 Shutdown, relocation and restructuring .................. 13.1 9.3 Insurance and loss reserves ............................. 20.9 4.0 Other ................................................... 3.1 2.5 ------ ----- $365.3 263.3 ====== =====
- ---------------------------------------------------------------------------- 12. LONG-TERM DEBT AND OTHER FINANCING Long-term debt due after one year is summarized below (in millions):
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1994 1993 ------ -----
7.75% Notes due 2002 ...................................... $100.0 100.0 7.96% Notes due 1998-2000 ................................. 50.0 50.0 Air Quality Control Obligations: 5.45% Notes due 2009 ..................................... 81.1 -- 5.75% to 6.25% Series A and B notes due 1995-2004 ........ -- 81.1 6.50% Installment sale obligations due 2013 .............. 90.0 90.0 Candelaria ................................................ 235.4 164.7 Ojos del Salado ........................................... 8.0 -- Columbian Tiszai Carbon Ltd ............................... 30.0 33.5 Columbian Carbon Spain, S.A ............................... 13.0 -- Phelps Dodge International ................................ 11.3 14.4 Accuride Canada ........................................... -- 6.0 Other ..................................................... 3.5 7.6 ------ ----- $622.3 547.3 ====== =====
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Annual maturities of debt outstanding at December 31, 1994, are as follows (in millions): 1995 - $25.3; 1996 - $16.8; 1997 - $37.7; 1998 - $50.9; 1999 - $55.4.
During 1993, the Corporation refunded its 7 percent installment sale obligations due in the years 1994 through 2004 through the issuance of $90 million of 6.50 percent obligations due 2013. On January 19, 1994, the Corporation issued $81.1 million of 5.45 percent obligations due 2009; the proceeds from the issue were used to retire its 5.75 percent to 6.25 percent Series A and B notes due in the years 1994 through 2004 on March 1, 1994.
The Corporation entered into a new revolving credit agreement with several lenders on June 30, 1993, at which time it terminated its then existing credit agreement. The agreement was amended on October 31, 1994. The new agreement, as amended, permits borrowings of up to $200 million from time to time until its maturity on October 31, 1999. Interest is payable at a fluctuating rate based on the agent bank's prime rate or a fixed rate, based on the Eurodollar Interbank Offered Rate or at fixed rates offered independently by the several lenders, for maturities of from seven to 360 days. This agreement provides for a facility fee of one-eighth of 1 percent of total commitments. The agreement requires the Corporation to maintain a minimum consolidated tangible net worth of $1.1 billion and limits indebtedness to 40 percent of total consolidated capitalization. There were no borrowings under the current or the previous agreement at either December 31, 1994, or December 31, 1993.
The Corporation had other lines of credit totaling $100.0 million at December 31, 1994, compared with $90.5 million at December 31, 1993. These facilities are subject to agreement as to availability, terms and amount. There were no borrowings outstanding under these lines of credit at either December 31, 1994, or December 31, 1993.
The Corporation had $49.3 million in short-term borrowings, all by its international operations, at December 31, 1994, compared with $82.7 million at December 31, 1993. The weighted average interest rate on this debt at December 31, 1994, and December 31, 1993, was 14.9 percent and 9.9 percent, respectively.
As of December 31, 1994, the Corporation's 80 percent owned Compania Contractual Minera Candelaria subsidiary had drawn down all $290 million under its limited-recourse debt project financing agreements to finance construction of the Candelaria copper project in Chile. Under the proportional consolidation method, the Corporation reflects 80 percent of this amount in its financial statements. These borrowings are limited recourse to the Corporation prior to satisfaction of certain completion tests, and non-recourse thereafter. This $290 million of 13-year financing includes $200 million of floating rate dollar denominated debt (with a rate based on the six-month London Interbank Offered Rate (LIBOR)), $60 million of fixed rate dollar denominated debt, and $30 million of floating rate debt denominated in Chilean pesos (with a rate based on the 90-day Tasa Activa Bancaria), with a nine and one-half year repayment period that starts in 1997.
The Corporation also caused Candelaria to enter into an interest rate protection agreement with certain financial institutions to limit the effect of increases in the cost of the $200 million of floating rate dollar denominated debt. Under the terms of the agreement, the project will receive payments from these institutions if the six-month LIBOR exceeds 9 percent prior to December 31, 2001, and 11 percent during the two subsequent years ending December 31, 2003.
In December 1994, Columbian Chemicals, through its wholly owned subsidiary, Columbian Carbon Spain, S.A., acquired for approximately $25 million the assets of a carbon black plant in Santander, Spain; $13 million of the purchase price was financed through borrowings from Barclays Bank, S.A. This facility is floating rate debt denominated in Spanish pesetas and matures in the years 1995 through 2000. These borrowings are fully with recourse to the Corporation.
In December 1994, Phelps Dodge Mining Company, through its wholly owned subsidiary, Compania Contractual Minera Ojos del Salado S.A. de C.V., borrowed $10.4 million under facilities from the Bank of Nova Scotia to fund working capital requirements and capital expenditures. This facility is floating rate dollar denominated debt and matures in the years 1995 through 1999. These borrowings are with recourse to the Corporation except in the event of political force majeure.
The Corporation's 60 percent owned Hungarian subsidiary, Columbian Tiszai Carbon Ltd., has borrowed $33.5 million under facilities from the Overseas Private Investment Corporation (OPIC) and the European Bank for Reconstruction and Development (EBRD) to finance construction of a carbon black manufacturing plant. Both facilities are with recourse to Columbian Chemicals Company prior to satisfaction of certain completion tests, and non-recourse thereafter. The OPIC facility is a $24.5 million fixed rate dollar borrowing bearing interest rates of between 8.01 percent and 9.15 percent, while the EBRD $9 million loan is a floating rate dollar borrowing. These borrowings mature in the years 1995 through 2001.
13. SHAREHOLDERS' EQUITY Changes in common shareholders' capital accounts are summarized below:
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Common Shares ------------- Capital in Shares Par value excess of (000s) $6.25 par value ------- --------- ----------
Balance at December 31, 1991 ......... 34,811 $ 217,500 $ 281,000 Adjustment for two-for-one stock split .............................. 35,019 218,900 (218,900) Stock options exercised ............. 535 3,300 17,900 Restricted shares activity and other .......................... 9 100 600 --------- --------- --------- Balance at December 31, 1992 ......... 70,374 439,800 80,600 Stock options exercised ............. 236 1,500 5,300 Shares purchased .................... (130) (800) (4,700) Restricted shares granted ........... 51 300 1,900 --------- --------- --------- Balance at December 31, 1993 ......... 70,531 440,800 83,100 Stock options exercised ............. 216 1,400 4,600 Shares purchased .................... (76) (500) (3,400) Restricted shares granted ........... 14 100 700 Restricted shares terminated ........ (13) (100) (500) --------- --------- --------- Balance at December 31, 1994 ......... 70,672 $ 441,700 $ 84,500 ========= ========= =========
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In 1988, the Corporation adopted a Preferred Share Purchase Rights Plan and declared a dividend of one right on each of its common shares. In certain circumstances, if a person or group of persons acquires or tenders for 20 percent or more of the Corporation's outstanding common shares, these rights vest and entitle the holder to certain share purchase rights. Until 10 days after vesting, the rights may be modified or redeemed by the Board of Directors.
During 1994, the Corporation purchased 76,000 of its common shares under a 4 million common share buy-back program initiated in September 1989 (numbers of shares have been revised to give effect to the two-for-one stock split in May 1992). The Corporation purchased a total of 2,449,000 of its common shares under this program through December 31, 1994. These purchased shares were restored to the treasury.
The Corporation has 6,000,000 authorized preferred shares with a par value of $1.00 each; no shares were outstanding at either December 31, 1994, or December 31, 1993.
14. STOCK OPTION PLANS; RESTRICTED STOCK Executives and other key employees have been granted options to purchase common shares under stock option plans adopted in 1979, 1987 and 1993. In each case, the option price equals the fair market value of the common shares on the day of the grant. The options include limited stock appreciation rights under which an optionee has the right, in the event common shares are purchased pursuant to a third party tender offer or in the event a merger or similar transaction in which the Corporation shall not survive as a publicly held corporation is approved by the Corporation's shareholders, to relinquish the option and to receive from the Corporation an amount per share equal to the excess of the price payable for a common share in such offer or transaction over the option price per share.
The 1993 plan provides (and the 1987 plan provided) for "reload" option grants to executives and other key employees. If an optionee exercises an option under the 1993 or 1987 plan with already-owned shares of the Corporation, the optionee receives a reload option that restores the option opportunity on a number of common shares equal to the number of shares used to exercise the original option. A reload option has the same terms as the original option except that it has an exercise price per share equal to the fair market value of a common share on the date the reload option is granted and is exercisable six months after the date of grant.
The 1993 plan provides (and the 1987 plan provided) for the issuance to executives and other key employees, without any payment by them, of common shares subject to certain restrictions (Restricted Stock). The 1993 plan limits the award of Restricted Stock to 1,000,000 shares.
Under a stock option plan adopted in 1989, options to purchase common shares have been granted to directors who have not been employees of the Corporation or its subsidiaries for one year or are not eligible to participate in any plan of the Corporation or its subsidiaries entitling participants to acquire stock, stock options or stock appreciation rights.
At December 31, 1994, options for 886 shares, 905,791 shares, 40,555 shares and 303,479 shares were exercisable under the 1979 plan, the 1987 plan, the 1989 plan and the 1993 plan, respectively, at average prices of $9.76, $38.90, $34.84 and $46.02 per share. In addition, 12,800 shares of Restricted Stock issued under the 1987 plan and 55,226 shares of Restricted Stock issued under the 1993 plan were outstanding at December 31, 1994. Also at December 31, 1994, 3,538,430 shares were available for option grants (including 947,774 shares as restricted stock awards) under the 1993 plan (plus an additional 734,505 shares that may be issued as reload options) and 102,735 shares were available for option grants under the 1989 plan. These amounts are subject to future adjustment. No further options may be granted under the 1987 plan or the 1979 plan.
Changes during 1992, 1993 and 1994 in options outstanding for the combined plans were as follows:
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Average option Shares price per share ------ -----------
Outstanding at December 31, 1991 (before stock split) ............................. 1,077,974 $ 56.38 Granted ....................................... 83,633 78.87 Exercised ..................................... (287,901) 52.02 Expired or terminated ......................... (2,668) 57.24 Adjustment for two-for-one stock split .......... 871,038 N/A Post-stock split: Granted ....................................... 772,157 47.27 Exercised ..................................... (496,161) 29.75 Expired or terminated ......................... (42,222) 30.28 -------- Outstanding at December 31, 1992 (after stock split) .............................. 1,975,850 36.78 Granted ......................................... 831,896 45.11 Exercised ....................................... (377,203) 28.03 Expired or terminated ........................... (50,982) 41.37 --------- Outstanding at December 31, 1993 (after stock split) .............................. 2,379,561 40.88 Granted ......................................... 961,087 58.35 Exercised ....................................... (479,660) 37.32 Expired or terminated ........................... (28,802) 44.34 --------- Outstanding at December 31, 1994 (after stock split) .............................. 2,832,186 47.38 =========
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Changes during 1992, 1993 and 1994 in Restricted Stock were as follows:
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Shares ------
Outstanding at December 31, 1991 ............................ 52,300 Adjustment for two-for-one stock split .................... 46,200 Granted ................................................... 16,900 Terminated ................................................ (3,600) Released .................................................. (32,200) -------- Outstanding at December 31, 1992 ............................ 79,600 Granted ................................................... 51,000 Released .................................................. (30,400) -------- Outstanding at December 31, 1993 ............................ 100,200 Granted ................................................... 14,226 Terminated ................................................ (13,000) Released .................................................. (33,400) --------
Outstanding at December 31, 1994 ............................ 68,026 ========
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15. CUMULATIVE TRANSLATION ADJUSTMENTS Changes in the cumulative translation adjustments account during 1992, 1993 and 1994 are summarized below (in millions):
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Cumulative translation adjustments account -------------------
Balance at December 31, 1991 ............................... $ (71.1) Aggregate adjustment for 1992 ............................ (17.9) ------- Balance at December 31, 1992 ............................... (89.0) Aggregate adjustment for 1993 ............................ (12.2) ------- Balance at December 31, 1993 ............................... (101.2) Aggregate adjustment for 1994 ............................ 7.4 -------
Balance at December 31, 1994 ............................... $ (93.8) =======
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16. PENSION PLANS The Corporation has several non-contributory employee defined benefit pension plans covering substantially all U.S. employees. Employees covered under the salaried defined benefit pension plans are eligible to participate upon the completion of one year of service, and benefits are based upon final average salary and years of service. Employees covered under the remaining plans are generally eligible to participate at the time of employment, and benefits are generally based on a fixed amount for each year of service. Employees are vested in the plans after five years of service. The Corporation also maintains pension plans for certain employees of international subsidiaries following the legal requirements in those countries.
In a number of these plans, the plan assets exceed the accumulated benefit obligations (overfunded plans) and in the remainder of the plans, the accumulated benefit obligations exceed the plan assets (underfunded plans).
The status of employee pension benefit plans at December 31 is summarized below (in millions):
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The Corporation's pension plans were valued between November 1, 1993, and January 1, 1994, and the obligations were projected to, and the assets were valued as of, the end of 1994. The majority of plan assets are invested in a diversified portfolio of stocks, bonds and cash or cash equivalents. A small portion of the plan assets is invested in pooled real estate and other private corporate investment funds.
The components of net periodic pension cost were as follows (in millions):
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1994 1993 1992 ------ ------ ------
Benefits earned during the year ................... $ 12.6 10.8 9.8 Interest accrued on projected benefit obligation ....................................... 40.1 40.8 39.5 Return on assets - actual ......................... (0.4) (68.0) (63.2) - unrecognized gain (loss) ....... (51.2) 17.5 15.7 Net amortization .................................. 1.2 0.5 0.3 ------ ------ ------ Net periodic pension cost for the year ......... $ 2.3 1.6 2.1 ====== ====== ======
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Assumptions used to develop the net periodic pension cost included a 7.25 percent discount rate in 1994, compared with a discount rate of 8.5 percent in 1993 and 1992. An expected long-term rate of return on assets of 9.5 percent and a rate of increase in compensation levels of 4 percent were used for 1994, compared with rates of 10 percent and 5 percent, respectively, for both 1993 and 1992. For the valuation of pension obligations, the discount rate at the end of 1994 was 8.5 percent, increased from 7.25 percent in 1993 and equivalent to the discount rate at the end of 1992, and the rate of increase in compensation levels was 4 percent, the same as 1993 and a reduction from 5 percent in 1992.
The Corporation recognizes a minimum liability in its financial statements for its underfunded plans. "Other liabilities and deferred credits" at December 31, 1994, included $40 million relating to this minimum liability, compared with $43 million at December 31, 1993. This amount was offset by an $18 million intangible asset, a $13 million reduction in "Common Shareholders' Equity" and a $9 million deferred tax benefit at December 31, 1994, compared with a $17 million intangible asset, a $16 million reduction in "Common Shareholders' Equity" and a $10 million deferred tax benefit at December 31, 1993.
The Corporation intends to fund at least the minimum amount required under the Employee Retirement Income Security Act of 1974 for U.S. plans or, in the case of international subsidiaries, the minimum legal requirements in that particular country. The excess of amounts accrued over minimum funding requirements, together with such excess amounts accrued in prior years, have been included in "Other liabilities and deferred credits." The anticipated funding for the current year is included in "Accounts payable and accrued expenses."
17. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS As discussed in Note 1 to the Consolidated Financial Statements, the Corporation elected early adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," as of January 1, 1992. SFAS No. 106 requires recognition of postretirement medical and life insurance benefits on an accrual rather than cash basis. One of the principal requirements of the method is that the expected cost of providing such postretirement benefits be accrued during the years employees render the necessary service. Under the Corporation's previous accounting method, such benefits were accounted for on a cash basis. In 1992, the Corporation elected to recognize immediately the cumulative obligation for benefits attributable to service of retired and active employees prior to 1992 rather than amortizing the cumulative obligation over future service periods. This election resulted in a one-time 1992 transition charge of $105.5 million before taxes ($66.4 million, or 94 cents per common share, after taxes). This charge was combined with the cumulative effect of other accounting changes (see Notes 6 and 18) and reported separately in the Consolidated Statement of Operations for the year ended December 31, 1992.
Substantially all of the Corporation's U.S. employees who retire from active service on or after normal retirement age of 65 are eligible for life insurance benefits. The Corporation also provides postretirement life insurance for employees of international subsidiaries in some cases. Life insurance benefits are also available under certain early retirement programs or pursuant to the terms of certain collective bargaining agreements. The majority of the costs of such benefits were paid out of a previously established fund maintained by an insurance company; however, a portion was paid through an insured contract. Health care insurance benefits are also provided for many employees retiring from active service. The coverage is provided on a non-contributory basis for certain groups of employees and on a contributory basis for other groups. The majority of these benefits are paid by the Corporation.
The status of employee postretirement benefit plans at December 31 is summarized below (in millions):
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1994 1993 ----- ----- Accumulated Postretirement Benefit Obligation: Retirees .............................................. $ 69 69 Fully eligible active plan participants ............... 8 18 Other active plan participants ........................ 56 49 ----- ----- Total accumulated postretirement benefit obligation ........................................... 133 136
Plan assets at fair value ............................... 11 11 ----- ----- Accumulated postretirement benefit obligation in excess of plan assets .................................. 122 125 Unrecognized prior service cost ......................... 5 9 Unrecognized net gain (loss) from actuarial experience ............................................. 1 (13) ----- ----- Accrued postretirement benefit cost ..................... $ 128 121 ===== =====
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The components of net periodic postretirement benefit cost were as follows (in millions):
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1994 1993 1992 ----- ----- ----- Benefits attributed to service during the year ........................................ $ 4 3 4 Interest cost on accumulated postretirement benefit obligation .............................. 10 10 10 Return on assets - actual ........................ (1) (1) (1) Net amortization ................................. (1) (1) -- ----- ----- ----- Net periodic postretirement benefit cost for the year .................................... $ 12 11 13 ===== ===== =====
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For 1994 measurement purposes, annual rates of increase in the per capita cost of covered health care benefits were assumed to average 11 percent for 1995 decreasing gradually to 6.3 percent by 2010 and remaining at that level thereafter. For 1993 measurement purposes, annual rates of increase in the per capita cost of covered health care benefits were assumed to average 11 percent for 1994 decreasing gradually to 5.3 percent by 2010 and remaining at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994, by approximately $13.0 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by approximately $1 million.
The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.5 percent for 1994, compared with 7.25 percent used for 1993. The expected long-term rate of return on plan assets was 8 percent for both years. Assumptions used to develop net periodic postretirement benefit cost included a 7.25 percent discount rate in 1994, compared with a discount rate of 8.5 percent in 1993 and 1992.
18. POSTEMPLOYMENT BENEFITS As discussed in Note 1 to the Consolidated Financial Statements, the Corporation elected early adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits," as of January 1, 1992. SFAS No. 112 prescribes accounting methods for employers who provide certain benefits to former or inactive employees after employment but before retirement. Adoption of this standard resulted in a one-time 1992 transition charge of $5.6 million before taxes ($3.5 million, or 5 cents per common share, after taxes).
19. COMMITMENTS Rent expense for the years 1994, 1993 and 1992 was (in millions): $23.5, $26.6 and $25.1, respectively. Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year totaled $69.2 million at December 31, 1994. These commitments for future periods are as follows (in millions): 1995 - $15.0; 1996 - $13.4; 1997 - $10.1; 1998 - $7.9; 1999 - $6.7; 2000 and thereafter - $16.1 million.
The Corporation enters into price protection arrangements from time to time, depending on market circumstances, to ensure a minimum price for a portion of its expected future mine production. See Note 21 to the Consolidated Financial Statements to which reference should be made for a fuller understanding of these arrangements with respect to expected 1995 production.
20. CONTINGENCIES The Corporation is from time to time involved in various legal proceedings of a character normally incident to its past and present businesses. Management does not believe that the outcome of these proceedings will have a material adverse effect on the financial condition or results of operations of the Corporation on a consolidated basis.
The Corporation is subject to federal, state and local environmental laws, rules and regulations, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund), as amended by the Superfund Amendments and Reauthorization Act of 1986. Under Superfund, the Environmental Protection Agency (EPA) has identified approximately 35,000 sites throughout the United States for review, ranking and possible inclusion on the National Priorities List (NPL) for possible response. Among the sites identified, EPA has included 13 sites owned by the Corporation. The Corporation believes that most, if not all, of its sites so identified will not qualify for listing on the NPL.
In addition, the Corporation may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment associated with past disposal practices at sites not owned by the Corporation. The Corporation has received notice that it is a potentially responsible party from EPA and/or individual states under CERCLA or a state equivalent and is participating in environmental assessment and remediation activity at 36 sites.
The amounts of the Corporation's liabilities for remedial activities are very difficult to estimate due to such factors as the unknown extent of the remedial actions that may be required and, in the case of sites not owned by the Corporation, the unknown extent of the Corporation's probable liability in proportion to the probable liability of other parties. The Corporation has probable environmental liabilities that in its judgment cannot reasonably be estimated, and losses attributable to remediation costs are reasonably possible at other sites. The Corporation cannot now estimate the total additional loss it may incur for such environmental liabilities, but such loss could be substantial (see Notes 1 and 2 to the Consolidated Financial Statements for further information concerning the Corporation's environmental obligations).
The possibility of recovery of some of the environmental remediation costs from insurance companies or other parties exists; however, the Corporation does not recognize these recoveries in its financial statements until they become probable.
21. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation does not acquire, hold or issue derivative financial instruments for trading purposes. Derivative financial instruments are used to manage well defined commodity price, foreign exchange and, to a lesser extent, interest rate risks, that arise out of the Corporation's core business activities. The fair values of the Corporation's derivative financial instruments, as summarized in the table that follows, are based on quoted market prices for similar financial instruments. A summary of derivative financial instruments held by the Corporation is as follows:
COPPER PRICE PROTECTION AGREEMENTS - The Corporation may periodically use various price protection programs to ameliorate the adverse effect of price fluctuations on its copper production. The Corporation's current strategy includes a combination of option contracts with several financial institutions to ensure a minimum price for a portion of its expected copper production. Approximately 95 percent of the Corporation's anticipated copper production for 1995 has been protected under such arrangements. Certain of these agreements provide for minimum 1995 quarterly average prices of 80 cents per pound for approximately 640 million pounds of copper cathode. These contracts are based on the average London Metal Exchange (LME) price each quarter. Similar contracts for 1994 covering approximately 244 million pounds of copper cathode expired as of December 31, 1994, without payment to the Corporation. In addition, other contracts effectively ensure minimum (approximately 95 cents) and maximum (approximately $1.33) prices per pound during 1995 for approximately 650 million pounds of copper cathode. The minimum prices are based on quarterly average LME prices for approximately 370 million pounds and on the annual average LME price for the remainder. The maximum prices are based on the annual average LME price for all 650 million pounds.
FOREIGN EXCHANGE CONTRACTS - The Corporation periodically enters into forward exchange contracts to hedge certain recorded transactions denominated in foreign currencies and enters into currency option contracts to hedge certain firm commitments and other anticipated foreign currency transactions. The objective of the Corporation's foreign currency hedging activities is to protect the Corporation from the risk that the eventual dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. In hedging one transaction, the Corporation's foreign exchange hedging strategy may, in certain circumstances, require the use of a number of offsetting currency option contracts to minimize the cost of the underlying hedge. Thus, the notional principal amount, which represents the arithmetic sum of all outstanding foreign currency hedging instruments, is not a measurement of risk to the Corporation from the use of derivative financial instruments. At December 31, 1994, the Corporation had protection in place for approximately $95 million of recorded and anticipated foreign currency transactions through the use of forward exchange contracts and currency option contracts with an aggregate notional principal amount of approximately $306 million. The forward exchange contracts and currency option contracts acquired by the Corporation have maturities of less than one year. Deferred unrealized losses were approximately $0.9 million at December 31, 1994.
INTEREST RATE PROTECTION AGREEMENT - The Corporation has caused its Candelaria copper project in Chile to enter into an interest rate protection agreement with certain financial institutions to limit the effect of increases in the interest rate on its $200 million floating rate dollar denominated debt. Under the terms of the agreement, the project will receive payments from these institutions if the six-month London Interbank Offered Rate (LIBOR) exceeds 9 percent prior to December 31, 2001, and 11 percent during the two subsequent years ending December 31, 2003.
CREDIT RISK - The Corporation is exposed to credit loss in the event of nonperformance by counterparties to its price protection, forward foreign exchange and interest rate protection agreements. To minimize the risk of credit loss, the Corporation deals only with highly rated financial institutions and monitors the credit worthiness of these institutions on a continuing basis. The Corporation does not anticipate nonperformance by any of these counterparties.
The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value are as follows:
Cash and short-term investments -- the carrying amount is a reasonable estimate of the fair value because of the short maturity of those instruments.
Investments and long-term receivables -- the fair values of some investments are estimated based on quoted market prices for those or similar investments. The fair values of other types of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities.
Long-term debt -- the fair value of the Corporation's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current notes offered to the Corporation for debt of the same remaining maturities.
Standby letters of credit and financial guarantees -- the fair values of guarantees and letters of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The Corporation has guaranteed the borrowings of certain subsidiaries totaling $292.3 million. These guarantees include project financings for the Candelaria copper project in Chile and the Hungarian carbon black project; upon the satisfaction of completion requirements, those borrowings become non-recourse to the Corporation. There is no market for these guarantees and they were issued without explicit cost. Therefore, it is not practicable to establish their fair value.
The estimated fair values of the Corporation's financial instruments as of December 31, 1994, are as follows (in millions):
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Carrying Fair Amount Value -------- -----
Cash and short-term investments .......................... $286.9 286.9 Price protection arrangements (copper price guarantees) ............................... 8.1 (16.4) Investments and long-term receivables (including amounts due within one year) for which it is practicable to estimate fair value *................................. 28.4 29.0 Long-term debt (including amounts due within one year) ........................................ 647.6 622.6 Interest rate protection agreements ...................... 2.5 4.0 Foreign currency exchange contracts ...................... 0.5 (0.6)
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* It is not practicable to estimate the fair value of investments in certain untraded foreign companies carried at historic cost. The Corporation's largest cost basis investment is its 16.25 percent interest in Southern Peru Copper Corporation (SPCC), which is carried at a book value of $13.2 million. For the year ended December 31, 1994, SPCC reported total assets of $968.5 million, common stockholders' equity of $634.8 million, revenues of $701.7 million and net income of $91.2 million. In November 1994, SPCC filed a rgistration statement with the U. S. Securities and Exchange Commission for the offering of 16 million common shares of its stock to be listed on the New York Stock Exchange; however, in February 1995, the offering was withdrawn.
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22. BUSINESS SEGMENT DATA The Corporation's business consists of two segments, Phelps Dodge Mining Company and Phelps Dodge Industries. The principal activities of each segment are described below, and the accompanying tables present results of operations and other financial information by segment and by significant geographic area.
Phelps Dodge Mining Company is an international business comprising a group of companies involved in vertically integrated copper operations including mining, concentrating, electrowinning, smelting and refining, rod production, marketing and sales, and related activities. Copper is sold primarily to others as rod, cathode or concentrates, and to the Phelps Dodge Industries segment. In addition, Phelps Dodge Mining Company at times smelts and refines copper and produces copper rod for others on a toll basis, and produces gold, silver, molybdenum and copper chemicals, principally as by-products, and sulfuric acid from its air quality control facilities. This segment also includes the Corporation's other mining operations and investments (including fluorspar, silver, lead and zinc operations) and its worldwide mineral exploration and development programs.
Phelps Dodge Industries is a business segment comprising a group of international companies that manufacture engineered products principally for the transportation and electrical sectors. Its operations are characterized by products with significant market share, internationally competitive cost and quality, and specialized engineering capabilities. This business segment includes the Corporation's carbon black and synthetic iron oxide operations through Columbian Chemicals Company and its subsidiaries; its wheel and rim operations through Accuride Corporation and its subsidiaries; its magnet wire operations through Phelps Dodge Magnet Wire Company and its subsidiaries; its international wire and cable manufacturing operations through Phelps Dodge International Corporation and its U.S. specialty conductor operations through Hudson International Conductors. The major portion of the sales of this segment is to customers primarily involved in the transportation industry ($642.0 million or 44 percent in 1994, compared with $602.3 million or 47 percent in 1993 and $528.0 million or 45 percent in 1992) and the electrical industry ($714.7 million or 49 percent in 1994, compared with $566.2 million or 44 percent in 1993 and $544.3 million or 46 percent in 1992).
The Corporation's total 1994 sales include exports of $76.2 million from U.S. operations to unaffiliated foreign customers, including products sold through U.S. brokers, compared with $60.3 million in 1993 and $86.5 million in 1992. Intersegment sales reflect the transfer of copper from Phelps Dodge Mining Company to Phelps Dodge Industries at the same prices charged to outside customers.
A summary of segment data by business segment for the years 1994, 1993 and 1992 is as follows (see Note 2 to the Consolidated Financial Statements for the effect of 1994 provisions for environmental costs and asset dispositions on operating income).
A summary of segment data by significant geographic area for the years 1994, 1993 and 1992 is as follows:
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1994 1993 1992 ---- ---- ----
SALES AND OTHER OPERATING REVENUES: Unaffiliated customers United States and Canada ........... $ 2,659,600 2,069,300 2,095,500 Latin America ...................... 346,700 274,000 222,900 Other .............................. 282,900 252,600 260,900 ----------- ----------- ----------- $ 3,289,200 2,595,900 2,579,300 =========== =========== =========== Intergeographic areas United States and Canada ........... $ 8,000 8,000 6,200 Latin America ...................... -- -- -- Other .............................. -- -- -- ----------- ----------- ----------- $ 8,000 8,000 6,200 =========== =========== =========== OPERATING INCOME: United States and Canada ............ $ 359,800 282,000 347,100 Latin America ....................... 30,000 17,700 38,600 Other ............................... 10,600 26,800 34,900 ----------- ----------- ----------- $ 400,400 326,500 420,600 =========== =========== =========== IDENTIFIABLE ASSETS AT DECEMBER 31: United States and Canada ............ $ 2,973,800 2,751,600 2,771,000 Latin America ....................... 798,200 653,300 402,400 Other ............................... 361,800 316,000 267,800 ----------- ----------- ----------- $ 4,133,800 3,720,900 3,441,200 =========== =========== ===========
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Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure - -------------------------------------------------------------
Not applicable.
Part III
Items 10, 11, 12 and 13. - -----------------------
The information called for by Part III (Items 10, 11, 12 and 13) is incorporated herein by reference from the material included under the captions "Election of Directors," "Beneficial Ownership of Securities," "Executive Compensation" and "Other Matters" in Phelps Dodge Corporation's definitive proxy statement (to be filed pursuant to Regulation 14A) for its Annual Meeting of Shareholders to be held May 3, 1995 (the 1995 Proxy Statement), except that the information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I of this report. The 1995 Proxy Statement is being prepared and will be filed with the Securities and Exchange Commission and furnished to shareholders on or about April 1, 1995.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------
(a) 1. Financial Statements.
2. Financial Statement Schedules.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Corporation, effective June 16, 1987 (incorporated by reference to Exhibit 3.1 to the Corporation's Form 10-Q for the quarter ended June 30, 1987 (SEC File No. 1-82)). Certificate of Amendment of such Restated Certificate of Incorporation, effective August 4, 1988, and Certificate of Amendment of such Restated Certificate of Incorporation, effective August 9, 1988 (incorporated by reference to Exhibits 3.1 and 3.2 to the Corporation's Form 10-Q for the quarter ended September 30, 1988 (SEC File No. 1-82)). Complete composite copy of the Certificate of Incorporation of the Corporation as amended to date (incorporated by reference to Exhibit 3.1 to the Corporation's 1992 Form 10-K (SEC File No. 1-82)).
3.2 By-Laws of the Corporation, as amended effective September 1, 1994 (incorporated by reference to Exhibit 3.2 to the Corporation's Form 10-Q for the quarter ended September 30, 1994 (SEC File No. 1-82)).
4.1 Reference is made to Exhibits 3.1 and 3.2 above.
4.3 Rights Agreement, dated as of July 29, 1988 and Amended and Restated as of December 6, 1989, between the Corporation and Chemical Bank (formerly Manufacturers Hanover Trust Company), which includes the form of Certificate of Amendment setting forth the terms of the Junior Participating Cumulative Preferred Shares, par value $1.00 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 1 to the Corporation's Current Report on Form 8-K filed on December 7, 1989 (SEC File No. 1-82)).
Note: Certain instruments with respect to long-term debt of the Corporation have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10 percent of the total assets of the Corporation and its subsidiaries on a consolidated basis. The Corporation agrees to furnish a copy of each such instrument upon request of the Securities and Exchange Commission.
10. Management contracts and compensatory plans and agreements.
10.1 The Corporation's 1987 Stock Option and Restricted Stock Plan (the 1987 Plan), as amended to and including June 3, 1992, and form of Stock Option Agreement and form of Reload Option Agreement, both as modified through June 3, 1992 (incorporated by reference to Exhibit 10.2 of the Corporation's Form 10-Q for the quarter ended June 30, 1992 (SEC File No. 1-82)). Form of Restricted Stock letter under the 1987 Plan (incorporated by reference to Exhibit 10.1 to the Corporation's 1990 10-K (SEC File No. 1-82)) and the amendment thereto dated June 25, 1992 (incorporated by reference to Exhibit 10.2 to the Corporation's 1992 Form 10-K (SEC File No. 1-82)).
10.2 The Corporation's 1989 Directors Stock Option Plan (the 1989 Directors Plan), as amended to and including June 3, 1992 (incorporated by reference to Exhibit 10.3 to the Corporation's Form 10-Q for the quarter ended June 30, 1992 (SEC File No. 1-82)). Form of Stock Option Agreement under the 1989 Directors Plan (incorporated by reference to the Corporation's Registration Statement on Form S-8 (Reg. No. 33-34363)).
10.3 The Corporation's 1993 Stock Option and Restricted Stock Plan (the 1993 Plan), as amended through December 1, 1993, and form of Restricted Stock letter under the 1993 Plan (incorporated by reference to Exhibit 10.4 to the Corporation's 1993 Form 10-K (SEC File No. 1-82)). Form of Stock Option Agreement and form of Reload Option Agreement, both as amended through November 2, 1994, under the 1993 Plan.
Note: Omitted from filing pursuant to the Instruction to Item 601(b) (10) are actual Stock Option Agreements between the Corporation and certain officers, under the 1987 Plan and the 1993 Plan, and certain Directors, under the 1989 Directors Plan, which contain substantially similar provisions to Exhibits 10.1, 10.2 and 10.3 above.
10.4 Description of the Corporation's Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to the Corporation's 1993 Form 10-K (SEC File No. 1-82)).
10.5 Deferred Compensation Agreement dated January 27, 1988 between Dr. Patrick J. Ryan and the Corporation (incorporated by reference to Exhibit 10.6 to the Corporation's 1987 Form 10-K (SEC File No. 1-82)) and amendment to such agreement dated March 17, 1989 (incorporated by reference to Exhibit 10.7 to the Corporation's 1988 Form 10-K (SEC File No. 1-82)).
10.6 Deferred Compensation Plan for the Directors of the Corporation, amended and restated as of July 31, 1992 (incorporated by reference to Exhibit 10 to the Corporation's Form 10-Q for the quarter ended September 30, 1992 (SEC File No. 1-82)).
10.7 Form of Change-of-Control Agreement between the Corporation and certain executives, including all of the current executive officers to be listed in the summary compensation table to the 1995 Proxy Statement (incorporated by reference to Exhibit 10.7 to the Corporation's 1992 Form 10-K (SEC File No. 1-82)).
10.8 Form of Severance Agreement between the Corporation and certain executives, including all of the current executive officers to be listed in the summary compensation table to the 1995 Proxy Statement (incorporated by reference to Exhibit 10.11 to the Corporation's 1988 Form 10-K (SEC File No. 1-82)).
10.9 The Corporation's 1992 - 1994 Long-Term Performance Plan (incorporated by reference to Exhibit 10.14 to the Corporation's 1991 Form 10-K (SEC File No. 1-82)).
10.10 The Corporation's Retirement Plan for Directors, effective January 1, 1988 (incorporated by reference to Exhibit 10.13 to the Corporation's 1987 Form 10-K (SEC File No. 1-82)).
10.11 The Corporation's Comprehensive Executive Nonqualified Retirement and Savings Plan (the Nonqualified Plan), as amended November 7, 1990 (incorporated by reference to Exhibit 10.14 to the Corporation's 1990 Form 10-K (SEC File No. 1-82)). Amendment, effective January 1, 1991, to the Nonqualified Plan (incorporated by reference to Exhibit 10.2 to the Corporation's Form 10-Q for the quarter ended June 30, 1991 (SEC File No. 1-82)). Three amendments, one effective as of January 1, 1991, one effective as of November 15, 1993 (both incorporated by reference to Exhibit 10.13 of the Corporation's 1993 Form 10-K (SEC File No. 1-82)), and one effective as of September 7, 1994, to the Nonqualified Plan.
11 Statement re computation of per share earnings.
12 Statement re computation of ratios of total debt to total capitalization.
21 List of Subsidiaries and Investments.
23 Consent of Price Waterhouse LLP.
24 Powers of Attorney executed by certain officers and directors who signed this Annual Report on Form 10-K.
Note: Shareholders may obtain copies of Exhibits by making written request to the Secretary of the Corporation and paying copying costs of 10 cents per page, plus postage.
(b) Reports on Form 8-K:
No current Reports on Form 8-K were filed by the Corporation during the quarter ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PHELPS DODGE CORPORATION --------------------------- (Registrant)
March 23, 1995 By: Thomas M. St. Clair -------------------- Thomas M. St. Clair Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Chairman of the Board, President, Chief Executive Officer and Director Douglas C. Yearley (Principal Executive Officer) March 23, 1995 - ------------------- Douglas C. Yearley
Senior Vice President and Chief Financial Officer Thomas M. St. Clair (Principal Financial Officer) March 23, 1995 - ------------------- Thomas M. St. Clair
Vice President and Controller Thomas M. Foster (Principal Accounting Officer) March 23, 1995 - ------------------- Thomas M. Foster
Edward L. Addison, Robert N. Burt, George C. Dillon, ) Paul W. Douglas, William A. Franke, Paul Hazen, ) Marie L. Knowles, Robert D. Krebs, Southwood J. Morcott, ) March 23, 1995 Gordon R. Parker, George L. Shinn, Directors )
By: Thomas M. St. Clair ------------------- Thomas M. St. Clair Attorney-in-fact