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 were also challenged by the American Mining Congress and others in federal court actions filed in 1989 and 1993. The U.S. Court of Appeals for the District of Columbia Circuit decided two of the appeals in 1995. In National Mining Association v. EPA, 59 F.3d 1351 (D.C. Cir. 1995), the court agreed with EPA that, under the federal hazardous air pollutants program, collocated facilities should be considered as part of the same emitting "source" and fugitive emissions must be counted when determining whether a source is a "major source." The court agreed with the industry petitioners that a source could avoid "major source" status by using effective air pollution controls, even if the controls are not "federally enforceable."
In Chemical Manufacturers Association et al. v. EPA, No. 89-1514, Slip op. (D.C. Cir. 1995), the court agreed with the industry petitioners and vacated and remanded EPA's rules which did not allow facilities to consider air pollution controls when determining whether a permit is needed for new or increased emissions of criteria pollutants, unless the controls were "federally enforceable." In response, EPA has asserted that its rules nevertheless remain in effect and that it may cure the defect in the rules merely by issuing written guidance in the near future. The industry petitioners have requested the court to enforce its original mandate against the agency.
The effect of these decisions on the Corporation's facilities will vary on a case-by-case basis. They will have no effect on some facilities; they may cause some facilities to be regulated as "major sources" under one or more federal programs; and they may allow some sources to avoid regulation as "major sources" by using air pollution controls that are enforceable under federal, state or local laws.
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 second one-year extension to that law so that the settlement will become effective if it is approved by the Arizona Superior Court and certain conditions are met by December 31, 1996.
(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's rulings entered April 14, 1995, regarding water quality, limitations on industrial uses, the definition of subflow and the plaintiff-in-intervention's right to natural flows from the Gila River, 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.
Additional issues remain, some of which may go to trial during 1996.
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 its 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 16,350 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 197 claims against PDI were dismissed in 1995. During that year, 2,559 new asbestos-related claims were filed against PDI in ten states. As of December 31, 1995, a total of 2,701 asbestos-related claims were pending against PDI in 15 jurisdictions. PDI is vigorously contesting and defending these asbestos-related claims.
In December 1995, Phelps Dodge and its insurers executed an agreement embodying a cost sharing arrangement for defense and indemnity costs arising out of the asbestos litigation.
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. While additional costs to the Corporation are reasonably possible, that cost is not expected to exceed $10.0 million.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
No matters were submitted during the fourth quarter of 1995 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, 1996, the executive officers of Phelps Dodge Corporation were as follows:
Age at Officer of the Name 3/1/96 Position Corporation since ---- ------ -------- -----------------
Douglas C. Yearley 60 Chairman of the Board, President and Chief Executive Officer 1981
Manuel J. Iraola 47 Senior Vice President 1995
Thomas M. St. Clair 60 Senior Vice President and Chief Financial Officer 1989
J. Steven Whisler 41 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 1995 consolidated net income of $746.6 million, or $10.65 per common share. This amount compares with 1994 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, that reduced reported 1994 net income to $271.0 million, or $3.81 per common share. The 1994 non-recurring charges primarily reflected additional provisions for estimated future costs associated with environmental matters and for estimated losses on the disposition of certain operating facilities. Note 2 to the Consolidated Financial Statements contains further information to which reference should be made for a fuller understanding of the 1994 non-recurring charges.
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. As a result, the Corporation raised its 1993 tax provision by approximately $9.0 million, or 13 cents per common share.
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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1995 1994 1993 ---- ---- ----
Sales and other operating revenues ........ $ 4,185.4 3,289.2 2,595.9 Operating income .......................... $ 1,100.5 400.4 326.5 Net income ................................ $ 746.6 271.0 187.9 Net income per common share ............... $ 10.65 3.81 2.66
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A significant factor influencing the Corporation's 1995 results was the improved price of copper, the Corporation's principal product. The New York Commodity Exchange (COMEX) spot price per pound of copper cathode, upon which the Corporation bases its selling price, averaged $1.35 in 1995, compared with $1.07 in 1994 and 85 cents in 1993. The COMEX price averaged $1.17 per pound for the first two months of 1996, and closed at $1.18 on March 7, 1996.
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 1.4 billion pounds of copper. 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 $14 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. With respect to 1995 production, the Corporation had contracts that provided minimum quarterly average London Metal Exchange (LME) prices of 80 cents per pound for approximately 640 million pounds of copper. These contracts expired on December 31, 1995, without payment to Phelps Dodge. In addition, the Corporation had contracts that provided minimum (approximately 95 cents) and maximum (approximately $1.33) LME prices per pound for approximately 650 million pounds of copper. These contracts expired on December 31, 1995, with Phelps Dodge making payments totaling $1.3 million to the financial institutions involved. During 1994, contracts that provided the Corporation with minimum average LME copper prices of 75 cents per pound for about 21 percent of that year's production expired without payment to Phelps Dodge. During 1993, the Corporation received revenues of $39.4 million before taxes ($26.0 million, or 37 cents per common share, after taxes) from similar arrangements.
With respect to 1996 production, as of March 7, 1996, the Corporation had entered into contracts with several financial institutions that provide for a combination of minimum and maximum prices based on the quarterly average LME price. These contracts are summarized in the following table:
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Contracts Providing Contracts Providing Minimum Minimum Prices and Maximum Prices -------------- ------------------ Copper Cathode Copper Price (LME) Cathode Price Pounds ----------------- Pounds (LME) (millions) Minimum Maximum (millions) ----- ---------- ------- ------- ----------
First Quarter ........ $0.95 170 $0.95 $1.47 170 Second Quarter ....... $0.95 90 $0.95 $1.42 170 Third Quarter ........ $0.95 40 $0.90 $1.40 145 Fourth Quarter ....... - $0.95 $1.36 190 ------ ----- 300 675 ====== =====
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Note: If average quarterly LME prices exceed the maximum prices, Phelps Dodge will be obligated to pay the difference to the financial institutions involved; if average quarterly LME prices fall below the minimum prices, the financial institutions will be obligated to pay Phelps Dodge the difference.
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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 equivalent dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. During 1995, recorded and anticipated foreign currency transactions that the Corporation had hedged did not exceed $85 million and totaled $73 million at year end. The Corporation did not have any deferred unrealized gains or losses on its foreign exchange contracts at December 31, 1995, compared with deferred unrealized losses of $0.9 million at December 31, 1994. Notes 1 and 19 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 1995 revenues were $4,185.4 million, compared with $3,289.2 million in 1994. This increase principally resulted from higher average copper prices, increased volumes of copper sold from mine production, and higher prices and sales volumes for carbon black, wheels and rims, and wire and cable products. The increase in consolidated revenues from $2,595.9 million in 1993 to $3,289.2 million in 1994 primarily resulted from higher average copper prices and higher sales volumes of copper (including copper purchased for resale), wheels and rims, wire and cable products (including magnet wire sales from two U.S. plants acquired in early 1994) and carbon black.
Phelps Dodge's results for 1995, 1994 and 1993 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 operations, its wheel and rim business, and its wire 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 20 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 as rod 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 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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1995 1994 1993 ---- ---- ---- Copper (from own mines - thousand tons) * Production .............................. 712.7 572.8 547.7 Deliveries .............................. 696.6 560.6 543.9 COMEX average spot copper price per pound - cathodes .................... $ 1.35 1.07 0.85
(millions of dollars)
Sales and other operating revenues ......... $ 2,488.7 1,820.7 1,320.3 Operating income ........................... $ 896.8 326.4 227.2
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* The Corporation's worldwide copper production and deliveries shown in the above table exclude the amounts attributable to (i) the 15 percent undivided interest in the Morenci, Arizona, copper mining complex held by Sumitomo Metal Mining Arizona, Inc. (Sumitomo), (ii) the one-third partnership interest in Chino Mines Company in New Mexico held by Heisei Minerals Corporation (Heisei), and (iii) the 20 percent interest in Candelaria held by SMMA Candelaria, Inc., a jointly owned indirect subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation. Excluded production amounts for 1995, 1994 and 1993 were 65,600 tons, 61,000 tons and 60,500 tons produced at Morenci for the account of Sumitomo and 56,200 tons, 53,200 tons and 53,200 tons produced at Chino for the account of Heisei. Excluded production amounts for 1995 and 1994 at Candelaria for the account of Sumitomo were 33,100 tons and 6,200 tons.
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Phelps Dodge Mining Company reported 1995 operating income of $896.8 million. This compares with 1994 operating income of $420.8 million, which was reduced to $326.4 million after reflecting $94.4 million of fourth quarter non-recurring pre-tax charges applicable to its operations, and $227.2 million in 1993. The increase in 1995 operating earnings resulted from higher average copper prices and higher volumes of copper sold from mine production, especially from Candelaria which commenced operation in the 1994 fourth quarter. Unit production costs for 1995 were approximately the same as those in 1994 as certain costs associated with higher copper prices were offset by the favorable effects of higher-than-average ore grades mined at Candelaria and the start up of the Southside solution extraction/electrowinning (SX/EW) project at the Morenci mine. The increase in operating earnings in 1994 compared with 1993 also resulted from higher average copper prices and sales volumes of copper sold from mine production.
The Candelaria mine is located near Copiapo in the Atacama Desert of northern Chile. Phelps Dodge Mining Company completed construction and commenced operations at Candelaria in October 1994, and achieved full production in 1995. Phelps Dodge owns an 80 percent interest in Candelaria and a jointly owned indirect subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation, both of Japan, owns a 20 percent interest. The project consists of an open-pit mine, concentrator, port and associated facilities.
During the third quarter of 1995, Phelps Dodge Mining Company completed construction and commenced operations at its $200 million Southside project (the Corporation's share was $170 million with the remainder provided by its co-participant, Sumitomo) at its Morenci mine in southeastern Arizona. This project has increased Phelps Dodge's share of annual electrowon copper production capacity by approximately 130 million pounds. The expansion involved the development of the Southside ore deposit adjacent to the existing open-pit mine at Morenci. The expansion included the construction of an electrowinning tankhouse, the expansion of existing solution extraction plants, the upgrading of infrastructure systems and the addition of mining equipment.
Copper unit production costs generally have been stable for the three-year period ended December 31, 1995, primarily as a result of high levels of production of low-cost cathode copper at 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. In 1995, the Corporation produced a total of 364,200 tons of cathode copper at its SX/EW facilities, compared with 325,800 tons in 1994 and 308,200 tons in 1993. The SX/EW method is a cost-effective process of extracting copper from certain types of ores. As used by the Corporation in conjunction with its conventional concentrating, smelting and refining, SX/EW is a major factor in its continuing efforts to maintain internationally competitive costs.
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 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; however, unless further reserves are identified, production will decline toward the latter part of that period.
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 companies that manufacture engineered products principally for the transportation, energy and telecommunications sectors worldwide. 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 operations through Columbian Chemicals Company and its subsidiaries (Columbian Chemicals); its wheel and rim operations through Accuride Corporation and its subsidiaries (Accuride); and its wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates.
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1995 1994 1993 ---- ---- ---- (millions of dollars)
Sales and other operating revenues ..... $ 1,696.7 1,468.5 1,275.6 Operating income ....................... $ 243.3 106.1 129.1
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Phelps Dodge Industries reported 1995 operating income of $243.3 million including a pre-tax gain of $26.8 million from the sale of Columbian Chemicals Company's synthetic iron oxide division (MAPICO), compared with 1994 operating income of $150.7 million that was reduced to $106.1 million by $44.6 million of 1994 fourth quarter non-recurring pre-tax charges applicable to its facilities. Operating income in 1993 was $129.1 million. Higher 1995 operating earnings primarily reflected continued excellent results in the carbon black business which saw higher average worldwide prices and higher sales volumes both in the United States and Europe, especially from new operations in Hungary and recently acquired operations in Spain. Increased 1995 operating income also reflected higher prices and sales volumes in the wire and cable businesses and in the wheel and rim business (which experienced a modest decline in sales volumes in the 1995 fourth quarter). Earnings increases in 1994 over 1993 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' 1995 earnings were higher than in 1994 primarily because of higher sales in both North America, as overall capacity continued to tighten in the industry, and Europe. Margins in North America were favorably affected by high operating rates and improved prices. European sales volumes and prices improved during the course of the year as European economies continued to recover from the recent recession. Columbian Chemicals' 1994 earnings were higher than in 1993 primarily because of higher sales volumes and prices in North America and Europe. The 1994 earnings were 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 1994 fourth quarter reserve discussed in Note 2 to the Consolidated Financial Statements.
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 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 sufficient to supply the entire Hungarian carbon black market. In excess of 80 percent of CTC's production is exported. Columbian Chemicals holds a 60 percent interest in CTC; TVK, Hungary's largest petrochemical company, holds the remaining 40 percent interest.
Accuride's 1995 earnings exceeded its 1994 earnings principally as a result of higher sales volumes and prices. North American demand for light, medium and heavy trucks and trailers continued to be strong for most of 1995. Industry build rates for commercial light trucks, heavy trucks and trailers, which were at near-record levels for most of 1994 and 1995, began to decrease in the 1995 fourth quarter. This late-1995 decrease in new and backlogged orders may be an indication of a predicted cyclical softening of this market. The increase in 1994 earnings over those in 1993 resulted from a 16 percent increase in sales volume of wheels, rims and components in response to strong demand.
Higher 1995 earnings from Phelps Dodge Magnet Wire were primarily the result of an increase in sales volumes and improved margins. In addition to an increase in selling prices, margins also benefited from producing at capacity and the effects of certain cost reduction programs. Earnings in 1994 exceeded 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 1994. Sales volumes benefited from the acquisition in early 1994 of two U.S. magnet wire facilities.
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. The capacity of the Laurinburg and El Paso facilities is expected to increase by 60 percent and 100 percent, respectively, upon completion of plant expansion projects currently under way.
In response to 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 has increased by 75 percent after new equipment was 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 1995 earnings of Phelps Dodge International Corporation were higher than those in 1994 primarily as a result of higher sales volumes and prices. Earnings increased despite the continuation of the economic difficulties in Venezuela and the opening of traditionally local Latin American markets to global competition. Sales volumes benefited from the continued growth of the telephone cable and energy cable markets in Thailand while the Venezuelan business benefited from increased demand for energy cable from that country's oil industry. Earnings for the U.S. specialty conductor business also improved in 1995 as manufacturing cost reduction programs and an administrative reorganization began to take effect. Earnings in 1994 were lower than 1993 earnings primarily because of the economic difficulties in Venezuela and economic slowdowns 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. Earnings in 1994 also reflected a pre-tax provision of $20.0 million for the impairment of value of the Corporation's wholly owned U.S. specialty conductor operations. This charge reflected an unfavorable change in market conditions, particularly in the defense sector, that is now considered permanent. The loss on the sale of CONELEC and the provision for impairment of value of the specialty conductor business are included in the 1994 fourth quarter reserve 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. Earnings in 1993 reflected the integration of a group of Venezuelan wire and cable manufacturing companies acquired in late 1992, and the continued growth of telephone cable, power cable and commercial wire sales in other markets.
In 1995, operations outside the United States provided 51 percent of Phelps Dodge Industries' sales, compared with 48 percent in 1994 and 51 percent in 1993. During the year, operations outside the United States contributed 53 percent of the segment's operating income (after excluding from U.S. earnings the $26.8 million pre-tax gain on the sale of Columbian Chemicals Company's MAPICO division), compared with 52 percent in 1994 and 66 percent in 1993.
OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS
The Corporation reported net interest expense in 1995 of $62.0 million, compared with $36.6 million in 1994 and $37.0 million in 1993. Increased 1995 net interest expense principally resulted from the cessation of capitalization of interest costs for the Candelaria project in Chile reflecting the substantial completion of construction and development in the 1994 fourth quarter. The 1995 increase also reflected interest expense on second half 1994 borrowings at Candelaria that remain outstanding, and interest expense on increased short-term borrowings at the Corporation's international wire and cable operations to finance working capital requirements. Partially offsetting the 1995 increases were foreign currency exchange gains of $8.1 million reflecting the remeasurement of Venezuelan local currency debt after a major devaluation of the Bolivar. Reported net interest expense remained relatively constant between 1994 and 1993 despite a $49.7 million increase in debt in 1994 and a $158.7 million increase in debt in 1993. This resulted from the capitalization of interest charges (totaling $20.7 million in 1994, compared with $17.5 million in 1993) primarily relating to the construction and development of two major projects -- Candelaria and the carbon black project in Hungary. Capitalization of interest charges for the carbon black plant in Hungary ceased at the end of 1993.
The Corporation's 1995 miscellaneous income, net of miscellaneous expense, was $37.2 million, compared with $11.3 million in 1994 and $16.4 million in 1993. The increase in 1995 primarily resulted from higher interest income earned on cash and short-term investments. Miscellaneous income in 1995 also included an increase of $10.1 million in dividends received from the Corporation's 13.9 percent minority interest in Southern Peru Copper Corporation. The decrease in 1994 from 1993 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, 1995, the Corporation recorded a provision for taxes of $322.7 million (an effective rate of approximately 30.0 percent). This compares with a 1994 provision for taxes of $104.7 million (an effective rate of approximately 27.9 percent) and a 1993 provision of $105.9 million (an effective rate of approximately 34.6 percent). The 1995 effective rate was higher than 1994 primarily as a result of a decrease in the tax benefit for percentage depletion. Despite higher average realized copper prices in 1995, the benefit from the Corporation's allowable deduction for percentage depletion decreased from 1994 due to the first full year of operating results at Candelaria which are not subject to percentage depletion. The 1994 effective rate was lower than the 1993 effective rate 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. (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 1992, 1993 and 1994 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 1990 and 1991 and will contest those proposals with the appropriate authorities. The Corporation has reached a tentative agreement with the Internal Revenue Service to settle the proposed assessment relating to the Corporation's federal income tax liability for the years 1988 and 1989. 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. It is possible, however, that settlement of these issues may have a material effect on the timing and extent 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 1995 decrease in long-term interest rates, the Corporation decreased its discount rate from 8.5 percent at December 31, 1994, to 7.25 percent at December 31, 1995. The Corporation's estimated pension obligations increased by a net $68 million primarily as a result of this discount rate decrease. The effect of the decreased discount rate on these pension obligations was offset mostly by better-than-expected returns on plan assets. Other estimated postretirement benefit obligations of the Corporation increased by a net $14 million as a result of the discount rate decrease. The effect of the decreased discount rate on this estimated obligation was offset mostly by a 1 percentage point decrease for each year in the assumed annual rate of increase in the per capita cost of covered health care benefits. For a further discussion of these issues, see Notes 15 and 16 to the Consolidated Financial Statements.
CHANGES IN FINANCIAL CONDITION; CAPITALIZATION
At the end of 1995, the Corporation had cash and short-term investments of $608.5 million, compared with $286.9 million at the beginning of the year. The Corporation's operating activities provided $959.0 million of cash during the year which was more than adequate to cover dividend payments on its common stock and its investing activities.
The Corporation also used cash provided by operating activities to purchase 2,760,600 of its common shares at a total cost of $163 million, including 2,675,600 shares under a 5 million share buy-back program authorized on March 7, 1995, and 85,000 shares under the superseded program. There were 68,593,300 common shares outstanding on December 31, 1995. On March 6, 1996, the Corporation announced that its current share purchase authorization had been increased from 5 million shares to a total of 10 million shares. Through March 7, 1996, the Corporation purchased a total of 4,424,900 of its common shares under the program, leaving an additional 5,575,100 shares authorized for purchase. The Corporation will continue to make purchases in the open market as circumstances warrant, and will also consider purchasing shares in privately negotiated transactions.
Investing activities during 1995 included capital expenditures of $404.9 million, compared with $355.0 million in 1994 and $387.2 million in 1993. The 1995 capital expenditures included $40 million for certain mining properties owned by Azco Mining, Inc. and its subsidiaries, comprising the Sanchez property in southeastern Arizona and a 70 percent interest in the Piedras Verdes property in Mexico. Investing activities in 1995 also included cash proceeds of $45.0 million for the divestiture of Columbian Chemicals Company's synthetic iron oxide facility (MAPICO). The $32.2 million decrease in 1994 capital expenditures from 1993 principally reflected higher 1993 spending on the Candelaria project, substantially completed in October 1994, and the Hungarian carbon black plant, substantially completed in late 1993. These 1994 decreases in spending were offset partially 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.
The Corporation expects capital outlays in 1996 to be approximately $300 million for Phelps Dodge Mining Company and approximately $125 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 $6.4 million increase in dividend payments on the Corporation's common shares, from $119.2 million in 1994 to $125.6 million in 1995, principally resulted from 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).
The Corporation's total debt was $696.5 million at December 31, 1995 (including $66.6 million of foreign short-term borrowings), compared with $696.9 million at the end of 1994 (including $49.3 million of foreign short-term borrowings). Total debt remained virtually unchanged as short-term borrowings at the Corporation's international wire and cable operations to finance working capital requirements were offset by payments on the Corporation's foreign long-term debt. The ratio of total debt to total capitalization was 20.2 percent at the end of 1995, compared with 23.6 percent at the end of 1994.
During the 1995 second quarter, the Corporation's majority-owned subsidiary, Compania Contractual Minera Candelaria (CCMC), satisfied all operating, financial, construction and legal tests and conditions as set forth in the completion agreement associated with the $290.0 million project financing of its Candelaria mine in Chile. Borrowings under these debt facilities are now non-recourse to Phelps Dodge. Financing agreements for the $290 million debt were executed during 1993. The debt carries a 13-year maturity, and comprises $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. 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 CCMC 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 until satisfaction of certain completion tests, and non-recourse thereafter.
During 1994, the Corporation issued $81.1 million of tax-exempt, unsecured 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 tax-exempt, unsecured 6.50 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.
An existing revolving credit agreement between the Corporation and several lenders was amended on October 31, 1994. The 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 this agreement at either December 31, 1995, or December 31, 1994.
The Corporation had other lines of credit totaling $100.0 million at December 31, 1995, and December 31, 1994. 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, 1995, or December 31, 1994.
The Corporation had $66.6 million in short-term borrowings, all by its international operations, at December 31, 1995, compared with $49.3 million at December 31, 1994. The weighted average interest rate on this debt at December 31, 1995, and December 31, 1994, was 18.5 percent and 14.9 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 week to six months. This facility, which is subject to renewal annually, provides for a standby fee of one-eighth of 1 percent of the $25.0 million. There were no borrowings outstanding under this facility at either December 31, 1995, or December 31, 1994.
The current portion of the Corporation's long-term debt, scheduled for payment in 1996, is $16.8 million including $13.7 million for its international manufacturing operations, $2.2 million for its mining operations and $0.9 million for other Corporate obligations.
During 1995, increases in current assets (exclusive of cash and short-term investments) together with decreases in current liabilities (exclusive of current debt) resulted in an $84.2 million change in net working capital (exclusive of adjustments for foreign currency exchange rate changes). This change principally resulted from a $55.5 million decrease in accounts payable, a $29.5 million decrease in accrued income taxes, a $15.8 million increase in inventories and an $11.9 million increase in supplies, partially offset by a $36.8 million increase in accrued expenses. The $55.5 million decrease in accounts payable primarily resulted from lower copper concentrate purchase requirements by Phelps Dodge Mining Company's smelter operations and the timing of raw material purchases by the Phelps Dodge Industries businesses. The $29.5 million decrease in accrued income taxes was principally the result of approximately $22 million in additional federal income taxes paid in the first quarter of 1995 with the Corporation's 1994 income tax return. The $15.8 million increase in inventories was attributable to higher inventories of copper at Phelps Dodge Mining Company, partially offset by lower inventories at Accuride. The $11.9 million increase in supplies was the result of increases at Candelaria and Accuride. The $36.8 million increase in accrued expenses primarily resulted from higher accruals for copper conversion and freight charges and accruals for certain costs associated with higher copper prices at Phelps Dodge Mining Company (higher conversion and freight accruals are due to the higher copper inventory balances at the end of 1995), and an increase in the current portion of Corporate-wide pension liabilities due to an increase in expected plan funding in 1996 resulting from certain provisions of the recently enacted General Agreement on Tariffs and Trade (GATT).
During 1994, increases in current assets (exclusive of cash and short-term investments) exceeded increases in current liabilities (exclusive of current debt) by $36.0 million. This change in net working capital (exclusive of adjustments for foreign currency exchange rate changes) 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.
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, 1995, the Corporation had reserves of $144.1 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 reasonably can 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 1996 and 1997, and the expenditures for those programs in 1995, are separate from the reserves and estimates described above.
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 began in 1995 and, until completed, it will not be possible to determine the nature, extent, cost, and timing of remedial work which will be required under the AOC, although remedial work is expected to be required.
In 1993 and 1994, the New Mexico and Arizona legislatures, respectively, 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.
In 1995, 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 bills was enacted into law. However, mining law amendments were added to the 1996 budget bill, which is still the subject of negotiation between the Congress and the President. The amendments contained in the budget bill (i) impose a 5 percent net proceeds royalty on minerals extracted from federal lands, (ii) require payment of fair market value for patenting federal lands, (iii) make permanent the existing claim maintenance fee and double the fee in the future, and (iv) require that patented lands used for non-mining purposes revert to the federal government. 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 the amendments would result in additional expenses in the development and operation of new mines on federal lands.
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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1995 1994 1993 ---- ---- ---- (millions of dollars)
Phelps Dodge Mining Company: Southside project (Morenci mine) ..... $ 112.6 49.6 - Azco acquisition ..................... 40.2 - - Candelaria ........................... 15.1 137.9 189.8 Other ................................ 153.7 111.7 95.6 ------- ------- ------- 321.6 299.2 285.4 Phelps Dodge Industries ................ 82.3 55.1 101.2 Corporate and other .................... 1.0 0.7 0.6 ------- ------- ------- $ 404.9 355.0 387.2 ======= ======= =======
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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 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 6, 1996, there were 11,894 holders of record of the Corporation's common shares. The Corporation paid quarterly dividends of 41.25 cents on each common share throughout 1993 and for the first three quarters of 1994. 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, low and closing prices per common share (composite quotation) in the periods indicated.
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Market Price Ranges * - ---------------------
High Low Close ---- ---- ---- 1995: - ---- First Quarter .... $ 63.00 51.88 56.88 Second Quarter ... 60.25 52.50 59.00 Third Quarter .... 70.50 58.50 62.75 Fourth Quarter ... 69.50 59.75 62.25
1994: - ---- First Quarter .... $ 59.50 47.63 52.25 Second Quarter ... 60.88 50.50 57.00 Third Quarter .... 65.00 55.88 62.00 Fourth Quarter ... 64.00 54.38 61.88
1993: - ---- First Quarter .... $ 55.63 47.75 50.38 Second Quarter ... 50.75 41.50 44.63 Third Quarter .... 49.25 39.13 39.75 Fourth Quarter ... 50.88 40.00 48.75
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* The market price ranges reflect actual share prices as reported for each day's trading.
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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, 1995 and 1994, and the related consolidated statements of income, of cash flows and of common shareholders' equity for each of the three years in the period ended December 31, 1995, and notes thereto, together with the report thereon of Price Waterhouse LLP dated January 22, 1996, 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, 1995. 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, 1995, 1994 and 1993:
VIII - Valuation and qualifying accounts and reserves.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Phelps Dodge Corporation
Our audits of the consolidated financial statements referred to in our report dated January 22, 1996 appearing on page 54 of 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 22, 1996
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 also has 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, currently consisting of six 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 income, of cash flows and of common shareholders' equity present fairly, in all material respects, the financial position of Phelps Dodge Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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.
PRICE WATERHOUSE LLP
Phoenix, Arizona January 22, 1996
CONSOLIDATED BALANCE SHEET - -------------------------- (In thousands except per share values) December December 31, 31, 1995 1994 ---- ---- ASSETS Current assets: Cash and short-term investments, at cost ....... $ 608,500 286,900 Accounts receivable, less allowance for doubtful accounts (1995 - $12,000; 1994 - $11,800) .............................. 483,700 489,500 Inventories .................................... 281,500 266,300 Supplies ....................................... 121,400 110,700 Prepaid expenses ............................... 15,500 15,900 Deferred income taxes .......................... 44,600 38,600 --------- --------- Current assets ................................ 1,555,200 1,207,900 Investments and long-term accounts receivable .. 79,000 82,000 Property, plant and equipment, net ............. 2,728,700 2,566,400 Other assets and deferred charges .............. 283,000 277,500 --------- --------- $ 4,645,900 4,133,800 ========= =========
LIABILITIES Current liabilities: Short-term debt ................................ $ 66,600 49,300 Current portion of long-term debt .............. 16,800 25,300 Accounts payable and accrued expenses .......... 504,800 528,500 Income taxes ................................... 16,800 46,600 --------- --------- Current liabilities ........................... 605,000 649,700 Long-term debt ................................. 613,100 622,300 Deferred income taxes .......................... 358,100 243,600 Other liabilities and deferred credits ......... 318,700 365,300 --------- --------- 1,894,900 1,880,900 --------- --------- COMMITMENTS AND CONTINGENCIES (SEE NOTES 17 AND 18)
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES .. 73,300 65,300 --------- --------- COMMON SHAREHOLDERS' EQUITY Common shares, par value $6.25; 100,000 shares authorized; 68,593 outstanding (1994 - 70,672) after deducting 6,595 shares (1994 - 4,503) held in treasury ............... 428,700 441,700 Capital in excess of par value .................. - 84,500 Retained earnings ............................... 2,360,100 1,770,300 Cumulative translation adjustments .............. (93,900) (93,800) Other ........................................... (17,200) (15,100) --------- --------- 2,677,700 2,187,600 --------- --------- $ 4,645,900 4,133,800 ========= =========
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 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.
Management's Estimates and Assumptions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 method used for mining, smelting and refining operations is the units of production method. Buildings, machinery and equipment for other operations are depreciated using the straight-line method over estimated lives of five to 40 years, or the estimated life of the operation if shorter. 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 reasonably can 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 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 for impairment its long-term assets to be held and used and its identifiable intangible assets when events or changes in economic circumstances indicate the carrying amount of such assets may not be recoverable. Long-term assets to be disposed of are carried at the lower of cost or fair value less the costs of disposal.
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 mitigate the risk of adverse 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 equivalent 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.
Stock Compensation. The Corporation has elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Corporation applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. Note 14 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share for 1995, 1994 and 1993 if the Corporation had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123.
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. The Corporation accounts 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. The Corporation accounts 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. Note 14 to the Consolidated Financial Statements contains a summary of the pro forma effects to reported earnings per share for 1995, 1994 and 1993 if the Corporation had elected to recognize compensation cost in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation."
Reclassification. For comparative purposes, certain prior year amounts have been reclassified to conform with the current year presentation.
2. PROVISION FOR ENVIRONMENTAL COSTS AND ASSET DISPOSITIONS During the 1995 first quarter, the Corporation recognized a $26.8 million gain before taxes from the sale of Columbian Chemicals Company's synthetic iron oxide facility in St. Louis, Missouri (MAPICO). This gain increased net income by $16.6 million, or 24 cents per common share, after taxes. MAPICO was peripheral to Columbian's core business.
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 $144.1 million and $168.9 million at December 31, 1995, and December 31, 1994, respectively (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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1995 1994 1993 ---- ---- ----
International wire and cable manufacturers .......................... $ 1,000 1,700 3,300 Black Mountain .......................... 4,500 6,000 (600) Santa Gertrudis ......................... - (600) (3,300) Other ................................... 1,000 1,500 600 ------- ------- ------- $ 6,500 8,600 - ======= ======= =======
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Dividends were received as follows:
- -------------------------------------------------------------------------------- 1995 1994 1993 ---- ---- ----
Equity investments: International wire and cable manufacturers ......................... $ 300 1,400 400 Black Mountain ......................... 5,700 2,900 - Other .................................. 100 - - ------- ------- ------- $ 6,100 4,300 400 ======= ======= ======= Cost basis investments: Southern Peru Copper Corporation (13.9%) ................... $ 13,600 3,500 2,900 Other .................................. 300 400 600 ------- ------- ------- $ 13,900 3,900 3,500 ======= ======= =======
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Investments and long-term receivables were as follows: - --------------------------------------------------------------------------------
1995 1994 1993 ---- ---- ---- Equity basis: International wire and cable manufacturers ........................ $ 18,200 18,500 38,300 Black Mountain ........................ 11,300 12,800 10,200 Santa Gertrudis ....................... - - 3,000 Other ................................. 12,200 11,100 9,300 Cost basis: Southern Peru Copper Corporation (13.9%) ................... 13,200 13,200 13,200 Other ................................. 24,100 26,400 41,400 ------- ------- ------- $ 79,000 82,000 115,400 ======= ======= =======
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Retained earnings of the Corporation include undistributed earnings of equity investments of (in millions): 1995 - $59.0; 1994 - $58.6; 1993 - $54.3.
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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1995 1994 1993 ---- ---- ----
Sales ................................ $ 771,200 637,200 637,200 Net income ........................... 42,000 46,000 36,700 - --------------------------------------------------------------------------------
Net current assets ................... $ 66,600 63,300 44,700 Fixed assets, net .................... 259,100 249,500 292,300 Long-term debt ....................... (40,500) (39,000) (64,900) Other assets, net .................... (3,900) (2,500) 27,500 -------- -------- -------- Net assets ........................... $ 281,300 271,300 299,600 ======== ======== ========
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4. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED The Corporation reported net interest expense in 1995 of $62.0 million, compared with $36.6 million in 1994 and $37.0 million in 1993. Increased 1995 net interest expense principally resulted from the cessation of capitalization of interest costs for the Candelaria project in Chile reflecting the substantial completion of construction and development in the 1994 fourth quarter. Also included in 1995 interest expense were foreign currency exchange gains of $8.1 million reflecting the remeasurement of Venezuelan local currency debt after a major devaluation of the Bolivar.
5. MISCELLANEOUS INCOME AND EXPENSE, NET Interest income totaled $31.5 million in 1995, principally from the Corporation's short-term investments, compared with $11.0 million and $10.9 million in 1994 and 1993, respectively. Miscellaneous income in 1995 also included pre-tax dividends of $13.6 million on its 13.9 percent minority interest in Southern Peru Copper Corporation, compared with $3.5 million and $2.9 million in 1994 and 1993, respectively. Losses from changes in currency exchange rates, especially in Venezuela and Chile, amounted to $10.2 million in 1995, compared with losses of $6.3 million and $0.1 million in 1994 and 1993, respectively.
6. INCOME TAXES The Corporation reports its income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." 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. SFAS No. 109 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.
Geographic sources of income before taxes, minority interests and equity in net earnings of affiliated companies for the years ended December 31 were as follows:
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1995 1994 1993 ---- ---- ----
United States ................. $ 816,200 298,900 258,200 Foreign ....................... 259,500 76,200 47,700 --------- ------- ------- $ 1,075,700 375,100 305,900 ========= ======= =======
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The provisions for income taxes for the years ended December 31 were as follows:
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1995 1994 1993 ---- ---- ---- Currently payable: Federal ................... $ 157,800 94,000 49,900 State ..................... 23,900 14,000 8,400 Foreign ................... 38,100 25,000 18,100 --------- --------- --------- 219,800 133,000 76,400 --------- --------- --------- Deferred: Federal ................... 78,400 (27,100) 24,700 State ..................... 400 (2,500) 2,700 Foreign ................... 24,100 1,300 2,100 --------- --------- --------- 102,900 (28,300) 29,500 --------- --------- --------- $ 322,700 104,700 105,900 ========= ========= =========
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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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1995 1994 1993 ---- ---- ----
Statutory tax rate ................. 35.0 % 35.0 35.0 Depletion .......................... (5.3) (10.6) (4.7) State and local income taxes ....... 1.5 2.0 2.5 Rate increase effect on existing temporary differences ............. - - 2.0 Other items, net ................... (1.2) 1.5 (0.2) ----- ----- ----- Effective tax rate 30.0 % 27.9 34.6 ===== ===== =====
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The Corporation paid federal, state, local and foreign income taxes of approximately $247 million in 1995, compared with approximately $114 million in 1994 and approximately $113 million in 1993. As of December 31, 1995, the Corporation had alternative minimum tax credits of approximately $87 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 alternative minimum foreign tax credit carryforwards for federal income tax purposes of approximately $30 million, which begin to expire in 1996.
The Corporation's federal income tax returns for the years 1992, 1993 and 1994 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 1990 and 1991 and will contest those proposals with the appropriate authorities. The Corporation has reached a tentative agreement with the Internal Revenue Service to settle the proposed assessment relating to the Corporation's federal income tax liability for the years 1988 and 1989. 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. It is possible, however, that settlement of these issues may have a material effect on the timing and extent of its tax payments.
Deferred income tax assets and (liabilities) comprised the following at December 31:
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1995 1994 ---- ----
Minimum tax credits .............................. $ 86,700 119,000 Postretirement and postemployment benefits ....... 52,500 49,300 Reserves ......................................... 89,600 85,800 Mining costs ..................................... 33,100 19,800 Other ............................................ 6,400 13,100 --------- --------- Deferred tax assets ............................ 268,300 287,000 --------- --------- Depreciation ..................................... (540,600) (452,000) Mining properties ................................ (9,300) (13,500) Exploration and mine development costs ........... (8,300) (8,800) Pensions ......................................... (25,000) (15,500) Inventories ...................................... 1,400 (2,200) --------- --------- Deferred tax liabilities ....................... (581,800) (492,000) --------- --------- $(313,500) (205,000) ========= =========
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Income taxes have not been provided on the Corporation's share ($398 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 loaned to the Corporation or a U.S. affiliate, or if the Corporation should sell its stock in the subsidiaries. It is estimated that repatriation of these foreign earnings would generate additional foreign tax withholding and U.S. tax, net of foreign tax credit, in the amounts of $61 million and $31 million, respectively.
7. INVENTORIES AND SUPPLIES Inventories at December 31 were as follows (in millions): - --------------------------------------------------------------------------------
1995 1994 ---- ----
Metals and other raw materials .................. $ 200.4 176.6 Work in process ................................. 14.6 15.3 Finished manufactured goods ..................... 61.4 69.4 Other ........................................... 5.1 5.0 ------- ------ $ 281.5 266.3 ======= ======
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Inventories valued by the last-in, first-out method would have been greater if valued at current costs by approximately $115 million and $111 million at December 31, 1995 and 1994, respectively.
Supplies in the amount of $121.4 million and $110.7 million at December 31, 1995 and 1994, respectively, are stated net of a reserve for obsolescence of $10.5 million and $14.0 million, respectively.
8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 comprised the following (in millions):
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1995 1994 ---- ----
Buildings, machinery and equipment ................ $ 4,296.2 4,060.9 Mining properties ................................. 173.2 129.1 Capitalized mine development ...................... 284.8 283.9 Land and water rights ............................. 66.6 72.5 -------- ------- 4,820.8 4,546.4 Less accumulated depreciation, depletion and amortization ................................. 2,092.1 1,980.0 -------- ------- $ 2,728.7 2,566.4 ======== =======
The net increases in property, plant and equipment of $162.3 million in 1995 and $226.2 million in 1994 are summarized below (in millions):
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1995 1994 ---- ----
Balance at beginning of year ...................... $ 2,566.4 2,340.2 -------- ------- Capital expenditures .............................. 404.9 355.0 Depreciation, depletion and amortization .......... (218.7) (190.2) Property, plant and equipment of acquired companies ........................................ - 69.8 Asset sales, currency translation adjustments and other ........................................ (23.9) (8.4) -------- ------- 162.3 226.2 -------- ------- Balance at end of year ............................ $ 2,728.7 2,566.4 ======== =======
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9. OTHER ASSETS AND DEFERRED CHARGES Other assets and deferred charges at December 31 were as follows (in millions):
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1995 1994 ---- ----
Goodwill, less accumulated amortization (1995 - $34.5; 1994 - $30.1) ....................... $ 120.8 125.2 Employee benefit plans .............................. 108.8 95.8 Debt issue costs .................................... 29.2 32.8 Intangible pension asset ............................ 18.0 18.0 Other intangible assets ............................. 4.0 4.1 Other ............................................... 2.2 1.6 ------- ------ $ 283.0 277.5 ======= ======
- -------------------------------------------------------------------------------- 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 were as follows (in millions): - --------------------------------------------------------------------------------
1995 1994 ---- ----
Accounts payable .................................... $ 247.5 303.5 Employee benefit plans .............................. 55.8 39.5 Insurance and loss reserves ......................... 12.3 11.4 Salaries, wages and other compensation .............. 36.5 30.3 Environmental reserves .............................. 51.1 42.1 Smelting, refining and freight ...................... 25.9 15.1 Other accrued taxes ................................. 17.6 14.6 Shutdown, relocation and restructuring .............. 7.1 11.4 Interest * .......................................... 13.6 12.4 Candelaria development .............................. - 6.8 Returnable containers ............................... 3.3 4.9 Other ............................................... 34.1 36.5 ------ ------ $ 504.8 528.5 ====== ====== - ---------------
* Interest paid by the Corporation in 1995 was $70.4 million, compared with $58.5 million in 1994 and $54.9 million in 1993.
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11. OTHER LIABILITIES AND DEFERRED CREDITS Other liabilities and deferred credits at December 31 were as follows (in millions):
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1995 1994 ---- ----
Postretirement and postemployment benefit plans ......... $ 148.8 139.4 Other employee benefit plans ............................ 39.9 63.9 Environmental reserves .................................. 92.1 124.9 Shutdown, relocation and restructuring .................. 11.2 13.1 Insurance and loss reserves ............................. 20.7 20.9 Other ................................................... 6.0 3.1 ------ ------ $ 318.7 365.3 ====== ======
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12. LONG-TERM DEBT AND OTHER FINANCING Long-term debt at December 31 is summarized below (in millions):
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1995 1994 ---- ----
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 81.1 6.50% Installment sale obligations due 2013 .......... 90.0 90.0 Candelaria ............................................ 237.4 235.4 Ojos del Salado ....................................... 8.0 10.4 Columbian Tiszai Carbon Ltd. .......................... 30.0 33.5 Columbian Carbon Spain, S.A ........................... 14.1 13.0 Phelps Dodge International Corporation ................ 13.3 24.3 Other ................................................. 6.0 9.9 ------- ------ Long-term debt before current portion ................. 629.9 647.6 Less current portion .................................. 16.8 25.3 ------- ------ Long-term debt after current portion .................. $ 613.1 622.3 ======= ======
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Annual maturities of debt outstanding at December 31, 1995, are as follows (in millions): 1996 - $16.8; 1997 - $38.5; 1998 - $51.9; 1999 - $56.1; 2000 - $48.7.
During 1994, the Corporation issued $81.1 million of tax-exempt, unsecured 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.
An existing revolving credit agreement between the Corporation and several lenders was amended on October 31, 1994. The 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 this agreement at either December 31, 1995, or December 31, 1994.
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 the London Interbank Offered Rate (LIBOR), for maturities of one week to six months. This facility, which is subject to renewal annually, provides for a standby fee of one-eighth of 1 percent of the $25.0 million. There were no borrowings outstanding under this facility at either December 31, 1995, or December 31, 1994.
The Corporation had other lines of credit totaling $100.0 million at December 31, 1995, and at December 31, 1994. 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, 1995, or December 31, 1994.
The Corporation had $66.6 million in short-term borrowings, all by its international operations, at December 31, 1995, compared with $49.3 million at December 31, 1994. The weighted average interest rate on this debt at December 31, 1995, and December 31, 1994, was 18.5 percent and 14.9 percent, respectively.
The Corporation's 80-percent-owned Compania Contractual Minera Candelaria (CCMC) subsidiary borrowed $290 million under its 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 became non-recourse to the Corporation subsequent to the satisfaction of certain completion tests during the second quarter of 1995. This $290 million of 13-year financing comprises $200 million of floating rate dollar denominated debt (with a rate based on the six-month 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 CCMC 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.
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 until 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, and the EBRD $9 million loan is a fixed rate dollar borrowing bearing an interest rate of 8.30 percent. The balances due on these borrowings mature in the years 1996 through 2001.
13. SHAREHOLDERS' EQUITY During 1995, the Corporation purchased 2,760,600 of its common shares at a total cost of $163 million. These purchases included 2,675,600 shares under a new 5 million share buy-back program authorized on March 7, 1995, and 85,000 shares under the superseded program. There were 68,593,300 common shares outstanding on December 31, 1995.
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, 1995, or December 31, 1994.
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.
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 and an option's maximum term is ten years. Options granted vest ratably over a three-year period. 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 Corporation has elected early adoption of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," issued in October 1995. In accordance with the provisions of SFAS No. 123, the Corporation applies APB Opinion 25 and related Interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Corporation had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below (in millions except per share amounts):
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1995 1994 1993 ---- ---- ---- Net income - as reported ............... $ 746.6 271.0 187.9 Net income - pro forma ................. 741.6 266.8 184.7
Earnings per share - as reported ....... 10.65 3.81 2.66 Earnings per share - pro forma ......... 10.60 3.76 2.62
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The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 3.34% Expected stock price volatility 22.1% Risk-free interest rate 6.00% Expected life of options 3 years
The weighted average fair value of options granted during 1995 is $11.04 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, 1995, options for 627,187 shares, 38,643 shares and 826,272 shares were exercisable under the 1987 plan, the 1989 plan and the 1993 plan, respectively, at average prices of $43.46, $39.82 and $52.70 per share. In addition, 225,925 shares of Restricted Stock issued under the 1993 plan were outstanding at December 31, 1995. Also at December 31, 1995, 2,650,259 shares were available for option grants (including 761,258 shares as restricted stock awards) under the 1993 plan (plus an additional 600,999 shares that may be issued as reload options) and 92,403 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.
Changes during 1993, 1994 and 1995 in options outstanding for the combined plans were as follows:
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Average option Shares price per share ------ ----------------
Outstanding at December 31, 1992 ................ 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 ................ 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 ................ 2,832,186 47.38 Granted ....................................... 953,838 66.37 Exercised ..................................... (635,881) 38.19 Expired or terminated ......................... (110,345) 51.03 --------- Outstanding at December 31, 1995 * .............. 3,039,798 55.13 ========= - ------------
* Exercise prices for options outstanding at December 31, 1995, range from a minimum of approximately $27 per share to a maximum of approximately $68 per share. The average remaining maximum term of options outstanding is approximately 8 years.
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Changes during 1993, 1994 and 1995 in Restricted Stock were as follows:
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Shares ------
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 Granted ......................................................... 186,516 Released ........................................................ (28,617) -------- Outstanding at December 31, 1995 .................................. 225,925 ========
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15. PENSION PLANS The Corporation has several non-contributory employee defined benefit pension plans covering substantially all U.S. employees (the U.S. pension plans). 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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Overfunded Underfunded Plans Plans ------------- ------------- 1995 1994 1995 1994 ---- ---- ---- ---- Actuarial present value of projected benefit obligation, based on employment service to date and current salary levels: Vested employees ......................... $ 335 254 194 205 Non-vested employees ..................... 18 14 17 17 ----- ----- ----- ----- Accumulated benefit obligation ........... 353 268 211 222 Additional amounts related to projected salary increases ........................ 39 31 5 7 ----- ----- ----- ----- Total projected benefit obligation ....... 392 299 216 229
Plan assets at fair value .................. 448 357 178 176 ----- ----- ----- ----- Projected pension benefit obligation in excess of (less than) plan assets ......... (56) (58) 38 53 Unamortized net asset (liability) existing at January 1, 1985 .............. 10 13 (3) (4) Unrecognized prior service cost ............ (14) (15) (15) (13) Unrecognized net loss from actuarial experience ...................... (12) (10) (11) (17) ----- ----- ----- ----- Accrued (prepaid) pension cost ............. $ (72) (70) 9 19 ===== ===== ===== =====
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The Corporation's pension plans were valued between November 1, 1994, and January 1, 1995, and the obligations were projected to, and the assets were valued as of, the end of 1995. Of its 21 U.S. pension plans at December 31, 1995, eight were overfunded while 13 were underfunded. Of the Corporation's 18 U.S. pension plans at December 31, 1994, five were overfunded while 13 were underfunded. 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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1995 1994 1993 ---- ---- ----
Benefits earned during the year ................. $ 11.2 12.6 10.8 Interest accrued on projected benefit obligation ..................................... 42.9 40.1 40.8 Return on assets - actual ....................... (119.6) (0.4) (68.0) - unrecognized gain (loss) ..... 66.6 (51.2) 17.5 Net amortization ................................ 1.0 1.2 0.5 ------ ------ ------ Net periodic pension cost for the year ....... $ 2.1 2.3 1.6 ====== ====== ======
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Assumptions used to develop the net periodic pension cost included an 8.5 percent discount rate in 1995, compared with discount rates of 7.25 percent and 8.5 percent in 1994 and 1993, respectively. 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 1995 and 1994, compared with rates of 10 percent and 5 percent, respectively, for 1993. For the valuation of pension obligations, the discount rate at the end of 1995 was 7.25 percent, decreased from 8.5 percent in 1994 and equivalent to the discount rate at the end of 1993, and the rate of increase in compensation levels was 4 percent, the same as 1994 and 1993.
The Corporation recognizes a minimum liability in its financial statements for its underfunded plans. "Other liabilities and deferred credits" at December 31, 1995, included $26 million relating to this minimum liability, compared with $40 million at December 31, 1994. This amount was offset by an $18 million intangible asset, a $5 million reduction in "Common Shareholders' Equity" and a $3 million deferred tax benefit at December 31, 1995, compared with an $18 million intangible asset, a $13 million reduction in "Common Shareholders' Equity" and a $9 million deferred tax benefit at December 31, 1994.
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."
16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation records its obligation for postretirement medical and life insurance benefits in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106 requires recognition of these benefits on an accrual 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.
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 also are 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 also are 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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1995 1994 ---- ---- Accumulated Postretirement Benefit Obligation: Retirees .............................................. $ 80 69 Fully eligible active plan participants ............... 10 8 Other active plan participants ........................ 61 56 ----- ----- Total accumulated postretirement benefit obligation ........................................... 151 133
Plan assets at fair value ............................... 11 11 ----- ----- Accumulated postretirement benefit obligation in excess of plan assets .................................. 140 122 Unrecognized prior service cost ......................... 7 5 Unrecognized net gain (loss) from actuarial experience ............................................. (10) 1 ----- ----- Accrued postretirement benefit cost ..................... $ 137 128 ===== =====
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The components of net periodic postretirement benefit cost were as follows (in millions):
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1995 1994 1993 ---- ---- ---- Benefits attributed to service during the year ........................................ $ 4 4 3 Interest cost on accumulated postretirement benefit obligation .............................. 11 10 10 Return on assets - actual ........................ (1) (1) (1) Net amortization ................................. (1) (1) (1) ---- ---- ---- Net periodic postretirement benefit cost for the year .................................... $ 13 12 11 ==== ==== ====
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For 1995 measurement purposes, annual rates of increase in the per capita cost of covered health care benefits were assumed to average 9 percent for 1996 decreasing gradually to 5.3 percent by 2010 and remaining at that level thereafter. 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. 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, 1995, by approximately $14.0 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 7.25 percent for 1995, compared with 8.5 percent used for 1994. 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 an 8.5 percent discount rate in 1995, increased from 7.25 percent in 1994 and equivalent to the discount rate used in 1993.
17. COMMITMENTS Rent expense for the years 1995, 1994 and 1993 was (in millions): $18.8, $23.5 and $26.6, respectively. Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year totaled $61.3 million at December 31, 1995. These commitments for future periods are as follows (in millions): 1996 - $14.2; 1997 - $11.9; 1998 - $8.6; 1999 - $7.6; 2000 - $5.3; 2001 and thereafter - $13.7.
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 19 to the Consolidated Financial Statements to which reference should be made for a fuller understanding of these arrangements with respect to expected 1996 production.
18. 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).
In 1993 and 1994, the New Mexico and Arizona legislatures, respectively, 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.
19. 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 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 mitigate the risk of adverse price fluctuations on its copper production. With respect to 1995 production, the Corporation had contracts that provided minimum quarterly average London Metal Exchange (LME) prices of 80 cents per pound for approximately 640 million pounds of copper. These contracts expired on December 31, 1995, without payment to Phelps Dodge. In addition, the Corporation had contracts that provided minimum (approximately 95 cents) and maximum (approximately $1.33) LME prices per pound for approximately 650 million pounds of copper. These contracts expired on December 31, 1995, with Phelps Dodge making payments totaling $1.3 million to the financial institutions involved. During 1994, contracts that provided the Corporation with minimum average LME copper prices of 75 cents per pound for about 21 percent of that year's production expired without payment to Phelps Dodge. During 1993, the Corporation received revenues of $39.4 million before taxes ($26.0 million, or 37 cents per common share, after taxes) from similar arrangements.
With respect to 1996 production, the Corporation has entered into contracts with several financial institutions that provide for a combination of minimum and maximum prices based on the quarterly average LME price. These contracts are summarized in the following table:
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Contracts Providing Contracts Providing Minimum Minimum Prices and Maximum Prices -------------- ------------------
Copper Cathode Copper Price (LME) Cathode Price Pounds ------------------ Pounds (LME) (millions) Minimum Maximum (millions) --- -------- ------- ------- --------
First Quarter ............... $ 0.95 170 $ 0.95 $ 1.47 170 Second Quarter .............. $ 0.95 90 $ 0.95 $ 1.42 170 Third Quarter ............... $ 0.95 40 $ 0.90 $ 1.40 145 Fourth Quarter .............. - $ 0.95 $ 1.36 190 ----- --- 300 675 ===== ===
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Note: If average quarterly LME prices exceed the maximum prices, Phelps Dodge will be obligated to pay the difference to the financial institutions involved; if average quarterly LME prices fall below the minimum prices, the financial institutions will be obligated to pay Phelps Dodge the difference.
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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 equivalent dollar cash flows resulting from transactions denominated in foreign currencies will be adversely affected by changes in exchange rates. In hedging a transaction, the Corporation's foreign exchange hedging strategy may, in certain circumstances, involve 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, 1995, the Corporation had protection in place for approximately $73 million of recorded and anticipated foreign currency transactions through the use of currency option contracts with an aggregate notional principal amount of approximately $80 million. The currency option contracts acquired by the Corporation have maturities of less than one year. The Corporation did not have any deferred unrealized gains or losses on its foreign exchange contracts at December 31, 1995, compared with deferred unrealized losses of $0.9 million at December 31, 1994.
Interest Rate Protection Agreement - The Corporation has caused its 80-percent-owned 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, 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 instruments are estimated by discounting the future cash flows using the current rates at which similar instruments would be made with similar credit ratings and for the same remaining maturities.
Long-term debt -- the fair value of substantially all 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 $59.4 million. There is no market for these guarantees or standby letters of credit 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, 1995, were as follows (in millions):
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Carrying Fair Amount Value -------- -----
Cash and short-term investments ................ $ 608.5 608.5 Price protection arrangements (copper price guarantees) ..................... 4.7 (0.4) Investments and long-term receivables (including amounts due within one year) for which it is practicable to estimate fair value * .......... 34.7 201.7 Long-term debt (including amounts due within one year) .............................. 629.9 659.3 Interest rate protection agreements ............ 2.5 1.2 Foreign currency exchange contracts ............ 0.6 0.3
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* The Corporation's largest cost basis investment is its minority interest in Southern Peru Copper Corporation (SPCC), which is carried at a book value of $13.2 million. Phelps Dodge's interest in SPCC was reduced from 16.25 percent to 13.9 percent through an exchange offering of SPCC common shares recently completed whereby 14.2 percent of SPCC's equity capital was registered for trading on the New York and Lima Stock Exchanges. Based on the New York Stock Exchange closing market price of those shares as of January 5, 1996 (the first day of trading), the estimated fair value of the Corporation's investment in SPCC is approximately $180 million. Phelps Dodge's ownership interest in SPCC is represented by its share of a class of SPCC common stock which is currently not registered for trading on any public exchange.
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20. 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 as rod 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 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 companies that manufacture engineered products principally for the transportation, energy and telecommunications sectors worldwide. 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 operations through Columbian Chemicals Company and its subsidiaries; its wheel and rim operations through Accuride Corporation and its subsidiaries; and its wire and cable and specialty conductor operations through Phelps Dodge International Corporation and Phelps Dodge Magnet Wire Company and their subsidiaries and affiliates.
The Corporation's total 1995 sales included exports of $93.7 million from U.S. operations to unaffiliated foreign customers, compared with $76.2 million in 1994 and $60.3 million in 1993. Intersegment sales reflect the transfer of copper from Phelps Dodge Mining Company to Phelps Dodge Industries at the same prices charged to outside customers.
The following tables give a summary of financial data by business segment and geographic area for the years 1993 through 1995. Major unusual items during the three-year period included (i) a 1995 pre-tax gain of $26.8 million included in Phelps Dodge Industries' operating income from the sale by its carbon black operations of a synthetic iron oxide facility, (ii) a 1994 pre-tax charge of $94.4 million to Phelps Dodge Mining Company's operating income for costs associated with environmental matters and asset dispositions, and (iii) a 1994 pre-tax charge of $44.6 million to Phelps Dodge Industries' operating income for costs associated with environmental matters and asset dispositions, including $17.6 million for carbon black facilities and $27.0 million for wire and cable and specialty conductor facilities. (See Note 2 to the Consolidated Financial Statements for a further discussion of these issues.)
FINANCIAL DATA BY GEOGRAPHIC AREA (In millions)
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1995 1994 1993 ---- ---- ----
SALES AND OTHER OPERATING REVENUES: Unaffiliated customers United States ................... $ 3,072.6 2,485.9 1,918.7 Latin America ................... 537.3 346.7 274.0 Other ........................... 575.5 456.6 403.2 -------- ------- ------- $ 4,185.4 3,289.2 2,595.9 ======== ======= ======= Intergeographic areas United States ................... $ 13.1 19.3 17.1 Latin America ................... 23.7 - - Other ........................... 47.9 54.4 53.6 -------- ------- ------- $ 84.7 73.7 70.7 ======== ======= ======= OPERATING INCOME: United States .................... $ 810.4 337.2 267.7 Latin America .................... 196.8 30.0 17.7 Other ............................ 93.3 33.2 41.1 -------- ------- ------- $ 1,100.5 400.4 326.5 ======== ======= ======= IDENTIFIABLE ASSETS AT DECEMBER 31: United States .................... $ 3,157.1 2,789.0 2,581.2 Latin America .................... 931.3 798.2 653.3 Other ............................ 557.5 546.6 486.4 -------- ------- ------- $ 4,645.9 4,133.8 3,720.9 ======== ======= =======
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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 1, 1996 (the 1996 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 1996 Proxy Statement is being prepared and will be filed with the Securities and Exchange Commission and furnished to shareholders on or about April 1, 1996.
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 (incorporated by reference to Exhibit 10.3 to the Corporation's 1994 Form 10-K (SEC File No. 1-82)).
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 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)).
10.6 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 1996 Proxy Statement (incorporated by reference to Exhibit 10.7 to the Corporation's 1992 Form 10-K (SEC File No. 1-82)).
10.7 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 1996 Proxy Statement (incorporated by reference to Exhibit 10.11 to the Corporation's 1988 Form 10-K (SEC File No. 1-82)).
10.8 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)).
10.9 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)). Four 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)), one effective as of September 7, 1994 (incorporated by reference to Exhibit 10.11 of the Corporation's 1994 Form 10-K (SEC File No. 1-82)), and one effective June 7, 1995 (incorporated by reference to Exhibit 10.11 of the Corporation's Form 10-Q for the quarter ended June 30, 1995 (SEC File No. 1-82)).
10.10 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)).
10.11 Retirement Agreement dated as of June 20, 1995, between Dr. Patrick J. Ryan and the Corporation (incorporated by reference to Exhibit 10.13 of the Corporation's Form 10-Q for the quarter ended June 30, 1995 (SEC File No. 1-82)).
10.12 Consulting Agreement dated as of June 20, 1995, between Dr. Patrick J. Ryan and the Corporation (incorporated by reference to Exhibit 10.14 of the Corporation's Form 10-Q for the quarter ended June 30, 1995 (SEC File No. 1-82)).
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, 1995.
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 20, 1996 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 20, 1996 - ------------------- Douglas C. Yearley
Senior Vice President and Chief Financial Officer Thomas M. St. Clair (Principal Financial Officer) March 20, 1996 - ------------------- Thomas M. St. Clair
Vice President and Controller Thomas M. Foster (Principal Accounting Officer) March 20, 1996 - ------------------- Thomas M. Foster
Edward L. Addison, Robert N. Burt, Paul W. Douglas, ) William A. Franke, Paul Hazen, Marie L. Knowles, ) March 20, 1996 Robert D. Krebs, Southwood J. Morcott, Gordon R. Parker,) J. Steven Whisler, Directors )
By: Thomas M. St. Clair ------------------- Thomas M. St. Clair Attorney-in-fact