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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
Commission file number 1-82
PHELPS DODGE CORPORATION
(a New York corporation)
13-1808503
(I.R.S. Employer Identification No.)
2600 N. Central Avenue, Phoenix, AZ 85004-3089
Registrant's telephone number: (602) 234-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
Number of Common Shares outstanding at November 8, 1996: 64,832,837 shares.
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PHELPS DODGE CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1996
TABLE OF CONTENTS
Statement of Consolidated Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Statement of Common Shareholders' Equity
Notes to Consolidated Financial Information
Review by Independent Accountants
Report of Independent Accountants on Review of Interim Financial
Information
Management's Discussion and Analysis
Legal Proceedings
Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
PHELPS DODGE CORPORATION AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements
STATEMENT OF CONSOLIDATED INCOME
(Unaudited; in millions except per share data)
First Nine
Third Quarter Months
-------------- ----------------
1996 1995 1996 1995
---- ---- ---- ----
SALES AND OTHER OPERATING
REVENUES $ 853.6 1,076.7 2,816.0 3,134.4
------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Cost of products sold 613.4 664.2 1,924.8 2,033.5
Depreciation, depletion
and amortization 61.9 54.9 185.8 166.3
Selling and general
administrative expense 29.4 27.5 91.1 89.1
Exploration and research
expense 22.2 18.7 62.3 50.5
Gain on asset dispositions - - - (26.8)
------- ------- ------- -------
726.9 765.3 2,264.0 2,312.6
------- ------- ------- -------
OPERATING INCOME 126.7 311.4 552.0 821.8
Interest expense (17.5) (19.0) (45.0) (53.8)
Capitalized interest 0.5 1.3 1.0 2.8
Miscellaneous income and
expense, net 11.4 10.4 28.6 28.8
------- ------- ------- -------
INCOME BEFORE TAXES, MINORITY
INTERESTS AND EQUITY IN NET
EARNINGS OF AFFILIATED
COMPANIES 121.1 304.1 536.6 799.6
Provision for taxes on
income (39.3) (91.2) (174.4) (239.9)
Minority interests in
consolidated subsidiaries (3.9) (3.1) (10.3) (8.4)
Equity in net earnings
of affiliated companies 2.3 2.0 7.7 5.3
------- ------- ------- -------
NET INCOME $ 80.2 211.8 359.6 556.6
======= ======= ======= =======
EARNINGS PER SHARE $ 1.22 3.03 5.40 7.92
======= ======= ======= =======
AVERAGE NUMBER OF SHARES
OUTSTANDING 65.7 69.9 66.6 70.3
BUSINESS SEGMENTS
(Unaudited; in millions)
SALES AND OTHER OPERATING
REVENUES
Phelps Dodge Mining
Company $ 437.2 659.9 1,551.1 1,856.0
Phelps Dodge Industries 416.4 416.8 1,264.9 1,278.4
------- ------- ------- -------
$ 853.6 1,076.7 2,816.0 3,134.4
======= ======= ======= =======
OPERATING INCOME (LOSS)
Phelps Dodge Mining
Company $ 76.5 266.8 407.4 656.8
Phelps Dodge Industries 58.8 55.4 173.3 193.4
Corporate and other (8.6) (10.8) (28.7) (28.4)
------- ------- ------- -------
$ 126.7 311.4 552.0 821.8
======= ======= ======= =======
See Notes to Consolidated Financial Information.
CONSOLIDATED BALANCE SHEET
(Unaudited; in millions)
Sept. 30, Dec. 31,
1996 1995
---- ----
ASSETS
Cash and short-term investments, at cost $ 567.7 608.5
Accounts receivable, net 445.4 483.7
Inventories 282.1 281.5
Supplies 119.2 121.4
Prepaid expenses 19.4 15.5
Deferred income taxes 43.4 44.6
-------- -------
Current assets 1,477.2 1,555.2
Investments and long-term
accounts receivable 89.1 79.0
Property, plant and equipment, net 2,917.5 2,728.7
Other assets and deferred charges 293.4 283.0
-------- --------
$ 4,777.2 4,645.9
======== ========
LIABILITIES
Short-term debt $ 66.9 66.6
Current portion of long-term debt 29.4 16.8
Accounts payable and accrued expenses 535.5 504.8
Income taxes 18.7 16.8
-------- --------
Current liabilities 650.5 605.0
Long-term debt 600.7 613.1
Deferred income taxes 422.2 358.1
Other liabilities and deferred credits 318.5 318.7
-------- --------
1,991.9 1,894.9
-------- --------
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES 81.4 73.3
-------- --------
COMMON SHAREHOLDERS' EQUITY
Common shares, 65.0 outstanding
(12/31/95 - 68.6) 406.5 428.7
Retained earnings 2,410.9 2,360.1
Cumulative translation adjustments (98.3) (93.9)
Other (15.2) (17.2)
-------- --------
2,703.9 2,677.7
-------- --------
$ 4,777.2 4,645.9
======== ========
See Notes to Consolidated Financial Information.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited; in millions)
Nine months
ended
September 30,
---------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net income $ 359.6 556.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and
amortization 185.8 166.3
Deferred income taxes 56.3 79.9
Equity earnings net of dividends
received (3.9) (5.1)
Changes in current assets and
liabilities:
(Increase) decrease in accounts
receivable 39.0 (51.2)
(Increase) decrease in inventories 13.8 (7.5)
(Increase) decrease in supplies 2.1 (15.1)
(Increase) decrease in prepaid
expenses (3.6) (2.8)
(Increase) decrease in deferred
income taxes 1.3 (5.7)
Increase (decrease) in interest
payable 4.2 3.9
Increase (decrease) in other accounts
payable 2.3 (50.6)
Increase (decrease) in income taxes 1.6 (27.8)
Increase (decrease) in other accrued
expenses 14.0 25.6
Gain on asset dispositions - (26.8)
Other adjustments, net 4.6 2.6
-------- --------
Net cash provided by operating
activities 677.1 642.3
-------- --------
INVESTING ACTIVITIES
Capital outlays (338.8) (273.6)
Capitalized interest (1.0) (2.8)
Investment in subsidiaries (47.3) (0.2)
Proceeds from asset dispositions
and other 3.6 40.3
-------- --------
Net cash used in investing activities (383.5) (236.3)
-------- --------
FINANCING ACTIVITIES
Increase in debt 15.7 36.7
Payment of debt (17.6) (18.6)
Common dividends (96.2) (94.5)
Purchase of common shares (247.0) (93.7)
Other 10.7 6.9
-------- --------
Net cash used in financing activities (334.4) (163.2)
-------- --------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (40.8) 242.8
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 608.5 286.9
-------- --------
CASH AND SHORT-TERM INVESTMENTS AT END
OF PERIOD $ 567.7 529.7
======== ========
See Notes to Consolidated Financial Information.
STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(Unaudited; in millions)
Common Shares Cumulative
--------------- Translation
Number Adjustments Common
of At Par Retained and Shareholders'
shares Value Earnings Other Equity
------ ----- -------- ----- ------
BALANCE AT
DECEMBER 31, 1995 68.6 $ 428.7 $ 2,360.1 $ (111.1) $ 2,677.7
Stock options
exercised 0.3 2.2 10.0 12.2
Common shares
purchased (3.9) (24.4) (222.6) (247.0)
Net income 359.6 359.6
Dividends on common
shares (96.2) (96.2)
Translation
adjustment (4.4) (4.4)
Other 2.0 2.0
----- ------ ------- ------- -------
BALANCE AT
SEPTEMBER 30, 1996 65.0 $ 406.5 $ 2,410.9 $ (113.5) $ 2,703.9
===== ====== ======= ======= =======
See Notes to Consolidated Financial Information.
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
1. The unaudited consolidated financial information presented herein has
been prepared in accordance with the instructions to Form 10-Q and does
not include all of the information and note disclosures required by
generally accepted accounting principles. Therefore, this information
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Corporation's Form 10-K
for the year ended December 31, 1995. This information reflects all
adjustments that are, in the opinion of management, necessary to a fair
statement of the results for the interim periods reported.
2. The results of operations for the three-month and nine-month periods
ended September 30, 1996, are not necessarily indicative of the results
to be expected for the full year.
3. Depending on market circumstances, the Corporation may periodically
purchase or liquidate various copper price protection contracts to
mitigate the risk of adverse price fluctuations on a portion of its
expected future mine production.
During the 1996 third quarter, the Corporation liquidated a portion of
its copper price protection contracts that covered anticipated mine
production in the fourth quarter of 1996 and the first quarter of 1997.
This resulted in cash payments to the Corporation of $15.6 million. The
related gains, $8.8 million for the 1996 fourth quarter contracts and
$6.8 million for the 1997 first quarter contracts, will be deferred and
recognized in income during the periods to which the original contracts
were applicable. Contracts ensuring minimum prices for 185 million
pounds of 1996 third quarter copper production resulted in payments of
$3.1 million to Phelps Dodge. Similar contracts covering 600 million
pounds of 1996 first half copper production expired without payment.
As of November 8, 1996, the Corporation had net positions in place with
several financial institutions that provide for a minimum 1996 fourth
quarter average price of 95 cents per pound for 95 million pounds of
copper cathode and a minimum 1997 first quarter average price of 90
cents per pound for 85 million pounds of copper cathode. These minimum
prices are based on average London Metal Exchange (LME) prices. If
average quarterly LME prices fall below the minimum prices, the
financial institutions will be obligated to pay Phelps Dodge the
difference.
REVIEW BY INDEPENDENT ACCOUNTANTS
The financial information as of September 30, 1996, and for the
three-month and nine-month periods ended September 30, 1996 and 1995, included
in Part I pursuant to Rule 10-01 of Regulation S-X has been reviewed by Price
Waterhouse LLP (Price Waterhouse), the Corporation's independent accountants, in
accordance with standards established by the American Institute of Certified
Public Accountants. Price Waterhouse's report is included in this quarterly
report.
Price Waterhouse does not carry out any significant or additional audit
tests beyond those that would have been necessary if its report had not been
included in this quarterly report. Accordingly, such report is not a "report" or
"part of a registration statement" within the meaning of Sections 7 and 11 of
the Securities Act of 1933 and the liability provisions of Section 11 of such
Act do not apply.
<AUDIT-REPORT>
PRICE WATERHOUSE LLP
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Phelps Dodge Corporation
We have reviewed the accompanying consolidated balance sheet of Phelps Dodge
Corporation and its subsidiaries as of September 30, 1996 and the statement of
consolidated income for the three-month and nine-month periods ended September
30, 1996 and 1995 and the consolidated statements of cash flows and of common
shareholders' equity for the nine-month periods ended September 30, 1996 and
1995. These financial statements are the responsibility of the Corporation's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1995, and the related
consolidated statements of income, of cash flows and of common shareholders'
equity for the year then ended (not presented herein), and in our report dated
January 22, 1996 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of December 31, 1995, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
Price Waterhouse LLP
Phoenix, Arizona
October 9, 1996
</AUDIT-REPORT>
Item 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS
Phelps Dodge Corporation had consolidated net income of $80.2 million,
or $1.22 per common share, in the third quarter of 1996, compared with $211.8
million, or $3.03 per common share, in the 1995 third quarter. Net income for
the nine months ended September 30, 1996, was $359.6 million, or $5.40 per
common share, compared with $556.6 million, or $7.92 per common share, in the
corresponding 1995 period. Net income in the 1995 nine-month period included a
first quarter after-tax gain of $16.6 million, or 24 cents per common share,
from the sale of Columbian Chemicals Company's MAPICO division.
Earnings in the three-month and nine-month periods ended September 30,
1996, were lower than those reported in the corresponding 1995 periods
principally as a result of lower average copper prices. Average spot prices per
pound of cathode copper on the New York Commodity Exchange (COMEX) decreased
approximately 45 cents and 28 cents in the third quarter and first nine months
of 1996, respectively, from the average prices in the corresponding 1995
periods.
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
1.5 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 $15 million.
The COMEX spot price per pound of copper cathode, upon which the
Corporation bases its selling price, averaged 91 cents in the third quarter and
$1.08 in the first nine months of 1996, compared with an average of $1.36 in
each of the corresponding 1995 periods. From October 1 to November 8, 1996, the
average price was 94 cents, closing at 96 cents on November 8, 1996.
The Corporation enters into price protection arrangements from time to
time, depending on market circumstances, to ensure a minimum price for a portion
of the copper it expects from future mine production. For further discussion of
the Corporation's price protection arrangements for 1996 and 1997 production,
see Note 3 to Consolidated Financial Information.
Sales were $853.6 million in the 1996 third quarter, compared with
$1,076.7 million in the corresponding 1995 period. The 1996 decrease primarily
was a result of lower average copper prices and lower sales volumes of wheels
and rims. The decrease was offset partially by higher sales volumes of wire and
cable products. Sales were $2,816.0 million in the first nine months of 1996,
compared with $3,134.4 million in the corresponding 1995 period. This decrease
also primarily was the result of lower average copper prices and lower sales
volumes of wheels and rims, and was partially offset by greater sales volumes of
copper and higher sales volumes of wire and cable products.
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, principally
as by-products, and sulfuric acid from its air quality control facilities. This
segment also includes the Corporation's other mining operations and investments
(including fluorspar, silver, lead and zinc operations) and its worldwide
mineral exploration and development programs.
================================================================================
First Nine
Third Quarter Months
-------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
Copper production
(short tons):
Total production 227,000 221,800 694,400 624,600
Less minority participants'
shares * 39,100 39,500 121,100 111,600
------- ------- ------- -------
Net Phelps Dodge share 187,900 182,300 573,300 513,000
======= ======= ======= =======
Copper sales (short tons):
Net Phelps Dodge share from
own mines 194,500 196,600 573,900 512,300
Purchased copper 43,900 49,300 163,500 179,900
------- ------- ------- -------
Total copper sales 238,400 245,900 737,400 692,200
======= ======= ======= =======
New York Commodity Exchange
average spot price per
pound - copper cathodes $ 0.91 1.36 1.08 1.36
(in millions)
Sales and other operating
revenues $ 437.2 659.9 1,551.1 1,856.0
Operating income $ 76.5 266.8 407.4 656.8
- -------------------------
* Minority participant interests include (i) a 15 percent undivided
interest in the Morenci, Arizona, copper mining complex held by
Sumitomo Metal Mining Arizona, Inc., (ii) a one-third partnership
interest in Chino Mines Company in New Mexico held by Heisei Minerals
Corporation, and (iii) a 20 percent interest in Candelaria held by SMMA
Candelaria, Inc., a jointly owned subsidiary of Sumitomo Metal Mining
Co., Ltd. and Sumitomo Corporation.
================================================================================
Phelps Dodge Mining Company's 1996 third quarter sales of $437.2
million were 34 percent lower than in the third quarter of 1995. This decrease
principally resulted from a 45 cents per pound decrease in average copper
prices. Sales of $1,551.1 million in the first nine months of 1996 were 16
percent lower than in the corresponding 1995 period. This decrease primarily
resulted from a 28 cents per pound decrease in average copper prices, partially
offset by a 61,600 ton or 12 percent increase in copper sales from mine
production. The primary contributor to 1996 production and sales volume
increases for the first nine months was the Morenci mine, which included
production from its Southside solution extraction/electrowinning (SX/EW) project
that commenced operations in the third quarter of 1995.
Phelps Dodge Mining Company recorded operating income of $76.5 million
in the 1996 third quarter and $407.4 million in the first nine months of 1996,
compared with $266.8 million and $656.8 million in the corresponding 1995
periods. The 1996 third quarter decrease from the corresponding 1995 period
resulted from the lower average copper prices already discussed. The decrease in
operating income in the first nine months of 1996 from the corresponding 1995
period resulted principally from the lower average copper prices, and was
partially offset by the higher volumes of copper sold from mine production
already discussed. The 1996 first nine months also reflected an $18.0 million
reduction of pre-tax earnings in the second quarter for adjustments during June
to mark to market concentrate transactions that had been recorded in prior
months at provisional forward prices. These adjustments primarily reflected a
sharp drop in copper futures prices in the month of June.
On May 1, 1996, the Corporation announced plans to expand concentrator
throughput at its Candelaria copper mining complex in northern Chile (the
Corporation owns an 80 percent interest in Candelaria). At full capacity, the
$337 million expansion will result in copper production of more than 400 million
pounds in each of the first two years of operations, although, under the current
operating plan, annual copper production will average approximately 380 million
pounds during the post-expansion mine life. The expansion will include increased
mining activity, the installation of a second semi-autogenous (SAG) mill and new
and expanded concentrating facilities, and the addition of more than 200
employees. Construction began in the third quarter of 1996, with new production
scheduled to come on line in mid-1998. As a result of the expansion, the
estimated mine life of Candelaria will be reduced from 35 years of production to
19 years.
The collective bargaining agreements covering approximately 700
employees at Phelps Dodge Mining Company's Chino operations in New Mexico
expired on June 30, 1996. As of November 8, 1996, employees who were covered by
the agreements have continued to work without a contract.
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 specialty chemicals 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.
================================================================================
First Nine
Third Quarter Months
-------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
Sales and other operating revenues:
Specialty chemicals $ 105.1 99.5 327.4 319.2
Wheels and rims 71.3 84.5 235.2 277.1
Wire and cable 240.0 232.8 702.3 682.1
------- ------- ------- -------
$ 416.4 416.8 1,264.9 1,278.4
======= ======= ======= =======
Operating income: *
Specialty chemicals $ 19.4 18.1 64.3 87.7
Wheels and rims 9.5 11.5 33.7 39.0
Wire and cable 29.9 25.8 75.3 66.7
------- ------- ------- -------
$ 58.8 55.4 173.3 193.4
======= ======= ======= =======
- -------------------------
* Operating income in the first nine months of 1995 included a pre-tax
gain of $26.8 million in specialty chemicals from the sale of a
synthetic iron oxide facility in the first quarter.
================================================================================
During the 1996 third quarter, Phelps Dodge Industries recorded
operating income of $58.8 million, compared with $55.4 million in the
corresponding 1995 period. Operating income in the first nine months of 1996 was
$173.3 million, compared with $166.6 million in the first nine months of 1995
before a pre-tax gain of $26.8 million from the sale of Columbian Chemicals
Company's MAPICO division in the first quarter. Primarily as a result of
benefits from certain manufacturing cost reduction programs instituted during
1995, earnings in the third quarter and first nine months of 1996 were higher
than in the 1995 periods (excluding the MAPICO gain) despite an overall decrease
in sales.
Phelps Dodge Industries' sales of $416.4 million and $1,264.9 million
in the third quarter and first nine months of 1996, respectively, were less than
1 percent lower than in the corresponding 1995 periods as continued strength in
the specialty chemicals business and higher sales volumes in the wire and cable
businesses largely offset a 15 percent decrease in wheel and rim sales. Sales
volumes of wire and cable products benefited from the acquisition in May 1996 of
Nesor Alloy Corporation, a leading manufacturer of high-performance conductors
for the general electronics and aerospace industries. The decrease in wheel and
rim sales was driven by lower sales volumes resulting from decreased demand from
the major North American manufacturers of medium and heavy trucks and trailers.
On August 7, 1996, the Corporation announced plans to construct a
magnet wire manufacturing plant in Monterrey, Mexico. Construction of the $42
million project is scheduled to begin in 1996 with commercial production
expected in early 1998. This new plant, together with the Corporation's recently
expanded facility in El Paso, Texas, is expected to support customer growth in
the region while freeing up capacity at existing U.S. plants to meet growing
demand for magnet wire in the United States.
The collective bargaining agreement covering approximately 360
employees at Phelps Dodge Industries' magnet wire facility in Hopkinsville,
Kentucky, expired on October 11, 1996. As of November 8, 1996, employees who
were covered by the agreement have continued to work without a contract.
OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED INCOME
Interest expense net of capitalized interest was $17.0 million in the
third quarter of 1996 and $44.0 million in the first nine months, compared with
$17.7 million and $51.0 million in the corresponding periods in 1995. The 1996
nine month period benefited from foreign currency exchange gains of
approximately $8.0 million representing the remeasurement of Venezuelan local
currency debt after a major devaluation of the Bolivar. These gains were offset
by approximately $7.0 million of similar expenses included in miscellaneous
income and expense, net, principally reflecting the effect of the devaluation on
working capital. Miscellaneous income in the first nine months of 1996, also
included an increase of $4.7 million in dividends received from the
Corporation's 13.9 percent minority interest in Southern Peru Copper
Corporation.
CHANGES IN FINANCIAL CONDITION
Capital outlays during the first nine months of 1996, were $225.4
million for Phelps Dodge Mining Company and $110.6 million for Phelps Dodge
Industries. Capital outlays in the corresponding 1995 period were $218.5 million
for Phelps Dodge Mining Company and $54.4 million for Phelps Dodge Industries.
The Corporation expects capital outlays for the year 1996, to be approximately
$325 million for Phelps Dodge Mining Company, including Phelps Dodge's 80
percent share of amounts to be spent on the recently announced Candelaria
expansion. Phelps Dodge Industries is expected to spend approximately $150
million during the year. This amount does not include the $29 million spent in
May 1996, for the previously announced acquisition of Nesor Alloy Corporation.
At September 30, 1996, the Corporation's total debt was $697.0 million,
compared with $696.5 million at year-end 1995. The Corporation's ratio of debt
to total capitalization was 20.0 percent at September 30, 1996, compared with
20.2 percent at December 31, 1995.
An existing revolving credit agreement between the Corporation and
several lenders was amended on June 4, 1996. The agreement, as amended and
restated, permits borrowings of up to $500 million from time to time until its
scheduled maturity on June 4, 2001. The agreement allows for two one-year
renewals beyond the scheduled maturity date if the Corporation requests and
receives approval from at least two-thirds of the lenders involved. 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 eight basis points (0.08 percent)
on total commitments. The agreement requires the Corporation to maintain a
minimum consolidated tangible net worth of $1.1 billion and limits indebtedness
to 50 percent of total consolidated capitalization. There were no borrowings
under this agreement at either September 30, 1996 or December 31, 1995.
On September 6, 1996, the Corporation paid a regular quarterly dividend
of 50 cents per share on its common shares for the 1996 third quarter. The
amount paid for the third quarter was $32.7 million, bringing total 1996
dividends paid through September 30 to $96.2 million. On November 6, 1996, the
Board of Directors declared a 1996 fourth quarter regular dividend of 50 cents
per common share to be paid on December 6, 1996, to shareholders of record at
the close of business on November 18, 1996.
In 1996 through November 8, the Corporation purchased 4,104,300 of its
common shares at a total cost of $260.0 million. 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
November 8, 1996, the Corporation had purchased 6,779,900 of its common shares
under the program at a total cost of $418.1 million, leaving an additional
3,220,100 shares authorized for purchase. There were 65,035,000 common shares
outstanding on September 30, 1996.
Part II. Other Information
Item 1. Legal Proceedings
I. Reference is made to Paragraph II, section A.2. (a) of Item 3. Legal
Proceedings of the Corporation's Form 10-K for the year ended December 31, 1995,
regarding 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).
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 and other land use issues involving the Tribe's Reservation. Since
that time comprehensive settlement agreements among the Tribe, the Corporation
and other parties have been under negotiation. In the more recent phases of the
settlement negotiations, the Tribe has sought terms that the Corporation
believes are unacceptable and inconsistent with the principles set forth in the
September 7, 1990 letter agreement. In July 1996, the Tribe notified the
Corporation to make preparations to vacate the Corporation's Black River pump
station, which is located on the Tribe's Reservation, by July 1997. Through the
Black River pump station the Corporation obtains approximately 10,000 acre feet
of water annually for use at the Corporation's Morenci complex. The Corporation
believes that it holds valid rights-of-way and easements and has other legal
rights sufficient to allow for the continued operation of the Black River pump
station on Reservation lands. However, the Corporation has advised the Tribe
that, without waiving any such rights, it has begun to consider issues
associated with dismantling and removing the Black River pump station and
related facilities from the Reservation. The federal legislation authorizing
settlement of the Tribe's water rights claims with the Corporation and the other
parties to the proceeding has been extended for a six month period expiring June
30, 1997.
II. Reference is made to Paragraph III. of Item 3. Legal Proceedings of
the Corporation's Form 10-K for the year ended December 31, 1995, regarding the
proceedings described below.
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 17,200 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. Since the beginning of 1993, PDI has obtained
dismissal of all but one of the claims brought against it in Mississippi.
As of September 30, 1996, a total of 3,276 asbestos-related claims were
pending against PDI in 14 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.
Based on its experience to date in connection with these
asbestos-related claims, and also taking into account the cost-sharing agreement
referred to above, Phelps Dodge has concluded that these claims do not involve
material legal proceedings requiring disclosure in this report under the
applicable regulations of the Securities and Exchange Commission. Accordingly,
Phelps Dodge does not intend to describe these claims in future reports on Form
10-Q or Form 10-K unless there is a material change requiring such disclosure.
Item 6. Exhibits and Reports on Form 8-K
(a) Any exhibits required to be filed by the Corporation are listed
in the Index to Exhibits.
(b) No reports on Form 8-K were filed by the Corporation during the
quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHELPS DODGE CORPORATION
------------------------
(Corporation or Registrant)
Date: November 8, 1996 By: Thomas M. Foster
----------------
Thomas M. Foster
Vice President and Controller
(Principal Accounting Officer)
PHELPS DODGE CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
3.2 By-Laws of the Corporation, as amended effective September 4, 1996.
12 Computation of ratios of total debt to total capitalization.
15 Letter from Price Waterhouse LLP with respect to unaudited interim
financial information.