Freeport-McMoRan 2013 Annual Report Download - page 61

MANAGEMENT’S DISCUSSION AND ANALYSIS
2013 ANNUAL REPORT | 59
derivative contracts are not designated as hedging instruments;
accordingly, they are recorded at fair value with the mark-to-
market gains and losses recorded in revenues each period. Net
charges to revenues for realized losses on crude oil and natural
gas derivative contracts totaled $22 million ($14 million to
net income attributable to FCX common stockholders or $0.01 per
share) and net unrealized and noncash realized losses on
crude oil and natural gas derivative contracts totaled $312 million
($194 million to net income attributable to FCX common
stockholders or $0.19 per share) for the seven months from
June 1, 2013, to December 31, 2013.
As of December 31, 2013, our crude oil and natural gas
derivatives consisted of crude oil put options and natural gas
swaps. Following presents the estimated (increase) decrease in
the net liability on our balance sheet of a 10 percent change in
Brent crude oil and NYMEX forward natural gas prices on the fair
values of outstanding crude oil and natural gas derivative
contracts, compared with the forward prices used to determine
the fair values at December 31, 2013 (in millions):
10% Increase 10% Decrease
Crude oil puts $(72) $146
Natural gas swaps (14) 14
$(86) $160
At December 31, 2013, premium settlements of crude oil and
natural gas derivative contracts are expected to result in realized
losses of approximately $240 million for the year 2014. Refer to
Note 14 for further discussion of our crude oil and natural gas
derivative contracts. Our crude oil derivative arrangements
provide us protection on the underlying volumes if prices decline
below the prices at which these derivatives are set.
Foreign Currency Exchange Risk
The functional currency for most of our operations is the U.S.
dollar. All of our revenues and a significant portion of our costs
are denominated in U.S. dollars; however, some costs and
certain asset and liability accounts are denominated in local
currencies, including the Indonesian rupiah, Australian dollar,
Chilean peso, Peruvian nuevo sol and euro. Generally, our results
are positively affected when the U.S. dollar strengthens in
relation to those foreign currencies and adversely affected when
the U.S. dollar weakens in relation to those foreign currencies.
settlement. We record revenues and invoice customers at the time
of shipment based on then-current LME prices, which results in
an embedded derivative on our provisionally priced concentrate
and cathode sales that is adjusted to fair value through earnings
each period, using the period-end forward prices, until the date of
final pricing. To the extent final prices are higher or lower than
what was recorded on a provisional basis, an increase or decrease
to revenues is recorded each reporting period until the date
of final pricing. Accordingly, in times of rising copper prices, our
revenues benefit from adjustments to the final pricing of
provisionally priced sales pursuant to contracts entered into in
prior periods; in times of falling copper prices, the opposite occurs.
Following are the (unfavorable) favorable impacts of net
adjustments to the prior years’ provisionally priced copper sales
for the years ended December 31 (in millions, except per
share amounts):
2013 2012 2011
Revenues $ (26) $ 101 $ (12)
Net income attributable to FCX common
stockholders $ (12) $ 43 $ (5)
Net income per share of FCX common stock $ (0.01) $ 0. 05 $ (0.01)
At December 31, 2013, we had provisionally priced copper sales at
our copper mining operations, primarily South America and
Indonesia, totaling 481 million pounds of copper (net of
intercompany sales and noncontrolling interests) recorded at an
average price of $3.34 per pound, subject to final pricing over the
next several months. We estimate that each $0.05 change in the
price realized from the December 31, 2013, provisional price
recorded would have a net impact on our 2014 consolidated
revenues of approximately $32 million ($16 million to net income
attributable to common stockholders). The LME spot copper price
closed at $3.25 per pound on February 14, 2014.
Oil & Gas. Our financial results from oil and gas operations may
vary with fluctuations in crude oil prices and, to a lesser extent
natural gas prices. Market prices for crude oil and natural gas
have fluctuated historically and are affected by numerous factors
beyond our control. Because we cannot control the price of our
products, including oil and gas, the key measures that
management focuses on in operating our oil and gas business are
sales volumes, cash production costs per BOE and operating cash
flows. Refer to “Outlook” for further discussion of projected sales
volumes, cash production costs per BOE and operating cash flows
for 2014.
Our oil and gas operations use various derivative contracts to
manage exposure to commodity price risk for a substantial
portion of its oil and gas production through 2015. In connection
with the acquisition of PXP, we assumed derivative contracts for
2013, 2014 and 2015 that consisted of crude oil options, and crude
oil and natural gas swaps. These crude oil and natural gas