Freeport-McMoRan 2013 Annual Report Download - page 119

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 ANNUAL REPORT | 117
reflected in revenues for sales contracts and in cost of sales as
production and delivery costs for purchase contracts.
A summary of FCX’s embedded derivatives at December 31,
2013, follows:
Average Price
Open Per Unit Maturities
Positions Contract Market Through
Embedded derivatives in
provisional sales contracts:
Copper (millions of pounds) 673 $ 3.24 $ 3.34 June 2014
Gold (thousands of ounces) 254 1,245 1,202 April 2014
Embedded derivatives in
provisional purchase contracts:
Copper (millions of pounds) 60 3.26 3.34 April 2014
Crude Oil and Natural Gas Contracts. As a result of the acquisition
of PXP, FCX assumed PXP’s 2013, 2014 and 2015 derivative
instruments that consisted of crude oil options, and crude oil and
natural gas swaps. The crude oil and natural gas derivatives are not
designated as hedging instruments and are recorded at fair value
with the mark-to-market gains and losses recorded in revenues.
The crude oil options were entered into by PXP to protect the
realized price of a portion of expected future sales in order to limit
the effects of crude oil price decreases. At December 31, 2013,
these contracts are composed of crude oil put spreads consisting
of put options with a floor limit. The premiums associated
with put options are deferred until the settlement period. At
December 31, 2013, the deferred option premiums and accrued
interest associated with the crude oil option contracts totaled
$444 million, which was included as a component of the fair value
of the crude oil option contracts. At December 31, 2013,
the outstanding crude oil option contracts, all of which settle
monthly, follow:
Average Price
(per barrel)
a
Daily Value Average Deferred
Instrument (thousand Floor Premium
Period Type barrels) Floor Limit (per barrel) Index
2014
Jan – Dec Put options
b
75 $ 90 $ 70 $ 5.74 Brent
Jan – Dec Put options
b
30 95 75 6.09 Brent
Jan – Dec Put options
b
5 100 80 7.11 Brent
2015
Jan – Dec Put options
b
84 90 70 6.89 Brent
a. The average strike prices do not reflect any premiums to purchase the put options.
b. If the index price is less than the per barrel floor, FCX receives the difference between the
per barrel floor and the index price up to a maximum of $20 per barrel less the option
premium. If the index price is at or above the per barrel floor, FCX pays the option premium
and no cash settlement is received.
In addition, at December 31, 2013, outstanding natural gas swaps
with a weighted-average fixed swap price of $4.09 per million
British thermal units (MMBtu) cover approximately 37 million
MMBtu of natural gas with maturities through December 2014 (on
daily volumes of 100,000 MMBtu). If the Henry Hub index price is
Derivatives Designated as Hedging Instruments — Fair Value Hedges
Copper Futures and Swap Contracts. Some of FCX’s U.S. copper
rod customers request a fixed market price instead of the COMEX
average copper price in the month of shipment. FCX hedges this
price exposure in a manner that allows it to receive the COMEX
average price in the month of shipment while the customers pay
the fixed price they requested. FCX accomplishes this by entering
into copper futures or swap contracts. Hedging gains or losses
from these copper futures and swap contracts are recorded in
revenues. FCX did not have any significant gains or losses during
the three years ended December 31, 2013, resulting from hedge
ineffectiveness. At December 31, 2013, FCX held copper futures
and swap contracts that qualified for hedge accounting for
44 million pounds at an average contract price of $3.28 per pound,
with maturities through November 2014.
A summary of gains (losses) recognized in revenues for
derivative financial instruments related to commodity contracts
that are designated and qualify as fair value hedge transactions,
along with the unrealized gains (losses) on the related hedged item
(firm sales commitments) for the years ended December 31 follows:
2013 2012 2011
Unrealized gains (losses):
Derivative financial instruments $ 1 $ 15 $ (28)
Hedged item (1) (15) 28
Realized losses:
Matured derivative financial instruments (17) (2) (28)
Derivatives Not Designated as Hedging Instruments
Embedded derivatives and derivative financial instruments that
do not meet the criteria to qualify for hedge accounting are
discussed below.
Embedded Derivatives. As described in Note 1 under “Revenue
Recognition,” certain FCX copper concentrate, copper cathode
and gold sales contracts provide for provisional pricing primarily
based on the LME price (copper) or the COMEX price (copper) and
the London price (gold) at the time of shipment as specified in the
contract. Similarly, FCX purchases copper under contracts that
provide for provisional pricing. FCX applies the normal purchases
and normal sales scope exception in accordance with derivatives
and hedge accounting guidance to the host sales agreements
since the contracts do not allow for net settlement and always
result in physical delivery. Sales and purchases with a provisional
sales price contain an embedded derivative (i.e., the price
settlement mechanism is settled after the time of delivery) that is
required to be bifurcated from the host contract. The host contract
is the sale or purchase of the metals contained in the concentrates
or cathodes at the then-current LME or COMEX price (copper) or
the London price (gold) as defined in the contract. Mark-to-market
price fluctuations recorded through the settlement date are