Freeport-McMoRan 2013 Annual Report Download - page 120

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
118 | FREEPORT-McMoRan
FCX’s commodity contracts have netting arrangements with
counterparties with which the right of offset exists, and it is FCX’s
policy to offset balances by counterparty on the balance sheet.
FCX’s embedded derivatives on provisional sales/purchases are
netted with the corresponding outstanding receivable/payable
balances. A summary of these unsettled commodity contracts
that are offset in the balance sheet follows:
Assets Liabilities
December 31, 2013 2012 2013 2012
Gross amounts recognized:
Commodity contracts:
Embedded derivatives on provisional
sales/purchase contracts $ 63 $ 36 $ 16 $ 27
Crude oil and natural gas derivatives — — 313 —
Copper derivatives 6 5 1 1
69 41 330 28
Less gross amounts of offset:
Commodity contracts:
Embedded derivatives on provisional
sales/purchase contracts 10 8 10 8
Crude oil and natural gas derivatives — — — —
Copper derivatives — — — —
10 8 10 8
Net amounts presented in balance sheet:
Commodity contracts:
Embedded derivatives on provisional
sales/purchase contracts 53 28 6 19
Crude oil and natural gas derivatives — — 313 —
Copper derivatives 6 5 1 1
$ 59 $ 33 $ 320 $ 20
Balance sheet classification:
Trade accounts receivable $ 53 $ 24 $ — $ 9
Other current assets 6 5 — —
Accounts payable and accrued liabilities — 4 205 11
Other liabilities — — 115 —
$ 59 $ 33 $ 320 $ 20
Credit Risk. FCX is exposed to credit loss when financial institutions
with which FCX has entered into derivative transactions
(commodity, foreign exchange and interest rate swaps) are unable
to pay. To minimize the risk of such losses, FCX uses counterparties
that meet certain credit requirements and periodically reviews
the creditworthiness of these counterparties. FCX does not
anticipate that any of the counterparties it deals with will default
on their obligations. As of December 31, 2013, the maximum
amount of credit exposure associated with derivative transactions
was $54 million.
Other Financial Instruments. Other financial instruments include
cash and cash equivalents, accounts receivable, investment
securities, legally restricted funds, accounts payable and accrued
liabilities, dividends payable and long-term debt. The carrying value
for cash and cash equivalents (which included time deposits of
less than the fixed price, FCX receives the difference between the
fixed price and the Henry Hub index price. FCX pays the difference
between the index price and the fixed price if the Henry Hub
index price is greater than the fixed price.
Copper Forward Contracts. Atlantic Copper, FCX’s wholly
owned smelting and refining unit in Spain, enters into forward
copper contracts designed to hedge its copper price risk
whenever its physical purchases and sales pricing periods do not
match. These economic hedge transactions are intended to hedge
against changes in copper prices, with the mark-to-market
hedging gains or losses recorded in cost of sales. At December 31,
2013, Atlantic Copper held net forward copper sales contracts for
10 million pounds at an average contract price of $3.27 per pound,
with maturities through February 2014.
Summary of Gains (Losses). A summary of the realized and
unrealized gains (losses) recognized in income before income
taxes and equity in affiliated companies’ net earnings for
commodity contracts that do not qualify as hedge transactions,
including embedded derivatives, for the years ended
December 31 follows:
2013 2012 2011
Embedded derivatives in provisional
copper and gold sales contracts
a
$ (136) $ 77 $ (519)
Crude oil options
a
(344) — —
Natural gas swaps
a
10 — —
Copper forward contracts
b
3 15 (2)
a. Amounts recorded in revenues.
b. Amounts recorded in cost of sales as production and delivery costs.
Unsettled Derivative Financial Instruments
A summary of the fair values of unsettled commodity derivative
financial instruments follows:
December 31, 2013 2012
Commodity Derivative Assets:
Derivatives designated as hedging instruments:
Copper futures and swap contracts
a
$ 6 $ 5
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper and
gold sales/purchase contracts 63 36
Total derivative assets $ 69 $ 41
Commodity Derivative Liabilities:
Derivatives designated as hedging instruments:
Copper futures and swap contracts
a
$ — $ 1
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper and
gold sales/purchase contracts 16 27
Crude oil options
b
309 —
Natural gas swaps 4 —
Copper forward contracts 1 —
Total derivative liabilities $ 330 $ 28
a. FCX had paid $1 million to brokers at December 31, 2013, and $7 million at December 31,
2012, for margin requirements (recorded in other current assets).
b. Included $444 million for deferred premiums and accrued interest at December 31, 2013.