Freeport-McMoRan 2013 Annual Report Download - page 123

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 ANNUAL REPORT | 121
Long-term debt, including current portion, is not actively traded
and is valued using prices obtained from a readily available
pricing source and, as such, is classified within Level 2 of the fair
value hierarchy.
At December 31, 2012, FCX’s investment in MMR’s 5.75%
Convertible Perpetual Preferred Stock, Series 2 (MMR investment)
was not actively traded; therefore, FCX valued its MMR
investment based on a pricing simulation model that used the
quoted market prices of MMR’s publicly traded common stock as
the most significant observable input and other inputs, such as
expected volatility, expected settlement date, and risk-free
interest rate. Therefore, this investment was classified within
Level 2 of the fair value hierarchy. FCX’s shares of MMR’s 5.75%
Convertible Perpetual Preferred Stock, Series 2 were canceled in
connection with the acquisition of MMR.
A summary of the changes in the fair value of FCX’s Level 3
instruments follows:
Plains
Crude Oil Offshore
Options Warrants
Fair value at December 31, 2012 $ — $ —
Derivative financial instruments assumed
in the PXP acquisition (83) (10)
Net realized losses (38)
a
—
Net unrealized (losses) gains included in earnings
related to assets and liabilities still held at the
end of the period (230)
b
8
c
Settlement payments 42 —
Fair value at December 31, 2013 $ (3 0 9) $ (2 )
a. Included net realized losses of $37 million recorded in revenues and $1 million of interest
expense associated with the deferred premiums for the seven-month period from June 1,
2013, to December 31, 2013.
b. Included unrealized losses of $228 million recorded in revenues and $2 million of interest
expense associated with the deferred premiums.
c. Recorded in other (expense) income, net.
The techniques described above may produce a fair value
calculation that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, while FCX believes
its valuation techniques are appropriate and consistent with
other market participants, the use of different techniques or
assumptions to determine fair value of certain financial instruments
could result in a different fair value measurement at the reporting
date. There have been no changes in the techniques used at
December 31, 2013.
Refer to Note 2 for the levels within the fair value hierarchy
associated with other assets acquired, liabilities assumed and
redeemable noncontrolling interest related to second-quarter
2013 acquisitions.
FCX’s derivative financial instruments for crude oil options are
valued using an option pricing model, which uses various
observable inputs including IntercontinentalExchange, Inc. (ICE)
crude oil prices, volatilities, interest rates and contract terms.
FCX’s derivative financial instruments for natural gas swaps are
valued using a pricing model that has various observable inputs
including NYMEX price quotations, interest rates and contract
terms. Valuations are adjusted for credit quality, using the
counterparties’ credit quality for asset balances and FCX’s credit
quality for liability balances. For asset balances, FCX uses the
credit default swap value for counterparties when available or the
spread between the risk-free interest rate and the yield rate on
the counterparties’ publicly traded debt for similar instruments
(which considers the impact of netting agreements on counterparty
credit risk, including whether the position with the counterparty is
a net asset or net liability). The 2014 natural gas swaps are classified
within Level 2 of the fair value hierarchy because the inputs used
in the valuation models are directly or indirectly observable for
substantially the full term of the instruments. The 2014 and 2015
crude oil options are classified within Level 3 of the fair value
hierarchy because the inputs used in the valuation models are not
observable for substantially the full term of the instruments. The
significant unobservable inputs used in the fair value measurement
of the crude oil options are implied volatilities and deferred
premiums. Significant increases (decreases) in implied volatilities
in isolation would result in a significantly higher (lower) fair value
measurement. The implied volatilities ranged from 17 percent
to 45 percent, with a weighted average of 23 percent. The deferred
premiums ranged from $5.15 per barrel to $7.22 per barrel, with
a weighted average of $6.33 per barrel. Refer to Note 14 for further
discussion of these derivative financial instruments.
FCX’s derivative financial instruments for copper futures and
swap contracts and copper forward contracts that are traded on
the respective exchanges are classified within Level 1 of the fair
value hierarchy because they are valued using quoted monthly
COMEX or LME prices at each reporting date based on the month
of maturity (refer to Note 14 for further discussion). Certain of
these contracts are traded on the over-the-counter market and are
classified within Level 2 of the fair value hierarchy based on
COMEX and LME forward prices.
The fair value of warrants associated with the Plains Offshore
Preferred Stock was determined with an option pricing model
that used unobservable inputs. The inputs used in the valuation
model are the estimated fair value of the underlying Plains
Offshore common stock, expected exercise price, expected term,
expected volatility and risk-free interest rate. The assumptions
used in the valuation model are highly subjective because
the common stock of Plains Offshore is not publicly traded. As a
result, these warrants are classified within Level 3 of the fair
value hierarchy. Refer to Note 2 for further discussion of the
Plains Offshore warrants.