FCX Q313 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
Commission File Number: 001-11307-01
Freeport-McMoRan Copper & Gold Inc.
(Exact name of registrant as specified in its charter)
Delaware
74-2480931
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
333 North Central Avenue
 
Phoenix, AZ
85004-2189
(Address of principal executive offices)
(Zip Code)
(602) 366-8100
(Registrant's telephone number, including area code)
 
 
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.
þ Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).       þ Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ         Accelerated filer ¨          Non-accelerated filer ¨         Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes þ No

On October 31, 2013, there were issued and outstanding 1,038,155,157 shares of the registrant’s common stock, par value $0.10 per share.


FREEPORT-McMoRan COPPER & GOLD INC.

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
.


2
Table of Contents                 


Part I.
FINANCIAL INFORMATION

Item 1.
Financial Statements.

FREEPORT-McMoRan COPPER & GOLD INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 
September 30,
2013
 
December 31,
2012
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,219

 
$
3,705

Trade accounts receivable
1,749

 
927

Other accounts receivable
480

 
702

Inventories:
 
 
 
Materials and supplies, net
1,762

 
1,504

Mill and leach stockpiles
1,744

 
1,672

Product
1,347

 
1,400

Other current assets
305

 
387

Total current assets
9,606

 
10,297

Property, plant, equipment and development costs, net
46,647

 
20,999

Long-term mill and leach stockpiles
2,304

 
1,955

Goodwill
1,932

 
—

Other assets
2,109

 
2,189

Total assets
$
62,598

 
$
35,440

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
3,698

 
$
2,708

Dividends payable
332

 
299

Current portion of reclamation and environmental obligations
257

 
241

Accrued income taxes
141

 
93

Current portion of debt
70

 
2

Total current liabilities
4,498

 
3,343

Long-term debt, less current portion
21,053

 
3,525

Deferred income taxes
6,922

 
3,490

Reclamation and environmental obligations, less current portion
3,077

 
2,127

Other liabilities
1,774

 
1,644

Total liabilities
37,324

 
14,129

 
 
 
 
Redeemable noncontrolling interest
720

 
—

 
 
 
 
Equity:
 
 
 
FCX stockholders’ equity:
 
 
 
Common stock
117

 
107

Capital in excess of par value
22,092

 
19,119

Retained earnings
2,361

 
2,399

Accumulated other comprehensive loss
(484
)
 
(506
)
Common stock held in treasury
(3,681
)
 
(3,576
)
Total FCX stockholders’ equity
20,405

 
17,543

Noncontrolling interests
4,149

 
3,768

Total equity
24,554

 
21,311

Total liabilities and equity
$
62,598

 
$
35,440

 
The accompanying notes are an integral part of these consolidated financial statements.

3
Table of Contents                 


FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In millions, except per share amounts)
Revenues
$
6,165

 
$
4,417

 
$
15,036

 
$
13,497

Cost of sales:
 
 
 
 
 
 
 
Production and delivery
3,332

 
2,592

 
8,904

 
7,642

Depreciation, depletion and amortization
919

 
298

 
1,778

 
856

Total cost of sales
4,251

 
2,890

 
10,682

 
8,498

Selling, general and administrative expenses
158

 
110

 
457

 
311

Mining exploration and research expenses
57

 
79

 
173

 
214

Environmental obligations and shutdown costs
(8
)
 
(73
)
 
23

 
18

Total costs and expenses
4,458

 
3,006

 
11,335

 
9,041

Operating income
1,707

 
1,411

 
3,701

 
4,456

Interest expense, net
(162
)
 
(42
)
 
(351
)
 
(148
)
Losses on early extinguishment of debt
—

 
—

 
(45
)
 
(168
)
Gain on investment in McMoRan Exploration Co.
—

 
—

 
128

 
—

Other income (expense), net
3

 
(15
)
 
13

 
23

Income before income taxes and equity in affiliated companies' net earnings (losses)
1,548

 
1,354

 
3,446

 
4,163

Provision for income taxes
(499
)
 
(215
)
 
(967
)
 
(1,128
)
Equity in affiliated companies’ net earnings (losses)
(1
)
 
1

 
3

 
—

Net income
1,048

 
1,140

 
2,482

 
3,035

Net income and preferred dividends attributable to noncontrolling interests
(227
)
 
(316
)
 
(531
)
 
(737
)
Net income attributable to FCX common stockholders
$
821

 
$
824

 
$
1,951

 
$
2,298

 
 
 
 
 
 
 
 
Net income per share attributable to FCX common stockholders:
 
 
 
 
 
 
 
Basic
$
0.79

 
$
0.87

 
$
1.97

 
$
2.42

Diluted
$
0.79

 
$
0.86

 
$
1.96

 
$
2.41

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
1,038

 
949

 
989

 
949

Diluted
1,043

 
953

 
993

 
953

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.3125

 
$
0.3125

 
$
1.9375

 
$
0.9375

 
The accompanying notes are an integral part of these consolidated financial statements.


4
Table of Contents                 


FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(In millions)
Net income
$
1,048

 
$
1,140

 
$
2,482

 
$
3,035

 
 
 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Defined benefit plans:
 
 
 
 
 
 
 
Amortization of unrecognized amounts included in net periodic benefit costs
6

 
7

 
18

 
22

Adjustment to deferred tax valuation allowance
—

 
—

 
—

 
5

Unrealized (losses) gains on securities arising during the period
(1
)
 
1

 
(1
)
 
—

Translation adjustments arising during the period
5

 
—

 
4

 
(1
)
Other comprehensive income
10

 
8

 
21

 
26

 
 
 
 
 
 
 
 
Total comprehensive income
1,058

 
1,148

 
2,503

 
3,061

Total comprehensive income and preferred dividends attributable to noncontrolling interests
(226
)
 
(315
)
 
(530
)
 
(737
)
Total comprehensive income attributable to FCX common stockholders
$
832

 
$
833

 
$
1,973

 
$
2,324


The accompanying notes are an integral part of these consolidated financial statements.




5
Table of Contents                 


FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended
 
September 30,
 
2013
 
2012
 
(In millions)
Cash flow from operating activities:
 
 
 
Net income
$
2,482

 
$
3,035

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
1,778

 
856

Net losses on oil and gas derivative contracts
205

 
—

Gain on investment in McMoRan Exploration Co. (MMR)
(128
)
 
—

Stock-based compensation
94

 
77

Pension plans contributions
(62
)
 
(114
)
Net charges for reclamation and environmental obligations, including accretion
98

 
64

Payments for reclamation and environmental obligations
(166
)
 
(148
)
Losses on early extinguishment of debt
45

 
168

Deferred income taxes
169

 
223

Increase in long-term mill and leach stockpiles
(348
)
 
(184
)
Other, net
65

 
71

(Increases) decreases in working capital and other tax payments, excluding amounts from acquisitions:
 
 
 
Accounts receivable
51

 
(603
)
Inventories
(66
)
 
(581
)
Other current assets
162

 
(33
)
Accounts payable and accrued liabilities
(596
)
 
78

Accrued income taxes and other tax payments
(40
)
 
(400
)
Net cash provided by operating activities
3,743

 
2,509

 
 
 
 
Cash flow from investing activities:
 
 
 
Capital expenditures:
 
 
 
North America copper mines
(795
)
 
(568
)
South America
(734
)
 
(659
)
Indonesia
(720
)
 
(624
)
Africa
(155
)
 
(428
)
Molybdenum mines
(128
)
 
(189
)
Oil and gas operations
(928
)
 
—

Other
(163
)
 
(50
)
Acquisition of Plains Exploration & Production Company, net of cash acquired
(3,465
)
 
—

Acquisition of MMR, net of cash acquired
(1,628
)
 
—

Acquisition of cobalt chemical business, net of cash acquired
(348
)
 
—

Restricted cash and other, net
(24
)
 
(19
)
Net cash used in investing activities
(9,088
)
 
(2,537
)
 
 
 
 
Cash flow from financing activities:
 
 
 
Proceeds from debt
11,229

 
3,023

Repayments of debt
(4,816
)
 
(3,179
)
Redemption of MMR preferred stock
(227
)
 
—

Cash dividends and distributions paid:
 
 
 
Common stock
(1,957
)
 
(832
)
Noncontrolling interests
(157
)
 
(76
)
Contributions from noncontrolling interests
—

 
15

Debt financing costs
(113
)
 
(22
)
Net payments for stock-based awards
(101
)
 
(3
)
Excess tax benefit from stock-based awards
1

 
7

Net cash provided by (used in) financing activities
3,859

 
(1,067
)
 
 
 
 
Net decrease in cash and cash equivalents
(1,486
)
 
(1,095
)
Cash and cash equivalents at beginning of year
3,705

 
4,822

Cash and cash equivalents at end of period
$
2,219

 
$
3,727

The accompanying notes are an integral part of these consolidated financial statements.

6
Table of Contents                 


FREEPORT-McMoRan COPPER & GOLD INC.
CONSOLIDATED STATEMENT OF EQUITY (Unaudited)

 
FCX Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
Retained
Earnings
 
Accumu-
lated
Other Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total FCX
Stock-holders' Equity
 
 
 
 
 
Number
of
Shares
 
At Par
Value
 
Capital in
Excess of
Par Value
 
 
 
Number
of
Shares
 
At
Cost
 
 
Non-
controlling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Balance at December 31, 2012
1,073

 
$
107

 
$
19,119

 
$
2,399

 
$
(506
)
 
124

 
$
(3,576
)
 
$
17,543

 
$
3,768

 
$
21,311

Common stock issued to acquire Plains Exploration & Production Co.
91

 
9

 
2,822

 
—

 
—

 
—

 
—

 
2,831

 
—

 
2,831

Exchange of employee stock-based awards in connection with acquisitions
—

 
—

 
67

 
—

 
—

 
—

 
—

 
67

 
—

 
67

Exercised and issued stock-based awards
1

 
1

 
4

 
—

 
—

 
—

 
—

 
5

 
—

 
5

Stock-based compensation
—

 
—

 
89

 
—

 
—

 
—

 
—

 
89

 
—

 
89

Reserve on tax benefit for stock-based awards
—

 
—

 
(2
)
 
—

 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Tender of shares for stock-based awards
—

 
—

 
—

 
—

 
—

 
3

 
(105
)
 
(105
)
 
—

 
(105
)
Dividends on common stock
—

 
—

 
—

 
(1,989
)
 
—

 
—

 
—

 
(1,989
)
 
—

 
(1,989
)
Dividends to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(144
)
 
(144
)
Noncontrolling interests' share of contributed capital in subsidiary
—

 
—

 
(7
)
 
—

 
—

 
—

 
—

 
(7
)
 
7

 
—

Redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(12
)
 
(12
)
Total comprehensive income
—

 
—

 
—

 
1,951

 
22

 
—

 
—

 
1,973

 
530

 
2,503

Balance at September 30, 2013
1,165

 
$
117

 
$
22,092

 
$
2,361

 
$
(484
)
 
127

 
$
(3,681
)
 
$
20,405

 
$
4,149

 
$
24,554

 
The accompanying notes are an integral part of these consolidated financial statements.


7
Table of Contents                 


FREEPORT-McMoRan COPPER & GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. GENERAL INFORMATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Copper & Gold Inc.’s (FCX) consolidated financial statements and notes contained in its annual report on Form 10-K for the year ended December 31, 2012. The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. With the exception of certain adjustments associated with the acquisition of Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR), collectively known as Freeport-McMoRan Oil & Gas (FM O&G), all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month and nine-month periods ended September 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

As further discussed in Note 2, FCX completed its acquisitions of PXP on May 31, 2013, and MMR on June 3, 2013. The financial results for the nine months ended September 30, 2013, include PXP's results beginning June 1, 2013, and MMR's results beginning June 4, 2013.

2. ACQUISITIONS
Oil and Gas. PXP and MMR are both wholly owned consolidated subsidiaries of FCX. These acquisitions added a portfolio of oil and gas assets to FCX's global mining business, creating a U.S.-based natural resource company. The portfolio of oil and gas assets includes oil production facilities and growth potential in the Deepwater Gulf of Mexico (GOM), oil production from the onshore Eagle Ford shale play in Texas, oil production facilities onshore and offshore California, onshore natural gas resources in the Haynesville shale play in Louisiana, and a position in the emerging shallow water, ultra-deep gas trend on the Shelf of the GOM and onshore in South Louisiana. The acquisitions have been accounted for under the acquisition method as required by Accounting Standards Codification (ASC) Topic 805, “Business Combinations,” with FCX as the acquirer. As further discussed in Note 7, FCX issued $6.5 billion of unsecured senior notes in March 2013 for net proceeds of $6.4 billion, which was used, together with borrowings under a $4.0 billion unsecured five-year bank term loan, to fund the cash portion of the merger consideration for both transactions, to repay certain indebtedness of PXP and for general corporate purposes.

In the PXP acquisition, FCX acquired PXP for per-share consideration equivalent to 0.6531 shares of FCX common stock and $25.00 in cash. PXP stockholders had the right to elect to receive merger consideration in the form of cash or shares of FCX common stock, subject to the proration provisions in the merger agreement. Based on the final results of the merger consideration elections and as set forth in the merger agreement, FCX issued 91 million shares of its common stock and paid $3.8 billion in cash (which includes $411 million for the value of the $3 per share special dividend paid to PXP stockholders on May 31, 2013).

Following is a summary of the $6.6 billion purchase price for PXP (in millions, except the exchange ratio and closing share price):
Number of shares of PXP common stock acquired
132.280

a 
Exchange ratio of FCX common stock for each PXP share
0.6531

 
 
86.392

 
Shares of FCX common stock issued for certain PXP equity awards
4.769

 
Total shares of FCX common stock issued
91.161

 
 
 
 
Closing share price of FCX common stock at May 31, 2013
$
31.05

 
FCX stock consideration
$
2,831

 
Cash consideration
3,725

b 
Employee stock-based awards, primarily cash-settled stock-based awards
78

 
Total purchase price
$
6,634

 
a.
Adjusted for cash paid in lieu of fractional shares.
b.
Cash consideration includes the payment of $25.00 in cash for each PXP share ($3.3 billion), cash paid in lieu of any fractional shares of FCX common stock, cash paid for certain equity awards ($7 million), and the value of the $3 per share PXP special cash dividend ($411 million) paid on May 31, 2013.

8
Table of Contents                 


In the MMR acquisition, for each MMR share owned, MMR shareholders received $14.75 in cash and 1.15 units of a royalty trust, which holds a five percent overriding royalty interest in future production from MMR's ultra-deep exploration prospects that existed as of December 5, 2012, the date of the merger agreement. MMR conveyed the royalty interests to the royalty trust immediately prior to the effective time of the merger, and they were "carved out" of the mineral interests that were acquired by FCX and not considered part of purchase consideration.

Prior to June 3, 2013, FCX owned 500,000 shares of MMR's 5.75% Convertible Perpetual Preferred Stock, Series 2, which was accounted for under the cost method and recorded on FCX's balance sheet at $432 million on May 31, 2013. Through its acquisition of PXP on May 31, 2013, FCX acquired 51 million shares of MMR's common stock, which had a fair value of $848 million on that date based upon the closing market price of MMR's common stock ($16.63 per share, i.e., Level 1 measurement). As a result of FCX obtaining control of MMR on June 3, 2013, FCX remeasured its ownership interests in MMR to a fair value of $1.4 billion in accordance with ASC Topic 805, resulting in a gain of $128 million that was recorded in second-quarter 2013. Fair value was calculated using the closing quoted market price of MMR's common stock on June 3, 2013, of $16.75 per share (i.e., Level 1 measurement for the common stock and Level 2 measurement for the preferred stock).

Following is a summary of the $3.1 billion purchase price for MMR (in millions, except the closing share price):
Number of shares of MMR common stock acquired
112.362

a 
Cash consideration of $14.75 per share
$
14.75

 
Cash consideration paid by FCX
$
1,657

 
Employee stock-based awards
63

 
Total
1,720

 
 
 
 
Fair value of FCX's investment in 51 million shares of MMR common stock acquired on
 
 
May 31, 2013, through the acquisition of PXP
854

 
Fair value of FCX's investment in MMR's 5.75% Convertible Perpetual Preferred Stock, Series 2
554

 
Total purchase price
$
3,128

 
a. Excluded 51 million shares of MMR common stock owned by FCX through its acquisition of PXP on May 31, 2013.

The final valuation of assets acquired, liabilities assumed and redeemable noncontrolling interest is not complete and the net adjustments to those values may result in changes to goodwill and other carrying amounts initially assigned to the assets, liabilities and redeemable noncontrolling interest based on the preliminary fair value analysis. The following table summarizes the preliminary purchase price allocations for PXP and MMR (in millions):
 
PXP
 
MMR
 
Eliminations
 
Total
Current assets
$
1,192

 
$
98

 
$
—

 
$
1,290

Oil and gas properties - full cost method:
 
 
 
 
 
 
 
Subject to depletion
11,447

 
756

 
—

 
12,203

Not subject to depletion
9,431

 
1,686

 
—

 
11,117

Property, plant and equipment
261

 
1

 
—

 
262

Investment in MMRa
848

 
—

 
(848
)
 
—

Other assets
12

 
421

 
—

 
433

Current liabilities
(907
)
 
(174
)
 
—

 
(1,081
)
Debt (current and long-term)
(10,631
)
 
(620
)
 
—

 
(11,251
)
Deferred income taxesb
(3,956
)
 
—

 
—

 
(3,956
)
Other long-term liabilities
(805
)
 
(258
)
 
—

 
(1,063
)
Redeemable noncontrolling interest
(713
)
 
(259
)
 
—

 
(972
)
Total fair value, excluding goodwill
6,179

 
1,651

 
(848
)
 
6,982

Goodwill
455

 
1,477

 
—

 
1,932

Total purchase price
$
6,634

 
$
3,128

 
$
(848
)
 
$
8,914

a.
PXP owned 51 million shares of MMR common stock, which was eliminated in FCX's condensed consolidated balance sheet at the acquisition date of MMR.
b.
Deferred income taxes have been recognized based on the estimated fair value adjustments to net assets using a 38 percent tax rate, which reflected the 35 percent federal statutory rate and a 3 percent weighted-average of the applicable statutory state tax rates (net of federal benefit).



9
Table of Contents                 


In accordance with the acquisition method of accounting, the purchase price from FCX's acquisitions of both PXP and MMR has been allocated on a preliminary basis to the assets acquired, liabilities assumed and redeemable noncontrolling interest based on their estimated fair values on the respective acquisition dates. The estimated fair values were based on preliminary estimates and are subject to change as FCX completes its analysis. The fair value estimates were based on, but not limited to quoted market prices, where available; expected future cash flows based on estimated reserve quantities; costs to produce and develop reserves; current replacement cost for similar capacity for certain fixed assets; market rate assumptions for contractual obligations; appropriate discount rates and growth rates, and oil and gas forward prices. The excess of the total consideration over the estimated fair value of the amounts initially assigned to the identifiable assets acquired, liabilities assumed and redeemable noncontrolling interest has been recorded as goodwill. Goodwill recorded in connection with the acquisitions will not be deductible for income tax purposes.

The fair value measurement of the oil and gas properties, asset retirement obligations included in other liabilities (refer to Note 8 for further discussion) and redeemable noncontrolling interest were based, in part, on significant inputs not observable in the market (as discussed above) and thus represents a Level 3 measurement. The fair value measurement of long-term debt, including the current portion, was based on prices obtained from a readily available pricing source and thus represents a Level 2 measurement.

As of September 30, 2013, FCX had not identified any material pre-acquisition contingencies where the related asset, liability or impairment is probable and the amount of the asset, liability or impairment can be reasonably estimated. Prior to the end of the purchase price allocation period, if information becomes available that an asset existed, a liability had been incurred or an asset had been impaired as of the applicable acquisition date, and the amounts can be reasonably estimated, such items will be included in the applicable purchase price allocations.

Goodwill arose on these acquisitions principally because of limited drilling activities to date and the absence of production history and material reserve data associated with the very large geologic potential of an emerging trend targeting deep-seated structures in the shallow waters of the GOM and onshore analogous to large discoveries in the deepwater GOM and other proven basins' prospects. In addition, goodwill also resulted from the requirement to recognize deferred taxes on the difference between the fair value and the tax basis of the acquired assets.

A summary of third-quarter 2013 adjustments to the preliminary fair values assigned to assets acquired, liabilities assumed and redeemable noncontrolling interest from the acquisitions follows (in millions):
 
 
PXP
 
MMR
 
Total
Increase in current assets (primarily current deferred income tax asset)
 
$
182

 
$
2

 
$
184

(Decrease) in oil and gas properties - full cost method:
 
 
 
 
 
 
Subject to depletion
 
—

 
(45
)
 
(45
)
Not subject to depletion
 
(204
)
 
(6
)
 
(210
)
Increase in other assets (deferred income tax asset)
 
—

 
22

 
22

Net (increase) in deferred income tax liability
 
(85
)
 
—

 
(85
)
Net decrease in other liabilities (primarily warrants)
 
70

 
—

 
70

Decrease in redeemable noncontrolling interest
 
36

 
—

 
36

Increase in goodwill
 
1

 
27

 
28


The third-quarter 2013 adjustments to the preliminary purchase price allocations were primarily associated with revised estimated fair values of oil and gas properties, which also resulted in adjustments to the fair value of warrants, redeemable noncontrolling interest and deferred income taxes. In addition, an adjustment was recorded to reclassify $162 million of deferred income taxes to current assets.

In third-quarter 2013, FM O&G contributed revenue of $1.2 billion and operating income of $274 million to FCX's consolidated results; for the four-month period from June 1, 2013, to September 30, 2013, FM O&G contributed revenue of $1.5 billion and operating income of $338 million. FCX's acquisition-related costs of $76 million for the first nine months of 2013 were included in selling, general and administrative expense in the consolidated statements of income. In addition, FCX deferred debt issuance costs of $96 million in connection with the debt financings of the acquisitions (refer to Note 7 for further discussion of the debt financings), which are included in other assets in the condensed consolidated balance sheet as of September 30, 2013.

10
Table of Contents                 


Redeemable Noncontrolling Interest - PXP. In 2011, PXP issued (i) 450,000 shares of Plains Offshore Operations Inc. (Plains Offshore) 8% Convertible Preferred Stock (Preferred Stock) for gross proceeds of $450 million and (ii) non-detachable warrants with an exercise price of $20 per share to purchase in aggregate 9.1 million shares of Plains Offshore's common stock. In addition, Plains Offshore issued 87 million shares of Plains Offshore Class A common stock, which will be held in escrow until the conversion and cancellation of the Preferred Stock or the exercise of the warrants. Plains Offshore holds certain of FM O&G's oil and gas properties and assets located in the GOM in water depths of 500 feet or more, including the Lucius oil field and the Phobos prospect, but excluding the properties acquired by PXP in 2012 from BP Exploration & Production Inc., BP America Production Company and Shell Offshore Inc. The Preferred Stock represents a 20 percent equity interest in Plains Offshore and is entitled to a dividend of 8 percent per annum, payable quarterly, of which 2 percent may be deferred ($20 million of accumulated deferred dividends as of September 30, 2013). The shares of Preferred Stock also fully participate, on an as-converted basis at four times, in cash dividends distributed to any class of common stockholders of Plains Offshore. Plains Offshore has not distributed any dividends to its common stockholders.
The holders of the Preferred Stock (preferred holders) have the right, at any time at their option, to convert any or all of such holder's shares of Preferred Stock and exercise any of the associated non-detachable warrants into shares of Class A common stock of Plains Offshore, at an initial conversion/exercise price of $20 per share; the conversion price is subject to adjustment as a result of certain events. Furthermore, Plains Offshore has the right to convert all or a portion of the outstanding shares of Preferred Stock if certain events occur more than 180 days after an initial public offering or a qualified public offering of Plains Offshore. FM O&G also has a right to purchase shares of Plains Offshore preferred stock, common stock and warrants under certain circumstances in order to permit the consolidation of Plains Offshore for federal income tax purposes. Additionally, at any time on or after November 17, 2016, the fifth anniversary of the closing date, FM O&G may exercise a call right to purchase all, but not less than all, of the outstanding shares of Preferred Stock and associated non-detachable warrants for cash, at a price equal to the liquidation preference described below.
At any time after November 17, 2015, the fourth anniversary of the closing date, a majority of the preferred holders may cause Plains Offshore to use its commercially reasonable efforts to consummate an exit event. An exit event, as defined in the stockholders agreement, means, at the sole option of Plains Offshore (i) the purchase by FM O&G or the redemption by Plains Offshore of all the preferred stock, warrants and common stock held by the preferred holders for the aggregate fair value thereof; (ii) a sale of Plains Offshore or a sale of all or substantially all of its assets, in each case in an arms' length transaction with a third party, at the highest price available after reasonable marketing efforts by Plains Offshore; or (iii) a qualified initial public offering. In the event that Plains Offshore fails to consummate an exit event prior to the applicable exit event deadline, the conversion price of the Preferred Stock and the exercise price of the warrants will immediately and automatically be adjusted such that all issued and outstanding shares of Preferred Stock on an as-converted basis taken together with shares of Plains Offshore common stock issuable upon exercise of the warrants, in the aggregate, will constitute 49 percent of the common equity securities of Plains Offshore on a fully diluted basis. In addition, FM O&G would be required to purchase $300 million of junior preferred stock in Plains Offshore.

The preferred holders are entitled to vote on all matters on which Plains Offshore common stockholders are entitled to vote.
In the event of liquidation of Plains Offshore, each preferred holder is entitled to receive the liquidation preference before any payment or distribution is made on any Plains Offshore junior preferred stock or common stock. A liquidation event includes any of the following events: (i) the liquidation, dissolution or winding up of Plains Offshore, whether voluntary or involuntary, (ii) a sale, consolidation or merger of Plains Offshore in which the stockholders immediately prior to such event do not own at least a majority of the outstanding shares of the surviving entity, or (iii) a sale or other disposition of all or substantially all of Plains Offshore's assets to a person other than FM O&G or its affiliates. The liquidation preference, as defined in the stockholders agreement, is equal to (i) the greater of (a) 1.25 times the initial offering price and (b) the sum of (1) the fair market value of the shares of common stock issuable upon conversion of the Preferred Stock and (2) the applicable tax adjustment amount, plus (ii) any accrued dividends and accumulated dividends.
The non-detachable warrants may be exercised at any time on the earlier of (i) November 17, 2019, the eighth anniversary of the original issue date or (ii) a termination event. A termination event is defined as the occurrence of any of (a) the conversion of the Preferred Stock, (b) the redemption of the Preferred Stock, (c) the repurchase by FM O&G or any of its affiliates of the Preferred Stock or (d) a liquidation event of Plains Offshore, described above. The non-detachable warrants are considered to be embedded derivative instruments for accounting purposes and

11
Table of Contents                 


have been assessed as not being clearly and closely related to the related Preferred Stock. Therefore, the warrants are classified as a long-term liability in the accompanying condensed consolidated balance sheet and will be adjusted to fair value each reporting period with adjustments recorded in other income (expense). The fair value measurement of the warrants was based on significant inputs not observable in the market (refer to Note 10 for discussion of valuation technique) and thus represents a Level 3 measurement.
The Preferred Stock of Plains Offshore is classified as temporary equity because of its redemption features and is therefore reported outside of permanent equity in FCX's condensed consolidated balance sheet. The redeemable noncontrolling interest totaled $719 million as of September 30, 2013. Remeasurement of the redeemable noncontrolling interest represents its initial carrying amount adjusted for any noncontrolling interest's share of net income (loss) or changes to the redemption value. Additionally, the carrying amount will be further increased by amounts representing dividends not currently declared or paid, but which are payable under the redemption features described above. Future mark-to-market adjustments to the redemption value, subject to a minimum balance of the original recorded value ($713 million) on May 31, 2013, shall be reflected in retained earnings and earnings per share. FM O&G will accrete changes in the redemption value over the period from the date FCX acquired PXP to the earliest redemption date.
Redeemable Noncontrolling Interest - MMR. The enhanced "make-whole" conversion rates triggered by FCX's acquisition of MMR expired on July 9, 2013, for MMR's 8% Convertible Perpetual Preferred Stock (8% Preferred Stock) and 5.75% Convertible Perpetual Preferred Stock, Series 1 (5.75% Preferred Stock). A summary of the conversion activity follows (in millions):
 
 
8%
 
5.75%
 
 
Preferred
 
Preferred
 
 
Stock
 
Stock
Acquisition-date (June 3, 2013) fair value
 
$
30

 
$
229

Less June 2013 conversions
 
29

 
200

Less July 2013 conversions
 
—

 
29

Remaining balance at make-whole expiration dates
 
$
1

 
$
—

 
 
 
 
 
Royalty trust units released upon conversions:
 
 
 
 
June 2013 conversions
 
2.0

 
13.7

July 2013 conversions
 
—

 
2.0

Total
 
2.0

 
15.7


The conversions of the 8% Preferred Stock and 5.75% Preferred Stock required cash payments of $227 million and the release of royalty trust units with a fair value of $31 million at the acquisition date.

Unaudited Pro Forma Consolidated Financial Information. The following unaudited pro forma financial information has been prepared to reflect the acquisitions of PXP and MMR. The unaudited pro forma financial information combines the historical statements of income of FCX, PXP and MMR (including the pro forma effects of PXP's GOM acquisition that was completed on November 30, 2012) for the three-month period ended September 30, 2012, and the nine-month periods ended September 30, 2013 and 2012, giving effect to the mergers as if they had occurred on January 1, 2012. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the acquisitions.
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions, except per share amounts)
 
Revenues
$
6,165

 
$
5,406

 
$
17,190

 
$
16,955

 
Operating income
1,707

 
1,575

 
4,617

 
5,081

 
Income from continuing operations
1,048

 
898

 
2,762

 
3,161

 
Net income attributable to FCX common stockholders
821

 
573

 
2,213

 
2,397

 
 
 
 
 
 
 
 
 
 
Net income per share attributable to FCX common stockholders:
 
 
 
 
 
 
 
 
Basic
$
0.79

 
$
0.55

 
$
2.13

 
$
2.30

 
Diluted
0.79

 
0.55

 
2.12

 
2.29

 


12
Table of Contents                 


The above unaudited pro forma consolidated information has been prepared for illustrative purposes only and is not intended to be indicative of the results of operations that actually would have occurred, or the results of operations expected in future periods, had the events reflected herein occurred on the dates indicated. The most significant pro forma adjustments to income from continuing operations for the nine-month period ended September 30, 2013, were to exclude $519 million of acquisition-related costs, the net tax benefit of $183 million of acquisition-related adjustments and the $128 million gain on the investment in MMR and to include them in the nine-month period ended September 30, 2012. Additionally, for the nine-month period ended September 30, 2013, the pro forma consolidated information excluded a $77 million gain on the sale of MMR oil and gas properties because of the full cost method of accounting.

Cobalt Chemical Refinery Business. On March 29, 2013, FCX, through a newly formed consolidated joint venture, completed the acquisition of a cobalt chemical refinery in Kokkola, Finland, and the related sales and marketing business. The acquisition provides direct end-market access for the cobalt hydroxide production at Tenke Fungurume Mining S.A.R.L. (TFM or Tenke). The joint venture operates under the name Freeport Cobalt, and FCX is the operator with an effective 56 percent ownership interest. The remaining effective ownership interest is held by FCX's partners in TFM, including 24 percent by Lundin Mining Corporation (Lundin) and 20 percent by La Générale des Carrières et des Mines (Gécamines). Consideration paid was $382 million, which included $34 million for cash acquired, and was funded 70 percent by FCX and 30 percent by Lundin. Under the terms of the acquisition agreement, there is also the potential for additional consideration of up to $110 million over a period of three years, contingent upon the achievement of revenue-based performance targets. The initial estimates of the fair value of assets acquired and liabilities assumed included in FCX's consolidated financial statements as of September 30, 2013, are not final.

3. SIGNIFICANT ACCOUNTING POLICIES
As a result of the acquisitions of PXP and MMR, the following supplements the significant accounting policies contained in FCX's annual report on Form 10-K for the year ended December 31, 2012.

Basis of Presentation. FCX began consolidating its wholly owned subsidiaries, PXP and MMR, effective June 1, 2013, and June 4, 2013, respectively. PXP's and MMR's financial information consolidates the results of operations and the assets and liabilities for their majority-owned subsidiaries. Investments in unincorporated joint ventures, as well as individual interests in oil and gas exploration, development and production activities, are reflected using the proportionate consolidation method. All significant intercompany transactions have been eliminated.

Use of Estimates. As a result of the acquisitions of PXP and MMR, other significant areas requiring the use of management estimates include oil and gas reserve estimation; timing of transfers of oil and gas properties not subject to amortization into the full cost pool; determination of fair value of assets acquired, liabilities assumed and redeemable noncontrolling interest, and recognition of goodwill and deferred taxes in connection with business combinations; and valuation of derivative instruments. Actual results could differ from those estimates. In particular, initial estimates of acquisition fair values are preliminary and subject to change as the related valuations are finalized.

Goodwill. Goodwill has an indefinite useful life and is not amortized, but rather is tested for impairment at least annually, unless events occur or circumstances change between annual tests that would more likely than not reduce the fair value of a related reporting unit below its carrying value. Impairment occurs when the carrying amount of goodwill exceeds its implied fair value. FCX uses a discounted cash flow model to determine if the carrying value of the reporting unit, including goodwill, is less than the fair value of the reporting unit. FCX's approach to allocating goodwill includes the identification of the reporting unit it believes has contributed to the excess purchase price and includes consideration of the reporting unit's potential for future growth. Goodwill arose with FCX's acquisitions of PXP and MMR, which has been allocated to the oil and gas reporting unit. Events affecting oil and gas prices may cause a decrease in the fair value of the reporting unit, and FCX could have an impairment of its goodwill in future periods. When a sale of oil and gas properties occurs, goodwill is allocated to that property based on the relationship of the fair value of the property sold to the total reporting unit's fair value. A significant sale of oil and gas properties may represent a triggering event that requires goodwill to be evaluated for impairment.


13
Table of Contents                 


Oil and Gas Properties. FCX follows the full cost method of accounting whereby all costs associated with oil and gas property acquisitions, exploration and development activities are capitalized. Such costs include internal general and administrative costs, such as payroll and related benefits and costs directly attributable to employees engaged in acquisition, exploration and development activities. General and administrative costs associated with production, operations, marketing and general corporate activities are charged to expense as incurred. Capitalized costs, along with estimated future costs to develop proved reserves and asset retirement costs that are not already included in oil and gas properties, net of related salvage value, are amortized to expense under the unit-of-production method using engineers' estimates of proved oil and gas reserves. The costs of unproved oil and gas properties are excluded from amortization until the properties are evaluated. Interest is capitalized on oil and gas properties not subject to amortization and in the process of development. Proceeds from the sale of oil and gas properties are accounted for as reductions to capitalized costs unless such sale causes a 25 percent or greater change in the total proved reserves of oil and gas attributable to a cost center, in which case a gain or loss is recognized.

As of September 30, 2013, property, plant, equipment and development costs, net on the condensed consolidated balance sheet included $12.2 billion for oil and gas properties subject to depletion and $11.1 billion for oil and gas properties not subject to depletion.

Under the U.S. Securities and Exchange Commission's (SEC) full cost accounting rules, FCX reviews the carrying value of its oil and gas properties each quarter on a country-by-country basis, with each country representing a cost center. FCX's oil and gas operations currently have one cost center, the U.S. Under these rules, capitalized costs of oil and gas properties (net of accumulated depreciation, depletion and amortization, and related deferred income taxes) for each cost center may not exceed a “ceiling” equal to:

•
the present value, discounted at 10 percent, of estimated future net cash flows from proved oil and gas reserves, net of estimated future income taxes; plus
•
the cost of unproved properties not being amortized; plus
•
the lower of cost or estimated fair value of unproved properties included in the costs being amortized (net of related tax effects).

These rules generally require that FCX price its future oil and gas production at the trailing twelve-month average of the first-day-of-the-month reference prices as adjusted for location and quality differentials. FCX reference prices are West Texas Intermediate (WTI) for oil and the Henry Hub spot price for gas. Such prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. The reserve estimates exclude the effect of any oil and gas derivatives FCX has in place. The estimated future net cash flows exclude future cash outflows associated with settling asset retirement obligations included in the net book value of the oil and gas properties. The rules require an impairment if the capitalized costs exceed this “ceiling.” At September 30, 2013, the ceiling with respect to FCX's oil and gas properties exceeded the net capitalized costs, and therefore, no impairment was recorded.

14
Table of Contents                 



4. EARNINGS PER SHARE
FCX’s basic net income per share of common stock was calculated by dividing net income attributable to FCX common stockholders by the weighted-average shares of common stock outstanding during the period. Following is a reconciliation of net income and weighted-average shares of common stock outstanding for purposes of calculating diluted net income per share (in millions, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
Net income
$
1,048

 
$
1,140

 
$
2,482

 
$
3,035

 
Net income attributable to noncontrolling interests
(218
)
 
(316
)
 
(519
)
 
(737
)
 
Preferred dividends on redeemable noncontrolling interest
(9
)
 
—

 
(12
)
 
—

 
Net income attributable to FCX common stockholders
$
821

 
$
824

 
$
1,951

 
$
2,298

 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding
1,038

 
949

 
989

 
949

 
Add shares issuable upon exercise or vesting of
 
 
 
 
 
 
 
 
dilutive stock options and restricted stock units
5

 
4

 
4

 
4

a 
Weighted-average shares of common stock outstanding
 
 
 
 
 
 
 
 
for purposes of calculating diluted net income per share
1,043

 
953

 
993

 
953

 
 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to FCX common stockholders
$
0.79

 
$
0.86

 
$
1.96

 
$
2.41

 
a.
Excluded shares of common stock associated with outstanding stock options with exercise prices less than the average market price of FCX's common stock that were anti-dilutive based on the treasury stock method totaled approximately one million for the nine months ended September 30, 2012.

Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net income per share of common stock. Excluded amounts were 34 million stock options with a weighted-average exercise price of $40.11 per option for third-quarter 2013, and approximately 32 million stock options with a weighted average exercise price of $40.63 for the nine months ended September 30, 2013. Stock options for approximately 24 million shares with a weighted-average exercise price of $42.52 per option were excluded for third-quarter 2012, and stock options for approximately 19 million shares with a weighted-average exercise price of $43.80 were excluded for the nine months ended September 30, 2012.

5. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories, excluding mill and leach stockpiles, follow (in millions):
 
September 30,
2013
 
December 31, 2012
Raw materials (primarily concentrates)
$
154

 
$
237

Work-in-processa
80

 
252

Finished goodsb
1,113

 
911

Total product inventories
$
1,347

 
$
1,400

 
 
 
 
Total materials and supplies, netc
$
1,762

 
$
1,504

a.
FCX's mining operations also have work-in-process inventories that are included in mill and leach stockpiles.
b.
Primarily included molybdenum concentrates and copper concentrates, anodes, cathodes and rod.
c.
Materials and supplies inventory was net of obsolescence reserves totaling $30 million at September 30, 2013, and $27 million at December 31, 2012.


15
Table of Contents                 


A summary of mill and leach stockpiles follows (in millions):
 
September 30,
2013
 
December 31, 2012
Current:
 
 
 
Mill stockpiles
$
85

 
$
104

Leach stockpiles
1,659

 
1,568

Total current mill and leach stockpiles
$
1,744

 
$
1,672

Long-term:a
 
 
 
Mill stockpiles
$
672

 
$
615

Leach stockpiles
1,632

 
1,340

Total long-term mill and leach stockpiles
$
2,304

 
$
1,955

 
a.
Metals in stockpiles not expected to be recovered within the next 12 months.

6. INCOME TAXES
Geographic sources of FCX's provision for income taxes follow (in millions):
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
United States operations
$
99

 
$
98

 
$
76

a 
$
291

 
International operations
400

 
117

b 
891

 
837

b 
Total
$
499

 
$
215

 
$
967

 
$
1,128

 
a.
As a result of second-quarter 2013 oil and gas acquisitions, FCX recognized a net tax benefit of $183 million consisting of income tax benefits of $190 million associated with net reductions in FCX's valuation allowances and $69 million related to the release of the deferred tax liability on PXP's investment in MMR common stock, partially offset by income tax expense of $76 million associated with the write off of deferred tax assets related to environmental liabilities.
b.
Included a net tax benefit of $234 million associated with an adjustment to Cerro Verde's deferred income tax liability.

Excluding the net tax benefit of $183 million for acquisition-related adjustments in 2013 and Cerro Verde's net deferred tax liability adjustment of $234 million in 2012, FCX’s consolidated effective income tax rate was 33 percent for the first nine months of 2013 and 2012. Variations in the relative proportions of jurisdictional income can result in fluctuations to FCX’s consolidated effective income tax rate.

16
Table of Contents                 



7. DEBT
At September 30, 2013, FCX had $21.1 billion in debt, which included $10.5 billion of acquisition-related debt and $7.1 billion of debt assumed in the acquisitions of PXP and MMR. As of September 30, 2013, debt included $683 million of fair value adjustments related to the debt assumed in the acquisitions of PXP and MMR. All of FCX's debt is unsecured.

A summary of the changes in debt for the nine months ended September 30, 2013, follows (in millions):
Balance at December 31, 2012
 
$
3,527

Additions:
 
 
Acquisition-related debt:
 
 
Bank term loan
 
4,000

2.375% Senior Notes due 2018
 
1,500

3.100% Senior Notes due 2020
 
1,000

3.875% Senior Notes due 2023
 
1,999

5.450% Senior Notes due 2043
 
1,991

PXP debt assumed at the acquisition date (initially recorded at fair value):
 
 
Amended credit facility:
 
 
Revolving line of credit
 
1,469

Five-year term loan due 2017
 
750

Seven-year term loan due 2019
 
1,250

7⅝% Senior Notes due 2018
 
415

6⅛% Senior Notes due 2019
 
823

8⅝% Senior Notes due 2019
 
451

7⅝% Senior Notes due 2020
 
339

6½% Senior Notes due 2020
 
1,658

6⅝% Senior Notes due 2021
 
663

6¾% Senior Notes due 2022
 
1,118

6⅞% Senior Notes due 2023
 
1,695

MMR debt assumed at the acquisition date (initially recorded at fair value):
 
 
11.875% Senior Notes due 2014
 
314

4% Convertible Senior Notes due 2017
 
237

5¼% Convertible Senior Notes due 2013
 
69

FCX's borrowings under the revolving credit facility
 
200

PXP's additional borrowings under the amended credit facility
 
396

Other borrowings and changes
 
75

Subtotal
 
25,939

Less cash repayments and payments for conversions:
 
 
FCX's revolving credit facility
 
200

PXP's amended credit facility
 
3,865

MMR's 4% Convertible Senior Notes due 2017
 
209

PXP's 7⅝% Senior Notes due 2018
 
415

Other
 
127

Total debt balance at September 30, 2013
 
21,123

Less current portion
 
(70
)
Long-term debt
 
$
21,053


Revolving Credit Facility. On February 14, 2013, FCX and PT Freeport Indonesia entered into a new senior unsecured $3.0 billion revolving credit facility, which replaced FCX's existing revolving credit facility (scheduled to mature on March 30, 2016) upon completion of the acquisition of PXP. On May 31, 2013, in connection with the PXP acquisition, FCX satisfied all conditions under its new senior unsecured $3.0 billion revolving credit facility, and Freeport-McMoRan Oil & Gas, LLC (FM O&G LLC, the successor entity of PXP) joined the revolving credit facility as a borrower. The new revolving credit facility is available until May 31, 2018, in an aggregate principal amount of $3.0 billion, with $500 million available to PT Freeport Indonesia. At September 30, 2013, FCX had no borrowings and $46 million of letters of credit issued under the revolving credit facility, resulting in availability of approximately

17
Table of Contents                 


$3.0 billion, of which $1.5 billion could be used for additional letters of credit. Interest on the new revolving credit facility (currently London Interbank Offered Rate (LIBOR) plus 1.50 percent or the alternate base rate (ABR) plus 0.50 percent) is determined by reference to FCX's credit rating.

Lines of Credit. During third-quarter 2013, FCX entered into uncommitted lines of credit totaling $450 million with three financial institutions. These unsecured lines allow FCX to borrow at a spread over LIBOR or the respective financial institution's cost of funds with terms and pricing that are more favorable than FCX's revolving credit facility. As of September 30, 2013, there were no borrowings drawn on these lines of credit.

Acquisition-Related Debt. In connection with financing FCX's acquisitions of PXP and MMR, FCX used the proceeds from the issuance of $6.5 billion of unsecured senior notes and a $4.0 billion unsecured five-year bank term loan (the Term Loan) to fund the cash portion of the merger consideration for both transactions, to repay certain indebtedness of PXP and for general corporate purposes.

Senior Notes. On March 7, 2013, in connection with the financing of FCX's then-pending acquisitions of PXP and MMR, FCX issued $6.5 billion of unsecured senior notes in four tranches. FCX sold $1.5 billion of 2.375% Senior Notes due March 2018 (5-year notes), $1.0 billion of 3.100% Senior Notes due March 2020 (7-year notes), $2.0 billion of 3.875% Senior Notes due March 2023 (10-year notes) and $2.0 billion of 5.450% Senior Notes due March 2043 (30-year notes) for total net proceeds of $6.4 billion. Interest on these notes is payable semiannually on March 15 and September 15, beginning September 15, 2013.

Bank Term Loan. On February 14, 2013, FCX entered into an agreement for a $4.0 billion unsecured Term Loan in connection with the then-pending acquisitions of PXP and MMR. Upon closing the PXP acquisition, FCX borrowed $4.0 billion under the Term Loan, and FM O&G LLC joined the Term Loan as a borrower. The Term Loan will amortize in equal quarterly installments during the second, third and fourth years of the loan in annual amounts equal to 10 percent, 15 percent and 20 percent, respectively, of the original aggregate principal amount, and the remainder will mature five years from the date of the first borrowing on May 31, 2013). At FCX's option, the Term Loan bears interest at either an adjusted LIBOR or an alternate base rate (as defined under the Term Loan agreement) plus a spread determined by reference to FCX's credit ratings (currently LIBOR plus 1.50 percent or ABR plus 0.50 percent).

PXP Debt Assumed. At the close of the acquisition of PXP, FCX assumed long-term debt with a stated value of $9.9 billion, which was increased by $762 million to reflect the acquisition-date fair market value of these obligations. The fair value adjustments will be amortized over the term of the senior notes and recorded as a reduction of interest expense. Following is a brief description of the debt assumed in the PXP acquisition.

PXP's 6⅛% Senior Notes due 2019, 8⅝% Senior Notes due 2019, 7⅝% Senior Notes due 2020, 6½% Senior Notes due 2020, 6⅝% Senior Notes due 2021, 6¾% Senior Notes due 2022 and 6⅞% Senior Notes due 2023 had a total stated value of $6.4 billion (including the 7⅝% Senior Notes due 2018 that were repaid in June 2013), which was increased by $716 million to reflect the acquisition-date fair market value of these senior notes. Interest on these notes is payable semiannually. These senior notes are redeemable in whole or in part, at the option of FCX, at make-whole redemption prices prior to the dates stated below, and beginning on the dates below at specified redemption prices. In addition, up to 35 percent of the principal amount of certain of these notes may be redeemed at specified redemption prices with all or a portion of the proceeds of an equity contribution.
Debt Instrument
 
Date
6⅛% Senior Notes due 2019
 
June 15, 2016
8⅝% Senior Notes due 2019
 
October 15, 2014
7⅝% Senior Notes due 2020
 
April 1, 2015
6½% Senior Notes due 2020
 
November 15, 2015
6⅝% Senior Notes due 2021
 
May 1, 2016
6¾% Senior Notes due 2022
 
February 1, 2017
6⅞% Senior Notes due 2023
 
February 15, 2018


18
Table of Contents                 


MMR Debt Assumed. At the close of the acquisition of MMR, FCX assumed long-term debt with a stated value of $558 million, which was increased by $62 million to reflect the acquisition-date fair market value of these obligations. The fair value adjustments will be amortized over the term of the senior notes and recorded as a reduction of interest expense. Following is a brief description of the debt assumed in the MMR acquisition.

Interest on MMR's 11.875% Senior Notes due 2014 is payable semiannually, and these notes are redeemable in whole or in part, at the option of FCX, at specified redemption prices. These notes are callable at par in November 2013 (refer to Note 12 for discussion of the redemption of these notes). During June and July 2013, holders of MMR's 4% Convertible Senior Notes due 2017 converted their notes into merger consideration totaling $237 million, including cash payments of $209 million and 16.3 million royalty trust units with a fair value of $28 million at the acquisition date. Interest on MMR's 5¼% Convertible Senior Notes due 2013 was payable semiannually (refer to Note 12 for discussion of the conversion of these notes in October 2013).

Repayments. In connection with the acquisition of PXP, FCX repaid the $3.9 billion outstanding under PXP's amended credit facility. Additionally, during June 2013, FCX redeemed all of PXP's 7⅝% Senior Notes due 2018, which were recorded at fair value on the date of acquisition, for $415 million.

On March 14, 2012, FCX redeemed the remaining $3.0 billion of its outstanding 8.375% Senior Notes due 2017, for which holders received 104.553 percent of the principal amount together with the accrued and unpaid interest. As a result of this redemption, FCX recorded a loss on early extinguishment of debt of $168 million ($149 million to net income attributable to FCX common stockholders) for the first nine months of 2012.

Other. During the first nine months of 2013, FCX recorded a loss on early extinguishment of debt of $45 million ($36 million to net income attributable to FCX common stockholders) for financing costs incurred for the terminated $9.5 billion acquisition bridge loan facility, which was entered into in December 2012 to provide interim financing for the acquisitions of PXP and MMR but was replaced with other financing.

In February 2012, FCX sold $500 million of 1.40% Senior Notes due 2015, $500 million of 2.15% Senior Notes due 2017 and $2.0 billion of 3.55% Senior Notes due 2022 for total net proceeds of $2.97 billion. Interest on these notes is payable semiannually.

Guarantees. In connection with the acquisition of PXP, FCX guaranteed the PXP senior notes, and the guarantees by certain PXP subsidiaries were released. At the time of FCX's acquisition of MMR, FCX guaranteed MMR's 11.875% Senior Notes due 2014, and the guarantees by certain MMR subsidiaries were released. Refer to Note 14 for a discussion of FCX's senior notes guaranteed by FM O&G LLC.

Restrictive Covenants. The Term Loan and new revolving credit facility both contain customary affirmative covenants and representations, and also contain a number of negative covenants that, among other things, restrict, subject to certain exceptions, the ability of FCX's subsidiaries that are not borrowers or guarantors to incur additional indebtedness (including guarantee obligations) and FCX's ability or the ability of FCX's subsidiaries to: create liens on assets; enter into sale and leaseback transactions; engage in mergers, liquidations and dissolutions; and sell assets. The Term Loan and new revolving credit facility also contain financial ratios governing maximum total leverage and minimum interest coverage. The FCX senior notes contain limitations on liens that are generally typical for investment grade companies.

Maturities. Maturities of debt instruments based on the amounts and terms outstanding at September 30, 2013, total $67 million for the remainder of 2013; $614 million in 2014; $1.1 billion in 2015, $750 million in 2016, $700 million in 2017 and $17.9 billion thereafter.

Consolidated interest expense (excluding capitalized interest) totaled $223 million in third-quarter 2013, $56 million in third-quarter 2012, $465 million for the first nine months of 2013 and $210 million for the first nine months of 2012. Capitalized interest totaled $61 million in third-quarter 2013, $14 million in third-quarter 2012, $114 million for the first nine months of 2013 and $62 million for the first nine months of 2012.


19
Table of Contents                 


8. CONTINGENCIES AND COMMITMENTS
Asset Retirement Obligations (AROs). A summary of changes in FCX's AROs (included in reclamation and environmental obligations in the condensed consolidated balance sheet) for the nine months ended September 30, 2013, follows (in millions):
Balance at December 31, 2012
$
1,146

Liabilities assumed in the acquisitions of PXP and MMRa
1,024

Liabilities incurred
15

Settlements and revisions to cash flow estimates, net
(3
)
Accretion expense
66

Spending
(62
)
Other
(3
)
Balance at September 30, 2013
2,183

Less: current portion
(125
)
Long-term portion
$
2,058

a.
The fair value of AROs assumed in the acquisitions of PXP and MMR ($741 million and $283 million, respectively) were estimated based on projected cash flows, an estimated long-term annual inflation rate of 2.5 percent, and discount rates based on FCX's estimated credit-adjusted, risk-free interest rates ranging from 1.3 percent to 6.3 percent.

The following discussion updates previously reported information regarding AROs included in Note 13 of FCX's annual report on Form 10-K for the year ended December 31, 2012, to reflect the acquisitions of PXP and MMR. Consistent with oil and gas industry practices, substantially all of the oil and gas leases require that, upon termination of economic production, the working interest owners plug and abandon non-producing wellbores, remove platforms, tanks, production equipment and flow lines and restore the wellsite. Typically, when producing oil and gas assets are purchased, the purchaser assumes the obligation to plug and abandon wells and facilities that are part of such assets. However, in some instances, an indemnity may be received with respect to those costs. FCX cannot be assured that it will be able to collect on these indemnities. In connection with the acquisitions of PXP and MMR, the most significant asset retirement obligations were related to the oil and gas properties located in the GOM.

Litigation. The following information includes a discussion of updates to previously reported legal proceedings included in Note 13 of FCX’s annual report on Form 10-K for the year ended December 31, 2012, and Notes 8 and 9 of FCX’s quarterly report on Form 10-Q for the quarters ended June 30, 2013, and March 31, 2013, respectively.

Shareholder Litigation.  On July 19, 2013, the plaintiffs in In Re Freeport-McMoRan Copper & Gold, Inc. Derivative Litigation, No. 8145-VCN, pending in the Delaware Court of Chancery, filed a second amended consolidated complaint and voluntarily dismissed without prejudice the aiding and abetting claims against most of the defendants. On October 10, 2013, FCX and the other defendants filed a motion to dismiss the second amended consolidated complaint.
 
On August 14, 2013, the parties in In Re Plains Exploration & Production Company Stockholder Litigation, No. 8090-VCN, entered into a stipulation that provided for dismissal with prejudice as to the named plaintiffs and without prejudice as to the non-present class members. The court approved the stipulation on August 15, 2013.

On October 11, 2013, the court held a hearing to consider the evidence in support of the proposed settlement of In Re McMoRan Exploration Co. Stockholder Litigation, No. 8132-VCN. On October 16, 2013, the court entered an order approving the settlement, the terms of which are not material to FCX.

Tax and Other Matters. Cerro Verde Royalty Dispute. As reported in Note 13 of FCX's annual report on Form 10-K for the year ended December 31, 2012, SUNAT, the Peruvian national tax authority, has assessed mining royalties on ore processed by the Cerro Verde concentrator that commenced operations in late 2006. These assessments cover the period October 2006 to December 2007 and the years 2008 and 2009. In July 2013, the Peruvian Tax Tribunal issued two decisions affirming SUNAT's assessments for the period October 2006 through December 2008. Decisions by the Tax Tribunal end the administrative stage of the appeal procedures for the assessments. In September 2013, Cerro Verde filed judiciary appeals related to the assessments because it continues to believe that its 1998 stability agreement provides an exemption for all minerals extracted from its mining concession, irrespective of the method used for processing those minerals. Although FCX believes its interpretation of the stability agreement is correct, if Cerro Verde is ultimately found responsible for these assessments, it will also be

20
Table of Contents                 


liable for interest, which accrues at rates that range from approximately 7 to 18 percent based on the year accrued and the currency in which the amounts would be payable.

On October 1, 2013, SUNAT served Cerro Verde with a demand for payment totaling 492 million Peruvian nuevo soles ($176 million based on current exchange rates, including interest and penalties of $104 million) based on the Peruvian Tax Tribunal’s July 2013 decisions. As permitted by law, Cerro Verde requested and was granted an installment payment program that defers payment for six months and thereafter satisfies the amount via sixty-six equal monthly payments. On July 19, 2013, a hearing on SUNAT's assessment for 2009 was held, but no decision has been issued by the Tax Tribunal for that year. As of September 30, 2013, the aggregate amount of the assessments, including interests and penalties, for the year 2009 was 200 million Peruvian nuevo soles ($72 million based on current exchange rates). SUNAT may make additional assessments for mining royalties and associated penalties and interest for the years 2010 through 2013, which Cerro Verde will contest; FCX believes any such assessments for the years 2010 through 2013, if made, would in the aggregate be similar to the aggregate assessments received for the periods October 2006 through December 2009. No assessments can be issued for years after 2013, as Cerro Verde’s current stability agreement expires on December 31, 2013, and Cerro Verde will begin paying royalties on all of its production in January 2014 under its new 15-year stability agreement. No amounts were accrued as of September 30, 2013, because Cerro Verde believes its stability agreement exempts it from these royalties.

Indonesia Tax Matters. PT Freeport Indonesia has received assessments from the Indonesian tax authorities for additional taxes and interest related to various audit exceptions for the years 2005, 2006, 2007, 2008 and 2011. During first-quarter 2013, PT Freeport Indonesia received assessments from the Indonesian tax authorities for additional taxes of $59 million and interest of $55 million related to various audit exceptions for 2008. During second-quarter 2013, the Indonesian tax authorities agreed to refund $291 million ($320 million was included in other accounts receivable in the condensed consolidated balance sheet at December 31, 2012) associated with overpayments made by PT Freeport Indonesia for 2011. PT Freeport Indonesia filed objections for $22 million of the remaining 2011 overpayments that it believes it is due. Additionally, the Indonesian tax authorities withheld $126 million of the 2011 overpayment for unrelated assessments from 2005 and 2007, which PT Freeport Indonesia is disputing. A refund of $165 million was received in July 2013. PT Freeport Indonesia has filed objections to the 2005, 2006, 2007, 2008 and 2011 assessments because it believes it has properly determined and paid its taxes. As of September 30, 2013, FCX had $284 million included in other assets for amounts paid on disputed tax assessments, which it believes are collectible, including the $126 million discussed above for the 2011 refunds.

Contractual Obligations. The following information updates previously reported contractual obligations included in Note 14 of FCX's annual report on Form 10-K for the year ended December 31, 2012, to reflect the acquisitions of PXP and MMR. As is common within the oil and gas industry, FCX has various commitments and operating agreements associated with oil and gas exploration, development and production activities, gathering and transportation, and oilfield and other services. As of September 30, 2013, aggregate future obligations under these agreements total $2.3 billion, primarily comprising minimum commitments of $1.5 billion for two ultra-deepwater drillships currently under construction and expected to be delivered in late 2014 and early 2015 for the GOM drilling campaign and $472 million associated with the deferred premium costs and future interest expected to be accrued on crude oil option contracts, which will be paid once the options settle (refer to Note 9 for further discussion). FCX's future commitments associated with these oil and gas unconditional purchase obligations total $72 million for the remainder of 2013, $340 million in 2014, $704 million in 2015, $565 million in 2016, $493 million in 2017 and $166 million thereafter.

9. FINANCIAL INSTRUMENTS
FCX does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation, or it anticipates a future activity that is likely to occur and will result in exposure to market risks, which FCX intends to offset or mitigate. FCX does not enter into any derivative financial instruments for speculative purposes, but has entered into derivative financial instruments in limited instances to achieve specific objectives. These objectives principally relate to managing risks associated with commodity price changes, foreign currency exchange rates and interest rates.

Commodity Contracts.  From time to time, FCX has entered into forward, futures and swap contracts to hedge the market risk associated with fluctuations in the prices of copper and gold commodities it purchases and sells. As a result of the acquisition of PXP, FCX assumed a variety of oil and gas commodity derivatives, such as swaps, collars, puts, calls and various combinations of these instruments, to hedge the exposure to the volatility of oil and gas commodity prices.

21
Table of Contents                 



Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. A discussion of FCX’s derivative commodity contracts and programs follows.

Commodity 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 Commodity Exchange Inc. (COMEX), a division of the New York Mercantile Exchange (NYMEX), 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 and swap contracts and then liquidating the copper futures contracts and settling the copper swap contracts during the month of shipment, which generally results in FCX receiving the COMEX average copper price in the month of shipment. 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-month or nine-month periods ended September 30, 2013 and 2012, resulting from hedge ineffectiveness. At September 30, 2013, FCX held copper futures and swap contracts that qualified for hedge accounting for 41 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) follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Copper futures and swap contracts:
 
 
 
 
 
 
 
Unrealized (losses) gains:
 
 
 
 
 
 
 
Derivative financial instruments
$
16

 
$
13

 
$
(2
)
 
$
20

Hedged item
(16
)
 
(13
)
 
2

 
(20
)
 
 
 
 
 
 
 
 
Realized (losses) gains:
 
 
 
 
 
 
 
Matured derivative financial instruments
(3
)
 
1

 
(17
)
 
(3
)

Commodity Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. As described in Note 1 to FCX’s annual report on Form 10-K for the year ended December 31, 2012, under “Revenue Recognition,” certain FCX copper concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the London Metal Exchange (LME) price (copper) or the COMEX price (copper) and the London Bullion Market Association (London PM) 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 that 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 PM price (gold) as defined in the contract. Mark-to-market price fluctuations recorded through the settlement date are 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 commodity derivatives at September 30, 2013, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
555

 
$
3.22

 
$
3.31

 
February 2014
Gold (thousands of ounces)
161

 
1,356

 
1,332

 
January 2014
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
52

 
3.17

 
3.31

 
January 2014


22
Table of Contents                 


Oil and Gas Contracts. As a result of the acquisition of PXP, FCX assumed PXP's 2013, 2014 and 2015 economic hedge positions that consisted of crude oil options, and crude oil and natural gas swaps. The crude oil and natural gas derivatives do not qualify or 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. These contracts are composed of crude oil put spreads (consisting of put options with a floor limit) and crude oil three-way collars (consisting of a put option with a floor limit and a call option with a ceiling). The premiums associated with put options are deferred until the settlement period. At September 30, 2013, the deferred option premiums and accrued interest associated with the crude oil option contracts totaled $461 million, which was included as a component of the fair value of the crude oil options contracts. At September 30, 2013, the outstanding crude oil option contracts, all of which settle monthly, follow:
 
 
 
 
 
 
Average Price (per Bbl)a
 
 
 
 
Period
 
Instrument Type
 
Daily Volumes (MBbls)
 
Ceiling
 
Floor
 
Floor Limit
 
Average Deferred Premium
 (per Bbl)
 
Index
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Oct - Dec
 
Three-way collarsb
 
25

 
$
124.29

 
$
100

 
$
80

 
$
—

 
Brent
Oct - Dec
 
Put optionsc
 
17

 
N/A

 
90

 
70

 
6.25

 
Brent
Oct - Dec
 
Put optionsc
 
13

 
N/A

 
100

 
80

 
6.80

 
Brent
Oct - Dec
 
Three-way collarsb
 
5

 
126.08

 
90

 
70

 
—

 
Brent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jan - Dec
 
Put optionsc
 
75

 
N/A

 
90

 
70

 
5.74

 
Brent
Jan - Dec
 
Put optionsc
 
30

 
N/A

 
95

 
75

 
6.09

 
Brent
Jan - Dec
 
Put optionsc
 
5

 
N/A

 
100

 
80

 
7.11

 
Brent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jan - Dec
 
Put optionsc
 
84

 
N/A

 
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. FCX pays the difference between the index price and the per barrel ceiling if the index price is greater than the per barrel ceiling. If the index price is at or above the per barrel floor and at or below the per barrel ceiling, no cash settlement is required.
c.
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 September 30, 2013, outstanding crude oil swaps with a weighted-average swap price of $109.23 per barrel cover approximately 4 million barrels (MMBbls) of crude oil, and natural gas swaps with a weighted-average swap price of $4.13 per million British thermal units (MMBTU) cover approximately 47 million MMBTUs of natural gas.

At September 30, 2013, the outstanding crude oil and natural gas swap contracts, all of which settle monthly, follow:
 
 
Daily
 
Weighted-Average
 
 
 
Maturities
 
 
Volumes
 
Fixed Price
 
Index
 
Through
2013 crude oil swaps (MBbls)a
 
40

 
$
109.23

 
Brent
 
December 2013
2013 natural gas swaps (MMBtu)a
 
110,000

 
4.27

 
Henry Hub
 
December 2013
2014 natural gas swaps (MMBtu)a
 
100,000

 
4.09

 
Henry Hub
 
December 2014
a.
If the index price is less than the fixed price, FCX receives the difference between the fixed price and the index price. FCX pays the difference between the index price and the fixed price if the index price is greater than the fixed price.


23
Table of Contents                 


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 September 30, 2013, Atlantic Copper held net forward copper sales contracts for 14 million pounds at an average contract price of $3.25 per pound, with maturities through November 2013.

A summary of the realized and unrealized gains (losses) recognized in income before income taxes and equity in affiliated companies’ net earnings (losses) for commodity contracts that do not qualify or are not designated as hedge transactions, including embedded derivatives, follows (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Embedded derivatives in provisional copper and gold
 
 
 
 
 
 
 
sales contractsa
$
141

 
$
164

 
$
(147
)
 
$
188

Crude oil options and swapsa
(173
)
 
—

 
(227
)
 
—

Natural gas swapsa
3

 
—

 
22

 
—

Copper forward contractsb
—

 
5

 
3

 
17

a.
Amounts recorded in revenues. 
b.
Amounts recorded in cost of sales as production and delivery costs.

Unsettled Commodity Derivative Financial Instruments
A summary of the fair values of unsettled commodity derivative financial instruments follows (in millions):
 
 
September 30,
2013
 
December 31, 2012
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts:a
 
$
3

 
$
5

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
51

 
36

Crude oil and natural gas swaps
 
24

 
—

Total derivative assets
 
$
78

 
$
41

 
 
 
 
 
Commodity Derivative Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contractsa
 
$
1

 
$
1

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
13

 
27

Crude oil options
 
218

 
—

Copper forward contracts
 
1

 
—

Total derivative liabilities
 
$
233

 
$
28

a.
FCX paid $3 million to brokers at September 30, 2013, and $7 million at December 31, 2012, for margin requirements (recorded in other current assets).

24
Table of Contents                 


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 (in millions):
 
 
Assets
 
Liabilities
 
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives on provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
$
51

 
$
36

 
$
13

 
$
27

Crude oil and natural gas derivatives
 
24

 
—

 
218

 
—

Copper derivatives
 
3

 
5

 
2

 
1

 
 
78

 
41

 
233

 
28

 
 
 
 
 
 
 
 
 
Less gross amounts of offset:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives on provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
4

 
8

 
4

 
8

Crude oil and natural gas derivatives
 
20

 
—

 
20

 
—

Copper derivatives
 
1