FCX Q214 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 June 30, 2014
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 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 July 31, 2014, there were issued and outstanding 1,039,046,081 shares of the registrant’s common stock, par value $0.10 per share.


FREEPORT-McMoRan INC.

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
.


2
Table of Contents                 


Part I.
FINANCIAL INFORMATION

Item 1.
Financial Statements.

FREEPORT-McMoRan INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 
June 30,
2014
 
December 31,
2013
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,458

 
$
1,985

Trade accounts receivable
1,838

 
1,728

Other accounts receivable
920

 
834

Inventories:
 
 
 
Mill and leach stockpiles
1,880

 
1,705

Materials and supplies, net
1,825

 
1,730

Product
1,665

 
1,583

Other current assets
668

 
407

Total current assets
10,254

 
9,972

Property, plant, equipment and mining development costs, net
25,407

 
24,042

Oil and gas properties - full cost method
 
 
 
Subject to amortization, less accumulated amortization
11,057

 
12,472

Not subject to amortization
10,769

 
10,887

Long-term mill and leach stockpiles
2,518

 
2,386

Goodwill
1,717

 
1,916

Other assets
2,287

 
1,798

Total assets
$
64,009

 
$
63,473

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
3,950

 
$
3,708

Current portion of debt
2,784

 
312

Dividends payable
334

 
333

Current portion of environmental and asset retirement obligations
250

 
236

Accrued income taxes
240

 
184

Total current liabilities
7,558

 
4,773

Long-term debt, less current portion
17,512

 
20,394

Deferred income taxes
7,451

 
7,410

Environmental and asset retirement obligations, less current portion
3,294

 
3,259

Other liabilities
1,782

 
1,690

Total liabilities
37,597

 
37,526

 
 
 
 
Redeemable noncontrolling interest
745

 
716

 
 
 
 
Equity:
 
 
 
FCX stockholders’ equity:
 
 
 
Common stock
117

 
117

Capital in excess of par value
22,221

 
22,161

Retained earnings
3,081

 
2,742

Accumulated other comprehensive loss
(401
)
 
(405
)
Common stock held in treasury
(3,686
)
 
(3,681
)
Total FCX stockholders’ equity
21,332

 
20,934

Noncontrolling interests
4,335

 
4,297

Total equity
25,667

 
25,231

Total liabilities and equity
$
64,009

 
$
63,473

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

3
Table of Contents                 


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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
Revenues
$
5,522

 
$
4,288

 
$
10,507

 
$
8,871

Cost of sales:
 
 
 
 
 
 
 
Production and delivery
3,082

 
2,853

 
5,819

 
5,572

Depreciation, depletion and amortization
1,013

 
530

 
1,979

 
859

Total cost of sales
4,095

 
3,383

 
7,798

 
6,431

Selling, general and administrative expenses
164

 
186

 
299

 
299

Mining exploration and research expenses
34

 
64

 
64

 
116

Environmental obligations and shutdown costs
76

 
16

 
82

 
31

Total costs and expenses
4,369

 
3,649

 
8,243

 
6,877

Operating income
1,153

 
639

 
2,264

 
1,994

Interest expense, net
(164
)
 
(132
)
 
(325
)
 
(189
)
Net gain (loss) on early extinguishment of debt
5

 
—

 
5

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

 
128

 
—

 
128

Other (expense) income, net
(8
)
 
13

 
25

 
10

Income before income taxes and equity in affiliated companies' net earnings
986

 
648

 
1,969

 
1,898

Provision for income taxes
(328
)
 
(40
)
 
(685
)
 
(468
)
Equity in affiliated companies’ net earnings
2

 
2

 
2

 
4

Net income
660

 
610

 
1,286

 
1,434

Net income attributable to noncontrolling interests
(168
)
 
(125
)
 
(274
)
 
(301
)
Preferred dividends attributable to redeemable noncontrolling interest
(10
)
 
(3
)
 
(20
)
 
(3
)
Net income attributable to FCX common stockholders
$
482

 
$
482

 
$
992

 
$
1,130

 
 
 
 
 
 
 
 
Net income per share attributable to FCX common stockholders:
 
 
 
 
 
 
 
Basic
$
0.46

 
$
0.49

 
$
0.95

 
$
1.17

Diluted
$
0.46

 
$
0.49

 
$
0.95

 
$
1.17

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
1,039

 
980

 
1,039

 
965

Diluted
1,045

 
984

 
1,045

 
968

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.3125

 
$
1.3125

 
$
0.625

 
$
1.625

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


4
Table of Contents                 


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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In millions)
Net income
 
$
660

 
$
610

 
$
1,286

 
$
1,434

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
Amortization of unrecognized amounts included in net periodic benefit costs
 
4

 
5

 
7

 
12

Foreign exchange losses
 
(3
)
 
—

 
(3
)
 
—

Translation adjustments and unrealized gains (losses) on securities
 
—

 
—

 
—

 
(1
)
Other comprehensive income
 
1

 
5

 
4

 
11

 
 
 
 
 
 
 
 
 
Total comprehensive income
 
661

 
615

 
1,290

 
1,445

Total comprehensive income attributable to noncontrolling interests
 
(168
)
 
(125
)
 
(274
)
 
(301
)
Preferred dividends attributable to redeemable noncontrolling interest
 
(10
)
 
(3
)
 
(20
)
 
(3
)
Total comprehensive income attributable to FCX common stockholders
 
$
483

 
$
487

 
$
996

 
$
1,141


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




5
Table of Contents                 


FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended
 
 
June 30,
 
 
2014
 
2013
 
 
(In millions)
 
Cash flow from operating activities:
 
 
 
 
Net income
$
1,286

 
$
1,434

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
1,979

 
859

 
Net losses on crude oil and natural gas derivative contracts
120

 
35

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

 
(128
)
 
Stock-based compensation
69

 
65

 
Pension plans contributions
(28
)
 
(42
)
 
Net charges for environmental and asset retirement obligations, including accretion
97

 
73

 
Payments for environmental and asset retirement obligations
(96
)
 
(91
)
 
Net (gain) loss on early extinguishment of debt
(5
)
 
45

 
Deferred income taxes
37

 
43

 
Increase in long-term mill and leach stockpiles
(131
)
 
(236
)
 
Other, net
36

 
3

 
(Increases) decreases in working capital and changes in other tax payments, excluding amounts from acquisitions:
 
 
 
 
Accounts receivable
(243
)
 
350

 
Inventories
(230
)
 
(160
)
 
Other current assets
35

 
58

 
Accounts payable and accrued liabilities
(186
)
 
(371
)
 
Accrued income taxes and other tax payments
(153
)
 
(72
)
 
Net cash provided by operating activities
2,587

 
1,865

 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
Capital expenditures:
 
 
 
 
North America copper mines
(627
)
 
(543
)
 
South America
(839
)
 
(470
)
 
Indonesia
(479
)
 
(511
)
 
Africa
(60
)
 
(103
)
 
Molybdenum mines
(33
)
 
(82
)
 
U.S. oil and gas operations
(1,484
)
 
(190
)
 
Other
(40
)
 
(79
)
 
Acquisition of Deepwater Gulf of Mexico interests
(925
)
 
—

 
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
—

 
(321
)
 
Net proceeds from sale of Eagle Ford shale assets
3,009

 
—

 
Restricted cash and other, net
(363
)
 
(264
)
 
Net cash used in investing activities
(1,841
)
 
(7,656
)
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
Proceeds from debt
1,248

 
11,021

 
Repayments of debt
(1,611
)
 
(4,541
)
 
Redemption of MMR preferred stock
—

 
(202
)
 
Cash dividends and distributions paid:
 
 
 
 
Common stock
(653
)
 
(595
)
 
Noncontrolling interests
(250
)
 
(90
)
 
Contributions from noncontrolling interests
24

 
—

 
Debt financing costs
(34
)
 
(111
)
 
Stock-based awards net proceeds (payments), including excess tax benefit
3

 
(102
)
 
Net cash (used in) provided by financing activities
(1,273
)
 
5,380

 
 
 
 
 
 
Net decrease in cash and cash equivalents
(527
)
 
(411
)
 
Cash and cash equivalents at beginning of year
1,985

 
3,705

 
Cash and cash equivalents at end of period
$
1,458

 
$
3,294

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

6
Table of Contents                 


FREEPORT-McMoRan 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, 2013
1,165

 
$
117

 
$
22,161

 
$
2,742

 
$
(405
)
 
127

 
$
(3,681
)
 
$
20,934

 
$
4,297

 
$
25,231

Exercised and issued stock-based awards
1

 
—

 
8

 
—

 
—

 
—

 
—

 
8

 
—

 
8

Stock-based compensation
—

 
—

 
52

 
—

 
—

 
—

 
—

 
52

 
—

 
52

Tender of shares for stock-based awards
—

 
—

 
—

 
—

 
—

 
—

 
(5
)
 
(5
)
 
—

 
(5
)
Dividends on common stock
—

 
—

 
—

 
(653
)
 
—

 
—

 
—

 
(653
)
 
—

 
(653
)
Dividends to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(236
)
 
(236
)
Net income attributable to FCX common stockholders
—

 
—

 
—

 
992

 
—

 
—

 
—

 
992

 
—

 
992

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
274

 
274

Other comprehensive income
—

 
—

 
—

 
—

 
4

 
—

 
—

 
4

 
—

 
4

Balance at June 30, 2014
1,166

 
$
117

 
$
22,221

 
$
3,081

 
$
(401
)
 
127

 
$
(3,686
)
 
$
21,332

 
$
4,335

 
$
25,667

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


7
Table of Contents                 


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

NOTE 1. GENERAL INFORMATION
Effective July 14, 2014, Freeport-McMoRan Copper & Gold Inc. changed its name to Freeport-McMoRan Inc. (FCX) to simplify the corporate name and better reflect FCX's expanded portfolio of assets. 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 FCX's consolidated financial statements and notes contained in its annual report on Form 10-K for the year ended December 31, 2013. 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 acquisitions of Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR), collectively known as FCX Oil & Gas Inc. (FM O&G), all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month and six-month periods ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

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

NOTE 2. ACQUISITIONS AND DISPOSITIONS
PXP and MMR Acquisitions. The second-quarter 2013 acquisitions of PXP and MMR added a portfolio of oil and gas assets to FCX's global mining business, creating a U.S.-based natural resources company. The acquisitions have been accounted for under the acquisition method, with FCX as the acquirer.

During the second quarter of 2014, FCX finalized the purchase price allocations, which resulted in a net increase of $20 million to oil and gas properties, an increase of $22 million to goodwill and a net decrease of $42 million to deferred income tax assets.

For further discussion of the PXP and MMR acquisitions and the related financing, refer to Notes 2 and 8 in FCX's annual report on Form 10-K for the year ended December 31, 2013.

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 for the three-month and six-month periods ended June 30, 2013, 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
 
Six Months
 
 
 Ended
 
Ended
 
 
June 30, 2013
 
June 30, 2013
 
 
(in millions, except per share amounts)
 
 
 
 
 
Revenues
 
$
5,330

 
$
11,025

Operating income
 
1,330

 
2,910

Income from continuing operations
 
722

 
1,635

Net income attributable to FCX common stockholders
 
585

 
1,313

 
 
 
 
 
Net income per share attributable to FCX common stockholders:
 
 
 
 
Basic
 
$
0.56

 
$
1.26

Diluted
 
0.56

 
1.26



8
Table of Contents                 


The 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 date indicated. The most significant pro forma adjustments to income from continuing operations for the three-month period ended June 30, 2013, were to exclude $506 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. Additionally, for the six-month period ended June 30, 2013, the pro forma consolidated information excluded a $77 million gain on the sale of MMR oil and gas properties because of the application of the full cost method of accounting.

Eagle Ford Disposition. On June 20, 2014, FCX completed the sale of its Eagle Ford shale assets to a subsidiary of Encana Corporation (Encana) for cash consideration of $3.1 billion, before closing adjustments from the April 1, 2014, effective date through closing. Under full cost accounting rules, the proceeds were recorded as a reduction of capitalized oil and gas properties, with no gain or loss recognition, except for $58 million of deferred tax expense recorded in connection with the allocation of $221 million of goodwill (for which deferred taxes were not previously provided) to the Eagle Ford shale assets. Approximately $1.3 billion of proceeds from this transaction was placed in a like-kind exchange escrow to reinvest into additional oil and gas interests. On June 30, 2014, $919 million from this like-kind exchange escrow was used to fund the Deepwater Gulf of Mexico (GOM) acquisition discussed below. The remaining $414 million of funds in the like-kind exchange escrow may be used to acquire additional interests in the Deepwater GOM on a tax-efficient basis. Additionally, a portion of the proceeds was used to reduce indebtedness.

Deepwater GOM Acquisition. On June 30, 2014, FCX completed the acquisition of interests in the Deepwater GOM from a subsidiary of Apache Corporation, including interests in the Lucius and Heidelberg oil production development projects and several exploration leases, for $919 million. Based on preliminary valuations, and including transaction costs and estimated asset retirement costs, FCX recorded capitalized costs for oil and gas properties subject to amortization of $460 million and costs not subject to amortization of $476 million. The Deepwater GOM acquisition was funded with a portion of the net proceeds from the sale of the Eagle Ford shale assets.

NOTE 3. EARNINGS PER SHARE
FCX’s basic net income per share of common stock was computed by dividing net income attributable to FCX common stockholders by the weighted-average of common stock outstanding during the period. Diluted net income per share of common stock was computed using the most dilutive of (a) the two-class method or (b) the treasury stock method. Under the two-class method, net income is allocated to each class of common stock and participating securities as if all of the earnings for the period had been distributed. FCX’s participating securities consist of vested restricted stock units (RSUs) for which the underlying common shares are not yet issued and entitle holders to non-forfeitable dividends.

The following table sets forth the computation of basic and diluted net income per share (in millions, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
Net income
$
660

 
$
610

 
$
1,286

 
$
1,434

 
Net income attributable to noncontrolling interests
(168
)
 
(125
)
 
(274
)
 
(301
)
 
Preferred dividends on redeemable noncontrolling interest
(10
)
 
(3
)
 
(20
)
 
(3
)
 
Undistributed earnings allocable to participating securities
(2
)
 
—

 
(3
)
 
—

 
Net income allocable to FCX common stockholders
$
480

 
$
482

 
$
989

 
$
1,130

 
 
 
 
 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
1,039

 
980

 
1,039

 
965

 
Add shares issuable upon exercise or vesting of dilutive stock options and RSUs
6

a 
4

 
6

a 
3

 
Diluted weighted-average shares of common stock outstanding
1,045

 
984

 
1,045

 
968

 
 
 
 
 
 
 
 
 
 
Basic net income per share attributable to FCX common stockholders
$
0.46

 
$
0.49

 
$
0.95

 
$
1.17

 
Diluted net income per share attributable to FCX common stockholders
$
0.46

 
$
0.49

 
$
0.95

 
$
1.17

 

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Table of Contents                 


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 totaled approximately 3 million for both second-quarter 2014 and for the six months ended June 30, 2014.


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Table of Contents                 


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 stock options totaled 30 million with a weighted-average exercise price of $41.05 per option for both second-quarter 2014 and for the six months ended June 30, 2014, 32 million with a weighted-average exercise price of $40.53 per option for second-quarter 2013 and 30 million with a weighted-average exercise price of $40.92 per option for the six months ended June 30, 2013.

NOTE 4. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):
 
June 30,
2014
 
December 31, 2013
 
Current inventories:
 
 
 
 
Raw materials (primarily concentrates)
$
297

 
$
238

 
Work-in-processa
154

 
199

 
Finished goodsb
1,214

 
1,146

 
Total product inventories
$
1,665

 
$
1,583

 
 
 
 
 
 
Mill stockpiles
$
104

 
$
91

 
Leach stockpiles
1,776

 
1,614

 
Total current mill and leach stockpiles
$
1,880

 
$
1,705

 
 
 
 
 
 
Total materials and supplies, netc
$
1,825

 
$
1,730

 
 
 
 
 
 
Long-term inventories:
 
 
 
 
Mill stockpiles
$
753

 
$
698

 
Leach stockpiles
1,765

 
1,688

 
Total long-term mill and leach stockpilesd
$
2,518

 
$
2,386

 
a.
FCX's mining operations also have work-in-process inventories that are reflected as mill and leach stockpiles.
b.
Primarily included molybdenum concentrates; copper concentrates, anodes, cathodes and rod; and various cobalt products.
c.
Materials and supplies inventory was net of obsolescence reserves totaling $21 million at June 30, 2014, and $24 million at December 31, 2013.
d.
Estimated metals in stockpiles not expected to be recovered within the next 12 months.

NOTE 5. INCOME TAXES
Variations in the relative proportions of jurisdictional income result in fluctuations to FCX’s consolidated effective income tax rate. Geographic sources of FCX's provision for income taxes follow (in millions):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
 
U.S. operations
$
149

a 
$
(95
)
b 
$
285

a 
$
(19
)
b 
International operations
179

 
135

 
400

 
487

 
Total
$
328

 
$
40

 
$
685

 
$
468

 
a.
FCX recognized a $58 million charge for deferred taxes recorded in connection with the allocation of goodwill to the sale of Eagle Ford.
b.
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.

FCX’s consolidated effective income tax rate was 35 percent for the first six months of 2014 and 34 percent for the first six months of 2013, excluding the net benefit of $183 million for acquisition-related adjustments.


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NOTE 6. DEBT AND EQUITY TRANSACTIONS
In June 2014, FCX announced the redemption of $1.7 billion of the aggregate principal amount of outstanding senior notes on July 23, 2014. The redemptions included $263 million for the 6.125% Senior Notes due 2019, $525 million for the 6½% Senior Notes due 2020, $350 million for the 6.75% Senior Notes due 2022 and $525 million for the 6.875% Senior Notes due 2023. At the redemption date, these senior notes had a book value of $1.8 billion, which included fair value adjustments of $167 million. In accordance with the terms of these senior notes, the redemptions were funded with cash contributions to FM O&G by FCX in exchange for additional equity, which is eliminated in the consolidated financial statements. FCX used available cash and borrowed approximately $950 million under its revolving credit facility and uncommitted lines of credit to fund the contributions to FM O&G. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest to the redemption date. As a result of these redemptions, FCX will report a gain on early extinguishment of debt of $58 million in third-quarter 2014.

In May 2014, FCX, PT Freeport Indonesia (PT-FI) and Freeport-McMoRan Oil & Gas LLC (FM O&G LLC, a wholly owned subsidiary of FM O&G and the successor entity of PXP) amended the senior unsecured $3.0 billion revolving credit facility to extend the maturity date one year to May 31, 2019, and increase the aggregate principal amount from $3.0 billion to $4.0 billion, with $500 million available to PT-FI. FCX, PT-FI and FM O&G LLC had entered into the $3.0 billion revolving credit facility on May 31, 2013 (upon completion of the acquisition of PXP). At June 30, 2014, there were no borrowings and $46 million of letters of credit issued under the revolving credit facility, resulting in availability of approximately $4.0 billion, of which $1.5 billion could be used for additional letters of credit.

In April 2014, FCX redeemed $210 million of the aggregate principal amount of the outstanding 6.625% Senior Notes due 2021. In accordance with the terms of the senior notes, the redemption was funded with cash contributions to FM O&G by FCX in exchange for additional equity, which is eliminated in the consolidated financial statements. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest to the redemption date. As a result of the redemption, FCX recorded a gain on early extinguishment of debt of $6 million in second-quarter 2014.

In March 2014, Sociedad Minera Cerro Verde S.A.A. (Cerro Verde, FCX's mining subsidiary in Peru) entered into a five-year, $1.8 billion senior unsecured credit facility that is nonrecourse to FCX and the other shareholders of Cerro Verde. The credit facility allows for term loan borrowings up to the full amount of the facility, less any amounts issued and outstanding under a $500 million letter of credit sublimit. Interest on amounts drawn under the term loan is based on London Interbank Offered Rate (LIBOR) plus a spread (currently 1.90 percent) based on Cerro Verde’s total net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio as defined in the agreement. Amounts may be drawn or letters of credit may be issued over a two-year period to fund a portion of Cerro Verde’s expansion project and for Cerro Verde's general corporate purposes. The credit facility amortizes in three installments in amounts necessary for the aggregate borrowings and outstanding letters of credit not to exceed 85 percent of the $1.8 billion commitment on September 30, 2017, 70 percent on March 31, 2018, and 35 percent on September 30, 2018, with the remaining balance due on the maturity date of March 10, 2019. At June 30, 2014, there were no borrowings and no letters of credit issued under Cerro Verde’s credit facility.

FCX recorded a loss on early extinguishment of debt of $45 million ($39 million to net income attributable to FCX common stockholders) in first-quarter 2013 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 FCX's second-quarter 2013 acquisitions of PXP and MMR.

Consolidated interest expense (excluding capitalized interest) totaled $225 million in second-quarter 2014, $167 million in second-quarter 2013, $449 million for the first six months of 2014 and $242 million for the first six months of 2013. Capitalized interest included in property, plant, equipment and mining development costs, net, totaled $39 million in second-quarter 2014, $27 million in second-quarter 2013, $79 million for the first six months of 2014 and $45 million for the six months of 2013. Capitalized interest included in oil and gas properties not subject to amortization totaled $22 million in second-quarter 2014, $8 million in second-quarter 2013, $45 million for the first six months of 2014 and $8 million for the first six months of 2013.

On June 25, 2014, FCX's Board of Directors declared a quarterly dividend of $0.3125 per share, which was paid on August 1, 2014, to common shareholders of record at the close of business on July 15, 2014.

In connection with the second-quarter 2013 acquisition of PXP, FCX issued 91 million shares of its common stock.

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NOTE 7. 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 derivative contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. As a result of the acquisition of PXP, FCX assumed a variety of crude oil and natural gas commodity derivatives to hedge the exposure to the volatility of crude oil and natural gas commodity prices. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of June 30, 2014, and December 31, 2013, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative contracts and programs follows.

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 or swap contracts. Hedging gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses during the three-month or six-month periods ended June 30, 2014 and 2013, resulting from hedge ineffectiveness. At June 30, 2014, FCX held copper futures and swap contracts that qualified for hedge accounting for 53 million pounds at an average contract price of $3.10 per pound, with maturities through September 2015.

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 follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Copper futures and swap contracts:
 
 
 
 
 
 
 
Unrealized gains (losses):
 
 
 
 
 
 
 
Derivative financial instruments
$
12

 
$
(6
)
 
$
—

 
$
(18
)
Hedged item – firm sales commitments
(12
)
 
6

 
—

 
18

 
 
 
 
 
 
 
 
Realized losses:
 
 
 
 
 
 
 
Matured derivative financial instruments
(2
)
 
(13
)
 
(4
)
 
(14
)

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, 2013, 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) copper price or the COMEX copper price and the London Bullion Market Association (London) gold price at the time of shipment as specified in the contract. Similarly, FCX purchases copper under contracts that provide for provisional pricing. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host sales agreements since the contracts do not allow for net settlement and always result in physical delivery. Sales and purchases with a provisional sales price contain an embedded derivative (i.e., the price settlement mechanism is settled after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale or purchase of the metals contained in the concentrates or cathodes at the then-current LME or COMEX copper price or the London gold price 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.


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A summary of FCX’s embedded commodity derivatives at June 30, 2014, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
496

 
$
3.08

 
$
3.18

 
November 2014
Gold (thousands of ounces)
85

 
1,273

 
1,314

 
August 2014
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
84

 
3.07

 
3.19

 
October 2014

Crude Oil and Natural Gas Contracts. As a result of the acquisition of PXP, FCX has derivative contracts for 2014 and 2015 that consist of crude oil options and natural gas swaps. These crude oil and natural gas derivatives are not designated as hedging instruments and are recorded at fair value with the mark-to-market gains and losses recorded in revenues.

The crude oil options were entered into by PXP to protect the realized price of a portion of expected future sales in order to limit the effects of crude oil price decreases. At June 30, 2014, these contracts are composed of crude oil put spreads consisting of put options with a floor limit. The premiums associated with put options are deferred until the settlement period. At June 30, 2014, the deferred option premiums and accrued interest associated with the crude oil option contracts totaled $329 million, which was included as a reduction of the fair value of the crude oil options contracts. At June 30, 2014, the outstanding crude oil option contracts, which settle monthly and cover approximately 20 million barrels in 2014 and approximately 31 million barrels in 2015, follow:
 
 
 
 
 
 
Average Strike Price (per barrel)a
 
 
 
 
Period
 
Instrument Type
 
Daily Volumes (thousand barrels)
 
Floor
 
Floor Limit
 
Average Deferred Premium
 (per barrel)
 
Index
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Jul - Dec
 
Put optionsb
 
75

 
$
90

 
$
70

 
$
5.74

 
Brent
Jul - Dec
 
Put optionsb
 
30

 
95

 
75

 
6.09

 
Brent
Jul - Dec
 
Put optionsb
 
5

 
100

 
80

 
7.11

 
Brent
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
Jan - Dec
 
Put optionsb
 
84

 
90

 
70

 
6.89

 
Brent
 
 
 
 
 
 
 
 
 
 
 
 
 
a.
The average strike prices do not reflect any premiums to purchase the put options.
b.
If the index price is less than the per barrel floor, FCX receives the difference between the per barrel floor and the index price up to a maximum of $20 per barrel less the option premium. If the index price is at or above the per barrel floor, FCX pays the option premium and no cash settlement is received.

In addition, at June 30, 2014, outstanding natural gas swaps with a weighted-average fixed swap price of $4.09 per million British thermal units (MMBtu) cover approximately 18 million MMBtu of natural gas, with maturities through December 2014 (on daily volumes of 100,000 MMBtu). If the Henry Hub index price is 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 June 30, 2014, Atlantic Copper held net forward copper purchase contracts for 19 million pounds at an average contract price of $3.07 per pound, with maturities through July 2014.


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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, follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Embedded derivatives in provisional copper and gold
 
 
 
 
 
 
 
sales contractsa
$
84

 
$
(205
)
 
$
(85
)
 
$
(288
)
Crude oil optionsa
(68
)
 
(54
)
 
(104
)
 
(54
)
Natural gas swapsa
(2
)
 
19

 
(16
)
 
19

Copper forward contractsb
4

 
—

 
5

 
3

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 (in millions):
 
 
June 30,
2014
 
December 31, 2013
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contractsa
 
$
6

 
$
6

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
55

 
63

Copper forward contracts
 
2

 
—

Total derivative assets
 
$
63

 
$
69

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

 
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
12

 
16

Crude oil optionsb
 
298

 
309

Natural gas swaps
 
7

 
4

Copper forward contracts
 
—

 
1

Total derivative liabilities
 
$
318

 
$
330

a.
FCX paid $1 million to brokers at June 30, 2014, and at December 31, 2013, for margin requirements (recorded in other current assets).
b.
Included $329 million at June 30, 2014, and $444 million at December 31, 2013, for deferred premiums and accrued interest.

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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
 
 
June 30,
2014
 
December 31, 2013
 
June 30,
 2014
 
December 31, 2013
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives on provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
$
55

 
$
63

 
$
12

 
$
16

Crude oil and natural gas derivatives
 
—

 
—

 
305

 
313

Copper derivatives
 
8

 
6

 
1

 
1

 
 
63

 
69

 
318

 
330

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

 
10

 
—

 
10

Crude oil and natural gas derivatives
 
—

 
—

 
—

 
—

Copper derivatives
 
1

 
—

 
1

 
—

 
 
1

 
10

 
1

 
10

 
 
 
 
 
 
 
 
 
Net amounts presented in balance sheet:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives on provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
55

 
53

 
12

 
6

Crude oil and natural gas derivatives
 
—

 
—

 
305

 
313

Copper derivatives
 
7

 
6

 
—

 
1

 
 
$
62

 
$
59

 
$
317

 
$
320

 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
$
55

 
$
53

 
$
—

 
$
—

Other current assets
 
7

 
6

 
—

 
—

Accounts payable and accrued liabilities
 
—

 
—

 
232

 
205

Other liabilities
 
—

 
—

 
85

 
115

 
 
$
62

 
$
59

 
$
317

 
$
320


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 June 30, 2014, the maximum amount of credit exposure associated with derivative transactions was $62 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 $72 million at June 30, 2014, and $211 million at December 31, 2013), accounts receivable, accounts payable and accrued liabilities, and dividends payable approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 8 for the fair values of investment securities, legally restricted funds and long-term debt).

In addition, FCX has non-detachable warrants, which are considered to be embedded derivative instruments, associated with FM O&G's Plains Offshore Operations Inc. (Plains Offshore) 8% Convertible Preferred Stock (Preferred Stock) (refer to Note 8 for the fair value of these instruments).


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Table of Contents                 


NOTE 8. FAIR VALUE MEASUREMENT
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). FCX recognizes transfers between levels at the end of the reporting period. FCX did not have any significant transfers in or out of Level 1, 2 or 3 for second-quarter 2014.

A summary of the carrying amount and fair value of FCX’s financial instruments, other than cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable (refer to Note 7), follows (in millions):
 
At June 30, 2014
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
Money market fundsc
$
434

 
$
434

 
$
434

 
$
—

 
$
—

U.S. core fixed income fund
22

 
22

 
—

 
22

 
—

Equity securities
4

 
4

 
4

 
—

 
—

Total
460

 
460

 
438

 
22

 
—

 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a,b,d
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
50

 
50

 
—

 
50

 
—

Government bonds and notes
35

 
35

 
—

 
35

 
—

Government mortgage-backed securities
31

 
31

 
—

 
31

 
—

Corporate bonds
29

 
29

 
—

 
29

 
—

Asset-backed securities
16

 
16

 
—

 
16

 
—

Money market funds
6

 
6

 
6

 
—

 
—

Municipal bonds
1

 
1

 
—

 
1

 
—

Total
168

 
168

 
6

 
162

 
—

 
 
 
 
 
 
 
 
 
 
Derivatives:a,e
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross asset position
55

 
55

 
—

 
55

 
—

Copper futures and swap contracts
6

 
6

 
6

 
—

 
—

Copper forward contracts
2

 
2

 
2

 
—

 
—

Total
63

 
63

 
8

 
55

 
—

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
691

 
$
452

 
$
239

 
$
—

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a,e
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross liability position
$
12

 
$
12

 
$
—

 
$
12

 
$
—

Crude oil options
298

 
298

 
—

 
—

 
298

Natural gas swaps
7

 
7

 
—

 
7

 
—

Copper futures and swap contracts
1

 
1

 
1

 
—

 
—

Total
318

 
318

 
1

 
19

 
298

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portionf
20,296

 
20,607

 
—

 
20,607

 
—

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
20,925

 
$
1

 
$
20,626

 
$
298




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Table of Contents                 


 
At December 31, 2013
 
Carrying
 
Fair Value
 
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
21

 
$
21

 
$
—

 
$
21

 
$
—

Money market funds
18

 
18

 
18

 
—

 
—

Equity securities
5

 
5

 
5

 
—

 
—

Total
44

 
44

 
23

 
21

 
—

 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a,b,d
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
48

 
48

 
—

 
48

 
—

Government mortgage-backed securities
34

 
34

 
—

 
34

 
—

Corporate bonds
28

 
28

 
—

 
28

 
—

Government bonds and notes
28

 
28

 
—

 
28

 
—

Money market funds
28

 
28

 
28

 
—

 
—

Asset-backed securities
15

 
15

 
—

 
15

 
—

Municipal bonds
1

 
1

 
—

 
1

 
—

Total
182

 
182

 
28

 
154

 
—

 
 
 
 
 
 
 
 
 
 
Derivatives:a,e
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross asset position
63

 
63

 
—

 
63

 
—

Copper futures and swap contracts
6

 
6

 
5

 
1

 
—

Total
69

 
69

 
5

 
64

 
—

 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
295

 
$
56

 
$
239

 
$
—

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivatives:a
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/purchase
 
 
 
 
 
 
 
 
 
contracts in a gross liability positione
$
16

 
$
16

 
$
—

 
$
16

 
$
—

Crude oil optionse
309

 
309

 
—

 
—

 
309

Natural gas swapse
4

 
4

 
—

 
4

 
—

Copper forward contractse
1

 
1

 
1

 
—

 
—

Plains Offshore warrantsg
2

 
2

 
—

 
—

 
2

Total
332

 
332

 
1

 
20

 
311