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 September 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 nine-month periods ended September 30, 2014 and 2013, resulting from hedge ineffectiveness. At September 30, 2014, FCX held copper futures and swap contracts that qualified for hedge accounting for 54 million pounds at an average contract price of $3.09 per pound, with maturities through December 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						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Copper futures and swap contracts:
Unrealized gains (losses):
Derivative financial instruments	$	(10	)	$	16		$	(10	)	$	(2	)
Hedged item – firm sales commitments	10			(16		)	10			2

Realized gains (losses):
Matured derivative financial instruments	1			(3		)	(3		)	(17		)

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.

A summary of FCX’s embedded commodity derivatives at September 30, 2014, follows:



	Open Positions	Average Price Per Unit				Maturities Through
	Open Positions	Contract		Market		Maturities Through
Embedded derivatives in provisional sales contracts:
Copper (millions of pounds)	554	$	3.14	$	3.03	February 2015
Gold (thousands of ounces)	301	1,259		1,214		January 2015
Embedded derivatives in provisional purchase contracts:
Copper (millions of pounds)	98	3.16		3.03		January 2015

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 September 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 September 30, 2014, the deferred option premiums and accrued interest associated with the crude oil option contracts totaled $269 million, which was included as a reduction of the fair value of the crude oil options contracts. At September 30, 2014, the outstanding crude oil option contracts, which settle monthly and cover approximately 10 million barrels in the fourth quarter of 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
Oct - Dec	Put options^b	75	$	90	$	70	$	5.74	Brent
Oct - Dec	Put options^b	30	95		75		6.09		Brent
Oct - Dec	Put options^b	5	100		80		7.11		Brent

2015
Jan - Dec	Put options^b	84	90		70		6.89		Brent


a.	The average strike prices do not reflect any premiums to purchase the put options.


b.	If the index price is less than the per barrel floor, FCX receives the difference between the per barrel floor and the index price up to a maximum of $20 per barrel less the option premium. If the index price is at or above the per barrel floor, FCX pays the option premium and no cash settlement is received.

In addition, at September 30, 2014, outstanding natural gas swaps with a weighted-average fixed swap price of $4.09 per million British thermal units (MMBtu) cover approximately 9 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 September 30, 2014, Atlantic Copper held net forward copper purchase contracts for 46 million pounds at an average contract price of $3.12 per pound, with maturities through November 2014.

Summary of Gains (Losses). A summary of the realized and unrealized gains (losses) recognized in income before income taxes and equity in affiliated companies’ net earnings for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Embedded derivatives in provisional copper and gold
sales contracts^a	$	(99	)	$	141		$	(184	)	$	(147	)
Crude oil options and swaps^a	57			(173		)	(47		)	(227		)
Natural gas swaps^a	7			3			(9		)	22
Copper forward contracts^b	(4		)	—			1			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):



	September 30, 2014		December 31, 2013
Commodity Derivative Assets:
Derivatives designated as hedging instruments:
Copper futures and swap contracts^a	$	1	$	6
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper and gold
sales/purchase contracts	12		63
Total derivative assets	$	13	$	69

Commodity Derivative Liabilities:
Derivatives designated as hedging instruments:
Copper futures and swap contracts^a	$	5	$	—
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional copper and gold
sales/purchase contracts	75		16
Crude oil options^b	182		309
Natural gas swaps	—		4
Copper forward contracts	4		1
Total derivative liabilities	$	266	$	330


a.	FCX paid $6 million to brokers at September 30, 2014, and $1 million at December 31, 2013, for margin requirements (recorded in other current assets).


b.	Included $269 million at September 30, 2014, and $444 million at December 31, 2013, for deferred premiums and accrued interest.

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, 2014		December 31, 2013		September 30, 2014		December 31, 2013

Gross amounts recognized:
Commodity contracts:
Embedded derivatives on provisional
sales/purchase contracts	$	12	$	63	$	75	$	16
Crude oil and natural gas derivatives	—		—		182		313
Copper derivatives	1		6		9		1
	13		69		266		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	12		53		75		6
Crude oil and natural gas derivatives	—		—		182		313
Copper derivatives	—		6		8		1
	$	12	$	59	$	265	$	320

Balance sheet classification:
Trade accounts receivable	$	1	$	53	$	60	$	—
Other current assets	—		6		—		—
Accounts payable and accrued liabilities	11		—		169		205
Other liabilities	—		—		36		115
	$	12	$	59	$	265	$	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 September 30, 2014, the maximum amount of credit exposure associated with derivative transactions was $12 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 September 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).