inactive based on transaction volume for such instruments and classify as Level 3 those instruments
that are not actively traded. For these inputs, we utilize pricing and volatility information from other
instruments with similar characteristics and extrapolate and/or interpolate data between data points for
thinly traded instruments. As of December 31, 2011, our 2013 natural gas swaps and certain of our
2012 crude oil collars are classified as Level 2, certain of our 2012 crude oil collars are classified as
Level 3 and all of our 2012 natural gas and 2013 crude oil contracts are classified as Level 3
instruments.
We determine the fair value of our investment by discounting for lack of marketability at the
reporting date. The discount factor for lack of marketability is determined by utilizing both Protective put
and Asian put option models. Both of these options are valued using a Black-Scholes option-pricing
model which utilizes various inputs including the closing price of the McMoRan common stock, implied
volatility of the instrument, number of shares being valued, length of time that would be necessary to
dispose of our investment, expected dividend and risk-free interest rates. As of December 31, 2011,
we have classified our investment as Level 3 since the fair value is determined by utilizing significant
inputs that are unobservable.
We determine the appropriate level for each financial asset and liability on a quarterly basis and
recognize any transfers at the beginning of the reporting period.
The following table presents a reconciliation of changes in fair value of financial assets and
liabilities classified as Level 3 for the years ended December 31, 2011 and 2010 (in thousands):
Year Ended December 31,
2011
2010
Commodity
Derivatives
(1)
Investment
Commodity
Derivatives
(1)
Investment
Fair value at beginning of period . . . . . . . . . . . . . . . . . . . . $ 4,785 $ 664,346 $ 14,312 $
-
Transfers
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,962
-
-
-
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,948
-
16,894 665,897
Realized and unrealized gains and losses included in
earnings
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,775
(52,675)
12,613
(1,551)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,374)
-
(39,034)
-
Fair value at end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 114,096 $ 611,671 $ 4,785 $ 664,346
Change in unrealized gains and losses relating to assets
and liabilities held as of the end of the period
(3)
. . . . . . . . $ 50,894 $ (52,675) $ (12,108) $ (1,551)
(1) Deferred option premiums and interest are not included in the fair value of derivatives.
(2) During the third quarter of 2011, the inputs used to value certain of our 2011 natural gas collars were directly or indirectly
observable and those contracts were transferred to Level 2.
(3) Realized and unrealized gains and losses included in earnings for the period are reported as gain (loss) on mark-to-market
derivative contracts and loss on investment measured at fair value in our income statement for our commodity derivative
contracts and our investment, respectively.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Nonfinancial assets and liabilities, such as goodwill and other property and equipment, are
measured at fair value on a nonrecurring basis upon impairment; however, we have no material assets
or liabilities that are reported at fair value on a nonrecurring basis in our balance sheet.
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