Allegheny Power 2010 Annual Report Download - page 86

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Accounting guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy defined by
accounting guidance are as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active
markets are those where transactions for the asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. Level 1 assets include registered investment companies, common stocks, publicly
traded real estate investment trusts and certain shorter duration, more liquid fixed income securities. Registered
investment companies and common stocks are stated at fair value as quoted on a recognized securities exchange and
are valued at the last reported sales price on the last business day of the plan year. Market values for real estate
investment trusts and certain fixed income securities are based on daily quotes available on public exchanges as with
other publicly traded equity and fixed income securities.
Level 2 – Pricing inputs are either directly or indirectly observable in the market as of the reporting date, other than
quoted prices in active markets included in Level 1. Additionally, Level 2 includes those financial instruments that are
valued using models or other valuation methodologies based on assumptions that are observable in the marketplace
throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at
which transactions are executed in the marketplace. These models are primarily industry-standard models that consider
various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market
and contractual prices for the underlying instruments, as well as other relevant economic measures. Level 2 investments
include common collective trusts, certain real estate investment trusts, and fixed income assets. Common collective
trusts are not available in an exchange and active market; however, the fair value is determined based on the underlying
investments as traded in an exchange and active market.
Level 3 – Pricing inputs include inputs that are generally less observable from objective sources. These inputs may be
used with internally developed methodologies that result in management’s best estimate of fair value in addition to the
use of independent appraisers’ estimates of fair value on a periodic basis typically determined quarterly but no less than
annually. Assets in this category include private equity, limited partnership, certain real estate trusts and fixed income
securities. The fixed income securities’ market values are based in part on quantitative models and on observing market
value ascertained through timely trades for securities that are similar to the ones being valued.
As of December 31, 2010 and 2009, the pension investments measured at fair value were as follows:
December 31, 2010 Asset
Level 1 Level 2 Level 3 Total Allocation
(In millions)
Cash and short-term securities $ - $ 72 $ - $ 72 1 %
Equity investments
Domestic 342 189 - 531 12 %
International 118 615 - 733 16 %
Fixed income
Government bonds - 722 - 722 16 %
Corporate bonds - 1,414 - 1,414 31 %
Distressed debt - 97 - 97 2 %
Mortgaged-backed securities
(non-government) - 52 - 52 1 %
A
lternatives
Hedge funds - 497 - 497 11 %
Private equity funds - - 119 119 4 %
Real estate funds 2 - 282 284 6 %
$ 462 $ 3,658 $ 401 $ 4,521 100 %