(14) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

PHI applies FASB guidance on fair value measurement (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). PHI utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, PHI utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs 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) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, PHI’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. PHI’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Derivative instruments
Preferred stock	$	3	$	—	$	—	$	3
Cash equivalents and restricted cash equivalents
Treasury fund		143		143		—		—
Executive deferred compensation plan assets
Money market funds and short-term investments		35		15		20		—
Life insurance contracts		46		—		27		19

Total	$	227	$	158	$	47	$	22

LIABILITIES
Derivative instruments (b)
Natural gas (c)	$	2	$	2	$	—	$	—
Executive deferred compensation plan liabilities
Life insurance contracts		30		—		30		—

Total	$	32	$	2	$	30	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the three months ended March 31, 2015.

(b)	The fair values of derivative liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents natural gas futures purchased by DPL as part of a natural gas hedging program approved by the DPSC.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Derivative instruments
Preferred stock	$	3	$	—	$	—	$	3
Restricted cash equivalents
Treasury fund		38		38		—		—
Executive deferred compensation plan assets
Money market funds and short-term investments		35		14		21		—
Life insurance contracts		46		—		27		19

Total	$	122	$	52	$	48	$	22

LIABILITIES
Derivative instruments (b)
Natural gas (c)	$	4	$	4	$	—	$	—
Executive deferred compensation plan liabilities
Life insurance contracts		30		—		30		—

Total	$	34	$	4	$	30	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the year ended December 31, 2014.

(b)	The fair values of derivative liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents natural gas futures purchased by DPL as part of a natural gas hedging program approved by the DPSC.

PHI classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation 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 in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis, such as the Intercontinental Exchange.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Executive deferred compensation plan assets and liabilities categorized as level 2 consist of life insurance policies and certain employment agreement obligations. The life insurance policies are categorized as level 2 assets because they are valued based on the assets underlying the policies, which consist of short-term cash equivalents and fixed income securities that are priced using observable market data and can be liquidated for the value of the underlying assets as of March 31, 2015. The level 2 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance sub-accounts. The sub-accounts are designed to mirror existing mutual funds and money market funds that are observable and actively traded.

The value of certain employment agreement obligations (which are included with life insurance contracts in the tables above) is derived using a discounted cash flow valuation technique. The discounted cash flow calculations are based on a known and certain stream of payments to be made over time that are discounted to determine their net present value. The primary variable input, the discount rate, is based on market-corroborated and observable published rates. These obligations have been classified as level 2 within the fair value hierarchy because the payment streams represent contractually known and certain amounts and the discount rate is based on published, observable data.

Level 3 – Pricing inputs that are significant and generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Derivative instruments classified as level 3 include embedded call and redemption features on the Preferred Stock as further discussed in Note (12), “Preferred Stock.”

Executive deferred compensation plan assets include certain life insurance policies that are valued using the cash surrender value of the policies, net of loans against those policies. The cash surrender values do not represent a quoted price in an active market; therefore, those inputs are unobservable and the policies are categorized as level 3. Cash surrender values are provided by third parties and reviewed by PHI for reasonableness.

Reconciliations of the beginning and ending balances of PHI’s fair value measurements using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014 are shown below:


	Three Months Ended March 31, 2015					Three Months Ended March 31, 2014
	Preferred Stock		Life Insurance Contracts			Life Insurance Contracts
	*(millions of dollars)*

Beginning balance as of January 1	$	3	$	19		$	19
Total gains (losses) (realized and unrealized):
Included in income		—		1			1
Included in accumulated other comprehensive loss		—		—			—
Included in regulatory liabilities		—		—			—
Purchases		—		—			—
Issuances		—		—			(1	)
Settlements		—		(1	)		—
Transfers in (out) of level 3		—		—			—

Ending balance as of March 31	$	3	$	19		$	19

The breakdown of realized and unrealized gains on level 3 instruments included in income as a component of Other income or Other operation and maintenance expense for the periods below were as follows:


	Three Months Ended March 31,
	2015		2014
	*(millions of dollars)*
Total net gains included in income for the period	$	1	$	1

Change in unrealized gains relating to assets still held at reporting date	$	1	$	1

Other Financial Instruments

The estimated fair values of PHI’s Long-term debt instruments that are measured at amortized cost in PHI’s consolidated financial statements and the associated levels of the estimates within the fair value hierarchy as of March 31, 2015 and December 31, 2014 are shown in the tables below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. PHI’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.

The fair value of Long-term debt and Transition bonds issued by ACE Funding (Transition Bonds) categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers, and PHI reviews the methodologies and results.

The fair value of Long-term debt categorized as level 3 is based on a discounted cash flow methodology using observable inputs, such as the U.S. Treasury yield, and unobservable inputs, such as credit spreads, because quoted prices for the debt or similar debt in active markets were insufficient. The Long-term project funding represents debt instruments issued by Pepco and Pepco Energy Services related to its energy savings and construction contracts. Long-term project funding is categorized as level 3 because PHI concluded that the amortized cost carrying amounts for these instruments approximates fair value, which does not represent a quoted price in an active market.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	5,871	$	1,890	$	3,524	$	457
Transition Bonds (b)		224		—		224		—
Long-term project funding		10		—		—		10

Total	$	6,105	$	1,890	$	3,748	$	467

(a)	The carrying amount for Long-term debt was $5,015 million as of March 31, 2015.

(b)	The carrying amount for Transition Bonds, including amounts due within one year, was $203 million as of March 31, 2015.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	5,583	$	—	$	5,136	$	447
Transition Bonds (b)		235		—		235		—
Long-term project funding		28		—		—		28

Total	$	5,846	$	—	$	5,371	$	475

(a)	The carrying amount for Long-term debt was $4,807 million as of December 31, 2014.

(b)	The carrying amount for Transition Bonds, including amounts due within one year, was $215 million as of December 31, 2014.

The carrying amounts of all other financial instruments in the accompanying consolidated financial statements approximate fair value.

Fair Value Disclosures

(10) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

Pepco applies FASB guidance on fair value measurement (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Pepco utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, Pepco utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs 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) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, Pepco’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Pepco’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS

Cash equivalents and restricted cash equivalents
Treasury fund	$	116	$	116	$	—	$	—
Executive deferred compensation plan assets
Money market funds and short-term investments		34		14		20		—
Life insurance contracts		42		—		23		19

Total	$	192	$	130	$	43	$	19

LIABILITIES

Executive deferred compensation plan liabilities
Life insurance contracts	$	6	$	—	$	6	$	—

Total	$	6	$	—	$	6	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the three months ended March 31, 2015.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS

Restricted cash equivalents
Treasury fund	$	5	$	5	$	—	$	—

Executive deferred compensation plan assets
Money market funds and short-term investments		34		13		21		—
Life insurance contracts		41		—		23		18

Total	$	80	$	18	$	44	$	18

LIABILITIES

Executive deferred compensation plan liabilities
Life insurance contracts	$	7	$	—	$	7	$	—

Total	$	7	$	—	$	7	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the year ended December 31, 2014.

Pepco classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation 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 in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Executive deferred compensation plan assets and liabilities categorized as level 2 consist of life insurance policies and certain employment agreement obligations. The life insurance policies are categorized as level 2 assets because they are valued based on the assets underlying the policies, which consist of short-term cash equivalents and fixed income securities that are priced using observable market data and can be liquidated for the value of the underlying assets as of March 31, 2015. The level 2 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance sub-accounts. The sub-accounts are designed to mirror existing mutual funds and money market funds that are observable and actively traded.

The value of certain employment agreement obligations (which are included with life insurance contracts in the tables above) is derived using a discounted cash flow valuation technique. The discounted cash flow calculations are based on a known and certain stream of payments to be made over time that are discounted to determine their net present value. The primary variable input, the discount rate, is based on market-corroborated and observable published rates. These obligations have been classified as level 2 within the fair value hierarchy because the payment streams represent contractually known and certain amounts and the discount rate is based on published, observable data.

Level 3 – Pricing inputs that are significant and generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Executive deferred compensation plan assets include certain life insurance policies that are valued using the cash surrender value of the policies, net of loans against those policies. The cash surrender values do not represent a quoted price in an active market; therefore, those inputs are unobservable and the policies are categorized as level 3. Cash surrender values are provided by third parties and reviewed by Pepco for reasonableness.

Reconciliations of the beginning and ending balances of Pepco’s fair value measurements using significant unobservable inputs (level 3) for the three months ended March 31, 2015 and 2014 are shown below:


	Life Insurance Contracts
	Three Months Ended March 31,
	2015		2014
	*(millions of dollars)*
Beginning balance as of January 1	$	18	$	18
Total gains (losses) (realized and unrealized):
Included in income		1		1
Included in accumulated other comprehensive loss		—		—
Purchases		—		—
Issuances		—		(1	)
Settlements		—		—
Transfers in (out) of level 3		—		—

Ending balance as of March 31	$	19	$	18

The breakdown of realized and unrealized gains on level 3 instruments included in income as a component of Other operation and maintenance expense for the periods below were as follows:


	Three Months Ended March 31,
	2015		2014
	*(millions of dollars)*
Total gains included in income for the period	$	1	$	1

Change in unrealized gains relating to assets still held at reporting date	$	1	$	1

Other Financial Instruments

The estimated fair values of Pepco’s Long-term debt instruments that are measured at amortized cost in Pepco’s financial statements and the associated levels of the estimates within the fair value hierarchy as of March 31, 2015 and December 31, 2014 are shown in the tables below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Pepco’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.

The fair value of Long-term debt categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers and Pepco reviews the methodologies and results.

The Project funding represents debt instruments issued by Pepco related to its construction contracts. Project funding is categorized as level 3 because PHI concluded that the amortized cost carrying amounts for these instruments approximate fair value, which does not represent a quoted price in an active market.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	2,884	$	1,624	$	1,260	$	—

(a)	The carrying amount for Long-term debt was $2,332 million as of March 31, 2015.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	2,624	$	—	$	2,624	$	—
Project funding		12		—		—		12

Total	$	2,636	$	—	$	2,624	$	12

(a)	The carrying amount for Long-term debt was $2,124 million as of December 31, 2014.

The carrying amounts of all other financial instruments in the accompanying financial statements approximate fair value.

Fair Value Disclosures

(12) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

DPL applies FASB guidance on fair value measurement (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). DPL utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, DPL utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs 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) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, DPL’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. DPL’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS

Executive deferred compensation plan assets
Money market funds	$	1	$	1	$	—	$	—

Total	$	1	$	1	$	—	$	—

LIABILITIES

Derivative instruments (b)
Natural gas (c)	$	2	$	2	$	—	$	—
Executive deferred compensation plan liabilities
Life insurance contracts		1		—		1		—

Total	$	3	$	2	$	1	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the three months ended March 31, 2015.

(b)	The fair value of derivative liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents natural gas futures purchased by DPL as part of a natural gas hedging program approved by the DPSC.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS

Restricted cash equivalents
Treasury funds	$	5	$	5	$	—	$	—

Executive deferred compensation plan assets
Money market funds		1		1		—		—
Life insurance contracts		1		—		—		1

Total	$	7	$	6	$	—	$	1

LIABILITIES

Derivative instruments (b)	$	4	$	4	$	—	$	—
Natural gas (c)
Executive deferred compensation plan liabilities
Life insurance contracts		1		—		1		—

Total	$	5	$	4	$	1	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the year ended December 31, 2014.

(b)	The fair value of derivative liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents natural gas futures purchased by DPL as part of a natural gas hedging program approved by the DPSC.

DPL classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation 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 in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis, such as the Intercontinental Exchange.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 2 executive deferred compensation plan liabilities associated with the life insurance policies represent a deferred compensation obligation, the value of which is tracked via underlying insurance sub-accounts. The sub-accounts are designed to mirror existing mutual funds and money market funds that are observable and actively traded.

Level 3 – Pricing inputs that are significant and generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Executive deferred compensation plan assets include certain life insurance policies that are valued using the cash surrender value of the policies, net of loans against those policies. The cash surrender values do not represent a quoted price in an active market; therefore, those inputs are unobservable and the policies are categorized as level 3. Cash surrender values are provided by third parties and reviewed by DPL for reasonableness.

Reconciliations of the beginning and ending balances of DPL’s fair value measurements using significant unobservable inputs (level 3) for the three months ended March 31, 2015 and 2014 are shown below:


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
	Life Insurance Contracts			Life Insurance Contracts
	*(millions of dollars)*
Balance as of January 1	$	1		$	1
Total gains (losses) (realized and unrealized):
Included in income		—			—
Included in accumulated other comprehensive loss		—			—
Included in regulatory liabilities		—			—
Purchases		—			—
Issuances		—			—
Settlements		(1	)		—
Transfers in (out) of Level 3		—			—

Balance as of March 31	$	—		$	1

Other Financial Instruments

The estimated fair values of DPL’s Long-term debt instruments that are measured at amortized cost in DPL’s financial statements and the associated levels of the estimates within the fair value hierarchy as of March 31, 2015 and December 31, 2014 are shown in the tables below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. DPL’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.

The fair value of Long-term debt categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers and DPL reviews the methodologies and results.

The fair value of Long-term debt categorized as level 3 is based on a discounted cash flow methodology using observable inputs, such as the U.S. Treasury yield, and unobservable inputs, such as credit spreads, because quoted prices for the debt or similar debt in active markets were insufficient.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	1,139	$	15	$	1,017	$	107

(a)	The carrying amount for Long-term debt was $1,071 million as of March 31, 2015.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	1,123	$	—	$	1,016	$	107

(a)	The carrying amount for Long-term debt was $1,071 million as of December 31, 2014.

The carrying amounts of all other financial instruments in the accompanying consolidated financial statements approximate fair value.

Fair Value Disclosures

(10) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

ACE applies FASB guidance on fair value measurement (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ACE utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, ACE utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs 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) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, ACE’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. ACE’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS

Restricted cash equivalents
Treasury fund	$	24	$	24	$	—	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the three months ended March 31, 2015.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS

Restricted cash equivalents
Treasury fund	$	24	$	24	$	—	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories during the year ended December 31, 2014.

ACE classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation 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 in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 – Pricing inputs that are significant and generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Other Financial Instruments

The estimated fair values of ACE’s Long-term debt instruments that are measured at amortized cost in ACE’s consolidated financial statements and the associated levels of the estimates within the fair value hierarchy as of March 31, 2015 and December 31, 2014 are shown in the tables below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. ACE’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.

The fair value of Long-term debt and Transition bonds issued by ACE Funding (Transition Bonds) categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers and ACE reviews the methodologies and results.

The fair value of Long-term debt categorized as level 3 is based on a discounted cash flow methodology using observable inputs, such as the U.S. Treasury yield, and unobservable inputs, such as credit spreads, because quoted prices for the debt or similar debt in active markets were insufficient.


	Fair Value Measurements at March 31, 2015
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	1,049	$	—	$	905	$	144
Transition Bonds (b)		224		—		224		—

Total	$	1,273	$	—	$	1,129	$	144

(a)	The carrying amount for Long-term debt was $903 million as of March 31, 2015.

(b)	The carrying amount for Transition Bonds, including amounts due within one year, was $203 million as of March 31, 2015.


	Fair Value Measurements at December 31, 2014
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES

Debt instruments
Long-term debt (a)	$	1,035	$	—	$	903	$	132
Transition Bonds (b)		235		—		235		—

Total	$	1,270	$	—	$	1,138	$	132

(a)	The carrying amount for Long-term debt was $903 million as of December 31, 2014.

(b)	The carrying amount for Transition Bonds, including amounts due within one year, was $215 million as of December 31, 2014.

The carrying amounts of all other financial instruments in the accompanying consolidated financial statements approximate fair value.