NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in the Fair Value of Financial Instruments Classified in Level 3 The following table summarizes the changes in fair value of financial instruments classified in Level 3 for the years ended December 31, 2013  and 2012. The Pension Plan classifies financial instruments as Level 3 when the fair value is measured based on at least one significant input  that is not observable in the markets or due to lack of liquidity in certain markets. The gains and losses presented in the table below may include  changes in fair value based on both observable and unobservable inputs. There have been no material transfers into or out of Level 3 of the fair value hierarchy. The Company performs sensitivity analysis for fair value measurements classified in Level 3, substituting the unobservable inputs with one  or more reasonably possible alternative assumptions. These sensitivity analyses resulted in negligible changes in the fair value of financial  instruments classified in this level. The pooled fund category mainly consists of private equity investments. Private equity investments represent private equity funds that invest in  operating companies that are not publicly traded on a stock exchange. Investment strategies in private equity include limited partnerships in  businesses that are characterized by high internal growth and operational efficiencies, venture capital, leveraged buyouts and special situations  such as distressed investments. Private equity valuations are reported by the fund manager and are based on the valuation of the underlying  investments which includes inputs such as cost, operating results, discounted future cash flows and market-based comparable data. Since these  valuation inputs are not highly observable, private equity investments have been categorized as Level 3 within pooled funds. Valuation Techniques Used to Determine Fair Value Pooled Funds Real Estate Short-Term Securities Cash Equivalents Bonds and Debentures Corporate Shares Demand cash deposits held with banks and cash held by the investment managers are considered cash equivalents and are included in the fair value measurements hierarchy as Level 1. Short-term securities are valued at cost plus accrued interest, which approximates fair value due to their short-term nature. Short-term securities  have been categorized as Level 2. Real estate investments represent private equity investments in holding companies that invest in real estate properties. The investments in the  holding companies are valued using net asset values reported by the fund manager. Real estate investments are categorized as Level 3.  Corporate shares are valued based on quoted prices in active markets and are categorized as Level 1. Investments denominated in foreign  currencies are translated into Canadian currency at year-end rates of exchange. Bonds and debentures are presented at published closing trade quotations, and are categorized as Level 2. Year ended December 31 (millions of Canadian dollars) 2013 2012 Fair value, beginning of year  106 167 Realized and unrealized gains  23 5 Purchases  – 6 Sales and disbursements  (10) (72) Fair value, end of year  119 106 86 HYDRO ONE ANNUAL REPORT 2013