CAPITAL POWER CORPORATION Notes to the Consolidated Financial Statements (Tabular amounts in millions of Canadian dollars, except share and per share amounts) 29. Financial instruments, continued: Fair value hierarchy, continued December 31, 2012 Level 1 Level 2 Level 3 Total Derivative financial instruments assets Commodity derivatives $ 25 $ 52 $ - $ 77 Derivative financial instruments liabilities Commodity derivatives (30) (18) (16) (64) December 31, 2011 Level 1 Level 2 Level 3 Total Other financial assets $ 53 $ - $ - $ 53 Derivative financial instruments assets Commodity derivatives - 37 1 38 Derivative financial instruments liabilities Commodity derivatives (1) (63) (2) (66) Interest rate derivatives - (8) - (8) $ (1) $ (71) $ (2) $ (74) 119 The fair value measurement of a financial instrument is included in only one of the three levels, the determination of which is based upon the lowest level input that is significant to the derivation of the fair value. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment which will affect the placement within the fair value hierarchy levels. The following tables present the Company’s financial instruments measured at fair value on a recurring basis in the consolidated statement of financial position, classified using the fair value hierarchy described above:  Level 2: Fair value is based on other than unadjusted quoted prices included in level 1, which are either directly or indirectly observable at the reporting date. Level 2 includes those financial instruments that are valued using commonly used valuation techniques, such as a discounted cash flow model or the Black-Scholes option pricing models. Valuation models use inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active but observable, and other observable inputs that are principally derived from or corroborated by observable market data for substantially the full term of the instrument. Financial instruments classified in Level 2 include commodity and foreign exchange derivatives whose values are determined based on broker quotes, observable trading activity for similar, but not identical instruments, and prices published on information platforms and exchanges.  Level 3: Fair value is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 includes financial instruments that are also valued using commonly used valuation techniques described in Level 2, however some inputs used in the models may not be based on observable market data, but rather are based on the Company’s best estimate from the perspective of a market participant. Financial instruments classified in Level 3 include long-dated commodity derivatives, commodity contracts involving non-standard features, transmission and commodity based options, and credit derivatives whose values are in part determined based on historical data such as plant operation costs, credit default probabilities, transmission congestion, demand profiles, volatilities and correlations between products derived from historical prices.