Q1 2015 Form 10-Q



    
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2015
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12291
THE AES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
54 1163725
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
4300 Wilson Boulevard Arlington, Virginia
 
22203
(Address of principal executive offices)
 
(Zip Code)
(703) 522-1315
Registrant’s telephone number, including area code:
______________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
 
 
 
 
 
 
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
______________________________________________________________________________________________
The number of shares outstanding of Registrant’s Common Stock, par value$0.01 per share, on May 5, 2015 was 702,441,162
 




THE AES CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
TABLE OF CONTENTS
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 




GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
Adjusted EPS
Adjusted Earnings Per Share, a non-GAAP measure
Adjusted PTC
Adjusted Pretax Contribution, a non-GAAP measure of operating performance
AES
The Parent Company and its subsidiaries and affiliates
ANEEL
Brazilian National Electric Energy Agency
AOCL
Accumulated Other Comprehensive Loss
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
BNDES
Brazilian Development Bank
CA
Commercial Availability
CAA
United States Clean Air Act
CAMMESA
Wholesale Electric Market Administrator in Argentina
CDPQ
La Caisse de depot et placement du Quebec
CEEE
Companhia Estadual de Energia
CESCO
Central Electricity Supply Company of Orissa Ltd.
CFE
Federal Commission of Electricity
CO2
Carbon Dioxide
COSO
Committee of Sponsoring Organizations of the Treadway Commission
CPCN
Certificate of Public Convenience and Necessity
DP&L
The Dayton Power & Light Company
DPL
DPL Inc.
DPLER
DPL Energy Resources, Inc.
EPA
United States Environmental Protection Agency
EPC
Engineering, Procurement, and Construction
ERC
Energy Regulatory Commission
EURIBOR
Euro Interbank Offered Rate
FASB
Financial Accounting Standards Board
FCA
Federal Court of Appeals
FX
Foreign Exchange
GAAP
Generally Accepted Accounting Principles in the United States
GHG
Greenhouse Gas
GSA
Gas Supply Agreement
GWh
Gigawatt Hours
ICC
International Chamber of Commerce
IPALCO
IPALCO Enterprises, Inc.
IPL
Indianapolis Power & Light Company
IURC
Indiana Utility Regulatory Commission
KPI
Key Performance Indicator
kWh
Kilowatt Hours
LIBOR
London Interbank Offered Rate
LNG
Liquefied Natural Gas
MRE
Energy Reallocation Mechanism
MW
Megawatts
MWh
Megawatt Hours
NEK
Natsionalna Elektricheska Kompania (state-owned electricity public supplier in Bulgaria)
NOV
Notice of Violation
NOX
Nitrogen Dioxide
NPDES
National Pollutant Discharge Elimination System
O&M
Operations and Maintenance
OPGC
Odisha Power Generation Corporation
Parent Company
The AES Corporation
PIS
Partially Integrated System
PM
Particulate Matter
PPA
Power Purchase Agreement
PREPA
Puerto Rico Electric Power Authority
RSU
Restricted Stock Unit
SAIDI
System Average Interruption Duration Index
SAIFI
System Average Interruption Frequency Index
SBU
Strategic Business Unit
SEC
United States Securities and Exchange Commission
SO2
Sulfur Dioxide
SSR
Service Stability Rider
TA
Transportation Agreement
VIE
Variable Interest Entity

1



PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE AES CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
 
March 31,
2015
 
December 31,
2014
 
(in millions, except share and per share data)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
1,337

 
$
1,539

Restricted cash
318

 
283

Short-term investments
582

 
709

Accounts receivable, net of allowance for doubtful accounts of $83 and $96, respectively
2,807

 
2,709

Inventory
707

 
702

Deferred income taxes
173

 
275

Prepaid expenses
129

 
175

Other current assets
1,562

 
1,434

Current assets of held-for-sale businesses
27

 
—

Total current assets
7,642

 
7,826

NONCURRENT ASSETS
 
 
 
Property, Plant and Equipment:
 
 
 
Land
780

 
870

Electric generation, distribution assets and other
29,377

 
30,459

Accumulated depreciation
(9,652
)
 
(9,962
)
Construction in progress
2,343

 
3,784

Property, plant and equipment, net
22,848

 
25,151

Other Assets:
 
 
 
Investments in and advances to affiliates
586

 
537

Debt service reserves and other deposits
406

 
411

Goodwill
1,465

 
1,458

Other intangible assets, net of accumulated amortization of $121 and $158, respectively
261

 
281

Deferred income taxes
597

 
662

Service concession assets
1,520

 
—

Other noncurrent assets
2,520

 
2,640

Noncurrent assets of held-for-sale businesses
152

 
—

Total other assets
7,507

 
5,989

TOTAL ASSETS
$
37,997

 
$
38,966

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
2,051

 
$
2,278

Accrued interest
346

 
260

Accrued and other liabilities
2,345

 
2,326

Non-recourse debt, including $215 and $240, respectively, related to variable interest entities
1,831

 
1,982

Recourse debt
—

 
151

Current liabilities of held-for-sale businesses
9

 
—

Total current liabilities
6,582

 
6,997

NONCURRENT LIABILITIES
 
 
 
Non-recourse debt, including $1,062 and $1,030, respectively, related to variable interest entities
13,625

 
13,618

Recourse debt
4,945

 
5,107

Deferred income taxes
1,223

 
1,277

Pension and other post-retirement liabilities
1,142

 
1,342

Other noncurrent liabilities
3,060

 
3,222

Noncurrent liabilities of held-for-sale businesses
62

 
—

Total noncurrent liabilities
24,057

 
24,566

Contingencies and Commitments (see Note 9)

 

Redeemable stock of subsidiaries
323

 
78

EQUITY
 
 
 
THE AES CORPORATION STOCKHOLDERS’ EQUITY
 
 
 
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 815,087,569 issued and 702,899,220 outstanding at March 31, 2015 and 814,539,146 issued and 703,851,297 outstanding at December 31, 2014)
8

 
8

Additional paid-in capital
8,530

 
8,409

Retained earnings
423

 
512

Accumulated other comprehensive loss
(3,549
)
 
(3,286
)
Treasury stock, at cost (112,188,349 shares at March 31, 2015 and 110,687,849 shares at December 31, 2014)
(1,390
)
 
(1,371
)
Total AES Corporation stockholders’ equity
4,022

 
4,272

NONCONTROLLING INTERESTS
3,013

 
3,053

Total equity
7,035

 
7,325

TOTAL LIABILITIES AND EQUITY
$
37,997

 
$
38,966

See Notes to Condensed Consolidated Financial Statements.

2



THE AES CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions, except per share amounts)
Revenue:
 
 
 
Regulated
$
2,080

 
$
2,142

Non-Regulated
1,904

 
2,120

Total revenue
3,984

 
4,262

Cost of Sales:
 
 
 
Regulated
(1,807
)
 
(1,932
)
Non-Regulated
(1,456
)
 
(1,536
)
Total cost of sales
(3,263
)
 
(3,468
)
Operating margin
721

 
794

General and administrative expenses
(55
)
 
(51
)
Interest expense
(363
)
 
(373
)
Interest income
90

 
63

Loss on extinguishment of debt
(23
)
 
(134
)
Other expense
(20
)
 
(8
)
Other income
16

 
12

Goodwill impairment expense
—

 
(154
)
Asset impairment expense
(8
)
 
(12
)
Foreign currency transaction losses
(23
)
 
(19
)
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES
335

 
118

Income tax expense
(96
)
 
(54
)
Net equity in earnings of affiliates
15

 
25

INCOME FROM CONTINUING OPERATIONS
254

 
89

Income from operations of discontinued businesses, net of income tax expense of $0 and $14, respectively
—

 
20

Net loss from disposal and impairments of discontinued businesses, net of income tax expense (benefit) of $0 and $(1), respectively
—

 
(43
)
NET INCOME
254

 
66

Noncontrolling interests:
 
 
 
Less: Income from continuing operations attributable to noncontrolling interests
(112
)
 
(136
)
Plus: Loss from discontinued operations attributable to noncontrolling interests
—

 
12

Total net income attributable to noncontrolling interests
(112
)
 
(124
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
$
142

 
$
(58
)
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
 
 
 
Income (loss) from continuing operations, net of tax
$
142

 
$
(47
)
Loss from discontinued operations, net of tax
—

 
(11
)
Net income (loss)
$
142

 
$
(58
)
BASIC EARNINGS PER SHARE:
 
 
 
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax
$
0.20

 
$
(0.07
)
Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax
—

 
(0.01
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
$
0.20

 
$
(0.08
)
DILUTED EARNINGS PER SHARE:
 
 
 
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax
$
0.20

 
$
(0.07
)
Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax
—

 
(0.01
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
$
0.20

 
$
(0.08
)
DILUTED SHARES OUTSTANDING
706

 
724

DIVIDENDS DECLARED PER COMMON SHARE
$
—

 
$
—

See Notes to Condensed Consolidated Financial Statements.

3



THE AES CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(in millions)
NET INCOME
$
254

 
$
66

Foreign currency translation activity:
 
 
 
Foreign currency translation adjustments, net of income tax benefit (expense) of $0 and $(1), respectively
(421
)
 
5

Reclassification to earnings, net of income tax (expense) benefit of $0 and $0, respectively
—

 
6

Total foreign currency translation adjustments
(421
)
 
11

Derivative activity:
 
 
 
Change in derivative fair value, net of income tax benefit of $17 and $24, respectively
(72
)
 
(120
)
Reclassification to earnings, net of income tax (expense) of $(2) and $(3), respectively
12

 
19

Total change in fair value of derivatives
(60
)
 
(101
)
Pension activity:
 
 
 
Reclassification to earnings due to amortization of net actuarial loss, net of income tax (expense) of $(3) and $(3), respectively
5

 
6

Total pension adjustments
5

 
6

OTHER COMPREHENSIVE LOSS
(476
)
 
(84
)
COMPREHENSIVE LOSS
(222
)
 
(18
)
Less: Comprehensive loss (income) attributable to noncontrolling interests
88

 
(125
)
COMPREHENSIVE LOSS ATTRIBUTABLE TO THE AES CORPORATION
$
(134
)
 
$
(143
)
See Notes to Condensed Consolidated Financial Statements.

4



THE AES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions)
OPERATING ACTIVITIES:
 
 
 
Net income
$
254

 
$
66

Adjustments to net income:
 
 
 
Depreciation and amortization
298

 
306

Impairment expenses
8

 
166

Deferred income taxes
(12
)
 
56

Provisions for contingencies
14

 
12

Loss on the extinguishment of debt
23

 
134

Loss on disposal of assets
10

 
3

Loss on disposals and impairments — discontinued operations
—

 
44

Other
54

 
36

Changes in operating assets and liabilities
 
 
 
(Increase) decrease in accounts receivable
(337
)
 
(219
)
(Increase) decrease in inventory
(35
)
 
(12
)
(Increase) decrease in prepaid expenses and other current assets
68

 
(74
)
(Increase) decrease in other assets
(290
)
 
(444
)
Increase (decrease) in accounts payable and other current liabilities
273

 
415

Increase (decrease) in income tax payables, net and other tax payables
(15
)
 
(206
)
Increase (decrease) in other liabilities
124

 
(62
)
Net cash provided by operating activities
437

 
221

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(619
)
 
(399
)
Acquisitions, net of cash acquired
(17
)
 
—

Proceeds from the sale of businesses, net of cash sold
—

 
29

Sale of short-term investments
1,076

 
1,049

Purchase of short-term investments
(1,054
)
 
(993
)
Increase in restricted cash, debt service reserves and other assets
(75
)
 
(19
)
Other investing
(31
)
 
7

Net cash used in investing activities
(720
)
 
(326
)
FINANCING ACTIVITIES:
 
 
 
Borrowings under the revolving credit facilities
101

 
217

Issuance of recourse debt
—

 
750

Issuance of non-recourse debt
574

 
554

Repayments under the revolving credit facilities
(62
)
 
(152
)
Repayments of recourse debt
(336
)
 
(866
)
Repayments of non-recourse debt
(269
)
 
(349
)
Payments for financing fees
(9
)
 
(78
)
Distributions to noncontrolling interests
(19
)
 
(26
)
Contributions from noncontrolling interests
67

 
32

Proceeds from the sale of redeemable stock of subsidiaries
247

 
—

Dividends paid on AES common stock
(70
)
 
(36
)
Payments for financed capital expenditures
(42
)
 
(178
)
Purchase of treasury stock
(35
)
 
—

Other financing
(34
)
 
—

Net cash provided by (used in) financing activities
113

 
(132
)
Effect of exchange rate changes on cash
(27
)
 
(22
)
Increase (decrease) in cash of held-for-sale businesses
(5
)
 
30

Total decrease in cash and cash equivalents
(202
)
 
(229
)
Cash and cash equivalents, beginning
1,539

 
1,642

Cash and cash equivalents, ending
$
1,337

 
$
1,413

SUPPLEMENTAL DISCLOSURES:
 
 
 
Cash payments for interest, net of amounts capitalized
$
242

 
$
226

Cash payments for income taxes, net of refunds
$
103

 
$
237

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Assets acquired through capital lease
$
5

 
$
11

See Notes to Condensed Consolidated Financial Statements.

5



THE AES CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2015 and 2014
1. FINANCIAL STATEMENT PRESENTATION
Consolidation
In this Quarterly Report the terms “AES,” “the Company,” “us” or “we” refer to the consolidated entity including its subsidiaries and affiliates. The terms “The AES Corporation,” “the Parent” or “the Parent Company” refer only to the publicly held holding company, The AES Corporation, excluding its subsidiaries and affiliates. Furthermore, VIEs in which the Company has a variable interest have been consolidated where the Company is the primary beneficiary. Investments in which the Company has the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting. All intercompany transactions and balances have been eliminated in consolidation.
Interim Financial Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with GAAP, as contained in the FASB ASC, for interim financial information and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, comprehensive income and cash flows. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the 2014 audited consolidated financial statements and notes thereto, which are included in the 2014 Form 10-K filed with the SEC on February 25, 2015 (the “2014 Form 10-K”).
New Accounting Pronouncements Adopted
ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
Effective July 1, 2014, the Company prospectively adopted ASU No. 2014-08, which significantly changed the previous accounting guidance on discontinued operations. Under ASU No. 2014-08, only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations. Other changes are as follows: equity method investments that were previously scoped-out of the discontinued operations accounting guidance are now included in the scope; a business can meet the criteria to be classified as held for sale upon acquisition and can be reported in discontinued operations; and components where an entity retains significant continuing involvement or where operations and cash flows will not be eliminated from ongoing operations as a result of a disposal transaction can meet the definition of discontinued operations. Additionally, where summarized amounts are presented on the face of the financial statements, reconciliations of those amounts to major classes of line items are also required. ASU No. 2014-08 requires additional disclosures for individually material components that do not meet the definition of discontinued operations. Under the previous accounting guidance, the UK Wind and Ebute disposals in the third and fourth quarters of 2014, respectively, would have met the discontinued operations criteria and would have been reclassified accordingly. Additionally, Armenia Mountain, which met the held-for-sale criteria in the first quarter of 2015, would have met the discontinued operations criteria under the previous accounting guidance and would have been reclassified accordingly.
ASU No. 2014-05, Service Concession Arrangements (Topic 853)
Effective January 1, 2015, the Company adopted ASU No. 2014-05, which states that certain service concession arrangements with public-sector entity grantors are not in scope of ASC 840, Leases (“ASC 840”) and that entities should not recognize the related infrastructure as property, plant and equipment, but should apply other GAAP. The Company has a small number of entities that fall within the scope of this guidance, with the Company’s Mong Duong generation facility in Vietnam being the most significant.
Mong Duong is a build, operate and transfer agreement with the Vietnam government. Management concluded there were two deliverables included within the arrangement, as well as a financing element. Due to the contingent nature of the revenue stream, no amounts of revenue can be recognized during the build phase of the contract. All amounts billed during the operate phase will be recognized as revenue when billed, with amounts allocated between the financing element and build and operate deliverables. The financing element will be recognized as interest income using the effective interest method as payments received for construction of the plant are received over the life of the contract. Costs are expensed as incurred. As the related infrastructure is no longer considered property, plant and equipment, there are no longer any capitalizable expenses beyond those related to the initial build, and accordingly these will be expensed as incurred. All cash flows, excluding those related to

6



the debt incurred by AES for these arrangements will be reflected in cash flows from operating activities on the Company’s Condensed Consolidated Statements of Cash Flows prospectively.
The guidance was applied on a modified retrospective basis to service concession arrangements in existence at January 1, 2015. Upon adoption of this standard, the impact to the Company’s Condensed Consolidated Balance Sheet as of January 1, 2015 resulted in a reclassification of $1.5 billion from property, plant and equipment to service concession assets, as well as a cumulative adjustment to retained earnings and cumulative translation adjustment of $(18) million, net of tax, and $13 million, respectively.
Accounting Pronouncements Issued But Not Yet Effective
The following accounting standards have been issued but are not yet effective for, nor have been adopted by, AES:
ASU No. 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU No. 2015-05, which clarifies how customers in cloud computing arrangements should determine whether the arrangement includes a software license and eliminates the existing requirement for customers to account for software licenses they acquired by analogizing to the accounting guidance on leases. The standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods therein. Early adoption is permitted. The standard permits the use of a prospective or retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the standard on its consolidated financial statements.
ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30)
In April 2015, the FASB issued ASU No. 2015-03, which simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods therein, and requires the use of the full retrospective approach. Early adoption is permitted for financial statements that have not been previously issued. As of March 31, 2015, the Company had approximately $384 million in deferred financing costs classified in other noncurrent assets that would be reclassified to reduce the related debt liabilities upon adoption of ASU No. 2015-03.
ASU No. 2015-02, Consolidation — Amendments to the Consolidation Analysis (Topic 810)
In February 2015, the FASB issued ASU 2015-02, which makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the VIE guidance. The standard amends the evaluation of whether (1) fees paid to a decision-maker or service providers represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a VIE and (3) a reporting entity is the primary beneficiary of a VIE. The standard is effective for annual periods beginning after December 15, 2015 and interim periods therein. Early adoption is permitted. The Company is currently assessing the impact of the standard on its consolidated financial statements.
ASU No. 2014-12, Compensation — Stock Compensation (Topic 718)
In June 2014, the FASB issued ASU No. 2014-12, which is intended to resolve the diverse accounting treatment in practice with compensation awards. The objective of the new standard is to clarify the treatment of accounting for performance targets that affect award vesting. The standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods therein. Early adoption is permitted. The standard permits the use of either a prospective or modified retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of the standard on its financial position and results of operations.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU No. 2014-09 which clarifies principles for recognizing revenue and will result in a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The objective of the new standard is to provide a single and comprehensive revenue recognition model for all contracts with customers to improve comparability. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The standard requires an entity to recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016 and interim periods therein. Early adoption is not permitted. The standard permits the use of either a full retrospective or modified retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the standard on its consolidated financial statements. In April 2015, the FASB tentatively decided to defer the effective date by one year but to permit early adoption on the original effective date. These decisions are being exposed for public comment.

7



2. INVENTORY
The following table summarizes the Company’s inventory balances as of the periods indicated:
 
 
March 31, 2015
 
December 31, 2014
 
 
(in millions)
Fuel and other raw materials
 
$
363

 
$
357

Spare parts and supplies
 
344

 
345

Total
 
$
707

 
$
702

3. FAIR VALUE
The fair value of current financial assets and liabilities, debt service reserves and other deposits approximate their reported carrying amounts. The estimated fair value of the Company’s assets and liabilities have been determined using available market information. By virtue of these amounts being estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. There were no changes in fair valuation techniques during the period and the Company continues to follow the valuation techniques described in Note 4.—Fair Value in Item 8.—Financial Statements and Supplementary Data of its 2014 Form 10-K.
Recurring Measurements
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of the periods indicated:
 
March 31, 2015
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured debentures
$
—

 
$
410

 
$
—

 
$
410

 
$
—

 
$
501

 
$
—

 
$
501

Certificates of deposit
—

 
139

 
—

 
139

 
—

 
151

 
—

 
151

Government debt securities
—

 
35

 
—

 
35

 
—

 
57

 
—

 
57

Subtotal
—

 
584

 
—

 
584

 
—

 
709

 
—

 
709

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
—

 
24

 
—

 
24

 
—

 
25

 
—

 
25

Subtotal
—

 
24

 
—

 
24

 
—

 
25

 
—

 
25

Total available for sale
—

 
608

 
—

 
608

 
—

 
734

 
—

 
734

TRADING:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
15

 
—

 
—

 
15

 
15

 
—

 
—

 
15

Total trading
15

 
—

 
—

 
15

 
15

 
—

 
—

 
15

DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives
—

 
21

 
240

 
261

 
—

 
18

 
218

 
236

Commodity derivatives
—

 
42

 
4

 
46

 
—

 
37

 
7

 
44

Total derivatives
—

 
63

 
244

 
307

 
—

 
55

 
225

 
280

TOTAL ASSETS
$
15

 
$
671

 
$
244

 
$
930

 
$
15

 
$
789

 
$
225

 
$
1,029

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
—

 
$
167

 
$
302

 
$
469

 
$
—

 
$
206

 
$
210

 
$
416

Cross-currency derivatives
—

 
—

 
33

 
33

 
—

 
29

 
—

 
29

Foreign currency derivatives
—

 
49

 
17

 
66

 
—

 
43

 
9

 
52

Commodity derivatives
—

 
28

 
—

 
28

 
—

 
16

 
1

 
17

Total derivatives
—

 
244

 
352

 
596

 
—

 
294

 
220

 
514

TOTAL LIABILITIES
$
—

 
$
244

 
$
352

 
$
596

 
$
—

 
$
294

 
$
220

 
$
514

 _____________________________
(1) 
Amortized cost approximated fair value at March 31, 2015 and December 31, 2014.
The following tables present a reconciliation of net derivative assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2015 and 2014 (presented net by type of derivative). Transfers between Level 3 and Level 2 are determined as of the end of the reporting period and principally result from changes in the significance of unobservable inputs used to calculate the credit valuation adjustment.

8



 
Three Months Ended March 31, 2015
 
Interest Rate
 
Foreign Currency
 
Commodity
 
Cross Currency
 
Total
 
(in millions)
Balance at the beginning of the period
$
(210
)
 
$
209

 
$
6

 
$
—

 
$
5

Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
 
Included in earnings
—

 
22

 
3

 
—

 
25

Included in other comprehensive income — derivative activity
(35
)
 
—

 
—

 
—

 
(35
)
Included in other comprehensive income — foreign currency translation activity
11

 
(6
)
 
—

 
—

 
5

Settlements
6

 
(2
)
 
(5
)
 
—

 
(1
)
Transfers of assets (liabilities) into Level 3
(74
)
 
—

 
—

 
(33
)
 
(107
)
Balance at the end of the period
$
(302
)
 
$
223

 
$
4

 
$
(33
)
 
$
(108
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
$
—

 
$
21

 
$
3

 
$
—

 
$
24

 
Three Months Ended March 31, 2014
 
Interest Rate
 
Foreign Currency
 
Commodity
 
Total
 
(in millions)
Balance at the beginning of the period
$
(101
)
 
$
93

 
$
4

 
$
(4
)
Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
Included in earnings
—

 
26

 
(1
)
 
25

Included in other comprehensive income — derivative activity
(64
)
 
(1
)
 
—

 
(65
)
Included in other comprehensive income — foreign currency translation activity
—

 
(18
)
 
—

 
(18
)
Included in regulatory (assets) liabilities
—

 
—

 
(3
)
 
(3
)
Settlements
8

 
—

 
—

 
8

Transfers of (assets) liabilities out of Level 3
70

 
1

 
—

 
71

Balance at the end of the period
$
(87
)
 
$
101

 
$
—

 
$
14

Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
$
—

 
$
26

 
$
(1
)
 
$
25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table summarizes the significant unobservable inputs used for the Level 3 derivative assets (liabilities) as of March 31, 2015:
Type of Derivative
 
Fair Value
 
Unobservable Input
 
Amount or Range (Weighted Avg)
 
 
(in millions)
 
 
 
 
Interest rate
 
$
(302
)
 
Subsidiaries’ credit spreads
 
3.75% — 7.00% (4.69%)

Foreign currency:
 
 
 
 
 
 
Derivative — Argentine Peso
 
221

 
Argentine Peso to USD currency exchange rate after one year
 
8.96 — 35.91 (22.86)

Embedded derivative — Euro
 
2

 
Subsidiaries’ credit spreads
 
4.62% — 7.00% (5.81%)

Cross currency
 
(33
)
 
Subsidiaries’ credit spread
 
2.84
%
Commodity:
 
 
 
 
 
 
Other
 
4

 
 
 
 
Total
 
$
(108
)
 
 
 
 
Nonrecurring Measurements
When evaluating impairment of goodwill, long-lived assets, discontinued operations and held-for-sale businesses, and equity method investments, the Company measures fair value using the applicable fair value measurement guidance. Impairment expense is measured by comparing the fair value at the evaluation date to their then-latest available carrying amount. The following table summarizes major categories of assets and liabilities measured at fair value on a nonrecurring basis during the period and their level within the fair value hierarchy:
 
Three Months Ended March 31, 2015
 
Carrying
Amount (1)
 
Fair Value
 
Pretax
Loss
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Equity method investment:
 
 
 
 
 
 
 
 
 
Solar Spain
$
29

 
$
—

 
$
—

 
$
29

 
$
—

Long-lived assets held and used:(2)
 
 
 
 
 
 
 
 
 
Other
29

 
—

 
21

 
—

 
8


9



 
Three Months Ended March 31, 2014
 
Carrying
Amount (1)
 
Fair Value
 
Pretax
Loss
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Long-lived assets held and used: (2)
 
 
 
 
 
 
 
 
 
DPL (East Bend)
$
14

 
$
—

 
$
2

 
$
—

 
$
12

Discontinued operations and held-for-sale businesses: (3)
 
 
 
 
 
 
 
 


Cameroon
372

 
—

 
334

 
—

 
38

Goodwill: (4)
 
 
 
 
 
 
 
 
 
DPLER
136

 
—

 
—

 
—

 
136

Buffalo Gap
28

 
—

 
—

 
10

 
18

_____________________________
(1) 
Represents the carrying value (including costs to sell) at the date of measurement, before fair value adjustment.
(2) 
See Note 15—Asset Impairment Expense for further information.
(3) 
See Note 16—Discontinued Operations and Held-For-Sale Businesses for further information. Fair value of long-lived assets held-for-sale excludes costs to sell.
(4) 
See Note 14—Goodwill Impairment for further information.
The following table summarizes the significant unobservable inputs used in the Level 3 measurement of long-lived assets during the three months ended March 31, 2015:
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(in millions)
 
 
 
 
 
 
Equity method investment:
 
 
 
 
 
 
 
Solar Spain
$
29

 
Discounted cash flow
 
Annual revenue growth
 
-3% to 0% (0%)

 
 
 
 
 
Annual pretax operating margin
 
-13% to 56% (24%)

 
 
 
 
 
Cost of equity
 
12
%
Financial Instruments not Measured at Fair Value in the Condensed Consolidated Balance Sheets
The following table sets forth the carrying amount, fair value and fair value hierarchy of the Company’s financial assets and liabilities that are not measured at fair value in the Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, but for which fair value is disclosed.
 
Carrying
Amount
 
Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
March 31, 2015
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Accounts receivable — noncurrent (1)
$
310

 
$
297

 
$
—

 
$
—

 
$
297

Liabilities
 
 
 
 
 
 
 
 
 
Non-recourse debt
15,456

 
16,030

 
—

 
12,481

 
3,549

Recourse debt
4,945

 
5,204

 
—

 
5,204

 
—

December 31, 2014
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Accounts receivable — noncurrent (1)
$
301

 
$
290

 
$
—

 
$
—

 
$
290

Liabilities
 
 
 
 
 
 
 
 
 
Non-recourse debt
15,600

 
16,008

 
—

 
12,538

 
3,470

Recourse debt
5,258

 
5,552

 
—

 
5,552

 
—

_____________________________
(1) 
These accounts receivable principally relate to amounts due from CAMMESA, and are included in Noncurrent assets—Other in the accompanying Condensed Consolidated Balance Sheets. The fair value and carrying amount of these accounts receivable exclude value-added tax of $33 million and $36 million at March 31, 2015 and December 31, 2014, respectively.
4. INVESTMENTS IN MARKETABLE SECURITIES
The Company’s investments in marketable debt and equity securities as of March 31, 2015 and December 31, 2014 by security class and by level within the fair value hierarchy have been disclosed in Note 3—Fair Value. The security classes are determined based on the nature and risk of a security and are consistent with how the Company manages, monitors and measures its marketable securities. As of March 31, 2015, $549 million of available-for-sale debt securities had stated maturities within one year and $35 million had stated maturities between one and two years. Gains and losses on the sale of investments are determined using the specific-identification method. For the three months ended March 31, 2015 and 2014, pretax gains and losses related to available-for-sale and trading securities were less than $1 million, there were no realized losses on the sale of available-for-sale securities, and no other-than-temporary impairments of marketable securities were recognized in earnings or other comprehensive income. The following table summarizes the gross proceeds from sale of available-for-sale securities for the periods indicated:
 
Three Months Ended March 31,
 
2015
 
2014
 
(in millions)
Gross proceeds from sales of available-for-sale securities
$
1,086

 
$
1,060


10



5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
There have been no changes to the information disclosed under Derivatives and Hedging Activities in Note 1—General and Summary of Significant Accounting Policies included in Item 8.—Financial Statements and Supplementary Data in the 2014 Form 10-K.
Volume of Activity
The following three tables set forth, by type of derivative, the Company’s outstanding notional under its derivatives and the weighted-average remaining term as of March 31, 2015 regardless of whether the derivative instruments are in qualifying cash flow hedging relationships:
 
 
Current
 
Maximum
 
 
 
 
Interest Rate and Cross-Currency(1)
 
Derivative
Notional
 
Derivative Notional Translated to USD
 
Derivative
Notional
 
Derivative Notional Translated to USD
 
Weighted-Average Remaining Term
 
% of Debt Currently Hedged by Index (2)
 
 
(in millions)
 
(in years)
 
 
Interest Rate Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
LIBOR (U.S. Dollar)
 
2,422

 
$
2,422

 
3,010

 
$
3,010

 
11
 
51
%
EURIBOR (Euro)
 
526

 
564

 
526

 
564

 
7
 
87
%
Cross-Currency Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Chilean Unidad de Fomento
 
4

 
173

 
4

 
173

 
14
 
82
%
_____________________________
(1) 
The Company’s interest rate derivative instruments primarily include accreting and amortizing notionals. The maximum derivative notional represents the largest notional at any point between March 31, 2015 and the maturity of the derivative instrument, which includes forward-starting derivative instruments. The interest rate and cross-currency derivatives range in maturity through 2033 and 2028, respectively.
(2) 
The percentage of variable-rate debt currently hedged is based on the related index and excludes forecasted issuances of debt and variable-rate debt tied to other indices where the Company has no interest rate derivatives.
Foreign Currency Derivatives
 
Notional (1)
 
Notional Translated to USD
 
Weighted-Average Remaining Term (2)
 
 
(in millions)
 
(in years)
Foreign Currency Options and Forwards:
 
 
 
 
 
 
Chilean Unidad de Fomento
 
9

 
$
360

 
<1
Chilean Peso
 
122,874

 
197

 
<1
Brazilian Real
 
95

 
30

 
<1
Euro
 
47

 
50

 
<1
Colombian Peso
 
128,436

 
51

 
<1
Argentine Peso
 
2,001

 
227

 
10
British Pound
 
11

 
16

 
<1
Embedded Foreign Currency Derivatives:
 
 
 
 
 
 
Kazakhstani Tenge
 
4,278

 
23

 
1
Brazilian Real
 
93

 
29

 
<1
_____________________________
(1) 
Represents contractual notionals. The notionals for options have not been probability adjusted, which generally would decrease them.
(2) 
Represents the remaining tenor of our foreign currency derivatives weighted by the corresponding notional. These options and forwards and these embedded derivatives range in maturity through 2025 and 2017, respectively.
Commodity Derivatives
 
Notional
 
Weighted-Average Remaining Term(1)
 
 
(in millions)
 
(in years)
Power (MWh)
 
8

 
2
Coal (Metric tons)
 
1

 
2
_____________________________
(1) 
Represents the remaining tenor of our commodity derivatives weighted by the corresponding volume. These derivatives range in maturity through 2016.
Accounting and Reporting
Assets and Liabilities
The following tables present the fair values of the Company’s derivative instruments as of March 31, 2015 and December 31, 2014, first by whether they are designated hedging instruments, then by whether they are current or noncurrent, to the extent they are subject to master netting agreements or similar agreements (where the rights to set-off relate to settlement of amounts receivable and payable under those derivatives) and by balances no longer accounted for as derivatives.

11



 
March 31, 2015
 
December 31, 2014
 
Designated
 
Not Designated
 
Total
 
Designated
 
Not Designated
 
Total
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives
$
9

 
$
252

 
$
261

 
$
6

 
$
230

 
$
236

Commodity derivatives
30

 
16

 
46

 
25

 
19

 
44

Total assets
$
39

 
$
268

 
$
307

 
$
31

 
$
249

 
$
280

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
469

 
$
—

 
$
469

 
$
416

 
$
—

 
$
416

Cross-currency derivatives
33

 
—

 
33

 
29

 
—

 
29

Foreign currency derivatives
40

 
26

 
66

 
38

 
14

 
52

Commodity derivatives
12

 
16

 
28

 
7

 
10

 
17

Total liabilities
$
554

 
$
42

 
$
596

 
$
490

 
$
24

 
$
514

 
March 31, 2015
 
December 31, 2014
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(in millions)
Current
$
76

 
$
152

 
$
77

 
$
148

Noncurrent
231

 
444

 
203

 
366

Total
$
307

 
$
596

 
$
280

 
$
514

Derivatives subject to master netting agreement or similar agreement:
 
 
 
 
 
 
 
Gross amounts recognized in the balance sheet
$
42

 
$
524

 
$
53

 
$
507

Gross amounts of derivative instruments not offset
(11
)
 
(11
)
 
(10
)
 
(10
)
Gross amounts of cash collateral received/pledged not offset
—

 
(11
)
 
—

 
(5
)
Net amount
$
31

 
$
502

 
$
43

 
$
492

Other balances that had been, but are no longer, accounted for as derivatives that are to be amortized to earnings over the remaining term of the associated PPA
$
155

 
$
177

 
$
161

 
$
180

Effective Portion of Cash Flow Hedges
The following tables set forth the pretax gains (losses) recognized in AOCL and earnings related to the effective portion of derivative instruments in qualifying cash flow hedging relationships (including amounts that were reclassified from AOCL as interest expense related to interest rate derivative instruments that previously, but no longer, qualify for cash flow hedge accounting), as defined in the accounting standards for derivatives and hedging, for the periods indicated:
 
 
Gains (Losses) Recognized in AOCL
 
 
 
Gains (Losses) Reclassified from AOCL into Earnings
 
 
Three Months Ended March 31,
 
Classification in Condensed Consolidated Statements of Operations
 
Three Months Ended March 31,
Type of Derivative
 
2015
 
2014
 
2015
 
2014
 
 
(in millions)
 
 
 
(in millions)
Interest rate derivatives
 
$
(98
)
 
$
(150
)
 
Interest expense
 
$
(24
)
 
$
(31
)
 
 
 
 
 
 
Non-regulated cost of sales
 
—

 
(1
)
 
 
 
 
 
 
Net equity in earnings of affiliates
 
—

 
(1
)
Cross-currency derivatives
 
—

 
(3
)
 
Interest expense
 
(1
)
 
(1
)
 
 
 
 
 
 
Foreign currency transaction losses
 
—

 
(10
)
Foreign currency derivatives
 
2

 
(15
)
 
Foreign currency transaction gains
 
6

 
7

Commodity derivatives
 
7

 
24

 
Non-regulated revenue
 
5

 
13

 
 


 


 
Non-regulated cost of sales
 
—

 
2

Total
 
$
(89
)
 
$
(144
)
 
 
 
$
(14
)
 
$
(22
)
 
 
 
 
 
 
 
 
 
 
 
The pretax accumulated other comprehensive income (loss) expected to be recognized as an increase (decrease) to income from continuing operations before income taxes over the next 12 months as of March 31, 2015 is $(117) million for interest rate hedges, $(4) million for cross-currency swaps, $10 million for foreign currency hedges, and $10 million for commodity and other hedges.
Ineffective Portion of Cash Flow Hedges
The following table presents the pretax gains (losses) recognized in earnings related to the ineffective portion of derivative instruments in qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, for the periods indicated:
 
 
Classification in Condensed Consolidated Statements of Operations
 
Three Months Ended March 31,
Type of Derivative
 
2015
 
2014
 
 
 
 
(in millions)
Foreign currency derivatives
 
Foreign currency transaction losses
 
(2
)
 
—

Total
 
 
 
$
(2
)
 
$
—


12



Not Designated for Hedge Accounting
The following table sets forth the gains (losses) recognized in earnings related to derivative instruments not designated as hedging instruments under the accounting standards for derivatives and hedging and the amortization of balances that had been, but are no longer, accounted for as derivatives, for the periods indicated:
 
 
Classification in Condensed Consolidated Statements of Operations
 
Three Months Ended March 31,
Type of Derivative
 
2015
 
2014
 
 
 
 
(in millions)
Foreign currency derivatives
 
Foreign currency transaction gains
 
$
32

 
$
23

 
 
Net equity in earnings of affiliates
 
—

 
(4
)
Commodity and other derivatives
 
Non-regulated revenue
 
(5
)
 
3

 
 
Non-regulated cost of sales
 
1

 
—

 
 
Regulated cost of sales
 
(4
)
 
(8
)
 
 
Income (loss) from operations of discontinued businesses
 
—

 
(5
)
Total
 
 
 
$
24

 
$
9

Credit Risk-Related Contingent Features
DP&L has certain over-the-counter commodity derivative contracts under master netting agreements that contain provisions that require DP&L to maintain an investment-grade issuer credit rating from credit rating agencies. Since DP&L’s rating has fallen below investment grade, certain of the counterparties to the derivative contracts have requested immediate and ongoing full overnight collateralization of the mark-to-market loss (fair value excluding credit valuation adjustments), which was $21 million and $12 million as of March 31, 2015 and December 31, 2014, respectively, for all derivatives with credit risk-related contingent features. As of March 31, 2015 and December 31, 2014, DP&L had posted $11 million and $5 million, respectively, of cash collateral directly with third parties and in a broker margin account and DP&L held no cash collateral from counterparties to its derivative instruments that were in an asset position.
6. FINANCING RECEIVABLES
Financing receivables are defined as receivables that have contractual maturities of greater than one year. The Company primarily has financing receivables pursuant to amended agreements or government resolutions that are due from certain governmental bodies in Argentina. The following table presents financing receivables by country as of the periods indicated:
 
March 31, 2015
 
December 31, 2014
 
(in millions)
Argentina
$
272

 
$
278

Cameroon sale (1)
44

 
44

United States
16

 
—

Brazil
11

 
15

Total long-term financing receivables
$
343

 
$
337

_____________________________
(1) 
Represents non-contingent consideration to be received in 2016 from the sale of the businesses in 2014. See Note 16—Discontinued Operations and Held-For-Sale Businesses.
Argentina — Collection of the principal and interest on these receivables is subject to various business risks and uncertainties including, but not limited to, the completion and operation of power plants which generate cash for payments of these receivables, regulatory changes that could impact the timing and amount of collections, and economic conditions in Argentina. The Company monitors these risks including the credit ratings of the Argentine government on a quarterly basis to assess the collectability of these receivables. The Company accrues interest on these receivables once the recognition criteria have been met. The Company’s collection estimates are based on assumptions that it believes to be reasonable, but are inherently uncertain. Actual future cash flows could differ from these estimates.
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES
Summarized Financial Information
The following table summarizes financial information of the Company’s 50%-or-less-owned affiliates that are accounted for using the equity method.
 
Three Months Ended March 31,
50%-or-less-Owned Affiliates
2015
 
2014
 
(in millions)
Revenue
$
184

 
$
277

Operating margin
56

 
77

Net income
36

 
49


13



8. DEBT
Recourse Debt
In March 2015, the Company redeemed in full the $151 million balance of its 7.75% senior unsecured notes due October 2015 and the $164 million balance of its 9.75% senior unsecured notes due April 2016. As a result of these transactions, the Company recognized a loss on extinguishment of debt of $23 million that is included in the Condensed Consolidated Statement of Operations.
In February 2014, the Company redeemed in full the $110 million balance of its 7.75% senior unsecured notes due March 2014. On March 7, 2014, the Company issued $750 million aggregate principal amount of 5.50% senior notes due 2024. Concurrent with this offering, the Company redeemed via tender offers $625 million aggregate principal of its existing 8.00% senior unsecured notes due 2017. As a result of the latter transaction, the Company recognized a loss on extinguishment of debt of $132 million that is included in the Condensed Consolidated Statement of Operations.
Non-Recourse Debt
Significant transactions
During the three months ended March 31, 2015, the Company’s subsidiaries had the following significant debt transactions:
•
Gener issued new debt of $297 million; and
•
Sul issued new debt of $177 million, partially offset by repayments of $145 million.
Debt in default
The following table summarizes the Company’s subsidiary non-recourse debt in default as of March 31, 2015. Due to the defaults, these amounts are included in the current portion of non-recourse debt:
 
 
Primary Nature of Default
 
March 31, 2015
Subsidiary
 
Default Amount
 
Net Assets
 
 
 
 
(in millions)
Maritza (Bulgaria)
 
Covenant
 
$
583

 
$
560

Kavarna (Bulgaria)
 
Covenant
 
142

 
71

 
 
 
 
$
725

 
 
The above defaults are not payment defaults. All of the subsidiary non-recourse defaults were triggered by failure to comply with other covenants and/or other conditions such as (but not limited to) failure to meet information covenants, complete construction or other milestones in an allocated time, meet certain minimum or maximum financial ratios, or other requirements contained in the non-recourse debt documents of the applicable subsidiary.
In the event that there is a default, bankruptcy or maturity acceleration at a subsidiary or group of subsidiaries that meets the applicable definition of materiality under the Parent Company’s corporate debt agreements, there could be a cross-default to the Company’s recourse debt. Materiality is defined in the Parent’s senior secured credit facility as having provided 20% or more of the Parent Company’s total cash distributions from businesses for the four most recently completed fiscal quarters. As of March 31, 2015, none of the defaults listed above individually or in the aggregate result in or are at risk of triggering a cross-default under the recourse debt of the Parent Company. In the event the Parent Company is not in compliance with the financial covenants of its senior secured revolving credit facility, restricted payments will be limited to regular quarterly shareholder dividends at the then-prevailing rate. Payment defaults and bankruptcy defaults would preclude the making of any restricted payments.
9. CONTINGENCIES AND COMMITMENTS
Guarantees, Letters of Credit and Commitments
In connection with certain project financing, acquisition, power purchase and other agreements, the Parent Company has expressly undertaken limited obligations and commitments, most of which will only be effective or will be terminated upon the occurrence of future events. In the normal course of business, the Parent Company has entered into various agreements, mainly guarantees and letters of credit, to provide financial or performance assurance to third parties on behalf of AES subsidiaries. These agreements are entered into primarily to support or enhance the creditworthiness otherwise achieved by a business on a stand-alone basis, thereby facilitating the availability of sufficient credit to accomplish their intended business purposes. Most of the contingent obligations relate to future performance commitments which the Company or its businesses expect to fulfill within the normal course of business. The expiration dates of these guarantees vary from less than one year to more than 20 years.

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Amounts presented in the table below represent the Parent Company’s current undiscounted exposure to guarantees and the range of maximum undiscounted potential exposure. The maximum exposure is not reduced by the amounts, if any, that could be recovered under the recourse or collateralization provisions in the guarantees. The amounts include contingent obligations of $24 million made by the Parent Company for the direct benefit of the lenders associated with the non-recourse debt of its businesses. The following table summarizes the Parent Company’s contingent contractual obligations as of March 31, 2015.
Contingent Contractual Obligations
 
Amount
 
Number of
Agreements
 
Maximum Exposure Range for
Each Agreement
 
 
(in millions)
 
 
 
(in millions)
Guarantees and commitments
 
$
365

 
15

 
$1 — 53
Asset sale related indemnities(1)
 
27

 
1

 
$27
Cash collateralized letters of credit
 
72

 
9

 
<$1 — 44
Letters of credit under the senior secured credit facility
 
61

 
7

 
<$1 — 29
Total
 
$
525

 
32

 
 
_____________________________
(1) 
Excludes normal and customary representations and warranties in agreements for the sale of assets (including ownership in associated legal entities) where the associated risk is considered to be nominal.
During the three months ended March 31, 2015, the Company paid letter of credit fees ranging from 0.2% to 2.5% per annum on the outstanding amounts of letters of credit.
Environmental
The Company periodically reviews its obligations as they relate to compliance with environmental laws, including site restoration and remediation. As of March 31, 2015 and December 31, 2014, the Company had recognized liabilities of $11 million and $12 million, respectively, for projected environmental remediation costs. Due to the uncertainties associated with environmental assessment and remediation activities, future costs of compliance or remediation with current legislation or costs for new legislation introduced could be higher or lower than the amount currently accrued. Moreover, where no liability has been recognized, it is reasonably possible that the Company may be required to incur remediation costs or make expenditures in amounts that could be material but could not be estimated as of March 31, 2015. In aggregate, the Company estimates that the range of potential losses related to environmental matters, where estimable, to be up to $1 million. The amounts considered reasonably possible do not include amounts accrued as discussed above.
Litigation
The Company is involved in certain claims, suits and legal proceedings in the normal course of business. The Company accrues for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company has evaluated claims in accordance with the accounting guidance for contingencies that it deems both probable and reasonably estimable and, accordingly, has recognized aggregate liabilities for all claims of approximately $193 million and $199 million as of March 31, 2015 and December 31, 2014, respectively. These amounts are reported on the Condensed Consolidated Balance Sheets within accrued and other liabilities and other noncurrent liabilities. A significant portion of these accrued liabilities relate to employment, non-income tax and customer disputes in international jurisdictions, principally Brazil. Certain of the Company’s subsidiaries, principally in Brazil, are defendants in a number of labor and employment lawsuits. The complaints generally seek unspecified monetary damages, injunctive relief, or other relief. The subsidiaries have denied any liability and intend to vigorously defend themselves in all of these proceedings. There can be no assurance that these accrued liabilities will be adequate to cover all existing and future claims or that we will have the liquidity to pay such claims as they arise.
The Company believes, based upon information it currently possesses and taking into account established accruals for liabilities and its insurance coverage, that the ultimate outcome of these proceedings and actions is unlikely to have a material effect on the Company’s consolidated financial statements. However, where no accrued liability has been recognized, it is reasonably possible that some matters could be decided unfavorably to the Company and could require the Company to pay damages or make expenditures in amounts that could be material but could not be estimated as of March 31, 2015. The material contingencies where a loss is reasonably possible primarily include claims under financing agreements; disputes with offtakers, suppliers and EPC contractors, alleged violation of monopoly laws and regulations, income tax and non-income tax matters with tax authorities, and regulatory matters. In aggregate, the Company estimates that the range of potential losses, where estimable, related to these reasonably possible material contingencies to be between $919 million and $974 million. Certain claims are in settlement negotiations. The amounts considered reasonably possible do not include amounts accrued, as discussed above. These material contingencies do not include income tax-related contingencies which are considered part of our uncertain tax positions.

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10. PENSION PLANS
Total pension cost for the periods indicated included the following components:
 
Three Months Ended March 31,
 
2015
 
2014
 
U.S.
 
Foreign
 
U.S.
 
Foreign
 
(in millions)
Service cost
$
4

 
$
4

 
$
3

 
$
4

Interest cost
12

 
102

 
12

 
122

Expected return on plan assets
(17
)
 
(72
)
 
(16
)
 
(90
)
Amortization of prior service cost
2

 
—

 
2

 
1

Amortization of net loss
5

 
8

 
3

 
8

Total pension cost
$
6

 
$