BENEFIT PLANS

Defined Contribution Plan

The Company sponsors four defined contribution plans ("the Plans"). Three are for U.S. non-union employees, of which one is for employees of the Parent Company and U.S. SBU generation businesses, one is for IPL employees and one is for DPL employees. One defined contribution plan is for union employees at DPL. The Plans are qualified under section 401 of the Internal Revenue Code. All U.S. employees of the Company are eligible to participate in the appropriate Plan except for those employees who are covered by a collective bargaining agreement, unless such agreement specifically provides that the employee is considered an eligible employee under a Plan. The Plans provide matching contributions in AES common stock or cash, other contributions at the discretion of the Compensation Committee of the Board of Directors in AES common stock or cash and discretionary tax deferred contributions from the participants. Participants are fully vested in their own contributions and the Company’s matching contributions. Participants vest in other company contributions ratably over a five-year period ending on the fifth anniversary of their hire date. For the year ended December 31, 2014, the Company’s contributions to the defined contribution plans were approximately $14 million, and for the years ended December 31, 2013 and 2012, contributions were $15 million and $21 million per year, respectively.

Defined Benefit Plans

Certain of the Company’s subsidiaries have defined benefit pension plans covering substantially all of their respective employees. Pension benefits are based on years of credited service, age of the participant and average earnings. Of the 31 active defined benefit plans as of December 31, 2014, five are at U.S. subsidiaries and the remaining plans are at foreign subsidiaries .

The following table reconciles the Company’s funded status, both domestic and foreign, as of the periods indicated:



	December 31,
	2014						2013
	U.S.			Foreign			U.S.			Foreign
	(in millions)
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation as of January 1	$	1,059		$	4,749		$	1,210		$	6,768
Service cost	14			16			16			26
Interest cost	50			489			46			515
Employee contributions	—			4			—			4
Plan amendments	8			(3		)	—			—
Benefits paid	(59		)	(415		)	(75		)	(407		)
Actuarial (gain) loss	163			87			(138		)	(1,436		)
Effect of foreign currency exchange rate changes	—			(564		)	—			(721		)
Benefit obligation as of December 31	$	1,235		$	4,363		$	1,059		$	4,749
CHANGE IN PLAN ASSETS:
Fair value of plan assets as of January 1	$	941		$	3,605		$	883		$	4,712
Actual return on plan assets	123			360			81			(345		)
Employer contributions	56			135			52			160
Employee contributions	—			4			—			4
Benefits paid	(59		)	(415		)	(75		)	(407		)
Effect of foreign currency exchange rate changes	—			(417		)	—			(519		)
Fair value of plan assets as of December 31	$	1,061		$	3,272		$	941		$	3,605
RECONCILIATION OF FUNDED STATUS
Funded status as of December 31	$	(174	)	$	(1,091	)	$	(118	)	$	(1,144	)

The following table summarizes the amounts recognized on the Consolidated Balance Sheets related to the funded status of the plans, both domestic and foreign, as of the periods indicated:



	December 31,
	2014						2013
	U.S.			Foreign			U.S.			Foreign
	(in millions)
AMOUNTS RECOGNIZED ON THE
CONSOLIDATED BALANCE SHEETS
Noncurrent assets	$	—		$	51		$	—		$	23
Accrued benefit liability—current	—			(4		)	—			(4		)
Accrued benefit liability—noncurrent	(174		)	(1,138		)	(118		)	(1,163		)
Net amount recognized at end of year	$	(174	)	$	(1,091	)	$	(118	)	$	(1,144	)

The following table summarizes the Company’s accumulated benefit obligation, both domestic and foreign, as of the periods indicated:



	December 31,
	2014					2013
	U.S.		Foreign			U.S.		Foreign
	(in millions)
Accumulated Benefit Obligation	$	1,208	$	4,301		$	1,036	$	4,686
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation	$	1,235	$	4,021		$	1,059	$	4,412
Accumulated benefit obligation	1,208		3,979			1,036		4,366
Fair value of plan assets	1,061		2,885			941		3,246
Information for pension plans with a projected benefit obligation in excess of plan assets:
Projected benefit obligation	$	1,235	$	4,038	⁽¹⁾	$	1,059	$	4,425
Fair value of plan assets	1,061		2,897		⁽¹⁾	941		3,259


⁽¹⁾	$1.1 billion of the total net unfunded projected benefit obligation is due to Eletropaulo in Brazil.

The table below summarizes the significant weighted average assumptions used in the calculation of benefit obligation and net periodic benefit cost, both domestic and foreign, as of the periods indicated:



	December 31,
	2014						2013
	U.S.			Foreign			U.S.			Foreign
Benefit Obligation:
Discount rates	4.04	%		10.47	%	⁽²⁾	4.89	%		10.80	%	⁽²⁾
Rates of compensation increase	3.94	%	⁽¹⁾	6.41	%		3.94	%	⁽¹⁾	6.44	%
Periodic Benefit Cost:
Discount rate	4.89	%		10.80	%		3.86	%		8.28	%
Expected long-term rate of return on plan assets	6.92	%		10.44	%		7.15	%		11.16	%
Rate of compensation increase	3.94	%	⁽¹⁾	6.44	%		3.94	%	⁽¹⁾	6.47	%


⁽¹⁾	A U.S. subsidiary of the Company has a defined benefit obligation of $748 million and $651 million as of December 31, 2014 and 2013, respectively, and uses salary bands to determine future benefit costs rather than rates of compensation increases. Rates of compensation increases in the table above do not include amounts related to this specific defined benefit plan.


⁽²⁾	Includes an inflation factor that is used to calculate future periodic benefit cost, but is not used to calculate the benefit obligation.

The Company establishes its estimated long-term return on plan assets considering various factors, which include the targeted asset allocation percentages, historic returns and expected future returns.

The measurement of pension obligations, costs and liabilities is dependent on a variety of assumptions. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

The assumptions used in developing the required estimates include the following key factors:


•	discount rates;


•	salary growth;


•	retirement rates;


•	inflation;


•	expected return on plan assets; and


•	mortality rates.

The effects of actual results differing from the Company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect the Company’s recognized expense in such future periods.

Sensitivity of the Company’s pension funded status to the indicated increase or decrease in the discount rate and long-term rate of return on plan assets assumptions is shown below. Note that these sensitivities may be asymmetric and are specific to the base conditions at year-end 2014. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The funded status as of December 31, 2014 is affected by the assumptions as of that date. Pension expense for 2014 is affected by the December 31, 2013 assumptions. The impact on pension expense from a one percentage point change in these assumptions is shown in the table below (in millions):



Increase of 1% in the discount rate	$	(50	)
Decrease of 1% in the discount rate	42
Increase of 1% in the long-term rate of return on plan assets	(45		)
Decrease of 1% in the long-term rate of return on plan assets	45

The following table summarizes the components of the net periodic benefit cost, both domestic and foreign, for the years indicated:



	December 31,
	2014						2013						2012
Components of Net Periodic Benefit Cost:	U.S.			Foreign			U.S.			Foreign			U.S.			Foreign
	(in millions)
Service cost	$	14		$	16		$	16		$	26		$	14		$	18
Interest cost	50			489			46			515			48			509
Expected return on plan assets	(67		)	(362		)	(64		)	(484		)	(55		)	(444		)
Amortization of prior service cost	6			(1		)	5			—			4			—
Amortization of net loss	13			37			23			77			19			38
Settlement gain recognized	—			1			—			—			—			1
Total pension cost	$	16		$	180		$	26		$	134		$	30		$	122

The following table summarizes the amounts reflected in AOCL including accumulated other comprehensive loss attributable to noncontrolling interests, on the Consolidated Balance Sheet as of December 31, 2014, that have not yet been recognized as components of net periodic benefit cost and amounts expected to be reclassified to earnings in the next fiscal year:



	December 31, 2014
	Accumulated Other Comprehensive Income (Loss)						Amounts expected to be reclassified to earnings in next fiscal year
	U.S.			Foreign			U.S.			Foreign
	(in millions)
Prior service cost	$	—		$	2		$	(2	)	$	1
Unrecognized net actuarial gain (loss)	(8		)	(927		)	(6		)	(34		)
Total	$	(8	)	$	(925	)	$	(8	)	$	(33	)

The following table summarizes the Company’s target allocation for 2014 and pension plan asset allocation, both domestic and foreign, as of the periods indicated:



				Percentage of Plan Assets as of December 31,
	Target Allocations			2014				2013
Asset Category	U.S.		Foreign	U.S.		Foreign		U.S.		Foreign
Equity securities	46	%	15% -30%	44.02	%	16.28	%	37.09	%	19.84	%
Debt securities	50	%	60% - 85%	50.90	%	78.85	%	46.97	%	75.32	%
Real estate	2	%	0% - 4%	2.45	%	3.15	%	2.44	%	2.77	%
Other	2	%	0% - 6%	2.63	%	1.72	%	13.50	%	2.07	%
Total pension assets				100.00	%	100.00	%	100.00	%	100.00	%

The U.S. plans seek to achieve the following long-term investment objectives:


•	maintenance of sufficient income and liquidity to pay retirement benefits and other lump sum payments;


•	long-term rate of return in excess of the annualized inflation rate;


•	long-term rate of return, net of relevant fees, that meet or exceed the assumed actuarial rate; and


•	long-term competitive rate of return on investments, net of expenses, that is equal to or exceeds various benchmark rates.

The asset allocation is reviewed periodically to determine a suitable asset allocation which seeks to manage risk through portfolio diversification and takes into account, among other possible factors, the above-stated objectives, in conjunction with current funding levels, cash flow conditions and economic and industry trends. The following table summarizes the Company’s U.S. plan assets by category of investment and level within the fair value hierarchy as of the periods indicated:



	December 31, 2014								December 31, 2013
U.S. Plans	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
Equity securities:
Common stock	$	—	$	—	$	—	$	—	$	46	$	—	$	—	$	46
Mutual funds	467		—		—		467		303		—		—		303
Debt securities:
Government debt securities	67		—		—		67		24		8		—		32
Corporate debt securities	—		—		—		—		—		159		—		159
Mutual funds⁽¹⁾	473		—		—		473		251		—		—		251
Real Estate:
Real Estate	—		26		—		26		—		23		—		23
Other:
Cash and cash equivalents	4		—		—		4		56		—		—		56
Other investments	—		24		—		24		40		31		—		71
Total plan assets	$	1,011	$	50	$	—	$	1,061	$	720	$	221	$	—	$	941


⁽¹⁾	Mutual funds categorized as debt securities consist of mutual funds for which debt securities are the primary underlying investment.

The investment strategy of the foreign plans seeks to maximize return on investment while minimizing risk. The assumed asset allocation has less exposure to equities in order to closely match market conditions and near term forecasts. The following table summarizes the Company’s foreign plan assets by category of investment and level within the fair value hierarchy as of December 31, 2014 and 2013:



	December 31, 2014								December 31, 2013
Foreign Plans	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
Equity securities:
Common stock	$	21	$	—	$	—	$	21	$	23	$	—	$	—	$	23
Mutual funds	274		—		—		274		322		—		—		322
Private equity⁽¹⁾	—		—		237		237		—		—		370		370
Debt securities:
Certificates of deposit	—		3		—		3		—		2		—		2
Unsecured debentures	—		10		—		10		—		13		—		13
Government debt securities	12		98		—		110		12		95		—		107
Mutual funds⁽²⁾	215		2,236		—		2,451		174		2,410		—		2,584
Other debt securities	—		6		—		6		—		9		—		9
Real estate:
Real estate⁽¹⁾	—		—		103		103		—		—		100		100
Other:
Cash and cash equivalents	1		—		—		1		15		—		—		15
Participant loans⁽³⁾	—		—		52		52		—		—		60		60
Other assets	—		—		4		4		—		—		—		—
Total plan assets	$	523	$	2,353	$	396	$	3,272	$	546	$	2,529	$	530	$	3,605


⁽¹⁾	Plan assets of our Brazilian subsidiaries are invested in private equities and commercial real estate through the plan administrator in Brazil. The fair value of these assets is determined using the income approach through annual appraisals based on a discounted cash flow analysis.


⁽²⁾	Mutual funds categorized as debt securities consist of mutual funds for which debt securities are the primary underlying investment.


⁽³⁾	Loans to participants are stated at cost, which approximates fair value.

The following table presents a reconciliation of all plan assets measured at fair value using significant unobservable inputs (Level 3) for the periods indicated:



	December 31,
	2014			2013
	(in millions)
Balance at January 1	$	530		$	635
Actual return on plan assets:
Returns relating to assets still held at reporting date	(87		)	(26		)
Purchases, sales and settlements, net	1			—
Transfers of (assets) liabilities into Level 3	5			—
Change due to exchange rate changes	(53		)	(79		)
Balance at December 31	$	396		$	530

The following table summarizes the estimated cash flows for U.S. and foreign expected employer contributions and expected future benefit payments, both domestic and foreign:



	U.S.		Foreign
	(in millions)
Expected employer contribution in 2015	$	27	$	101
Expected benefit payments for fiscal year ending:
2015	63		352
2016	65		365
2017	67		378
2018	69		392
2019	71		406
2020 - 2024	376		2,228