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Derivative Instruments and Hedging Activities | 3 Months Ended
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Sep. 30, 2012
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Risk Management Objectives The Company is exposed to market risks associated with its enterprise-wide business activities, namely the purchase and sale of fuel and electricity as well as foreign currency risk and interest rate risk. In order to manage the market risks associated with these business activities, we enter into contracts that incorporate derivatives and financial instruments, including forwards, futures, options, swaps or combinations thereof, as appropriate. The Company generally applies hedge accounting to contracts as long as they are eligible under the accounting standards for derivatives and hedging. While derivative transactions are not entered into for trading purposes, some contracts are not eligible for hedge accounting. Interest Rate Risk AES and its subsidiaries utilize variable rate debt financing for construction projects and operations, resulting in an exposure to interest rate risk. Interest rate swap, cap and floor agreements are entered into to manage interest rate risk by effectively fixing or limiting the interest rate exposure on the underlying financing. These interest rate contracts range in maturity through 2030, and are typically designated as cash flow hedges. The following table sets forth, by underlying type of interest rate index, the Company's current and maximum outstanding notional under its interest rate derivative instruments, the weighted average remaining term and the percentage of variable-rate debt hedged that is based on the related index as of September 30, 2012 regardless of whether the derivative instruments are in qualifying cash flow hedging relationships:
|  |  | September 30, 2012
|  |  | Current |  | Maximum(1) |  |  |  |
|  |  |  |  | Derivative |  |  |  | Derivative |  | Weighted |  | % of Debt
|  |  |  |  | Notional |  |  |  | Notional |  | Average |  | Currently
|  |  | Derivative |  | Translated |  | Derivative |  | Translated |  | Remaining |  | Hedged
Interest Rate Derivatives |  | Notional |  | to USD |  | Notional |  | to USD |  | Term(1) |  | by Index(2)
|  |  | (in millions) |  | (in years) |  |
Libor (U.S. Dollar) |  | 3,614 |  | $ | 3,614 |  | 4,561 |  | $ | 4,561 |  | 10 |  | 70%
Euribor (Euro) |  | 627 |  |  | 806 |  | 627 |  |  | 806 |  | 10 |  | 66%
Libor (British Pound) |  | 58 |  |  | 94 |  | 70 |  |  | 113 |  | 16 |  | 88%
(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 September 30, 2012 and the maturity of the derivative instrument, which includes forward starting derivative instruments. The weighted average remaining term represents the remaining tenor of our interest rate derivatives weighted by the corresponding maximum notional. (2) Excludes variable-rate debt tied to other indices where the Company has no interest rate derivatives. Cross currency swaps are utilized in certain instances to manage the risk related to fluctuations in both interest rates and certain foreign currencies. These cross currency contract s range in maturity through 2028. The following table sets forth, by type of foreign currency denomination, the Company's outstanding notional amount under its cross currency derivative instruments as of September 30, 2012, which are all in qualifying cash flow hedge relationships. These swaps are amortizing and therefore the notional amount represents the maximum outstanding notional amount as of September 30, 2012:
|  |  | September 30, 2012
|  |  |  |  |  |  | Weighted |  | % of Debt
|  |  |  |  | Notional |  | Average |  | Currently
|  |  |  |  | Translated |  | Remaining |  | Hedged
Cross Currency Swaps |  | Notional |  | to USD |  | Term(1) |  | by Index(2)
|  |  | (in millions) |  | (in years) |  |
Chilean Unidad de Fomento (CLF) |  | 6 |  | $ | 266 |  | 13 |  | 85%
(1) Represents the remaining tenor of our cross currency swaps weighted by the corresponding notional. (2) Represents the proportion of foreign currency denominated debt hedged by the same foreign currency denominated notional of the cross currency swap. Foreign Currency Risk We are exposed to foreign currency risk as a result of our investments in foreign subsidiaries and affiliates. AES operates busines ses in many foreign countries and such operations may be impacted by significant fluctuations in foreign currency exchange rates. Foreign currency options and forwards are utilized, where deemed appropriate, to manage the risk related to fluctuations in certain foreign currencies. These foreign currency contracts range in maturity through 2015. The following tables set forth, by type of foreign currency denomination, the Company's outstanding notional amounts over the remaining terms of its foreign currency derivative instruments as of September 30, 2012 regardless of whether the derivative instruments are in qualifying hedging relationships:
|  |  | September 30, 2012
|  |  |  |  |  |  |  |  |  |  | Weighted
|  |  |  |  | Notional |  | Probability |  | Average
|  |  |  |  | Translated |  | Adjusted |  | Remaining
Foreign Currency Options |  | Notional |  | to USD(1) |  | Notional(2) |  | Term(3)
|  |  | (in millions) |  | (in years)
Euro (EUR) |  | 68 |  | $ | 87 |  | $ | 38 |  | <1
Brazilian Real (BRL) |  | 94 |  |  | 46 |  |  | 26 |  | <1
Philippine Peso (PHP) |  | 1,174 |  |  | 28 |  |  | 6 |  | <1
British Pound (GBP) |  | 18 |  |  | 28 |  |  | 6 |  | <1
(1) Represents contractual notionals at inception of trade. (2) Represents the gross notional amounts times the probability of exercising the option, which is based on the relationship of changes in the option value with respect to changes in the price of the underlying currency. (3) Represents the remaining tenor of our foreign currency options weighted by the corresponding notional.
|  |  | September 30, 2012
|  |  |  |  | Notional |  |  | Weighted Average
Foreign Currency Forwards |  | Notional |  | Translated to USD |  |  | Remaining Term(1)
|  |  | (in millions) |  |  | (in years)
Chilean Peso (CLP) |  | 86,476 |  | $ | 176 |  |  | <1
Euro (EUR) |  | 115 |  |  | 161 |  |  | 1
Colombian Peso (COP) |  | 172,643 |  |  | 94 |  |  | <1
British Pound (GBP) |  | 11 |  |  | 17 |  |  | <1
Argentine Peso (ARS) |  | 76 |  |  | 14 |  |  | 1
(1) Represents the remaining tenor of our foreign currency forwards weighted by the corresponding notional. In addition, certain of our subsidiaries have entered into contracts which contain embedded derivatives that require separate valuation and accounting due to the fact that the item that is being purchased or sold is denominated in a currency other than the functional currency of the subsidiary or the currency of the item. These contract s range in maturity through 2026. The following table sets forth, by type of foreign currency denomination, the Company's outstanding notional over the remaining terms of its foreign currency embedded derivative instruments as of September 30, 2012:
|  |  | September 30, 2012
|  |  |  |  | Notional |  |  | Weighted Average
Embedded Foreign Currency Derivatives |  | Notional |  | Translated to USD |  |  | Remaining Term(1)
|  |  | (in millions) |  |  | (in years)
Philippine Peso (PHP)(2) |  | 62,040 |  | $ | 1,486 |  |  | 11
Argentine Peso (ARS) |  | 857 |  |  | 183 |  |  | 12
Kazakhstani Tenge (KZT) |  | 1,266 |  |  | 8 |  |  | 4
Euro (EUR) |  | 2 |  |  | 3 |  |  | 8
(1) Represents the remaining tenor of our foreign currency embedded derivatives weighted by the corresponding notional. (2) Notional also relates to an embedded derivative relate d to inflation. Commodity Price Risk We are exposed to the impact of market fluctuations in the price of electricity, fuel and environmental credits. Although our businesses primarily enter into long-term contracts or retail sales concessions (which provide our distribution businesses with a franchise to serve a specific geographic region), a portion of our current and expected future revenues are derived from businesses without significant long-term purchase or sales contracts. These businesses subject our results of operations to the volati lity of prices for electricity and fuel in competitive markets. We have used a hedging strategy, where appropriate, to hedge our financial performance against the effects of fluctuations in energy commodity prices. The PPAs and fuel supply agreements entered into by the Company are evaluated to determine if they meet the definition of a derivative or contain embedded derivatives, either of which require s separate valuation and accounting. To be a derivative under the accounting standards for derivatives and hedging, an agreement would need to have a notional and an underlying, require little or no initial net investment and could be net settled. Generally, these agreements do not meet the definition of a derivative, often due to the inability to be net settled. On a quarterly basis, we evaluate the markets for the commodities to be delivered under these agreements to determine if facts and circumstances have changed such that the agreements could then be net settled and meet the definition of a derivative. Nonetheless, certain of the PPAs and fuel supply agreements entered into by certain of the Company's subsidiaries are derivatives or contain embedded derivatives requiring separate valuation and accounting. These contract s range in maturity through 2024. The following table sets forth, by type of commodity, the Company's outstanding notionals for the remaining term of its commodity derivatives and embedded derivative instruments as of September 30, 2012:
|  |  | September 30, 2012 |
|  |  |  |  | Weighted Average |
| Commodity Derivatives |  | Notional |  | Remaining Term(1) |
|  |  | (in millions) |  | (in years) |
| Natural gas (MMBTU) |  | 29 |  | 11 |
| Aluminum (MWh) |  | 14(2) |  | 7 |
| Petcoke (Metric tons) |  | 12 |  | 12 |
| Power (MWh) |  | 4 |  | 2 |
| Heating Oil (Gallons) |  | 2 |  | 1 |
| Coal (Metric tons) |  | 1 |  | 1 |
(1) Represents the remaining tenor of our commodity and embedded derivatives weighted by the corresponding volume. (2) The embedded derivative relates to fluctuations in the price of aluminum versus fluctuations in the price of electricity, wh ere the notional is based on the amount of power we sell under the PPA. Accounting and Reporting Fair Value Hierarchy The following table sets forth the Company's derivative instruments as of September 30, 2012 and December 31, 2011 by type of derivative and by level within the fair value hierarchy. Derivative assets and liabilities are recognized at their fair value. Derivative assets and liabilities are combined with other balances and included in the following captions in our condensed consolidated balance sheets: current derivative assets in other current assets, noncurrent derivative assets in other noncurrent assets, current derivative liabilities in accrued and other liabilities and noncurrent derivative liabilities in other noncurrent liabilities.
|  |  |  |  | September 30, 2012 |  | December 31, 2011
|  |  |  |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
|  |  |  |  | (in millions)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Foreign currency derivatives |  | $ | - |  | $ | 6 |  | $ | 5 |  | $ | 11 |  | $ | - |  | $ | 24 |  | $ | 4 |  | $ | 28
| Commodity and other derivatives |  |  | - |  |  | 14 |  |  | 5 |  |  | 19 |  |  | 2 |  |  | 16 |  |  | 3 |  |  | 21
|  | Total current assets |  |  | - |  |  | 20 |  |  | 10 |  |  | 30 |  |  | 2 |  |  | 40 |  |  | 7 |  |  | 49
Noncurrent assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate derivatives |  |  | - |  |  | 2 |  |  | - |  |  | 2 |  |  | - |  |  | - |  |  | - |  |  | -
| Cross currency derivatives |  |  | - |  |  | 8 |  |  | - |  |  | 8 |  |  | - |  |  | - |  |  | 1 |  |  | 1
| Foreign currency derivatives |  |  | - |  |  | 7 |  |  | 63 |  |  | 70 |  |  | - |  |  | 3 |  |  | 58 |  |  | 61
| Commodity and other derivatives |  |  | - |  |  | 5 |  |  | 11 |  |  | 16 |  |  | - |  |  | 9 |  |  | - |  |  | 9
|  | Total noncurrent assets |  |  | - |  |  | 22 |  |  | 74 |  |  | 96 |  |  | - |  |  | 12 |  |  | 59 |  |  | 71
|  |  | Total assets |  | $ | - |  | $ | 42 |  | $ | 84 |  | $ | 126 |  | $ | 2 |  | $ | 52 |  | $ | 66 |  | $ | 120
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate derivatives |  | $ | - |  | $ | 79 |  | $ | 37 |  | $ | 116 |  | $ | - |  | $ | 97 |  | $ | 22 |  | $ | 119
| Cross currency derivatives |  |  | - |  |  | 4 |  |  | - |  |  | 4 |  |  | - |  |  | - |  |  | 5 |  |  | 5
| Foreign currency derivatives |  |  | - |  |  | 8 |  |  | 1 |  |  | 9 |  |  | - |  |  | 5 |  |  | 1 |  |  | 6
| Commodity and other derivatives |  |  | - |  |  | 18 |  |  | 7 |  |  | 25 |  |  | - |  |  | 17 |  |  | 6 |  |  | 23
|  | Total current liabilities |  |  | - |  |  | 109 |  |  | 45 |  |  | 154 |  |  | - |  |  | 119 |  |  | 34 |  |  | 153
Noncurrent liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate derivatives |  |  | - |  |  | 263 |  |  | 260 |  |  | 523 |  |  | - |  |  | 334 |  |  | 106 |  |  | 440
| Cross currency derivatives |  |  | - |  |  | 2 |  |  | - |  |  | 2 |  |  | - |  |  | - |  |  | 14 |  |  | 14
| Foreign currency derivatives |  |  | - |  |  | 106 |  |  | 7 |  |  | 113 |  |  | - |  |  | 10 |  |  | 10 |  |  | 20
| Commodity and other derivatives |  |  | - |  |  | 5 |  |  | 47 |  |  | 52 |  |  | - |  |  | 13 |  |  | 50 |  |  | 63
|  | Total noncurrent liabilities |  |  | - |  |  | 376 |  |  | 314 |  |  | 690 |  |  | - |  |  | 357 |  |  | 180 |  |  | 537
|  |  | Total liabilities |  | $ | - |  | $ | 485 |  | $ | 359 |  | $ | 844 |  | $ | - |  | $ | 476 |  | $ | 214 |  | $ | 690
Hedge Designation The following table sets forth the fair value and balance sheet classification of derivative instruments as of September 30, 2012 and December 31, 2011:
|  |  |  | September 30, 2012 |  | December 31, 2011
|  |  |  |  |  | Not |  |  |  |  |  | Not |  |
|  |  |  | Designated |  | Designated |  |  |  | Designated |  | Designated |  |
|  |  |  | as Hedging |  | as Hedging |  |  |  | as Hedging |  | as Hedging |  |
|  |  |  | Instruments |  | Instruments |  | Total |  | Instruments |  | Instruments |  | Total
|  |  |  | (in millions)
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Foreign currency derivatives |  | $ | 4 |  | $ | 7 |  | $ | 11 |  | $ | 10 |  | $ | 18 |  | $ | 28
| Commodity and other derivatives |  |  | 1 |  |  | 18 |  |  | 19 |  |  | 2 |  |  | 19 |  |  | 21
| Total current assets |  |  | 5 |  |  | 25 |  |  | 30 |  |  | 12 |  |  | 37 |  |  | 49
Noncurrent assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate derivatives |  |  | - |  |  | 2 |  |  | 2 |  |  | - |  |  | - |  |  | -
| Cross currency derivatives |  |  | 8 |  |  | - |  |  | 8 |  |  | 1 |  |  | - |  |  | 1
| Foreign currency derivatives |  |  | 7 |  |  | 63 |  |  | 70 |  |  | 3 |  |  | 58 |  |  | 61
| Commodity and other derivatives |  |  | 1 |  |  | 15 |  |  | 16 |  |  | - |  |  | 9 |  |  | 9
| Total noncurrent assets |  |  | 16 |  |  | 80 |  |  | 96 |  |  | 4 |  |  | 67 |  |  | 71
Total assets |  | $ | 21 |  | $ | 105 |  | $ | 126 |  | $ | 16 |  | $ | 104 |  | $ | 120
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate derivatives |  | $ | 106 |  | $ | 10 |  | $ | 116 |  | $ | 110 |  | $ | 9 |  | $ | 119
| Cross currency derivatives |  |  | 4 |  |  | - |  |  | 4 |  |  | 5 |  |  | - |  |  | 5
| Foreign currency derivatives |  |  | 7 |  |  | 2 |  |  | 9 |  |  | 1 |  |  | 5 |  |  | 6
| Commodity and other derivatives |  |  | 7 |  |  | 18 |  |  | 25 |  |  | - |  |  | 23 |  |  | 23
| Total current liabilities |  |  | 124 |  |  | 30 |  |  | 154 |  |  | 116 |  |  | 37 |  |  | 153
Noncurrent liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest rate derivatives |  |  | 500 |  |  | 23 |  |  | 523 |  |  | 425 |  |  | 15 |  |  | 440
| Cross currency derivatives |  |  | 2 |  |  | - |  |  | 2 |  |  | 14 |  |  | - |  |  | 14
| Foreign currency derivatives |  |  | - |  |  | 113 |  |  | 113 |  |  | - |  |  | 20 |  |  | 20
| Commodity and other derivatives |  |  | 3 |  |  | 49 |  |  | 52 |  |  | 3 |  |  | 60 |  |  | 63
| Total noncurrent liabilities |  |  | 505 |  |  | 185 |  |  | 690 |  |  | 442 |  |  | 95 |  |  | 537
Total liabilities |  | $ | 629 |  | $ | 215 |  | $ | 844 |  | $ | 558 |  | $ | 132 |  | $ | 690
The Company has elected not to offset derivative positions in the financial statements. Accordingly, we do not offset such derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements. At September 30, 2012 and December 31, 2011, we held $1 million and $3 million, respectively, of cash collateral that we received from counterparties to our derivative positions. Beyond the cash collateral held by us, our derivative assets are exposed to the credit risk of the respective counterparty and, due to this credit risk, the fair value of our derivative assets (as shown in the above two tables) have been reduced by a CVA. Also, at September 30, 2012 and December 31, 2011, there was $13 mill ion and $16 million, respectively, of cash collateral posted with (held by) counterparties to our derivative positions. The table below sets forth the pre-tax accumulated other comprehensive income (loss) expected to be recognized as an increase (decrease) to income from continuing operations before income taxes (in millions) over the next twelve months as of September 30, 2012 for the following types of derivative instruments:
| Interest rate derivatives |  | $ | (106) |
| Cross currency derivatives |  | $ | 6 |
| Foreign currency derivatives |  | $ | (5) |
| Commodity and other derivatives |  | $ | (9) |
The balance in accumulated other comprehensive loss related to derivative transactions will be reclassified into earnings as interest expense is recognized for interest rate hedges and cross currency swaps (except for the amount reclassified to foreign currency transaction gains and losses to offset the remeasurement of the foreign currency-denominated debt being hedged by the cross currency swaps), as depreciation is recognized for interest rate hedges during construction, as foreign currency transaction gains and losses are recognized for hedges of foreign currency exposure, and as electricity sales and fuel purchases are recognized for hedges of forecasted electricity and fuel transactions. These balances are included in the consolidated statements of cash flows as operating and/or investing activities based on the nature of the underlying transaction. For the three and nine months ended September 30, 2012 and 2011, pre-tax gains (losses) of $(11) million, and $0 million, respectively, net of non controlling interests were reclassified into earnings as a result of the discontinuance of a cash flow hedge because it was probable that the forecasted transaction would not occur by the end of the originally specified time period (as documented at the inception of the hedging relationship) or within an additional two-month time period thereafter. Effective Portion of Cash Flow Hedges The following tables set forth the gains (losses) recognized in accumulated other comprehensive loss (“AOCL”) and earnings related to the effective portion of derivative instruments in qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, for the three and nine months ended September 30, 2012 and 2011:
|  |  | Gains (Losses) |  |  |  | Gains (Losses) Reclassified
|  |  | Recognized in AOCL |  |  |  | from AOCL into Earnings(1)
|  |  | Three Months |  | Classification in |  | Three Months
|  |  | Ended September 30, |  | Condensed Consolidated |  | Ended September 30,
Type of Derivative |  | 2012 |  | 2011 |  | Statements of Operations |  | 2012 |  | 2011
|  |  | (in millions) |  |  |  |  | (in millions)
Interest rate derivatives |  | $ | (62) |  | $ | (295) |  | Interest expense |  | $ | (40) |  | $ | (35)
|  |  |  |  |  |  |  |  | Non-regulated cost of sales |  |  | (1) |  |  | (1)
|  |  |  |  |  |  |  |  | Net equity in earnings of |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | affiliates |  |  | (2) |  |  | (1)
|  |  |  |  |  |  |  |  | Asset impairment expense |  |  | (5) |  |  | -
Cross currency derivatives |  |  | 4 |  |  | (37) |  | Interest expense |  |  | (3) |  |  | (3)
|  |  |  |  |  |  |  |  | Foreign currency transaction |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | gains (losses) |  |  | 15 |  |  | (26)
Foreign currency derivatives |  |  | - |  |  | 29 |  | Foreign currency transaction |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | gains (losses) |  |  | 4 |  |  | 3
Commodity and other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| derivatives |  |  | (4) |  |  | - |  | Non-regulated revenue |  |  | - |  |  | (2)
Total |  | $ | (62) |  | $ | (303) |  |  |  |  | $ | (32) |  | $ | (65)
|  |  | Gains (Losses) |  |  |  |  | Gains (Losses) Reclassified
|  |  | Recognized in AOCL |  |  |  | from AOCL into Earnings(1)
|  |  | Nine Months |  | Classification in |  | Nine Months
|  |  | Ended September 30, |  | Condensed Consolidated |  | Ended September 30,
Type of Derivative |  | 2012 |  | 2011 |  | Statements of Operations |  | 2012 |  | 2011
|  |  | (in millions) |  |  |  |  | (in millions)
Interest rate derivatives |  | $ | (204) |  | $ | (391) |  | Interest expense |  | $ | (102) |  | $ | (91)
|  |  |  |  |  |  |  |  | Non-regulated cost of sales |  |  | (4) |  |  | (3)
|  |  |  |  |  |  |  |  | Net equity in earnings of |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | affiliates |  |  | (4) |  |  | (3)
|  |  |  |  |  |  |  |  | Asset impairment expense |  |  | (5) |  |  | -
|  |  |  |  |  |  |  |  | Gain on sale of investments |  |  | (96) |  |  | -
Cross currency derivatives |  |  | 9 |  |  | (34) |  | Interest expense |  |  | (9) |  |  | (7)
|  |  |  |  |  |  |  |  | Foreign currency transaction |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | gains (losses) |  |  | 27 |  |  | (20)
Foreign currency derivatives |  |  | 12 |  |  | 27 |  | Foreign currency transaction |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  | gains (losses) |  |  | 4 |  |  | (1)
Commodity and other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| derivatives |  |  | (11) |  |  | - |  | Non-regulated revenue |  |  | (2) |  |  | (2)
Total |  | $ | (194) |  | $ | (398) |  |  |  |  | $ | (191) |  | $ | (127)
(1) Includes amounts that were reclassified from AOCL related to derivative instruments that previously, but no longer, qualify for cash flow hedge accounting. Ineffective Portion of Cash Flow Hedges The following table sets forth the pre-tax 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 three and nine months ended September 30, 2012 and 2011:
|  |  |  |  |  | Gains (Losses) |  | Gains (Losses)
|  |  |  |  |  | Recognized in Earnings |  | Recognized in Earnings
|  |  | Classification in Condensed |  | Three Months Ended |  | Nine Months Ended
|  |  | Consolidated Statements |  | September 30, |  | September 30,
Type of Derivative |  | of Operations |  | 2012 |  | 2011 |  | 2012 |  | 2011
|  |  |  |  |  | (in millions)
Interest rate derivatives |  | Interest expense |  | $ | (2) |  | $ | 1 |  | $ | (1) |  | $ | (6)
|  |  | Net equity in earnings of affiliates |  |  | - |  |  | (1) |  |  | (1) |  |  | (2)
Cross currency derivatives |  | Interest expense |  |  | (1) |  |  | (3) |  |  | (1) |  |  | (5)
Total |  |  |  |  | $ | (3) |  | $ | (3) |  | $ | (3) |  | $ | (13)
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, for the three and nine months ended September 30, 2012 and 2011:
|  |  |  |  |  | Gains (Losses) |  | Gains (Losses)
|  |  |  |  |  | Recognized in Earnings |  | Recognized in Earnings
|  |  | Classification |  | Three Months Ended |  | Nine Months Ended
|  |  | in Condensed Consolidated |  | September 30, |  | September 30,
Type of Derivative |  | Statements of Operations |  | 2012 |  | 2011 |  | 2012 |  | 2011
|  |  |  |  |  | (in millions)
Interest rate derivatives |  | Interest expense |  | $ | (2) |  | $ | (1) |  | $ | (5) |  | $ | (2)
Foreign currency derivatives |  | Foreign currency transaction gains (losses) |  |  | (11) |  |  | 27 |  |  | (87) |  |  | 54
Commodity and other derivatives |  | Non-regulated revenue |  |  | 14 |  |  | (54) |  |  | 15 |  |  | (63)
|  |  | Regulated revenue |  |  | (3) |  |  | - |  |  | (2) |  |  | -
|  |  | Non-regulated cost of sales |  |  | 1 |  |  | 3 |  |  | 4 |  |  | 2
|  |  | Regulated cost of sales |  |  | (3) |  |  | - |  |  | (20) |  |  | -
Total |  |  |  |  | $ | (4) |  | $ | (25) |  | $ | (95) |  | $ | (9)
Regulatory Assets and Liabilities In addition, DPL and IPL, our utilities in North America, have derivative instruments for which the gains and losses are accounted for in accordance with accounting standards for regulated operations, as regulatory assets or liabilities. Gains and losses due to changes in the fair value of these derivatives are probable of recovery through future rates and are initially recognized as an adjustment to the regulatory asset or liability and recognized through earnings when the related costs are recovered through rates. Therefore, these gains and losses are excluded from the above table. The following table sets forth the change in regulatory assets and liabilities resulting from the change in the fair value of these derivatives for the three and nine months ended September 30, 2012 and 2011:
|  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
|  | 2012 |  | 2011 |  | 2012 |  | 2011
|  | (in millions)
(Increase) decrease in regulatory assets |  | $ | 4 |  | $ | (4) |  | $ | (1) |  | $ | (6)
Increase (decrease) in regulatory liabilities |  | $ | - |  | $ | (3) |  | $ | (1) |  | $ | 3
Credit Risk-Related Contingent Features Gener, our generation business in Chile, has cross currency swap agreements with counterparties to swap Chilean inflation indexed bonds issued in December 2007 into U.S. Dollars. The derivative agreements contain credit contingent provisions which would permit the counterparties with which Gener is in a net liability position to require collateral credit support when the fair value of the derivatives exceeds the unsecured thresholds established in the agreements. These thresholds vary based on Gener's credit rating. If Gener's credit rating were to fall below the minimum threshold established in the swap agreements, the counterparties can demand immediate collateralization of the entire mark-to-market loss of the swaps (excluding credit valuation adjustments), which was $2 million at September 30, 2012. The mark-to-market value of the swaps was $18 million at December 31, 2011. As of September 30, 2012 and December 31, 2011, Gener had not posted collateral to support these swaps. DPL has certain over-the-counter commodity derivative contracts under master netting agreements that contain provisions that require its debt to maintain an investment-grade credit rating from credit rating agencies. If its debt were to fall below investment grade, the business would be in violation of these provisions, and the counterparties to the derivative contracts could request immediate payment or demand immediate and ongoing full overnight collateralization of the mark-to-market loss (excluding credit valuation adjustments), which was $22 million as of September 30, 2012. As of September 30, 2012, DPL had posted $13 million of cash collateral directly with third parties and in a broker margin account and held $1 million of cash collateral that it received from counterparties to its derivative instruments that were in an asset position. As of December 31, 2011, DPL had p osted $16 million of cash collateral directly with third parties and in a broker margin account a nd held $3 million of cash collateral that it received from counterparties to its derivative instruments that were in an asset position.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624177-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624258-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708773-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5580258-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624163-113959 Reference 20: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 45 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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