GE 2010 Annual Report Download - page 58

management’s discussion and analsis
56 GE 2010 ANNUAL REPORT
Other debt and derivative agreements of consolidated entities:
• One group of consolidated entities holds investment securities
funded by the issuance of GICs. If the long-term credit rating of
GECC were to fall below AA-/Aa3 or its short-term credit rating
were to fall below A-1+/P-1, GECC would be required to provide
approximately $1.5 billion to such entities as of December 31,
2010, pursuant to letters of credit issued by GECC, as com-
pared to $2.4 billion at December 31, 2009. Furthermore, to the
extent that the entities’ liabilities exceed the ultimate value of
the proceeds from the sale of its assets and the amount drawn
under the letters of credit, GECC is required to provide such
excess amount. As of December 31, 2010, the value of these
entities’ liabilities was $5.7 billion and the fair value of its assets
was $6.0 billion (which included unrealized losses on investment
securities of $0.7 billion). With respect to these investment
securities, we intend to hold them at least until such time as
their individual fair values exceed their amortized cost and we
have the ability to hold all such debt securities until maturity.
• Another consolidated entity also issues GICs where proceeds
are loaned to GECC. If the long-term credit rating of GECC were
to fall below AA-/Aa3 or its short-term credit rating were to fall
below A-1+/P-1, GECC could be required to provide up to
approximately $2.3 billion as of December 31, 2010, to repay
holders of GICs, compared to $3.0 billion at December 31,
2009. These obligations are included in long-term borrowings
in our Statement of Financial Position.
• If the short-term credit rating of GECC were reduced below
A-1/P-1, GECC would be required to partially cash collateralize
certain covered bonds. The maximum amount that would be
required to be provided in the event of such a downgrade is
determined by contract and amounted to $0.8 billion at both
December 31, 2010 and 2009. These obligations are included in
long-term borrowings in our Statement of Financial Position.
RATIO OF EARNINGS TO FIXED CHARGES, INCOME MAINTENANCE
AGREEMENT AND SUBORDINATED DEBENTURES. On March 28,
1991, GE entered into an agreement with GECC to make pay-
ments to GECC, constituting additions to pre-tax income under
the agreement, to the extent necessary to cause the ratio of
earnings to fixed charges of GECC and consolidated affiliates
(determined on a consolidated basis) to be not less than 1.10:1
for the period, as a single aggregation, of each GECC fiscal year
commencing with fiscal year 1991. GECC’s ratio of earnings to
fixed charges increased to 1.13:1 during 2010 due to higher
pre-tax earnings at GECC, which were primarily driven by higher
margins and lower provisions for losses on financing receivables.
On October 29, 2009, GE and GECC amended this agreement
to extend the notice period for termination from three years to
five years. It was further amended to provide that any future
amendments to the agreement that could adversely affect GECC
require the consent of the majority of the holders of the aggregate
outstanding principal amount of senior unsecured debt securities
issued or guaranteed by GECC (with an original stated maturity in
excess of 270 days), unless the amendment does not trigger a
downgrade of GECC’s long-term ratings. No payment is required
in 2011 pursuant to this agreement.
GE made a $9.5 billion payment to GECS in the first quarter of
2009 (of which $8.8 billion was further contributed to GECC
through capital contribution and share issuance) to improve
tangible capital and reduce leverage. This payment constitutes an
addition to pre-tax income under the agreement and therefore
increased the ratio of earnings to fixed charges of GECC for the
fiscal year 2009 for purposes of the agreement to 1.33:1. As a
result, no further payments under the agreement in 2010 were
required related to 2009.
Any payment made under the Income Maintenance Agreement
will not affect the ratio of earnings to fixed charges as determined
in accordance with current SEC rules because it does not consti-
tute an addition to pre-tax income under current U.S. GAAP.
In addition, in connection with certain subordinated deben-
tures for which GECC receives equity credit by rating agencies,
GE has agreed to promptly return dividends, distributions or other
payments it receives from GECC during events of default or inter-
est deferral periods under such subordinated debentures. There
were $7.3 billion of such debentures outstanding at December 31,
2010. See Note 10.
Consolidated Statement of Changes in Shareowners’ Equity
GE shareowners’ equity increased by $1.6 billion in 2010, com-
pared with an increase of $12.6 billion in 2009 and a decrease of
$10.9 billion in 2008.
Net earnings increased GE shareowners’ equity by $11.6 bil-
lion, $11.0 billion and $17.4 billion, partially offset by dividends
declared of $5.2 billion, $6.8 billion and $12.6 billion in 2010, 2009
and 2008, respectively.
Elements of other comprehensive income decreased share-
owners’ equity by $2.3 billion in 2010, compared with an increase
of $6.6 billion in 2009 and a decrease of $30.2 billion in 2008,
inclusive of changes in accounting principles. The components
of these changes are as follows:
• Changes in benefit plans increased shareowners’ equity by
$1.1 billion in 2010, primarily reflecting prior service cost and
net actuarial loss amortization and increases in the fair value of
plan assets, partially offset by a decrease in the discount rate
used to value pension and postretirement benefit obligations.
This compared with a decrease of $1.8 billion and $13.3 billion
in 2009 and 2008, respectively. The decrease in 2009 primarily
related to a decrease in the discount rate used to value pension
and postretirement benefit obligations. The decrease in 2008
primarily related to declines in the fair value of plan assets as
a result of market conditions and adverse changes in the eco-
nomic environment. Further information about changes in
benefit plans is provided in Note 12.
• Currency translation adjustments decreased shareowners’
equity by $3.9 billion in 2010, increased equity by $4.1 billion in
2009 and decreased equity by $11.0 billion in 2008. Changes
in currency translation adjustments reflect the effects of