GE 2012 Annual Report Download - page 50

management’s discussion and analsis
48 GE 2012 ANNUAL REPORT
dispositions and portfolio run-off in various businesses at
Consumer. See GECC Selected European Exposures section.
Financial results of our global activities reported in U.S. dollars
are affected by currency exchange. We use a number of tech-
niques to manage the effects of currency exchange, including
selective borrowings in local currencies and selective hedging of
significant cross-currency transactions. Such principal currencies
are the pound sterling, the euro, the Japanese yen, the Canadian
dollar and the Australian dollar.
Environmental Matters
Our operations, like operations of other companies engaged in
similar businesses, involve the use, disposal and cleanup of sub-
stances regulated under environmental protection laws. We are
involved in a number of remediation actions to clean up hazard-
ous wastes as required by federal and state laws. Such statutes
require that responsible parties fund remediation actions regard-
less of fault, legality of original disposal or ownership of a disposal
site. Expenditures for site remediation actions amounted to
approximately $0.4 billion in 2012, $0.3 billion in 2011 and $0.2 bil-
lion in 2010. We presently expect that such remediation actions
will require average annual expenditures of about $0.4 billion for
each of the next two years.
In 2006, we entered into a consent decree with the
Environmental Protection Agency (EPA) to dredge PCB-containing
sediment from the upper Hudson River. The consent decree pro-
vided that the dredging would be performed in two phases. Phase
1 was completed in May through November of 2009. Between
Phase 1 and Phase 2 there was an intervening peer review by
an independent panel of national experts. The panel evaluated
the performance of Phase 1 dredging operations with respect to
Phase 1 Engineering Performance Standards and recommended
proposed changes to the standards. On December 17, 2010, EPA
issued its decision setting forth the final performance standards
for Phase 2 of the Hudson River dredging project, incorporat-
ing aspects of the recommendations from the independent
peer review panel and from GE. In December 2010, we agreed
to perform Phase 2 of the project in accordance with the final
performance standards set by EPA and increased our reserve
by $0.8 billion in the fourth quarter of 2010 to account for the
probable and estimable costs of completing Phase 2. In 2011, we
completed the first year of Phase 2 dredging and commenced
work on planned upgrades to the Hudson River wastewater
processing facility. Over the past two years we have dredged
1.0 million cubic yards from the river and based upon that result
and our best professional engineering judgment, we believe that
our current reserve continues to reflect our probable and estima-
ble costs for the remainder of Phase 2 of the dredging project.
Financial Resources and Liquidity
This discussion of financial resources and liquidity addresses
the Statement of Financial Position, Liquidity and Borrowings,
Debt and Derivative Instruments, Guarantees and Covenants,
Shareowners’ Equity, Statement of Cash Flows, Contractual
Obligations, and Variable Interest Entities.
Overview of Financial Position
Major changes to our shareowners’ equity are discussed in the
Shareowners’ Equity section. In addition, other significant
changes to balances in our Statement of Financial Position follow.
Statement of Financial Position
Because GE and GECC share certain significant elements of their
Statements of Financial Position—property, plant and equipment
and borrowings, for example—the following discussion addresses
significant captions in the consolidated statement. Within the
following discussions, however, we distinguish between GE and
GECC activities in order to permit meaningful analysis of each
individual consolidating statement.
INVESTMENT SECURITIES comprise mainly investment grade debt
securities supporting obligations to annuitants, policyholders and
holders of guaranteed investment contracts (GICs) in our run-off
insurance operations and Trinity, investment securities at our
treasury operations and investments held in our CLL business
collateralized by senior secured loans of high-quality, middle-
market companies in a variety of industries. The fair value of
investment securities increased to $48.5 billion at December 31,
2012 from $47.4 billion at December 31, 2011, primarily due to the
impact of lower interest rates and improved market conditions.
Of the amount at December 31, 2012, we held debt securities
with an estimated fair value of $47.6 billion, which included cor-
porate debt securities, asset-backed securities (ABS), residential
mortgage-backed securities (RMBS) and commercial mortgage-
backed securities (CMBS) with estimated fair values of
$26.6 billion, $5.7 billion, $2.3 billion and $3.1 billion, respectively.
Net unrealized gains on debt securities were $4.8 billion and
$3.0 billion at December 31, 2012 and December 31, 2011,
respectively. This amount included unrealized losses on corpo-
rate debt securities, ABS, RMBS and CMBS of $0.4 billion,
$0.1 billion, $0.1 billion and $0.1 billion, respectively, at
December 31, 2012, as compared with $0.6 billion, $0.2 billion,
$0.3 billion and $0.2 billion, respectively, at December 31, 2011.
We regularly review investment securities for impairment
using both qualitative and quantitative criteria. For debt securi-
ties, our qualitative review considers our intent to sell the security
and the financial health of and specific prospects for the issuer,
including whether the issuer is in compliance with the terms
and covenants of the security. Our quantitative review considers
whether there has been an adverse change in expected future
cash flows. Unrealized losses are not indicative of the amount of
credit loss that would be recognized. We presently do not intend
to sell the vast majority of our debt securities that are in an unre-
alized loss position and believe that it is not more likely than not
that we will be required to sell the vast majority of these securi-
ties before recovery of our amortized cost. For equity securities,
we consider the length of time and magnitude of the amount that
each security is in an unrealized loss position. We believe that
the unrealized loss associated with our equity securities will be
recovered within the foreseeable future. Uncertainty in the capi-
tal markets may cause increased levels of other-than-temporary
impairments. For additional information relating to how credit
losses are calculated, see Note 3.