GE 2012 Annual Report Download - page 62

management’s discussion and analsis
60 GE 2012 ANNUAL REPORT
Fair values of our derivatives can change significantly from
period to period based on, among other factors, market move-
ments and changes in our positions. We manage counterparty
credit risk (the risk that counterparties will default and not make
payments to us according to the terms of our standard master
agreements) on an individual counterparty basis. Where we have
agreed to netting of derivative exposures with a counterparty,
we offset our exposures with that counterparty and apply the
value of collateral posted to us to determine the net exposure.
We actively monitor these net exposures against defined limits
and take appropriate actions in response, including requiring
additional collateral.
Swap, forward and option contracts are executed under
standard master agreements that typically contain mutual down-
grade provisions that provide the ability of the counterparty to
require termination if the long-term credit ratings of the applica-
ble GE entity were to fall below A-/A3. In certain of these master
agreements, the counterparty also has the ability to require
termination if the short-term ratings of the applicable GE entity
were to fall below A-1/P-1. The net derivative liability after consid-
eration of netting arrangements, outstanding interest payments
and collateral posted by us under these master agreements was
estimated to be $0.3 billion at December 31, 2012. See Note 22.
Other debt and derivative agreements of consolidated entities
include Trinity, which comprises two entities that hold invest-
ment securities, the majority of which are investment grade,
and were funded by the issuance of GICs. These GICs included
conditions under which certain holders could require immediate
repayment of their investment should the long-term credit rat-
ings of GECC fall below AA-/Aa3 or the short-term credit ratings
fall below A-1+/P-1. The Trinity assets and liabilities are disclosed
in note (a) on our Statement of Financial Position. Another con-
solidated entity also had issued GICs where proceeds are loaned
to GECC. These GICs included conditions under which certain
holders could require immediate repayment of their investment
should the long-term credit ratings of GECC fall below AA-/Aa3.
These obligations are included in long-term borrowings on our
Statement of Financial Position. These three consolidated entities
ceased issuing GICs in 2010.
Following the April 3, 2012 Moody’s downgrade of GECC’s
long-term credit rating to A1, substantially all of these GICs
became redeemable by their holders. In 2012, holders of $2.4 bil-
lion in principal amount of GICs redeemed their holdings and
GECC made related cash payments. The remaining outstanding
GICs will continue to be subject to their scheduled maturities
and individual terms, which may include provisions permitting
redemption upon a downgrade of one or more of GECC’s ratings,
among other things.
RATIO OF EARNINGS TO FIXED CHARGES, INCOME MAINTENANCE
AGREEMENT AND SUBORDINATED DEBENTURES
GE provides implicit and explicit support to GECC through com-
mitments, capital contributions and operating support. For
example, and as discussed below, GE has committed to keep
GECC’s ratio of earnings to fixed charges above a minimum level.
In addition, GE has made a total of $15.0 billion of capital contri-
butions to GECC in 2009 and 2008 to improve tangible capital and
reduce leverage. GECC’s credit rating is higher than it would be
on a stand-alone basis as a result of this financial support.
On March 28, 1991, GE entered into an agreement with GECC
to make payments 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 was 1.64:1 for 2012. No payment is required in
2013 pursuant to this agreement.
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 constitute an addition to pre-tax income under current
U.S. GAAP.
In addition, in connection with certain subordinated deben-
tures of GECC that may be classified as equity (hybrid debt),
during events of default or interest deferral periods under such
subordinated debentures, GECC has agreed not to declare or pay
any dividends or distributions or make certain other payments
with respect to its capital stock, and GE has agreed to promptly
return any payments made to GE in violation of this agree-
ment. There were $7.3 billion of such debentures outstanding at
December 31, 2012. See Note 10.
Shareowners’ Equity
Effective with 2012 reporting, activity affecting shareowners’
equity is presented in two statements: the Consolidated
Statement of Changes in Shareowners’ Equity and the
Consolidated Statement of Comprehensive Income. The elements
of other comprehensive income previously disclosed in the
Consolidated Statement of Changes in Shareowners’ Equity are
now presented in the new Consolidated Statement of
Comprehensive Income, which combines those elements with
net earnings. An analysis of changes in the elements of share-
owners’ equity, as presented in these two statements, follows.
GE shareowners’ equity increased by $6.6 billion in 2012, com-
pared with a decrease of $2.5 billion in 2011 and an increase of
$1.6 billion in 2010.
Net earnings increased GE shareowners’ equity by $13.6 bil-
lion, $14.2 billion and $11.6 billion, partially offset by dividends
declared of $7.4 billion, $7.5 billion (including $0.8 billion related to
our preferred stock redemption) and $5.2 billion in 2012, 2011 and
2010, respectively.