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GENERAL ELECTRIC CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) We are one of the largest and most diversified infrastructure and financial services corporations in the world. With products and services ranging from aircraft engines, power generation, oil and gas production equipment, and household appliances to medical imaging, business and consumer financing and industrial products. Operating businesses that are reported as segments include Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Appliances & Lighting and GE Capital. General Electric Company's consolidated financial statements represent the combination of the industrial manufacturing and product services businesses of General Electric Company (GE) and the financial services businesses of General Electric Capital Corporation (GECC or Financial Services). In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered "non-GAAP financial measures" under the U.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in Exhibit 99(a) to this Form 10-Q Report. We supplement our GAAP net earnings and earnings per share (EPS) reporting by also reporting operating earnings and operating EPS (non-GAAP measures). Operating earnings and operating EPS include service costs, prior service cost amortization and curtailment loss for our principal pension plans as these costs represent expenses associated with employee benefits earned. Operating earnings and operating EPS exclude non-operating pension cost/income such as interest costs, expected return on plan assets and non-cash amortization of actuarial gains and losses. We believe that this reporting provides better transparency to the employee benefit costs of our principal pension plans and Company operating results. Unless otherwise indicated, we refer to captions such as revenues and other income and earnings from continuing operations attributable to the Company simply as "revenues" and "earnings" throughout this Management's Discussion and Analysis. Similarly, discussion of other matters in our condensed, consolidated financial statements relates to continuing operations unless otherwise indicated. We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses. We have reclassified certain prior-period amounts to conform to the current-period presentation. (53) --------------------------------------------------------------------------------OVERVIEW -------------------------------------------------------------------------------- Three months ended September 30 Nine months ended September 30 (Dollars in millions, except per share amounts) 2014 2013 V % 2014 2013 V % GAAP Consolidated revenues and $ 36,174 $ 35,661 1% $ 106,585 $ 105,663 1% other income Earnings from continuing operations attributable to the Company 3,480 3,282 6% 10,053 10,186 (1)% Earnings (loss) from discontinued operations, net of taxes, 57 (91) F 28 (335) F attributable to the Company Consolidated net earnings attributable to the Company 3,537 3,191 11% 10,081 9,851 2% EPS from continuing 0.34 0.32 6% 0.99 0.98 1% operations-diluted EPS from net 0.35 0.31 13% 0.99 0.95 4% earnings-diluted Effective tax rate 11.8 % 9.6 % 10.5 % 10.1 % Non-GAAP Operating earnings $ 3,829 $ 3,708 3% $ 11,088 $ 11,465 (3)% Operating EPS 0.38 0.36 6% 1.09 1.11 (2)% Revenues Revenues increased 1% in the three months ended September 30, 2014 compared with the same period of 2013. Industrial sales increased 3%, reflecting organic growth. Financial Services revenues decreased 1% as a result of organic revenue declines and the effects of dispositions, partially offset by higher gains and lower impairments. Overall, the effects of acquisitions increased consolidated revenues $0.3 billion and $0.6 billion in the three months ended September 30, 2014 and 2013, respectively. Dispositions also affected our operations through lower revenues of $0.6 billion and $1.0 billion in the three months ended September 30, 2014 and 2013, respectively. Revenues increased 1% in the nine months ended September 30, 2014 compared with the same period of 2013. Industrial sales increased 6%, reflecting organic growth and the effects of acquisitions. Financial Services revenues decreased 5% as a result of organic revenue declines, primarily due to lower ending net investment, the effects of dispositions and lower gains, partially offset by lower impairments. Other income decreased to $0.8 billion in the nine months ended September 30, 2014 from $2.1 billion in the same period of 2013 due to the absence of NBCUniversal (NBCU LLC) related income, primarily from the sale of our remaining 49% common equity interest in NBCU LLC in the first quarter of 2013. Overall, the effects of acquisitions increased consolidated revenues $1.5 billion and $0.9 billion in the nine months ended September 30, 2014 and 2013, respectively. Dispositions also affected our operations through lower revenues of $3.0 billion and $0.2 billion in the nine months ended September 30, 2014 and 2013, respectively Earnings from continuing operations attributable to the Company Earnings from continuing operations attributable to the Company increased 6% in the three months ended September 30, 2014 compared with the same period of 2013, primarily due to a 9% increase in the operating profit of the industrial segments. Our consolidated earnings in both the three months ended September 30, 2014 and 2013 increased an insignificant amount from acquired businesses. The effects of dispositions on earnings were decreases of $0.1 billion and $0.6 billion in the three months ended September 30, 2014 and 2013, respectively. Earnings from continuing operations attributable to the Company decreased 1% in the nine months ended September 30, 2014 compared with the same period of 2013, primarily due to the absence of gains related to the first quarter 2013 sale of our remaining 49% common equity interest in NBCU LLC ($1.4 billion), partially offset by a 10% increase in the operating profit of the industrial segments. Our consolidated earnings in the nine months ended September 30, 2014 and 2013 increased $0.2 billion and an insignificant amount, respectively, from acquired businesses. The effects of dispositions on earnings were a decrease of $1.5 billion and an increase of $0.2 billion in the nine months ended September 30, 2014 and 2013, respectively. (54)-------------------------------------------------------------------------------- Other 2014 Financial Highlights and Significant Developments · In the third quarter of 2014, Industrial segment revenues increased 3% on organic growth of 4%, and Industrial segment profit increased 9% with growth driven by Aviation, Oil & Gas and Healthcare. In the nine months ended September 30, 2014, Industrial segment revenues increased 6% on organic growth of 5%, and Industrial segment profit increased 10% with growth driven by Aviation, Oil & Gas, Power & Water and Energy Management. · In the third quarter of 2014, Industrial segment margin increased 90 bps driven by higher productivity and pricing, partially offset by the effects of inflation. In the nine months ended September 30, 2014, Industrial segment margin increased 50 bps driven by higher pricing and productivity, partially offset by the effects of inflation. · In the third quarter of 2014, orders of $31.4 billion increased 22%. In the nine months ended September 30, 2014, orders of $80.3 billion increased 9%. Backlog increased to $250.4 billion. · GE Capital segment earnings decreased 22% and 9% in the three and nine months ended September 30, 2014, respectively, on GE Capital ending net investment (ENI), excluding cash and equivalents, of $365 billion. · On October 13, 2014, we announced that GE Capital Aviation Services signed an agreement to acquire Milestone Aviation Group, a helicopter leasing business, for approximately $1.8 billion. The transaction remains subject to customary closing conditions and regulatory approval, and is targeted to close in 2015. · During the third quarter of 2014, GE signed an agreement to sell its Appliances business to Electrolux for $3.3 billion. The transaction has been approved by the boards of directors of GE and Electrolux and remains subject to customary closing conditions and regulatory approvals, and is targeted to close in 2015. We recorded a $0.1 billion curtailment loss on the principal retirement plans as a result of this agreement. · On August 5, 2014, we completed the initial public offering (IPO) of our North American Retail Finance business, Synchrony Financial, as a first step in a planned, staged exit from that business. Synchrony Financial closed the IPO of 125 million shares of common stock at a price to the public of $23.00 per share and on September 3, 2014, Synchrony Financial issued an additional 3.5 million shares of common stock pursuant to an option granted to the underwriters in the IPO (Underwriters' Option). We received net proceeds from the IPO and the Underwriters' Option of $2.8 billion, which remain at Synchrony Financial. Following the closing of the IPO and the Underwriters' Option, we currently own approximately 85% of Synchrony Financial and as a result, GECC will continue to consolidate the business. In addition, in August 2014, Synchrony Financial completed issuances of $3.6 billion of senior unsecured debt with maturities up to 10 years and $8.0 billion of unsecured term loans maturing in 2019 under the New Bank Term Loan Facility with third party lenders. · During the second quarter of 2014, GE's offer to acquire the Thermal, Renewables and Grid businesses of Alstom for $13.5 billion, net of $3.4 billion of assumed net cash in the businesses to be acquired, was positively recommended by Alstom's board of directors. In addition, GE, Alstom and the French Government signed a memorandum of understanding for the formation of three joint ventures in grid technology, renewable energy, and global nuclear and French steam power. Alstom will invest $3.5 billion of cash in these joint ventures. The proposed transaction is subject to further reviews and approvals, including Alstom's works councils and shareholder approval, as well as regulatory approvals. The transaction is targeted to close in 2015. · During the second quarter of 2014, we committed to sell GE Money Bank AB, our consumer finance business in Sweden, Denmark and Norway (GEMB - Nordic) to Santander. The transaction is targeted to close in the fourth quarter of 2014. · GE acquired API Healthcare (API), a healthcare workforce management software and analytics solutions provider, in February 2014 for $0.3 billion and certain Thermo Fisher Scientific Inc. life-science businesses (Thermo Fisher) in March 2014 for $1.1 billion. GE acquired Cameron's Reciprocating Compression division in June 2014 for $0.6 billion. · GE completed issuances of $3.0 billion of senior unsecured debt with maturities up to 30 years in the first quarter of 2014. (55)-------------------------------------------------------------------------------- SEGMENT OPERATIONS -------------------------------------------------------------------------------- Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business in a given period. In connection with that assessment, the Chief Executive Officer may exclude matters such as charges for restructuring; rationalization and other similar expenses; acquisition costs and other related charges; technology and product development costs; certain gains and losses from acquisitions or dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team. Segment revenues include both revenues and other income related to the segment. Segment profit excludes results reported as discontinued operations, the portion of earnings attributable to noncontrolling interests of consolidated subsidiaries, and accounting changes. Segment profit excludes or includes interest and other financial charges and income taxes according to how a particular segment's management is measured - excluded in determining segment profit, which we sometimes refer to as "operating profit," for Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation and Appliances & Lighting; included in determining segment profit, which we sometimes refer to as "net earnings," for GE Capital. Certain corporate costs, such as shared services, employee benefits and information technology are allocated to our segments based on usage. A portion of the remaining corporate costs are allocated based on each segment's relative net cost of operations. Effective in the second quarter of 2014, our GE Capital segment results include the effects of the GECC preferred stock dividends. Previously, such dividends had been reported in the caption "Corporate items and eliminations" in the Company's Summary of Operating Segments table. Presenting GE Capital segment results including the effects of the GECC preferred stock dividends is consistent with the way management now measures the results of our financial services business. Prior-period segment information has been recast to be consistent with how we currently evaluate the performance of GE Capital. Results of our former equity method investment in NBCU LLC, through the date of sale in the first quarter of 2013, are reported in the Corporate items and eliminations line in the Summary of Operating Segments. In addition to providing information on segments in their entirety, we have also provided supplemental information for certain operations within the segments. (56) --------------------------------------------------------------------------------Summary of Operating Segments (Unaudited) Three months ended September 30 Nine months ended September 30 (Dollars in millions) 2014 2013 V % 2014 2013 V % Revenues Power & Water $ 6,375 $ 6,498 (2) % $ 18,176 $ 17,038 7 % Oil & Gas 4,597 4,315 7 % 13,666 11,669 17 % Energy Management 1,813 1,828 (1) % 5,341 5,557 (4) % Aviation 5,698 5,364 6 % 17,566 15,741 12 % Healthcare 4,485 4,304 4 % 13,166 13,083 1 % Transportation 1,540 1,406 10 % 4,073 4,425 (8) % Appliances & Lighting 2,117 2,098 1 % 6,094 6,142 (1) % Total industrial segment revenues 26,625 25,813 3 % 78,082 73,655 6 % GE Capital 10,451 10,606 (1) % 31,213 32,990 (5) % Total segment revenues 37,076 36,419 2 % 109,295 106,645 2 % Corporate items and eliminations (902) (758) (19) % (2,710) (982) U % Consolidated revenues and other income $ 36,174 $ 35,661 1 % $ 106,585 $ 105,663 1 % Segment profit Power & Water $ 1,191 $ 1,289 (8) % $ 3,212 $ 3,095 4 % Oil & Gas 660 519 27 % 1,771 1,376 29 % Energy Management 59 18 F 133 64 F Aviation 1,264 1,091 16 % 3,576 3,094 16 % Healthcare 727 665 9 % 2,027 1,986 2 % Transportation 342 306 12 % 814 886 (8) % Appliances & Lighting 88 77 14 % 243 239 2 % Total industrial segment profit 4,331 3,965 9 % 11,776 10,740 10 % GE Capital 1,492 1,903 (22) % 5,128 5,630 (9) % Total segment profit 5,823 5,868 (1) % 16,904 16,370 3 % Corporate items and eliminations (1,550) (1,904) 19 % (4,566) (4,131) (11) % GE interest and other financial charges (377) (338) (12) % (1,142) (988) (16) % GE provision for income taxes (416) (344) (21) % (1,143) (1,065) (7) % Earnings from continuing operations attributable to the Company 3,480 3,282 6 % 10,053 10,186 (1) % Earnings (loss) from discontinued operations, net of taxes 57 (91) F 28 (335) F Consolidated net earnings attributable to the Company $ 3,537 $ 3,191 11 % $ 10,081 $ 9,851 2 % Power & Water Revenues of $6.4 billion in the three months ended September 30, 2014 decreased $0.1 billion, or 2%, on lower volume ($0.1 billion) and lower prices ($0.1 billion). Lower volume was primarily driven by lower equipment sales at Distributed Power. Segment profit of $1.2 billion in the three months ended September 30, 2014 decreased $0.1 billion, or 8%, on lower productivity ($0.1 billion) and lower prices ($0.1 billion). Revenues of $18.2 billion in the nine months ended September 30, 2014 increased $1.1 billion, or 7%, on higher volume ($1.3 billion), primarily an increase in sales of equipment at Wind and Thermal, partially offset by lower prices ($0.2 billion). Segment profit of $3.2 billion in the nine months ended September 30, 2014 increased $0.1 billion, or 4%, on higher volume ($0.2 billion) and higher other income ($0.1 billion), partially offset by lower prices ($0.2 billion). The increase in earnings from higher volume was primarily driven by Wind and Thermal. (57) --------------------------------------------------------------------------------Oil & Gas Revenues of $4.6 billion in the three months ended September 30, 2014 increased $0.3 billion, or 7%, on higher volume ($0.3 billion). Higher volume was primarily due to higher equipment sales, primarily at Subsea and Drilling & Surface. Segment profit of $0.7 billion in the three months ended September 30, 2014 increased $0.1 billion, or 27%, on higher productivity ($0.1 billion). Revenues of $13.7 billion in the nine months ended September 30, 2014 increased $2.0 billion, or 17%, on higher volume ($1.8 billion), the effects of a weaker U.S. dollar ($0.1 billion), higher other income ($0.1 billion) due to non-repeat of charges incurred in the first quarter of 2013 and higher prices ($0.1 billion). Higher volume was primarily due to higher equipment sales, primarily at Subsea and Turbomachinery and the result of the third-quarter 2013 acquisition of Lufkin Industries, Inc. Segment profit of $1.8 billion in the nine months ended September 30, 2014 increased $0.4 billion, or 29%, on higher volume ($0.2 billion), higher productivity ($0.1 billion) and higher prices ($0.1 billion). The operating profit improvements were primarily at Subsea and Turbomachinery. Energy Management Revenues of $1.8 billion in the three months ended September 30, 2014 decreased 1% on lower volume. Segment profit of $0.1 billion increased more than 100% in the three months ended September 30, 2014 on higher productivity reflecting SG&A cost reductions. Revenues of $5.3 billion in the nine months ended September 30, 2014 decreased $0.2 billion, or 4%, on lower volume ($0.2 billion). Lower volume was primarily driven by the weakness in the electrical distribution markets. Segment profit of $0.1 billion in the nine months ended September 30, 2014 increased $0.1 billion on higher productivity ($0.1 billion) reflecting continued SG&A cost reductions, partially offset by the absence of a gain on a disposition in the first quarter of 2013. Aviation Revenues of $5.7 billion in the three months ended September 30, 2014 increased $0.3 billion, or 6%, on higher prices ($0.2 billion) and higher volume ($0.1 billion). Higher volume was driven by higher equipment sales on increased commercial engine shipments and the third-quarter 2013 acquisition of Avio S.p.A. (Avio). Segment profit of $1.3 billion in three months ended September 30, 2014 increased $0.2 billion, or 16%, on higher prices ($0.2 billion), partially offset by the effects of inflation ($0.1 billion). Operating profit improvements were primarily driven by equipment sales and the impact of Avio. Revenues of $17.6 billion in the nine months ended September 30, 2014 increased $1.8 billion, or 12%, on higher volume ($1.0 billion) and higher prices ($0.7 billion). Higher volume was driven by higher equipment sales on increased commercial engine shipments, and increased service revenues as well as the third-quarter 2013 acquisition of Avio. Segment profit of $3.6 billion in nine months ended September 30, 2014 increased $0.5 billion, or 16%, on higher prices ($0.7 billion), higher volume ($0.2 billion) and higher other income ($0.1 billion), partially offset by lower productivity ($0.4 billion) and the effects of inflation ($0.2 billion). Operating profit improvements were primarily driven by services and the impact of Avio. Healthcare Revenues of $4.5 billion in the three months ended September 30, 2014 increased $0.2 billion, or 4%, on higher volume ($0.3 billion), partially offset by lower prices ($0.1 billion). The revenue increase was driven by higher equipment sales. Segment profit of $0.7 billion in the three months ended September 30, 2014 increased $0.1 billion, or 9%, on higher productivity ($0.2 billion) reflecting SG&A cost reductions, partially offset by lower prices ($0.1 billion). Revenues of $13.2 billion in the nine months ended September 30, 2014 increased $0.1 billion, or 1%, on higher volume ($0.3 billion), partially offset by lower prices ($0.2 billion). The revenue increase was driven by higher equipment sales. Segment profit of $2.0 billion in the nine months ended September 30, 2014 increased 2% on higher productivity ($0.4 billion) reflecting SG&A cost reductions and higher volume ($0.1 billion), partially offset by lower prices ($0.2 billion) and the effects of inflation ($0.1 billion). (58) --------------------------------------------------------------------------------Transportation Revenues of $1.5 billion in the three months ended September 30, 2014 increased $0.1 billion, or 10%, on higher volume ($0.1 billion). Higher volume was driven by higher locomotive equipment sales, partially offset by the weakness in the Mining business where both equipment and services revenues decreased. Segment profit of $0.3 billion in the three months ended September 30, 2014 increased 12% on higher volume due to the higher locomotive equipment sales. Revenues of $4.1 billion in the nine months ended September 30, 2014 decreased $0.4 billion, or 8%, on lower volume ($0.4 billion). Segment profit of $0.8 billion in the nine months ended September 30, 2014 decreased $0.1 billion, or 8%, primarily due to lower volume ($0.1 billion). Lower volume was driven by lower equipment sales and the weakness in the Mining business where both equipment and services revenues decreased. Appliances & Lighting Revenues of $2.1 billion in the three months ended September 30, 2014 increased 1% on higher volume. Segment profit of $0.1 billion in the three months ended September 30, 2014 increased 14% driven by higher productivity. Revenues of $6.1 billion in the nine months ended September 30, 2014 decreased 1%, on lower volume. Segment profit of $0.2 billion in the nine months ended September 30, 2014 increased 2% on higher productivity. GE Capital GE Capital revenues decreased 1% and net earnings decreased 22% in the three months ended September 30, 2014. Revenues decreased as a result of organic revenue declines, and the effects of dispositions, partially offset by higher gains and lower impairments. Net earnings reflected core decreases, higher provisions for losses on financing receivables and the effects of dispositions, partially offset by higher gains and lower impairments. GE Capital revenues decreased 5% and net earnings decreased 9% in the nine months ended September 30, 2014. Revenues decreased as a result of organic revenue declines, primarily due to lower ENI, the effects of dispositions and lower gains, partially offset by lower impairments. Net earnings reflected core decreases, the effects of dispositions and lower gains, partially offset by lower impairments and lower provisions for losses on financing receivables. We have communicated our goal of reducing GE Capital's ENI, excluding cash and equivalents, most recently targeting a balance of $300 billion to $350 billion. ENI is a metric used by us to measure the total capital we have invested in our financial services business. GE Capital's ENI, excluding cash and equivalents, was $365 billion at September 30, 2014. To achieve this goal, we are more aggressively focusing our businesses on selective financial services products where we have deep domain experience, broad distribution, the ability to earn a consistent return on capital and are competitively advantaged, while managing our overall balance sheet size and risk. We have a strategy of exiting those businesses that are deemed to be non-strategic or that are underperforming. We have completed a number of dispositions in our businesses in the past and will continue to evaluate options going forward. Accordingly, in the short-term, as we reduce our ENI through exiting non-core businesses, the overall level of our future net earnings may be reduced. However, over the long-term, we believe that this strategy will improve our long-term performance through higher returns as we will have a larger concentration of assets in our core businesses, as opposed to the underperforming or non-strategic assets we will be exiting; reduce liquidity risk as we pay down outstanding debt and diversify our sources of funding (with less reliance on the global commercial paper markets and an increase in alternative sources of funding such as deposits); and reduce capital requirements while strengthening capital ratios. (59) --------------------------------------------------------------------------------Additional Information - GE Capital Businesses Three months ended September 30 Nine months ended September 30 (Dollars in millions) 2014 2013 V% 2014 2013 V% Revenues CLL $ 3,681 $ 3,677 -% $ 10,874 $ 11,091 (2)% Consumer 3,622 3,683 (2)% 10,822 11,158 (3)% Real Estate 697 689 1% 1,992 3,218 (38)% Energy Financial Services 344 438 (21)% 1,120 1,084 3% GECAS 1,262 1,312 (4)% 3,952 3,973 (1)% Total revenues 9,606 9,799 (2)% 28,760 30,524 (6)% Corporate items and 845 807 5% 2,453 2,466 (1)% eliminations Total revenues $ 10,451 $ 10,606 (1)% $ 31,213 $ 32,990 (5)% Profit CLL $ 617 $ 479 29% $ 1,722 $ 1,702 1% Consumer 621 898 (31)% 1,879 2,262 (17)% Real Estate 175 464 (62)% 703 1,589 (56)% Energy Financial Services 61 150 (59)% 290 293 (1)% GECAS 133 173 (23)% 828 825 -% Total profit 1,607 2,164 (26)% 5,422 6,671 (19)% Corporate items and (115) (261) 56% (133) (906) 85% eliminations Earnings from continuing operations attributable to GECC 1,492 1,903 (22)% 5,289 5,765 (8)% Preferred stock dividends - - -% (161) (135) (19)% declared Earnings from continuing operations attributable to GECC 1,492 1,903 (22)% 5,128 5,630 (9)% common shareowner Earnings (loss) from discontinued operations, net of taxes 57 (91) F 33 (334) F Net earnings attributable to GECC common shareowner $ 1,549 $ 1,812 (15)% $ 5,161 $ 5,296 (3)% September December 31, September (In millions) 30, 2014 2013 30, 2013 Assets CLL $ 170,478 $ 174,357 $ 170,310 Consumer 140,529 132,236 134,645 Real Estate 36,485 38,744 39,947 Energy Financial Services 16,197 16,203 18,135 GECAS 42,960 45,876 47,172 Corporate items and eliminations 100,265 109,413 110,519 Total Assets $ 506,914 $ 516,829 $ 520,728 CLL CLL revenues were flat and net earnings increased 29% in the three months ended September 30, 2014. Net earnings increased reflecting lower impairments ($0.1 billion) and core increases. CLL revenues decreased 2% and net earnings increased 1% in the nine months ended September 30, 2014. Revenues decreased as a result of organic revenue declines ($0.4 billion) and the effects of dispositions ($0.2 billion), partially offset by lower impairments ($0.4 billion). Net earnings increased reflecting lower impairments ($0.4 billion) and lower provisions for losses on financing receivables ($0.1 billion), partially offset by core decreases ($0.3 billion) and the effects of dispositions ($0.2 billion). (60)-------------------------------------------------------------------------------- Consumer Consumer revenues decreased 2% and net earnings decreased 31% in the three months ended September 30, 2014. Revenues decreased as a result of the effects of dispositions ($0.1 billion), partially offset by organic revenue growth. The decrease in net earnings resulted primarily from higher provisions for losses on financing receivables ($0.1 billion), core decreases ($0.1 billion) and the effects of dispositions ($0.1 billion). Consumer revenues decreased 3% and net earnings decreased 17% in the nine months ended September 30, 2014. Revenues decreased as a result of the effects of dispositions ($0.3 billion), partially offset by lower impairments ($0.1 billion). The decrease in net earnings resulted primarily from core decreases ($0.3 billion) and the effects of dispositions ($0.2 billion), partially offset by lower provisions for losses on financing receivables ($0.1 billion). Real Estate Real Estate revenues increased 1% and net earnings decreased 62% in the three months ended September 30, 2014. Revenues increased as a result of increases in net gains on property sales ($0.1 billion), partially offset by organic revenue declines ($0.1 billion). Net earnings decreased as a result of core decreases ($0.3 billion), including lower tax benefits ($0.3 billion) and higher impairments ($0.1 billion), partially offset by increases in net gains on property sales ($0.1 billion). Depreciation expense on real estate equity investments totaled $0.1 billion in both the three months ended September 30, 2014 and 2013, respectively. Real Estate revenues decreased 38% and net earnings decreased 56% in the nine months ended September 30, 2014. Revenues decreased as a result of decreases in net gains on property sales ($0.9 billion) mainly due to the 2013 sale of real estate comprising certain floors located at 30 Rockefeller Center, New York and organic revenue declines ($0.3 billion). Net earnings decreased as a result of core decreases ($0.9 billion), including decreases in net gains on property sales ($0.5 billion) and lower tax benefits ($0.4 billion), partially offset by lower provisions for losses on financing receivables and lower impairments associated with the strategic decision to exit certain equity platforms in 2013. Depreciation expense on real estate equity investments totaled $0.2 billion and $0.4 billion in the nine months ended September 30, 2014 and 2013, respectively. Energy Financial Services Energy Financial Services revenues decreased 21% and net earnings decreased 59% in the three months ended September 30, 2014. Revenues decreased as a result of lower gains ($0.1 billion) and higher impairments, partially offset by organic revenue growth. The decrease in net earnings resulted primarily from lower gains, core decreases and higher impairments. Energy Financial Services revenues increased 3% and net earnings decreased 1% in the nine months ended September 30, 2014. Revenues increased as a result of organic revenue growth ($0.3 billion) and higher gains ($0.1 billion), partially offset by the effects of dispositions ($0.1 billion) and higher impairments ($0.1 billion). The decrease in net earnings resulted primarily from higher impairments ($0.1 billion) and the effects of dispositions ($0.1 billion), partially offset by core increases ($0.1 billion) and higher gains. GECAS GECAS revenues decreased 4% and net earnings decreased 23% in the three months ended September 30, 2014. Revenues decreased as a result of organic revenue declines ($0.1 billion), partially offset by higher gains. The decrease in net earnings resulted primarily from core decreases ($0.1 billion), partially offset by higher gains. GECAS revenues decreased 1% and net earnings were flat in the nine months ended September 30, 2014. Revenues decreased as a result of organic revenue declines ($0.2 billion), partially offset by higher gains ($0.1 billion). (61) --------------------------------------------------------------------------------Corporate Items and Eliminations Three months ended September 30 Nine months ended September 30 (In millions) 2014 2013 2014 2013 Revenues NBCU LLC $ - $ 31 $ - $ 1,402 Gains (losses) on disposed or held for sale businesses - - 91 - Eliminations and other (902) (789) (2,801) (2,384) Total $ (902) $ (758) $ (2,710) $ (982) Operating Profit (Cost) NBCU LLC $ - $ 31 $ - $ 1,402 Gains (losses) on disposed or held for sale businesses - - 91 - Principal retirement plans(a) (582) (811) (1,745) (2,409) Restructuring and other charges (435) (456) (1,218) (1,282) Unallocated corporate, other costs and eliminations (533) (668) (1,694) (1,842) Total $ (1,550) $ (1,904) $ (4,566) $ (4,131) (a) Included non-operating (non-GAAP) pension income (cost) of $(0.5) billion and $(0.7) billion in the three months ended September 30, 2014 and 2013, respectively, and $(1.6) billion and $(2.0) billion in the nine months ended September 30, 2014 and 2013, respectively, which includes expected return on plan assets, interest costs and non-cash amortization of actuarial gains and losses. Revenues in the three months ended September 30, 2014 decreased $0.1 billion as a result of $0.1 billion of higher inter-segment eliminations. Operating cost decreased $0.4 billion as a result of $0.2 billion of lower costs of our principal retirement plans and $0.1 billion of lower research and development spending and global corporate costs. Restructuring and other charges in the third quarter of 2014 included $0.1 billion of curtailment loss on the principal retirement plans resulting from our agreement with Electrolux to sell the GE Appliances business. Revenues in the nine months ended September 30, 2014 decreased $1.7 billion as a result of $1.4 billion lower income related to the operations and disposition of NBCU LLC in the first quarter of 2013 and $0.4 billion of higher inter-segment eliminations, partially offset by $0.1 billion gain related to the disposition of our fuel dispenser business at Oil & Gas in the second quarter of 2014. Operating cost increased $0.4 billion as a result of $1.4 billion of lower NBCU LLC related income, partially offset by $0.7 billion of lower costs of our principal retirement plans, $0.2 billion of lower research and development spending and global corporate costs, $0.1 billion of higher gains on business dispositions and $0.1 billion of lower restructuring and other charges. Restructuring and other charges in the nine months ended September 30, 2014 included $0.1 billion of asset write-offs at a consolidated nuclear joint venture in which we hold a 51% interest at Power & Water and $0.1 billion of curtailment loss on the principal retirement plans resulting from our agreement with Electrolux to sell the GE Appliances business. Certain amounts included in corporate items and eliminations cost are not allocated to GE operating segments because they are excluded from the measurement of their operating performance for internal purposes. These costs include certain restructuring and other charges, technology and product development costs and acquisition-related costs. For the three months ended September 30, 2014, these amounts totaled $0.5 billion, including Power & Water ($0.1 billion), Oil & Gas ($0.1 billion), Energy Management ($0.1 billion), Aviation ($0.1 billion) and Healthcare ($0.1 billion). For the nine months ended September 30, 2014, these amounts totaled $1.4 billion, including Power & Water ($0.3 billion), Oil & Gas ($0.2 billion), Energy Management ($0.2 billion), Aviation ($0.2 billion), Healthcare ($0.4 billion) and Appliances & Lighting ($0.1 billion). In addition, corporate items and eliminations included a $0.1 billion gain related to the Oil & Gas fuel dispenser business disposition in the second quarter of 2014. For the three months ended September 30, 2013, these amounts totaled $0.6 billion, including Power & Water ($0.1 billion), Oil & Gas ($0.1 billion), Aviation ($0.2 billion) and Healthcare ($0.1 billion). For the nine months ended September 30, 2013, these amounts totaled $1.6 billion, including Power & Water ($0.3 billion), Oil & Gas ($0.2 billion), Energy Management ($0.1 billion), Aviation ($0.5 billion), Healthcare ($0.4 billion), Transportation ($0.1 billion) and Appliances & Lighting ($0.1 billion). (62) --------------------------------------------------------------------------------INCOME TAXES The consolidated provision for income taxes was an expense of $0.5 billion in the three months ended September 30, 2014 (an effective tax rate of 11.8%), compared with $0.3 billion for the same period of 2013 (an effective tax rate of 9.6%). The increase in consolidated tax expense is primarily attributable to decreased benefits from lower-taxed global operations. This increase was partially offset by the adjustment in the third quarter of 2014 to bring our nine month tax rate in line with the projected full year tax rate that was lower than in the third quarter 2013 adjustment. The consolidated provision for income taxes was an expense of $1.2 billion in the nine months ended September 30, 2014 (an effective tax rate of 10.5%), a slight increase in expense from the same period of 2013 (an effective tax rate of 10.1%). The increase in consolidated tax expense is primarily attributable to decreased benefits from lower-taxed global operations including the absence of the 2013 benefits from enactment, discussed below, of the extension of the U.S. tax provision deferring tax on active financial services income. This increase was partially offset by the 2014 year-to-date adjustment to bring our nine month tax rate in line with the projected full year tax rate that was significantly lower than the third quarter 2013 year-to-date adjustment and a decrease in income taxed at rates above the average tax rate. On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted and the law extended several provisions, including a two year extension of the U.S. tax provision deferring tax on active financial services income and certain U.S. business credits, retroactive to January 1, 2012. Under accounting rules, a tax law change is taken into account in calculating the income tax provision in the period enacted. Because the extension was enacted into law in 2013, tax expense in the first quarter of 2013 reflected retroactive extension of the previously expired provisions. GE and GECC file a consolidated U.S. federal income tax return. This enables GE to use GECC tax deductions and credits to reduce the tax that otherwise would have been payable by GE. The GECC effective tax rate for each period reflects the benefit of these tax reductions in the consolidated return. GE makes cash payments to GECC for these tax reductions at the time GE's tax payments are due. Our effective income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures. There is a tax benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. The rate of tax on our indefinitely reinvested non-U.S. earnings is below the 35% U.S. statutory rate largely because GECC funds the majority of its non-U.S. operations through foreign companies that are subject to low foreign taxes and because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate. The most significant portion of these benefits at GECC depends on the provision of U.S. law deferring the tax on active financial services income, which, as discussed below, is subject to expiration. A substantial portion of the remaining benefit at GECC related to business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate is derived from our GECAS aircraft leasing operations located in Ireland. We expect our ability to benefit from non-U.S. income taxed at less than the U.S. rate to continue subject to changes of U.S. or foreign law, including the expiration of the U.S. tax law provision deferring tax on active financial services income. If this provision is not extended, our tax rate will increase significantly after 2014. In addition, since this benefit depends on management's intention to indefinitely reinvest amounts outside the U.S., our tax provision will increase to the extent we no longer intend to indefinitely reinvest foreign earnings. (63) -------------------------------------------------------------------------------- DISCONTINUED OPERATIONS -------------------------------------------------------------------------------- Nine months ended September Three months ended September 30 30 (In millions) 2014 2013 2014 2013 Earnings (loss) from discontinued operations, net of taxes $ 57 $ (91) $ 28 $ (335) Discontinued operations primarily comprises GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), our CLL trailer services business in Europe (CLL Trailer Services) and our Consumer banking business in Russia (Consumer Russia). Results of these businesses are reported as discontinued operations for all periods presented. Earnings from discontinued operations, net of taxes, in the three months ended September 30, 2014 primarily reflect a $0.1 billion tax benefit related to the extinguishment of our loss-sharing arrangement for excess interest claims associated with the 2008 sale of GE Money Japan. Earnings from discontinued operations, net of taxes, in the nine months ended September 30, 2014 primarily reflect a $0.1 billion tax benefit related to the extinguishment of our loss-sharing arrangement for excess interest claims associated with the 2008 sale of GE Money Japan, offset by a $0.1 billion after-tax effect of incremental reserves related to retained representation and warranty obligations to repurchase previously sold loans on the 2007 sale of WMC. Loss from discontinued operations, net of taxes, in the three months ended September 30, 2013 primarily reflected a $0.1 billion after-tax effect of incremental reserves for excess interest claims related to our loss-sharing arrangement on the 2008 sale of GE Money Japan. Loss from discontinued operations, net of taxes, in the nine months ended September 30, 2013 primarily reflected a $0.2 billion after-tax effect of incremental reserves for excess interest claims related to our loss-sharing arrangement on the 2008 sale of GE Money Japan, and a $0.1 billion after-tax effect of incremental reserves related to retained representation and warranty obligations to repurchase previously sold loans on the 2007 sale of WMC. For additional information related to discontinued operations, see Note 2 to the condensed, consolidated financial statements. STATEMENT OF FINANCIAL POSITION -------------------------------------------------------------------------------- Major changes in our financial position for the nine months ended September 30, 2014 resulted from the following: · The U.S. dollar was stronger against most major currencies at September 30, 2014 than at December 31, 2013, decreasing the translated levels of our non-U.S. dollar assets and liabilities. · GE's inventory balance increased $2.1 billion in order to fulfill commitments and backlog, partially offset by the reclassification of inventories at our Appliances business of $0.7 billion to held for sale. · Consistent with our effort to reduce the GECC balance sheet, collections (which includes sales) on financing receivables exceeded originations by $1.0 billion and net repayments exceeded new issuances of total borrowings by $17.9 billion. · GE completed issuances of $3.0 billion of senior unsecured debt with maturities up to 30 years. · GECC's bank deposits balance increased $7.5 billion, primarily due to increases at Synchrony Financial. · We committed to sell our Appliances business with assets of $2.6 billion and liabilities of $0.8 billion. · We committed to sell GEMB-Nordic with assets of $3.2 billion and liabilities of $0.9 billion. · GE completed acquisitions of Thermo Fisher and API in our Healthcare segment and Cameron's Reciprocating Compression Division in our Oil & Gas segment resulting in increased goodwill and intangible assets balances of $1.7 billion. (64) -------------------------------------------------------------------------------- STATEMENT OF CASH FLOWS -------------------------------------------------------------------------------- We evaluate our cash flow performance by reviewing our industrial (non-financial services) businesses and financial services businesses separately. Cash from operating activities (CFOA) is the principal source of cash generation for our industrial businesses. The industrial businesses also have liquidity available via the public capital markets. Our financial services businesses use a variety of financial resources to meet our capital needs. Cash for financial services businesses is primarily provided from the issuance of term debt and commercial paper in the public and private markets, time deposits, as well as financing receivables, collections, sales and securitizations. GE Cash Flow GE CFOA totaled $7.2 billion and $7.8 billion for the nine months ended September 30, 2014 and 2013, respectively. With respect to GE CFOA, we believe that it is useful to supplement our GE Condensed Statement of Cash Flows and to examine in a broader context the business activities that provide and require cash. Nine months ended September 30 (In billions) 2014 2013 Operating cash collections(a) $ 76.7 $ 72.9 Operating cash payments (71.7) (69.0) Cash dividends from GECC 2.2 3.9 GE cash from operating activities (GE CFOA)(a) $ 7.2 $ 7.8 (a) GE sells customer receivables to GECC in part to fund the growth of our industrial businesses. These transactions can result in cash generation or cash use. During any given period, GE receives cash from the sale of receivables to GECC. It also foregoes collection of cash on receivables sold. The incremental amount of cash received from sale of receivables in excess of the cash GE would have otherwise collected had those receivables not been sold, represents the cash generated or used in the period relating to this activity. The incremental cash generated in GE CFOA from selling these receivables to GECC increased GE CFOA by $0.2 billion and decreased GE CFOA by $0.8 billion in the nine months ended September 30, 2014 and 2013, respectively. See Note 17 to the condensed, consolidated financial statements for additional information about the elimination of intercompany transactions between GE and GECC. The most significant source of cash in GE CFOA is customer-related activities, the largest of which is collecting cash resulting from product or services sales. GE operating cash collections increased $3.8 billion in the nine months ended September 30, 2014. This increase is consistent with comparable GE segment revenue increases from sales of goods and services and higher collections on current receivables. These increases were partially offset by a decrease in progress collections. The most significant operating use of cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services. GE operating cash payments increased $2.7 billion in the nine months ended September 30, 2014. This increase is consistent with cost and expense increases and increased inventory spend to fulfill commitments and backlog. These increases were partially offset by the non-recurrence of payments made in 2013, including NBCU deal-related tax payments and payouts under our long-term incentive plan. Dividends from GECC, including special dividends, represent the distribution of a portion of GECC retained earnings, and are distinct from cash from continuing operations within the financial services businesses. The amounts included in GE CFOA are the total dividends, including special dividends from excess capital. GECC paid dividends totaling $2.2 billion and $3.9 billion, including special dividends of $0.7 billion and $3.0 billion to GE in the nine months ended September 30, 2014 and 2013, respectively. GE cash used for investing activities was $4.6 billion compared with cash from investing activities of $5.3 billion during the nine months ended September 30, 2014 and 2013, respectively. Cash from investing activities decreased $9.9 billion compared with the same period in 2013, primarily due to proceeds of $16.7 billion from the 2013 sale of our remaining 49% common equity interest in NBCU LLC to Comcast Corporation. This decrease in cash from investing activities was partially offset by a decrease in business acquisitions of $5.9 billion primarily driven by the 2014 acquisitions of Thermo Fisher for $1.1 billion, Cameron's Reciprocating Compression Division for $0.6 billion, and API for $0.3 billion compared with the 2013 acquisitions of Avio for $4.4 billion and Lufkin for $3.3 billion. (65) -------------------------------------------------------------------------------- GE cash used for financing activities was $5.6 billion and $18.4 billion for the nine months ended September 30, 2014 and 2013, respectively. Cash used for financing activities decreased $12.8 billion compared with the same period in 2013, primarily as a result of our 2013 repayment of $5.0 billion of unsecured notes compared with an issuance of $3.0 billion of unsecured notes in 2014. Additionally, there was decreased net repurchases of GE shares for treasury of $6.1 billion. These decreases in cash used for financing were partially offset by an increase in the dividends paid to shareowners of $0.7 billion. GECC Cash Flow GECC cash from operating activities was $11.7 billion and $11.8 billion for the nine months ended September 30, 2014 and 2013, respectively. Cash from operating activities decreased $0.1 billion compared with the same period in 2013 primarily due to a $2.4 billion decrease driven by net tax payments in 2014 compared with net tax refunds in 2013 coupled with a decrease in cash generated from net earnings in 2014, partially offset by a decrease in net cash collateral activity with counterparties on derivative contracts of $4.2 billion. GECC cash from investing activities was $3.7 billion and $28.3 billion for the nine months ended September 30, 2014 and 2013, respectively. Cash from investing activities decreased $24.6 billion compared with the same period in 2013 primarily due to lower collections (which includes sales) exceeding originations of financing receivables of $7.6 billion, the 2013 acquisition of MetLife Bank, N.A., resulting in net cash provided of $6.4 billion, lower cash settlements on derivative instruments of $3.4 billion, lower net maturities of investment securities of $2.0 billion, the payment of our obligation to the buyer of GE Money Japan of $1.7 billion and lower net loan repayments from our equity method investments of $1.6 billion. GECC cash used for financing activities was $9.0 billion and $24.7 billion for the nine months ended September 30, 2014 and 2013, respectively. Cash used for financing activities decreased $15.7 billion compared with the same period in 2013 primarily due to a net increase in deposits at our banks of $11.2 billion and proceeds received from the initial public offering of Synchrony Financial of $2.8 billion. Additionally, lower net repayments of borrowings of $1.0 billion was driven by net cash provided from the issuances of unsecured term loans of $7.5 billion and senior unsecured debt of $3.6 billion at Synchrony Financial, partially offset by higher repayments on other borrowings of $10.1 billion. GECC paid dividends totaling $2.2 billion and $3.9 billion, including special dividends of $0.7 billion and $3.0 billion to GE for the nine months ended September 30, 2014 and 2013, respectively. There were preferred stock dividend payments of $0.2 billion and $0.1 billion in the nine months ended September 30, 2014 and 2013, respectively. LIQUIDITY AND BORROWINGS -------------------------------------------------------------------------------- We maintain a strong focus on liquidity. At both GE and GECC we manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations throughout business cycles. Our liquidity and borrowing plans for GE and GECC are established within the context of our annual financial and strategic planning processes. At GE, our liquidity and funding plans take into account the liquidity necessary to fund our operating commitments, which include primarily purchase obligations for inventory and equipment, payroll and general expenses (including pension funding). We also take into account our capital allocation and growth objectives, including paying dividends, repurchasing shares, investing in research and development and acquiring industrial businesses. At GE, we rely primarily on cash generated through our operating activities, any dividend payments from GECC, and also have historically maintained a commercial paper program that we regularly use to fund operations in the U.S., principally within fiscal quarters. GECC's liquidity position is targeted to meet its obligations under both normal and stressed conditions. GECC establishes a funding plan annually that is based on the projected asset size and cash needs of the Company, which, over the past few years, has included our strategy to reduce our ending net investment in GE Capital. GECC relies on a diversified source of funding, including the unsecured term debt markets, the global commercial paper markets, deposits, secured funding, retail funding products, bank borrowings and securitizations to fund its balance sheet, in addition to cash generated through collection of principal, interest and other payments on our existing portfolio of loans and leases to fund its operating and interest expense costs. (66) -------------------------------------------------------------------------------- Our 2014 GECC funding plan anticipates repayment of principal on outstanding short-term borrowings, including the current portion of long-term debt ($39.2 billion at December 31, 2013), through issuance of long-term debt and reissuance of commercial paper, cash on hand, collections of financing receivables exceeding originations, dispositions, asset sales, and deposits and other alternative sources of funding. Long-term maturities and early redemptions were $12.0 billion in the third quarter of 2014. Interest on borrowings is primarily repaid through interest earned on existing financing receivables. During the third quarter of 2014, GECC earned interest income on financing receivables of $4.7 billion, which more than offset interest and other financial charges of $2.1 billion. We maintain a detailed liquidity policy for GECC that includes a requirement to maintain a contingency funding plan. The liquidity policy defines GECC's liquidity risk tolerance under different stress scenarios based on its liquidity sources and also establishes procedures to escalate potential issues. We actively monitor GECC's access to funding markets and its liquidity profile through tracking external indicators and testing various stress scenarios. The contingency funding plan provides a framework for handling market disruptions and establishes escalation procedures in the event that such events or circumstances arise. In August 2014, the U.S. Government enacted the "Highway and Transportation Funding Act", which contained provisions that changed the interest rate methodology to calculate minimum pension funding requirements in the U.S. We currently estimate that the change will reduce our GE Pension Plan required cash funding by approximately $2.9 billion through year-end 2015. We are currently in the process of finalizing our revised cash funding plan for the next few years. Postretirement benefit actuarial assumptions, including mortality assumptions, are significant inputs to the actuarial models that measure benefit obligations and their related effects on operations. The Society of Actuaries recently issued new mortality tables that project longer life expectancies that will result in higher postretirement benefit obligations for U.S. companies. We are in the process of reviewing the new tables and will update our mortality assumptions at year end. Our current best estimate indicates that the new mortality assumptions may increase postretirement benefit obligations by approximately $5.0 billion at year end and may increase our postretirement benefit costs resulting in a reduction in 2015 earnings of approximately $0.06 per share, including a $0.01 per share reduction in operating earnings. Liquidity Sources We maintain liquidity sources that consist of cash and equivalents, committed unused credit lines and high-quality, liquid investments. We had consolidated cash and equivalents of $90.4 billion at September 30, 2014 that were available to meet our needs. Of this, $10.6 billion was held at GE and $79.9 billion was held at GECC. We had committed, unused credit lines totaling $45.0 billion that were extended to us by 50 financial institutions at September 30, 2014. GECC can borrow up to $44.5 billion under all of these credit lines. GE can borrow up to $14.2 billion under certain of these credit lines. These lines include $25.4 billion of revolving credit agreements under which we can borrow funds for periods exceeding one year. Additionally, $19.6 billion are 364-day lines that contain a term-out feature that allows us to extend borrowings for two years from the date on which such borrowings would otherwise be due. Cash and equivalents of $62.4 billion at September 30, 2014 were held by non-U.S. subsidiaries. Of this amount, $5.1 billion was indefinitely reinvested. Indefinitely reinvested cash held outside of the U.S. is available to fund operations and other growth of non-U.S. subsidiaries; it is also available to fund our needs in the U.S. on a short-term basis through short-term loans, without being subject to U.S. tax. Under the Internal Revenue Code, these loans are permitted to be outstanding for 30 days or less and the total of all such loans is required to be outstanding for less than 60 days during the year. At September 30, 2014, GE cash and equivalents of $2.7 billion were held in countries with currency controls that may restrict the transfer of funds to the U.S. or limit our ability to transfer funds to the U.S. without incurring substantial costs. These funds are available to fund operations and growth in these countries and we do not currently anticipate a need to transfer these funds to the U.S. At September 30, 2014, GECC cash and equivalents of $24 billion were in regulated banks and insurance entities and were subject to regulatory restrictions. (67)-------------------------------------------------------------------------------- If we were to repatriate indefinitely reinvested cash held outside the U.S., we would be subject to additional U.S. income taxes and foreign withholding taxes. Funding Plan We reduced our GE Capital ENI, excluding cash and equivalents, to $365 billion at September 30, 2014. During the first nine months of 2014, GE completed issuances of $3.0 billion of senior unsecured debt with maturities up to 30 years. GECC completed issuances of $9.4 billion of senior unsecured debt (excluding securitizations described below) with maturities up to 23 years. In addition, in August 2014, Synchrony Financial completed issuances of $3.6 billion of senior unsecured debt with maturities up to 10 years and $8.0 billion of unsecured term loans maturing in 2019 under the New Bank Term Loan Facility with third party lenders. Average commercial paper borrowings for GECC and GE during the third quarter were $25.1 billion and $8.3 billion, respectively, and the maximum amounts of commercial paper borrowings outstanding for GECC and GE during the third quarter were $25.1 billion and $10.8 billion, respectively. GECC commercial paper maturities are funded principally through new commercial paper issuances and at GE are substantially repaid before quarter-end using indefinitely reinvested overseas cash, which as discussed above, is available for use in the U.S. on a short-term basis without being subject to U.S. tax. We securitize financial assets as an alternative source of funding. During 2014, we completed $9.4 billion of non-recourse issuances and $9.3 billion of non-recourse borrowings matured. At September 30, 2014, consolidated non-recourse securitization borrowings were $30.2 billion. We have 9 deposit-taking banks outside of the U.S. and two deposit-taking banks in the U.S. - Synchrony Bank (formerly GE Capital Retail Bank), a Federal Savings Bank (FSB), and GE Capital Bank, an industrial bank (IB). The FSB and IB currently issue certificates of deposit (CDs) in maturity terms up to 10 years. Total alternative funding at September 30, 2014 was $117.4 billion, composed mainly of $60.8 billion of bank deposits, $30.2 billion of non-recourse securitization borrowings, $7.3 billion of funding secured by real estate, aircraft and other collateral and $5.8 billion of GE Interest Plus notes. The comparable amount of total alternative funding at December 31, 2013 was $107.5 billion. As a matter of general practice, we routinely evaluate the economic impact of calling debt instruments where GECC has the right to exercise a call. In determining whether to call debt, we consider the economic benefit to GECC of calling debt, the effect of calling debt on GECC's liquidity profile and other factors. During 2014, we called $0.4 billion of long-term debt. Income Maintenance Agreement GE provides implicit and explicit support to GECC through commitments, 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. GECC's credit rating is higher than it would be on a stand-alone basis as a result of this financial support. GECC currently does not pay GE for this support. As set forth in Exhibit 99(b) hereto, GECC's ratio of earnings to fixed charges was 1.78:1 during the nine months ended September 30, 2014. For additional information, see the Income Maintenance Agreement section in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 consolidated financial statements. (68) --------------------------------------------------------------------------------PORTFOLIO QUALITY -------------------------------------------------------------------------------- Investment Securities Investment securities comprise mainly investment-grade debt securities supporting obligations to annuitants, policyholders and holders of guaranteed investment contracts (GICs) in Trinity, 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 $47.0 billion at September 30, 2014 from $44.0 billion at December 31, 2013, reflecting higher net unrealized gains in U.S. Corporate and State and Municipal securities driven by lower interest rates in the U.S. Total pre-tax, other-than-temporary impairment losses recognized in earnings during the three months ended September 30, 2014 and September 30, 2013 were an insignificant amount and $0.1 billion, respectively. The 2013 amount primarily related to credit losses on corporate debt securities and other-than-temporary impairment on equity securities. Total pre-tax, other-than-temporary impairment losses recognized in earnings during the nine months ended September 30, 2014 and September 30, 2013 were an insignificant amount and $0.5 billion, respectively. The 2013 amount primarily related to credit losses on corporate debt securities and other-than-temporary impairment on equity securities. For additional information, see Note 3 to the condensed, consolidated financial statements. Financing Receivables Financing receivables is our largest category of assets and represents one of our primary sources of revenues. Our portfolio of financing receivables is diverse and not directly comparable to major U.S. banks. A discussion of the quality of certain elements of the financing receivables portfolio follows. Our commercial portfolio primarily comprises senior secured positions with comparatively low loss history. The secured receivables in this portfolio are collateralized by a variety of asset classes, which for our CLL business primarily include: industrial-related facilities and equipment, vehicles, corporate aircraft, and equipment used in many industries, including the construction, manufacturing, transportation, media, communications, entertainment, and healthcare industries. The portfolios in our Real Estate, GECAS and Energy Financial Services businesses are collateralized by commercial real estate, commercial aircraft and operating assets in the global energy and water industries, respectively. We are in a secured position for substantially all of our commercial portfolio. During the first quarter of 2014, we combined our CLL Europe and CLL Asia portfolios into CLL International and we transferred our CLL Other portfolio to the CLL Americas portfolio. Prior-period amounts were reclassified to conform to the current-period presentation. Our consumer portfolio is composed primarily of non-U.S. mortgage, sales finance, auto and personal loans in various European and Asian countries and U.S. consumer credit card and sales finance receivables. In 2007, we exited the U.S. mortgage business and we have no U.S. auto or student loans. Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of losses depends on the size, type and risk characteristics of the related financing receivable. Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers and market sectors, collateral values (including housing price indices as applicable), and the present and expected future levels of interest rates. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions and are subject to the regulatory examinations process, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible to experience credit losses that are different from our current estimates. (69)-------------------------------------------------------------------------------- Our risk management process includes standards and policies for reviewing major risk exposures and concentrations, and evaluates relevant data either for individual loans or financing leases, or on a portfolio basis, as appropriate. Loans acquired in a business acquisition are recorded at fair value, which incorporates our estimate at the acquisition date of the credit losses over the remaining life of the portfolio. As a result, the allowance for losses is not carried over at acquisition. This may have the effect of causing lower reserve coverage ratios for those portfolios. For purposes of the discussion that follows, "delinquent" receivables are those that are 30 days or more past due based on their contractual terms. Loans purchased at a discount are initially recorded at fair value and accrete interest income over the estimated life of the loan based on reasonably estimable cash flows even if the underlying loans are contractually delinquent at acquisition. "Nonaccrual" financing receivables are those on which we have stopped accruing interest. We stop accruing interest at the earlier of the time at which collection of an account becomes doubtful or the account becomes 90 days past due, with the exception of consumer credit card accounts, for which we continue to accrue interest until the accounts are written off in the period that the account becomes 180 days past due. Recently restructured financing receivables are not considered delinquent when payments are brought current according to the restructured terms, but may remain classified as nonaccrual until there has been a period of satisfactory payment performance by the borrower and future payments are reasonably assured of collection. Further information on the determination of the allowance for losses on financing receivables and the credit quality and categorization of our financing receivables is provided in Notes 5 and 18 to the condensed, consolidated financial statements. (70) -------------------------------------------------------------------------------- Financing receivables at Nonaccrual receivables at Allowance for losses at September 30, December 31, September 30, September 30, December 31, (In millions) 2014 2013 2014 December 31, 2013 2014 2013 Commercial CLL Americas $ 66,871 $ 69,036 $ 1,101 $ 1,275 $ 426 $ 473 International(a) 43,268 47,431 1,013 1,459 379 505 Total CLL 110,139 116,467 2,114 2,734 805 978 Energy Financial Services 2,798 3,107 57 4 6 8 GECAS 8,449 9,377 153 - 15 17 Other 134 318 - 6 - 2 Total Commercial 121,520 129,269 2,324 2,744 826 1,005 Real Estate 19,799 19,899 1,628 2,551 154 192 Consumer Non-U.S. residential mortgages(b) 27,674 30,501 1,960 2,161 439 358 Non-U.S. installment and revolving credit 10,098 13,677 50 88 445 594 U.S. installment and revolving credit 55,258 55,854 2 2 3,053 2,823 Non-U.S. auto 1,588 2,054 19 18 147 56 Other 6,638 6,953 218 351 106 150 Total Consumer 101,256 109,039 2,249 2,620 4,190 3,981 Total $ 242,575 $ 258,207 $ 6,201 (c) $ 7,915 $ 5,170 $ 5,178 (a) Write-offs to net realizable value are recognized against the allowance for losses primarily in the reporting period in which management has deemed all or a portion of the financing receivable to be uncollectible, but not later than 360 days after initial recognition of a specific reserve for a collateral dependent loan. In accordance with regulatory standards that are applicable in Italy, commercial loans are considered uncollectible when there is demonstrable evidence of the debtor's insolvency, which may result in write-offs occurring beyond 360 days after initial recognition of a specific reserve. (b) Included financing receivables of $11,555 million and $12,401 million, nonaccrual receivables of $895 million and $965 million and allowance for losses of $179 million and $126 million at September 30, 2014 and December 31, 2013, respectively, primarily related to loans, net of credit insurance, whose terms permitted repayments that are less than the repayments for fully amortizing loans and high loan-to-value ratios at inception (greater than 90%). At origination, we underwrite loans with an adjustable rate to the reset value. Of these loans, about 85% are in our U.K. and France portfolios, which have a delinquency rate of 14%, have a loan-to-value ratio at origination of 82% and have re-indexed loan-to-value ratios of 78% and 65%, respectively. Re-indexed loan-to-value ratios may not reflect actual realizable values of future repossessions. At September 30, 2014, 13% (based on dollar values) of these loans in our U.K. and France portfolios have been restructured. (c) Of our $6.2 billion nonaccrual loans of September 30, 2014, $2.7 billion are currently paying in accordance with the contractual terms. The portfolio of financing receivables, before allowance for losses, was $242.6 billion at September 30, 2014, and $258.2 billion at December 31, 2013. Financing receivables, before allowance for losses, decreased $15.6 billion from December 31, 2013, primarily as a result of write-offs ($3.9 billion), the stronger U.S. dollar ($3.3 billion), the reclassification of GEMB-Nordic to held for sale ($2.9 billion) and collections (which includes sales) exceeding originations ($1.0 billion). Related nonaccrual receivables totaled $6.2 billion (2.6% of outstanding receivables) at September 30, 2014 compared with $7.9 billion (3.1% of outstanding receivables), at December 31, 2013. Nonaccrual receivables decreased from December 31, 2013 primarily due to payoffs, collections and write-offs in our Real Estate and CLL portfolios. The allowance for losses remained constant at $5.2 billion at September 30, 2014 representing our best estimate of probable losses inherent in the portfolio. Allowance for losses decreased at Commercial and Real Estate, primarily as a result of write-offs and resolutions. These decreases were offset by increases at Consumer, primarily as a result of an increase in the projected net write-offs over the next 12 months in the U.S. and the effects of recent legislation on consumer pricing in Hungary, partially offset by the reclassification of GEMB-Nordic to held for sale. These factors also resulted in an increase in allowance for losses as a percent of total financing receivables from 2.0% at December 31, 2013 to 2.1% at September 30, 2014. Further information about the allowance for losses for each of our portfolios is provided below. (71) -------------------------------------------------------------------------------- Selected Ratios Related to Nonaccrual Financing Receivables and the Allowance for Losses Nonaccrual financing receivables Allowance for losses Allowance for losses as a percent of as a percent of as a percent of total financing nonaccrual financing total financing receivables at receivables at receivables at September December September December September December 30, 2014 31, 2013 30, 2014 31, 2013 30, 2014 31, 2013 Commercial CLL Americas 1.7 % 1.8 % 38.7 % 37.1 % 0.6 % 0.7 % International 2.3 3.1 37.4 34.6 0.9 1.1 Total CLL 1.9 2.3 38.1 35.8 0.7 0.8 Energy Financial Services 2.0 0.1 10.5 200.0 0.2 0.3 GECAS 1.8 - 9.8 - 0.2 0.2 Other - 1.9 - 33.3 - 0.6 Total Commercial 1.9 2.1 35.5 36.6 0.7 0.8 Real Estate 8.2 12.8 9.5 7.5 0.8 1.0 Consumer Non-U.S. residential mortgages(a) 7.1 7.1 22.4 16.6 1.6 1.2 Non-U.S. installment and revolving credit 0.5 0.6 890.0 675.0 4.4 4.3 U.S. installment and revolving credit - - (b) (b) 5.5 5.1 Non-U.S. auto(c) 1.2 0.9 773.7 311.1 9.3 2.7 Other 3.3 5.0 48.6 42.7 1.6 2.2 Total Consumer 2.2 2.4 186.3 151.9 4.1 3.7 Total 2.6 3.1 83.4 65.4 2.1 2.0 (a) Included nonaccrual financing receivables as a percent of financing receivables of 7.7% and 7.8%, allowance for losses as a percent of nonaccrual receivables of 20.0% and 13.0% and allowance for losses as a percent of total financing receivables of 1.5% and 1.0% at September 30, 2014 and December 31, 2013, respectively, primarily related to loans, net of credit insurance, whose terms permitted repayments that are less than the repayments for fully amortizing loans and high loan-to-value ratios at inception (greater than 90%). Compared to the overall Non-U.S. residential mortgage loan portfolio, the ratio of allowance for losses as a percent of nonaccrual financing receivables for these loans is lower, driven primarily by the higher mix of such products in the U.K. and France portfolios and as a result of the better performance and collateral realization experience in these markets. (b) Not meaningful. (c) Increase in allowance for losses ratios attributable to recent legislation on consumer pricing in Hungary. Included below is a discussion of financing receivables, allowance for losses, nonaccrual receivables and related metrics for each of our significant portfolios. CLL - Americas. Nonaccrual receivables of $1.1 billion represented 17.8% of total nonaccrual receivables at September 30, 2014. The ratio of allowance for losses as a percent of nonaccrual receivables increased from 37.1% at December 31, 2013, to 38.7% at September 30, 2014, reflecting a decline in nonaccrual receivables in our media, materials and franchise portfolios, partially offset by increases in our Canada and Latin America portfolios. The ratio of nonaccrual receivables as a percent of financing receivables decreased from 1.8% at December 31, 2013 to 1.7% at September 30, 2014, reflecting decreased nonaccrual receivables for the reasons described above. Collateral supporting these nonaccrual financing receivables primarily includes assets in the restaurant and hospitality, trucking and industrial equipment industries and corporate aircraft, and for our leveraged finance business, equity of the underlying businesses. (72) -------------------------------------------------------------------------------- CLL - International. Nonaccrual receivables of $1.0 billion represented 16.3 % of total nonaccrual receivables at September 30, 2014. The ratio of allowance for losses as a percent of nonaccrual receivables increased from 34.6 % at December 31, 2013 to 37.4 % at September 30, 2014, reflecting a decrease in nonaccrual receivables and allowance for losses in our Interbanca S.p.A. and Australia portfolios primarily as a result of account resolutions and sales of nonaccrual receivables in Korea. Approximately 54% of our CLL - International nonaccrual receivables are attributable to the Interbanca S.p.A. portfolio, which was acquired in 2009. The loans acquired with Interbanca S.p.A. were recorded at fair value, which incorporates an estimate at the acquisition date of credit losses over their remaining life. Accordingly, these loans generally have a lower ratio of allowance for losses as a percent of nonaccrual receivables compared to the remaining portfolio. Excluding the nonaccrual loans attributable to the 2009 acquisition of Interbanca S.p.A., the ratio of allowance for losses as a percent of nonaccrual receivables increased from 42.2 % at December 31, 2013, to 53.1% at September 30, 2014, primarily due to sales of nonaccrual receivables in Korea and a decrease in nonaccrual receivables and allowance for losses in our Australia portfolio. The ratio of nonaccrual receivables as a percent of financing receivables decreased from 3.1% at December 31, 2013 to 2.3% at September 30, 2014, for the reasons described above. Collateral supporting these secured nonaccrual financing receivables are primarily equity of the underlying businesses, purchased receivables, commercial real estate, manufacturing and other equipment, and corporate aircraft. Real Estate. Nonaccrual receivables of $1.6 billion represented 26.3% of total nonaccrual receivables at September 30, 2014. The decrease in nonaccrual receivables from December 31, 2013, was primarily due to Asian office collections and resolutions as well as the resolution of North American office, multi-family and hotel nonaccrual loans, and European retail nonaccrual loans through payoffs and collections. The ratio of allowance for losses as a percent of nonaccrual receivables increased from 7.5% to 9.5% reflecting decreases in the allowance for losses at a lower rate than decreases in nonaccrual loans as mentioned above. The ratio of allowance for losses as a percent of total financing receivables decreased from 1.0% at December 31, 2013 to 0.8% at September 30, 2014, driven primarily by the reduction in overall reserves due to improving market conditions and new loan originations in 2014. The Real Estate financing receivables portfolio is collateralized by income-producing or owner-occupied commercial properties across a variety of asset classes and markets. At September 30, 2014, total Real Estate financing receivables of $19.8 billion were primarily collateralized by office buildings ($6.2 billion), apartment buildings ($3.3 billion), retail facilities ($2.9 billion), warehouse properties ($2.4 billion) and hotel properties ($1.9 billion). In 2014, commercial real estate markets continue to show signs of improved stability and liquidity in certain markets; however, the pace of improvement varies significantly by asset class and market and the long-term outlook remains uncertain. We have and continue to maintain an intense focus on operations and risk management. Loan loss reserves related to our Real Estate-Debt financing receivables are particularly sensitive to declines in underlying property values. Estimating the impact of global property values on loss performance across our portfolio depends on a number of factors, including macroeconomic conditions, property level operating performance, local market dynamics and individual borrower behavior. As a result, any attempts to forecast potential losses carry a high degree of imprecision and are subject to change. At September 30, 2014, we had 100 foreclosed commercial real estate properties totaling $0.8 billion. Consumer - Non-U.S. residential mortgages. Nonaccrual receivables of $2.0 billion represented 31.6 % of total nonaccrual receivables at September 30, 2014. The ratio of allowance for losses as a percent of nonaccrual receivables increased from 16.6% at December 31, 2013, to 22.4% at September 30, 2014, due to an increase in provisions as a result of recent legislation on consumer pricing in Hungary and an increase in allowances for losses in our U.K. portfolio. Our non-U.S. mortgage portfolio has a loan-to-value ratio of approximately 76% at origination and the vast majority are first lien positions. Our U.K. and France portfolios, which comprise a majority of our total mortgage portfolio, have reindexed loan-to-value ratios of 71% and 56%, respectively, and about 7% of these loans are without mortgage insurance and have a reindexed loan-to-value ratio equal to or greater than 100%. Re-indexed loan-to-value ratios may not reflect actual realizable values of future repossessions. Loan-to-value information is updated on a quarterly basis for a majority of our loans and considers economic factors such as the housing price index. At September 30, 2014, we had in repossession stock 180 houses in the U.K., which had a value of less than $0.1 billion. The ratio of nonaccrual receivables as a percent of financing receivables remained constant at 7.1% at September 30, 2014. Consumer - Non-U.S. installment and revolving credit. Nonaccrual receivables of $0.1 billion represented 0.8% of total nonaccrual receivables at September 30, 2014. The ratio of allowance for losses as a percent of financing receivables increased slightly from 4.3% at December 31, 2013 to 4.4% at September 30, 2014, primarily reflecting the reclassification of GEMB-Nordic to held for sale. (73) -------------------------------------------------------------------------------- Consumer - U.S. installment and revolving credit. The ratio of allowance for losses as a percent of financing receivables increased from 5.1% at December 31, 2013 to 5.5% at September 30, 2014, reflecting an increase in the projected net write-offs over the next 12 months. Impaired Loans "Impaired" loans in the table below are defined as larger-balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. The vast majority of our Consumer and a portion of our CLL nonaccrual receivables are excluded from this definition, as they represent smaller-balance homogeneous loans that we evaluate collectively by portfolio for impairment. Impaired loans include nonaccrual receivables on larger-balance or restructured loans, loans that are currently paying interest under the cash basis (but are excluded from the nonaccrual category), and loans paying currently that had been previously restructured. Specific reserves are recorded for individually impaired loans to the extent we have determined that it is probable that we will be unable to collect all amounts due according to original contractual terms of the loan agreement. Certain loans classified as impaired may not require a reserve because we believe that we will ultimately collect the unpaid balance (through collection or collateral repossession). Loans Classified as Impaired and Specific Reserves September 30, December 31, (In millions) 2014 2013 Loans requiring allowance for losses Commercial(a) $ 547 $ 1,116 Real Estate 478 1,245 Consumer 2,369 2,879 Total loans requiring allowance for losses 3,394 5,240 Loans expected to be fully recoverable Commercial(a) 2,690 2,776 Real Estate 1,994 2,615 Consumer 131 109 Total loans expected to be fully recoverable 4,815 5,500 Total impaired loans $ 8,209 $ 10,740 Allowance for losses (specific reserves) Commercial(a) $ 189 $ 328 Real Estate 27 74 Consumer 484 567 Total allowance for losses (specific reserves) $ 700 $ 969 Average investment during the period $ 9,755 $ 12,347 Interest income earned while impaired(b) 321 626 (a) Includes CLL, Energy Financial Services, GECAS and Other. (b) Recognized principally on an accrual basis. We regularly review our Real Estate loans for impairment using both quantitative and qualitative factors, such as debt service coverage and loan-to-value ratios. We evaluate a Real Estate loan for impairment when the most recent valuation reflects a projected loan-to-value ratio at maturity in excess of 100%, even if the loan is currently paying in accordance with its contractual terms. Of our $2.5 billion of impaired loans at Real Estate at September 30, 2014, $2.2 billion are currently paying in accordance with the contractual terms of the loan and are typically loans where the borrower has adequate debt service coverage to meet contractual interest obligations. Impaired loans at CLL primarily represent senior secured lending positions. (74) --------------------------------------------------------------------------------Impaired Loan Balance Classified by the Method Used To Measure Impairment September December 31, (In millions) 30, 2014 2013 Discounted cash flow $ 4,172 $ 5,558 Collateral value 4,037 5,182 Total $ 8,209 $ 10,740 Our loss mitigation strategy is intended to minimize economic loss and, at times, can result in rate reductions, principal forgiveness, extensions, forbearance or other actions, which may cause the related loan to be classified as a troubled debt restructuring (TDR), and also as impaired. Changes to Real Estate's loans primarily include forbearance, maturity extensions and changes to collateral or covenant terms or other actions, which are in addition to, or sometimes in lieu of, fees and rate increases. The determination of whether these changes to the terms and conditions of our commercial loans meet the TDR criteria includes our consideration of all relevant facts and circumstances. At September 30, 2014, TDRs included in impaired loans were $7.1 billion, primarily relating to Consumer ($2.4 billion), Real Estate ($2.3 billion) and CLL ($2.3 billion). Real Estate TDRs decreased from $3.6 billion at December 31, 2013 to $2.3 billion at September 30, 2014, primarily driven by resolution of TDRs through paydowns. For borrowers with demonstrated operating capabilities, we work to restructure loans when the cash flow and projected value of the underlying collateral support repayment over the modified term. We deem loan modifications to be TDRs when we have granted a concession to a borrower experiencing financial difficulty and we do not receive adequate compensation in the form of an effective interest rate that is at current market rates of interest given the risk characteristics of the loan or other consideration that compensates us for the value of the concession. For the nine months ended September 30, 2014, we modified $0.5 billion of loans classified as TDRs. Changes to these loans primarily included forbearance, maturity extensions and changes to collateral or covenant terms or other actions, which are in addition to, or sometimes in lieu of, fees and rate increases. The limited liquidity and higher return requirements in the real estate market for loans with higher loan-to-value (LTV) ratios have typically resulted in the conclusion that the modified terms are not at current market rates of interest, even if the modified loans are expected to be fully recoverable. We received the same or additional compensation in the form of rate increases and fees for the majority of these TDRs. Of our $0.8 billion and $2.1 billion of modifications classified as TDRs in the last 12 months ended September 30, 2014 and 2013, respectively, $0.3 billion and $0.3 billion have subsequently experienced a payment default in the nine months ended September 30, 2014 and 2013, respectively. The substantial majority of the Real Estate TDRs have reserves determined based upon collateral value. Our specific reserves on Real Estate TDRs were less than $0.1 billion at September 30, 2014 and $0.1 billion at December 31, 2013, and were 1.2% and 1.9%, respectively, of Real Estate TDRs. In many situations these loans did not require a specific reserve as collateral value adequately covered our recorded investment in the loan. While these modified loans had adequate collateral coverage, we were still required to complete our TDR classification evaluation on each of the modifications without regard to collateral adequacy. We utilize certain short-term (three months or less) loan modification programs for borrowers experiencing temporary financial difficulties in our Consumer loan portfolio. These loan modification programs are primarily concentrated in our non-U.S. residential mortgage and non-U.S. installment and revolving portfolios. We sold our U.S. residential mortgage business in 2007 and, as such, do not participate in the U.S. government-sponsored mortgage modification programs. For the nine months ended September 30, 2014, we provided short-term modifications of less than $0.1 billion of consumer loans for borrowers experiencing financial difficulties, substantially all in our non-U.S. residential mortgage, credit card and personal loan portfolios, which are not classified as TDRs. For these modified loans, we provided insignificant interest rate reductions and payment deferrals, which were not part of the terms of the original contract. We expect borrowers whose loans have been modified under these short-term programs to continue to be able to meet their contractual obligations upon the conclusion of the short-term modification. In addition, we have modified $0.8 billion of Consumer loans for the nine months ended September 30, 2014, which are classified as TDRs. Further information on Consumer impaired loans is provided in Note 18 to the condensed, consolidated financial statements. (75)-------------------------------------------------------------------------------- Delinquencies For additional information on delinquency rates at each of our major portfolios, see Note 18 to the condensed, consolidated financial statements. All Other Assets All other assets of our financial services business comprises mainly real estate equity properties and investments, equity and cost method investments, derivative instruments and assets held for sale, and totaled $47.1 billion at September 30, 2014, a decrease of $0.2 billion from December 31, 2013, primarily related to the sale of certain held-for-sale real estate and aircraft ($5.8 billion), the net sale of loans held for sale ($3.1 billion), the net decrease in equity and cost method investments ($1.1 billion), and the sale of certain real estate investments ($1.1 billion). These decreases were partially offset by a net increase in assets held for sale ($10.1 billion) and an increase in derivative instruments ($0.6 billion). During the three and nine months ended September 30, 2014, we recognized $0.1 billion and $0.4 billion, respectively, of pre-tax other-than-temporary impairments of cost and equity method investments, excluding those related to real estate. Included in other assets are Real Estate equity investments of $12.1 billion and $13.7 billion and Real Estate equity assets classified as held for sale of $0.1 billion and $0.7 billion at September 30, 2014 and December 31, 2013, respectively. Our portfolio is diversified, both geographically and by asset type. We review the estimated values of our commercial real estate investments at least annually, or more frequently as conditions warrant. Commercial real estate valuations have shown signs of improved stability and liquidity in certain markets, primarily in the U.S.; however, the pace of improvement varies significantly by asset class and market. Accordingly, there continues to be risk and uncertainty surrounding commercial real estate values. Declines in estimated value of real estate below carrying amount result in impairment losses when the aggregate undiscounted cash flow estimates used in the estimated value measurement are below the carrying amount. As such, estimated losses in the portfolio will not necessarily result in recognized impairment losses. During the three and nine months ended September 30, 2014, Real Estate recognized pre-tax impairments of $0.1 billion and $0.2 billion, respectively, in its real estate held for investment. Real Estate investments with undiscounted cash flows in excess of carrying value of 0% to 5% at September 30, 2014 had a carrying value of $1.3 billion and an associated estimated unrealized loss of $0.1 billion. Continued deterioration in economic conditions or prolonged market illiquidity may result in further impairments being recognized. FOREIGN EXPOSURE -------------------------------------------------------------------------------- GECC Selected European Exposures At September 30, 2014, we had $69.9 billion in financing receivables to consumer and commercial customers in Europe. The GECC financing receivables portfolio in Europe is well diversified across European geographies and customers. Approximately 93% of the portfolio is secured by collateral and represents approximately 500,000 commercial customers. Several European countries, including Spain, Portugal, Ireland, Italy, Greece and Hungary (focus countries), have been subject to credit deterioration due to weaknesses in their economic and fiscal situations. The carrying value of GECC funded exposures in these focus countries and in the rest of Europe comprised the following at September 30, 2014. (76) -------------------------------------------------------------------------------- Rest of Total (In millions) Spain Portugal Ireland Italy Greece Hungary Europe Europe September 30, 2014 Financing receivables, before allowance for losses on financing $ 1,360 $ 215 $ 521 $ 5,782 $ 2 $ 2,746 $ 60,424 $ 71,050 receivables Allowance for losses on financing receivables (85) (17) - (178) - (222) (655) (1,157) Financing receivables, net of allowance for losses on financing 1,275 198 521 5,604 2 2,524 59,769 69,893 receivables(a)(b) Investments(c)(d) 3 - - 454 - 277 2,129 2,863 Cost and equity - - 469 50 33 - 1,643 2,195 method investments(e) Derivatives, net of 2 - - 52 - - 374 428 collateral(c)(f) Equipment leased to others 484 208 64 675 233 234 9,775 11,673 (ELTO)(g) Real estate held 612 - - 399 - - 3,479 4,490 for investment(g) Total funded $ 2,376 $ 406 $ 1,054 $ 7,234 $ 268 $ 3,035 $ 77,169 $ 91,542 exposures(h)(i) Unfunded commitments(j) $ 16 $ 8 $ 189 $ 189 $ 4 $ 827 $ 5,597 $ 6,830 (a) Financing receivable amounts are classified based on the location or nature of the related obligor. (b) Substantially all relates to non-sovereign obligors. Included residential mortgage loans of approximately $27.4 billion before consideration of purchased credit protection. We have third-party mortgage insurance for less than 10% of these residential mortgage loans, which were primarily originated in France and the U.K. (c) Investments and derivatives are classified based on the location of the parent of the obligor or issuer. (d) Included $0.8 billion related to financial institutions, $0.2 billion related to non-financial institutions and $1.9 billion related to sovereign issuers. Sovereign issuances totaled $0.1 billion and $0.2 billion related to Italy and Hungary, respectively. We held no investments issued by sovereign entities in the other focus countries. (e) Substantially all is non-sovereign. (f) Net of cash collateral; entire amount is non-sovereign. (g) These assets are held under long-term investment and operating strategies, and our ELTO strategies contemplate an ability to redeploy assets under lease should default by the lessee occur. The values of these assets could be subject to decline or impairment in the current environment. (h) Excluded $34.8 billion of cash and equivalents, which is composed of $25.9 billion of cash on short-term placement with highly rated global financial institutions based in Europe, sovereign central banks and agencies or supranational entities, of which $1.1 billion is in focus countries, and $8.9 billion of cash and equivalents placed with highly rated European financial institutions on a short-term basis, secured by U.S. Treasury securities ($3.7 billion) and sovereign bonds of non-focus countries ($5.2 billion), where the value of our collateral exceeds the amount of our cash exposure. (i) Rest of Europe included $2.0 billion and $0.1 billion of exposure for Russia and Ukraine, respectively, substantially all ELTO and financing receivables related to commercial aircraft in our GECAS portfolio. (j) Includes ordinary course of business lending commitments, commercial and consumer unused revolving credit lines, inventory financing arrangements and investment commitments. We manage counterparty exposure, including credit risk, on an individual counterparty basis. We place defined risk limits around each obligor and review our risk exposure on the basis of both the primary and parent obligor, as well as the issuer of securities held as collateral. These limits are adjusted on an ongoing basis based on our continuing assessment of the credit risk of the obligor or issuer. In setting our counterparty risk limits, we focus on high-quality credits and diversification through spread of risk in an effort to actively manage our overall exposure. We actively monitor each exposure against these limits and take appropriate action when we believe that risk limits have been exceeded or there are excess risk concentrations. Our collateral position and ability to work out problem accounts have historically mitigated our actual loss experience. Delinquency experience has been relatively stable in our European commercial and consumer platforms in the aggregate, and we actively monitor and take action to reduce exposures where appropriate. Uncertainties surrounding European markets could have an impact on the judgments and estimates used in determining the carrying value of these assets. (77) --------------------------------------------------------------------------------Other For our operations in Venezuela, determining the appropriate exchange rate for remeasurement of bolivar-denominated monetary assets and liabilities into U.S. dollars continues to be subject to uncertainty. We continue to access the official exchange mechanism maintained by the government for certain of our qualifying imports and measure the associated bolivar-denominated net monetary assets at that rate. During the three months ended September 30, 2014, we became eligible to access the SICAD1 exchange mechanism to settle certain future transactions, including the payment of dividends. In light of this development, we concluded the SICAD1 rate is the most appropriate for measuring those monetary assets that do not qualify for the official exchange rate and recorded a $29 million pre-tax charge during the three months ended September 30, 2014. We continue to monitor the evolving situation in Venezuela and will reevaluate the determination of the appropriate exchange rates for remeasurement in light of current developments related to the alternative exchange mechanisms. Net monetary assets subject to remeasurement were approximately $43 million at September 30, 2014, including approximately $18 million in Bolivar denominated cash and cash equivalents and approximately $68 million related to a non-consolidated investment. We also continue to monitor the effects of economic and operating environment in Venezuela on recoverable amounts of bolivar denominated non-monetary assets. NEW ACCOUNTING STANDARDS -------------------------------------------------------------------------------- In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. REGULATIONS AND SUPERVISION -------------------------------------------------------------------------------- GECC is a regulated savings and loan holding company under U.S. law and became subject to Federal Reserve Board (FRB) supervision on July 21, 2011, the one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA). In addition, on July 8, 2013, the U.S. Financial Stability Oversight Council (FSOC) designated GECC as a nonbank systemically important financial institution (nonbank SIFI) under the DFA. Many of the rulemakings for supervision of nonbank SIFIs are not final and therefore the exact impact and implementation date remain uncertain. GECC continues to plan for the enhanced prudential standards that will apply to nonbank SIFIs. These DFA rulemakings will require, among other items, enhanced capital and liquidity levels, compliance with the comprehensive capital analysis and review regulations (CCAR), compliance with counterparty credit exposure limits, and the development of a resolution plan for submission to regulators. GECC submitted its first resolution plan to the FRB and Federal Deposit Insurance Corporation (FDIC) on June 30, 2014. GECC's resolution plan describes how GECC could be resolved under existing insolvency regimes in a manner that mitigates potential disruption to the U.S. financial system and the global financial markets without the use of government support or taxpayer funds. If the FRB and FDIC determine that GECC's resolution plan is deficient, the Dodd-Frank Act authorizes the FRB and FDIC to impose more stringent capital, leverage or liquidity requirements on GECC or restrict its growth or activities until it submits a plan remedying the deficiencies. If the FRB and FDIC ultimately determine that GECC has not adequately addressed the deficiencies, they could order GECC to divest assets or operations in order to facilitate orderly resolution in the event of its failure. GE is also subject to the Volcker Rule, which U.S. regulators finalized on December 10, 2013. The rule prohibits companies that are affiliated with U.S. insured depository institutions from engaging in "proprietary trading" or acquiring or retaining ownership interest in, or sponsoring or engaging in certain transactions with, a "hedge fund" or a "private equity fund." Proprietary trading and fund investing, as prohibited by the rule, are not core activities for GE, but GE is assessing the full impact of the rule, in anticipation of full conformance with the rule, as required by July 21, 2015. (78)-------------------------------------------------------------------------------- In July 2013, the FRB finalized regulations to revise and replace its current rules on capital adequacy and to extend capital regulations to savings and loan holding companies like GECC. Under the final rules, the standardized approach for calculating capital could apply to GECC, in its capacity as a savings and loan holding company, as early as January 1, 2015. However, that timing could change once nonbank SIFI rules are finalized. GECC may become subject to the Basel III advanced capital rules that will be applicable to institutions with $250 billion or more in assets. Initial actions required for compliance with the advanced capital rules, including building out the necessary systems and models, will begin once GECC is subject to regulatory capital rules. However, full implementation will take several years to complete. The FRB has also indicated that they will require nonbank SIFIs to submit annual capital plans for review, including institutions' plans to make capital distributions, such as dividend payments. The applicability and timing of this requirement to GECC is not yet determined. While GECC is not yet subject to this regulation, GECC's capital allocation planning remains subject to FRB review as a savings and loan holding company. GECC undertakes an annual review of its capital adequacy prior to establishing a plan for dividends to its parent, GE. This review is based on a forward-looking assessment of GECC's material enterprise risks and involves the consideration of a number of factors. This analysis also includes an assessment of GECC's capital and liquidity levels, as well as incorporating risk management and governance considerations. The most recent capital adequacy review was approved by the GECC board of directors and the GE Board of Directors Risk Committee in 2014. While a savings and loan holding company and nonbank SIFI like GECC is currently not required to obtain FRB approval to pay a dividend, it may not, under FRB regulations, conduct its operations in an unsafe or unsound manner. The FRB has articulated factors that it expects boards of directors of bank holding companies and savings and loan holding companies to consider in determining whether to pay a dividend. |