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Executives

Trevor Schauenberg – VP, Investor Communications

Jeff Immelt - Chairman and CEO

Keith Sherin - Vice Chairman and CFO

Analysts

Nicole Parent - Credit Suisse

Jeff Sprague - Citigroup Investments

Terry Darling - Goldman Sachs

Nigel Coe - Deutsche Bank Securities

Stephen Whittaker - Sanford Bernstein

Scott Davis - Morgan Stanley

Robert Cornell - Barclays Capital

John Inch - BAS-ML

Stephen Tusa - J.P. Morgan

Daniel Holland - Morningstar

General Electric Company (GE) Q1 2009 Earnings Call April 17, 2008 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the General Electric first quarter 2009 earnings conference call. (Operator Instructions)

I would now like to turn the program over to your host for today's conference, Trevor Schauenberg, VP of Investor Communications. Please proceed.

Trevor Schauenberg

Thank you, [Noelia]. Good morning and welcome, everyone. Joanna and I are pleased to host today's webcast.

Hopefully you have the press release from earlier this morning. Slides are available via the webcast. Slides are also available for download and printing on our website at www.GE.com/Investor. If you don't see it please refresh.

As always, elements of this presentation are forward looking and are based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light.

We'll be reviewing the GE press release that went out earlier today and have time for Q&A at the end. For today's webcast we have our Chairman and CEO, Jeff Immelt, and our Vice Chairman and CFO, Keith Sherin.

Now I'd like to turn it over to our Chairman and CEO, Jeff Immelt.

Jeff Immelt

Great, Trevor, and good morning, everyone.

Just to start on the overview page, the global environment remains challenging. Everybody can read the newspapers every day and that's what we all see. GE I think demonstrated in this quarter that we're navigating through the recession.

We'll discuss in the presentation the way we're running the company, but a couple of things that I want to point out - very aggressive cost out, strong and solid cash flow, our commercial teams are doing a good job of holding our backlog, and GE Capital is safe and secure. Many of you attended the meeting we had on March 19th and this is really an update of that.

And while earnings are down 35% year-over-year due to the recession, our first quarter earnings really were consistent with our March update and December framework. The infrastructure and media earnings were flat for the quarter and Capital Finance segment profit was $1.1 billion, this did include some one-time tax benefits that we'll walk through. But we're profitable in the first quarter and we'll remain profitable in the year.

We're running GE for the long term. We're investing in growth. Several weeks ago we announced a joint venture with Intel for home health, which is a good example of the things that we think we can do in this environment.

Now if you turn to the environment, I'll just give you a snapshot of the way we see the world based on the industries we participate in. The downturn continues. We're in the midst of a global recession that is taking place around the world. Unemployment continues to increase. We believe it's going to go higher. Capital markets are improving. We've seen some bond issuances and some IPOs recently. I think that's encouraging. But there's still some volatility. The commercial credit cycle we believe will be very difficult and we're planning for that eventuality. And we still see weak consumer business confidence. We had more capacity, quite honestly, to lend to our commercial customers in Q1 than we had demand.

There are some positive signs, you know, the parts of the globe that are still robust. China, the Middle East and Latin America, our order intake was decent. Broad deflation will help margins throughout the year and we're seeing pretty good expansion in Energy Infrastructure and Technology Infrastructure. Customer usage helps our services business. We have a very solid installed base and we think that will get worked hard in this downturn. And stimulus is starting to take hold. And while this will take some time to translate into hard results, we're seeing momentum around projects.

So while we are seeing some positive indicators globally, we continue to be cautious and run the company to be safe and secure.

On the next page are just some operational details. These are things we discussed in December and what I want to do is just update them today.

We talked about having aggressive cost out and with revenue decreasing we've upped our goals and we should have more than $5 billion of cost out this year.

The focus on driving orders where available while protecting the backlog - and, again, we'll take you through that - but we think we've done a fairly good job of protecting the backlog.

Solid Industrial cash flow; our CFOA was at 1.6 times our industrial net income. We're on plan for cash through the first quarter.

Keeping GE Capital safe and secure, you know, I think the transparency of an 180-page presentation on March 19th demonstrates our commitment to the business and desire to share the results with investors.

And resolving the credit ratings and the rating agency reviews are behind us now and, despite the downgrades, we retain a strong and stable rating and we're pleased to have this uncertainty resolved.

So the next page just takes you through some of our aggressive cost out and, as I said, we're ahead of plan. In the first quarter our base cost was $1 billion below last year. In addition, we have funded an additional $400 million restructuring. That's going to help us achieve even greater results throughout the year. Headcount's down and we have lower spend and just to put restructuring in context, we've done about $2.5 billion in restructuring over the last several years.

On indirect costs, our indirect costs were down about $600 million year-over-year. We're seeing price down and lower usage in IT, telecom, transportation, MRO across the company and we think this will give us good momentum going forward.

In direct material, we've upped our goals. We're seeing more deflation, places like steel and other raw materials. We're seeing some opportunities. Some of this will take place in '09, but we see even more improvement on the books for 2010 and 2011.

And our margins we're still targeting to be positive for the year and the quarter. Our infrastructure business had 90 basis point expansion. We have a very positive value gap. And that was offset by some margin headwinds at NBC which we'll go through later, but on balance we think we have good momentum for margins to potentially be positive this year.

So we've increased our goals on cost out and are ahead of plan.

Turning over to orders, orders are down 10% overall but relative to the economy I'm pleased with our sales effectiveness in this environment; if you look at the top left, a real focus on preserving backlog.

The backlog is essentially flat quarter-over-quarter. We did have about $500 million of cancellations, $400 million in energy and $100 million in aviation, but on balance we feel very good about how the backlog is in place.

From an order standpoint, equipment orders are down 21%. We think that's to be expected in a cycle like this and we could see several quarters of negative orders as we go through a combination of having a huge order run up over the last few years and some of the economic headwinds. I think more importantly the service orders actually picked up in Q1 versus Q4 - 7% order intake in our high-margin service businesses I think encouraging and on track.

Just a few highlights by business. The Energy Infrastructure, equipment orders were $4.3 billion, services were $4.1 billion. Wind hung in there almost flat for the quarter at $1.7 billion. Thermal was down by about 50%. But we didn't book any of the Iraq order in the first quarter. That was about $500 million that slipped into Q2.

Technology Infrastructure had pretty good orders in aviation, both in equipment and services. And we had real headwind in health care as that market is proving to be very difficult, particularly in the U.S., in the first quarter. From a services standpoint, I think it was pretty strong across the board - aviation commercial spares were up, overhauls were up, energy and wind services were strong, transportation services were up 19%. So we saw pretty good service capability across the board. And lastly, a lot of orders are coming from outside the United States, a lot of global orders, health care in China, the West to East pipeline in China. So we're trying to focus where the growth is available.

And in that context I thought I'd give you an update on what we're seeing on stimulus. You know, once again, this is going to take some time for the projects to translate to income, but we are seeing activity. On the left-hand side, about $2 trillion of stimulus has been announced. GE is targeting in nine regions - U.S., Canada, China, Japan, Brazil, U.K., France, Germany, Middle East. We've got a real strong team and process in place. You're going to see several big projects break in the second quarter. And we've got a pipeline of about $100 billion plus in opportunities.

On the right-hand side I thought I'd just take you for a walk on how global and how broad-based these activities are. You know, the first one has a lot to do with wind in terms of stabilizing the backlog and solidifying the 2009 projects and then building the backlog in '10 and '11. You're seeing projects like Invenergy. There was one in Missouri yesterday funded by the Wind Capital Group. So you've seen three or four in the last few weeks and we think that'll pick up during the rest of the year.

And in China, their stimulus is actually accelerating our wind demand. They're accelerating green energy investing like the smart grid. From your perspective, a 1 million population city is about $500 million in GE content in the smart grid. And you'll see a big deal on this next week in a big city where this technology is going to be applied by GE.

Stimulus outside the United States is solidifying our growing backlog. The China rail project is actually growing year-over-year and we see more opportunities behind the Iraq turbine order which is going to help us grow in the future.

Health care stimulus differs by region. In the U.S. it's focused on health care information technology. Outside the United States it's focused on building new hospitals and equipment. And, again, in different ways we think this stimulus is going to help our health care business in 2010 and 2011.

We're seeing access to innovation investment. This is going to allow us to spend more in R&D in 2009. In the U.S. we've got support on things like green appliances and batteries and globally we're getting R&D offsets to fund more projects, so we think that's a benefit.

And lastly there's many programs being put in place to support export finance in aviation, energy, transportation and health care through the XM Bank or in Europe places like Coface.

So GE is uniquely well positioned and this is both important and intense. We're going to get some benefits from this in 2009, but we think a lot of benefit in 2010 and 2011.

Next page on cash, cash was $2.8 billion in the quarter. Now this is consistent with our operating plan because there's always a build during the year. Historically, 18% of our full year cash flow is in the first quarter. This would put us on a run rate to hit about $16 billion for the year. You should know and I think most of you know that we're not going to have any GECS dividend in the GE CFOA in 2009. All that capital is going to be kept inside GE Capital.

Our working capital improvements were solid for the quarter, offsetting the decline in progress collections. And if you look at the right-hand side of the page you really see the big event in the quarter was that we contributed $9.5 billion to GE Capital and returned $3.3 billion to shareholders as dividends. So that's really what you see on the GE cash balance walk between the fourth quarter of '08 and the first quarter of '09.

So cash is really on plan in terms of what we expected. And, importantly, our consolidated cash flow at the end of the quarter is $47 billion ahead of plan. So we continue to make good progress on cash and we're on plan for the company so far through the first quarter.

The next page is on safe and secure GE Capital. Our key metrics on liquidity, funding and capital are all consistent with our March 19th update that many of you attended. And just to give you a brief update, we're really about funded for this year on our long-term funding plan, so we feel good about that. Our commercial paper progress is really ahead of plan. We're targeting to get to $50 billion by year end of 2009 and, you know, when you look at the difference between first quarter of '08, it's really significant.

Cash on the balance sheet of $47 billion is above the estimate we gave you on March 19th, the $41 billion. Our leverage is on plan to be at 6 to 1, so we feel good about just making the company safer. And an important capital ratio of tangible common equity to tangible assets increased significantly. I think it's a sign of balance sheet strength. It's very solid and ahead of our March 19th commitment and it compares, we think, very favorably to the banks.

So we funded 93% of our long-term debt, we've reduced commercial paper and our capital ratios I think really signify how serious we take the need to have a very strong balance sheet in this very rigorous economy.

Lastly on credit ratings, we retain a strong and stable outlook. We've made progress throughout the quarter. Just taking you back, in December S&P put us on negative outlook. In January Moody's put GE under review. Those have both been resolved in the short term. S&P has given us a AA-plus with a stable outlook on March 12th. The rating of AA-plus indicates a very strong capacity to meet financial commitments and a stable outlook means the rating is unlikely to change in the next six months to two years. Moody's put us on a Aa2 with a stable outlook, again, obligations of Aa2 judged to be of high quality and no change in short-term rating.

So nobody likes a downgrade, but GE retains a strong, stable rating and vis-à-vis our financial service peers we think this makes us competitive in terms of our cost of funds and capacity.

So with that let me turn it over to Keith to take you through the first quarter performance.

Keith Sherin

All right. Thanks, Jeff.

Before we get into the details of the first quarter by businesses, I wanted to start with the framework that we outlined in December and then we updated again at the March 19th capital meeting.

We said we expected Energy Infrastructure to be a strong positive performer for the year. If you look at first quarter results, up 19%, that was a great performance.

We said we thought Technology Infrastructure would have positive growth for the year. First quarter was up 6%.

We said we expected NBCU to be flat to down in December and as the environment worsened we said it would be more negative in March a couple of times. The actuals are very tough, but I'm going to take you through the details of why the first quarter performance isn't indicative of what we expect for the total year.

In total we said infrastructure and media would be up zero to 5. With the pressure at NBC we came in flat.

For Capital Finance we updated December framework at the March 19th meeting. There we said we expected Capital Finance to be profitable. They are at $1.1 billion. And I'm going to take you through a lot of details on Capital. Overall, the results were consistent with the outline from the March meeting.

And we said we expected Corporate, including the C&I results, and Industrial taxes to be flat and the actual results were flat.

So that's a summary of Q1 against our previous updates.

Here's a summary of the first quarter. On the left side is the summary of continuing operations. Revenues of $38.4 billion were down 9%. You can see our Industrial sales of $24 billion were down 1%. We were impacted by the strong dollar in the quarter. They'd be up 2% ex FX, so we had a lot of good, actually, international activity. Financial services revenue as expected would be down as we're shrinking that balance sheet, $14.4 billion, down 20%. We earned $2.8 billion in net income. It was down 35%. And for earnings per share we earned $0.26, which includes the cost of the preferred dividend.

Total cash flow from operating activities was $2.8 billion, as Jeff took you through.

And for taxes, the bottom left of the page has the tax rates for the quarter. I'm going to take a little bit of time to explain them as they were significant in the quarter. The consolidated rate came in at negative 12%. That rate comes from a large tax benefit or credit mostly in GE Capital, as you can see on the income statement on significantly reduced pre-tax income for the quarter. And, again, that's all in GE Capital. The whole rate's driven by the GE Capital credit. As you can see, the Industrial rate for the quarter was 31%. For GE Capital the rate's a positive because we have a credit that we're dividing into negative pre-tax income. The pre-tax was about $150 negative and then you've got a significant tax credit resulting in the favorable rate.

One key point here that I want to reinforce is that our Industrial earnings enable us to use these GE Capital tax losses and that's a benefit of having GE Industrial and GE Capital together.

So for GE Capital, the $1.2 billion credit for capital includes the first quarter impact of the tax benefit that we would otherwise expect for the year, the normal benefits we get from our low-taxed international operations, plus $700 million from a decision we made in the first quarter to permanently reinvest about $2 billion of our low-tax overseas earnings. That resulted in a one-time tax benefit. And under the accounting rules, the $700 million benefit is recorded entirely in the first quarter, not spread through the year, so that reduced the rate compared to what we project for the year.

But only $200 million of that impact actually fell through in the quarter because, as we increased that prior year indefinite reinvestment for $700 million, that was offset by $500 million of tax charges that we took in the quarter to book to our projected full year rate. The $500 million charge was necessary because excluding that permanent reinvestment benefit, our tax benefits for the quarter would have resulted in a lower tax rate in the first quarter than we're projecting for the year and therefore we recorded a $500 million tax benefit to bring the first quarter rate up excluding the discrete items to the projected full year rate.

So in total there's a $0.02 incremental tax benefit in the quarter, $700 million from the one-time permanent reinvestment offset by $500 million of expense that's been booked in Corporate to bring the rate to the total year benefit.

On the right side are the segment results. Looking at our December framework format, Industrial ex C&I had $3.4 billion of segment profit, which was flat. And you can see the pieces, as we talked about on the previous page. Capital Finance earned $1.1 billion and C&I earned $36 million, which was down 75%. And I'm going to cover the businesses over the next several pages.

Before I get into the businesses, there's one page here in the summary of the first quarter items which impacted our results. We tried to describe this in the press release to give you the unique items in the quarter and how the plusses and minuses offset.

First, for transaction gains and margin impairments, the impact in total on the company was $0.03 positive. We basically had three transactions that generated gains - two in aviation for $0.03 and one in GE Capital for $0.03. And I'll cover these in the business results, but the total in the quarter was a positive $0.06.

And then partially offsetting that were the margin impairments. We had $0.03 of margin impairments at GE Capital. There was no one large item. Included in the impairments we had $72 million for real estate. That'd be the largest single category, although it was several properties. And we had $32 million for FGIC, a writedown of our FGIC investment.

Second, we also completed a lot of restructuring, as Jeff said. We're taking a lot of cost out of the company. We did $400 million after-tax of restructuring in the quarter. The majority of that is recorded in Corporate and then some of it is recorded in Capital. If you look by business, there was $50 million for our Energy business, $75 million for our Tech Infrastructure business, there was $60 million in GE Capital, $75 million for C&I were the biggest pieces of the work force and footprint reductions.

And then third we had the two tax items in the quarter which I just went through. That netted to a $0.02 positive impact.

So overall the net of all these was a $0.01 favorable impact on consolidated GE in the quarter.

I'm going to start the business results with GE Capital and just wanted to reinforce some of the key messages we talked about on March 19th. As Jeff already said, we're running the company to be safe and secure. Clearly, liquidity has dramatically improved over the last six months. With commercial paper under $60 billion and $47 billion of consolidated cash, we've dramatically improved that position. We've completed most of our funding. And after looking at the 2009 plan, today we're reviewing our 2010 long-term debt needs and we're going to continue to fund ahead of our needs to maintain a strong liquidity position, and our objective is to be issuing on a non-guaranteed basis during 2009 as we enter 2010. So we're going to keep working on that.

We've obviously been working on resizing GE Capital. That's gone very well. Assets were down $31 billion from the fourth quarter ex FX. Some of this is from the strong dollar and translation, but even ex FX we achieved 44% of the total year shrinkage plan, and I'll show you in a few pages that we have more capacity to invest in new opportunities starting in the second quarter, which is good news.

We're being very aggressive on managing costs. SG&A for GECS was down $600 million in the first quarter. We're on track for a $3 billion plan. I think we showed you $2.7 billion roughly at the March 19th meeting. So we continue to make progress on that.

We are in a really challenging credit cycle. There's no doubt about it. We do expect delinquencies and provisions for losses and write-offs to all continue to increase and that's the environment we planned for, what we're expecting. Even with that, with the dividend savings we're going to have in the second half of the year and the recent capital infusion, we believe we have capital that's sufficient to weather the adverse economic conditions, as we showed you on the 19th. And I'll show you lots of details on asset quality, reserves and non-earnings. We're increasing our total reserves and marks and impairments were about $0.03 lower than the fourth quarter, so a little bit of positive news there.

We earned $1 billion in the quarter in total in GE Capital services. We said we'd be profitable and we expect to be profitable for the year. And even in this incredibly tough cycle, we're committed to GE Capital. We have great franchises. We've got great people. We have real businesses that going to earn strong returns for our shareholders over time and we're going to be smaller and more focused and better positioned as we come out of the credit cycle.

So here are the results for Capital Finance for Q1. Mike Neal and the team earned $1.1 billion which, while down 58% from last year, was a very positive outcome in this environment. We also continue to make progress on shrinking the business, as I said. Year-over-year total assets at $542 billion are down 13% from a year ago. Eleven points of that reduction comes from the stronger dollar, but if you look from the end of 2008 to the first quarter, assets being down $31 billion or 5% and half of that coming from real progress in shrinking the business. In consumer loan, without FX we're down $15 billion from year end and we also had a $3 billion decline from year end in commercial real estate.

In terms of the business results, I'm going to cover some of the income drivers for each of the businesses and then also tie back to the framework that the team pitched on March 19th, so let me start with Consumer.

You can see on the bottom left in Consumer we earned $727 million. That was down 27% year-over-year. The decline in earnings was driven by higher credit costs. The credit costs in Consumer were up $581 million and we also had lower gains - last year we had about $290 million of gains as we sold the corporate card business - and those declines were offset by higher tax benefits that I covered earlier and higher core earnings. We had some better earnings in the U.S. retail business and we had good earnings from global cost productivity.

In terms of the specific Consumer businesses from the March meeting, if you look at the right side the U.S. consumer was profitable in the first quarter. And while unemployment is trending towards the numbers in the adverse case, our credit costs in Q1 were $964 million which, when you look at the framework we laid out, is below the Q1 estimate even for the Fed base case. We're seeing the benefits from underwriting actions that we took last year and it's showing up in delinquencies and it's showing up in entry into delinquency, so I think there's some good news here.

On the U.K. home lending, the business lost $73 million in the quarter. We had $219 million in credit costs and a lot of that was to increase reserves. Home price inflation was a negative 2.7% in Q1, which is favorable; however, when you look at the indicators of rising delinquencies and nonearnings, we do expect to see more pressure in this portfolio as we go forward.

For Central and Eastern Europe the banks made $84 million in earnings in the quarter. We had $156 million of credit costs, which are below the Fed base case for the first quarter estimate.

Commercial real estate, obviously one of the biggest businesses that we're talking about today with investors and we gave a lot of details on the 19th, the business lost $173 million in the quarter. That was the biggest variance year-over-year for GE Capital. It was down $650 million. The main driver of the earnings decline is significantly lower property sales gains. Last year we sold $2.6 billion of fair value properties. This year we sold $200 million, we had a small gain, but year-over-year year the gains were down almost $500 million.

As expected, delinquencies have risen; 30 plus delinquencies in this portfolio is about 2.2%, which is very low. But we did increase our reserves in real estate by about $110 million and we had $70 million of impairments, explaining the full decline in negative income, basically gains plus the increase in credit costs.

In terms of the March update, the total loss of $173 million in the quarter basically is in line with our December outlook, but as we look at the indicators we expect the losses to continue to worsen as we go through 2009.

For commercial lending and leasing, the business earned $222 million in the quarter. It was down almost 70%. The earnings decline was driven by $155 million of higher credit provisions and we also had lower gains here. Last year we had the Genpac gain and that was partially offset by the gain in Penske this year. We sold to below a control a position. We've been selling down Penske for two and a half years now and we completed a transaction to get below 50% and that resulted in a gain of about $0.03 in GE Capital.

Our CLL customers are clearly being impacted by the tough economy. In terms of the March update, the total losses and impairments are just slightly above the base case that we showed you.

And finally the verticals had earnings declines, but mainly that was driven by lower gains. Last year GECAS benefited from some aircraft sales that didn't repeat. That was about $100 million. And we ended the quarter with one aircraft on the ground, but right after the end of the quarter in the first week of April we signed a new commitment on that plane and we'll move that out. So a lot of good asset quality stories in the verticals, really no issues there.

Let me go into asset quality. The next page is an update that we give you regularly on delinquencies and non-earnings. These are 30-plus day past dues and non-earning assets.

On the left side, commercial data, we continue to see the delinquencies and non-earnings rise as our customers are impacted by the economy. You can see most of the delinquencies, up 66 basis points versus the fourth quarter, is in the equipment finance business. It's in our core CLL portfolio, about two-thirds of the increase, non-earnings of 61 basis points, up 61 basis points versus the fourth quarter. It's driven by senior secured loans. They're well collateralized. I'll take you through how we think about non-earnings relative to our reserve positions in a couple of pages.

And then commercial real estate, it's not in the delinquency metric above but non-earnings are up to 1.2% and we are seeing delinquencies, as I said, up to 2.2%.

And then on the right side is the consumer data. We continue to see deterioration in the consumer portfolio in the quarter in both the mortgage and the non-mortgage book, but we break the mortgage and the non-mortgage out because the loss dynamics are so different. And I'll continue to show that as we go through the asset quality section here.

One piece of good news, as I mentioned, in North America we're seeing delinquencies stable. The consumer delinquency in North America was flat for the fourth quarter. Basically, it was 7.07% in the fourth quarter; it went to 7.1% in the first quarter. And we continue to see declining entry rates into delinquency. Our entry into delinquency is down. It was down in the fourth quarter and it was down in the first quarter, and that's a real positive sign in the card portfolio. So we'll have to see how that plays out as we go forward, but it did help us in terms of our provision needs and our profitability in the quarter.

The U.K., on the other hand, is the biggest pressure point. It drove 47 basis points of the delinquency increase and 54 basis points of the non-earnings increase. Mortgage delinquency rates are rising. The exposure, though, is mitigated, as we showed in the March 19th meeting. We've got very low loan-to-value positions and even with our delinquencies, the write-offs are very low at 0.45% of financing receivables.

So while non-earnings for both commercial and consumer are rising, I'm going to show you our reserve coverage from the March meeting in two pages. Overall delinquencies and non-earnings just show us that we're going to continue in a tough environment as we expected.

Next is an update on reserve coverage. If you look at the bars here, we took $1.7 billion of write-offs in the quarter, we had $2.3 billion of provisions in the quarter, and we increased our reserves by $400 million just from year end and $1.4 billion from year-over-year while we lowered our assets by $31 billion. The reserves would have actually been at $5.9 billion on a consistent FX basis, so we had a $200 million reduction in the absolute balance because of the strong dollar translation.

If you look - it's not on the chart - but if you look at reserves and the provisions run rate, there were some questions this morning in pre-notes about why is the provision down from fourth quarter? I'll just go through over the last year what have our provision for losses been. They were $1.3 billion in the first quarter of last year. They rose to $1.5 billion in the second quarter, $1.6 billion in the third quarter. They were $3 billion in the fourth quarter, but if you remember we had $500 million after-tax of incremental provisioning we did to adjust our loss reserve ratios in some methodologies. On an adjusted basis, taking out that one-time increase, you would probably be somewhere around $2.2 billion, and here in the first quarter we're at $2.336 billion.

So we've seen a full year cycle of increasing provisions; that will continue. And as we increase those reserves we are increasing our reserve coverage. If you look at the percents below the bars here, last year in the first quarter we were 1.04% and today at the end of the first quarter we're 1.59%. And we expect that to continue to increase as we go through the year.

So we've put up more provisions, we've increased our reserves in both commercial and consumer, and we've increased our coverage rate in commercial up to 0.86% and in consumer up to 2.87%.

Now for the U.S. card and sales finance, the coverage rate's up to 6.8% and we maintain strong non-earnings coverage of over 2 times. And for the mortgage business the coverage rate also increased up to 0.92% and we continue to see very low losses relative to our delinquencies and our non-earnings.

So in total the reserve coverage is up 55 basis points over the prior year and, as I said, that's going to continue as we go forward.

This is an update, the next page is an update, on non-earning assets and reserve coverage. These are the same charts that Jeff Bornstein, the CFO at GE Capital, covered during the March 19th meeting and we just updated them for the first quarter actual results. I think it helps to look at where are we on non-earnings in the business and then when you break out how we think about the exposure how do we feel in terms of our reserve coverage versus the real exposure.

On the left side's commercial, the non-earning assets of $4.5 billion were up $1.3 billion from year end. It's about 2% of our financing receivables. If you look at the next three bars, this is the benefit of being a senior secured lender. You can see we expect $1.4 billion of 100% recovery. We're so over collateralized that we have a very secure position. We have $1 billion of recovery that we'll get estimated on things that are in workout, where we're going to have to do some form of restructuring, but we expect a fully recovery or cure. We have $1.2 billion that we believe we will recover based on the collateral value and we work like crazy to make sure we get that right. And then that leaves a $900 million loss exposure on the non-earning where, with $2 billion of reserves on the commercial side, it's 220% coverage.

So when we look at the senior secured lending benefits that we have here and our positions by business item by item, loan by loan, we feel like we're in pretty good shape here. But, again, this is going to continue to rise as we go through the year.

On the right side's the consumer non-earnings of $5.5 billion. That's up $700 million over year end. It represents 4% of our financing receivables. But the consumer dynamics are pretty different if you compare mortgage and non-mortgage assets. I think the first deduct from the $5.5 billion is $1.6 billion of non-mortgage assets. These are our private label credit card and retail sales finance and other consumer non-mortgage assets that are delinquent. We've got $3.2 billion of non-mortgage reserves. So we've maintained over 200% coverage on those assets and feel pretty good about where we are on that. And externally that compares with other financial companies as well.

On the mortgage side we've got $3.9 billion in non-earnings. Again, we think we have $1.3 billion that will cure based on a portfolio detailed, loan-by-loan underwriting of our risk team. We have an estimated collateral value of about $2 billion and we think we have about $300 million of mortgage insurance benefits. So with the estimated exposure, we're still at 160% coverage.

And one additional point on mortgages. When a mortgage goes over 360 days past due for us, we mark that property to realizable value. So included in the mortgage non-earnings is about $600 million of mortgages that are over 360, but they're marked at realizable value. And we took about $60 million of marks on those mortgages in the quarter and they mark every quarter. So once you go over a year, we're at basically fair value.

So we believe we're appropriately covered for the non-earnings loss exposure.

Next is an update on origination. Jeff talked about it a little bit; I mentioned it. For the quarter we originated $32 billion of on-book assets. You can see it by business here. With our collections in sales and securitization of about $43 billion, we had a reduction in ending net investment of $11 billion in the quarter. And we also had additional asset declines because of the strong dollar translation, but that's about 44% of our total year plan.

So we're ahead of our plan in terms of collections versus originations and we're seeing good opportunities to make loans. We see the returns are above 2%. We expect to increase our volume in the second quarter. We've got more capacity and we're going to do it in the commercial lending and leasing as well as in the verticals. We've got a pretty good pipeline. We do have the capacity to buy some distressed assets. We're evaluating the PPIP, being an investor there.

We're going to continue shrink our mortgage business. In the quarter originations were a little under $500 million, down 89%, and that will continue to shrink as we go forward. We do see opportunities associated with the global stimulus, as Jeff mentioned, in areas like renewables, and we're going to maintain our pricing discipline.

Right now - this is good news - we're managing our collections and originations to meet our funding plan and since we're ahead of that plan we have additional capacity that we can take advantage of opportunities in the quarter and our teams have a nice pipeline that they've put together.

So first quarter volume was a little below plan, but it's a positive as we have capacity to increase lending as we go forward here at pretty good rates.

So to wrap up the Capital section I thought I'd come back to the outline of the stress cases from the March 19th meeting. This is the same data that was presented then. There's no one case that fits all our different business dynamics as I described by business a few pages ago. And as Mike Neal said on the 19th, we're not picking a specific case or outlook. Our overall view of the Q1 results would be that the Q1 credit loss and impairments are running to the original outlook; however, the leading indicators - unemployment, GDP, delinquency, non-earnings - would suggest caution as you think about the rest of the year.

So we're going to have lower costs, we're going to have higher volume as we move into Q2 and Q3 and Q4, but we don't have a specific case that we're picking here. I think we've given a lot of information for you to be able to go back to the 19th framework business and business and see how do you feel about the estimates, the economic assumptions, and where do you want to put GE Capital. But even in the most adverse case we don't foresee the need for additional capital and based on everything we know today we expect GE Capital to be profitable for the year.

Let me turn to infrastructure and media. I'm going to start with NBCU. Jeff Zucker and the team had a very challenging environment and some tough timing comparisons, which I'm going to cover here. As I said in March at the 19th meeting, the business and the industry are having a challenging time given the economy, but in Q1 NBC was also hit by other one-time impacts like the Super Bowl or the film DVD schedule that further hurt the results. And on this page and the next page I'm going to show you how the run rate for NBC is really down 15% to 25% in this tough environment and the 45% is overstated because of some of these one-time timing issues.

The highlight for the business continues to be the very strong cable performance. Revenue was up 7% and our profit was up 19%. We've got positive sub fees and positive ad sales as well as good cost controls.

In terms of operating profit, cable was strong everywhere. If you look, Bravo was up 41%, USA was up 15%, Oxygen was up over 100%. USA was number one for the 11th consecutive quarter. MSNBC had a great quarter - our profit was up 28% and they beat CNN in the morning and prime in adults age 25 to 54. CNBC, up 20%. It had its best performance in total business day viewers since 2001. Really performing well.

So a great performance out of cable and that continues and that will continue as we go forward.

Broadcast, while cable was strong, there was pressure in broadcast. Revenue was up 6%, driven by the Super Bowl, but our profit was down about $165 million from last year, driven by three things, really - the cost of the Super Bowl, the tough ad market, which really affected local stations, and then higher programming costs versus last year because last year we had the writers' strike in the first quarter which gave us a favorable impact in terms of the cost of programming.

On the film and parks, they also had a tough quarter. For film, revenue was down 9% and our profit was down $118 million. Home video is the largest driver here. We had about 5 million fewer DVDs with tough comparisons last year. In the first quarter we had very popular DVDs like the Bourne movie and American Gangster and we had very few this year in terms of comparison from the fourth quarter launches. We also had a higher film development cost than last year, so there's some real timing issues in the quarter. And I'll show you as we go forward the rest of the year looks a lot better.

The parks were down about $29 million in the quarter and that's from lower tenants. We are seeing an impact of the recession, down both 20% in attendance in Orlando and Hollywood.

Another highlight for the business is in digital. Hulu continues to be very successful. It's now the number two video website. We're very excited about the progress there. It's also a highlight the team is working incredibly hard on making sure the cost structure's right in this tough environment. We're going to continue to reduce costs.

And one other drag we had, we wrote off about $60 million on one of our media investments, ION, in the quarter.

So that covers a lot of one-time items and different timing impacts. On the next page I'm going to try and take a view and put it back together for you so you can see how we think about this operationally.

On the left side is a walk from the first quarter reported $391 million of our profit, down 45%, and if you look at the adjusting items, first of all, the Super Bowl doesn't repeat. The Super Bowl was an incredible ratings success, but those ratings carry with it the proportional share of the rights fees for the NFL contract and the costs of producing the Super Bowl and the rights fees in total left us with a $45 million one-time drag in the quarter. The film timing, as I said, on the DVDs and some parks - the parks had some timing with comparisons in the quarter versus last year - that could add another 9 points. The impairments we had were non-operational. And the writers' strike, obviously, is just a one-time thing that doesn't continue through the year.

So on a normalized basis, we see our profit here down somewhere between 15% and 25%, and that leaves you the operational drivers, you know, cable's going to continue to be strong, we're going to continue to see pressure in the local stations in advertising, and we're going to see continued pressure from the economy.

On the right side, if you look at the rest of the year, we expect to continue to have a great performance from cable. In the third quarter we're going to get about $150 million favorability just by not having a repeat of the Beijing Olympics and the financial impact of that. The film schedule is much more positive through the rest of the year, including DVDs, and that already started with the success of Fast and Furious, which was from early April. And then on the bottom we'll continue to see pressure from the economy. There could be additional impairments; there could be other gains from asset sales.

We put this page in to try and give you a better operational view of NBC performance and a fair baseline for how to think about the balance of the year.

Next is Technology Infrastructure. John Rice and the team delivered revenues of $10.4 billion, which were basically flat. 42% of our revenues in Tech Infra come from services and they were up about 5%. Segment profit of $1.8 billion was up 6%.

You can see the key business results on the bottom left. I'll start with the aviation business. They had a very good quarter obviously. Orders in the quarter were $5.5 billion, up 6%. Major equipment orders were $2.8 billion; that was down 4%. We had $1.1 billion of commercial engine orders, which were down 26%, but that was offset by military engine orders of $1.5 billion, which was up 60%. We ended the quarter with a major equipment backlog at $21.6 billion, up 12% versus the first quarter and up 4% versus the end of last year. So even with a full commercial book, this business had a very good orders quarter which positions us well as we continue to deal with the economy.

Service orders were very strong, up 18%. We had commercial spares up 10%. The average daily order rate was $21.6 million a day. Commercial overhauls were up 14% and the CSA orders in the quarter were very positive, which resulted in a backlog of $56 million at the end of the quarter. It's up $4 billion from last year's first quarter.

Revenue in the quarter was up 12%, driven by the double-digit growth in both equipment and service, and the military engine shipments of 185 engines, they're up 50% and that more than offset the commercial engine shipments of 494 units, which were down 9%.

Our profit in the quarter here you can see is up 39%. They had a very good quarter in terms of price and productivity. We also benefited here from some one-time transactions that I mentioned on the items page. If you look, we increased our controlling interest in a service and technology business in Singapore. That resulted in a gain. We sold a business from the Smiths acquisition which wasn't really core and that also resulted in a gain. And those gains were partially offset if you look year-over-year by lower partnership sales from the first quarter of 2008.

So excluding all the transactions, our profit here would have been up about 12% on revenue growth of 7%, still a very good performance and overall a great performance, including the transactions.

Next is health care. Orders of $3.6 billion were down 8%. That's a pretty result in this environment. We're seeing very tough conditions in the health care world in both the U.S. and Europe. Overall, orders of equipment was down 11%, services were down 2%. Total DI was down 22%. Life sciences was a positive, up 5%. And if you look regionally on equipment, U.S. was down 16%, Europe was down about the same, and China was up 23%. We have a bright spot in Asia. China and Japan were both very strong. But it was a tough quarter in terms of orders pretty much across all the product lines.

Revenue for the quarter was down 9%, with equipment down 10% and service down 7%, and our profit was down 22%. It's really driven by negative volume and a little bit of foreign exchange; we got hurt a little bit with foreign exchange here.

So as you look forward at health care, we expect this variance is going to improve through the year. We have a couple of things - one, OEC will continue to ramp up as we have additional product lines coming out at higher margins, and the comparisons get easier from a timing and relationship to last year perspective.

Next is transportation. Total orders of $940 million were down 10%. Our equipment backlog ended the quarter at $2.8 billion, which is down about $400 million from year end. We said we were going to have tough equipment orders here and we're looking for somewhere around 500 locomotives for the year.

Revenues in the quarter were up 2% driven by services, up 5%, which is a nice story, and equipment was down about 2%. And our profit was down 15%. It's basically driven by negative product mix. We have fewer AC locomotives and some of our international program investments had higher costs with them.

So overall, a mixed environment. We're doing a lot of restructuring in the Technology Infrastructure segment to reduce our costs.

And with that I'll switch over to Energy.

Energy Infrastructure, John Krenicki and the Energy team, had a very strong quarter - another very strong quarter in a string of them. Revenues of $8.2 billion were up 7%. 47% of the segment revenues come from services here. And segment profit of $1.3 billion was up 19%. You can see the business results on the bottom left, with both energy and oil and gas delivering double-digit growth.

If you look at energy, energy orders of $6.6 billion in total were down 20%. They're still strong at an absolute level and only $300 million lower than revenue in the quarter, so we're still operating at a very high absolute level of orders here.

Thermal orders of $1.1 billion were down 50%. We had $500 million of the Iraq order pushed into Q2, as Jeff said, which would have taken their total equipment orders up by another 15 points.

We received orders for 18 gas turbines. The thermal backlog is around $8 billion, which is up 7% from last year. It's down 6% from year end. It would have been flat with the Iraq orders.

Wind orders of $1.7 billion were down 8% and aero orders of $186 million were down 59%. Service orders were strong, up 4%, and our CSA backlog ended the quarter at almost $40 billion, up $5 billion from a year ago and $400 million from year end.

So revenue at Energy was up 9%, driven by thermal. They had good equipment. It was up 55%. We shipped 42 gas turbines - that was up 6 from last year - and very strong pricing from the backlog, up 5%. Wind was down 2%. We shipped 433 units - that was down 130 units - but the price was up 6%. And service revenues were up 3%.

Our profit was up 23%. That's driven by the strong volume and pricing in thermal and in the service our profit was up 1% as price and productivity were partially offset by inflation on some CSA contracts.

Oil and gas had another strong quarter also. Orders of $1.9 billion were down 1% in dollars, however, FX adjusted they were up 15%, so there's a lot of global activity. We had $150 million of orders for natural gas compression equipment. That's up 90%. It's nice to see us getting some orders for extraction of natural gas. We also had $560 million of orders for pipelines in O&G, including a $340 million East to West pipeline order in China, which is a great win for the team.

The equipment backlog ended the quarter at $6.3 billion - it's up $100 million from year end - and revenues were up 1%, driven by growth in both the petrochemical and the refinery equipment. Service revenue was down 1%. Both were up over 10% if you adjust for FX, so a good global quarter. And our profit was up 11%, driven by volume, price, productivity and is partially offset by FX.

So overall, just a really solid performance by the Energy team in a tougher environment.

And with that let me turn it back to Jeff.

Jeff Immelt

Great, Keith, thanks.

Just to wrap up, I think we're operating GE in this environment the way investors would want us to. We're running GE Capital to be safe and secure. We've got solid funding, with $47 billion of cash and $38 billion of tangible equity. We've earned $1.1 billion in the first quarter. We'll be profitable for '09. And we expect originations to accelerate in the second quarter through the fourth quarter and that's at higher margins and we think that portends well for the balance of '09 and into '10 and '11.

We positioned our infrastructure businesses I think to really weather the cycle and to do well. The first quarter segment profit was up 11%. We expect a difficult period, but I think one of the things is that, as GE, we have really a lot of mitigants to offset this. We are good at services and services is one of our differentiators in this environment and we think that's important.

The backlog is good. We've got lots of ways to work with our customers on the backlog. We think we're very well positioned on the stimulus. We've got a global network of national executives. We're well represented. We're in the right technologies, and so I think we feel good about that. We've got lots of new R&D investments that we're making that we think add to our ability to grow in 2010 and 2011.

And look, some of these one-timers we didn't let fall through. We put $400 million into restructuring. It's the kind of thing you'd expect us to do. That's going to help improve our cost out in the rest of the year. And so I think there's a lot of mitigants despite the fact we're in a very difficult period.

The media space is tough but, as Keith pointed out, I think the total year will exceed our first quarter run rate. The industrial cash flow, we've got lots of teams working on working capital and our ability to offset the decline in progress payments. And we think the run rate will be on track to be between $15 and $16 billion for the year.

And lastly, we're committed to transparency. The supplemental schedule will be in addition to our 10-Q this quarter and will feature lots of additional disclosures. We've got the EPG meeting in May. We plan to have another GE Capital meeting early in the summer. So we're just going to keep this drumbeat up of transparency and disclosure and we think it's important where we are in the economy.

So the economy remains tough. I think there's places where we can still win, and we're positioning the company to excel as we come out of this in 2010, 2011 or whenever that takes place.

So Trevor, let me turn it back over to you.

Trevor Schauenberg

Thanks, Jeff.

[Noelia], I think we're ready to switch over to the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nicole Parent - Credit Suisse.

Nicole Parent - Credit Suisse

My last question on GE ever. Big picture. Keith, you made a point of saying that Q1 results really aren't indicative of the full year. I guess theoretically you kind of acknowledge provisions at Capital are going to move higher over the course of the year. NBCU down 20% is indicative of how we should think about it for the full year. Health care, worse than what we thought, probably doesn't get better. And the cancellation numbers at Energy Infrastructure going up. And I can appreciate that you've gotten away from giving quarterly guidance, but why when we add all that up wouldn't we change the framework for the industrial side of the portfolio?

Keith Sherin

Well, I think my main comment was about NBCU, that the quarter results were indicative of the full year, and I tried to show you how to think about that. I think it also does apply to some of the health care, as you said.

But if you put the pieces back together, we think we're going to have a very strong year in the Energy Infrastructure base. You can see the first quarter was very good and, if you look at the backlog and the position that they have, you look at the services business that they have, you look at the wind business, including what we think we're going to benefit from in stimulus as we go through the year, the oil and gas business has a good set of orders and a good backlog. We feel very good about the strength in energy and Energy Infrastructure as you look at the total year.

For Tech Infrastructure, we were up 6% in the quarter. We think we're going to be positive for the year. We've got a lot of work going on to reduce our costs. I think you do have some easier comparisons as you get into the second half on some of the businesses there, but we feel very good about that.

If you adjust the NBC to the run rate that we said for the rest of the year, I mean, you get a $150 million variance just from the Olympics alone in the third quarter. We think we are still in the framework.

We're not giving guidance. You know, it's not dramatic enough that it would be something that we would change, I don't think, today, Nicole.

And I'd like Jeff to add some comments to it.

Jeff Immelt

I would say the same thing, Nicole. I think in a very realistic way having $171 billion of backlog is a real luxury when you think about 2009. This really doesn't even include - we haven't booked most of the Iraq order yet and cash there, so that I think gives some buoyancy to the Energy Infrastructure segment.

I think when you think about aviation being probably at a run rate of 10% to 15% for the year, it can offset some down quarters in health care and transportation. I think transportation actually solidifies during the year. Health care's probably the one with the least visibility right now.

And then media, again, I think Keith laid out a pretty good framework to think about media.

So, I don't know. I think it's always difficult to bridge between not giving guidance and giving a framework and things like that, but when I look at the puts and takes I don't think there's really a reason to change right now.

And then, you know, when I think about the stimulus, look, I think we will do better than most on the stimulus. That's a little bit of '09, but I really look at that more as '10 and '11.

Keith Sherin

If you look at services in the quarter, services were about $8.3 billion of revenue out of Energy Infrastructure and Tech Infrastructure. That's about 44%, but it represents somewhere around 70% of our profit. I think that services ongoing stream is what really helps to strengthen the industrial outlook, even with the tougher equipment orders in view that we know we're going to have as we go forward.

Jeff Immelt

Exactly.

Nicole Parent - Credit Suisse

And I guess just to that point on health care, the industry's had abysmal equipment orders for a long time, so how does that translate into service? Are people more inclined to actually ramp up service because they're not replacing the equipment or does it impact just timeline wise because you haven't had the equipment sales that you might have in a different type of environment?

Keith Sherin

I would say, Nicole, there's two factors going on. One is the services grow by installed base and then dollars by installed base. So the installed base has been flat at best, but the dollars per installed base has been growing.

And then the other one is health care information technology, which we show in the service numbers, and I would say even though I'm bullish about health care IT later this year, I think there's just been a lot of uncertainty about where the government programs are going to go and who's going to qualify. And I think, if anything, that had a negative impact in Q1 that may unwind as the year goes on.

Operator

Your next question comes from Jeff Sprague - Citigroup Investments.

Jeff Sprague - Citigroup Investments

Just a couple items. First just on this question of tax, Keith, and how it interrelates with the various outlooks, so it sounds like in terms of the expected loss performance at Capital you're somewhere between original outlook and Fed base case, but it would seem from the way you laid things out the tax benefits toggle pretty substantially based on the loss performance at Capital.

I tried to follow everything you said on tax in the quarter, but it seems like even adjusting for what you said tax is running more towards what we would have expected somewhere between the base case and adverse case for Capital in terms of the pre-tax and the resulting tax credits that would have been generated. Can you just provide a little more clarity on how to frame that for the rest of the year.

Keith Sherin

Sure, I'll take a shot at it. If you look at GE Capital in the first quarter we had about $1.2 billion of tax credits - it's 1160. $700 million of the benefit in total at GE Capital Services off the income statement comes from this one-time permanent reinvestment. That's not something that you would plan on having to repeat, but if you wanted to get to a run rate you ought to take a quarter of it and put it into the results. And if you adjust the $1.1 billion earnings that GE Capital has, either at the GE Capital Finance level or you could do it off the income statement, basically if you adjust for the $700 million and you put a quarter of it in the run rate, at the end of the day it comes out to be about $700 million of net income for GE Capital adjusted for tax.

So I think the tax benefits are somewhere around $500 million in GE Capital without the one-time benefit and you could run that forward through the year and then take a quarter of the $700 million benefit and kind of have it be - that’s where we are right now for run rate.

Now the thing I'd say to caution you is if the losses go higher and those losses are in high tax places, GE will be able to use those tax losses and then the tax credit number in GE Capital could be higher as you move towards the right side of those risk cases, Jeff.

Does that tie it together a little bit?

Jeff Sprague - Citigroup Investments

Yes, that helps. And just looking at equity sequentially, it did trend down again both in Capital  well, it's up in Capital but not up in keeping with the Capital injection in the quarter and on a consolidated basis it's drifting lower against the net income number. Can you reconcile that?

Keith Sherin

Sure. For GE Capital we had $53 billion of equity at the beginning of the quarter and we went to $60 billion at the end of the quarter; it's up $7.5 billion. The $9.5 billion infusion that we put in was offset partially by mostly strong dollar. Our currency translation account was about $3 billion in the quarter. Offsetting that we had the retained earnings, obviously, from the income.

So at the end of the day the strong dollar did hurt us in terms of equity. I think since the time those rates have been established in March the dollar has weakened a little bit and some of that I think will come back as we go into the second quarter. But the biggest driver is going to be the CTA change.

Same thing on the GE. For the GE level, at the total company level, instead of $3 billion that's about $4 billion.

Jeff Sprague - Citigroup Investments

And then just finally for me on cash flow, it appears to be tracking to your expectations but I guess if you still look at it you're down 24% or $1 billion on industrial on roughly flat industrial profits at the segment level. There was a comment that progress and working capital were largely offsetting, but that doesn't seem to reconcile with actually the year-over-year cash drop. Is there something else going on in the industrial cash flow in the quarter?

Keith Sherin

No. If you look at the quarter, industrial net income was $1.9 billion. We had about $600 million of depreciation. We had a decline of progress about $800 million and we had $1.5 billion of other working capital, so we had a very good performance in receivables and everything else. And then other CFOA was about a $400 million drag, which is a little bit of the long-term incentive plan payment and some restructuring funding.

So, you know, the team is really focused on working capital and we feel pretty good about the progress we've made. We've got operating accounts we're running every month and we actually were a little ahead of where we thought we were going to come out when you look at cash in the quarter at the 2.8 level.

In addition, if you think about it, that Iraq order slipped into second quarter. That's $500 million of progress that is included in these 2.8 we didn't get, so that rolled into Q2 for us.

Operator

Your next question comes from Terry Darling - Goldman Sachs.

Terry Darling - Goldman Sachs

Keith, on the industrial tax rate, is 31% a good run rate at this point?

Keith Sherin

It's a little high in the quarter, again, as we had to adjust and book $500 million to get to the total year estimate. A little of that happened at the industrial level and a little bit of that - about half happened at industrial, half happened at Capital.

We'd expect a high 20s tax rate for industrial for the year is the current estimate.

Terry Darling - Goldman Sachs

And then wondering if you can help us with kind of the year-over-year deltas in the pre-tax earnings at GE Capital or any color around that or how to allocate the tax benefit or anything that could help us understand the moving pieces on a pre-tax basis.

Keith Sherin

I'm going to have to have these guys get back to you on that. I don't have a schedule on it, so we'll have to have Trevor and Joanna get back to you, Terry, on it.

Terry Darling - Goldman Sachs

Okay. And then lastly on sort of this point about your capacity to help fund customer business this year if tight credit markets create a shortfall. I'm sort of forgetting whether that number was $10 or $15 billion, but I'm wondering kind of where you are with that number at this point. Did you burn through a significant amount of that in the first quarter or do you still see strong capacity there? Just maybe update us there.

Keith Sherin

I think that what I was trying to show you on the volume page is that the first quarter was a little lower and we think we got about $10 billion of incremental capacity here.

Jeff Immelt

Terry, you're talking about funding our own backlog?

Terry Darling - Goldman Sachs

Yes.

Jeff Immelt

Yes. You know, we really didn't do really any of that in Q1, but I think we need to stand ready to do some. In other words, my sense is that the way some of these stimulus packages might work is the government's going to create, for instance, an energy bank. We may have an opportunity to invest side-by-side in wind farms and things like that.

So what I would say, Terry, is that we've created about $10 billion to be able to do it. We really didn't use any in Q1, but we've got some dry powder that we can use in the rest of the year. And my sense is the way some of the stimulus programs might work, it might offer some good opportunities for us to go side-by-side with the government in a few of these things.

Terry Darling - Goldman Sachs

The discussion around the stress test, I know you've been clear that you do not expect to be subject to a stress test, but I just wanted to confirm that you don't think that anything has changed there.

Jeff Immelt

I think the answer is we don't - since we're not a bank holding company we don't expect to be subject to the stress test, but I think what we tried to reflect on the 19th and what we've tried to reflect today and what we reflect in every GE Capital meeting is that for investors we want to try to hold ourselves to the same standards and we want to share the same level of data, so we've really tried. I'm not sure we'll do 180 pages each time, but what we try to do is give the same disclosures that banks more or less do even though we're not subject to some of the same regulations.

Keith Sherin

Just to be clear on the stress test, we did not get direct guidance or input from the government on that. We used what we thought were the best estimates with help from all the investment banks on what it would look like and we made our stress cases based on the assumptions that were publicly announced. So we did the best we could to try and at least give a communication about how we felt about GE Capital into those different environments that the government had laid out.

Operator

Your next question comes from Nigel Coe - Deutsche Bank Securities.

Nigel Coe - Deutsche Bank Securities

Just a quick one on tax. I'm sorry to keep on banging about tax, but obviously you're utilizing the tax losses in the U.S. against your income you're running [inaudible]. Is there a level above which you wouldn't be able to use those losses and therefore have to carryforward?

Keith Sherin

I'm sure there is at some point. There's not one that we'd anticipate today. For the high tax losses in the U.S. we believe that we have plenty of capacity with the U.S. earnings to be able to offset those and we actually pay GE Capital for those losses. You'd have to be at some level that I couldn't even imagine, [Terry], to have that be something you couldn't monetize.

You have to be careful internationally country by country, but for the majority of what we're dealing with here that's not an issue.

Nigel Coe - Deutsche Bank Securities

And then secondly, obviously debt reduction in GE Capital was very strong, I think about $21 billion. What was that number excluding FX?

Keith Sherin

On the debt reduction?

Nigel Coe - Deutsche Bank Securities

Yes.

Keith Sherin

I'll have to get back to you on it.

Nigel Coe - Deutsche Bank Securities

Okay, great. And then thirdly, obviously interest costs came down a lot in GE Capital as well, low leverage and lower rates. You mentioned that you want to test [inaudible] markets at some point in the future. Do you have any sense on when that might happen and what kind of yield you might expect?

Keith Sherin

No, we'll have to see. At the end of the year the capital markets were pretty good and we did a 30-year. We did some 5-year in Europe. And last night we saw some financial companies do some unsecured, unguaranteed. That was very encouraging. We're don't need any capacity right now obviously, so we have the time to take a look and evaluate it, but we do think we'll be back in the unsecured, unguaranteed market.

We'll have to obviously watch the cash spreads. I think we watch JPMorgan as the benchmark today and where they are and we'll have to see how the capital markets unfold, but there have been some obviously positive signs. The CP market's very strong and robust, and I'm encouraged to see some of the other capital market signs opening up here.

Nigel Coe - Deutsche Bank Securities

But do you think you'll get better rates today than you would have two months ago - than you did two months ago?

Keith Sherin

Well, I think when we see that the capital markets are open enough we'll get rates that are competitive enough that we can earn 2.5% plus returns with that cost of funds. That's what I would say.

Operator

Your next question comes from Stephen Whittaker - Sanford Bernstein.

Stephen Whittaker - Sanford Bernstein

My first question is around inventory levels. Can you give me a sense for when you see inventory level deceleration slowing down on your own inventory on the equipment side for industrial? Are you still taking out inventory?

Keith Sherin

Yes, I think inventory for the quarter, if you look at what we had in our cash flow results for working capital, it was basically flat in the quarter while we're ramping up for higher shipments here as we get into the second quarter. So we're working on lean all across the company, but it didn't have a big cash flow impact. It was about $200 million delta.

Stephen Whittaker - Sanford Bernstein

And do you see going forward the trajectory of that changing.

Keith Sherin

Sure. We're going to have to continue to lower inventory as you go through the year, obviously. The interesting thing is if you look at the energy business, with the continued growth in equipment as we're delivering this backlog, you need inventory. If you look at the aviation business, we've still got a very robust backlog, a lot of equipment. I think if you get out of those two big long-cycle businesses we're going to see inventory down in transportation, we'll see inventory down in health care, we'll see inventory down in equipment services. Inventory's obviously been down in appliances.

So I think it goes with how our outlook goes and right now in Energy Infrastructure the outlook is still very strong; that's going to continue to keep a high level of inventory. But the lean focus, we're trying to make sure we're more efficient across the whole portfolio. But it's probably not a big, big driver until you get towards the end of the year and into next year.

Stephen Whittaker - Sanford Bernstein

And on the customer channel side, are they continuing to destock? Are you seeing that as well?

Keith Sherin

You know, Stephen, the only place - we're such a long-cycle project-oriented business where our customers don't sell out of inventory per se. I would say the health care market had its own cadence; people just weren't ordering much. And then I think if you look at appliance run rates, you know, appliance run rates have gotten sequentially better, which would indicate that either our customers are building inventory or there's better demand from our consumers.

Jeff Immelt

You know, in the appliance cycle we're 16 months into this cycle in terms of homebuilding and the inventory rebound levels have been pretty robust already at the retailers, so now we're kind of seeing flow through with our order rates.

Stephen Whittaker - Sanford Bernstein

The last question is on provisioning and the loan loss ratio. JPMorgan, some of these other guys, are coming out with sort of on average LLRs of 4% plus, 4.5%. I know some of that is due to the mix of business and you certainly took us through the detail in Slides 16 to 18, but in terms of how you think about an optimal loss reserve ratio in the near term given the chargeoff rates and you talk about increasing that over time, how far away are you from what you consider to be appropriate given how far ahead banks are reserving for net chargeoffs?

Jeff Immelt

I think we did cover some of that today, but I think you've got to go back to the March 19th meeting where Jeff Bornstein laid out trying to compare the actual product composition mix that we have to the product composition mix banks have and say okay, how are you reserved based on that? I think on the consumer side we feel like we're exactly in line with what other banks are based on our credit portfolio and our risk profile.

So we think we're there. We think we're there on the mortgage side. But we have a different mortgage portfolio, dramatically different, than what the banks have, so it's hard to compare directly. We don't have any U.S. mortgage exposure, as you know. And I think right now when we look at 1.59% in the quarter, that's the appropriate level for where we are based on the risk we have. We have said that we think that reserve coverage will go up to around 2% as we get through this year.

We think we are appropriately reserved. We think we're going to put up more reserves as we have more delinquencies and non-earnings, and we think the reserve coverage is going to increase as we go into the balance of 2009.

Operator

Your next question comes from Scott Davis - Morgan Stanley.

Scott Davis - Morgan Stanley

I think just to follow on that question a bit, the slide on Page 19 is very interesting. The assumptions on kind of the workouts and collateral value, things like that, is that based on historical? Is that some sort of adjusted assumption based on what you're expecting in the future? How do you kind of get to those numbers?

Keith Sherin

Our risk team has a loan-by-loan bottom's up evaluation of our exposure here in the non-earnings. They have to evaluate each case for the specifics of the creditor and the collateral. We do have historical values, obviously, on things like our collateral estimates, but we have to adjust them for what the markets are. For example, we have some corporate jets we got back in the quarter. We had marks on those to bring them to fair market value.

So I think we have some history, but these are based on what we think we're going to realize based on today's look loan-by-loan of these individual asset exposures. It's got to be current.

Scott Davis - Morgan Stanley

And then just looking at the supplemental, it looks like for both real estate and GECAS, there was pretty limited - I know these are long-lived assets so you don't have to mark things down to market, but presumably there's some assets that don't pass the impairment test. There was really nothing written down this quarter of note. Is that kind of a timing issue? Could you just give us a little detail on that?

Keith Sherin

Yes. There weren't really any - there were very minor impairments in GECAS and no write-offs really to speak of - I think it's $1 million, right? That was last year. So there's nothing in the quarter.

If you look, in real estate there were about $70 million of impairments and those are the equity properties where you don't pass the cash flow test, the cash flow estimates that you have over the life of the property are resulting in a value that's less than your book value and then you write it down to fair market value and we had about $70 million there. So that's based on a property by property analysis using today's rates on vacancy, rent expectations as we go forward, occupancy in the individual properties.

Scott Davis - Morgan Stanley

The tax credits, is there a cash versus non-cash component of those credits?

Keith Sherin

Well, there may be timing between GE and getting that credit from the government, but generally at the end of the day within an 18-month to two-year period you're going to be all equal on cash versus the government in terms of refunds or in terms of the return impact. Between GE and GE Capital it's usually settled within a quarter.

Scott Davis - Morgan Stanley

And then the last question, just for you, Jeff, on health care since you've known the business for such a long time. When you think about some of the things going on in diagnostic equipment, you could make an argument that there's a cycle impact here with macro conditions. You could also make an argument that there's some secular changes with just governments not being able to kind of afford the health care promise to folks and reimbursement rates kind of continuously - it seems like every couple years they get lowered on a global basis.

How do you think about some of these secular shifts and also just, you know, understand that your pricing model may have changed a bit over the last couple quarters where you're more discounting the product upfront to sign up service contracts. Just a little bit big picture about what you see in health care.

Jeff Immelt

You know, Scott, I think the U.S. market in particular is very tough right now for two reasons. One is that the overall economy, as it goes down, hospitals, their endowments and stuff like that have less money and they're going to spend less money on capital equipment. That's one factor.

I think the other factor is just great uncertainty. People say okay, there's going to be some changes in health care spend and reimbursements and things like that, so I think people are sitting on their hands.

Underlying that is just, I would say, procedure growth does continue and growth outside the United States does continue.

So I think just to weave through your question though, Scott, we believe that the U.S. diagnostic imaging market, the U.S. diagnostic imaging equipment market, is going to be at a lower level. I don't know if it's the first quarter run rate, but it's going to be at a lower level for maybe an extended period of time as people work through the changes that get made over on health care.

In terms of changing our business model, we really haven't changed the way we approach it. It's a competitive market. We like having the service revenue and I think the service business, actually, in health care over the long term is very well positioned, probably positioned better than competition, and has every chance to continue to grow.

Keith Sherin

Just a couple clarifications if I could. On the schedules that Scott asked about, the schedule on non-earnings and write-offs does not include impairments so that's why you don't see anything in GECAS or in real estate, the $70 million I mentioned happened in real estate.

And the second thing is on the debt reduction versus the fourth quarter for Nigel, we had a reported debt reduction of 22 - ex FX that’s 13.

Operator

Your next question comes from Robert Cornell - Barclays Capital.

Robert Cornell - Barclays Capital

Just going back to your comment on the commercial business and the cycle looks adverse [inaudible]. The delinquencies did rise pretty significantly. Maybe if you could just sort of flesh out your view there?

And I have a couple of other questions. What's embedded in your view for the business? Overall, Capital seemed profitable for the year with regard to the commercial cycle at this point.

Keith Sherin

Well, that's what we see today. We said we'd be profitable for the year and we've taken into account kind of the outlook we have.

If you look at the commercial cycle, if you see the delinquencies and you see the non-earning, we know we're going to have pressure here. The teams are all over it in terms of risk management and restructuring to protect our asset values. I think if you go back to the 19th meeting in a place like real estate you look at our underwriting discipline, you look at our cross-collateralization that we focus on, you look at the level of loan-to-value that we put into place. I think there's just things that are different about how we run the business that are going to help us to have lower losses in a cycle like this.

If you look over time at our leverage loan portfolio, we've had 1.5 to 2 basis points over a 15-year period of lower losses than what the average is for the banks in the category of asset class, and that's because we take a senior secured position, we take smaller holds, we're more diversified. But we're going to have higher losses as this economy rolls.

I think we've tried to outline that. The best way to think about it is to use the business results page that I showed you and then go back to the 19th meeting and look at the three cases, the retail case looks a little better on the consumer side. The mortgage case probably is pressured. On the commercial side, the real estate case is, you know, back to [our plan] right now, but I think everybody would agree based on the market that's out there, with delinquencies and vacancies and the economy that we're going to be more pressured as we go through the year.

So I think we're going to have a tough commercial cycle. I think the losses are going to exceed what they have in the past in cycles that we've seen. We expect that. It may be a lag effect, though. It may not be as fast as what others have predicted it may be. It may be dragged out a little. Maybe that's part of your question, Bob.

Robert Cornell - Barclays Capital

Well, you know, in one of the slides you showed in one of the meetings as you got into more detail you talked about the commercial cycle, peak losses of 1.4% looking back 20 years. I guess the question - we'd all like to know the answer to this - in you guys' minds where do those losses peak as a percent and when? What is the timing? Is it 2009 and 2010?

Keith Sherin

Jeff has asked me that question and he says, you know, it's like knowing what the market's going to do. It's just too hard, Bob, I think, to say. I think right now we're grinding it out. We've come from a period where people thought the world was going to end to a period that's a little better. And I think today you look and there are some signs in the economy that are a little better.

But we know that unemployment's going to continue to rise, as Jeff said, and that we're going to have a tough commercial real estate cycle. But I can't say that we've got enough visibility to be able to give you a good answer to that.

Jeff Immelt

I think what we tried to do on the 19th, Bob, is to maybe not predict it but to show you how seriously we're taking it as a company, how many good people we have working on it, that we've tried to be conservative and realistic as we go through it. We've been through the cycle before. Our risk people are 25 to 30-year veterans, people like [Jane Day] and some of the other people you saw.

I think that's the best we can do right now.

Robert Cornell - Barclays Capital

One follow up question for you guys. You go out into the market and you hear a lot of anecdotal evidence about how GE is really tightening up the screws in an effort to get collections, I mean to the point where you're putting some of the company's in distress to get money out. What's your view there with regard to the level of stress you're putting on some of your customers relative to the long-term market share you'd like to get in the business?

Jeff Immelt

Well, I'd make a couple of comments, Bob.

The first one is the fourth quarter last year, maybe even the beginning of '09, these are extraordinary times. And so we had collections ahead of originations and we went through a lot of changes in the field and things like that, but we've got big franchises here, big important franchises. We're doing a lot of funding on [debts]. We're doing a lot of asset-backed financing. And the page Keith showed you on originations says that we're going to do, you know, we did about $69 billion of funding in Q1 and we ought to do $150, you know, probably in quarter two through four we'll do another, you know, kind of $140 - $150 billion of originations.

So we're in this to stay and we're in it for the long term. We've gone through an extraordinary time period, but we've got a good franchise.

Keith Sherin

I think there's a balance. We're a senior secured lender. We take it seriously in terms of getting our money back. We always have. And we've got to be professional about that and we've got to think about our impact in the marketplace and our market position, but that's what a senior secured lender does. And we've got to definitely balance the customer needs and what the implications are for future business, but I think as we've gone through this I think we really wanted to make sure we had safe and secure collections and originations tightened down. I think now we're sitting here in a position where now we can go on offense a little more and that's a good place for us to be.

Operator

Your next question comes from John Inch - BAS-ML.

John Inch - BAS-ML

The first question would be, I guess, the GECS dividend. You've indicated on Slide 8 that it's now been pared to zero. I think, Keith, it was at 10%. Was there some reason why you've pared, like a trigger point, as to why you pared it to zero? And then what would be your expectation for the timing of restoring the GECS dividend just based on market conditions and what you're seeing?

Keith Sherin

Well, you know, we were sitting here in the first quarter, John, and when we decided to put the $9.5 billion equity infusion in we thought it'd be a little silly to take 10% of their earnings out. It wasn't a big number. We just thought it'd be cleaner to say, okay, for 2009 we're going to just suspend the GECS dividend in total and the cash flow, we can handle it in our plan. It's better to be safe and secure in GE Capital. It's not a material amount and we just thought it was less confusing to be putting equity in and then taking a little amount out.

So I think for our view right now we're just going to keep it that way for 2009 and we'll see as we get towards the end of the year what we think about 2010.

John Inch - BAS-ML

You had originally targeted sort of an '10 timeframe, had you not, though, for restoring at least some of this?

Keith Sherin

We did. Yes, we did.

John Inch - BAS-ML

Has anything changed on that front?

Keith Sherin

Well, it hasn't, but, as we showed you on the 19th, we've got to look at what the outlook is for the losses over multiple periods here. We again would prioritize the GE Capital safe and secure is the first banner that we've been running the company and taking a lot of actions to do that. I don't think we need to make a decision about the GE Capital 2010 dividend yet. We have plenty of time to do that.

John Inch - BAS-ML

I don't disagree. Can I ask you about the sort of, if you look at the billion dollar increase in provisioning, we're now running at kind of this Fed base case threshold. And I think if I were to parse your commentary around the tax credit, you could also probably surmise that we're running into kind of the base case zone versus what on the surface looks like the adverse case zone.

Does that kind of infer, Keith, that all else equal we're running - I heard your commentary about, you know, things could still get a little bit worse, but we're kind of running toward that slide of the $2 to $2.5 billion of net income for GE Capital and, if that's true -

Keith Sherin

I can't answer that, right, John? I mean, we're not giving guidance. We've given you the three cases. I think we've given a lot of details about how to [inaudible] it in there. I think you should make your view based on what we covered today. But we feel confident that we're within those ranges of the three cases.

And as I said, some businesses are left and some businesses are a little right, but we're not going to pick a number for GE Capital. We said we expect it to be profitable. That's kind of the way we said it.

John Inch - BAS-ML

No, I hear you. I guess I'm just thinking of the $1.1 billion that Capital just earned in net income, right? If it is closer to the middle scenario it means that the sequential run rate's going to be a lot less.

Keith Sherin

It could be. It could be.

I think if you look at the $1.1 billion, you've got to really adjust for annualized on the $700 million. In total unconsolidated results it didn't fall through, but in GE Capital Finance, the $1.1 billion includes about $400 million too much of taxes in the quarter for a run rate without adjusting for any differences in losses.

I think you've probably got to get back to $700 million if you just tried to normalize taxes at either the GE Capital Finance level or the GE Capital Service level.

John Inch - BAS-ML

But the $1 billion provision year-over-year, does that likely hold?

Keith Sherin

Well, I think if you look at 2.3 in the quarter as our provision for losses, it's in excess of the write-offs, that you've got to decide based on the cases we showed you and the different pressures by business what do you think that's going to do as you go through the year. I think we'd say that's probably going to go up.

John Inch - BAS-ML

Last question. You guys footnoted the marked-to-market rule changes that are pending. What sort of an impact is that going to have? Presumably it's a favorable one, but maybe you could flesh that out a little bit for us.

Keith Sherin

Well, as you know, the two FSPs came out after the quarter closed. There was one on other than temporary impairment and one on how to calculate fair values. I'd say it's too early for us to tell you what the impact will be. We're going to work our way through that and get into the second quarter. I think we need to make sure we understand how the accounting firms are going to interpret those two FSPs.

John Inch - BAS-ML

But you'll know by the second quarter, you think?

Keith Sherin

Sure. Of course, yes. We'll adopt in the second quarter, absolutely.

Operator

Your next question comes from Stephen Tusa - J.P. Morgan.

Stephen Tusa - J.P. Morgan

The GE Capital revenue, I think, year-over-year was down about $3.5 billion. Could you just maybe let us know at a high level within the different revenue categories which ones were the biggest moving parts?

Keith Sherin

I'm going to have to give you some of the pieces. The FX was a little over $1 billion, so quite a bit of it was driven by FX, but we'll have to break it out for the - it should be on the - gains are also obviously a very large piece. Just in real estate alone they're down $600 million.

Stephen Tusa - J.P. Morgan

And then when you look at the total write-off number for CLL going to 265 from 498 in the fourth quarter, is that a net number so you're collecting better or what was the change there?

Keith Sherin

The change, again, if you look at the fourth quarter - this is on provisions?

Stephen Tusa - J.P. Morgan

Total write-offs in the supplementary Slide 4.

Keith Sherin

In total write-offs. At the end of the day we had less accounts that went into completion of restructuring that required the write-off. Fourth quarter we finalized a lot more. We still have a lot of, obviously, accounts that are in discussions for restructuring, but when they get finalized we have to take the write-off.

Stephen Tusa - J.P. Morgan

So we should really, I mean, the trend in the non-earnings and delinquencies is more important than that write-off trend going down?

Keith Sherin

I think the write-off trend going down is helpful, but you've got to look at the delinquencies and non-earnings as a forward indicator. The write-offs were helpful in the quarter, definitely.

Stephen Tusa - J.P. Morgan

And then one more question. In Energy Infrastructure, I think last year according to your 10-K you got about 4% to 5% of price. What was that number in the first quarter?

Keith Sherin

I think I had it on thermal and wind was up about 5%. I don't know what the services number was in total, but it was very strong on equipment. I'll have to get you the service number.

Stephen Tusa - J.P. Morgan

And then one last question just on the - I know you guys have a backlog and there's some timing here, but with your equipment orders running down about 20%, when does that start to actually move into revenues? Is that a second half of '09 thing or is that more of early 2010, assuming that that trend continues?

Keith Sherin

I think the way we've tried to model 2009 is that you could think about if the orders level stay at the kind of level we're at you might be dealing with $1 billion of revenue in excess of orders and a decline in the equipment backlog a quarter. That's the way I would think about it as we go forward.

Now, you're going to have some lumpiness in there, but that's a rough way to think about it. It's kind of steady, not dramatic change as you go through.

Jeff Immelt

I'd say, though, it's more a '10 and '11 type of thing on the equipment, Steve. In other words, if you go between service and equipment, particularly when you think about aviation, energy, oil and gas, transportation and stuff like that, a lot of that's in backlog.

Trevor Schauenberg

We're over 10:00. [Noelia], why don't we take one more here.

Operator

Thank you. Your last question comes from Daniel Holland - Morningstar.

Daniel Holland - Morningstar

Just a question on health care. Could you talk a little bit about how it trended through the quarter? Is there kind of any momentum pushing it through the second quarter? Any kind of good news to talk about there?

Jeff Immelt

It was pretty tough all quarter, Dan. I think if you look, there wasn't any indicator that I'd say that led us to see some type of spike, either regionally or by product. It was a tough quarter and it stayed tough.

Daniel Holland - Morningstar

And just one more question on actually wind. There's been a lot of press releases, things like that, regarding new wind out there. I'm kind of curious if you guys have seen a material pickup in activity, not necessarily on orders but just more quoting kinds of things, things like that, in the last little bit here?

Jeff Immelt

I think the thing that's really picked up in the last month is that commitments that might have slipped out of the year because of lack of financing have now started to firm up. And so I think that's the encouraging piece because people see on the horizon that the credit markets are opening up to finance them and that the stimulus is going to have some advantages for them.

So I actually think that the shipments in '09 will improve in wind even while you might not see new projects announced just because there was such a lot of activity in '06, '07, '08.

Keith Sherin

It'll still be down year-over-year, but I think the commitment activity, as you said, has really picked up.

Just one comment on the energy services for Steve. The overall price is up 37. The equipment's about 5 and service was lower than that.

Okay. Trev?

Trevor Schauenberg

Great. Thank you, everyone, for your time today. A replay will be available this afternoon and I should announce our next earnings call will be held on July 17th. As always, Joanna and I will be available to take your questions today. Thank you, everyone.

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