• GM filed after the close on Wednesday a brief, but in our view important, 8K regarding the status of the Settlement Agreement regarding UAW retiree healthcare coverage.
• Recall that this was the deal hammered out as part of the 2007 contract negotiation with the Union, that effectively will take GM out of the business of providing retiree healthcare (OPEB) beginning in 2010, in exchange for a hefty installment of cash
(upwards of $30 billion) into a new VEBA trust.
• The 8K reported that all conditions have been met and all appeals expired, allowing the deal to become effective (for all practical purposes) as planned on January 1, 2010.
• There was a very important word in the 8K that we think investors should not overlook: “Terminate.” As in, the retiree healthcare plan will be “terminated” on the final settlement date. This is distinct from a plan “amendment,” and as such will receive very different accounting treatment.
• The key distinction is that under settlement accounting (which applies for a termination) the gains/losses generated by the agreement (in this case, a “significant curtailment gain”) will be recognized all at once (in this case, in 3Q08), rather than amortized through the income statement over a period of years, as would have been the case under the amendment accounting treatment that GM was originally seeking (and how the 2005 benefit cut was handled).
• This is where it gets dicey. When GM originally outlined the expected 2010-2011 savings (P&L) that would result from the VEBA deal, which ranged from $2.6 – $3.4 billion per year, the company had assumed it would be amortizing a sizable gain as a result of amendment accounting. In other words, the initial ~$3b estimate included not only the elimination of service and interest cost, but also some extra (significant) help (non-cash, of course) from the amortization of that amendment gain.
[thanks to you know who you are]
When the last contract negotiations started, I think Gettelfinger said , we want to see their books, we dont think G M is that bad off. ha ha.
Every year, GM charges its profit and loss statement with a pension cost. If the agreement is amended to reduce the pension outlay, the reduction can be charged as a gain over the life of the plan [1].
Terminating the plan means the net present value of this gain can be taken into income immediately because there is no matching liability to whittle down after 2010.
In essence, GM is trying to make its current period look better at the expense of future periods. Which reeks a bit of desperation but…
It’s an entirely defendable position if the UAW assumes the entire pension liability. If it’s no longer GM’s problem, it shouldn’t be on the books. Of course, there’s “assumes the entire liability” and then there’s the GM version which is what happened when GM was still on the hook for Delphi.
The other thing is that the $30b GM pays into the UAW has to come from somewhere. It certainly isn’t coming from cash for operations. So either GM will burn some of that huge (borrowed) cash pile or borrow some more. Either way, this cancels out any liabilities being written off so the balance sheet won’t get any stronger.
[1] – based on nebulous actuarial assumptions
Translation: GM continues to scramble for ways to cook the books and distract investors from the ongoing cash flow nightmare.
Bottom line, who pays for the health benefits and more importantly where is the cash going to come from?
That’s not change…. that’s more of the same.
“allowing the deal to become effective (for all practical purposes) as planned on January 1, 2010.”
Just in time for the Volt roll-out.