- The Washington Times - Monday, October 17, 2005

DETROIT (AP) — General Motors Corp., under mounting pressure to turn around its business after losing nearly $3 billion in the first nine months of the year, announced a tentative agreement with the United Auto Workers (UAW) yesterday that will help reduce its spending on health care for workers and retirees.

GM, the world’s largest automaker, said it lost $1.6 billion in the third quarter ($2.89 per share) compared with a profit of $315 million (56 cents per share) a year ago. The loss included charges of $861 million for restructuring and lower asset values in North America and Europe.

Prompted by its deteriorating credit rating, GM also said it may sell a controlling interest in its profitable finance arm, General Motors Acceptance Corp., despite the boost GMAC is giving to the struggling automaker’s bottom line.

GM has been beset by a declining U.S. market share, rising costs for materials like steel, and a drop in sales of sport utility vehicles (SUVs), the company’s longtime cash cows. It cut production by 20 percent in the first three quarters of this year, which hurt profits.

The automaker also faces huge pension-cost issues in the years ahead that some analysts said could push it into a bankruptcy reorganization. But, for the day at least, investors saw the bright side of GM’s outlook. Its shares rose $2.11, or 7.5 percent, to close at $30.09 on the New York Stock Exchange. They gained 12 percent earlier in the day and have traded in a 52-week range of $24.67 to $42.22.

GM Vice Chairman and Chief Financial Officer John Devine said the tentative agreement on health care would reduce GM’s retiree health care liabilities by 25 percent, or $15 billion, over seven years. It would cut GM’s annual employee health care expenses by $3 billion on a pretax basis. Cash savings are estimated at $1 billion a year.

GM pays for health care for 750,000 U.S. hourly employees, retirees and their dependents. The company expects to spend $5.6 billion on health care this year. GM’s UAW members now pay 7 percent of their health care costs, while the company’s salaried employees pay 27 percent, according to GM. It’s not clear how that will change under the agreement.

Himanshu Patel, an auto analyst with JPMorgan Chase & Co., said the agreement will make a substantial dent in GM’s $80 billion health care liability. But other analysts said the cuts may not stave off the red ink for long, especially since GM could be liable for billions in benefits at parts supplier Delphi Corp., which has filed for bankruptcy protection.

“These savings are a clear positive, but retiree liability cuts are likely to see some almost immediate offsets, from ongoing health care inflation, possible Delphi liability assumption and falling long-term rates,” Goldman Sachs analyst Robert Barry said in a note to investors.

GM Chairman and CEO Rick Wagoner said the agreement marks the largest reduction GM ever has announced in a single day. GM had asked the UAW to help it lower its health care costs before its contract with the union expires in 2007, and both parties have been negotiating since the spring.

The UAW said yesterday it agreed to the changes after an in-depth analysis of GM’s financial situation.

“We believe it is clearly in the best interests of UAW-GM active workers, retirees and their families,” UAW President Ron Gettelfinger and chief GM negotiator Richard Shoemaker said.

Under the agreement, GM would expand eligibility for some benefits to former GM employees who became employees at auto supplier Delphi. GM spun off Delphi in 1999, and the auto supplier filed for bankruptcy protection Oct. 8.

GM had said it could be liable for anywhere from nothing to $11 billion in benefits for Delphi employees, but the company said that now could reach $12 billion because of the new agreement.

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