Updated: GE Reorganizing Power Division

Power segment profits down 11% in the quarter

(Editor’s note: This story has been updated to include more information about GE’s turbine blade situation.)

GE intends to reorganize its power division in an effort to accelerate operating and financial improvements.

GE plans to create two units — a unified gas business combining GE’s natural gas turbines and services groups, and a second unit constituting the portfolio of GE Power’s other assets including steam, grid solutions, nuclear and power conversion. The announcement was part of the company’s third quarter earnings report.

The company bet big on power generation with the acquisition of Alstom Power in 2015. Since then, the global power market has gone through a major upheaval as the demand for large power products has waned leaving major manufacturers such as GE and Siemens vulnerable.

“Everything is on the table at power,” said GE Chairman and CEO H. Lawrence Culp Jr., during a conference call.

“The past 30 days I’ve spent a lot of time with Russell Stokes (president and CEO of the power division) and his team It has become clear to us that we need to simplify the business structure,” Culp said. “Therefore today we are announcing our intent to reorganize Power into two units, both of which will report directly to me. The first is a unified Gas lifecycle business combining our product and services group gas power systems and power services with the second constituting the portfolio of Steam, Grid, Nuclear, and Power Conversion.

“Additionally we intend to consolidate the Power headquarters, Gas Power systems and Power Services teams into the new Gas lifecycle business, effectively eliminating the Power headquarters structure. We have much more to do to improve our performance in Power and we intend to move quickly to enhance our execution agility and improve our cost structure.”

The Power segment saw profits down by 11% over the same quarter of 2017 with revenue of $5.7 billion—down 33%.

“Starting with Power, which has faced significant external and internal challenges, the market size continues to be in line with our previous expectations. But as we move into the second half it’s clear that our previous forecasts were overly optimistic on the timing and level of deal closures on heavy-duty gas turbines and particularly on aeros. And while we are seeing some progress, we’re not seeing the pace of operational improvement we expected. And we continue to see issues driven by our own execution and some on project execution with customers and partners,” said Jamie Miller, chief financial officer at GE.

Gas Power Systems orders were down 45% year to date, they were up 55% in the quarter based on easy comparison. 21 orders for heavy duty gas turbines, including five HA. There were two orders for aeros, down seven from last year.

GE also recorded US$240 million of warranty and maintenance reserves related to the HA 9FB stage 1 blade issue, Miller said.

Earlier this fall, GE said the oxidation, which weakens metal turbines blades, was affecting its 9FB turbines, in addition to some HA-Class turbines.

“We have a replacement blade in production and we’re working proactively with our customers to schedule outages to replace the parts over time, but we also expect to incur a similar incremental amount of cost over time related to the blades as we perform planned outages in our services contracts,” Miller said.

The Oil & Gas segment saw adjusted profit up 18% over the same quarter of 2017 with revenue of US$5.7 billion, up 7%.

“After my first few weeks on the job, it’s clear to me that GE is a fundamentally strong company with a talented team and great technology,” Culp said. “However, our results are far from our full potential. We will heighten our sense of urgency and increase accountability across the organization to deliver better results.”

Culp replaced John Flannery on Oct. 1.

“We are on the right path to create a more focused portfolio and strengthen our balance sheet. My priorities in my first 100 days are positioning our businesses to win, starting with Power, and accelerating deleveraging. We are moving with speed to improve our financial position, starting with the actions announced today. I look forward to updating you further on our progress in early 2019.”

GE said it also intends to consolidate power’s headquarters structure to ensure these units can best serve customers.

The company already announced that it was selling its distributed power unit—which included Jenbacher and Waukesha engine portfolios—to private equity firm Advent for US$3.25 billion. That deal is expected to close shortly.

The company is also looking to disengage itself from ownership in Baker Hughes, an oilfield services company, over the next two to three years.

During the earnings call, executives also said both the Justice Department and SEC are investigating a US$22 billion charge the company booked tied to the acquisitions in the power unit.

GE reported a loss of US$2.63 per share from GAAP continuing operations. As summarized in the attached reconciliation, adjusted earnings per share (non-GAAP) were US$0.14, down 33% from the same period in 2017. The Company recorded a non-cash goodwill impairment charge of US$22 billion, before tax, related to GE Power. The Company also announced immediate actions to strengthen its balance sheet and position its businesses for success. First, GE plans to reduce its quarterly dividend from US$0.12 to $0.01 per share beginning with the Board’s next dividend declaration, which is expected to occur in December 2018. This change will allow GE to retain about US$3.9 billion of cash per year compared to the prior payout level.

–Jack Burke

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