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Msg  7547 of 7558  at  11/23/2023 3:38:08 PM  by


How Larry Culp's Breakup of GE Just Got Easier

 Bloomberg businessweek (Online)

How Larry Culp's Breakup of GE Just Got Easier

  By: Beene, Ryan, Bloomberg Businessweek, 00077135, 11/20/2023, Issue 4805

Canceled wind power deals will free GE from $1.5 billion in unprofitable contracts

Everywhere you look these days, there seems to be trouble in the wind power industry. Inflation, high interest rates, supply chain chaos and costly quality lapses have battered the profits and stock prices of wind farm developers such as Orsted A/S and turbine manufacturers including Siemens Energy AG. The latest sign of turmoil came on Oct. 31, when Orsted abandoned two huge wind farms it had planned to build off the coast of New Jersey. The cancellations were a major blow to the nascent US wind industry's push to achieve the Biden administration's goal of installing 30 gigawatts of offshore wind capacity by 2030, up from almost none today.

But for General Electric Co., the largest US manufacturer of wind turbines, the seeming misfortune represents a boon of sorts. Almost three years ago, GE had contracted to supply roughly 100 gargantuan offshore machines to the first of those Orsted projects. The deal, worth an estimated $1.5 billion, was signed before costs for the industry skyrocketed, and it would've likely generated steep losses on each tower it delivered. Anything that winnows down the $6 billion backlog of money- losing contracts on the books of GE's offshore wind business is a big win for the company—one that could put its struggling renewable energy division on a firmer financial footing just as Chief Executive Officer Larry Culp's plan to break up the iconic conglomerate nears the finish line.

GE's renewable energy businesses are the last remaining fixer-uppers in Culp's massive restructuring of what was, until little more than a decade ago, one of the bluest of America's blue-chip companies. Culp has already unwound the financial-services business that had hobbled GE with debt and hidden risks. He's almost through with a plan to divide the company into three publicly traded businesses serving different industries: health care, aerospace and energy—which he's promised Wall Street will all be investment-grade. The health business was spun off in January, and Culp has said the energy-related businesses, which have been bogged down by both cost and pricing problems, will be ready to split off into an independent company called GE Vernova in early April. Pulling that off could cement his legacy as the executive who saved the company that Thomas Edison helped found.

GE Renewable Energy has been quietly gaining momentum, after having lost $5.6 billion from 2019 through this year's third quarter. Its onshore wind unit turned profitable in the third quarter after fueling much of a $2.2 billion loss last year at the broader renewables division. The grid solutions unit, which makes hardware and systems for electricity networks, in 2023 may turn its first annual profit in years. And Orsted's recent stumble stands to "significantly" reduce the odds of future losses and cash burn at GE's offshore wind business, according to Wolfe Research. (GE had previously said the offshore wind contract book of business would cause $1 billion in losses this year and next.

"If you heard anything on [GE's latest earnings call] from me in terms of enthusiasm and heightened confidence, it's less about everything that's good and great about commercial aerospace right now. It's really around the turn in renewables," Culp says.

When Culp announced the reorganization two years ago—which one longtime GE analyst dubbed the most anticipated breakup in the history of conglomerates—the logic was clear. Investors had already shunned the conglomerate structure GE came to epitomize two decades earlier when it became the world's most valuable company under then-CEO Jack Welch. Its thriving jet engine business could chart its own future without being held back by laggards in the portfolio. And GE's healthcare division would be free to make investments to yield fresh innovations in its vast catalog of MRI, X-ray and other lifesaving medical systems.

The future for GE Vernova has been less clear. GE Power was at the heart of the company's cash-flow problems that helped lead to Culp's 2018 appointment. (Culp says some were advising him to give away that business.) GE Renewable Energy, which houses the onshore and offshore wind units and operations catering to electricity grids (another unit Culp says he was urged to dump), has lost money every quarter since the beginning of 2019. About 30% of GE's onshore workforce was let go in a major restructuring that began last year.

A brighter picture is beginning to emerge. A slimmed-down GE Power generated a $1.2 billion operating profit last year, the most since 2017, on a revenue stream that's been almost halved in the same period. GE Renewable Energy is posting narrower losses, with third-quarter margins swinging to –7.6% from –26% a year earlier.

At GE Power, "they have driven a rather remarkable turnaround for a business that some people were advising me in my first six months to try to give away," Culp says of GE Vernova CEO Scott Strazik and his lieutenants. "That is in essence the playbook that we've run with gathering success at both onshore and at grid."

Last year, GE's onshore wind turbine sales plummeted after a key US tax credit expired at the end of 2021, putting project developers on the sidelines while Congress debated a possible extension. The 2022 passage of President Joe Biden's Inflation Reduction Act (IRA) replaced that uncertainty in GE's largest market with a decade of predictable tax credits and other incentives that are expected to turbocharge turbine installations.

The IRA is also beginning to catalyze new GE investments in the US wind supply chain, similar to how it's spurred a boom in plans for new factories building electric-vehicle batteries. Production is underway at a new GE assembly line for onshore wind turbines in Schenectady, New York. The company is also in talks with New York officials about adding two more factories to support offshore wind, backed by $300 million in state investment recently announced by Democratic Governor Kathy Hochul.

"You don't really make expansion plans until you're sure about certainty, especially in an environment where you're not really doing so great," says Atin Jain, a senior wind analyst at BloombergNEF.

GE says it's also narrowing its geographic focus for renewable efforts, pursuing new onshore wind deals in only about half of the countries it did just two years ago and prioritizing North America. Projects in far-flung locales outside the US and Europe sometimes represented "business that we signed up in a way that was more ambitious than perhaps our capabilities to fulfill at the time were," Culp says.

And GE has been mending other wounds, including some self-inflicted ones. It incurred a $500 million charge last year for a sprawling repair campaign to improve the reliability of its installed fleet of onshore turbines. Its line of wind turbines had too many variations, undermining the company's ability to build them in high volumes with consistent quality.

Now it's shifting to what it calls "workhorse" turbines that can be produced in higher volumes. 12 By 2025, GE plans to reduce the number of tower designs available in 2021, from 40 to 9, and the variety of rotors—the assembly of blades mounted to a turbine's central hub—from 15 to 4. Workhorse turbines represented about 70% of GE's onshore equipment sales booked in the third quarter, and building a backlog of orders at today's more reasonable pricing should provide better profit margins. "We see that business really turning," Culp says.

Still, there are more challenges ahead. GE forecast in March that its renewable energy division would turn a profit next year, but Wall Street analysts remain skeptical, estimating the division will lose roughly $370 million. And although Orsted's canceled offshore projects may ease what Culp says is a "challenged" backlog of those projects, he and others in the industry say bigger changes are needed for that slice of the clean energy sector—GE included—to thrive.

"We're going to have to find a different economic equilibrium if there are going to be positive returns in offshore wind for everybody investing in that segment of the market," Culp says.

THE BOTTOM LINE GE has said the three companies it will split itself into will all be investment-grade. Improving finances at its loss-ridden wind turbine unit will make that easier to accomplish.


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