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GE Shuffles Leadership to Revamp Struggling Power Unit

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Leadership shuffle

Yesterday, General Electric (GE) announced a leadership shuffle to help turn around its ailing power business. The management shuffle includes bringing back veteran GE executive John Rice from retirement to be the chair of the newly structured gas power business. Rice served the company for 39 years before retiring in December 2017 as vice chair. During this tenure, he led several divisions of GE including energy and transportation.

Apart from bringing back Rice, Culp made Scott Strazik CEO of GE Gas Power. Strazik is currently an executive at GE Power. Additionally, the current CEO of integrated GE Power division, Russell Stokes, will become the CEO of the non-gas business.

The move marks another step of newly appointed GE CEO Larry Culp’s effort to restore the revenues and profits of GE’s power business. For the last few years, the company’s power division has been witnessing declining sales and profitability due to falling demand for fossil fuel-based power plants.

In the third quarter of 2018, the segment’s revenues declined 33% YoY to $5.7 billion and also missed analysts’ projection of $6 billion. Also, the segment reported an operating loss of $631 million compared to its operating profit of $464 million in the corresponding quarter last year.

In a move to revamp its power business, Culp announced during GE’s third-quarter earnings conference call that it would be splitting the segment into two different business units: one that will focus on gas operations and another that will concentrate on steam, grid, nuclear, and power conversion.

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What’s troubling GE’s power business?

Once GE’s main growth engine, the Power segment is now struggling to cope with changing industry dynamics. Over the past several quarters, the division has been underperforming as growing demand for renewables and energy efficiency has eroded demand for fossil-fuel-based power plants. GE’s Power segment’s performance is dependent on the gas and coal turbine market.

Adding to the burn was the $10.1 billion acquisition of Alstom. At the time of the deal, GE justified the purchase by saying the buyout would add steam power to its portfolio and expand its existing offerings in gas power and services. Apart from this, the company pointed to cross-selling and cost benefits.

Some big natural-gas-fired power plant builders including Vistra Energy (VST) and Dominion Energy (D) are lowering their dependence on fossil-fuel–based power plants and moving to renewable sources.

In his first 50 days as chair and CEO of GE, Culp has undertaken various initiatives to turn around the Power business. However, the efforts are at a very nascent stage and will take a few quarters to be reflected in the company’s financial results.

Investors can gain exposure to GE by investing in the Industrial Select Sector SPDR ETF (XLI), which holds ~4.1% in the stock. The ETF has also invested 5.2% of its funds in top competitor 3M Company (MMM).

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