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GE Brings New Leadership to Revamp Ailing Power Business

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Leadership shuffle

In mid-November 2018, General Electric’s (GE) newly appointed CEO Larry Culp announced a leadership shuffle to help turn around the company’s ailing Power business. The leadership shuffle includes bringing back former GE executive John Rice from retirement to be the chair of the newly structured gas power business. Prior to his re-recruitment, Rice had served the company for 39 years before retiring in December 2017 as vice chair. During this period, he led several divisions of GE including energy and transportation.

Additionally, Culp promoted Scott Strazik to be CEO of GE Gas Power. Earlier, Strazik was an executive at GE Power. Apart from this, he made Russell Stokes the CEO of the non-gas business. Previously, Stokes was handling the CEO post of the integrated GE Power division.

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The management shuffle marks another step of Culp’s effort to restore the revenues and profits of GE’s power business. To revamp the Power division, Culp on October 30 announced splitting the Power 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.

GE’s power division has been witnessing declining sales and profitability for the last few years, due to falling demand for fossil fuel-based power plants. The segment’s revenues declined 33% YoY to $5.7 billion in the third quarter of 2018 and also missed analysts’ projection of $6 billion. Moreover, the segment reported an operating loss of $631 million compared to its operating profit of $464 million in the corresponding quarter last year.

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. The company’s Power division’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 three-month tenure 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 likely 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 5.8% of its funds in top competitor 3M Company (MMM).

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