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Keeping quiet on plans and vision -- GE Wind Energy

General Electric Co (GE) of the United States has officially entered the wind industry, unveiling a new company, GE Wind Energy, with fanfare but keeping its corporate cards close to its chest. GE, a blue chip company and the world's most valuable, announced on May 10 that GE Power Systems had finalised the purchase of Enron Wind Corp. Jeffrey Immelt, GE's chairman and chief executive, has said that renewable energy will be a priority.

The final purchase news comes almost three months after GE Power Systems, based in Atlanta, Georgia, first unveiled the acquisition of most of the wind assets of the bankrupt and shamed Texas energy giant Enron Corp. EU and US regulators have approved the deal, in which GE paid $325 million in cash for Enron Wind's technology and manufacturing in the US and Europe.

The location of the headquarters of GE Wind has not yet been decided, say GE officials. Steven Zwolinski, former general manager of GE Global Hydro and a leader of GE's "Six Sigma," the company's much studied quality improvement program, will head the unit.

"The wind power industry offers tremendous opportunities for growth and continued technology development," says Zwolinski, a 20-year veteran of GE, in a prepared statement. "There are synergies from several GE businesses, in areas such as plastics, transportation, gearing applications and power controls that can be applied to wind turbine technology." He notes the value of GE's Six Sigma program in improving wind turbines -- a strategy that analysts say could add a much-needed boost to the quality of the Enron Wind product -- and the company's massive global sales force. Wind power, he states, will grow by about 20% yearly, especially in the US, Europe and Latin America. Specifically mentioned as potential markets are France, Italy, Japan and China.

Unanswered questions

Zwolinski, who has a bachelor's in mechanical engineering and an MBA, declined to elaborate on the prepared statement. The company said he was travelling during last month and claimed he was unavailable over an entire ten day period. A raft of questions thus remains about GE Wind Power's plans and vision, both short term and long term. GE buys about 100 companies yearly and the creation of GE Wind Power may or may not mean a true commitment to wind long term.

For much of the wind industry, the most valuable part of Enron Wind acquired by GE is the American patent on variable-speed wind turbine electronics. Enron purchased this much disputed patent, which stops European companies from selling their most optimised technologies into the US market, from long bankrupt Kenetech Windpower. At one time Enron was actively pursuing a similar patent in Europe and it remains to be seen if GE Wind will also adopt this aggressive competitive tactic.

Nor is it known if GE will lay off any of the 1600 employed by Enron Wind at its main facilities in Tehachapi, California, and in Salzbergen, Germany, at assembly plants in Spain and the Netherlands, and in sales offices around the world; or to what extent GE will provide funds, perhaps from GE Capital, to expand its wind turbine manufacturing capabilities. Will the company be a developer and owner of wind projects as well as a turbine manufacturer? Will GE allow the wind division to operate relatively independently, particularly its European management, which has been used to a degree of autonomy under Enron? Will GE use its capital strength to drive down industry profit margins?

A wind market analysis released last month by Sweden's Handelsbanken Securities, points out, however, that "GE generally operates high margin businesses and does not build market positions through price dumping." It adds: "We don't believe GE can afford to go for market share short term, or even undermine the long term profitability of the industry."

GE Wind Energy must also face a wind market in which several major players are owed money by bankrupt Enron Corp and Enron Wind. One of the major sticking points of GE's purchase was an objection by an Enron Wind creditor, Mission Iowa, because GE would not takeover Enron Wind's warranty obligations on its troubled US-made 750 kW wind turbine. Mission Iowa, part of the ailing California energy company Edison, owns the 193 MW Storm Lake project in Iowa, which consists of 750 kW turbines. These are described in the Handelsbanken report as a "product with questionable quality and a poor track record."

Court clues

A few clues to GE's thinking -- and of the finances of Enron Wind -- could be glimpsed during court proceedings governing the sale, worth $358 million including debt. GE has said it expects the wind company's EBITDA -- "earnings before interest, taxes, depreciation and amortisation" -- to reach $81 million by 2003. It also says that Enron Wind's European operations are far more profitable than the US part of the company, a fact widely discussed in the wind industry but unconfirmed until now. In an agreement approved by the US Bankruptcy Court on April 25, two-thirds of the sale price will go to Enron Wind's European creditors.

Judge Arthur Gonzalez rejected objections from US creditors to the allocation of the proceeds. Mission Iowa, Fortis Bank and Pensions Guaranteed Service Corp were pressing for half of them to go to the American companies owed money by Enron Wind. Steve Zelin of The Blackstone Group and Enron's financial adviser, successfully argued that five of the six top markets for Enron Wind are in Europe.

A whopping two-thirds of the projected EBITDA in 2002 is from the European operations, he told the court. The same allocation of profitability held true in 2001, he said. Some $33.7 million or 65.9% of EBITDA was generated in Europe, while only $17.4 million or 43.1% came from the US.

GE Power Systems, one of the most profitable divisions of Connecticut-based GE, beat out a hostile bid from Caterpillar Inc in a court-supervised live auction on April 11 (Windpower Monthly, May 2002). GE's initial stalking horse bid, unveiled in February, of $258 million, during the auction was upped to $325 million in cash and $33 million in debt after several rounds of bidding against Caterpillar.

More clues

Another possible indication of how serious GE is about wind came late last month. With its eye toward the US wind power market, GE Industrial Systems, together with American Superconductor Corp (AMSC), began marketing AMSC's new "D-VAR" dynamic voltage regulation system, selling the first unit to an American wind farm. PacifiCorp bought the device to use at the 135 MW Foote Creek wind project in Wyoming, from which it buys 41.4 MW of the output, along with 50 MW from the adjacent Rock River I project. PacifiCorp owns the substation and transmission wires that connect the wind station to population centres, though not the station.

The D-VAR holds the voltage coming out of the wind farm stable within a limited band, even as the power output fluctuates. That helps to integrate the facility into the local transmission system, says PacifiCorp's Craig Quist. He adds that wind farms are usually built in areas where transmission is weak and the D-VAR system acts like a big shock absorber to cushion voltage fluctuation. In addition, voltage fluctuations exceeding 3% can damage some wind turbine gear boxes, something that applies to the Mitsubishi turbines used at Foote Creek, he says.

The utility industry normally uses shunt capacitors to inject the right amount of reactive power (measured in VARs) into the transmission grid when voltage sags, but wind generators require a high volume of switching and the extended use of capacitors stresses controls and gear boxes in wind turbines. According to AMSC, that will damage the capacitors and cause premature gear box failure. Quist says the device still has the brains to know when to switch on the capacitor banks when needed.

GE troubles

Whether or not GE is serious about wind, the company's recent performance has been subject to a deal of negative comment from analysts. When Judge Gonzalez approved the purchase of Enron Wind on April 11, General Electric had just announced disappointing first quarter 2002 earnings, even though they were up 17% to a record $3.5 billion. The company's profits have grown for 100 quarters in a row -- but that growth now seems to be slowing. GE's earnings excluded the effect of a change in accounting methods, required across the board in the US by the government because of the Enron scandal. If the changes are taken into account, the company's earnings actually fell by 2.7%, according to an analysis by the New York Times that is disputed by GE.

GE is also one of the top drawer companies accused in recent months, post-Enron, of accounting methods that are more than creative. The company has dishonestly diverted attention from its most risky dealings, say critics. It is a sort of manipulation that could be ominous, they say, and not the more acceptable profit-smoothing or "managed financials" for which GE and many large companies are known.

The investment community is questioning GE's use of short term financing, which boosts earnings in the short run but which can put the company at slightly more risk if liquidity dries up. GE announced in mid-April that it is firing 7000 people this year at GE Capital. GE shares, worth $60 apiece at their peak in August 2000, have sagged to about half that.

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