GE Splitting Its $50 Billion Energy Business in Three (Update 2)

Updated to include Barclays comments on management change.

NEW YORK ( TheStreet) -- General Electric ( GE) is restructuring its energy business as three standalone operations, in a move to unlock value and simplify the unit, which earns $50 billion in annual revenue.

In a statement released separate from Friday morning's second quarter earnings, GE said that it would reorganize GE Energy Infrastructure in the fourth quarter of 2012, in a move to speed up decision making, decrease operational costs and reduce management layers. Starting in 2013, each unit will report segmented earnings.

The Fairfield, Conn-based conglomerate said that its energy unit, which has approximately 100,000 employees, will be split into divisions focused on power and water, oil and gas, and energy management. The power and water unit that manufactures solutions for power and water processing plants will be the largest of the newly separated energy divisions.

"Big companies are always fighting organizational complexity. We are taking action at a time when the energy business is doing well," said GE CEO Jeffrey Immelt in a statement. "Removing layers is one way to reduce costs and increase our speed, focus and agility in the marketplace so we serve customers better," he added.

By splitting its disparate energy businesses, which serve operations ranging from shale drilling to offshore wind farms and power grids, GE is hoping to make the earnings of its businesses more apparent to investors. "This move will greatly simplify the way we communicate to investors and customers," Immelt said.

In the past few years, GE gas made a string of acquisitions in the oil service sector totaling approximately $11 billion.

Within GE's mix of energy, transportation, aviation, finance and healthcare businesses, Morgan Stanley analyst Nigel Coe noted that it was the company's soon-to-be realigned energy unit -- excluding wind turbines -- which was among the strongest performers in the second quarter. Other positive surprises came from GE's transportation unit, while aviation and healthcare earnings were lower than expected, Coe wrote in a note to clients.

In second quarter earnings, GE's combined energy businesses earned $11.9 billion in revenue, a near 15% increase from this time last year and a small increase from the first quarter. The unit also reported a second-quarter profit of $1.76 billion, an increase from the $1.52 billion it earned in the first quarter, and $1.55 billion a year earlier.

Those results beat estimates from Barclays analyst Scott Davis, who projected that GE's energy unit would earn $11.5 billion in revenue and turn a $1.7 billion profit.

Within GE's energy unit, its power and water business earns roughly $28 billion in annual revenue and is headquartered in Schenectady, NY, while its oil and gas unit, which manufactures key equipment for land and offshore drillers, is headquartered in Florence, Italy and earns roughly $15 billion in annual revenue.

GE's energy management unit is headquartered in Atlanta and it delivers conversion and optimization technologies to power grids and energy-intensive industrial companies. It earned $7 billion in 2012.

GE vice chairman John Krenicki, who is president and CEO of GE Energy, will leave the company at the end of 2012 and each of the three new energy division heads will report directly to Immelt.

Davis of Barclays said that the departure of Krenicki is puzzling given his strong reputation on Wall Street, but also wrote in a note to clients that the energy unit reorganization makes sense given the diversity of its operations and customer base.

"Segment re-org into three pieces makes sense given complexity of business and diversity of customer base within sub-segments; experienced segment heads provide continuity. The exit of a key leader near a cycle upturn will be questioned by many," wrote Davis.

In a Monday earnings preview, Davis noted that the company's energy growth was likely the result of the infrastructure demands for coal to gas switching -- as cheap natural gas and emissions regulations make utilities build more natural-gas powered plants -- and a subsequent surge in year-over-year natural gas-related orders. In addition, Davis highlighted that GE's "turbine service revenues will grow at least 10% annually (at a 40%+ margin) over the next 3 years."

In the second quarter, GE infrastructure orders were $23.1 billion, down 1%, primarily driven by a 37% decrease in orders for wind turbines, which continues to be the laggard within energy. Orders were up 8% on a year-to-date basis.

The industrial, engineering and finance conglomerate also said on Friday that its GE Capital financial arm will pay the parent company a $3 billion dividend, in a move that augurs well for an increased payout to shareholders later in 2012.

"GE Capital's strong operating performance and capital position allowed it to return a $3 billion dividend to the parent, and our Industrial segments delivered another quarter of double-digit organic revenue growth," said immelt in a statement released with earnings.

General Electric announced in May that its GE Capital unit would pay a dividend of $475 million to the parent company in the second quarter, and target a 30% dividend payout from earnings to the parent in 2012. GE Capital suspended its dividend to the parent in 2009, as the financial crisis hit the finance arm.

"We see GE as one of the best-positioned companies for a macro slowdown due to its Industrial visibility and now that GECC risk has been reduced over the past cycle," wrote Citigroup analyst Deane Dray in Friday note to clients. Dray said that GE's earnings reaffirmed the company's growth prospects for 2012, amid a tough macroeconomic environment.

In an earnings preview, Barclays analyst Davis had written, "Sentiment on GE has clearly been reset higher since 3 months ago, on the back of the GECC dividend announcement." The dividend could be "the first of several potential catalysts over the next few years that could lead to significant value creation for GE shareholders."

Overall, GE reported second-quarter operating earnings of $4 billion, or 38 cents a share, beating the consensus estimate of a 37-cent profit, among analysts polled by Thomson Reuters.

GE's second-quarter revenue totaled $36.5 billion, missing the consensus estimate of $36.8 billion, but increasing from $35.2 billion during the first quarter, and $35.6 billion during the second quarter of 2011.

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-- Written by Antoine Gara in New York