General Electric's energy unit had a rough second quarter as its wind turbine business took a hit. However, GE CEO Jeff Immelt said that volume for wind turbines should pick up in the second half as farms are built in the U.S. ahead of expiring tax credits.
On GE's earnings conference call---the conglomerate reported second quarter earnings of $3.84 billion on revenue of $35.6 billion---much of the discussion revolved around the company's energy unit, which was a straggler relative to other divisions. GE entered the wind business in 2002 after buying assets from Enron and makes 1.5MW and 2.5MW turbines as well as a 4 MW offshore version.
The wind turbine figures for the second quarter break down like this:
- GE's second quarter wind revenue of $630 million was down 46 percent from a year ago.
- GE shipped 269 wind units in the second quarter compared to 511 a year ago.
- And margins are being crimped by lower prices.
In other words, GE had a rough time in the wind business of late. GE executives have said the collapse of the credit markets in 2008 hurt wind farm development. As Pike Research recently detailed, wind farm projects tend to be lumpy given the capital requirements and an 18-month cycle. In 2010, wind power capacity fell 22 percent due to the recession.
However, second half orders and backlog point to a rebound in wind farm installations. This rush partly attributed to tax breaks that expire at the end of 2012 and a rush to build wind farms, said GE executives.
I think it's highly likely that we get a lot more volume in the US over the next 18 months. We have got the 1.6 megawatt, which is the highest performing unit, so we are going to gain market share probably in that activity. I would say in Canada, Australia, a bunch of other places in the world the wind wave, if you will, is just taking off. So I think from a unit standpoint and from a pricing standpoint we are going to see a little bit better performance.
Keith Sherin, chief financial officer of GE, said:
We are working our way through that last wave of the very profitable US bubble that we had. You can see the margins and the pricing was really brutal in the quarter. On the other hand, you are starting to see a lot of order activity. You see the orders in the second quarter in the V we had. We are seeing a lot of global activity. They are at lower margins than that previous U.S. high-priced backlog, but the volume is going to be pretty good. And the last thing I would say is that there is a program in place where the government obviously gives some benefits to wind installations; it's the production tax credits that are in place through 2012. I think the wind farms would have to be installed and operating before the end of the year. And I think that, depending upon how people view the probability of that being agreed to and extended in the future, you may see some pull in the wind business to put those units in place before the end of 2012 here in the U.S. So I think we are starting to have discussions with customers about some of that activity.
The big question is what happens to demand for wind equipment beyond 2012. Much of demand will revolve around federal and state policies in the U.S. as well as global projects ahead.
This post was originally published on Smartplanet.com