GE sees tide coming in for water business

Reuters, 11 August 2009 – General Electric Co predicts that water purification could grow from a drop in the corporate bucket to a major growth driver within years, just as its wind unit did.

The largest U.S. conglomerate has taken about a decade to build its water unit, which focuses on large-scale treatment and purification for municipal and industrial water users, through five takeovers costing about $4 billion.

With an estimated $2.5 billion in revenue, the water business remains a sliver of the $156 billion in sales the world’s largest maker of jet engines and electricity-producing turbines is expected to generate this year.

The unit’s small size has lead some investors to wonder if GE might prefer to sell it to focus on businesses where it can better enjoy the benefits of scale.

But executives with Fairfield, Connecticut-based GE said water has the potential to become a major profit contributor.

“What GE tries to do is to align the company with some of the mega-trends, the mega-challenges of the world. Energy is one, healthcare is the other, and the third one is water,” said Heiner Markhoff, president and chief executive of GE Water & Process Technologies.

While arid areas of the world, from the Middle East to the southwestern United States, have long coped with water shortages, rapid population growth and rising environmental regulations are making water scarcity and purification a more prominent issue in temperate, wetter areas.

GE does not disclose the profits or revenue of its water business, but the unit has been hit by the global recession.

In a conference call discussing the company’s 36 percent second-quarter profit decline, GE executives noted that service revenue related to the water business, which does not include equipment sales, fell 18 percent in the quarter.

While some of GE’s businesses, like lighting and appliances, have developed over a century, others take off more quickly.

Take wind turbines. When GE officials first pitched Chief Executive Jeff Immelt on the idea of getting into the business in 2001, he dismissed the technology as a “hula hoop.” Immelt later changed his mind when Enron’s bankruptcy provided a cheaper way into the business, and wind turbines last year generated about $6.5 billion in revenue.

“I hesitate to compare ourselves to (wind), but the space, clearly is similar,” Markhoff said.

GE is not the only major multinational to see potential in water. Its rivals include German conglomerate Siemens AG and No. 2 U.S. chemical company Dow Chemical Co, as well as smaller companies including Danaher Corp and Nalco Holding Co.

LARGE SCALE FOCUS

GE and its rivals are focusing on scarcity, and the growing competition for water among residential and commercial users.

An example of GE’s technology at work can be found in Loudon Water in Virginia, which serves 175,000 people. Located along the Potomac River in a commuter suburb of Washington, D.C., Loudon faces some of the state’s strictest wastewater quality standards.

Last year, Loudon’s Broad Run Water Reclamation Facility started treating wastewater with a GE system incorporating biological agents that clean the water of impurities and a membrane system that prevents them from escaping the plant.

That allows it to process higher volumes of water at lower cost than older, chemical-based options, said Tom Broderick, program manager for the facility.

The treated water is clean enough for the utility to offer it for industrial use, he said.

“More and more wastewater utilities are looking to water reuse, just from a sustainability standpoint,” Broderick said.

“We have signed up our first customer approximately two miles (3.2 km) to the north of us. It’s a data center that will be using it for cooling water.”

IN FOR THE LONG HAUL?

As it focuses on large-scale purification, GE has pulled back from residential water treatment. Last year it moved its residential business into a joint venture with U.S. industrial Pentair Inc, which owns 80 percent of the enterprise and handles sales and distribution.

Some analysts think GE may soon exit the water business.

“We think it is increasingly likely that GE may seek to divest its $2.5 billion water and process technologies platform over the next one to two years,” said Bank of America/Merrill Lynch analyst John Inch. In a June note to clients he noted that the water business has lagged GE’s typical profit margin and growth targets.

Markhoff, who would not confirm or deny Inch’s estimate of GE Water’s size, said the company remains committed to water.

“We have a lot of support throughout the energy infrastructure business, up to the chairman of the company,” Markhoff said. “We see clearly the medium- and long-term potential of this business, and it is very well aligned with the major trends.” (Editing by Alan Elsner and Mary Milliken)

Sourced from the Thomson Reuters Carbon Markets Community – a free, gated online network for carbon market and climate policy professionals.

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