Will PPC turn over a new leaf with change in management?

The change at the helm of the Public Power Corporation (PPC) last week was well received by Greek and international investors alike, betting that the new president and CEO of the company, an experienced top manager, will be able to turn around the country’s largest company in terms of assets and sail it through a more competitive landscape, as the Greek electricity sector heads toward full liberalization later this year. It is a risky bet, given the strength of its trade unions and what some think it may be called upon to do to meet tough demands by the European Commission in the future. To many analysts, PPC was the most expensive utility in Europe even when its share price stood at 19 euros. They had a good reason to think so even if PPC’s market value was estimated to be below its book value, a well-known valuation metric. The company’s nine-month financial results had disappointed the investment community with net profits plunging 53 percent to 72 million euros, well below market expectations. Worse than that, rumors wanted things to get worse, not better, with the company producing losses. Share price up Surprisingly, this did not deter markets from pushing its share price up some 12 percent in the last month or so, to its closing at 21.50 euros on Friday, even if government officials had made it clear that another flotation to lower the state’s equity stake in the utility was not on this year’s agenda. It is noted that PPC, the largest power generation company in Greece, became a societe anonyme company in 2001 with the state floating about 15 percent of its share capital in December 2001. Two more flotations in the next couple of years brought the state’s equity in the company to just above 50 percent where it stands today. PPC was considered one of the most successful investment stories on the Athens bourse the first few years after its trading debut, outperforming the benchmark General Stock Index and distributing high dividend yields. However, things have changed over the last couple of years, with it becoming a drag on the bourse. Perhaps this explains why the selection of Panayiotis Athanassopoulos, a respected retired top manager at Toyota, by the government to head PPC was received with a sigh of relief by the market. A number of commentators even drew comparisons between Athanassopoulos and the the chairman and CEO of OTE telecoms, Panayis Vourloumis, a respected retired banker who was picked by the government to head OTE in 2004. Vourloumis is credited by many with making OTE a more competitive company and some think Athanassopoulos, who has managerial experience, can do the same. But today’s PPC does not resemble today’s OTE even if one sets aside the fact that they operate in different industries. To some, the corporate culture of PPC today is closer to the culture at OTE in the late 1980s or even early 1990s. If one takes into account the fact the structure of the energy sector and electricity, in particular, the differences between the two former monopolies are becoming much bigger and Athanassopoulos’s task more Herculean. Unlike telecoms Unlike the telecoms market, where liberalization led to lower tariffs for consumers, the liberalization of the electricity sector will lead to quite the opposite, that is, price hikes in the country with the lowest retail electricity tariffs in the eurozone. This is highly unpopular and the government is trying to manage the new situation by linking PPC tariff hikes to inflation on the one hand, and by giving its blessing for higher wholesale prices to private producers to encourage investment in the sector on the other. PPC has already felt the impact. Within the context of the liberalization process, it is buying energy from the pool of private producers who have been granted power generation licenses at higher wholesale prices and is selling it to its customers at a lower price set by the government, incurring losses. It should be noted that energy purchases shot up 116 percent year-on-year to 366 million euros in the first nine months of the year. The fact that electricity tariffs are linked to inflation and not production costs also explains why the rise in oil and natural gas prices hurt PPC’s earnings in the last two years, making them more volatile as well. This does not mean the company has done enough to contain its payroll costs, a huge component of its total expenses. PPC is also paying the price of past managerial decisions not to proceed with investments in new company-owned units to replace less efficient plants compared to competition. This is because it apparently wanted to present better financial results and may partially explain the rise in its profits earlier in the decade. It should be remembered that the company cannot add new power plants to boost its installed power capacity in Greece where it holds a 96 percent market share. Its large market share, some analysts think, may prompt the European Commission to act faster than most people believe and demand that PPC sell a representative part of its installed power capacity to third parties in a bid to speed up the liberalization of the Greek electricity market. Is this something investors and other market participants have taken seriously into account when looking at PPC’s investment story? We doubt it. But this is something the new manager of PPC should take a good look at, along with ways to handle its powerful trade unions, cut operating expenses, expand into renewable energy resources, manage its huge real estate portfolio and get compensation from the state for services related to public service obligations. Of course, a single manager, even Bill Gates, would not have been able to succeed without the support of PPC’s major shareholder, that is, the state. Will the state be supportive this time around so as to turn PPC into another OTE? Time will tell, but it is not on PPC’s side.

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