Korea Electric Still in Red


South Korean utility behemoth – Korea Electric Power Corporation (KEP) – in the first quarter of 2012 digested an operating loss of KRW 105 billion (USD $0.09 billion), compared with an operating loss of KRW 476 billion (USD $0.41 billion) in the first quarter of 2011. The company continues to register operating losses mainly due to increases in operating expenses, such as fuel cost and power purchase cost, which were not fully offset by increases in operating revenues related to increases in power sales revenues from tariff hikes, and increases in power sales volume. Fuel costs and power purchase costs went up 16.6% and 41.0% respectively, year over year.

Operating revenues went up by 23.2% year over year to KRW 13.30 trillion (USD $11.41 billion). Electricity sale – the principal source of operating revenues – increased 20.9% to KRW 12.45 trillion (USD $10.68 billion). This increase was attributable mainly to a 12.2% increase in electricity unit tariff, and 2.5% power sales volume growth. Power sales volume was driven by increase in demand from the industrial sector, as well as regulatory recognition of account receivables related to the fuel cost adjustment.

Operating expenses grew 18.8% to KRW 13.62 trillion (USD $11.68 billion), of which power purchase costs increased 41.0% to KRW 2.85 trillion (USD $2.44 billion) and fuel costs rose 16.6% to KRW 6.93 trillion (USD $5.94 billion). The rise in fuel costs was primarily due to a 0.6% increase in power generation, and a 15.9% hike in unit cost of feedstock such as coal and LNG. Purchased power cost rise is attributable to a 21.7% increase in unit cost of purchased power and 15.9% hike in purchased power volume due to rising power demand. Overall, the company reported a net loss of KRW 513 billion (USD $0.44 billion) in the first quarter of 2012, versus a net loss of KRW 544 billion (USD $0.47 billion) in the same period of 2011.

Korea Electric Power is an integrated electric utility engaged in the generation, transmission and distribution of electricity in South Korea. The company along with its generation subsidiaries owns approximately 88.4% of the total electricity generating capacity in Korea. In 2011, the company sold approximately 455 billion kilowatt-hours of electricity.

We maintain our long-term Neutral recommendation on Korea Electric Power. In the near term however the quantitative Zacks #4 Rank (Sell) indicates clear directional pressure on the shares. In the near term, we would advise investors to focus on the company’s Zacks #2 Rank peers who have a Buy recommendation such as Atlantic Power Corporation (AT)and Ameren Corporation (AEE).

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