Korea Electric Sunk by Power Costs - Analyst Blog

State-run utility behemoth Korea Electric Power Corporation (KEP), in the first half of 2010, incurred a net operating loss of KRW2.3 trillion (USD$1.9 billion), an increase of 53.2%, compared with a net operating loss of KRW1.5 trillion (USD$1.3 billion) in the first half of 2009. This was primarily due to the increased power purchase costs. Power purchase costs rose mainly due to an increase in the volume of LNG-based electricity generation.

In the first half of 2010, Korea Electric Power’s operating revenues went up 14.1% to KRW17.9 trillion (USD$14.9 billion). Sale of electricity, the principal component of operating revenues increased 13.5% year over year to KRW17.6 trillion (USD$14.6 billion). The increase was mainly due to an average tariff increase of 3.9% in June 2009 as well as an 11.1% year-over-year growth in the volume of power sold. Volume of power sold rose mainly attributable to the demand growth for heating and an increased demand from the industrial sector, fueled by economic recovery in South Korea.

In the first half of 2010, operating expenses grew 17.5% year over year to KRW20.3 trillion (USD$16.8 billion). Of this power purchase costs increased 18.6% to KRW17.3 trillion (USD$14.3 billion) due to a 10.7% increase in the volume of power purchased and 7.1% increase in unit costs of power purchased.
 
Overall, the company recorded a net loss of KRW896.9 billion (USD$743.9 million) in the first half of 2010, compared with a net loss of KRW642.5 billion (USD$532.9 million) in the same period of last year.

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 87.1% of the total electricity generating capacity in Korea.

Korea Electric Power’s current Zacks Consensus EPS Estimate for fiscal 2010 is 7 cents, while the revenue estimate for fiscal 2010 is slightly above $31 billion.

We maintain our Neutral recommendation on Korea Electric Power with a quantitative Zacks #4 Rank (Sell), indicating no clear directional pressure on the shares over the near term. In the near term, we would advise investors to focus on the company’s Zacks #1 Rank peers who have a Strong Buy recommendation such as ALLETE Inc. (ALE), Companhia Paranaense de Energia (ELP) and NRG Energy Inc. (NRG).