South Korean utility behemoth – Korea Electric Power Corporation (KEP), in the first nine months of 2011 recorded operating income of KRW177 billion (USD$155.9 million), a year-on-year decrease of KRW1.5 trillion (USD$1.3 billion) compared to operating income of KRW1.6 trillion (USD$1.4 billion) in the year-ago period. This was primarily due to higher fuel costs and power purchase costs, which went up 14.8% and 44.9% respectively compared to the first nine months of 2010. The decline was however, partially arrested by an increase in power volume sales revenue along with twin tariff hikes in August 2010 and August 2011.
Operating revenues went up by 9.6% year over year to KRW31.6 trillion (USD$27.8 billion). Electricity sale – the principal source of operating revenues, increased 8.2% to KRW29.9 trillion (USD$26.3 billion). The increase was primarily due to the average tariff increase of 3.5% in August 2010 and 4.9% in August 2011, as well as 5.6% growth in power volume sold. Power volume sold rose mainly due to substantial growth in demand for increased use of air-conditioning in summer.
Operating expenses grew 15.3% to KRW21.9 trillion (USD$19.3 billion), of which fuel costs rose 14.8% to KRW15.8 trillion (USD$13.9 billion). The rise in fuel costs was due to a 1.2% increase in power generation due to rising power demand and a 13.6% jump in unit cost of fuel such as coal and LNG. Overall, the company reported a net loss of KRW1.7 trillion (USD$1.5 billion) in the first nine months of 2011, versus a net loss of KRW1.4 trillion (USD$1.2 billion) in the same period of 2010. This is attributable to the increase in interest payments and increase in foreign exchange related loss.
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 86.2% of the total electricity generating capacity in Korea.
We maintain our Neutral recommendation on Korea Electric Power with a quantitative Zacks #3 Rank (Hold), 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 #2 Rank peers who have a Buy recommendation such as The AES Corporation (AES) andAmeren Corporation (AEE).
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