South Korean utility major, Korea Electric Power Corporation (KEP) recorded a net income of KRW 636 billion (US $572.4 million) in the fourth quarter of 2013 versus a loss of KRW 1,756 billion in the year-ago period. In 2013, the country’s monopoly distributor reported net income of KRW 186 billion (US $167.4 million), compared with a net loss of KRW 3,078 billion (US$2,770.2 million) in 2012. This marks the company’s first turnaround since 2007, largely due to a foreign exchange translations gain.
Operating Highlights
During the fourth quarter 2013, operating revenues increased 9.6% year over year to KRW 14.27 trillion (US $12.84 billion). For full year 2013, operating revenue surged 9.3% year over year to KRW 54.04 trillion (US $48.63 billion). The full year boom was attributable to a 9.1% increase in power sales revenue and a 12.1% rise in revenue from the overseas business. As South Korea needs to import oil, natural gas and coal, record input prices in the past have led KEP to incur large losses.
On the cost side, over the twelve-month period ending Dec 31, 2013, purchased power cost was up 15.6% and fuel cost increased 1.6%, while unit cost of fuel declined 2.6% and unit cost of purchase went down 8.5%, on a year-over-year basis.
Again, depreciation cost rose 5.6% year over year in 2013 owing to the newly constructed substations and power plants – Incheon unit 3, Shin-Kori unit 2, in-Onsan unit 1, Pyeongtaek units 5 and 6, and Ulsan units 7 and 8.
During 2013, the company’s operating income stood at KRW 1,519 billion (US $1,367.0 million) versus an operating loss of KRW 818 billion incurred in 2012.
Nuclear utilization Rate
South Korea has the sixth-largest installed capacity of nuclear power in the world. In 2013, the nuclear utilization rate was 75.5% and the company expects it to be 87.5% for this year.
Investment Agenda
For 2014, Korea Electric Power expects to spend about KRW 19 trillion. However, the company has a conservative approach and ends up spending around 75% to 80% of the planned amount on an average. Effectively this would bring 2014 capital spending to a range of KRW 14 trillion to KRW 15 trillion.
In 2013, the company invested KRW 15 trillion, much lower than its original plan of KRW 18 trillion to KRW 19 trillion.
Our Take
Korea Electric Power is the dominant player in Korea’s electricity sector. It is well-positioned to capitalize on the growth opportunities in this market and to benefit from the industry restructuring initiatives of the Korean government.
Going forward, the company’s growth story will be bolstered by higher electricity tariff rates and electricity volume sales, an improving overseas business and a recent regulatory approval for the fuel cost pass-through mechanism. Recently, the South Korean government said that it will increase electricity prices and impose taxes on the use of thermal coal in power plants. This move is essential to balance the country’s rising power demand and the supply scenario. In Nov 2013, Korea Electric Power was allowed to lift electricity rates by an average 5.4%. The previous rise of around 4.0% was implemented in Jan 2013.
Again, the company won approval from the Korea Institute of Nuclear Safety or KINS related to the safety for re-operating of the three units and therefore they are back in operations. The company expects its Shin-Kori unit 3 and unit 4 to enter into operations in the second half of 2014 or the first half of 2015.
Zacks Rank
Korea Electric Power current sports a Zacks Rank #1 (Strong Buy). Apart from Korea Electric Power, one can also look at other well-placed utility players like Black Hills Corporation (BKH), Brookfield Infrastructure Partners L.P. (BIP) and CMS Energy Corp. (CMS). All these stocks hold a Zacks Rank #2 (Buy).
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