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On Jul 3, we have issued an updated research report on Korea Electric Power Corporation (KEP - Analyst Report). The Republic of Korea-based utility firm is maintaining a disciplined investment strategy through the expansion of its generation capacity while gradually raising the capital outlay.

Korea Electric continues with its systematic capital investments under the new capacity addition plan. The company plans to increase its electricity generation capacity to 138,424 megawatt (MW) through 2027 from the current level of 86,970 MW.

In 2013, Korea Electric invested approximately KRW15.8 billion as capital expenditure, up 19.7% from the prior-year comparable figure. Within a time span of 2014 to 2016, the company intends to spend around KRW54.7 billion, including nearly KRW19.9 billion in 2014.

Korea Electric is currently in the middle of several domestic and international ventures, including two each nuclear unit at Hanul and Kori in the Republic of Korea and two power generation projects in China. The scheduled completion of these projects will help the company to attain its future power generation target.

In addition to enhancing generation capacity, Korea Electric is focusing on infrastructure projects under the transmission and distribution operations. These initiatives will enable the company to offer uninterrupted services to its customers.

Korea Electric, a Zacks Rank #4 (Sell) stock, reported favorable result in first-quarter 2014. Both top as well as bottom line improved significantly from their respective prior-year figures. The outperformance was primarily driven by a rise in electricity volume sales and improvement in overseas business.

Korea Electric maintained a stable cash generation capacity, which supports its investment in organic growth ventures. During the first three months of 2014, the company’s cash flow from operating activities increased 22% to KRW3.66 million from the prior-year comparable figure.

On the flip side, uncertainty associated with the pending regulatory cases is a cause of concern. Korea Electric’s profitability depends on the rate relief and several other mechanisms. Any unfavorable decisions on pending regulatory cases may negatively impact Korea Electric’s results.

Moreover, the utility firms’ performance mainly depends on its capability to manage the operations of its transmission and distribution businesses. We believe several operational risks like breakdown, failure or damage of equipments or processes might disrupt the companies’ regular operations, thereby negatively impacting financial performance.

Key Picks from the Sector

However, some better-ranked stocks in the same industry include Dynegy Inc. (DYN - Snapshot Report), NRG Energy, Inc. (NRG - Analyst Report) and Wisconsin Energy Corporation (WEC - Analyst Report). All the stocks carry a Zacks Rank #1 (Strong Buy).

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