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Losses Mount at Korea Electric

KEP AT ED

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South Korean utility behemoth – Korea Electric Power Corporation (KEP - Analyst Report), in the first half of 2011 witnessed a six fold rise in its net operating loss to KRW1.30 trillion (USD$1.22 billion), compared to a net operating loss of KRW178 billion (USD$0.17 billion) in the first half of 2010.

This was primarily due to increased fuel costs and higher power purchase costs which went up 18.5% and 44.8% respectively compared to the first half of 2010.

Operating revenues went up by 12.0% year over year to KRW19.92 trillion (USD$18.60 billion). Electricity sale - the principal source of operating revenues, increased 10.1% to KRW18.81 trillion (USD$17.57 billion). The increase was primarily due to the average tariff increase of 3.5% in August 2010, as well as 6.7% growth in power volume sold.

Power volume sold rose mainly due to substantial growth in demand for electric heating and increased demand from the industrial sector as a result of economic recovery.

Operating expenses grew 17.9% to KRW21.58 trillion (USD$20.15 billion), of which power purchase costs increased 44.8% to KRW3.66 trillion (USD$3.42 billion) and fuel costs rose 18.5% to KRW10.77 trillion (USD$10.05 billion). The rise in fuel costs was due to a 3.3% increase in power generation due to rising power demand and a 14.8% jump in unit cost of fuel such as coal and LNG.

Overall, the company reported a net loss of KRW1.61 trillion (USD$1.50 billion) in the first half of 2011, versus a net loss of KRW1.05 trillion (USD$0.98 billion) in the same period of 2010.

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 Atlantic Power Corporation (AT - Snapshot Report) and Consolidated Edison Inc. (ED - Analyst Report).

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