South Korean utility behemoth – Korea Electric Power Corporation (KEP - Free Report) – in the second quarter of 2012 digested an operating loss of KRW 1.96 trillion (USD $1.73 billion) compared with an operating loss of KRW 0.80 trillion (USD $0.70 billion) in the second quarter of 2011. The company digested a higher quantum of operating loss mainly due to increases in operating expenses, such as fuel costs and power purchase costs. This was partly offset by increases in operating revenue from the increase in power sales revenue, due to tariff hikes, and increases in power sales volumes. Fuel costs and power purchase costs went up 30.1% and 59.5% respectively, year over year.
Operating revenues went up by 16.4% year over year to KRW 10.61 trillion (USD $9.37 billion). Electricity sale – the principal source of operating revenues – increased 16.7% to KRW 9.93 trillion (USD $8.77 billion). This increase was attributable mainly to a 10.5% increase in electricity unit tariff, and 2.6% power sales volume growth. Power sales volume was driven by increase in demand from the industrial sector, as well as regulatory recognition of account receivables related to the fuel cost adjustment.
Operating expenses rose 25.9% to KRW 12.75 trillion (USD $11.26 billion), of which power purchase costs increased 59.5% to KRW 2.62 trillion (USD $2.31 billion) and fuel costs rose 30.1% to KRW 6.28 trillion (USD $5.54 billion). The rise in fuel costs was primarily due to a 2.3% increase in power generation volume, and rising cost of feed stocks. In the reported period, unit cost of feed stocks, coal and LNG rose 2.1% and 29.3%, year over year. Purchased power cost rise is attributable to a 35.9% increase in unit cost of purchased power and 17.7% hike in purchased power volume due to rising power demand.
Overall, the company reported a net loss of KRW 1.77 trillion (USD $1.56 billion) in the second quarter of 2012, versus a net loss of KRW 1.06 trillion (USD $0.94 billion) in the same period of 2011.
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 88.4% of the total electricity generating capacity in Korea. In 2011, the company sold approximately 455 billion kilowatt-hours of electricity.
We maintain our long-term Neutral recommendation on Korea Electric Power. In the near term the quantitative Zacks #3 Rank (Hold) indicates no directional pressure on the shares. 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 Huaneng Power International, Inc. (HNP - Free Report) and IDACORP, Inc. (IDA - Free Report) .