Korea Electric Records Wider-than-Expected Loss

By Shinhye Kang

Aug. 13 (Bloomberg) -- Korea Electric Power Corp., supplier of almost all of the country's power, posted a second-quarter loss wider than analysts expected as fuel costs rose while the government capped electricity tariffs to fight inflation.

The loss amounted to 763.6 billion won ($736 million) in the quarter ended June 30 compared with a profit of 266 billion won a year earlier, the power producer said in a statement today. Seven analysts surveyed by Bloomberg News estimated a loss of 474 billion won on average.

Record crude oil prices helped drive up the cost of importing coal and natural gas while the government kept electricity tariffs unchanged after raising them on Jan. 15 last year. Korea Electric's fuel costs climbed 21.8 percent in the second quarter from a year earlier, Hana Daetoo Securities Co. said in a report on July 8.

``Korea Electric cannot avoid weak earnings in the second half and even next year without a sharp increase in electricity tariffs,'' said Joo Ick Chan, an analyst at Hana Daetoo.

The state-run utility reported a 908.2 billion won operating loss, its second consecutive quarterly loss. Sales rose 4.9 percent to 6.84 trillion won.

Asia's fourth-biggest economy is battling with inflation that has reached a 10-year high. Record energy and food costs pushed up annual consumer prices by 5.9 percent in July, the biggest gain since November 1998.

Cost of Coal

The cost of coal, from which 41 percent of Korea Electric's power is generated, rose 71 percent in the second quarter from a year earlier, according to Hana Daetoo. Nuclear energy accounts for 37 percent of the utility's generation, liquefied natural gas 16 percent, and oil 4 percent.

Thermal-coal prices at Australia's Newcastle port, a benchmark for Asia, advanced to a record $194.79 a metric ton in the week ended July 4, before retreating to $156.16 last week, according to the globalCOAL NEWC Index.

Korea Electric's fuel costs would increase 37 percent this year and climb a further 27 percent in 2009, Citigroup Global Markets said in a report on Aug. 6.

In May, the utility said fuel costs will rise by 2 trillion won this year. Fuel costs increased 15 percent to 11 trillion won last year, it said on Feb. 1.

The recent drop in commodity and energy prices may limit Korea Electric's losses, said Yun Hee Do, an analyst at Korea Investment & Securities Co. Crude oil has lost 22 percent since touching a record $147.27 a barrel in New York last month as unprecedented fuel costs threatened demand in the U.S., the world's largest energy consumer.

``Everybody agrees that Korea Electric will suffer an operating loss until next year, but falling crude oil prices will at least boost investor sentiment,'' said Yun.

Inflation Threat

The government has said it will moderately boost electricity charges to narrow Korea Electric's losses. The generator must raise tariffs by 30 percent next year to cover the rise in costs, said Yun at Korea Investment. In reality, the government may only allow a more limited increase due to inflation concerns, he said.

The 5.9 percent gain in consumer prices last month was the ninth consecutive breach of the central bank's target of keeping inflation between 2.5 percent and 3.5 percent for the three years to 2009. South Korea's decade-high inflation is a serious concern and the government will work to restrain price increases, Vice Finance Minister Kim Dong Soo said on Aug. 5.

``If prices rise further when the economy weakens, it will reduce purchasing power, damp consumer sentiment and the economic outlook will become more difficult,'' Kim said.

The government plans to hold a meeting on Aug. 21 to discuss utility charges, the Ministry of Knowledge Economy said.

Korea Electric shares fell 2.3 percent to 31,950 won in Seoul at 1:34 p.m. local time, compared with a 1.1 percent decline in the benchmark stock index Kospi. The stock has dropped 19 percent this year.

To contact the reporter on this story: Shinhye Kang in Seoul at skang24@bloomberg.net.