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LNG Liquidates Kepco's Power

By Stephen D. Simpson, Simpson, – Updated Nov 15, 2016 at 5:27PM

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Soaring gas-generation costs swallow up profits for this electrical utility.

Ordinarily, it's not a bad idea to look at utility companies in fast-growing emerging markets. After all, industrial growth almost always requires more electricity, and few emerging markets have open and competitive electricity markets. Yet nothing about recent history has been all that ordinary, and Korea Electric Power (NYSE:KEP) isn't quite the way I'd choose to play Korea's current growth cycle.

This was a tough quarter. Strong demand for juice, coupled with a tariff increase, led to better than 10% growth in revenue from electricity generation and better than 9% overall revenue growth. So far, so good.

Unfortunately, that extra power came at a high cost. Kepco had maintenance obligations on its nuclear facilities, and it had to meet the extra power demand with more gas-fueled generation. As the price of liquefied natural gas (LNG) is correlated with the price of oil, you might suspect the problem. A 19% boost in gas-fired generation, coupled with a 29% increase in LNG generation costs, led to pretty substantial cost increases. That, in turn, led to a nearly 26% drop in operating income and a 34% drop in net income.

Even though these shares have slid a bit from their highs, they're not what I'd call a bargain. The dividend isn't all that high compared with other foreign utility companies, nor is the valuation particularly enticing. And there are still big risk trade-offs with future earnings and stock performance. If the won continues to appreciate -- or oil declines, taking LNG with it -- that'd obviously be good. The opposite scenario, on the other hand, would bring bad news.

I'm an avid overseas investor, but I'm finding Korea to be a frustrating market -- the good companies are often too expensive (with perhaps an exception at KookminBank (NYSE:KB)), while the companies behind the cheap stocks often aren't so good. But if I've learned anything over the years, it's not to try to ram a square peg into a round hole. If a market isn't offering you bargains, find another market.

With that in mind, there are other places where investors can make better power plays.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Stocks Mentioned

KB Financial Group Inc. Stock Quote
KB Financial Group Inc.
KB
$34.01 (-2.52%) $0.88
Korea Electric Power Corporation Stock Quote
Korea Electric Power Corporation
KEP
$6.87 (-3.92%) $0.28

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