Korea Electric Power Corporation (A015760) Earnings Call Transcript & Summary

Good morning, and good evening. First of all, thank you all for joining this conference call. And now we'll begin the conference of the fiscal year 2023 4th quarter earning results by KEPCO. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 fourth quarter earnings results by KEPCO.

Good afternoon. This is Siyung Yang, General Manager of the Finance and IR team of KEPCO. I'd like to thank you all for participating in today's conference call for the business results for the full year 2023 despite your busy schedules. Today's call will be conducted in both Korean and English. We will begin with a brief presentation on the earnings results, which will be followed by a Q&A session. Please note that the financial information to be disclosed today are preliminary consolidated IFRS figures and all comparisons are on a year-over-year basis. Also business plans, targets, financial estimates and other forward-looking statements are based on our current targets and forecasts. Therefore, please be noted that such information may involve investment risks and uncertainties. Now we will begin with an overview of the earnings results for the year-end 2023 in Korean, which will then be repeated in English.

Now we will provide the business performance overview in English. Good afternoon. I am Wonkee Cho, Senior IR Manager. The company recorded an operating loss of KRW 4,569.1 billion in 2023. In Q4, however, the company recorded a positive net income of KRW 1.9 trillion, boosting positive for consecutive quarters since KRW 2 trillion net income in Q3. Revenue increased by 23.8% to KRW 88,205.1 billion. Power sales revenue rose by 25.3% to KRW 82,954.8 billion. Overseas business and other revenue rose by 3.8% to KRW 5,250.3 billion. Cost of goods sold and SG&A decreased by 10.7% to KRW 92,774.2 billion. Fuel costs and purchase power costs by 22.2% and 8.8% Y-o-Y, respectively, to KRW 26,978.3 billion and KRW 38,304.3 billion, respectively. Depreciation expense rose by 5.1% to KRW 11,314.3 billion due to an increase of the depreciable assets such as new power plants, namely Shin-Hanul Unit 1. Next, I will go over the changes in the nonoperating performance. Total debt stood at KRW 133,631.8 billion, which is a 10.8% increase Y-o-Y as of year-end 2023 due to higher power purchase costs. Financial profit recorded a loss of KRW 3,922.4 billion, which is a KRW 1 trillion increase Y-o-Y. As a result of the foregoing, for the full year 2023, the company posted a consolidated net loss of KRW 4.656.9 billion. Next, I'd like to go over the main points of interest, starting with power sales performance and outlook. In 2023, power sales volume decreased by 0.4% Y-o-Y to 546 terawatt hours, mainly due to a slowdown of the manufacturing sector, which resulted in a decline of industrial power sales. In 2024, sales volume should slightly increase as the exports start to pick up. Next, I'd like to go over the unit price of the major fuel sources. The unit fuel cost by fuel source in 2023 was KRW 230,000 per tonne for coal, KRW 1.36 million per tonne per LNG and KRW 1,191 per liter for oil as international fuel prices stabilized. For the year 2025 -- 2024, excluding offloading costs, coal is expected to be between KRW 200,000 to KRW 300,000 per tonne, KRW 1.1 million per tonne for LNG and around KRW 1,200 per liter for oil. Please note that forecast may change subject to international fuel price trends. Looking at the generation mix of group subsidiaries. Nuclear power plant utilization was similar to the previous year. However, installed capacity increased because of the addition of new power plant, Shin-Hanul Unit 1, December 2022 and the completion of maintenance of Hanbit Unit 4, which resulted in an increase of the contribution of nuclear power to the generation mix on a Y-o-Y basis. In case of coal, utilization decreased due to an increase of maintenance days, resulting in a lower contribution to the generation mix. The contribution of LNG also declined, mainly driven by a reduction of power demand and an increase of base generation. In 2024, the contribution of nuclear power plant should increase as utilization is expected to rise as new power plants, mainly Shin-Hanul Unit 2 is expected to come online in the first half and [ Shin-Hanul ] Unit 3 is scheduled for the second half. Contribution of coal and LNG should slightly decline. For 2024 utilization by power source, it is projected to be low to mid-80% for nuclear power, mid-50% for coal and mid to high-20% for LNG. Regarding RPS and ETS costs. As of 2023, RPS cost was KRW 2,779.2 billion on a consolidated basis and KRW 3,136.8 billion on stand-alone. ETS cost was KRW 87.8 billion on a consolidated basis and KRW 76.9 billion stand-alone basis. Now let us move on to Q&A session. Since we will be proceeding the Q&A session in both Korean and English, I'd like to ask that you make your questions brief and clear. Thank you.

[Operator Instructions] The first question will be given by Moon Kyeong Won from Meritz Securities.

Good afternoon. I have three questions. First is regarding the stand-alone performance. I see that net income for Q4 on stand-alone basis were quite strong and probably are exceeding some of the expectations. I think there has been a one-off financial profit that drove the positive income trend in Q4. So could you please elaborate on this? Second, as of year-end 2023, it seems that the retained earnings have been transferred to a separate KEPCO entity. So in 2024, can we expect that these resources will be used for dividend payments? Third, I think there is quite strong interest regarding the shareholder return policies of public corporations in recent times. So have you had any changes in the dividend policy? Do you plan to communicate that to the market? And if so, when will this be communicated to the market?

So regarding your first question, in Q4 2023 in those numbers, the interim dividend payments upstreamed by the subsidiaries have been booked, which is around KRW 3.2 trillion. And so this is part of the dividend profits under financial profits and losses. And so this generated quite strong net income on standalone basis for KEPCO.

So let me address question two and question three at the same time. So according to the KEPCO Act that clearly defines the resources that we can use for dividend payments. And while the -- we are still waiting for the final numbers of 2023, if we are able to generate a positive income, we will be in line with the government's overall dividend policies for the government-related and public corporations of Korea. And with those -- keeping in mind those dividend policies of the government and considering the overall financial performance. And if we are able to generate positive business performance, I think we will be able to make more clear communication with the market regarding our dividend. As for your last question, I think that in 2024 the government will be reflecting shareholder return policy and performance of the public corporations and the KPI overall business management evaluations, especially for the listed public operations. And so this has not been finalized yet. And if that is -- the final version is distributed, we will be reviewing that and we will be developing more clear internal dividend policy. And then we will be able to make announcement and communicate that with the market.

[Operator Instructions] The following question is Ryu Jae-Hyun from Mirae Asset Securities.

I would like to have a better idea of the outlook that you have for the unit price of LNG and coal on a quarterly basis. And I understand that you have not disclosed the unit price for the purchase power cost. However, it would be helpful if you can share the trend especially on a quarterly basis for us to better understand. Lastly, you mentioned that there was a dividend payment by subsidiaries upstreamed to KEPCO and it was quite large in size. However, I am not so sure if the subsidiaries were generating very strong profit streams to be able to upstream such large amount. So in that respect, can you talk about whether the dividend payment by subsidiaries was generated by strong profits of the subsidiaries? Or were there some other reasons for those subsidiaries to upstream the dividend?

So regarding your first question on the quarterly outlook of the price of LNG and coal, we usually disclose annual outlook, not quarterly outlook. So I ask for your understanding.

And regarding your second question on disclosing the unit price of the purchase power cost. So on our website, we have a section on KEPCO's statistics and the monthly actual figures are disclosed. However, in terms of our forecast and outlook, it can change quite quickly. So unfortunately, we are not able to disclose the outlook for this item.

Yes. So regarding your third question, I don't think I can speak on behalf of the subsidiaries for their dividend upstream. But on a stand-alone basis, according to the KEPCO Act, there is a ceiling on the amount of bonds that KEPCO can issue. And to be legally satisfying these requirements, the decision to pay the -- to receive interim dividends from the subsidiaries has been made.

The following question is by Kang Dong Jin from Hyundai Motor Securities.

My name is Kang Dong Jin, and I have two questions. First of all, you mentioned the outlook of the unit price of fuel. I was wondering, in your outlook did you incorporate private consumption tax issue? So it has been extended for 6 months. But once that expires it will go back up. So I was wondering if you have considered that change in your outlook. Second, regarding shareholder return and financial structure, whether it's on a stand-alone or a consolidated basis, I would like to know if you have any financial targets adjusted to equity. And how is your dividend policy related to those targets? For example, if debt equity goes to this level, will you be then paying dividends to the shareholders and so on?

So regarding your first question regarding the tax. Also, it has been extended and currently -- the current system has been reflected into the outlook. And then regarding the dividend policy requirements that you mentioned, we do not have a detailed dividend policy yet. So once that has been confirmed, we will be able to communicate that to the market.

The following question is by Hwang Sung Hyun from Eugene Investment Securities.

So I have two questions. My name is Hwang Sung Hyun from Eugene Securities. The LNG price in the spot market has been quite weak recent times, so have been the U.S. natural gas prices. And I know that KEPCO's pricing of these type of fuel is related to the oil price. So in this respect, can we expect cost levels of fuel to come further down compared to the outlook that you have mentioned in your presentation? And then second question is regarding the fuel as well. So I think in Q3, for the nuclear power, you have mentioned -- I feel that unit price has been somewhat on declining trend. So I would like to ask for your opinion on that. And also, given the inventory level that you have currently, do you think you will be able to exhaust it? Or what do you think the trend will be for this year?

Regarding your first question on LNG price, so like you've mentioned, we also read that spot prices have been quite weak in recent times. It takes about 5 to 6 months on average for the spot prices to have impact on our purchase price. And while spot price is of course important benchmark, we usually procure from KOGAS. And the KOGAS' mid- to long-term volume secure policy is also important, and it can also have an impact on our pricing as well.

Regarding your second question on the nuclear fuel. So KHNP usually has long-term contracts when they purchase the uranium, around 5- to 10-year contracts. In those contracts, KHNP is usually able to determine and control the volume of purchase during that contract period. So they try to have more -- so they are able to respond to changing market price trends of the nuclear fuel in the market, and they use that power to maintain an appropriate level of cost of nuclear fuel. And as for the inventory, it's around 3 years at the moment.

The following question is by Moon Kyeong Won from Meritz Securities.

I'm Moon Kyeong Won from Meritz Securities. And I have one more question regarding the adjustment factor. So in 2022 and 2023, the numbers have come down significantly. I am wondering about direction of the adjustment factor for 2024. Do you think it will be similar to 2023? Or do you think that given the loss and the financial status of KEPCO at the moment, what do you think the adjustment factor will be or at least the direction of it in 2024?

So to answer your question, first, if you look at the adjustment factor, although factor does not mean that the subsidiaries are taking a lower amount, the opposite is the same as well. The high factor does not mean that the subsidiaries are taking a higher portion. So usually, we take -- deduct the fuel cost from the SMP, that would be the margin. And then the factor will be calculated in a retrospective way. So it's -- we try to -- it's a retrospective number rather than a number that we set from the very beginning. And so I think rather than the factor itself, the profits that the subsidiaries can take on top of their cost can be more important. And in this sense, the actual number of the factor is quite -- can be quite insignificant and it's also very difficult to make an outlook on that. And as to the subsidiaries' profits, at this stage it's difficult to foresee as well. So unfortunately, I'm not able to give you a more clear answer on this question.

Currently there are no participants with questions. [Operator Instructions] The following question is by Hwang Sung Hyun from Eugene Investment Securities.

So in other items, compared to Q4 2022, there seems to be a decline. So what would be the main reason for this?

Yes. So in the previous year, we sold the former headquarter building that was booked under other items. But we do not have any similar transaction this year. So I think this will be the main reason.

Currently, there are no participant questions. [Operator Instructions] The following question is by Kang Dong Jin from Hyundai Motor Securities.

I'm looking forward to hear your CapEx numbers, CapEx guidance for 2024 and 2025. I understand that most of the new power plants that were under construction are coming online soon. So what would be the CapEx figures for '24 and '25?

For our 2024 annual number on a consolidated basis, CapEx is expected to be around KRW 17.6 trillion, and then 2025, KRW 19.9 trillion. These are CapEx numbers for the domestic market. 2024 transmission and distribution should be around KRW 8.2 trillion; nuclear power plant, KRW 4.2 trillion; thermal power, KRW 3.7 trillion. And the remaining will be mostly renewable energy and others.

Currently, there are no participants questions. [Operator Instructions] As there are no further questions, we'll now end the Q&A session. This concludes the Fiscal Year 2003 Fourth Quarter Earning Results by KEPCO. Thank you for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]