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

[Interpreted] Good afternoon. This is Siyung Yang, Head of Finance and IR team at KEPCO. I would like to thank you all for joining today's conference call for the business results for the first quarter of 2024 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 is preliminary consolidated IFRS figures and all comparison is on a year-over-year basis, unless stated otherwise. Also, business plans, targets, financial estimates and other forward-looking statements mentioned today are based on our current targets and forecasts. Please be noted that such statements may involve investment risks and uncertainties. Now we will begin with an overview of the earnings results for the first quarter of 2024 in Korean first, which will be then consecutively translated into English. [Interpreted] Good afternoon. I am Siyung Yang, General Manager of IR Team at KEPCO. First, I will go over the operating performance. The consolidated operating profit in 2024 Q1 stood at KRW 1,299.3 billion. Revenue increased by 7.9% to KRW 23,292.7 billion. Power sales rose by 9.4% to KRW 22,165 billion. Overseas business and other revenue decreased by 15.5% to KRW 1,127.7 billion. Cost of goods sold and SG&A decreased by 20.8% to KRW 21,993.4 billion. Fuel costs and power purchase costs decreased by 32.2% and 24.4%, respectively, to KRW 6,160.1 billion and KRW 9,202.9 billion, mainly driven by fuel price decline in the previous year. Depreciation expense decreased by 0.2% to KRW 2,808.5 billion, due to decrease of depreciable assets as the new power plant construction was completed, namely Shin-Hanul Unit 1. Next, I will go over the nonoperating items. Total debt decreased by KRW 3,198.9 billion to KRW 130,432.9 billion compared to year-end 2023 due to temporary decrease of working capital and redemption of debt using interim dividends. Interest expense recorded KRW 1,151.7 billion. As a result of the foregoing 2024 Q1 consolidated operated profit stood at KRW 1,299.3 billion, and net income was KRW 595.9 billion.

[Interpreted] Good afternoon. I am [indiscernible] Senior IR Manager. I will now go over the main areas of interest starting with Power sales performance and outlook. In Q1 2024, total power sales volume decreased Y-o-Y by 1.1% to 142 terawatt hour due to a decline in industrial power sales as the manufacturing sector remained weak. For the full year, as manufacturing exports improved, mainly driven by semiconductors, power sales volume is expected to slightly increase. [Interpreted] The unit fuel cost by fuel source in 2024 Q1 was KRW 196,000 per ton for coal, KRW 1.16 million per ton for LNG, and KRW 1,045 per liter for oil. For the full year 2024, excluding general offloading costs, coal is expected to be in the KRW 200,000 range per ton, KRW 1.1 billion range for LNG and around KRW 1,101 per liter for oil. Please note that these forecasts may change subject to international fuel price trends. [Interpreted] Looking at the subsidiary generation mix in Q1, the capacity factor of nuclear power slightly increased, resulting in a slightly higher contribution to the mix. The contribution of coal decreased due to a higher number of maintenance base. The installed capacity of LNG slightly increased; however, its contribution to the mix decreased, mainly because of the decrease of power demand and increase of baseload power generation. In 2024, the contribution of nuclear power should increase as a new power plant, namely Shin-Hanul Unit 2, started commercial operation in April and another new plant is scheduled to come online in the second half, mainly Shin-Hanul Unit 3. Coal should remain similar and LNG should slightly decline. For the full year 2024, the capacity factor of each power source is projected to be low to mid-80% for nuclear, low to mid-50% for coal, and mid- to high 20% for LNG. [Interpreted] Regarding RPS cost, as of 2024 Q1, RPS cost was KRW 708.7 billion on a consolidated basis and KRW 837.1 billion on a separate basis. Lastly, on funding. As of 2024 Q1, debt on consolidated basis was KRW 130.4 trillion and KRW 85.7 trillion on separate basis. [Interpreted] Now we will move on to the Q&A session. Since we will be conducting the Q&A session in Korean with consecutive translation into English, please make your questions clear and brief. Thank you.

[Interpreted] Our session will begin. [Operator Instructions]. [Interpreted] The first question will be given by Pierre Lau from Citigroup.

This is Pierre Lau from Citi. I have 3 questions. The first one is, what is your expectations regarding tariff hike in 2024? Second question is, what is the company impact from recent increase in spot LNG price? And the third question is, what is your expectations regarding your generation mix by different fuel types in 2024?

[Interpreted] Yes. As to your question regarding the tariff hike for 2024, KEPCO has raised the tariff from 2021 to 2023 multiple times, but we also have accumulated operating loss still remaining. Because of the loss, there is still reason for us to further raise the tariffs; however, due to the series of tariff hikes, there is some fatigue among the public and also recent inflation must be considered. So we will be continuously discussing closely with the government on tariff hikes in the future. [Interpreted] So regarding your question on the spot price of LNG. So there is usually a 5- to 6-month time lag between the spot price and the impact on our business and financials. And it's not necessarily 100% of the spot price volatility that is reflected on our numbers. It also is influenced by coal gas allocation of short-term and long-term volume.

[Interpreted] As to generation mix for the full year 2024. If we first look at the Q1, our generation subsidiary mix. Nuclear was around 46%, coal 38% and LNG was 12%. In October this year, we have planned to add the Shin Kori Unit 5 nuclear power plant online. It is expected to start commercial operations in October. So this may slightly increase the contribution of nuclear power to the generation mix, while the coal and LNG contribution is expected to remain similar.

[Interpreted] The following question is by Cho Yoon from UBS.

[Interpreted] So thank you for the opportunity today. I have 2 questions. First, in Q1, we can see that the unit fuel cost for nuclear power Y-o-Y basis almost doubled. So do you think this trend will continue in the future? Especially the uranium prices are showing upward trend in recent time. So do you think this is a trend that can continue for maybe the next couple of years and become a cost pressure item. Second, the other domestic business seems to have declined in terms of the revenue and profits, what would be the main reason for this?

[Interpreted] Regarding your first question on the uranium price trends, so KHNP usually procures uranium with long-term contracts, 5 to 10-year contracts. And they usually also have the option to control the volume of procurement. So in this sense, they are pretty much hedged against short-term price volatility of uranium. Also, the uranium is only around 10% of KHNP steel costs. They also carry inventory for around 3 years. So short-term market fluctuation of uranium prices should not have immediate or extensive impact on the KHNP's financials.

[Interpreted] I'll just add a little bit more color on KHNP and fuel price. So for -- KHNP has to set aside the spent fuel disposal cost every 2 years. And almost for the first time in a decade, that cost increased by around 100%. So because of this on a Y-o-Y basis, the depletion recognition on this cost, the disposal of spent fuel has increased significantly. So this is another reason that can contribute to what you mentioned regarding the fuel price increase of nuclear power. And then second, as to the domestic revenue, there are largely 2 reasons. One, KPS have usually service contracts with IPPs in terms of the maintenance and repair of power plants, but many of those service contracts have been completed in recent time, leading to a decline in revenue. And second, the LNG price has been declining. And so the revenue that is generated by providing heat to the clients and customers have declined as well. So these would be the main two drivers that has been impacting the domestic business revenue.

[Interpreted] The following question is by Ryu Jae-Hyun from Mirae Asset Securities.

[Interpreted] I have 2 questions. First of all, we can see that the account receivables have been on declining trend. Overall, cash and cash equivalents, the same. On a separate basis, the cash is only around KRW 100 billion at the moment. That's about 90% decline. We can also say that corporate brands has decreased as well. So the leverage ratio or the debt ratio has slightly declined. So I think that account receivable declining trend is quite exceptional. Do you have any changes to your policies in terms of receivable collection? And will this trend continue? Or can you please give explanation to better understand this trend? And second, given the value of program, I think, the market has expectations on dividends. But at the same time, the company has significant accumulated losses. So what would be your priority in terms of spending the cash account? Will it be reduction or redemption of debt? Or will you also consider paying out dividends as well.

[Interpreted] So regarding your first question on receivables compared to December of 2023 in March, there was the unit price change given that we are entering the spring season and also the heat demand has declined since the winter is coming to an end. So the sales volume has declined as well. So these would be the main 2 drivers. [Interpreted] And regarding your question on dividends. So we were not able to pay out dividends for recent 3 years due to the fact that we have been recording a net loss, and we ask for the understanding of shareholders on this point. For this year, we will be monitoring the annual business performance. And once the annual results are confirmed, we will be discussing closely with our largest shareholder, which is the government to review possibility of dividend payout.

[Interpreted] So in this case, can I understand that with excess cash, you will be prioritizing the dividend payout rather than redemption of debt?

[Interpreted] So we have not reviewed on that point yet.

[Interpreted] The following question is by Hwang Sung Hyun from Eugene Investment and Securities.

[Interpreted] Yes, I have 2 questions today. First of all, if we look at the tariffs. So in Q4 last year, the industrial power price was increased. And if this happens, I thought that the overall sales unit price will go up, but I don't think it has been as high as the market largely expected. So I would like to better understand this gap. And also, there is a similar issue regarding the LNG unit price. I think there is some gap between the LNG unit price what we expected and what the data has given us. So could you please further help us understand on this difference as well?

[Interpreted] Yes, regarding your question on unit sales price, it is correct that we raised the industrial price in Q4 last year. But for industrial purposes, we also consider the season and hour of time. And in the spring time, the tariffs tend to be lower. So while there was a tariff hike, the seasonal and hourly timing issues were higher in terms of impact. So the unit increase of sales price may not have been as high as the market expected.

[Interpreted] And then regarding your question on LNG. So when you say unit price of LNG, I think you are referring to the current spot price. And when you refer to [indiscernible], I think, you are looking at the price, the landing price that is reflected in the current electricity trading market. So -- and this can have various different indexes and indicators. So I'm not exactly sure which one you are talking about. But I think the difference can largely come from 2 reasons. First, the time lag, so I already mentioned that there can be a time lag between the spot price and when it is reflected in the actual power prices in the market. So time lag can be one factor. Second factor is that when LNG is imported, the spot market may not be the most influential market for LNG. So coal gas actually has a very large market share. And because coal gas also allocates volume long term and short term, this can also have impact on the cost differences of LNG. Also note that some power plants and generators import LNG directly as well. So because there are multiple channels for securing LNG, the cost of those multiple channels can also be different as well causing variation.

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

[Interpreted] I have 3 questions today. First, I'm looking at the headline of power market data right now. And in Q1, I see that sales volume has declined, but also the power purchase volume has increased. I think this power purchase has been higher than what the market largely expected. So how should we interpret this? Has there been a continued lack of investment in the power grid that is leading to transmission and distribution-related losses that is resulting in KEPCO purchasing more power. That is my first question. Second question is regarding the adjustment coefficient. In Q1, has there been any revisions to the coefficient? Or has there been any other factors that can impact the total power purchase cost of KEPCO? And my third question is regarding shareholder return. I have read the business management evaluation of KEPCO. And as a qualitative factor, it is mentioned that shareholder returns will become more important and will be reflected in the financial policies of KEPCO. What does this mean? And how should we interpret this in terms of shareholder return of KEPCO?

[Interpreted] So you asked about the higher purchase, but lower sales volume. And I think this is because of the time difference. So while won is from January to March, dollar is based on the actual tech of the power usage. And depending on the date of when we go and check the power usage, I think, there can be some difference between these numbers in terms of the period that this number is coming from. So that can be one cause for this.

[Interpreted] As for the adjustment coefficient, the coefficient that was determined early on in 2024 has been used throughout Q1. So there has not been any revisions to that.

[Interpreted] Lastly, regarding your third question, we have not yet reviewed our dividend policy.

[Interpreted] Yes, just to get a little bit more understanding on the first question, does that mean that there has not been any incidence regarding the distribution and transmission of power this year.

Yes, that's correct.

[Operator Instructions] [Interpreted] The following question is given by Hur Minho from Daishin Securities.

[Interpreted] I have 4 questions today. First one is regarding the nuclear fuel cost. It was already mentioned today that it rose by almost 100%. But according to your explanation, does this mean that this higher cost level will continue in the future? And the second is regarding the coal purchase price. So I think if you look at the market purchase price and the different market data, coal price has declined from Q4 to Q1. But if we look at [indiscernible], Q4 and Q1 largely coal price is the same. So is there a reason that can explain this difference? Third, RPS cost seems to have increased quite significantly. What would be the main driver for this? Were there any changes in the settlement process? And fourth, I would like to know the external power purchase volume, not the value of the volume.

[Interpreted] Yes, regarding your first question, we mentioned that when we dispose the fuel, spent fuel, that related unit price has increased significantly earlier today, so that should stay stable. So the higher cost in that regard should stay stable. But if you look at the depletion or depreciation of the raw materials, it will also depend on the generation volume. So we cannot say for sure that these costs will increase in the future. [Interpreted] And then regarding your second question on coal price. So I think there are multiple markets to read a spot price of coal. But I think most of our people will be looking at the Australian coal. Like LNG, there is also a time lag between spot market and when it's reflected into our power market around 4 to 5 months. That will be one reason. And second, each generation company will be making their own purchase of coal, so the coal purchase in the price can vary depending on the portfolio, the purchase portfolio of that company. So to answer your question, largely 2 factors, why spot market price is different from [indiscernible]? First, is time lag and second is the portfolio of the generation company. [Interpreted] And then regarding your question on RPS. So the quota -- the RPS quota has increased from 13% to 13.5%. So the [ RFP ] purchase of generation companies have increased quite substantially.

[Interpreted] And the external purchase -- power purchase volume was your last question. So in 2022, 68% we purchased from our group and 32% from external parties. 2023, that number was 66% to 34%. And in Q1 this year, it was 64% to 36%.

[Interpreted] The final question is by Hwang Hyun Sung from Eugene Investment and Securities.

[Interpreted] So my question has already been asked by another colleague, so I don't need to further ask any questions.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] Again, if you have any questions, [Operator Instructions].

[Interpreted] There are no further questions. We will conclude the earnings call for 2024, Q1 of KEPCO. Thank you.

[Interpreted] As there are no further questions, we will now end the Q&A session. For any additional questions and inquiries, please contact our IR department.

[Interpreted] This concludes the fiscal year 2024 first quarter earnings results by KEPCO. Thank you for the participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]