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

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2024 third quarter earnings 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 2024 third quarter earnings results by KEPCO.

[Interpreted] Good afternoon. My name is [indiscernible]. I'm the Head of Finance and Accounting Department of Korea Power Corporation. I would like to thank you for taking time out of your business schedules to attend the IR conference call of the third quarter 2024 of KEPCO. Today's conference call is going to be provided in both Korean and English. I'm going to report to you the financial results and then take your questions. The financial results that we will present today are consolidated estimates based on IFRS and all comparisons are based on year-on-year basis unless otherwise mentioned. Also, the business plan and targets and estimates that we may mention during this conference call are the estimates at current point, so please understand there is uncertainty and risk in investment. Now I'm going to present to you the accumulated profit and loss of the third quarter 2024 in Korean and in English afterwards.

[Interpreted] Good afternoon. I am Yang Siyung. I'm the Head of IR. Let us now look at the operating profit. The accumulated consolidated operating profit in the third quarter 2024 recorded KRW 5,945.7 billion. Let's look at the details. Our sales recorded KRW 69,869.8 billion, up 6.4%. Among this, income from electricity sales KRW 66,727.9 billion, up 8.0% and other income, including income from overseas business, KRW 3,141.9 billion, down 19.5%. Cost of sales and selling and administrative expenses recorded KRW 63,924.1 billion, down 11.4%. Among this, fuel costs and power purchase costs, respectively recorded KRW 17,641.1 billion and KRW 26,819.3 billion, which are down 18.6% and 11.6%, respectively, due to fuel cost decrease. Depreciation recorded KRW 8,534.8 billion, down 0.2%. Among a major nonoperating profit and loss, interest expense recorded KRW 3,422.9 billion, which is a Y-o-Y increase of KRW 112.5 billion due to an increase in average balance of our borrowings. Due to the reasons that I mentioned so far, the accumulated consolidated operating profit in the '24 third quarter recorded KRW 5,945.7 billion, net income recorded KRW 2,590 billion.

[Interpreted] Good afternoon. I am Taeseop Eom, also in charge of IR. Now I'd like to report to you the major concerns. Now let me first start by the power sales performance and the outlook. Our power sales accumulated in the third quarter increased Y-o-Y by 1.7% to 421 terawatt hour, thanks to better export of semiconductors and higher demand for summer cooling. And in the annual basis, we believe that the power sales will slightly increase due to an increase in demand for heating and cooling. Now let me report to you the fuel costs by fuel source. The third quarter 2024, the quarterly fuel cost was KRW 190,000 per ton for coal, KRW 1.09 million per ton for LNG and KRW 974 per liter for oil. In the 2024 annual fuel cost other than all the unloading cost, the coal cost is above KRW 180,000 per ton; LNG KRW 1.1 million per ton and oil above KRW 907 per liter. Please understand that this outlook may differ according to global fuel price trends. Now looking at the power generation mix of our power generation companies. If you look at the power generation mix of accumulated third quarter, the nuclear power plant share increased, thanks to the operation of newly built reactors. Coal share slightly decreased because of a decrease in coal utilization rate. LNG's capacity slightly increased, but their mix maintained -- was maintained due to an increase in base load. In 2024 as a whole, we believe that the nuclear power plant share will increase due to the outlook of increase in utilization rate and the operation of newly built reactors, such as Shin-Hanul Unit 2, which started commercial operation in April. The coal's share will remain similarly and LNG's share will decrease. The utilization rate outlook of 2024 annually by power source is -- for nuclear power plants early to mid 80%, coal early to mid 50% and LNG later 20% range. Now let me report to you the costs related to RPS and ETS. The RPS-related cost accumulated to the third quarter of 2024 was KRW 2,763.8 billion on a consolidated basis and KRW 3,269 billion on a nonconsolidated basis. ETS-related cost, minus KRW 30.2 billion consolidated [ or KRW 0 million ] nonconsolidated. And lastly, let me report to you on our capital finance. The consolidated borrowing accumulated to the third quarter 2024 was KRW 132 trillion, and the borrowing of nonconsolidated was KRW 88 trillion. Now we are going to have a question-and-answer session. Since the Q&A session will be conducted through consecutive interpretation between Korean and English, so please make your questions concise and clear. We are ready to entertain your questions.

[Interpreted] The first question will be given by Mr. Pierre Lau of Citigroup.

I have 3 questions. The first one is what was the key reason for the finance expense drop by 80% year-on-year in the third quarter? The second question is, do you expect more tariff hike in the next 6 months? And the third question, what is your guidance for your fuel cost in the fourth quarter this year and 2025?

Your second question, please.

Second question, what is your expectation regarding more tariff rise in fourth quarter this year or first quarter next year?

[Interpreted] Let me now try to answer your first question about interest expense. Our borrowings did decrease on a consolidated basis. However, the average balance of borrowing increased year-on-year basis. So on an accumulated basis to third quarter, the interest expense was KRW 3.4 trillion, which is up by KRW 110 billion from the same quarter last year.

I'm asking for the finance expense in the first quarter. The number was KRW 334 billion, and it's dropped 80% year-on-year from last year on KRW 1,674 billion. So I'm asking about the finance expense, why it's dropped 80% year-on-year in the third quarter?

[Interpreted] The financial expenses is not only influenced by the interest rate. It is also influenced by the loss derived from foreign exchange. Because the range of increase of foreign exchange decreased from the last year, our loss of derived from foreign exchange also decreased. That is why we are down from the last year of [ KRW 1.6 billion ]. For your question on the guidance of tariffs into the fourth quarter and next year. We increased the tariff of industrial service power by [ 16.11 ] on October '24. And the effect of this tariff increase on average is equivalent to an increase of 8.51%. It has not been a month since the last increase in October. So we do not foresee any more increase in the near future. We are going to closely monitor the financial impact of this increase in energy prices and foreign exchange market. About your questions on the fuel cost outlook, KEPCO does not present any official outlook on fuel costs.

[Interpreted] If that answers your question, we would like to take the next question.

[Interpreted] The following question is by Sung Jong Hwa of LS Securities.

[Interpreted] My question is about dividend. We understand that still you have a sizable accumulated operating loss. But this year, net income was positive. So we want to know whether KEPCO is planning to resume paying out dividend. If so, the guideline -- will the guideline be same as the past, about 10% dividend of the net income? Or because still you have accumulated operating loss, are you going to pay out less than previous guideline and pay out more dividend as time goes by?

[Interpreted] In answering your question, we will consider the plan to pay out dividends if there is the funds to pay out dividends depending on our annual performance, and we do not have any set plan or policy on how much dividends to pay out. So the volume was low from the Korean speaker side. So we would like to ask the Korean speaker to repeat your answer, please.

[Interpreted] The next question is from Mr. Ryu Jae-Hyun of Mirae Asset Securities.

[Interpreted] Let's ask a question about your financial income being minus KRW 462 billion. Could you tell us why? And my second question is about the completion plan of nuclear power plants. You announced that the [ Shin-Hanul ] Unit 3 is planned to be completed in the fourth quarter. Is it still the case? Or is there any possibility of postponing this? And when this is completed, when will it start operation?

[Interpreted] To give you the answer on the financial income. The financial income is also influenced by a number of factors such as interest rate, foreign exchange and the derived products by valuation profits. And just like my last answer, this year, the increase of the foreign exchange was lower than the last year, the derived valuation profit also came down. And your questions about the plan for [ Shin-Hanul ] Unit 3 -- the completion plan for [ Shin-Hanul ] Unit 3, we have not been officially notified by either KHNP or KPX that this plan would be postponed. But we understand they are considering postponing this process because of a delayed construction process.

The next question is from Mr. Moon Kyeong from Meritz Securities.

[Interpreted] Two questions. Although your consolidated operating profit improved a lot, we see an enlarged deficit on the nonconsolidated basis. Can you tell us why the gap is getting bigger between consolidated operating profit and nonconsolidated operating profit and loss? Is it because you increased the adjusted coefficient? And if you did so, how much did you mark up the adjusted coefficient? My second question, the other operating expenses is down by KRW 300 billion. Can you tell us why?

[Interpreted] Our nonconsolidated operating profit is smaller because the SMP relatively increased in the third quarter. It led to the less profit on both consolidated and nonconsolidated basis. The consolidated operating profit increased because it includes not only KEPCO's operating profit, but also the operating process of our GENCOs and other subsidiaries. Other operating expenses came smaller because of the decrease in the fuel supply cost in Southeast power. To give you a number of adjusted coefficient, the first determination of the adjusted coefficient in 2024 was applied 2 months from January to March. They were determined at 0.4% for nuclear power and 0.5% for coal. And the coefficient got adjusted for April through September, [ 1% for ] coal and 0.5% for nuclear power. They got readjusted again for the fourth quarter to 0.5% for coal and 0.4% for nuclear power. And to add a little more point on the adjusted coefficient, the current coefficient, which is determined for the fourth quarter, maybe update one more -- maybe adjusted 1 more after updating our performance derived from the last adjusted coefficient.

[Interpreted] Currently, there is no participant with questions. [Operator Instructions] The next question is from Mr. Hur Minho of Daishin Securities.

[Interpreted] Three questions. My first question is about the fuel cost for the nuclear power plant. In the first quarter, there was a consensus and you also let us know that there will be an increase of the fuel cost for nuclear power plants for about KRW 300 billion, but actually, they decreased by KRW 220 billion in the second quarter Y-o-Y and again by KRW 75 billion. Could you tell us why they are going down after you said that they may go up in the first quarter? And again, other operating expenses are going down by KRW 500 billion in the second quarter and KRW 300 billion in the third quarter. Do you believe that they will continue to go down in the fourth quarter? And the last question, the SMP dropped a lot more than the drop of the fuel cost in October. Can you tell us why?

[Interpreted] We would like to answer your first question about the fuel cost for nuclear power plant later through a different format. And my answer to your question -- the second question is about other operating expenses. And I already answered to other questions. The fuel supply business cost for Southeast power generation company is going down because this is influenced by the decrease of the fuel cost. And that is why the other operating expense is going down.

[Interpreted] My questions related to other operating expenses. Does that have much to do with the fuel cost of Southeast power generation company?

[Interpreted] We try to answer the question. In the conference call -- IR conference call, when we referred to fuel costs by KEPCO [ this is first ] -- the pure fuel cost that goes into our power generation business, whereas the fuel expenses and other operating expenses refer to the fuel cost of our power generation facilities overseas and GENCO [ nuclear ] power. To give you the RPS related costs. On a consolidated basis, the RPS cost was KRW 2,763.8 billion, and on a nonconsolidated basis, KRW 3,269 billion. The EPS related expenses, minus KRW 30.2 billion consolidated and KRW 0 nonconsolidated. And your last question is about why the SMP dropped much larger than the fuel cost drop. SMP, of course, is influenced by the trend of fuel cost, but it is also influenced by the demand and supply. The October SMP dropped a lot because the demand for power decreased a lot after the hot season.

[Interpreted] Any other questions, please?

[Interpreted] The next questioner is Mr. Jiaren Luo of BlackRock.

I have two. One is again on SMP priced down a lot. Does that mean the cost, your procurement costs in fourth quarter would also drop proportionately due to this SMP decline? And the second question is regarding dividend. What's the current dividend payout policy? And given you are profitable this year, can we expect at least some dividend paid to shareholders?

[Interpreted] In your SMP-related question, what do you exactly mean by procurement cost?

The costs where you purchase power from a third-party, power plant?

[Interpreted] SMP sets the standards of settlement in the power market, so when the SMP goes down and then it is natural that our procurement cost, which is the power purchase cost also goes down. And once again, about our policy for dividend payout. At the point of announcing the annual closing of our finances, we will check whether we have profits that are payable as dividends and to make a decision for dividend payout. At the moment, we do not have any official consideration for dividend policy.

Sorry, do you mind if I follow up on this? What -- how do you define profit payable, any different versus reported net profit?

[Interpreted] This payable -- or dividend payable profit is calculated as on a nonconsolidated net income, we subtract the deferred loss and the reserve.

[Interpreted] Currently, there is no participant with questions. [Operator Instructions] The next question is from Mr. Hur Minho of Daishin Securities.

[Interpreted] How much power did you purchase?

[Interpreted] In the third quarter, we purchased about 156 terawatt hour. Among this, we purchased 104 terawatt hour from our GENCOs.

[Interpreted] Currently, there is no participant waiting with questions. [Operator Instructions] The next question is from Park Yushin of HSBC.

[Interpreted] I have 2 questions. I understand that KEPCO is making any efforts, including tariff increase to improve the financial structure. Other than tariff increase, what other measures is KEPCO taking? And secondly, in the market, currently the won is depreciating. Can you please tell us the impact of the value of won in the foreign exchange market?

[Interpreted] [indiscernible] worth KRW 30 trillion of -- KEPCO is implementing a KRW 30 trillion of financial stabilization plan for 5 years from 2022 to '26. In this plan, we are taking a lot of measures such as selling our assets and reducing our cost of investment and trying to increase the income other than from power sales and we are beating this target by 110%. And to answer your question about foreign exchange fluctuation impact on us. Foreign exchange fluctuation can impact our business in 2 ways. The first on the borrowing and the second on the fuel costs. However, our borrowings are hedged, so we are hedged from risk somewhat. And secondly, the impact on the fuel cost. We are exposed to some foreign exchange fluctuation risks [ when we sign ] LNG or other fuel, but the details of this impact varies from the fluctuation range and of course the global fuel.

[Interpreted] Currently, there is no participant waiting with questions. [Operator Instructions] The next question is from Cho Yoon [ Hang ] of UBS.

[Interpreted] For the information, if you look at our report of national investigation, we understand that KEPCO is planning asset revaluation to improve its financial spending. And if is planning so, when will this asset revaluation have an impact on your financial position?

[Interpreted] We have a plan to reevaluate our land as part of our financial stabilization plan, and we are considering by looking at the possible impact of this land revaluation. Next question, please.

[Interpreted] Currently, there is no participant with questions. [Operator Instructions]

[Interpreted] Since there is no further questions, we would like to conclude our IR conference call for the third quarter of 2024. If you have further questions, please do not hesitate to contact the IR team. Thank you for your attention.

This concludes the fiscal year 2024 third quarter earnings results by KEPCO. Thank you for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]