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

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

[Interpreted] Good afternoon, everyone. I am [indiscernible], Head of Finance at Korea Electric Power Corporation, KEPCO. Thank you for taking the time out of your busy schedule to join KEPCO's Q4 2024 Earnings Conference Call. Today's conference call will be conducted in both Korean and English. We will begin with a brief earnings presentation followed by a Q&A session. The financial results presented today are preliminary figures based on IFRS consolidated standard and may be subject to changes. And all comparisons are made on a year-over-year basis, unless otherwise specified. Additionally, any business plans, targets and estimated financial figures mentioned in the earnings presentation reflect our current market outlook and objectives, which is subject to uncertainties and investment risk. Now we will first present the key details regarding the cumulative profit and loss changes for Q4 2024 in Korean and then provide the same presentation in English.

[Interpreted] Good afternoon. This is Siyung Yang, IR Manager of KEPCO. Let me briefly first look at the operating profit and loss. KEPCO's cumulative consolidated operating profit for Q4 2024 recorded KRW 8.3 trillion. Breaking down the details, revenue increased by 6.6% year-over-year, reaching KRW 94 trillion. Among this, electricity sales revenue grew by 7.2%, totaling KRW 88.9 trillion, while revenue from overseas businesses and other sources decreased by 2.9% amounting to KRW 5.1 trillion. Cost of sales and SG&A expenses declined to KRW 85.6 trillion, down by 7.7%. Among them, fuel costs and purchased electricity costs decreased by 16.5% and 9.5%, respectively, due to falling fuel prices, reporting KRW 22.5 trillion and KRW 34.6 million. Depreciation expenses increased by 0.8% amounting to KRW 11.4 trillion. Among key nonoperating profit and loss, interest expenses increased by KRW 233.4 billion to KRW 4.7 trillion due to a rise in average balance of borrowing compared to the same period last year. As a result of the factors mentioned above, KEPCO's cumulative consolidated operating profit for Q4 2024 recorded KRW 8.3 trillion, while net income for the period was KRW 3.7 trillion.

[Interpreted] Good afternoon. This is Taeseop Eom from the IR team at KEPCO. I will now go over the key areas of interest, starting with the electricity sales performance and outlook. Total electricity sales volume for Q4 2024 increased by 0.7% year-on-year, reaching 550 terawatt hour, driven by improved -- driven by surge in cooling demand during the summer. On an annual basis, electricity sales volume is expected to see a slight increase due to a rising heating and cooling demand. Next is on fuel cost and energy source. For Q4 2024, coal costs were approximately KRW 190,000 per ton, LNG costs were KRW 1.08 million per ton and oil was KRW 978 per liter. For the full year in 2024, excluding unloading and handling costs, coal costs are expected to be around KRW 180,000 per ton and LNG around KRW 1.05 million per ton and oil around KRW 1,100 per liter. These estimates are subject to change according to global fuel prices. Looking at the power generation mix of GENCO in Q4, nuclear power increased its share due to the entry of new nuclear power plants. For coal, the power generation mix slightly decreased due to the decline in coal utilization rates. For LNG, although there was a slight increase in installed capacity, its power generation mix was maintained due to an increase in baseload generation. In 2024 (sic) [ 2025 ], nuclear power mix is expected to be maintained due to higher utilization despite retired nuclear power plant, while LNG is at par and coal mix is expected to slightly decrease. For the 2025 annual forecast of utilization rate by power source, nuclear power is projected to be in the early 90% range, coal in the mid- to high 40% range and LNG in the mid- to high 20% range. Next, I will provide details on RPS- and ETS-related costs. For Q4 2024, RPS cost recorded KRW 3.46 trillion on a consolidated basis and KRW 4.88 trillion on a separate basis. Finally, regarding the funding status for Q4 2024, KEPCO's total borrowing amounted to KRW 132.5 trillion on a consolidated basis and KRW 87.9 trillion on a separate basis. We will now begin the Q&A session. Since this session will be conducted in consecutive interpretation in both Korean and English, we kindly ask you to keep your questions and answers concise and clear. With that, we would now like to open up for questions.

[Interpreted] [Operator Instructions] The first question will be given by Hwang Sung Hyun of Eugene Investment Securities.

[Interpreted] I have 3 questions. First question is on the detailed breakdown of other revenue sources. Second question is we're seeing a slight increase in other costs as well. So could you also break down the cost items for other costs as well? The third question I would like to pose is on how you have calculated your dividend payout that you have disclosed for the fourth quarter? What was the criteria to reach the dividend payout ratio?

[Interpreted] So on the first 2 questions on other revenue, we have seen the additional incremental profit from outsourcing services as well as generation from KOSEP, Korea South-East Power Co. As for other costs, we have seen decline in materials cost for the fuel-related costs for other costs. Also answer your question on dividend payout ratio. Our goal was to maintain financial stability, so we have to consider the balance between the future investment and funding sources as well as ways to enhance shareholder value. With that, we have decided to provide -- decide on the minimum payout ratio for our shareholders.

The following question is from Mr. Pierre Lau of Citi.

I have one question on the company. The first one is about your consolidated income statement for the last year. In the Excel file that you sent out, the finance income was KRW 2.1 trillion and the finance expense was really large at KRW 34.1 trillion. I just want to confirm are these 2 numbers correct or not, we think that these numbers are too large. The second question is, what is your guidance regarding your unit coal, LNG and oil prices for 2025? And the third question is do you think you have any chance of tariff hike in 2025? And if yes, what do you expect regarding the magnitude? And the last question is you mentioned about your minimum dividend payout ratio. So what is the percentage that you want to keep for this minimum level going forward?

[Interpreted] To answer your first question on financial income as well as financial expenses, we have incurred financial income from the hedge product that we have purchased in order for our foreign exchange hedging. The overall valuation of the derivative hedging product that we have purchased has appreciated, hence, incurring a financial income. As for financial expenses, with the same reason because the foreign exchange rate has increased significantly, we have seen a loss in the currency-nominated liability financial vehicle that we were using. To answer your question on the unit fuel price, for 2024, our fuel mix or energy mix for nuclear power plant was 48%, coal was 36%, LNG 12%. We believe this trend will not change much in 2024 (sic) [ 2025 ]. As for the unit fuel price guideline, the coal unit cost is expected at KRW 180,000 per ton. And for oil -- for LNG, about KRW 1,050,000 per ton, as well as for oil we believe that it will be around KRW 1,100 per liter. But -- however, these prices are expected to change according to global energy prices. As for the tariff outlook for 2021 (sic) [ 2025 ]. in achieving our fair tariff level, we have to consider the overall outlook of the financial market as well as different operating environment. We also see increase in foreign exchange rate as well as for energy prices. So all of these different factors have to be taken into consideration dynamically while resolving all the deficits that was incurred during 2021 to 2023. These are the issues that we are in discussion with the government to achieve fair level of tariff for the Korean market. On your question regarding dividend payout trend going forward, we had, had a level -- deep level of deficit during 2021 to 2023, which were taken into consideration in coming out with our dividend payout stance and we also have to be in consideration of future CapEx that are in plan. So at this point, it's very difficult for us to carry out active dividend payout that has to be in consideration of our current financial status as well as future investment enhancement while balancing that with overall shareholder value. That's something that we're going to officially discuss with the government to balance that out with -- to balance that out to enhance shareholder value.

The following question is by Mr. Moon Kyeong Won of Meritz Securities.

[Interpreted] First question is regarding your other operating cost breakdown, which is a follow-up to the previous question. Compared to Q4 2023, we see an increase of about KRW 500 billion in repair and maintenance costs as well as KRW 1 trillion increase in other operating costs as well. What has driven this cost up? Is it coming from the additional reserves for the nuclear power plant maintenance reserve that are required or from reflecting UAE construction cost? It will be great to have some guidance on where this is coming from. And second question is something that was also mentioned by the media recently, but we were able to see that there has been some dispute between KEPCO and Korea Hydro & Nuclear Co. on UAE construction cost. What would be the impact of this dispute on your P&L? And how will that affect in 2025 as well? Third question is on your adjustment coefficient. When you look at the 2024 Q4, has it been adjusted once again? And could you share your insight in comparing this coefficient to 2024 Q3 as well as share the guidelines on how this coefficient will move in 2025? Will it increase or decrease?

[Interpreted] To answer your first question on the other operating cost item, we have seen the project cost of goods increase for our Egypt El Dabaa nuclear power plant project and that was taken into consideration. And also cost for depreciation and repair cost has also increased. As for the reserve for nuclear power plant decommissioning cost, we have reflected some discounting rate as well as the required mandatory reserves from -- defined by the government. And the reserve requirement has gone down, therefore, our funding for the decommissioning reserve has gone down as well. As for your question regarding our dispute with Korea Hydro & Nuclear Co. on the project budget expenses, we are currently in discussion with KHNP on the costs that will be involved in extending the overall construction period. We're going to reasonably calculate the expected amount that will be seen as the leakage of economic resources, and that has been recognized as the additional allowances or reserve for KEPCO to recognize. The details are currently in discussion, and we regret to share more details at this point in time. As for your question on adjustment coefficient, there has been a recalculation or a reset of the adjustment coefficient in Q4 2024 according to the rules and regulation that is set forth. As for the trend for 2025, we will need to reflect global energy prices as well as external environment, which makes this difficult to predict at this point in time on how it will evolve. We will work closely with the Power Exchange to be in compliance with the rules and regulation.

[Interpreted] Next question is from Mr. Yoo Jaeseon of Hana Securities.

[Interpreted] The first question is regarding the overseas revenue for Q4. The increase in revenue from overseas business, is it coming from your project in Egypt or from UAE construction project settlement? And we're also seeing this $1 billion newly added amount for UAE project for 2024 in Q4. We're seeing this in the footnote and it seems that, according to the construction planning, the total profit, which has been excluded is being added once again. Will this -- so according to the current statement is this $1 billion from UAE fully reflected? Or is it going to be a new expense that will be added going forward? It would be great if we can get some clarification from the management. On Q4, it seems that the fuel cost trend has been somewhat different from what we are seeing from Q1 to Q3. Could you also share where this is coming from? And I would also like to understand about your ETS cost on a consolidated basis.

[Interpreted] To answer your first question on the increase in overseas business revenue, it is actually coming from Egypt's El Dabaa project. On your question regarding KEPCO and KHNP additional cost, this will be -- this cost will be set aside for up to Q4 as liability allowances. On your question related to why the fuel cost for the nuclear power plant has declined for Q4, that's something I would like to follow up later on. On the ETS cost side, due to the feed-in tariff that we have reflected and also the fact that we have not executed the settlement payment, the overall ETS cost has increased due to these 2 factors. So on a separate basis, the ETS cost for a separate accounting basis is minimal. So that's something that I can get back to you later on.

[Interpreted] The following question is from Mr. Hwang Sung Hyun of Eugene Investment Securities.

[Interpreted] I have a follow-up question on your El Dabaa project in Egypt. What will be your guidance for additional revenue and cost for this going forward?

[Interpreted] We will get back to you on the guidance.

[Interpreted] Next question is from Mr. Moon Kyeong Won of Meritz Securities.

[Interpreted] I have a follow-up question on the dividend payout for GENCO. So for GENCO and other consolidated affiliate companies, I believe that the dividend amount would have been decided by now. What is your guidance for the dividend income for 2024 (sic) [ 2025 ]? And what would that look like compared to 2024?

[Interpreted] Dividend payout for our affiliate companies, including GENCOs are currently in discussion. Once that discussion is concluded, we will be able to share the details.

[Interpreted] Next question is from Mr. Yoo Jaeseon of Hana Securities.

[Interpreted] I have a question regarding overseas sales revenue for operating costs. I believe -- although it's not in the annual report, I believe there is a line item for this on a separate accounting basis. Could you share the overseas business-related expenses and costs for Q4?

[Interpreted] On the separate basis, overseas business cost compared to last year, the cost has gone down by KRW 150 billion to KRW 0.5 trillion.

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

[Interpreted] I have a question regarding the overseas business around nuclear power plant. For UAE project, have you reflected all the allowances that is required for Q4 and there's no longer any need for additional reserves required? Or is there a further need to satisfy these allowances going forward? It would be great if you can clarify that. And on a consolidated basis, what is the remaining balance for bond issuance -- of the fourth bond issuance for KEPCO?

[Interpreted] On your question regarding the allowances that we have set aside for liability for Q4 is something that we are currently in discussion to consider the economic resource leakage that will take place. And since we are in the midst of this discussion and negotiation, we regret to say that we are unable to share the details at this point. And as for our balance or limits on the corporate bond issuance, it's something that is based on preliminary earnings performance. So we cannot state an accurate number at this point.

[Interpreted] Currently, there is no participant waiting with questions. [Operator Instructions] The following question is from Mr. Hwang Sung Hyun of Eugene Investment Securities.

[Interpreted] Although there has been a statement that it will not be set at this point in time, but if the management can share with us how much will be strengthened in terms of issuing the fourth corporate bond, it will be great. The overall direction is to strengthen and tightly manage the issuance level? And what is the level that you're expecting for this?

[Interpreted] On the details of answer to your -- for a detailed answer to your question, we will be happy to get back to you once we find out the specifics of this content.

[Interpreted] Currently, there is no participant with questions. [Operator Instructions] As there is no further questions, we will now end the Q&A session. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]