Korea Electric Power Corp (KEP) 2022 Q1 法說會逐字稿

[Interpreted] Now we will provide the overview in English, starting with operating income. In the first quarter of 2022, KEPCO recorded an operating loss of KRW 7.8 trillion. To take a closer look, operating revenues increased by 9.1% to KRW 16.5 trillion year-on-year. Power sales revenue rose by 7.6% to KRW 15.4 trillion, while revenue for overseas and other businesses increased by 36.1% to KRW 1.1 trillion.

Moving on to main operating costs, cost of goods sold and selling, general and administrative expenses surged by 67.0% to KRW 24.3 trillion. Fuel costs surged by 92.8% to KRW 7.7 trillion due to rapid increase in oil and LNG prices.

Next, purchase power costs surged to KRW 10.6 trillion. This was due to larger purchase power volume from the independent power producers and higher unifies of purchase power. Depreciation cost rose by 5.9% to KRW 2.7 trillion due to the increase in depreciable assets resulting from the completion of electric facilities including transmission and distribution lines.

Now let me explain KEPCO's nonoperating segment. The net financial loss was KRW 0.6 trillion, increased loss by KRW 0.1 trillion from the last year. As a result of the foregoing, we (inaudible) KRW 5.9 billion consolidated net loss from KRW 0.1 trillion consolidated net profit in the previous year.

Now we will go over a few key numbers in business regarding our earnings performance. Power sales in Q1 due to recovery of the domestic economy and export has gone up by 4.5% year-on-year, as situation of COVID-19 improves. We believe that the economy will continue on with healthy growth, leading to also the growth of power sales as well.

Next is on the unit fuel cost. The Q1 fuel cost reflects the increase of international fuel prices which resulted in the coal fuel cost -- unit coal cost being KRW 230,000 per ton and LNG being KRW 1.4 million per ton. If you look at the recent fuel prices, the volatility has gone up. So it is rather difficult to have a prediction on the outlook of the annual fuel cost for the unit price. But as the fuel price continues to be at its strong high, we believe the unit cost for coal, excluding the unloading cost, will be somewhere between mid- to high KRW 200,000. And for LNG, we believe it will be around KRW 1.3 million per ton. Also, these outlooks can be changed in the future depending on the future of fuel prices.

When you take a look at the generation mix of our GENCO in Q1, as we have seen increase in nuclear power plant utilization year-on-year, the generation mix for nuclear power plant went up. We expect the utilization rate for the nuclear power plant will continue to increase on an annualized basis as we see the utilization number as well as completion of new nuclear power plant coming in within the year. So while the nuclear power plant utilization will increase, we believe, relatively speaking, the coal and LNG mix will go down. The utilization outlook for the year, we believe will be mid- to high 70% level for nuclear power plant, and also the high 50% level for coal.

Next is on the RPS and ETS-related costs. In Q1, RPS cost has increased for the consolidated basis, it has recorded KRW 688.6 billion. And on a stand-alone basis, it recorded KRW 679.9 billion since the RPS mandate has increased from 9% last year to 12.5% this year. As for ETS cost, on a consolidated basis, it reported KRW 86 billion. And on a stand-alone basis, it recorded KRW 85 billion.

This concludes the brief briefing on the key business outlook.

[Interpreted] Now let us move on to the Q&A session. I'm joined with our IR committee members in charge of major business areas at KEPCO. We are prepared to take any questions. Since we will proceed the session in both Korean and English, please make your questions and answers brief and clear. Thank you.

(Operator Instructions) [Interpreted] The first question will be given by (inaudible) Securities.

[Interpreted] I have 3 questions. First is on the financial side. It seems that the size -- or there has been increase of issuance for the power bond. And to what extent do you believe that KEPCO will be able to issue your power book bonds going forward? So based on the electricity business app and also the market practices, what would be the limit? Or to what extent will you be issuing this bond with potentially how much trillion won would that be possible?

Second question is, as we see increase in bond issuance and increase in interest rate, what is your expectation for the interest cost for this year and next year?

And third question is regarding the nuclear power plant. There has been released in the press that the current government of Korea is going through the negotiation with U.K. on winning the nuclear power plant project. Is there any further development that you can share with us at this point? And also, is there any additional projects that you're pursuing outside of the U.K. project?

[Interpreted] To answer your first question and second question on funding based on the KEPCO Incorporation Act, on a stand-alone basis, KEPCO is allowed to issue bond size leading up to 2x of its capital -- paid in capital as well as provisioning. And as of 2021, the outstanding balance would be KRW 92 trillion. And as of Q1, the client bond issuance level at KEPCO on a stand-alone basis is slightly over KRW 40 trillion at the moment. And currently, we don't have any funding issue within KEPCO. But however, since the external environment is aggravating and with somewhat lower financial performance that we are witnessing, we will make sure that we will not face any challenges in securing our funding going forward and see various measures to secure this funding source.

And so there will -- we will make sure that we will continue to improve our financial stance by increasing our financial improvement initiatives, as well as to prevent any issues with the funding going forward by closely monitoring the market situation going forward. As for the interest rate, we cannot have an outlook at this point on how much that interest rate would be. And since this will be depending on the changing market situation.

As for the update on the U.K. power plant project, we have pursued this project in the U.K. in the past, but U.K. has pursued a new nuclear power plant to develop this model. So we are actually monitoring the development of this model to reengage in this business opportunity. And for other projects outside of U.K. is currently we're pursuing an opportunity in Saudi Arabia to win a power plant project there. We are at the stage of preparing for the bidding papers. As for all these 2 projects, there hasn't been any concrete timeline or the project development that has been developed. So we will communicate with the market once the details are determined.

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

[Interpreted] First of all, my first question will be on whether or not you'll be sharing a fact sheet from now on.

And second question is on the other revenue category. Could you share with us some breakdown under other revenue? And also share with us the quarter-over-quarter changes.

Third question is around your CapEx. Is there any changes in CapEx guidance? And what is your execution rate leading up to this point? And also on the energy market uncertainties, is there any further development by the GENCOs on this volatile and uncertain energy market?

[Interpreted] To answer your second question on the other power revenue category, when you look at our KPN and KPS subsidiary revenue, it has gone up by KRW 130 billion. And also the construction revenue went up by KRW 13 billion. And the heat supply business due to increase in LNG fuel costs has seen revenue increase of KRW 130 billion. And also, when you look at our overseas business, the revenue from overseas business has gone up by KRW 21.8 billion.

On your question on our CapEx, our annual CapEx outlook or guidance for 2022 was KRW 15.4 trillion. In Q1, our expectation was to spend KRW 3.5 trillion, but we have executed KRW 2.9 trillion to date. Depending on the progress of detailed projects, there may be some changes to how much CapEx that will be executed on the ground. But when you look at the annualized CapEx guidance, we don't believe that the CapEx so much will change that much.

And to answer your third question on our GENCO, currently only (inaudible), the Korea Midland Power adopts their LNG directly from the market. If there is any further attempt or plan for our GENCOs to directly source LNG from the market, we will also communicate that with the community.

(foreign language) The following question is by Ryu Jae-Hyun from Mirae Asset Securities.

[Interpreted] Since you've mentioned that the nuclear power plant utilization would be somewhere mid- to late 70%, I would like to ask whether in Q1, when you look at -- when you consider the utilization rate for Q1, it seems that the utilization is going down as we move forward. Is there a reason why you have such an outlook. Also in the long run one, what is your utilization target and outlook for nuclear power plant? And as we see the fuel cost increase and expect it to increase going forward, I'm sure the fuel cost sensitivity would also change per 1% of fuel cost change. How do you -- is there any changes? And could you please share that with us?

[Interpreted] To answer your question on the utilization for nuclear power plant, first, as you can see, our utilization rate is determined by different planned maintenance schedule by different power plant units. So currently, we don't foresee any -- if you look at the current schedules for the scheduled maintenance, we don't believe that it will change on an annual basis, although there will be some slight changes on a quarterly basis level. And all in all, the Q1 utilization rate was relatively higher. And also just for your reference, we do not set a long-term nuclear power plant utilization target. And also as you can see, the fuel cost volatility has gone up exponentially. And this sensitivity is also heavily impacted by the S&P price. So at this point, it's very difficult for us to understand and calculate the sensitivity level because the volatility is so high.

[Interpreted] The following question is by Pierre Lau from Citibank.

I have 3 questions. The first one is given that you have a new president, so what is your guidance for the tariff high outlook for 2022nd?

The second question is regarding the unit fuel cost, so your latest guidance for coal is mid to high KRW 200,000 per tonne, which seems to be higher than the previous guidance KRW 225,000. But for LNG this year will be KRW 1.3 million per tonne which is lower than previous guidance, KRW 1.4 million. So I want to know why the coal price revised up by LNG price revised down?

And question number three is, given that the new president seems to be more in favor of nuclear, what is your company long-term business plan in terms of fuel mix? Any change because of the new president?

[Interpreted] So as the new government has been launched and they have announced the overall initiatives in this area, we will work closely with the government to have transparent and reasonable development and initiatives to make sure that we will have a transparent and rational plans going forward.

To answer your question on the unit fuel cost, in Q1, our unit cost for coal was KRW 230,000 per tonne in Q1 and our outlook for the remainder of the year would be the mid- to high KRW 200,000 level. At the end of last year, our fuel cost -- unit fuel cost for coal was KRW 120,000. So the coal price did go up, reflecting the increased coal price in the market.

As for LNG unit fuel cost, our unit cost at the end of the financial year last year was KRW 1.1 million, and our outlook is KRW 1.3 million as of now. So we do reflect the increase in fuel cost coming from the market.

And also to answer your third question, with the new government, the government is announcing of most of the government initiatives as we speak. And among that, that includes plan on nuclear power plant. But the detailed plan, I believe, will further be specified as we see the further construction plan for Shin-Hanul #3 and #4 nuclear power plant, and in line with the basic Energy Supply Act of Korea.

[Interpreted] The following question is by Lee Min-Jae from NH Investment Securities.

[Interpreted] I have 2 questions. First is on the utilization rate for the nuclear power plant. You mentioned that the outlook would be late 70%, but when you look at the utilization rate for June, it is mid-80% level. And when you also reflect the planned maintenance plan announced by KHNP where the number should also remain at mid-80% level. So how did you calculate the number to reach mid- to late 70% level for the nuclear power plant utilization rate. And also if you can share with us the CapEx plan for the GENCOs, that would be great.

[Interpreted] To answer your first question on the nuclear power plant utilization rate, the overall utilization rate is calculated based on the planned maintenance plan of each of the nuclear power plant as well as on plant maintenance plan as well. So the numbers could be different from the number you calculate with the currently released planned maintenance plan.

To answer your second question on GENCO's CapEx on renewable energy, they are currently engaged in direct and indirect investment in this area and to invest into offshore wind as well as renewable energy sources. And to just look into the direct CapEx level going into offshore energy, renewable energy, on an annualized basis, we believe it will be somewhere around KRW 900 billion in CapEx. For a detailed plan and the CapEx schedule, we will go back and get back to you on the details.

(foreign language) There are no participants to give you a question. The following question is by Ryu Jae-Hyun from Mirae Securities.

[Interpreted] So this could be a question somewhat out of the blue, but the question is around tariffs. It is that it is foreseeable that we need to increase tariffs soon and a lot in the foreseeable future. And with the new government, we are also -- although we want to anticipate that tariff could go up, there is, however, a ceiling on how much that we can increase. So there were some factors that was holding us back to not increase the tariff under the current situation. But when you look at the overall cash flow and external environment, is there -- can we potentially imagine a scenario where the tariff could substantially go up?

And also, the next question is on the power bond. You also mentioned that you're going to seek various measures to secure funding sources. But can you also or getting the capitalization from the market, is that also an option that you're considering?

[Interpreted] So on the tariff adjustment, to answer your first question, currently, we're in the process of developing the total comprehensive cost. And once the total comprehensive cost is finalized and fixed, we will closely work with the government to implement.

To answer your first question, we're going to work towards improving our financial situations and also to prevent any issues of financial sourcing from the market. Currently, there is no special or concrete measure that we are considering, but we're going to make sure and consider various measures so that we can securely have secure funding source from the market.

[Interpreted] So this concludes our Q&A session. And going forward, KEPCO and its GENCO will in order to overcome the financial crisis situation due to the surge in global fuel prices, will set up a contingency committee that is composed of all the GENCOs to come up with strong measures to cope with the situation. We will carry out bold innovation to enhance efficiency across all our business areas within KEPCO, and also, we will closely work with the government to rationally reflect the changed cost, including the fuel cost to the power tariff.

We would like to thank everyone for your participation. And with that, we close our earnings conference call. Thank you.

[Interpreted] This concludes the fiscal year 2022 first quarter earnings results by KEPCO. Thank you for your participation.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]