Korea Electric Power Corp (KEP) 2021 Q3 法說會逐字稿

[Interpreted] 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 2021 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 2021 third quarter earnings results by KEPCO.

[Interpreted] Good afternoon. This is the (inaudible). I'm Head of IR team at KEPCO. On behalf of KEPCO, I'd like to thank you for participating in today's conference call to announce the earnings results for the first 9 months of 2021. Today's call will be proceeded in both Korean and English. We'll 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 on a preliminary, unaudited and consolidated basis in accordance with K-IFRS.

Any comparison will be on a year-on-year basis between last year and this year. Business strategies, plans, financial estimates and other forward-looking statements included in today's call are based on our current expectations and plans. Please be noted that such statements may involve certain risks and uncertainties.

Now, Ms. Yoon Cho Hye, Senior IR Manager, will begin with an overview of earnings results for the first 9 months of 2021, first in Korean and repeat in English.

[Interpreted] Now, we will provide the overview in English, starting with operating income. In the first 9 months of 2021, KEPCO recorded an operating loss of KRW 1.1 trillion. To take a closer look, operating revenues increased by 2.7% to KRW 45.1 trillion. Power sales revenue increased by 1.9% to KRW 42.4 trillion, and revenues from overseas and other businesses also increased by 16.4% to KRW 2.6 trillion.

Moving on to main operating costs, Cost Of Goods Sold and Selling, General and Administrative expenses rose by 13.4% to KRW 46.2 trillion. Fuel costs increased by 16.4% to KRW 13.4 trillion, mainly due to 16.3% rise in average unit cost of fuel. Next, purchase power costs increased by 23.2% to KRW 15 trillion. This was due to larger purchase power volume from the independent power producers and higher RPS requirements related costs compared to the previous year.

Depreciation costs rose by 6.0% to KRW 7.8 trillion due to the increase in depreciable assets resulting from the acquisition of electric facilities, including transmission and distribution lines. Now, let me explain KEPCO's nonoperating segments. The net financial loss was KRW 1.4 trillion, increased loss by KRW 0.2 trillion from the last year. As a result of the foregoing, we recorded a consolidated net loss of KRW 1.6 trillion, which is a KRW 3.1 trillion decrease from KRW 1.5 trillion of consolidated net profit in the previous year.

[Interpreted] Next, I would like to briefly go over several items related to our earnings. I would like to first elaborate on the unit fuel price trends by fuel source. In 2021 Q3, fuel unit price trends were in line with international fuel prices showing a rising trend. For the unit price of coal excluding offloading prices, it was KRW 160,000 per ton, while LNG recorded KRW 730,000 per ton. As fuel prices are expected to continue to be escalated, we expect additional increases in the unit fuel prices in Q4. On an annual basis, for the entire year of 2021, our outlook for coal is KRW 150,000 per ton; and for LNG, KRW 680,000 per ton; and for oil, KRW 790 per liter.

I will move on to the generation mix of the Group. In 2021, Q3, the utilization of nuclear plants rose amid increased demand for power. The contribution of nuclear power was similar to the previous year, while LNG contribution rose on a year-over-year basis. In case of coal, the contribution decreased due to a reduction in installed capacity leading to a fall in generation volume. For the entire year of 2021, the contribution of nuclear and coal in the generation mix is expected to be slightly declining, while the contribution of LNG increasing. Looking at the utilization by fuel source. Nuclear was early mid-70%, coal just around below and above 60% and LNG early 30%.

Next, I will go over the RPS and ETS costs in Q3. In 2021, Q3, RPS costs recorded KRW 720 billion on a consolidated basis and KRW 950 billion on a stand-alone basis due to increased purchase of [RC]. The ETS cost was minus KRW 100 million on a consolidated basis and plus KRW 1.5 billion on a stand-alone basis.

Lastly, I will briefly go over the national carbon neutrality scenario, which was announced in October. The national carbon neutrality scenario is comprised of 2 scenarios for achieving net zero. The carbon neutrality strategy for each area is expected to be developed separately. Meanwhile, on November 10, KEPCO and its subsidiaries have announced a new vision. And it was the Zero for Green, which is the carbon neutral vision of the group. 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 to the Q&A session in both Korean and English, please make your questions and answers brief and clear.

[Interpreted] (Operator Instructions) The first question will be given by Pierre Lau from Citi.

I'm Pierre Lau from Citi. There are 3 questions from my side. The first one is, in the third quarter this year, the average unit sales price still dropped 2% year-on-year. What was the reason for the decline? And what is your guidance regarding the tariff outlook for the company in fourth quarter and 2022.

And second question is about fuel costs. What is your latest guidance of your unit coal, LNG and oil cost for 2021 on the back of recent energy price hike globally? The third question, you just mentioned the generation mix for 2021. But I'm sorry, I can't hear the number very clearly. Would you mind repeating those numbers?

[Interpreted] As to your first question, we do have a cost pass-through tariff system in place, and the adjustment charge will reflect the volatility of the fuel cost. And like you've mentioned, the fuel costs are on increasing trend. And so, even in 2022, through this cost mechanism, it should be reflected in the tariffs.

However, the adjustment charge is also closely consulted with the government and the government may have some (inaudible) they would like to consider when setting these numbers. So once we compute adjustment charge, we will be working closely together with the government to make the final decision.

So for the unit price of the different fuel sources, I just mentioned in the presentation that for coal, we largely expect around KRW 150,000, and for LNG, around KRW 680,000 for 2021 on an annual basis. So these numbers will be slightly different from the previous earnings calls, mainly due to the reflection of the increasing trends in recent fuel prices. These numbers that I just gave you may also change in the future, depending on the overall market situation and the supply and demand of each fuel source.

And then as to your question on the generation mix and the generation utilization of the power plants, for nuclear, it should be around early to mid-70%, coal around 60% and LNG early 30%.

[Interpreted] The following question is by (inaudible) from UBS Securities.

[Interpreted] I have 2 questions today. First is regarding the other costs. So regarding other costs, has there been any increase in trust forecast or any other element of the other costs? And then second question, regarding the environmental charge and the base fuel cost, has there been any discussion with the government in calculating these figures?

[Interpreted] So first I would like to go over the other costs. As the mandatory RPS ratio goes up, there has been increase in provisions for this item around KRW 30 billion, and the same goes for the provisions for greenhouse gas emissions costs, which rose by around KRW 60 billion on a Y-o-Y basis. Interpreted . And then as to your second question, regarding the environmental charge. So this year's environmental charge will be calculated, and then it is started to be reflected in the tariff next year. And currently, we are in the process of calculating the environmental charge for 2021. And once we have some more concrete numbers, we will be discussing that with the government. As for the base field cost, there has been the increase in recent fuel costs in the global market. So we are also discussing very closely with the government on the reflection of the recent fuel cost changes.

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

I have some more follow-up questions. The first one is, would you mind repeating the generation mix guidance for this year? I mean, how many percent from coal, how many percent from nuclear and LNG, et cetera. The second thing is that I can see that the percentage of power generations purchased from IPP3 pricing in recent years, would you expect the increment for 2022 still around 15% compared to that in 2021?

And the third question is, what is the company business strategy regarding overseas investment now? And the last question is, given that the economy gain ratio has gone up because of the loss-making situation at the moment, do you expect any risk or potential downgrade (inaudible).

[Interpreted] As to the generation mix of the entire group, in 2020, nuclear was around 41% and coal was around 45%. In 2021, given that the utilization of nuclear plants have gone down compared to 2020, the mix should go down as well. And we also believe that the contribution of coal in the generation mix should slightly decrease as well.

And then as to your second question regarding power purchased from IPP, in 2022, in order to have a better idea of this number, we need to look at the international fuel prices, we also need to have a better idea of the utilization of baseload power plants, so just nuclear and coal.

And on top of that, we also need to have more concrete numbers for the demand for next year. So given all of these different variables, the IPP power purchase may be different from 2022 and 2021. And it can go up, it can go down. I hope you understand that we are not able to give more concrete details.

As to your question on overseas strategy, KEPCO has been working to further promote its generation and grid businesses overseas. Given the recent trend of energy transition, we are making effort to reduce our involvement in fire -- coal-fired thermal power plants overseas and more focus on renewable energy, energy grid businesses and also to capture more opportunities for new businesses.

So our focus overseas will be in low-carbon environmental-friendly technologies.

[Interpreted] As to your last question regarding the credit rating of the company, KEPCO has a stand-alone rating and then also a final rating. And when KEPCO issues bonds in the global capital markets, the final rating is applied. And our final rating is on par with the Korean government. And therefore, we were able to reduce our financial cost because we are able to issue the bond at a very high rating. And we don't see that our borrowing ability in the global markets has been impacted significantly by our standalone credit rating. This is evidenced by our green bond issuance in September, where we believe that it was a very successful issuance, and we were able to enjoy a favorable interest rate that lowered our financial costs. As for a stand-alone rating, SMP actually decreased the rating of KEPCO from BBB flat to BBB minus.

But one thing to note is that when there was the tariff reform in Korea last year and then early this year, SMP increased or raised the stand-alone rating then. And so they're kind of taking it back and restoring it to before the tariff reform take place in Korea. As for (inaudible) they did not take any particular action even during and after the tariff reform in Korea. So we don't believe that they will be significantly changing the credit rating they have for the stand-alone status of KEPCO.

[Interpreted] The following question is by Seyon Park from Morgan Stanley.

[Interpreted] I have 2 questions. First, it may be a little bit too early, but I would like to have a better understanding of the utilization of coal and nuclear plants next year? And then the second question is, do you have a more detailed schedule on when the Unit 1 and 2 of Shin-Hanul will be utilized? So do you have the utilization schedule for that?

[Interpreted] As for your first question, regarding the next year outlook for utilization of coal and nuclear power plants, we don't have the final schedule for the preventive maintenance yet, and it can be impacted by other variables. So once we have a better idea, we will be communicating that with the market.

And then as for the utilization of Shin-Hanul Unit 1 and 2, Unit 1 on March 2022, and then unit 2, March 2023 is the time line that we have for commercial operation initiation.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions).

[Interpreted] (inaudible) this Q&A session, KEPCO would like to conclude the earnings release conference call. Thank you again for your participation.

[Interpreted] This concludes the fiscal year 2021 third quarter earning 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.]