Korea Electric Power Corp (KEP) 2021 Q1 法說會逐字稿

(spoken in Korean) Good morning. This is (inaudible) IR head of KEPCO. On behalf of KEPCO, I would like to thank you all for participating in today's conference call to announce the earnings results for the first quarter of 2021.

Today's call will be proceeded 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 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, [gross] 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, Mr. Yoonjue Lee, Senior IR Manager, will begin with an overview of our earnings results for the first quarter of 2021, first in Korean and repeat in English.

(spoken in Korean) Now, we will provide the overview in English starting with operating income. In the first quarter of 2021, KEPCO recorded an operating profit of KRW571.6 billion. To take a closer look, operating revenues decreased by 0.1% to KRW15.08 trillion year on year. Power sales revenues declined by 0.2% to KRW14.28 trillion, while revenues from overseas and other businesses increased by 1.1% to KRW0.8 trillion.

Moving on to main operating costs. Cost of goods sold and selling, general, and administrative expenses decreased by 1.1% to KRW14.5 trillion. Fuel costs dropped by 4.6% to KRW3.1 trillion due to decrease in cost of LNG prices in addition to lower utilization rates of coal-fired power plants.

Next, purchased power cost increased by 3.7% to KRW5 trillion. This was due to larger purchased power volumes from the independent power producers by 6.9% compared to the previous year. Unit price of purchased power, however, decreased because of lower unit price of LNG fuel.

Depreciation cost rose by 4.6% to KRW2.55 trillion mainly due to the increase in depreciable assets resulting from the completion of the electric facilities, including transmission and distribution lines. Repair and maintenance cost, marked KRW484 billion, shown 11.4% decrease largely due to shortened period of planned maintenance of our nuclear power plants.

Now, let me explain KEPCO's non-operating segments. The net financial loss was KRW536 billion, reduced loss by KRW87 billion from the last year. As a result of the foregoing, we recorded a consolidated net profit of KRW118.4 billion compared to KRW53.6 billion of consolidated net profit in the previous year.

(spoken in Korean) This concludes the overview of KEPCO's earnings results for the first quarter of 2021.

(spoken in Korean) Now, let us move to Q&A session. I am 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 Q&A session in both Korean and English, please make your questions and answers brief and clear.

(Operator Instructions). Pierre Lau, Citibank. Since there is no question from Mr. Lau from Citibank, we will move on to the next question. (Operator Instructions)

Shin, Ji-Yoon, KTB Investment Securities.

(interpreted) It seems that there has been some complication with the system and [hopeful that it resolves). And meanwhile, since I am able to ask questions, my first question would be on the unit price of your LNG and coal; and I'm sure that was what Pierre was also trying to ask through this conference call.

And when you look at the price of coal minus tax in dollar, the Q4 coal price was at around $60; whereas in Q1, it's over -- well over $70. And when you look at the spot price of the future price, it's currently $100 or above. So I would like to know the Company's guidance on the future price or the coal price projection.

(interpreted) So to give you our unit fuel cost predictions for the whole 2021 on an annual basis based on different fuel source, for coal we are anticipating KRW131,300 per ton; and for LNG we are anticipating KRW597,000 per ton.

So when you compare these numbers to the power predictions at the end of the year, the price for coal has gone up and we're especially monitoring the price trend of coal at the moment. So if there are changes to these unit price projections, we will be actively communicating to the market.

[Moon, Kyung-Won], Meritz Securities.

(interpreted) My question is regarding the baseload for the coal and nuclear power plant. What is your outlook for the overall capacity as baseload? Especially, you are going to be also using Shin-Hanul 1 generation, so what would be the utilization for it for nuclear power plant and also coal? If you can share your guidance on the utilization, it would be great.

(interpreted) To answer your question on the capacity for Shin-Hanul 1, it is projected to be up and running at end of July 2021. And also for Shin-Seocheon 1, it will be up and running at the end of May 2022 and the capacity will be 1.4 gigawatt.

For coal, the Shin-Seocheon 1 will be up and running in end of this year with a capacity of 0.1 gigawatt; and if there is any changes to the capacity or the operations scheduled for Shin-Hanul 1, we will be communicating that to the market.

And for Shin-Seocheon 1, the correction is that it will be up and running at the end of -- during end of July -- June of this year. And regarding the shutdown of coal-fired power plant for (inaudible), we are closing down a total of 2.6 gigawatt of capacity.

And for the utilization for the coal power plant for this year, last year it was at 75.3% for nuclear power plant; and our anticipation for this year would, of course, depend on our planned and unplanned maintenance timeline, but we anticipate that it will be somewhere around early to mid-70% for the nuclear power plant utilization.

And as for the coal power plant, although we are seeing demand increase for our power, what we are seeing end of Q1 actuals as well as the situation around particulate matter and greenhouse gas emission, we believe the utilization rate will be somewhere around or below 60%.

I hope that answered your question, and if so, we will be moving on to the next question.

You, Jae Hong, Mirae Asset Securities.

(interpreted) My first question would be on the standalone financial statements especially on your standalone revenue, including the operating profit. When you look at your standalone performance compared to a consolidated financial statement, the direction seems to be somewhat decoupled at the moment.

There could be various reasons for that, and I would like to understand what causes this decoupling of directions for the financial result. Is it because of the settlement coefficient or adjustment coefficient that is being applied? And once the adjustment coefficient is applied to settle the different unit prices, will the direction then be synced again? What is your outlook on that?

And more importantly, we haven't seen the increase of electric tariff at the moment, but when you look at the coal price, it is the right time to have a tariff increase. And if you look at it on a quarterly basis, it's already well over KRW30,000 to KRW40,000; and the fuel cost is going up, so we believe that there have been some pressure on the fuel cost as well.

So what is your outlook for the tariff in the second half of the year? And if possible, what is your investment coverage ratio that you anticipate going forward?

(interpreted) So on a standalone basis, we have had some slow progress made in our UAE business; and compared to last year, the revenue was negative KRW70.6 billion on our balance sheet. And also, for the purchased power cost, we have seen increased power cost purchase for RPS at around KRW175 billion, and that would give us the total purchased cost increase of power by KRW371.8 billion.

And to add to that, when you look at the different performance for Q1 on a standalone basis, it was also improved by the changed adjustment coefficient that we used to settle the unit cost.

(interpreted) So my follow-up question would be, do you anticipate that this trend will continue on to the future? If that's the case, your investment compensation ratio needs to be adjusted especially for your GENCOs.

(interpreted) As for the outlook for our adjustment coefficient, it will be very difficult for KEPCO to anticipate the future outlook of this coefficient because it is something that is determined by the cost evaluation committee and not by KEPCO.

(interpreted) When it comes to the fuel tariff adjustment, we are going to base our cost based on the purchase price by the Korea's public purchase agency office starting in March.

So any price that comes up, as determined by the office in March, will be used for the second half of our tariff calculation. But at this moment, it will be difficult for us to have an outlook on the second half adjustment for the tariff.

(interpreted) I fully understand why there could be difficulties in trying to project the fuel cost adjustment especially for tariff changes, but we are implementing a cost pass-through system and if we -- and the management has spoken about the investment compensation rate and the market expectation is to see this cost pass through the tariff system.

But to have that outlook somewhat unclear at the moment and to have lack of visibility into how these prices will move in the future would, kind of, kill the purpose of actually implementing the cost pass-through system. Would like to understand the management perspective on how this will unfold.

(interpreted) Regarding the fuel cost, we have seen -- we have had the cost pass-through system implemented to have a right signal for the market as well as to encourage efficient and effective use of electricity and power by our consumers.

But when you look at what is happening in the market, in Q2, we have seen volatility increase when it comes to the prices of different fuels. And due to COVID-19, we also have to consider how the Korean people are dealing with the economic and social difficulties at the moment. So there are many different things to consider and it has been decided that we will delay applying different price increase measures in the government.

So, although we are closely monitoring the oil prices as well as following the trade prices of different fuels, it will be still difficult for us to anticipate how these fuel costs will move in Q3 for our tariff determination.

(interpreted) A follow-up question to that because this is an important issue. So whether you increase or decrease your tariff moving forward, when and if there is an adjustment, do you plan to disclose and communicate to the market? If so, when would that timing be?

(interpreted) So we will be following the procedures set forth by the electricity tariff calculation standard. And what it stipulates is that every sixteenth of the previous month, we will be submitting the overall tariff calculation to the government, and the disclosure schedule or timeline would follow what is stipulated in the standard.

In Q1, we have also disclosed these calculation details and we will be doing the same.

So according to the standard, the Q3 price or tariff will be submitted by June 16 and be decided on June 20 according to what is stated on the evaluation standard.

As for the investment compensation ratio, we can only disclose it once it's submitted to the government and is approved by the government. So we will be communicating that to you once it is approved by the government.

Kang, Dong-jin, Hyundai Motor Securities.

(interpreted) I have one question, short question. When you look at last year's standalone net profit, it seems that your profit was higher than the fair rate of return. Did I understand that correctly? And if so, if you have created some profit off of it, would that also trigger tariff decrease going forward or are you going to have to share profit with your subsidiary to the adjustment coefficient?

(interpreted) When you look at the total cost that was submitted to the 2020 budget statement, fair rate of return will be higher than what was actually anticipated.

As for the adjustment coefficient calculation, we will be reflecting the total cost that went into all of our GENCOs as well as KEPCO and predict our profit or loss from that -- based off of that.

So it will be reflecting the total profit or loss at the end of the day. But currently, we don't have full visibility in to how much cost could be applied to our GENCOs, so we cannot predict whether the coefficient will go up or go down.

Cho, Yoon, UBS Securities.

(interpreted) I have a question on the overall carbon related cost. So for carbon emission trading and RPS, how much cost was there for the quarter and how much cost do you anticipate throughout the year? And in the second half of this year, you will be reducing discount for the essential usage of power as well as increasing discount for the underprivileged household. Will these plans be implemented as scheduled? If so, what will be the impact on your top-line revenue?

(interpreted) As for our RPS purchase cost, the cost has been increased by KRW211.7 billion in total; and as for the greenhouse gas emission trading cost and for the power, it was KRW112.6 billion. And also, we incurred a negative KRW29.2 billion; and on net, the cost would be minus KRW141.8 billion.

As for your question regarding the two plants that KEPCO is scheduled to roll out in the second half, they both will be rolled out within July of this year, and the impact on our revenue would be plus KRW70 billion to KRW80 billion.

Shin, Ji-Yoon, KTB Investment.

(interpreted) So I would like to understand further on how the accounting process is done for the fuel cost pass-through system. And for the case in CO gas, after implementing a cost pass-through system, if the cost increase has not been reflected in that month, what they do is that they state that as an account receivable on their (inaudible); and I believe, that you have done the same since 2012 and processing it as an account receivable.

I'm sure Q1 will not be applicable, but starting in April, it seems that you need to, kind of, apply the increased tariff rate that needs to be reflected. So you may also try to process it as a lump sum cost in a short period of time. So how do you plan to process this on an accounting term? I don't believe that you will be processing it as an account receivable, then how will it be processed?

And also, regarding your borrowing or loans. When we are getting negative cash flow, and you will probably need to borrow to offset the negative cash flow, what is your plan for that?

And another question is regarding your generation consolidation. We are hearing some of the media cover the potential consolidation of generators. How is that going to happen?

(interpreted) On a standalone basis, our accounting process for the addition of tariffs that needs to be processed would be the volume. In Q1, we have a negative KRW3 that needs to be reflected, which is then processed on our accounting book as revenue and account receivable; and that is something that we also continue to do, as we have done to date, to put on our accounting book and when we file for our invoices as well.

So we would continue on with processing it as revenue and accounts receivable according to our code for electric business.

So I need to make some clarification on the answer that was just provided. The minus KRW3 -- it was processed and was already reflected on our revenue and account receivable and that is something that we have done to date. But going forward, we need to also reflect the additional tariff that needs to be reflected as an increase coming from our cost pass-through system.

How we are going to do that is something that is under discussion at the moment, but it is likely that at the timing of our invoicing, we will be reflecting that as account receivable. That is something that needs to be further reviewed; and once it is determined and finalized, we will be communicating that to the market.

(spoken in Korean)

(interpreted) Follow-up question from our analyst is that that would be very important because once you increase or decrease your tariff, that would also impact the overall earnings result. And when you look at the timing of it, you are going to, of course, settle for Q2; and you probably need to decide that before August timeframe.

So is it something that you will drag on until August? When will be the time for determining how you are going to process this on an accounting basis?

(interpreted) In terms of timeline, it is our hope that this is determined ASAP. And the process is clearly underway at the moment, but it will be very difficult for us to state when that will be available. But we don't want to drag this on to the later date and it is our hope that we resolve this as soon as possible. That was on the accounting side.

But in terms of accounting processing, we believe it will be on our book as an account receivable at the point of invoicing. And that is our current stance in which we will be also pushing forward.

Just to clarify one point is that when there is a fuel cost increase, and when and if we need to reflect that on our tariff to increase our tariff amount, that will be -- the account receivable will not be reflected when we don't invoice. It is only after when we invoice, it will be reflected as account receivable. So it won't be on our books as an accounting receivable if it's not invoiced.

(interpreted) As for your question on the borrowing, as of end of Q1, KEPCO and its six GENCOs have about outstanding KRW66 trillion of borrowing. And we believe that that loan amount would slightly go up within this year, but we plan to diversify our funding sources to optimize and lower our funding cost.

And as for your question regarding generation consolidation, we regret to say that at this point, we will not be able to provide an answer for that and we ask for your understanding.

You, Jae Hong, Mirae Asset Securities.

(interpreted) As far as I know -- this is a follow-up question for your accounts receivable statement. But as far as I know, there has been some accounting rule that [unabled] us to process it as an account receivable.

Has KEPCO changed how you are processing this going forward to allow this to be accounted as an account receivable? I would like to understand whether the accounting rule has changed or whether you are changing the accounting process to enable this?

(interpreted) So currently, what I can say is that our accounting procedure is being under review and we have not decided on whether this -- and we have to look into whether this will be processed as account receivable or not.

But we did not change any accounting procedures or standard before related to it; and whether the accounts receivable will be received or not in the future is a sphere of judgment that we cannot make judgment into at this point.

So when you look at the accounting processing for this account receivable, what I can say is that it's still under review. And we are also trying to determine whether this AR will be recognized at the time of invoicing or not, which has not been determined yet.

Kang, Dong-jin, Hyundai Motor Securities.

(interpreted) This is a follow-up question on the fair rate of return question. Last year, you did exceed your net profit in terms of fair rate of return. But I wanted to further understand its impact on your tariff.

(interpreted) So the overall adjustment for tariffs is based on our budget statement regarding the overall total cost of electricity service; and this budget number has not been determined yet -- as of yet. But, however, once that is determined, it is something that we can discuss with the government to adjust our tariff.

(spoken in Korean) We are very sorry for [the technical problem]. If there is anyone who was unable give us a question, please contact our IR team.

We now conclude our earnings conference call. Thank you, all, for your participation.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.