Korea Electric Power Corp (KEP) 2020 Q4 法說會逐字稿

(foreign language) Good afternoon. First of all, thank you all for joining this conference call. Now we will begin the conference of the Fiscal Year of 2020 Annual Earnings Results by KEPCO. (Operator Instructions)

Now we shall commence the presentation on the Fiscal Year of 2020 Annual Earnings Results by KEPCO.

(foreign language) Good afternoon, this is [Tristan], 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 fiscal year of 2020.

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 the Q&A session. Please note that the financial information to be disclosed today is on a preliminary (inaudible) and consolidated basis income in the (inaudible) 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 Miss Yoon Cho Hye, Senior IR Manager, will begin with an overview of our earnings results for the 2020, first in Korean and repeated in English.

(foreign language) Now we will provide the overview in English, start with operating income.

In 2020, KEPCO recorded an operating profit of KRW 4.09 trillion. To take a closer look, operating revenues decreased by 1.0% to KRW 58.57 trillion year-on-year. Power sales revenue declined by 0.4% to KRW 55.73 trillion. And revenues from overseas and other businesses also decreased by 12.2% to KRW 2.84 trillion.

Moving on to main operating costs. Cost of goods sold and selling, general and administrative expenses dropped by 9.9% to KRW 54.48 trillion. Fuel costs climbed by 19.0% to KRW 14.79 trillion, thanks to lower international fuel prices in addition to higher utilization rate of nuclear power plants.

Next, purchase power costs fell by 13.9% to KRW 15.73 trillion. The unit cost of purchase power plunged by 19.3% as lower LNG prices moved the system marginal price downwards, while the electricity demand decreased.

Purchase power volume, on the other hand, increased by 2.0% due to the lower utilization rate of coal-fired power plants, despite of the higher utilization rate of nuclear ones. Depreciation costs rose by 3.0% to KRW 9.94 trillion, mainly due to the completion of new power plants at the end of the year 2019.

Repair and maintenance costs marched KRW 2.54 trillion, which has shown 10.7% of increase largely due to more repair and maintenance after the completion of new power plants.

Now let me explain KEPCO's nonoperating segment. The financial net loss was KRW 1.39 trillion, which has reduced loss by KRW 0.39 trillion from the last year. As a result of the foregoing, we're back to consolidated net profit of KRW 2.09 trillion, compared to KRW 2.26 trillion of consolidated net loss in the previous year.

This concludes the overview of KEPCO's earnings results for 2020.

(foreign language) 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. This will proceed the Q&A session in both Korean and English, please make your questions and answers brief and clear.

(Operator Instructions) The first question will be provided by Pierre Lau from Citi.

Congratulations for the group result last year. I have 4 questions. The first one is what is your unit fuel cost guidance for 2021 for coal, LNG and oil? Question 2 is, what is your expected generation mix for 2021? The third question is, is there any update regarding tariff change? And the last question is, what's your guidance for dividends for 2020?

[Interpreted] To answer your first question on the unit fuel cost for 2021. For coal, it is KRW 124,000 per ton. And for LNG, it is KRW 54,000 per ton. And also for oil, it's KRW 690 per liter.

As for the expected generation mix for 2021, for nuclear power plant, it will be similar to this year, which will be approximately 40%. And for coal, it's slightly up from last year, which would be expected to be 50%. And for LNG, it's slightly down from this year at 7% to 8% as we look into the 2021.

For #4 question, when you look at the dividend payout for fiscal year 2020, the government's dividend policy for nonconsolidated basis is 40%, but that has not, however, been finalized yet. The number will be finalized through the government dividend payout committee.

If you look at the historical trend, the number is often -- usually determined by end of February. And once it is finalized and confirmed, we will share that number with -- through our official channel and disclose the number.

(foreign language)

[Interpreted] My question is on the others operating cost. If you look at the fourth quarter, the number has gone down in the fourth quarter. And could you share why this is the case? And also, if you can elaborate on the current update or trend on the emission trading system, that will be great. Also, when you look at the profit and loss statement for this year and last year on a consolidated and last -- and nonconsolidated basis, the trend seems to be have shifted and the GENCO's performance has not been so good. Do you -- should we expect this to be an ongoing trend in the future? Is there any issue regarding adjustment in the -- adjustment coefficient?

[Interpreted] To answer your first question for other operating costs, the overall generation for the coal power plant has decreased. Therefore, the emission volume has also decreased, which decreased the overall others operating cost by KRW 397.4 billion. And for the decommissioning cost for 2020, we are not reflecting the allowance for the decommissioning costs, which also decreased the cost by KRW 242.5 billion.

To answer your third question, last year, we have seen an unusually low oil price as well as low power demand in the market. Therefore, our coal-fired power plant or our GENCO's performance has not been so great. Last year, for instance, our coal-fired power plant utilization was at 60%. But this year, we expect the demand to go up, which will give us somewhat different trend compared to last year. Of course, this all depends on the external environment, but that's how we see it at this point.

[Interpreted] The following question will be provided by Minjae Lee from NH Securities.

[Interpreted] I have about 3 questions. First, could you share with us some updates on your offshore wind business -- wind power business? Second is on the issue of network neutrality. We hear that there has been some forum or discussion between the relevant stakeholders on network neutrality. And when we look at the relevant association that gathered in the forum, it seems that there was a different representative for KEPCO and GENCO as well. So does GENCO and KEPCO share the same objective? That's my second question. And third question is from , will you have the same identical of base fuel cost for 2022 of -- versus December of 2020 to November of 2021? Or will there be any incremental increase.

[Interpreted] To answer your first question, currently, the offshore wind power project that KEPCO is involved in is the Southwest Wind power project as well as Jeju Hanlim wind power project. And we're participating in form of SPC. Currently, the National Assembly has a pending bill on the house to revise the relevant regulations and rules to allow KEPCO to directly get involved into this offshore wind power plant.

And also on your question regarding network neutrality regard -- and especially regarding the renewable energy and the overall power plant. It is external -- it is disclosed to external parties in a transparent manner. When you refer -- look at our T&D planning as well as the overall system equipment planning and facilities planning, it is all going to go through the approval of the Power Approval Committee, which will be transparently disclosed and shared with the public.

On your question on the base tariff. The tax will be recalculated and reassessed when there is a new amended and changed power tariff on the table. Without any changes into the tariff, current tariff system, the base rate will be the same as what is in place now.

[Interpreted] We will move on to the next question. The next question will be followed by Pierre Lau from Citi.

I have a follow-up question. Why are we expecting that our generation mix from coal in 2021 to be higher, given that you will have several coal-fired units to be shut down later this year?

[Interpreted] To answer your question, compared to last year, this year, we expect to see higher power demand. And also in June of this year, we're going to newly operate [Shin-Kori No. 1], which has 1 gigawatt in capacity. So that will slightly add to the generation mix for coal. I hope that answered your question. Then if so, we will move on to the next question.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions) Next question will be followed by [Shin Jae Yoon] from [KTB Securities].

[Interpreted] I have 2 questions. First question is on the cost pass-through system, which became active since February of 2021. We haven't received the latest newsletter regarding the power, but we would like to understand how the sales price or tariff would change in the future. Will it be changed on a monthly basis or a quarterly basis? We'd like to understand how it will be changed. Because according to what was announced last year, we would expect that the changes will be on a monthly basis.

Second question is on your reduced other operating costs, which you shared by lower ETS cost as well as the allowance for the nuclear power plant decommissioning cost, which was KRW 400 billion to KRW 250 billion, respectively. Would that cost just be relevant to just fourth quarter only? Or is it annualized number?

[Interpreted] The fuel cost adjustment price will be adjusted on a 3-month basis. To share the adjusted cost for ETS. On a 3-month basis, the reduced amount will be KRW 397.4 billion, which will give us the number of KRW 320.6 billion and an annualized number would be reduced cost of KRW 399 billion to give us KRW 310.5 billion.

As for the allowance for the decommissioning cost on a 3-month basis would be KRW 244.5 billion reduction to give us KRW 65.7 billion in cost. On an annual basis, there would be a reduction of KRW 232.6 billion to give us overall cost of KRW 216.7 billion.

[Interpreted] So I have a follow-up question. My question was not regarding whether it was a monthly or a quarterly adjustment, but when will we see the actual changes being applied for a cost pass-through system?

(foreign language) As for the cost pass-through system, it is -- it has been active since January of this year, and we are now applying this cost pass-through adjusted tariff at minus KRW 3, and that has been already reflected. When you look at the Power Statistics newsletter, the power unit cost may be different depending on the tariff segment and also the usage pattern.

[Interpreted] We will move on to the next question. Next question will be provided by Moon Kyung-Won from Meritz Securities.

[Interpreted] First of all, congratulations on your performance that delivered higher than market expectation. I have about 3 questions. First question is on the coal utilization. On a monthly basis, the utilization has gone up, starting from October, November and December. But as far as I know, starting from December, we have certain cap or limitation on the fine dust particle matter control. So how do you explain the fact that the coal utilization still increase in the month of December anyway?

And second question is on the revised bill on the National Assembly for the power business. Personally, I would like to see the bill passed through and be applied. However, if the bill is not passed, what will be the impact on the renewable energy project that you're pursuing? What will be the difference between having a separate entity for renewable businesses versus working through SPC? What will be the impact on the overall funding cost and the magnitude of the funding that you can actually source from the market?

Third question is on the T&D CapEx. I mean, we have seen the wide -- broad range of blackout in Texas. But as we see more renewable energy in the market, we need to also see increased CapEx for the T&D infrastructure. But we don't see that abreast of investment that has been happening. Will there be additional investment in such regard? Even if it's not on a quantitative number, can you share at least on a qualitative way -- level at how you're going to push this issue?

[Interpreted] To answer your first question, we have seen, of course, the control over the particulate matter issues starting in December and need to control the PM level accordingly. But the utilization of fire -- coal-fired power plant depends on various factors, such as demand as well as the planned stoppage and maintenance of other generations and also the fuel unit cost as well. So the system -- the PM regulation alone does not affect the utilization as a whole. So we have to consider various factors. And as accordingly, we have seen a slight increase in utilization.

Currently, it is very difficult for us to forecast into what will be the impact of bill not being passed by the National Assembly. But what we can, however, anticipate is that in terms of fund sourcing, the direct investment, which is through a separate entity, will have -- will allow us to have more funding compared to SPC as well as more feasibilities and the ease of doing business if we go direct.

If you look at our T&D CapEx, it was KRW 6.2 trillion in 2020 and KRW 6.4 trillion in 2021. And we expect to have T&D CapEx of KRW 7 trillion in 2022. Such CapEx planning is to maintain current power quality that we're providing to the market at the moment as well as not to be disturbed or not to have supply discontinuity in the market. And it also considers renewable infrastructure as well.

[Interpreted] We will move on to the next question. Next question will be followed by Pierre Lau from Citi.

I have 2 follow-up questions. The first one is what is your expected power demand growth in 2021 compared to 2020? And the second question is, what is your expected power purchase volume in 2020 compared to -- how power purchase volume in 2021 compared with 2020? I mean how many -- how much higher?

[Interpreted] To answer your first question, first. For this year, we are expecting to see recovery of economy in Korea as well as externally. So compared to last year, on a year-on-year basis, we expect the sales volume to go up by 2%. But of course, that depends on how the COVID-19 unfolds this year.

So for -- to answer your second question. For this year, we expect to see a slight increase in the coal purchased and also -- coal volume. And we expect the purchase of power from IPP to be at par with this year.

[Interpreted] We'll move on to the next question. The following question will be provided by Lee Minjae from NH Securities.

[Interpreted] I have 1 follow-up question regarding green bond. In 2020, what is your green bond issuance status? And do you also have plan to issue green bond in 2021 and 2022?

[Interpreted] When you look at the green bond issuance. Last year, we issued the U.S. green bond of $500,000 and we also have completed a currency swap for this green bond. So compared to the power bond of 5-year bond issue, we were able to source the funding from the market at 1.4% rate lower than the market. And through this low interest rate, we were able to save KRW 23.8 billion of fund sourcing.

For 2021, we also plan to issue a green bond, but the concrete plan has not been finalized and confirmed yet. As we pursue energy transition and renewable energy trajectory, we anticipate issuance of green bonds this year. If the plan is confirmed, we will share that with the public.

[Interpreted] Please go ahead with your question. If there is any question.

[Interpreted] With this, we would now like to conclude the earnings release conference call. Thank you for your participation. Thank you.

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