Korea Electric Power Corp (KEP) 2020 Q3 法說會逐字稿

(foreign language) Good afternoon. This is (inaudible). So I'm Head of IR -- Head of KEPCO IR team. On behalf of the KEPCO, I'd like to thank you for participating in today's conference call to announce the earnings results for the third quarter of 2020. We will begin with a brief presentation on the earnings results, which will be followed by the Q&A session. Today's call will be proceeded in both Korean and English.

Please note that the financial information to be disclosed today is on a preliminary, unaudited and consolidated basis in accordance with the 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 Mr. Sihyung Park, Senior IR manager, will begin with an overview of the earnings results for the third quarter of 2020, first in Korean and repeated in English.

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

For the first 9 months of 2020, KEPCO reported an operating profit of KRW 3.15 trillion.

Taking a closer look, operating revenues decreased by 0.8% to KRW 43.88 trillion. Power sales revenue decreased by 1.0% to KRW 41.62 trillion, 6-2 trillion, mainly due to the decrease in electricity demand from the effect of COVID-19 and prolonged rainy season. And the revenues from overseas and other businesses increased by 2.8% to KRW 2.26 trillion.

Moving on to main operating costs. COGS and SG&A expenses decreased by 7.3% to KRW 40.72 trillion Fuel cost decreased by 16.5% to KRW 11.55 trillion due to the increase in nuclear power generation volume and the decrease in coal-fired power generation volume and the drop in fuel prices compared to the previous year.

Also, purchased power cost increased by 11.6% to KRW 12.17 trillion. Notwithstanding improved utilized rate of nuclear power plants and reduction of the power demand as utilized rate of coal-fired power plant decreased, the purchased power volume increased by 1.1%. However, the unit cost of purchased power decreased by 16.0% due to the drop of unit cost of fuel.

Depreciation cost rose by 5.6% to KRW 7.36 trillion mainly due to the increase in depreciable assets, including power distribution facilities and the nuclear power plant, the Shin Kori No. 4.

Now let me explain KEPCO's nonoperating segment. The net financial loss was KRW 1.21 trillion, decrease by KRW 273 billion compared to the net loss of KRW 1.49 trillion of last year. As a result of the foregoing, we recorded a consolidated net profit of KRW 1.51 trillion, increase by KRW 2.44 trillion from the consolidated net loss of KRW 932 billion in the previous year.

(foreign language) This concludes the overview of KEPCO's earnings results for the third quarter of 2020.

(foreign language) Now let us move on to the Q&A session. I'm joined with our IR Committee members in charge of the major business area at KEPCO. We are prepared to take any questions. Just we'll proceed the Q&A session in both Korean and English. (Operator Instructions)

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

This is a from Pierre Lau from Citi. I have 3 questions. The first one is about your fuel costs. In third quarter, your unit LNG cost was much lower compared to that in second quarter. But the unit oil price in third quarter was similar compared to second quarter. So what was the reason for the sharp reductions of your unit LNG cost in third quarter? And also, could you give us the guidance for your unit coal, LNG and oil costs now for full year 2020?

The second question is about your generation mix. In third quarter, the utilization of your nuclear power plant was 66%, similar to last year third quarter, 65%. But in terms of your generation mix in third quarter, you have much high proportion from nuclear, at 40 -- sorry, yes, 36% in third quarter versus 31.5% in third quarter last year. Why the generation mix increased so much for nuclear, but the utilization remains similar? Is it just because of the addition of new capacity? And also, please let now your forecast for your generation mix from different fuel types in 2020.

And the last question is about your dividend policy. I think your company will likely to have full year net profit this year. So what will be the dividend payout ratio?

[Interpreted] To answer your first question on the third quarter our unit cost for LNG and on why it has dropped significantly is because you have seen the oil price drops since early this year, and the LNG price is lagging about 5 to 6 months time gap. According to the KOGAS, LNG unit cost price for third quarter, for July, August and September, you can also see that their LNG drop -- LNG price dropped significantly.

And to answer your second question on why the gen mix has increased for nuclear power while the utilization of the nuclear power plant remained somewhat similar to the previous quarter, it's because we have added Shin Kori No. 4 nuclear power plant, thus adding extra capacity.

And for KEPCO as a public company also owned by -- or also having government as the largest shareholder, we are -- we base our dividend policy and dividend payout ratio based on our net profit based on separated balance sheet. And our dividend payout ratio is 40% at the moment.

And to add to your first question on the unit fuel price, for coal, our full year 2020 unit cost for coal is KRW 124,000 per ton; and for LNG, it's KRW 565,000 per ton; and for oil, it's KRW 59 per liter.

And our utilization rate for the full year is based on our generation mix. For nuclear power plant for 2020, it's somewhere around mid-70% range. And for coal, due to the regulated fine particle matter issue, it will be early 60% range.

Could you also let us know our generation mix for 2020 from different energy, including coal, LNG and nuclear?

[Interpreted] So compared to previous year, the 2020 generation mix for nuclear power plant will slightly go up, while coal will slightly go down. For LNG, oil, renewable and hydropower, it will most likely stay the same as the previous year.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions) Interpreted The following question is by Sundeep from Eastspring.

First question is any update on the tariff regulation discussions with the government?

[Interpreted] Since June of -- or end of June of this year, as we have disclosed, the tariff updates are currently being reviewed, and we are leveraging our expert panel as well as our civic organization to consult them and to reflect their response and feedback to our plan. The details of that content is still under review at the moment and is to be finalized by end of this year when we will file for the final approval to the government.

And what is the key disagreement between your proposal so far? And how is the government reacting to your proposal?

[Interpreted] Currently, we haven't started discussion with the government yet. We are currently reviewing and finalizing our proposal that we want to put before the government.

Okay. So once you put the proposal to the government by the end of this year, when do you expect the final decision?

[Interpreted] Well, if you look at our historical trajectory, when we file for an approval for our tariff proposal, it took as short as 1 week. So our intention is to finalize it as soon as possible in discussion with our government.

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is because of -- although our demand has gone down, we also had to reduce the coal-fired power plant generation, which increased our power purchase cost as a result.

And so is this a permanent change, the reduction in coal utilization?

[Interpreted] To answer your question, there are mainly 2 reasons why the utilization of coal-fired power plant has gone down. First is because we have a government policy that is put in place to seasonally manage our coal-fired power plant due to particle matter issue, and that is mainly focused around January to March of the year. That's one.

And the second reason is because of low oil price, we are utilizing more LNG as our order of dispatch for power generation has slightly changed. So will the oil -- low oil price trend continue? Or -- it may be unlikely that it will continue throughout the future. But when you think about the impact of our coal-fired plant and the environmental implication, that is likely to stay.

And we are also expecting the government to announce the 9th basic plan for electric power supply and demand. And according to that -- the new plan, we're likely to see environmentally friendly fuel consumption, and we believe that this whole -- therefore, the coal utilization rate will likely continue at the current level going forward.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions) The following question is by Won Min-seok from HI Investment & Securities.

[Interpreted] I have 3 questions. First is on the 2021 generation utilization outlook as well as gen mix outlook for 2021. Second question is the outlook for fuel cost for 2021. And third question, if you can, can we have some insight into different sensitivity ratio that you have studied by different fuel based on tonnage or barrel on how the different price will change according to the fuel mix?

[Interpreted] On your question on the utilization rate and generation mix as well as unit fuel price and the sensitivity study, it's something that we're unable to provide at the moment because we don't have the data. We ask for your understanding.

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

[Interpreted] My first question is, we've seen some onetime expense go down in the fourth quarter. And with declining oil utilization, what's your outlook going forward?

And second question on the government's Green New Deal plan. It seems that the government is coming up with renewable energy targets. And what -- have you had a chance to look into your internal target for renewable energy going forward? There is a possibility that we may get into the generation business ourselves. What is the status update on that?

Third question is, what is your CapEx guideline going forward?

[Interpreted] On your first question on the onetime expense for the fourth quarter, we're currently not aware of -- or not aware of this cost or expense coming up. And once we have more information on this, we will communicate that with the market.

On the second question, as you know very well, that we're -- the government is pursuing the Korean green new deal. And under the government's Korean Green New Deal framework, there are many initiatives that involve KEPCO. KEPCO will continue to get heavily engaged in energy transformation as well as digital transformation as part of the Green New Deal effort. We're currently developing a detailed plan for that, and once we finalize it, we will be happy to communicate that to the market.

Also, an update on the renewable power generation business approval. In July, we have seen the legislation put fourth before the national assembly. It is currently going through the legislative process, and it is currently under review. Once that is done, we will have a clear idea on what is required of the renewable power generation company.

And also on your question on CapEx guidance for the system connection, currently we don't have a separate number for the CapEx for now yet. That number is included and it's part of the transmission and distribution investment CapEx that we provide.

[Interpreted] The following question is by Jung Hye-Jung from KB Securities.

[Interpreted] I have one question regarding Shin-Hanul Unit #1 nuclear power plant. In -- it was supposed to be up and running in October with a commercial operation planned for Q4. In order for a commercial operation to be possible, you need to have at least 6 months trial run or load the fuel onto the new nuclear power plant. So if the fuel is not still good and if there has not been 6 months of a trial run, physically it will be impossible for the commercial operation in Q4.

We would like to have some detailed visibility into how you're going to run Shin-Hanul #1. Is there any possibility that within 1 month or 1.5 months you'll be able to run this nuclear power plant?

[Interpreted] As you know, that Shin-Hanul #1 was supposed to be up and running commercially in October, but it has been delayed. Currently, our target date for commercial operation is not determined, and we are unable to provide that number at this point and we ask for your understanding for that.

But if you look at our Shin Kori No. 4 case in the past, it did require 6 months of trial run before going into commercial operation, and that is something for us to note.

[Interpreted] If that is the case, I have one follow-up question. Although it may not have a big impact according to the power plant utilization plan and gen mix you shared for this year, does that number include the operation of Shin-Hanul #1 in Q4? Could you explicitly mention whether that number is included or not for Shin-Hanul #1?

[Interpreted] To answer your question, as I have explained a moment ago, we were not -- or we are not sure that Shin-Hanul #1 will be up and running within this year, so that number is not included in our generation mix or our utilization.

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

[Interpreted] My next question is on REC and ETS expense.

[Interpreted] In Q3, our REC expense was, on a consolidated basis, KRW 559.6 billion. And for ETS, it was a negative KRW 59.6 billion.

I hope that answered your question.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions) The following question is by Sundeep from Eastspring.

So one follow-up question on purchased power. Purchased power has 2 fields. One is LNG. What is others? Can you please explain?

[Interpreted] Well, in the other line item, most of it is renewable energy.

[Interpreted] The following question is by Kang Dong Jin from Hyundai Motor Securities.

[Interpreted] My -- I have a follow-up question on ETS. You said it's negative KRW 59.6 billion. Would -- does that mean that, that money was credited back to the accounting? How does that work?

[Interpreted] Yes, that is correct. It is credited back to our accounting.

[Interpreted] Then my follow-up question is then, is it because your generation volume has gone down? Or is it because the generation mix of coal has gone down? And will this go -- will this cost of ETS go up in Q4?

[Interpreted] The reason we have a negative ETS cost in Q4 -- or Q3 is because in 2019, we had some 3 ETS that was allocated back to us. And also, these gencos and affiliate companies were able to sell off these 3 ETS, right, into the market, and that credit was put into our accounting books. I hope that answered your question.

[Interpreted] the following question is by Moon Kyung-Won from Meritz Securities.

[Interpreted] I have 2 questions. First is, we had the effect of typhoon in September, and we're aware that one of the nuclear power plant was suspended. Is it up and running once again? If not, when will the operation reconvene? And another question related to nuclear power plant is that there has been some defect that was discovered for Hanbit #3 and #4, and the -- their operation were suspended. What is update on that?

And the second question is that although the numbers were not provided, we've been hearing from the media that the government will soon have ceilings for coal-based power generation and also there would be some adjustment on coefficient. So does KEPCO's management have view on how this will likely head toward -- in the future? Will that -- how will it affect the ETS cost as well as coal utilization?

[Interpreted] To answer your first question, due to the effect of typhoon in September, 7 of our nuclear power plant was suspended in operation. Six of them were up and running again in end of September and early October. Shin-Hanul No. 2 -- or Shin Wolsong No. 2 has closed its -- Shin Wolsong No. 2 -- which one, I'm sorry? Wolsong No. 2 has approached its planned maintenance period, and it will go back to its operation again in early December.

For Hanbit #3 and #4, it is currently going through planned maintenance at the moment. And Hanbit #3 will start its operation within this month. And for #4, the recommencement will begin in early March.

To answer your second question, we will be announcing the 9th basic plan, well, soon, and the effect would be on the BM -- currently, the 2 factors that you mentioned on BM coefficient and coal usage -- utilization plan is not yet fixed as of yet, so it's rather too early for us to understand how it will impact the core utilization and ETS cost going forward. Once that is announced, the BM -- once that is announced, we will then need to understand how the coal usage will be limited by year or how the BM coefficient will be applied. And hence, because we're unable to have access to this information yet, we have not had a review on the impact.

Once the 9th basic plan is announced, we will go ahead and review the impact on KEPCO based on BM coefficient and the coal total usage plan, and then we will communicate that back to the market through our IR team.

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

[Interpreted] We now conclude our Q&A session, and I would like to briefly talk about KEPCO's effort on improving its financial status and ESG activities in Q4 2020.

KEPCO and its gencos is carefully following the increased uncertainties internally and externally following the COVID-19 reproliferation risk as well as volatility around oil price and foreign exchange rate. And we are -- we have set up a task force team to improve financial status across our group to look into issues like saving the fuel costs as well as reviewing the financial issues internally and externally to improve profitability and enhance the efficiency of cost execution across our groups.

In addition, since our business environment is structurally vulnerable to oil price change as well as foreign exchange change, we are pursuing a rational -- or restructuring of our tariff system to enhance transparency and predictability of our pricing, and we're putting in our utmost effort to achieve that.

Furthermore, KEPCO is continuously pursuing a great investment to achieve expansion of renewable energy usage as well as to achieve carbon neutrality. And we are continuously working on low-carbon green business overseas as well as publishing ESG-focused sustainable report as well as [TCFG]-based report as well. We're also installing and setting up ESG Committee under our Board of Director to expand ESG factor in our business management.

With this, we now conclude our earnings conference call. Thank you.

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