Korea Electric Power - Q1 2024
May 10, 2024
Transcript
Operator (participant)
The conference call for the fiscal year 2024 first quarter earnings results by KEPCO commenced in a few minutes. Please wait until the conference begins. Thank you.
Namyeon Jang (Head of Finance and Head of Investor Relations)
[Foreign language]
Speaker 10
Good afternoon. This is Namyeon Jang, Head of Finance and IR Team at KEPCO. I would like to thank you all for joining today's conference call for the business results for the first quarter of 2024 despite your busy schedules. Today's call will be conducted 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 preliminary consolidated IFRS figures, and all comparison is on a year-over-year basis unless stated otherwise. Also, business plans, targets, financial estimates, and other forward-looking statements mentioned today are based on our current targets and forecasts. Please be noted that such statements may involve investment risks and uncertainties. Now we will begin with an overview of the earnings results for the first quarter of 2024 in Korean first, which will be then consecutively translated into English.
Seoyeong Yang (General Manager of Investor Relations)
[Foreign language]
Speaker 10
Good afternoon. I am Seoyeong Yang, General Manager of IR Team at KEPCO. First, I will go over the operating performance. The consolidated operating profit in 2024 Q1 stood at ₩1,299.3 billion. Revenue increased by 7.9% to ₩23,292.7 billion. Power sales rose by 9.4% to ₩22,165 billion. Overseas business and other revenue decreased by 15.5% to ₩1,127.7 billion. Cost of goods sold and SG&A decreased by 20.8% to ₩21,993.4 billion. Fuel cost and power purchase costs decreased by 32.2% and 24.4% respectively to ₩6,160.1 billion and ₩9,202.9 billion, mainly driven by fuel price decline the previous year. Depreciation expense decreased by 0.2% to ₩2,808.5 billion due to decrease of depreciable assets as a new power plant construction was completed, namely Shin-Hanul Unit 1. Next, I will go over the non-operating items. Total debt decreased by ₩3,198.9 billion to ₩130,432.9 billion compared to year-end 2023 due to temporary decrease of working capital and redemption of debt using interim dividends. Interest expense recorded ₩1,151.7 billion. As a result of the foregoing, the 2024 Q1 consolidated operating profit stood at ₩1,299.3 billion, and net income was ₩595.9 billion.
Seoyeong Yang (General Manager of Investor Relations)
[Foreign language]
Speaker 10
Good afternoon. I am Tae-seop Eom, Senior IR Manager. I will now go over the main areas of interest, starting with power sales performance and outlook. In Q1 2024, total power sales volume decreased YoY by 1.1% to 142 TWh due to a decline in industrial power sales as the manufacturing sector remained weak. For the full year, as manufacturing exports improve, mainly driven by semiconductors, power sales volume is expected to slightly increase.
Tae-Sep Eom (Senior IR Manager)
[Foreign language]
Speaker 10
The unit fuel cost by fuel source in 2024 Q1 was ₩196,000 per ton for coal, ₩1.16 million per ton for LNG, and ₩1,045 per liter for oil. For the full year 2024, excluding general offloading cost, coal is expected to be in the ₩200,000 range per ton, ₩1.1 million range for LNG, and around ₩1,100 per liter for oil. Please note that these forecasts may change subject to international fuel price trends.
Tae-Sep Eom (Senior IR Manager)
[Foreign language]
Speaker 10
Looking at the subsidiary generation mix in Q1, the capacity factor of nuclear power slightly increased, resulting in a slightly higher contribution to the mix. The contribution of coal decreased due to a higher number of maintenance days. The installed capacity of LNG slightly increased; however, its contribution to the mix decreased, mainly because of the decrease of power demand and increase of baseload power generation. In 2024, the contribution of nuclear power should increase as a new power plant, namely Shin-Hanul Unit 2, started commercial operation in April, and another new plant is scheduled to come online in the second half, namely Shin-Hanul Unit 3. Coal should remain similar, and LNG should slightly decline. For the full year 2024, the capacity factor of each power source is projected to be low to mid-80% for nuclear, low to mid-50% for coal, and mid to high-20% for LNG.
Tae-Sep Eom (Senior IR Manager)
[Foreign language]
Speaker 10
Regarding RPS cost, as of Q1 2024, RPS cost was ₩708.7 billion on consolidated basis and ₩837.1 billion on separate basis. Lastly, on funding, as of Q1 2024, debt on consolidated basis was ₩130.4 trillion and ₩85.7 trillion on separate basis.
Tae-Sep Eom (Senior IR Manager)
[Foreign language]
Speaker 10
Now we will move on to the Q&A session. Since we will be conducting the Q&A session in Korean with consecutive translation into English, please make your questions clear and brief. Thank you.
Operator (participant)
[Foreign language]
Speaker 11
Our Q&A session will begin. Please press star plus one if you have any questions. For cancellation, please press star two on your phone.
Operator (participant)
[Foreign language]
Speaker 11
The first question will be given by Pierre Lau from Citigroup.
Pierre Lau (Analyst)
Hello. Good afternoon, KEPCO Management. This is Pierre Lau from CT. I have three questions. The first one is, what are your expectations regarding tariff rise in 2024? Second question is, what is the company impact from recent increase in spot LNG price? And the third question is, what are your expectations regarding your generation mix by different fuel type in 2024? Thank you.
[Foreign language]
[Foreign language]
Speaker 11
As to your question regarding the tariff hike for 2024, KEPCO has raised the tariff from 2021 to 2023 multiple times, but we also have accumulated operating loss still remaining. Because of the loss, there is still reason for us to further raise the tariffs. However, due to the series of tariff hikes, there is some fatigue among the public and also recent inflation must be considered. So we will be continuously discussing closely with the government on tariff hikes in the future.
[Foreign language]
Regarding your question on the spot price of LNG, there is usually a five to six month time lag between the spot price and the impact on our business and financials. It's not necessarily 100% of the spot price volatility that is reflected on our numbers. It also is influenced by KOGAS allocation of short-term and long-term volume.
[Foreign language]
As to generation mix for the full year 2024, if we first look at Q1, our generation subsidiary mix, nuclear was around 46%, coal 38%, and LNG was 12%. In October this year, we have planned to add the Shin-Kori Unit 5 nuclear power plant online. It is expected to start commercial operations in October. So this may slightly increase the contribution of nuclear power to the generation mix, while the coal and LNG contribution is expected to remain similar.
[Foreign language]
Operator (participant)
[Foreign language]
Speaker 11
The following question is by Cho Yoon-ho from UBS.
Cho Yoon-ho (Analyst)
[Foreign language]
Speaker 11
Thank you for the opportunity today. I have two questions. First, in Q1, we can see that the unit fuel cost for nuclear power YoY basis almost doubled. Do you think this trend will continue in the future? Especially the uranium prices are showing an upward trend in recent time. Do you think this is a trend that can continue for maybe the next couple of years and become a cost pressure item? Second, the other domestic business seems to have declined in terms of revenue and profits. What would be the main reason for this?
[Foreign language]
Regarding your first question on the uranium price trends, KHNP usually procures uranium with long-term contracts, five to 10-year contracts. They usually also have the option to control the volume of procurement. In this sense, they are pretty much hedged against short-term price volatility of uranium. Also, the uranium is only around 10% of KHNP's fuel cost. They also carry inventory for around three years. Short-term market fluctuation of uranium prices should not have immediate or extensive impact on KHNP's financials.
[Foreign language]
Just to add a little bit more color on KHNP and fuel cost. KHNP has to set aside the spent fuel disposal cost every two years. Almost for the first time in a decade, that cost increased by around 100%. Because of this, on a year-over-year basis, the depletion recognition on this cost, the disposal of spent fuel has increased significantly. This is another reason that can contribute to what you mentioned regarding the fuel cost increase of nuclear power. Second, as to the domestic revenue, there are largely two reasons.
One, KPS has usually service contracts with IPPs in terms of the maintenance and repair of power plants, but many of those service contracts have been completed in recent time, leading to a decline in revenue. Second, the LNG price has been declining, and the revenue that is generated by providing heat to the clients and customers has declined as well. These would be the main two drivers that have been impacting the domestic business revenue.
[Foreign language]
Operator (participant)
[Foreign language]
Speaker 11
The following question is by Yoo Jae-hyun from Mirae Asset Securities.
Joo Jae-Hyun (Head of the New Growth Investment Division)
[Foreign language]
Speaker 11
Thank you for the opportunity today. I have two questions. First of all, we can see that the account receivables have been on a declining trend. Overall cash and cash equivalents the same. On a separate basis, the cash is only around ₩100 billion at the moment. That's about 90% decline. We can also see that corporate bonds have decreased as well. The leverage ratio or the debt ratio has slightly declined. I think that account receivable declining trend is quite exceptional. Do you have any changes to your policies in terms of receivable collection, and will this trend continue? Can you please give an explanation to better understand this trend? Second, given the value-up program, I think the market has expectations on dividends, but at the same time, the company has significant accumulated losses. What would be your priority in terms of spending the cash account? Will it be reduction or redemption of debt, or will you also consider paying out dividends as well?
[Foreign language]
Regarding your first question on receivables, compared to December of 2023, in March, there was the unit price change given that we are entering the spring season. Also, the heat demand has declined since the winter is coming to an end. The sales volume has declined as well. These would be the main two drivers.
[Foreign language]
Regarding your question on dividends, we are not able to pay out dividends for recent three years due to the fact that we have been recording a net loss, and we ask for the understanding of shareholders on this point. As for this year, we will be monitoring the annual business performance, and once the annual results are confirmed, we will be discussing closely with our largest shareholder, which is the government, to review the possibility of dividend payouts.
[Foreign language]
[Foreign language]
[Foreign language]
Joo Jae-Hyun (Head of the New Growth Investment Division)
In this case, can I understand that with excess cash, you will be prioritizing the dividend payout rather than redemption of debt?
[Foreign language]
Speaker 11
We have not reviewed on that point yet.
Joo Jae-Hyun (Head of the New Growth Investment Division)
[Foreign language]
[Foreign language]
Operator (participant)
[Foreign language]
Speaker 11
The following question is by Hwang Seong-hyun from Eugene Investment & Securities.
Hwang Seong-hyun (Analyst)
[Foreign language]
Speaker 11
Yes, I have two questions today. First of all, if we look at the tariffs, so in Q4 last year, the industrial power price was increased. If this happens, I thought that the overall sales unit price will go up, but I don't think it has been as high as the market largely expected. So I would like to better understand this gap. Also, there is a similar issue regarding the LNG unit price. I think there is some gap between the LNG unit price, what we expected, and what the data has given us. So could you please further help us understand this difference as well?
[Foreign language]
Yes, regarding your question on unit delta price, it is correct that we raised the industrial price in Q4 last year, but for industrial purposes, we also consider the season and hour, the time. In the springtime, the tariffs tend to be lower. So while there was a tariff hike, the seasonal and hourly timing issues were higher in terms of impact. So the unit increase of sales price may not have been as high as the market expected.
[Foreign language]
Regarding your question on LNG, when you say unit price of LNG, I think you are referring to the current spot price. When you refer to EPSIS, I think you are looking at the LNG price that is reflected in the current electricity trading market. This can have various different indexes and indicators. I'm not exactly sure which one you are talking about, but I think the difference can largely come from two reasons. First, the time lag. I already mentioned that there can be a time lag between the spot price and when it is reflected in the actual power prices in the market. Time lag can be one factor. A second factor is that when LNG is imported, the spot market may not be the most influential market for the LNG. KOGAS actually has a very large market share. Because KOGAS also allocates volume long-term and short-term, this can also have impact on the cost differences of LNG. Also note that some power plants and generators import LNG directly as well. Because there are multiple channels for securing LNG, the cost of those multiple channels can also be different as well, causing variation.
[Foreign language]
[Foreign language]
The following question is by Moon Kyung-won from Meritz Securities.
Moon Kyung-won (Research Associate)
[Foreign language]
Speaker 11
Good afternoon, I have three questions today. First, I'm looking at the headline of power market data right now. In Q1, I see that sales volume has declined, but also the power purchase volume has increased. So I think this power purchase has been higher than what the market largely expected. So how should we interpret this? Has there been a continued lack of investment in the power grid that is leading to transmission and distribution-related losses that is resulting in KEPCO purchasing more power? That is my first question. Second question is regarding the adjustment coefficient. In Q1, has there been any revisions to the coefficient, or has there been any other factors that can impact the total power purchase cost of KEPCO? My third question is regarding shareholder return. I have read the business management evaluation of KEPCO, and as a qualitative factor, it is mentioned that shareholder return will become more important and will be reflected in the financial policies of KEPCO. What does this mean, and how should we interpret this in terms of shareholder return of KEPCO?
[Foreign language]
You asked about the higher purchase but lower sales volume, and I think this is because of the time difference. While one is from January to March, the other is based on the actual check of the power usage. Depending on the date of when we go and check the power usage, I think there can be some difference between these numbers in terms of the period that these numbers are coming from. That can be one cause for this.
[Foreign language]
Yes, as for the adjustment coefficient, the coefficient that was determined early on in 2024 has been used throughout Q1, so there have not been any revisions to that.
[Foreign language]
And lastly, regarding your third question, we have not yet reviewed our dividend policy.
Moon Kyung-won (Research Associate)
[Foreign language]
Speaker 11
Yes, just to get a little bit more understanding on the first question, does that mean that there has not been any incidents regarding the distribution and transmission of power this year? Yes, that's correct.
[Foreign language]
Operator (participant)
[Foreign language]
Currently, there are no participants with questions. Please press star and one to give your questions.
[Foreign language]
[Foreign language]
Speaker 11
The following question is given by Heo Min-ho from Daishin Securities.
Heo Min-hoon (Researcher)
[Foreign language]
Speaker 11
Good afternoon. I have four questions today. First one is regarding the nuclear fuel cost. It was already mentioned today that it grows by almost 100%. But according to your explanation, does this mean that this higher cost level will continue in the future? Second is regarding the coal purchase price. I think if you look at the market purchase price and the different market data, coal price has declined from Q4 to Q1. But if we look at KEPCO, Q4 and Q1, largely coal price is the same. Is there a reason that can explain this difference? Third, RPS cost seems to have increased quite significantly. What would be the main driver for this? Were there any changes in the settlement process? Fourth, I would like to know the external power purchase volume, not the value, but the volume.
[Foreign language]
Yes, regarding your first question, we mentioned that when we disposed of spent fuel, that related unit price has increased significantly earlier today. That should stay stable. The higher cost in that regard should stay stable. But if we look at the depletion or depreciation of the raw materials, it would also depend on the generation volume. We cannot say for sure that this cost will increase in the future.
[Foreign language]
Regarding your second question on coal price, I think there are multiple markets to read the spot price of coal, but I think most people will be looking at the Australian coal. Like LNG, there is also a time lag between spot market and when it's reflected into our power market, around four to five months. That will be one reason. Second, each generation company will be making their own purchase of coal. The coal purchase unit price can vary depending on the purchase portfolio of that company. To answer your question, largely two factors. Why is spot market price different from EBITDA? First is time lag, and second is the portfolio of the generation company.
[Foreign language]
Regarding your question on RPS, the RPS quota has increased from 13% to 13.5%. The REC purchase of the generation companies has increased quite substantially.
[Foreign language]
The external power purchase volume was your last question. In 2022, 68% we purchased from our group and 32% from external parties. In 2023, that number was 66% to 34%, and in Q1 this year, it was 64%-36%.
[Foreign language]
Operator (participant)
[Foreign language]
Speaker 11
The following question is by Hwang Seong-hyun from Eugene Investment & Securities.
Hwang Seong-hyun (Analyst)
[Foreign language]
Speaker 11
My question has already been asked by another colleague, so I don't need to further ask any questions. Thank you.
[Foreign language]
Operator (participant)
[Foreign language]
Speaker 11
Currently, there are no participants with questions. Please press star one to give your questions.
Operator (participant)
[Foreign language]
Speaker 11
Once again, if you have any questions, please press star and one.
[Foreign language]
If there are no further questions, we will conclude the earnings call for 2024 Q1 of KEPCO. Thank you.
Operator (participant)
[Foreign language]
Speaker 11
If there are no further questions, we will now end the Q&A session. For any additional inquiries, please contact our IR department.
Operator (participant)
[Foreign language]
Speaker 11
This concludes the fiscal year 2024 first quarter earnings result by KEPCO. Thank you for the participation.