Korea Electric Power H2 2023 Earnings Call Transcript

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February 23, 2024

Key Takeaways

  • Negative Sentiment: Full-year 2023 results showed an operating loss of KRW4,569.1 billion and a consolidated net loss of KRW4,656.9 billion.
  • Positive Sentiment: In Q4, Kepco posted a net income of KRW1.9 trillion, marking back-to-back profitable quarters since Q3.
  • Positive Sentiment: Revenue rose 23.8% YoY to KRW88.2 trillion while cost of goods sold and SG&A expenses fell 10.7%, driven by a 22% drop in fuel costs.
  • Negative Sentiment: Total debt climbed 10.8% YoY to KRW133.6 trillion and financial loss widened by KRW1 trillion to KRW3,922.4 billion.
  • Positive Sentiment: Generation mix shifted toward nuclear power with Shinano Unit 1 online, and 2024 utilization is forecast at mid-80% for nuclear, mid-50% for coal and high-20% for LNG.
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Earnings Conference Call
Korea Electric Power H2 2023
00:00 / 00:00

There are 2 speakers on the call.

Operator

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 twenty twenty three Fourth Quarter Earnings Results by Kepco. This conference will start with a presentation followed by a divisional Q and A session. Now we shall commence the presentation on the fiscal year twenty twenty three fourth quarter earning measures by KEVCO.

Speaker 1

Good afternoon. This is Young Yang, General Manager of Finance and IR team of KETCO. I would like to thank you all for participating in today's conference call for the business results for the full year 2023 despite your busy schedules. Today's call will be conducted in both Korean and English. We will begin with a brief presentation on the earnings results, which will be followed by a Q and A session.

Speaker 1

Please note that the financial information to be disclosed today are preliminary consolidated IFRS figures, and all comparisons are on a year over year basis. Also, business plans, targets, financial estimates and other forward looking statements are based on our current targets and forecasts. Therefore, please be noted that such information may involve investment risks and uncertainties. Now we will begin with an overview of the earnings results for the year end 2023 in Korean, which will then be repeated in English. Now we will provide the business performance overview in English.

Speaker 1

Good afternoon. I am Wonky Jo, Senior IR Manager. The company recorded an operating loss of KRW4569.1 billion in 2023. In Q4, however, the company recorded a positive net income of KRW1.9 trillion, posting positive numbers for consecutive quarters since KRW2 trillion net income in Q3. Revenue increased by 23.8% to KRW88.205.1 billion.

Speaker 1

Power sales revenue rose by 25.3% to KRW 82,954,800,000,000.0. Overseas business and other revenue rose by 3.8% to KRW 5,250,300,000,000.0. Cost of goods sold and SG and A decreased by 10.7% to KRW 92,774,200,000,000,000.0. Fuel cost and purchased power cost decreased by 22.28.8% Y o Y, respectively, to trillion and KRW38.304 trillion, respectively. Depreciation expense rose by 5.1% to KRW11.314.3 billion due to an increase of depreciable assets such as new power plants, namely Shinhanou Unit 1.

Speaker 1

Next, I will go over the changes in the non operating performance. Total debt stood at KRW133.631.8 billion, which is a 10.8% increase Y o Y as of year end 2023 due to higher power purchase cost. Financial profit recorded a loss of KRW3922.4 billion, which is a KRW1 trillion increase Y o Y. As a result of the foregoing, for the full year 2023, the company posted a consolidated net loss of KRW4656.9 billion. Next, I'd like to go over the main points of interest starting with power sales performance and outlook.

Speaker 1

In 2023, power sales volume decreased by 0.4% Y o Y to five forty six terawatt hour, mainly due to a slowdown of the manufacturing sector, which resulted in a decline of industrial power sales. In 2024, sales volume should slightly increase as the exports start to pick up. Next, I'd like to go over the unit price of the major fuel sources. The unit fuel cost by fuel source in 2023 was KRW230000 per ton for coal, KRW1.36 million per ton for LNG and KRW1191 per liter for oil as international fuel prices stabilized. For the year twenty twenty five twenty twenty four, excluding offloading costs, coal is expected to be between KRW200000 to KRW300000 per ton, KRW1.1 million per ton for LNG and around KRW1200 per liter per oil.

Speaker 1

Please note that forecast may change subject to international fuel price trends. Looking at the generation mix of group subsidiaries, nuclear power plant utilization was similar to the previous year. However, installed capacity increased because of the addition of new power plant Shinano Unit 1, December 2022 and the completion of maintenance of Hanbit Unit 4, which resulted in an increase of the contribution of nuclear power to the generation mix on a Y o Y basis. In case of coal, utilization decreased due to an increase of maintenance days, resulting in a lower contribution to the generation mix. The contribution of LNG also declined, mainly driven by a reduction of power demand and an increase of base generation.

Speaker 1

In 2024, the contribution of nuclear power plants should increase as utilization is expected to rise as new power plants namely Shinano Unit 2 is expected to come online in the first half and Seoul Unit 3 is scheduled for the second half. Contribution of coal and LNG should slightly decline. For 2024 utilization by power source, it is projected to be low to mid 80% for nuclear power, mid 50% for coal and mid to high 20% for LNG. Regarding RPS and EPS cost, as of 2023, RPS cost was KRW2779.2 trillion on consolidated basis and KRW3136.8 trillion on standalone. EPS cost was KRW87.8 billion on consolidated basis and KRW76.9 billion standalone basis.

Speaker 1

Now let us move on to the Q and A session. Since we will be proceeding the Q and A session in both Korean and English, I'd like to ask that you make your questions brief and clear. Thank you.

Operator

The first question will be given by Moon Kyung Won from Merit Security. Please go ahead.

Speaker 1

Good afternoon. I have three questions. First is regarding the standalone performance. I see that the net income for Q4 on standalone basis was quite strong and probably exceeding some of the expectations. I think there has been a one off financial profit that drove the positive income trend in Q4.

Speaker 1

So could you please elaborate on this? Second, as of year end 2023, it seems that the retained earnings have been transferred to a separate capital entity. So in 2024, can we expect that these resources will be used for dividend payments? Third, I think there is quite strong interest regarding the shareholder return policies of public corporations in recent times. So have you had any changes in the dividend policy?

Speaker 1

Do you plan to communicate that to the market? And if so, when will this be communicated to the market? So regarding your first question, in Q4 twenty twenty three, in those numbers, the interim dividend payments of Jun Fighter subsidiaries have been booked, which is around KRW3.2 trillion. And so this is part of the dividend profits under financial profits and losses. And so this generated quite strong net income on a stand alone basis for Kepco.

Speaker 1

So let me address question two and question three at the same time. So according to the KEPCO Act, clearly defines the resources that we can use for dividend payments. And while the we are still waiting for the final numbers of 2023, If we are able to generate a positive income, we will be in line with the government's overall dividend policy for the government related and public corporations of Korea. And with those keeping in mind those dividend policies of the government and considering the overall financial performance and if we are able to generate positive business performance, I think we will be able to make more clear communication with the market regarding our dividends. As for your last question, I think that the in 2024, the government will be reflecting shareholder return policy and performance of the corporate corporations in the KPI, overall business management evaluations, especially for the listed public corporations.

Speaker 1

And so this has not been finalized yet. And if that is the final version is distributed, we will be reviewing that, and we will be developing more clear internal dividend policy and then we will be able to make announcement and communicate that with the market.

Operator

The following question is by Ryu Jae Hyun from MiraSS Securities. Please go ahead.

Speaker 1

Good afternoon. I would like to have better idea of the outlook that you have for the unit price of LNG and coal on a quarterly basis. And I understand that you have not disclosed the unit price for the purchase power cost. However, it would be helpful if you can share the trend, especially on a quarterly basis for us to better understand. Lastly, you mentioned that there was the dividend payments by subsidiaries upstream to Kepco and it was quite large in size.

Speaker 1

However, I'm not so sure if the subsidiaries were generating very strong profit streams to be able to upstream such large amounts. So in that respect, can you talk about whether the dividend payment by subsidiaries was generated by strong profits of the subsidiaries or were there some other reasons for those subsidiaries to upstream the dividends? So regarding your first question on the quarterly outlook of the price of LNG and coal, we usually disclose annual outlook but not quarterly outlook. So I ask for your understanding. And then regarding your second question on disclosing the unit price of the purchase power cost, so on our website, we have a section on CapEx and the monthly actual figures are disclosed.

Speaker 1

However, in terms of the forecast and outlook, it can change quite quickly. So unfortunately, we are not able to disclose the outlook for this item. Yes. So regarding your third question, I don't think I can speak on behalf of the subsidiaries for their dividend upstream. But on a stand alone basis, according to the KEPCO Act, there is a ceiling on the amount of bonds that KEPCO can issue.

Speaker 1

And to be legally satisfying these requirements, the decision to pay to receive interim dividends from the subsidiaries have been made.

Operator

The following question is by Kang Dong Jin from Hyundai Motor Securities. Please go ahead.

Speaker 1

Yes. My name is Kang Joong Jin, and I have two questions. First of all, you mentioned the outlook of the unit price of fuel. I was wondering, in your outlook, did you incorporate the private consumption tax issue? So it has been extended for six months, but once that expires, it will go back up.

Speaker 1

So I was wondering if you have considered that change in your outlook. Second, regarding shareholder return and financial structure, whether it's on a standalone or a consolidated basis, I would like to know if you have any financial targets adjusted to equity? And how is your dividend policy related to those targets? For example, if debt equity goes to this level or will you be then paying dividends to the shareholders and so on? Thank you.

Speaker 1

Regarding your first question regarding the tax, so it has been extended and currently the current system has been reflected into the outlook. Then regarding the dividend policy requirements that you mentioned, we do not have a detailed dividend policy yet. So once that has been confirmed, we will be able to communicate that to the market.

Operator

The following question is by Hwang Sung Yeon from Eugene Investment Securities. Please go ahead.

Speaker 1

So I have two questions. My name is Hong Seong Yang from Aegion Securities. The LNG price in the spot market has been quite weak recent times, so have been The U. S. Natural gas prices.

Speaker 1

And I know that kept coal's pricing of these type of fuel is related to the oil price. So in this respect, can we expect cost levels of fuel to come further down compared to the outlook that you have mentioned in your presentation? And then second, regarding the fuel as well. So I think in Q3 for the nuclear power, you have mentioned I feel that unit price has been somewhat on declining trend. So I would like to ask for your opinion on that.

Speaker 1

And also given the inventory level that you have currently, do you think you will be able to exhaust it? What do you think the trend will be for this year? Regarding your first question on LNG price, so like you've mentioned, we are also aware that the spot prices have been quite weak in recent times. It takes about five to six months on average for the spot prices to have impact on our purchase price. And while spot price is, of course, important benchmark, we usually procure from coal gas.

Speaker 1

And the coal gas mid long term volumes to carrier policy is also important and it can also have impact on our pricings as well. Regarding your second question on the nuclear fuel, so KHMP usually has long term contracts when they purchase the uranium around five to ten year contracts. In those contracts, KHNAP is usually able to determine and control the volume of purchase during that contract period. So they try to have more derisked. So they are able to respond to the changing market price trends of the nuclear fuel in the market, and they use that power to maintain an appropriate level of cost of nuclear fuel.

Speaker 1

And as for the inventory, it's around three years at the moment.

Operator

The following question is by Moon Kyung Won from Merit Securities. Please go ahead.

Speaker 1

I am Boong Kyung Hwan from Baird Securities. And I have one more question regarding the adjustment factor. So in 2022 and 2023, the numbers have come down significantly. I am wondering the direction of the adjustment factor for 2024. Do you think it will be similar to 2023?

Speaker 1

Or do you think that given the loss and the financial status of TEPCO at the moment, what do you think the adjustment factor will be or at least the direction of it in 2024? So to answer your question, I first, if you look at the adjustment factor, a low factor does not mean that the subsidiaries are taking a lower amount. The opposite is the same as well. The high factor does not mean that the subsidiaries are taking a higher portion. So usually, we take deduct the fuel cost from the SMP, that would be the margin.

Speaker 1

And then the factor will be calculated in a retrospective way. So it's we try to it's a retrospective number rather than a number that we said from the very beginning. And so I think rather than the factor itself, the profits that the subsidiaries can take on top of their cost can be more important. And in this sense, the actual number of the factor is quite can be quite insignificant and it's also very difficult to make an outlook on that. And as to the subsidiaries profits, at this stage, it's difficult to foresee as well.

Speaker 1

So unfortunately, I'm not able to give you a more clear answer on this question.

Operator

Currently, there are no participants with question. The following question is by Hwang Song Yeon from Yixin Investment Securities. Please go ahead.

Speaker 1

So in other items, compared to Q4 twenty twenty two, there seems to be a decline. So what would be the main reason for this? So in the previous year, we sold the former headquarter building that was booked under other items, but we do not have any similar transaction this year. So I think this will be the main reason.

Operator

Currently, there are no participants to question. The following question is by Kang Dong Jin from Hyundai Motor Securities. Please go ahead.

Speaker 1

I'm looking forward to hearing your CapEx numbers, CapEx guidance for 2024 and 2025. I understand that most of the new power plants that were under construction are coming online soon. So what would be the CapEx figures for 2024 and 2025? For 2024 annual number on consolidated basis, CapEx is expected to be around KRW17.6 trillion and then 2025, KRW19.9 trillion. These are CapEx number for the domestic markets.

Speaker 1

2024 transmission and distribution should be around KRW8.2 trillion, nuclear power plant, KRW4.2 trillion, thermal power, 3,700,000,000,000.0 and the remaining will be mostly renewable energy and others.

Operator

Currently, there are no participants to question. As there are no further questions, we'll now end the Q and A session. This concludes the fiscal year twenty twenty three fourth quarter earnings results by Kepco. Thank you for your participation.

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