Need Time to Reduce Losses
The authors are analysts of Shinhan Investment Corp. They can be reached at krpark@shinhan.com and mw.choi@shinhan.com, respectively. -- Ed.
Fuel cost adjusted charge announced at KRW5/kWh for 4Q22
KEPCO has set the fuel cost adjusted charge per unit at KRW5/kWh for 4Q22. The hike in fuel costs for 4Q22 was calculated at KRW52.3/kWh (vs. KRW33.6/kWh in 3Q22) based on increased prices of bituminous coal, LNG and bunker C oil, but the final fuel cost adjusted charge was set at the same level as the previous quarter due to the ±KRW5/kWh cap on charges.
The fuel cost adjusted charge for 4Q22 reflected energy prices in June-August 2022. Based on data released by the Korea Customs Service, average prices after customs duties and taxes were up by 17.4% QoQ and 99.9% YoY for bituminous coal, 28.5% QoQ and 118.5% YoY for LNG, and 7.4% QoQ and 75.7% YoY for bunker C oil.
Tariffs raised by KRW2.5/kWh (+ additional KRW4.5-9.2/kWh by type)
Tariffs have been raised with the revision of terms and conditions for the total comprehensive cost-based electricity supply scheme. Effective from October, rates have been raised by KRW2.5/kWh across the board, with an additional hike of KRW4.5-9.2/kWh by type resulting in a 7.0-11.7/kWh tariff increase for heavy users of industrial/commercial-use electricity. Adding the KRW4.9/kWh increase announced previously, electricity tariffs for 4Q22 are now KRW7.4-16.6/kWh higher on a QoQ basis.
Despite tariff hikes, we lower our expectations for 4Q22 operating earnings reflecting changes in assumptions for system marginal prices (+13.6%) and coal prices (+3.8%), and negative impact of the higher USD/KRW rate on costs. We now expect KEPCO's operating loss to reach KRW7.9tr in 4Q22, vs. market consensus of KRW6tr and our previous forecast of KRW7.2tr.
Need time to reduce losses; focus on changing policy stance on tariffs
We retain our HOLD rating on KEPCO. With 3Q22 operating losses seen to have been far greater than the consensus estimate of KRW6.8tr at KRW10tr, KEPCO is unlikely to report a significant decline in operating losses within the remainder of 2022. However, what captures our attention is the government’s decision to raise tariffs amid high inflation. We believe additional policy measures, along with downward stabilization of energy prices, will help KEPCO to narrow losses at a rapid pace. In the near term, the divergence between fundamentals and share price may widen further.