KEPCO Q3 Operating Profit Plunges 70% YoY to 1.6 Trillion Won... "Middle East War Fallout"

Revenue of 26.8518 Trillion Won... Down 2.6%
Electricity Rates Aren't Rising, but Fuel Prices Are Amid the Middle East War

Korea Electric Power Corporation (KEPCO) saw its operating profit in the third quarter of this year plunge by more than 70% from the same period last year. Profitability deteriorated sharply as rising international fuel prices resulting from the war in the Middle East began to be fully reflected in power generation costs. On a standalone basis, which shows KEPCO’s own performance, the company even swung to an operating loss in the third quarter. Its cumulative operating profit for January through September remained above 6 trillion won, keeping it in the black, but if the burden of fuel costs persists, it is expected to put further pressure on efforts to improve its financial structure and its capacity to invest in expanding the national power grid.

KEPCO disclosed on Nov. 12 that it recorded consolidated revenue of 26.8518 trillion won and operating profit of 1.6442 trillion won in the third quarter of this year. Revenue fell 2.6% year over year, while operating profit declined 70.9%.

The year-over-year drop in operating profit alone amounted to 4.0077 trillion won. It was also down 23.0% from the previous quarter, when operating profit was 2.1359 trillion won. Operating profit, which stood at 3.7842 trillion won in the first quarter, fell to the 2 trillion won range in the second quarter and then dropped further to the 1 trillion won range in the third quarter.

The operating margin also fell by 14.4 percentage points, from 20.5% in the third quarter of last year to 6.1% this year. Net income plunged 77.9%, from 3.79 trillion won in the third quarter of last year to 835.9 billion won this year.

KEPCO’s standalone profitability deteriorated further. On a standalone basis, it posted an operating loss of 99 billion won in the third quarter, swinging from an operating profit of 2.6785 trillion won in the same period last year. Its standalone net income also turned into a net loss of 434 billion won this year, from a net profit of 1.8179 trillion won in the third quarter of last year.

The weak third-quarter results also cast a shadow over cumulative performance. KEPCO’s consolidated revenue for January through September this year was 73.1691 trillion won, down 0.8% from the same period last year. Operating expenses, by contrast, rose 7.1% to 66.6122 trillion won. As a result, cumulative operating profit fell 43.2%, from 11.5414 trillion won in the same period last year to 6.5569 trillion won this year. Net income also declined 50.4%, from 7.3281 trillion won to 3.6324 trillion won.

Rising fuel prices resulting from the war in the Middle East were the main cause of the deterioration. KEPCO said that international energy prices rose after the war broke out in the Middle East in late February, increasing the burden of power generation costs, and that the impact began to be fully reflected in the third quarter.

Fuel costs at KEPCO’s power generation subsidiaries totaled 17.0267 trillion won from January through September this year, up 2.2007 trillion won, or 14.8%, from the same period last year. The cost of purchasing electricity from private power generators also increased by 903.4 billion won, or 3.4%, to 27.5097 trillion won. The combined increase in fuel costs and electricity purchases alone reached 3.1041 trillion won.

Fuel costs rose in part because coal-fired power generation increased following the easing of output restrictions, while coal prices also climbed. The price of bituminous coal averaged $130.7 per ton from January through September this year, up 24.5% from $105 per ton in the same period last year. The price of liquefied natural gas (LNG) also rose 2.7%, from 1,013,200 won per ton to 1,040,100 won.

Higher LNG prices also affected the system marginal price (SMP), the wholesale electricity price. Over the same period, the SMP rose 1.9%, from 118.2 won per kWh to 120.4 won. In addition, the mandatory supply ratio under the Renewable Portfolio Standard (RPS) increased from 14% to 15%, pushing the cost of renewable energy certificates (RECs) up 27.6%, from 2.9 trillion won to 3.7 trillion won.

Electricity sales revenue, meanwhile, declined. Amid a slowdown in industrial activity resulting from the war in the Middle East, electricity sales from January through September this year fell 1.1% year over year to 415.3 TWh. The average sales price also slipped 0.4%, from 170.4 won per kWh to 169.7 won. As a result, electricity sales revenue decreased by 1.1606 trillion won. In other words, rising costs to generate and purchase electricity, coupled with falling sales revenue, put pressure on profitability.

KEPCO’s financial position remains poor. Its consolidated debt at the end of the third quarter this year stood at 209.6 trillion won, up 4 trillion won from 205.6 trillion won at the end of last year. Borrowings also increased by 3 trillion won over the same period, from 129.8 trillion won to 132.8 trillion won. KEPCO has maintained an operating profit for 13 consecutive quarters, but has yet to fully resolve the financial burden accumulated during the Russia-Ukraine war.

KEPCO said it had achieved 1.9 trillion won in financial improvements through the third quarter of this year. It cut costs by 1 trillion won through measures including improvements to grid operations and budget reductions, and generated 300 billion won in additional revenue by improving its business policies. It also reduced investment costs by 600 billion won through measures such as adjusting project priorities.

However, investment pressures are expected to grow as demand for expanding the national power grid rises rapidly, driven by the construction of artificial intelligence (AI) data centers and advanced industrial complexes. If the deterioration in profitability caused by higher fuel prices persists, the strain between KEPCO’s efforts to improve its financial structure and its large-scale grid investments is bound to intensify.

KEPCO said it will closely monitor rising international energy prices and continue operating its emergency management system focused on cost reduction and profitability. It also said it will cooperate with the government’s policies to stabilize the electricity market, including measures to increase the utilization of baseload power sources and lower taxes on power generation fuels, and make every effort to build the national power grid on schedule.

This content was produced with the assistance of AI translation services.