Korea Electric Power Corporation (KEP) Earnings

Management highlights

- Power Sales Volume * First half 2026 power sales volume decreased 0.6% YY to 266.7 terawatt-hours, driven by lower industrial demand amid an economic slowdown. * A correction was made during the call: the increase in coal-fired power generation's share of the generation mix was caused by elevated LNG prices triggered by the Middle East conflict, not just lower nuclear capacity factor as initially stated. - Generation Mix * In the first half of 2026, nuclear power capacity factor declined, reducing its contribution to the overall generation mix. This drop was offset by increases in both the utilization rate and generation mix contribution of coal, while LNG's generation mix contribution also rose due to lower overall base load generation. * First half 2026 fuel price benchmarks: Australian bituminous coal averaged $128.2 per ton, JKM LNG averaged $939 per ton, and the system average fuel price (S&P) was approximately 112.31 won per kilowatt-hour. - Balance Sheet & Funding * As of the end of the first half of 2026, total consolidated borrowings were 133.3 trillion won, with 84.8 trillion won in standalone borrowings.

Guidance

- Full-year 2026 power sales volume is expected to see a slight increase, driven by a higher projected economic growth rate and more annual operating days. - Full-year 2026 generation mix projection: nuclear power contribution will increase slightly, coal contribution will decrease slightly, and LNG contribution will remain largely unchanged. Projected full-year capacity factors are: low-to-mid 80% for nuclear power, low-to-mid 50% for coal, and low-to-mid 20% for LNG. - The proposed corporate/regional differentiated electricity tariff system is expected to be finalized in the second half of 2026 and introduced by the end of 2026, alongside reforms to the regional wholesale power pricing mechanism. - Management is committed to making maximum efforts to meet the requirement of reducing the corporate bond issuance ratio (ratio of bond issuance to the sum of capital and reserves) to below 2x by the end of 2027, primarily through improving operating profit generation and coordinating with the government on appropriate tariff adjustments. - Large national AI-related megaprojects and associated grid expansion are mid-to-long term initiatives that will not require full upfront capital outlay; capital expenditures will be spread out over multiple years.

Segment performance

Capco (Korea Power Corporation) reported preliminary consolidated IFRS results for the first half of FY2026. Total revenue increased 0.3% year-over-year (YY) to 46.3173 trillion won. Power tariff revenue, the firm's core revenue segment, decreased 0.4% YY to 43.9641 trillion won, accounting for approximately 94.9% of total consolidated revenue. Other revenue, which includes revenue from overseas operations, increased 16.7% YY to 2.3532 trillion won, accounting for approximately 5.1% of total consolidated revenue. Total cost of goods sold and selling, general & administrative expenses rose 2.8% YY to 41.4046 trillion won. Within operating costs, fuel costs increased 8.8% YY to 10.1429 trillion won, depreciation expense increased 1.3% YY to 5.9515 trillion won, and another major cost category increased 0.9% YY to 17.2069 trillion won. Consolidated operating income came in at 4.9127 trillion won, and net income totaled 2.7965 trillion won. RPS cost for the first half of 2026 was 2.533 trillion won on a consolidated basis. As of the end of the first half, total consolidated borrowing stood at 133.3 trillion won.

Risks & headwinds

- Prolonged preventive maintenance for some nuclear power generation units led to weaker-than-expected nuclear capacity factor in the first half of 2026, extending a four-quarter trend of declining nuclear contribution to the generation mix. - Elevated international fuel prices have started to be reflected in domestic fuel costs with a time lag, pushing up S&P prices in July and August 2026 compared to the same period in 2025, increasing overall operating cost pressure. - Large-scale national infrastructure and grid expansion projects require significant medium-to-long term capital investment, which creates a funding challenge alongside the requirement to reduce bond issuance levels to meet regulatory caps. - The financial impact of the upcoming differentiated electricity tariff system remains uncertain, as the policy is still being finalized. - Persistent weak industrial demand due to economic slowdown could pressure full-year power sales results.

Analyst Q&A

• Q: Nuclear contribution to the generation mix has declined for four consecutive quarters, and prolonged maintenance has weakened first half performance. Can the full-year target of a slight YoY increase in nuclear contribution still be met in the second half? /

  A: Management confirms that the full-year target capacity factor of low-to-mid 80% for nuclear power remains in place. A new nuclear unit will be added to the grid in the second half, and preventive maintenance schedules for existing units will be adjusted to be more timely to get back on track to meet the full-year contribution target.

• Q: What factors drove the recent increase in non-fuel operating costs, and what is the expected financial impact of the upcoming regional differentiated electricity tariff system? /

  A: The increase in other operating costs primarily came from 101.3 billion won in extra costs from prolonged maintenance at KHMP, plus a 70.3 billion won increase in material costs for coal supplied to private operators by Korea Southeastern Power. It is still too early to disclose detailed financial impacts of the new tariff system, which will go through a public hearing in H2 and be finalized by the end of 2026 alongside wholesale pricing reforms.

• Q: With stabilizing Middle East tensions, will Q3 fuel costs be lower than Q2? Can we expect a tariff hike before 2027? Will the bond cap target of below 2x be met by end-2027? /

  A: While Q2 2026 S&P was lower YoY, July-August 2026 S&P is significantly higher than 2025 levels due to lagged pass-through of elevated international fuel prices, so Q3 costs will not decline from Q2. Management says tariff hikes are needed to address accumulated losses and meet bond requirements, and will work with government to pursue hikes as soon as possible considering macroeconomic conditions. Management will make utmost effort to hit the 2x bond cap target by 2027, focusing on boosting operating profit rather than just cutting gross bond issuance.

• Q: The three new national AI megaprojects will require large capital outlays for new generation capacity and grid expansion, which conflicts with your goal to cut bond issuance to meet the 2x cap. How will you fund these projects? /

  A: These are mid-to-long term projects that do not require full upfront capital, so spending will be spread across multiple years. Management will develop a phased capital expenditure plan, implement strict existing fund management, coordinate with the government and relevant stakeholders, and balance project investment needs with overall capital structure requirements to avoid undermining core business financial health.