Korea Electric Power Corp (KEP) 2015 Q1 法說會逐字稿

(Interpreted). 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 2015 first quarter earnings results by KEPCO. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions). Now we shall commence the presentation on the fiscal year 2015 first quarter earnings results by KEPCO.

(Interpreted). Good afternoon. This is Weun-Gun Ko, Vice President and Treasurer of KEPCO. On behalf of KEPCO, I would like to thank you all for participating in today's conference call to announce earnings results for the first quarter of 2015. We will begin with a brief presentation on the earnings results which will be followed by a Q&A session. Today's call will be presented in both Korean and English.

Please note that the financial information to be disclosed today is on a preliminary, unaudited and consolidated basis in accordance with K-IFRS. Any comparison will be on a year-on-year basis between 2014 and 2015.

Business strategies, plans, financial estimates and other forward-looking statements included in today's call will be made based on our current expectations and plans. Please be noted that such statements may involve certain risks and uncertainties.

Now our Senior IR Manager, Mr. Changyoung Ji, will begin with an overview of earnings results for the first quarter of 2015, first in Korean and repeated in English.

(Interpreted). Now we will provide the overview in English, starting with operating income. In the first quarter of 2015, KEPCO recorded a net operating income of KRW2.24 trillion.

Taking a closer look, operating revenues increased 2.4% to KRW15.12 trillion. This was attributable mainly to 0.9% increase in power sales revenue, totaling KRW13.86 trillion, and 34.2% increase in revenue from the overseas business, amounting to KRW816b.

Moving on to main operating costs, cost of goods sold, SG&A expenses, decreased 0.9% to KRW12.88 trillion. Fuel cost decreased 24.7% to KRW4.63 trillion. Power generation affected by the lower power demand decreased 2.9% and unit cost of fuel declined by 22.5%. Meanwhile purchased power cost increased 11.6% to KRW3.66 trillion. Unit cost of purchased power decreased 12.3% because of the decrease of SMP caused by the increase of new highly-efficient power plants. And purchase volume increased 29%. Depreciation cost rose 5.1% to KRW1.77 trillion mainly due to the newly constructed substations and new facility additions by power plants.

Now let me explain KEPCO's non-operating expenses. Net financial loss was KRW494b in the first quarter of 2015, which was improved by KRW30b.

As a result of the foregoing, we recorded a consolidated net income of KRW1.22 trillion in the first quarter of 2015.

This concludes the overview of KEPCO's earnings results for the first quarter of 2015.

Now let me move on to the Q&A session. Q&A session will be hosted by Mr. Weun-Gun Ko.

(Interpreted). This is Weun-Gun Ko. I'm joined with our IR committee members in charge of major business areas at KEPCO. We are prepared to take any questions.

(Interpreted). Now Q&A session will begin. (Operator Instructions). Pierre Lau, Citibank.

Hi. Good afternoon management. I'm Pierre Lau from Citibank. I have three questions. The first one is about your generation mix. In the first quarter, your generation mix had 48% from coal and 35% from nuclear. So what is management guidance for the generation mix in 2015 for the full year?

Second question, in the first quarter your power purchased from IPP was up 29% to 19,000 gigawatt hour. What is management guidance for the full year power purchase amount from IPP?

And, last question, what is your unit coal, LNG and oil cost guidance for 2015 after seeing your first quarter results? Thank you.

(Interpreted). To answer your first question on the full year generation mix for 2015, we are planning to have 11% of LNG, 48% of coal-fired power plants and 38% for nuclear power plants.

As for your second question on the overall power purchase from IPPs for full year 2015, it's expected at 19%.

And as for the unit cost on fuel, as for coal it's [KRW2,100] per tonne for coal and KRW820,000 -- KRW827,000 for LNG, and as for fuel it's KRW576.68 per unit -- per liter.

Okay. Thank you. For the second question, that 19%, is it 19% of your electricity sales from power purchase or you expect power purchase from IPP increase by 19% year over year? Which one do you refer to? Thank you.

(Interpreted). So 19% is total mix from overall power purchase by KEPCO in 2015.

Okay. Thank you.

(Interpreted). [Baek Soo-Hyun], UBS.

Yes, hi. Thank you for the call. My first question is on your unconsolidated net profit. I see there's a big increase in the net profit due to the higher dividend income. Could you please let us know what the payout ratio of the gencos were this year and last year? I ask because you use the unconsolidated net profit for the dividend payout so if there's any guidance for this year's unconsolidated net profit that would also be very helpful.

My second question is on the nuclear plants. At the beginning of the year you guided for 85% nuclear utilization rate for this year. So I'd just like to check if this is still intact.

Also there's been a number of nuclear plants with issues so I think an update on these plants would be helpful as well. For example, the Hanbit number 3, when do you expect that to restart? The Wolseong number 1, there's been government approval but the plant hasn't restarted yet, so wondering when that plant would restart as well. Also for the new plants, your presentation is saying that the Shin Wolseong number 2 is scheduled to start operations in July 2015, but wondering when the Shin Kori number 3 and number 4 can start commercial operations.

(Interpreted). Based on the financial accounting year 2014, our dividend payout ratio for our subsidiary companies is as follows. As for Korea Nuclear Power Plant, KHNP it is 39% and as for five other gencos it's 15% -- as for KHNP, I'm sorry, it's 30.9%.

And as for the nuclear power plant utilization rate, the 85% utilization rate is still valid.

And as for each of the nuclear power plants, for Hanbit number 3 and Wolseong number 1, we expect it to be commercially operational by end of May or early June. And as for Shin Wolseong number 2, it will go live in July. As for Shin Kori number 3, there has been some change where it will not go live for this year, but it will be in operation together with Shin Kori number 4 in 2016.

Thank you. If I may just add one more question regarding the electricity tariff discussion with the regulator, I think last quarter you mentioned that you expect the discussions to start in June and a potential conclusion will be out sometime in June or July. Can I just check if that schedule is still intact?

(Interpreted). Yes, as we have mentioned before, the overall tariff discussions will be in discussion once the total cost, including the cost pass-through system, is calculated in end of June. And once that is settled, together with the overall power sales numbers, we will decide on whether to adjust our power tariff or not.

Thank you.

(Interpreted). Yun Hee-Do, Korea Investment & Securities.

(Interpreted). I have three questions. First question is if you look at your overseas business profit it has gone up significantly compared to the previous quarter, by 34% roughly to [KRW316.3b]. Now what has driven this kind of increase in your overseas business?

And on second question, if you look at the REC purchase cost, it has gone up year on year, but if you look at the quarter-on-quarter number for REC purchase, it has gone down by 21%. What is the reason behind it?

And my third question is this year we will start the trading of greenhouse gas emission right and how do you plan or how are you actually processing that on your accounting books?

(Interpreted). To answer your first question on the increase in overseas business performance is that if you look at the process -- if you look at overall completion rate for UAE business, it has climbed up to 34% at the moment, so most of the revenue increase from overseas business is driven by our UAE project.

To answer your question on the REC cost, if you look at the overall REC cost, and it's a process of purchase and the trading in the power market, that is usually done sometime around May and reflected in the accounting books at the end of the year. So the 2013 numbers have not been reflected and it has not been fully reflected in the base effect of our accounting books. Therefore, if you look at the overall REC purchase cost trend, it is going up continuously. However, temporarily on the accounting books it does look that it has decreased during those times.

As for the trading right, we are currently in discussions on how to treat that on our account books and nothing has been confirmed yet.

(Interpreted). A follow-up question to that. On the emission trading side you said end of last year that you're expecting about KRW3b impact on your accounting book and it seems that that has not been processed in your balance sheet yet. When do you believe that that will actually be reflected on the accounting books?

(Interpreted). It's KRW300b as of last year for the trading of emission rights. We believe the decisions around the accounting treatment will come around end of this year.

(Interpreted). Although it may be difficult for you to forecast the number at the moment, is it safe to assume that the numbers will be reflected as lump sum at the end of fourth quarter?

(Interpreted). As for the emission trading rights, we haven't even decided whether to treat that as an expense or whether to treat that as a liability on our accounting books yet. So it is very difficult for us to comment on the total amount of the trading emission right as well as the accounting line item itself.

(Interpreted). Jay Jae-Hyun, Daewoo Securities.

(Interpreted). My first question is what has driven the increase of other operating expense increase for this quarter?

And second question is could you share with us the increase of utilization or use of nuclear power plant by quarter-by-quarter basis for this year.

And also it seems that your equity method has increased, mainly I assume driven by [Cogas], but could you elaborate on that spend?

And also, last but not least, it seems that your gain from the headquarter land sell-off has gone through and you have received about KRW4 trillion in receivable at the moment. When do you plan to recognize that on your accounting book?

(Interpreted). As for your first question on the non-operating expense, as we have seen a large increase in overseas business revenue, we also have seen increase in expense according to UAE planned project. Therefore, the increase in equipment and facility costs has added to our non-operating expense increase.

And to answer your second question on utilization for our power plant, for first quarter it's 85.1%, for second quarter 86.7%, third quarter 82.7% and for fourth quarter we are assuming 88.8%.

As for the equity gain, yes, we are recognizing most of the gain from the [Cogas] equity, which is at KRW125b on the accounting book, and for other overseas business there is additional KRW38b gain that we are seeing in the equity side.

And our gain from the headquarter land sale will finalize in end of September. So we are receiving gains on three phases and final one will come at end of September and that is when it will be recognized in our accounting book.

(Interpreted). [Jangsook Shin], Morgan Stanley.

(Interpreted). I have three questions. First question is on your supply margin settlement with the [Cogas] when it comes to settling your energy source, LNG mainly. I think that you have been settling those differences in second quarter last year, but it seems that it was done already in the first quarter. So what is the impact of that settlement on your accounting book, combining both LNG for your proprietary usage as well as IPP?

And second question, it seems that according to the GS Holdings IPP, that there is one month lagging effect when it comes to LNG input price versus IPP sales price. And it seems that it was higher than the supply cost or the cost of fuel itself for this year. How much of the gap -- how much gap exists for this quarter, is the second question?

And the third question on the ESS, you're increasing the overall coal efficiencies to save energy. And in doing so what is your overall roadmap in terms of your utilization and timeline?

(Interpreted). So for your first question and second question, to my regret, we don't have the relevant person here to answer your question, but please allow us to follow-up on that question offline later on.

And on your third question, we are currently pursuing ESS project by phase by phase and it's spread out until 2017, and we are approaching that by different phases depending on the bandwidth. Our current planned capacity is 500 megawatt; 200 megawatt for 2015, 124 megawatt for 2016 and another 124 megawatt for 2017. And we are going to convert the coal-fired energy to 100% ESS to have 100% efficiency.

(Interpreted). Shin Ji Yoon, KTB Investment & Securities.

I have two questions. It seems that your LNG mix is going down by 30% whereas the IPP is going up, and [PPE] is going down whereas general IPP portion is also going up. And you mentioned that IPP mix in overall power generation will take up about 19%, in your previous comment. Having said that, your first quarter IPP mix was 18%. So it seems that you're expecting that this number will expand second quarter and afterwards.

I guess the main difference is, coming from the difference between KEPCO generation and IPP, is the difference in overall energy cost, but, still, 19% seems to be an extremely large number. Do you see this as a structural trend which will likely materialize and stay the same moving forward?

On my second question, shifting gears a little bit, it's on the other operating expense. I understand that the expense has gone up due to the UAE project, but could you share with us if you can some increase in labor cost or provisioning cost for the nuclear power plant decommissioning etc, so if there are any cost increase driven from those two factors?

(Interpreted). To answer your first question, recently we have added highly efficient new LNG generations and that has driven down SMP price. And we believe the trend of increasing IPP mix in Korea will continue to exist moving forward.

And your question regarding other non-operating expense, the labor there is not included as part of that non-operating expense. However, the liabilities for decommissioning costs or provisioning for decommissioning costs for nuclear power plant has been added and the impact of that is about 1.5%.

One correction here, if you look at our IR materials, labor cost is included in other operating expense and labor cost increase has been 6%.

(Interpreted). Min-Ho Hur, Shinhan Financial Investment.

(Interpreted). First question, it seems that if you look at the gencos, the settlement co-efficient, it has gone up in January, and usually you add 1% or 2% of WACC on top of it. But, however, if you look at the current level, it has reached its peak, historical peak at the moment. Historically, you have had higher number end of January and you have lower debt in July. Do you believe this to be the trend at the year too or do you believe it will further drop moving forward?

And if you look at your gencos' coefficient, it's 1% at the moment and there have been gap with the IPPs. Do you believe that for when it comes to the private IPPs you could expect increase of CP moving forward?

(Interpreted). To answer your first question, if you look at our settlement adjustment coefficient for 2015, we are reflecting the overall fluctuation of SMPs throughout the year. In January it was KRW140. On average it's expected to be KRW110. That's why first quarter of this year it seems that the IPP has created more profit, higher than ever. But it's something that is temporary. We believe that it will balance off throughout the year as we adjust the coefficient and it will get lower in the later half of this year in balance with KEPCO's level.

As for the CPs, the coefficient has the purpose of adjusting the cost issue between the gencos and KEPCO as it's headquarter, and it has no relevance with the CPs of private IPPs.

(Interpreted). Currently there are no participant questions. (Operator Instructions).

(Interpreted). All right then. We will conclude this conference call. Once again, thank you for joining us today.

(Interpreted). This concludes the fiscal year 2015 first quarter earning results by KEPCO. Thanks for the participation.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call.? The interpreter was provided by the Company sponsoring this Event.