Korea Electric Power Corp (KEP) 2015 Q2 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 second 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 second-quarter earnings results by KEPCO.

(Interpreted). Good afternoon. This is Weon-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 half 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 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 Senior IR Manager, Mr. Changyoung Ji, will begin with an overview of our earnings results of the first half of 2015, first in Korean and repeated in English.

(Interpreted). Now we will provide you an overview in English, starting with operating income. In the first half of 2015 KEPCO recorded a net operating income of KRW4.33 trillion. Taking a closer look, operating revenue has increased 4.1% to KRW28.79 trillion. This was attributed mainly to 2.1% increase in power sales revenue, totaling in KRW25.89 trillion, and 38.2% increase in revenue from the overseas business amounting to KRW2.11 trillion.

Moving onto net operating costs. Cost of goods sold, SG&A expenses decreased 4.4% to KRW24.47 trillion. Fuel cost decreased 25.9% to KRW7.98 trillion. Power generation affected by the low power demand decreased 4.2% and unit cost of fuel declined by 22.6%.

Meanwhile, purchased power cost increased 3.5% to KRW6.19 trillion. Unit cost of purchased power decreased 20% because of the decrease of [S&P] caused by the increase of new highly efficient power plants and purchase volume increased 29.3%. Depreciation cost rose 5.3% to KRW3.55 trillion, mainly due to the newly constructed substations and new facility additions by power plants.

Now let me explain KEPCO's non-operating segment. Net financial loss was KRW1 trillion in the first half of 2015, which was improved by KRW125b. As a result of the foregoing, we recorded a consolidated net income of KRW2.57 trillion in the first half of 2015.

This concludes the overview of KEPCO's earnings results for the first half of 2015. Now let me move onto the Q&A session. Q&A session will be hosted by Mr. Weon-Gun Ko.

(Interpreted). This is Weon-Gun Ko. I am joined with our IR committee members in charge of major business areas at KEPCO. We are prepared to take any questions. Since we will proceed in both Korean and English, all the Q&A's will be interpreted. Please make sure your questions and answers are brief and clear. Please begin.

(Operator Instructions). Pierre Lau, Citibank.

Hi. Good afternoon, KEPCO management. Congratulations to your good results. I'm Pierre Lau from Citibank. I have three questions. The first question is what is your generation mix from nuclear and coal respectively in 2015 for the full year?

Second question, what is your forecast of your unit coal and LNG costs respectively also in 2015 full year?

And finally for 2015 full year, how much electricity that you expect to purchase from IPP? Thank you.

(Interpreted). To answer your first question on the generation mix for the 2015 full year, we believe the LNG will be 11% and coal will be 49% and nuclear will be 37%.

And as for the unit cost for the fuel for the generation is as follows. For coal it is KRW102,000 per tonne. And for LNG it's KRW827,000 per tonne. And for oil it's KRW576,800.

And to answer your third question on our electricity purchased from IPP, we plan to purchase 19% of our power from IPP. And the overall budget in 2015 will be KRW11 trillion.

Okay. Thank you. For the unit coal cost, would you mind repeat the number?

(Interpreted). It is KRW102,000 per tonne for coal.

Okay. It's [KRW1,200]?

KRW102,000 per tonne.

I calculate the number in the first half was only -- seems to be much lower than that, less than KRW1,000. So do you expect coal costs to be higher in second half this year compared to first half?

(Interpreted). As of July 1 we're going to be affected by the coal tax by the government. Therefore, per kilogram, the impact will be KRW24 from KRW18 per kilogram.

Okay. Thank you.

(Interpreted). Jiyoon Shin, KTB Securities.

(Interpreted). I have two questions. My first question is rather similar to the previous question that was asked before me. For the LNG unit cost for the first half, you mentioned that it's KRW810,000. And for the second half of the year your guidance is KRW660,000. So throughout the year the overall guidance for LNG cost amounts to KRW820,000. So do you -- so it means that there will be a foreseeable increase in the second quarter of the year to come up with that guidance number.

Given that we are affected by the consumption tax that will increase from KRW18 per kilogram to KRW24, that still gives us a rather high level of LNG unit cost number. So I would like to hear more on that. Given that the oil price is declining and in November and December there will be also additional downward trend for the LNG, price, so how would you explain this trend?

And the second question is on the overseas business, which had a very high revenue generated in the term. I believe it is mostly coming from the [UAE] business under KEPCO. And in this first quarter it was announced that there has been about KRW620b generated from the UAE business. And second quarter then gives us that it should be over KRW1 trillion. So I would like to confirm what has driven the growth of the UAE business.

(Interpreted). To answer your first question, we had a rather conservative assumption when it comes to LNG, which was $62 per barrel. And in the third quarter our forecast that the LNG price would drop to KRW770,000 per unit. And in the fourth quarter then it goes up again to KRW800,000 per unit. So the price drop is not happening as fast as we have anticipated.

And we bought bulk of LNG in the first quarter at the price of KRW879,000 at the highest, and that's where we had the most purchase of LNG for the year. That's why, if you annualize that, that gives us about KRW820,000, which was an accumulated number because that goes back to the first quarter.

To answer your second question on the UAE business, for the first half of this year our revenue for the UAE business is KRW1.7329 trillion. And year on year, in the previous year it was KRW1.1372 trillion. So there has been increase of about KRW600b year on year. Our annual guidance for the UAE business is KRW3.4 trillion. And as you have mentioned, for the second quarter alone our revenue from UAE business is KRW1.1 trillion.

I hope that answered your questions.

(Interpreted). A follow-up question to my first question is you mentioned that the annual -- you mentioned that the LNG price is $62 per barrel. Is that annual number or annual guidance for the LNG price?

(Interpreted). Yes. Our guidance for the oil price is $62 per barrel, and that's correct. And because oil price continues to go down, our plant strategy team is reviewing to adjust our assumption for the oil price and lower that to $58 per barrel rather than $62.

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

(Interpreted). On a standalone P&L, it seems that your net profit is higher for the standalone than the consolidated basis. What has driven that change? And what is the reason behind that in the second quarter?

My second question what is the utilization that you are foreseeing for the second half of the year for the nuclear, coal and LNG generation?

And also another follow-up question is that for the second half of the year, could you also share your guidance on the overall trend by comparing the consolidated financial statement as well as the standalone financial statement?

(Interpreted). To answer your first question on the standalone P&L, the most of the drivers is coming from the sales of the electricity. Our unit price for electricity went up by 0.4%, whereas the sales volume went up by 1.4% resulting in increase of KRW300b on our bottom line. Also the S&P price was dropped by 25% and therefore our power purchase cost was lowered by KRW2.4 trillion, which is the largest factor driving down the -- driving up the performance.

As for the guidance for the 2015, for the standalone P&L, we believe the operating profit will be KRW3.4 trillion. And with the recognition of the sales of our asset, which was our old headquarter in September, we believe the annual number for the net profit will be KRW9.1 trillion. On a consolidated basis our operating profit is expected to be KRW8.3 trillion, whereas our net profit is expected to be KRW11.4 trillion.

As for the generation utilization as for the nuclear power plant, we believe the overall utilization would be 84.8% for year 2015, which is similar to the previous year, which was at 85%. For the third quarter and fourth quarter this year, our expectation is that it will be 82.7% and 88.8% respectively. And as for the coal-fired power plant, we expect a mid 80% to late 80% in utilization.

We have a confirmed number for the first half of the year for the coal-fired power plant, but there are certain uncertainties involved for the second half of the numbers, so that's our projection for now. For LNG power plant, we expect it to be the early 40% utilization or the mid 30% utilization for the year.

(Interpreted). Heedo Yun, Korea Investment & Securities.

(Interpreted). I have two questions. First question, if you look at your consolidated P&L for the second quarter on the -- under the line item other operating profit, it recorded KRW2.36 trillion and there has been increase of about KRW670b. I know this may have been influenced by some of the changes coming from the provisioning required for decommissioning the nuclear power plant which took effect since July 1. So could you elaborate on what is driving that?

And also my second question is that last week you have submitted the total cost or a tariff report to the government to adjust tariff moving forward. So could you share with us the timeline moving forward? And, Mr. Treasurer, would you be kind enough to share with us your perspective on whether it is possible for additional tariff decrease?

(Interpreted). Out of KRW3.3 trillion, we've seen the increase of KRW870b increase year on year. And if you break those numbers down, it was largely driven by increased facility or equipment purchase cost for our UAE business as the business proceeded for significant amount of period. And that number adds up to KRW410b.

And also we are adjusting numbers for provisioning for the decommissioning of the nuclear power plant. We are setting aside the waste disposal cost for the low and intermediate radioactive waste treatment. And we are currently adjusting the discount rate and interest rate that is affected in that liability. So that number added about KRW139.8b to the number. And also we are setting aside liability or provisioning for the RPS, which is another KRW140b, which totals to KRW3.3 trillion.

On your question on the potential task discount moving forward, we have had a one-time discount already when it comes to our electricity price. So in the second half of this year, of course we're going to adjust our tariff depending on the total cost and also the overall power sales profit. And we have submitted that plan based on our management accounting in year -- fiscal year 2014. So it has been submitted to the government, but nothing has been determined as of this point on the total cost.

When the results come out after government reviews this, we'll be adjusting the tariff, looking at the overall cost as well as the overall sales profit from electricity sales. But nothing has been determined yet. But we've this one-time discount of our electricity in July already. So any additional discount or decrease in tariff will be something that we will need to discuss with the government once everything becomes more concrete.

(Interpreted). (Operator Instructions). Minho Hur, Shinhan Finance Investment.

(Interpreted). So last year there was plan to fix the cost for nuclear waste disposal. But as far as I am aware, it has been just delayed to June of this year. But it seems that that cost still has not been determined yet. When do you believe that the disposal cost with nuclear waste will be determined? And when it is determined, how much of the cost do you expect?

(Interpreted). So the cost requirement for the nuclear waste disposal has been amended as of June 30, and it will be taken into effect since the second half of this year for the next few years. There hasn't been any significant changes to the amendment. However, for the low and intermediate nuclear waste disposal, the cost will be changed per barrel. And it used to be about KRW11,930,000 per barrel, but the number is going to be increased by about KRW200,000. So the overall cost therefore will be increased from current KRW603.3b to KRW643.7b moving forward. So we believe the overall cost impact will be somewhere around KRW250b to KRW300b per barrel -- per drum, that is, for the unit cost for the radioactive -- for the low and intermediate radioactive waste.

(Interpreted). (Operator Instructions). Joseph Jacobelli, Bloomberg Intelligence.

Good afternoon and thank you very much for the time and this presentation. Couple of quick questions with regards to your debt management going forward. So we've seen the level coming down in the last couple of quarters. Do you have any specific targets with regards to either your net debt to equity by 2015 and by 2016 or long-term debt to equity, whichever number you feel comfortable with?

And the other question is could you give us a quick update on your nuclear buildout over the next few years? Any more delays or any plans coming in a little bit more quickly than expected? Thank you.

(Interpreted). On your first question on the debt ratio, our goal or target for the consolidated basis for 2015 is 164% and for 2016 is 149% and for year 2017 is 133%. On a standalone basis, our target for 2015 is to lower the debt ratio below 100% level.

So as for Shin-Wolsong 2, we have gone live as of July 24 of this year. And for Shin-Kori number 3, our target date for operation is first half of 2016. And for Shin-Kori number 4 nuclear power plant is targeted to go live by first half of 2017.

(Interpreted). Josh Bae, UBS.

Yes. Hi. Thank you for the opportunity. I have two questions. First, I think you mentioned consolidated operating profit target of KRW8.3 trillion for this year. Could you please share with us what FX and oil price forecast you're using for this target?

Second question, just to follow up on the previous question regarding the Shin-Kori number 4, I think you were previously expecting this nuclear plant to come online sometime in 2016. Is there a particular reason for the delay to first half of 2017? Thank you.

(Interpreted). As for the assumption that we're using for our financial guidance for 2015 is we assume that the electricity sales will grow by 1.8%, whereas the foreign exchange rate against dollar will be KRW1,120 per dollar. And for oil price we expect it to be $62 per barrel using Dubai price. And for the bituminous coal, our assumption is $75 per tonne.

As for your second question on Shin-Kori number 4, it is being delayed because there has been some incompliance on the technology side that some valves, so some of the components, for example, the valves need to be replaced because it failed to meet the technology qualification. Therefore the operating date for Shin-Kori number 4 has been delayed to the first half of 2017 instead of its initial schedule, which was July of 2016.

(Interpreted). (Operator Instructions). Seong-Jin Kang, KB Investment & Securities.

(Interpreted). I have a question on the overall power purchase cost. It seems that the power purchase unit cost for your GenCo has gone down significantly in the second quarter. What is your expectation for the third quarter? And could you also share with us your perspective on the adjustment coefficient when you also explain the unit cost trend moving forward?

(Interpreted). So as for this year, if you look at the adjustment coefficient for the GenCos, reflecting on the last year's number, the S&P price was very high in the first half of the year and very low in the second half of the year. So there has been a fluctuation if you look at the whole year. And that has distorted the overall profit and loss of GenCos over the period.

So what we have decided to do this year is that we are going to split the adjustment coefficient being calculated separately for the first half of the year and the second half of the year. So what we see as a result is that the S&P is high in the first quarter. Therefore the GenCo's profitability appears to be very high in the first quarter, whereas in the second quarter the KEPCO's profitability appears to be high.

We have recalculated the adjustment coefficient at the end of June again. And in the second half of the year we believe the fluctuation of the S&P will rather be stable. So in the second half of this year, the coefficient or settlement price, unit price will be high and stable. So all in all, we are going to see a stabilized number with higher settlement price.

(Interpreted). (Operator Instructions). Joseph Jacobelli, Bloomberg Intelligence.

Just a quick follow-up question with regard to thermal coal costs. Given we've seen coal prices very low for quite some time and unlikely to get any -- go any higher, would this price trend of coal influence your decision in terms of future capacity planning? Will you adjust, say, for example, replacing one plant -- coal-fired power plant by -- so a gas-fired power plant to a coal-fired power plant? Or are you trying to secure longer-term contracts for coal or are you trying to diversify some of the coal sources? Thank you.

(Interpreted). Last month we have announced the seventh basic plan for the electricity supply and demand by the government. And there the LNG mix is somewhat similar; it has increased by about 0.3%. And for coal we assume that the coal price will go down and its mix will be about 32%, whereas for nuclear power plant we are adding two more nuclear power plants and that will take up about 28.5% in terms of our generation mix.

As for the coal-fired power plant, we have initially planned for adding four coal-fired power plants in our [sixth] basic plan for electricity supply and demand, but that has been withdrawn.

And as for the GenCos, they have -- when they plan for the purchase of coal, their target is to have 80% of the coal purchased under the long-term contract with their suppliers. So even if there is drop in coal price, they would not necessarily move to diversify their coal purchase sources in haste. The GenCos are looking into various methods and ways to have competitive pricing -- sourcing price for their coal.

Thank you.

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

(Interpreted). I have one short question on dividend payment. Now that we are wrapping up the first half of the year, has there been any internal discussion on the dividend payout for the end of the year? One potential idea is that because you have the sales of your headquarter asset, are you reviewing to use that fund to include that in your dividend payout? I know it's rather early to have a view on that, but could management potentially share anything with us?

(Interpreted). On our dividend policy or dividend forecast for 2015, I regret to say that there has not been any concrete measure that has been determined yet. Our intention is to maintain our historical dividend payout ratio, which was 30%. Of course for this year, because of our asset sales, we have incurred special profit. And that maybe then lead to special dividend. But nothing has been determined yet and we are in the process of discussing that with the government.

When we consider the special profit into our dividend policy, then that would significantly drive up our dividend payout. So our basic stance is to maintain our historical dividend payout. But that's something that we're still discussing with the government. But what we're keeping in mind is that we will act on behalf of the investors' interest and in leading that discussion with the government.

(Interpreted). (Operator Instructions).

(Interpreted). All right. Then we'll conclude this conference call. Once again, thank you for your generosity. Thank you. Bye-bye.

(Interpreted). This concludes the fiscal year 2015 second-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.