Korea Electric Power Corp (KEP) 2015 Q3 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 third 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 third 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 third quarter of 2015.

We will begin with a presentation on the earnings results, which will be followed by a Q&A session. This conference 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 the earnings results of the third quarter of 2015 first in Korean and repeat in English.

Now we will provide the overview in English, starting with operating income.

In the third quarter of 2015, KEPCO recorded a net operating income of KRW8.67 trillion.

Taking a closer look, operating revenues increased 4% to KRW44.27 trillion. This was attributable mainly due to 2% increase in power sales revenues totaling KRW39.96 trillion and 36.6% increase in revenues from the overseas business amounting to KRW3.16 trillion.

Moving on to main operating costs, cost of goods sold, SG&A expenses decreased 5.5% to KRW35.6 trillion.

Fuel cost decreased 24.3% to KRW11.74 trillion. Power generation affected by the low power demand decreased 2.3% and unit cost of fuel declined by 22.5%.

Meanwhile, purchased power cost decreased 3.4% to KRW8.95 trillion. Unit cost of purchased power decreased 22.3% because of the decrease of SMP caused by the increase of new highly efficient power plants and purchased volume increased 24%.

Depreciation cost rose 5.8% to KRW5.36 trillion mainly due to the newly constructed substations and new facility addition by power plants.

Now let me explain KEPCO's non-operating segment. Operating income rose [7,637%] to KRW8.61 trillion mainly due to the gain from headquarter land disposal.

Net financial loss was KRW1.45 trillion in the third quarter of 2015 which was an improvement by KRW268b.

As a result of the foregoing, we recorded a consolidated net income of KRW11.84 trillion in the third quarter of 2015.

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

Now let me move on to the Q&A session. The 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&As will be interpreted. Please make sure your questions and answers are brief and clear. Please begin.

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

Hi. Good afternoon KEPCO management. I'm Pierre Lau from Citibank. I have three questions. The first question is why your unit coal cost in the third quarter this year was higher than that in the second quarter and what is the outlook for the fourth quarter.

Second question, what is your Company's net profit sensitivity to 1% Korean won depreciation against US dollar?

And number three, what is your expected generation mix in 2016 from different kind of fuel? Thank you.

(Interpreted). So to answer your first question, in the third quarter, we've seen a slight increase in the unit coal cost. That is because there has been 30% increase on the coal taxation here in Korea. The expected cost, the unit cost, average unit cost is expected to be KRW98,000 per tonne.

On the sensitivity to the interest rate regarding your second question, the impact on our financial statements on a consolidated basis would be KRW160b per KRW10 of depreciation.

And as for the generation mix outlook for 2016 it will be as follows. Coal will be 51%, nuclear 40%, LNG 7%.

Okay. Thank you. For the first question, why the new plant have higher unit coal cost than the old one?

(Interpreted). As I have mentioned, starting in the second half of this year, the taxation for coal has been increased. It used to be KRW18 per kilogram of coal, but it has been increased to KRW24 per kilogram.

Thank you.

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

(Interpreted). Congratulations on your great financial performance this quarter. I have three questions. The first question is on the tariff filing. And at the end of July you have completed tariff filing report to the government and as far as I know there hasn't been feedback from the government side yet. Could you give us an update on the overall progress of the tariff filing?

And second question, what is the gain from the -- your headquarter land sales. And as far as I know, the financial performance is being reflected on the third quarter. So how much of that financial gain is reflected on your balance sheet and what is your impact on the net overall -- what is the amount that is actually going to impact your overall net profit?

Third question is on the maintenance provisioning. If you compare the first half of this year with the last half of the year, there has been about 32% increase in the provisioning. But on the third quarter, on a quarter-on-quarter basis, there has been 5.7% decline in the number. Could you give us a perspective on this?

(Interpreted). To answer your second question first, the impact on our net profit excluding the corporate taxation would be KRW6.4 trillion.

To update you on the overall tariff process, in the summer season we have launched the new regulation regarding the tariff, so we had to reflect that in our overall administrative system. We are also reflecting segment accounting into our profit. So, as a follow-up process, we've had some administrative work that has been attached to this new accounting that is being applied.

So there has been some time gap within the initial June timeframe and also within that, during those periods we've also tried to update the new foreign exchange rate status and oil price differences. So the overall cost, the total cost, has been calculated based on the September number and we are proceeding with that basis.

So on the net profit, [Kayco] will get back to you with the updated number later on.

(Interpreted). A follow-up question to the tariff process is that when do you expect the cost review will be completed.

(Interpreted). At this point, I regret to say it's very difficult for us to foresee when this outcome will be coming to us.

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

(Interpreted). Also congratulations again for your great performance. In the second half of the year there has been mention that there will be adjustment to the normal coefficient. How is that coefficient adjusted in the third quarter and what were the factors driving that adjustment?

And also, considering the differences and impact on the net profit and the financial gain from your headquarter building and land sales it seems that still your net profit was less than what someone -- one would have expected. Could you also give us a perspective on that?

(Interpreted). To answer your question on the coefficient adjustment, the typical process will be that we will look at the quarterly performance first and then go into the review of the overall normal coefficient adjustment. So we are releasing our financial performance this week and the review on adjusting the coefficient will start subsequently.

(Interpreted). To answer your second question, if we exclude the gain from the headquarter land sale on an unconsolidated basis, we have created a profit of KRW3.5 trillion which isn't less than anyone's expectation I believe. And this number is based on accumulative basis, not just third quarter.

(Interpreted). Sujin Bum, Samsung Securities.

(Interpreted). I have four questions. First question is on the completion of the power plant for the base load. In the third quarter, if you look -- and the second question is on the coal price. If you look at the price in the third quarter, considering that there has been an increase in the consumption tax and also impact from foreign exchange rate, it seems that the increase has been somewhat limited to one's expectation. Given that factor, how do you expect your fourth quarter average coal price to develop moving forward?

Third question is you talked about adjusting the overall, normal adjustment coefficient moving forward. Does that mean that a separated proportion or the baseline for the fourth quarter will be reduced? How do you foresee that evolving?

And also the fourth question would be on the dividend. Could you give us any comments regarding dividend?

(Interpreted). To answer your third question first, on the adjusting of the coefficient, nothing has been determined whatsoever or whether to increase or decrease or even adjust the coefficient at all. The agenda has been escalated to our Cost Evaluation Committee who will decide after looking at our third quarter financial performance. So nothing has been determined yet.

(Interpreted) To give you numbers for our power plants construction plan, the Shin Kori number 3 power plant will be completed in the first half of 2016. And as for coal fired power plant, we plan to complete seven plants with overall capacity of 6,500 megawatts.

To answer your second question on the unit price for our fuel costs, for the unit price for the coal in the third quarter, it has been KRW99,000 per tonne. And in the fourth quarter we expect the number to go down to about 98% to KRW98,000.

And for LNG, our expectation for the fourth quarter is that the price will remain at KRW700,000 to KRW750,000.

(Interpreted). And before that there is one adjustment to make. For the LNG, the third quarter was KRW750,000 and fourth quarter would be KRW700,000.

And for dividend payout, nothing has been determined and we haven't had any discussion with the government yet.

(Interpreted). As for our schedule for the coal fired power plant in 2016, it would be in the first half of the year, we will have Dangjin number 10 and Samcheok Green number 1 and Taen number 9 and Shin Poryong number 1 coming in the first half of the year. And Yeosu number 1 would be completed in August, Samcheok number 2 in October and Taen number 10 in December.

(Interpreted). Jiyoon Shin, KTB Investment Securities.

(Interpreted). I also have four questions. First question is in the third quarter alone your debt has been reduced by KRW4 trillion. How much -- to what extent do you believe you can reduce that debt further by the end of this year? That's the first question.

Second question is on the equity method. The valuation on equity method seems to be in deficit. Is that loss coming from the Kogas or could you give us some perspective on that?

Third question is we've been talking about dividend payout and also adjustment coefficient. And I think all these questions are coming from the fact that your dividend will be based on an unconsolidated basis. Your guidance, I remember, was around KRW3 trillion on overall profit. Excluding the land sales of your headquarter, it seems that your numbers will amount to KRW3.5 trillion. So on a KEPCO unconsolidated basis, what is your guidance and expectation by end of this year?

Fourth is on the coal consumption tax. It has been applied since July and I believe the number has only been reflected for a month or two. So how is that being applied?

(Interpreted). So on the debt, by end of this year, we expect to have a debt of KRW55.8 trillion.

On your second question on the equity method, the Kogas has not released earnings results yet, so we will be happy to update you the number afterwards.

On your question on the overall profit outlook on an unconsolidated basis, if you look at our cumulated operating profit up until third quarter, it is KRW4.2 trillion. But, because of the seasonality, we believe the sales margin moving forward will decline slightly. And towards the end of the year, the cost does seem to rise and there is also provisioning that we have to set aside. So the number will slightly go down by the end of this year and that's our anticipation for that.

(Interpreted). To answer your question on the tax consumption rate and its impact on our gencos, when we calculated the adjustment coefficient at the end of June, all of that impact has been reflected. So you can well say that all the numbers are fully reflected starting in July.

(Interpreted). Minho Hur, Shinhan Investments.

I'm sorry. As the connection of the host's line is not proper, we're connecting the host's line again. Please wait a moment until the line is connected again. Thank you.

(Interpreted). I have three questions. The first question is if you look at your unconsolidated profit for this year, excluding the headquarter sales, it's still a very significant number. Are you still going to maintain the 30% dividend payout ratio that you've been maintaining in the past and is that the stance that you're going to maintain when you discuss this dividend payout ratio with [LOCI]?

Second question is you are going to launch many nuclear power plants and coal-fired power plant next year. Could you share with us your forecast for the utilization of these power plants?

Third question, looking at the UAE construction progress, how much of that revenue has been realized in the third quarter on your book and what do you expect at the end of this year? And what is the expectation for the full year next year?

(Interpreted). To answer your question on the dividend, we have maintained a 30% payout ratio until last year and we have been trying to maintain that level. This year we do have some variables that may affect us regarding our performance and also there are some policy compliance costs that we need to take into consideration.

So when it comes to dividend, and when we talk with our government, we will try to address the matter to our investors too, as much as we can. But nothing has been determined whatsoever in our discussion with the government on whether to maintain that payout ratio that we've been maintaining.

And as for the power plant utilization rate, it won't be that much different from this year's actuals and forecasts that we've been releasing. For nuclear power plants, it will be somewhere between mid-80% level and for coal-fired power plant it will be about 90%.

To answer your question on the UAE revenue, the third quarter revenue that has been realized was KRW852.6b. By end of this year, overall progress has been progressed further than our initial plan. So the revenue will be slightly higher than expected.

For your information, our accumulated revenue from UAE project has been KRW2.5 trillion till third quarter of this year and our anticipation for the end of the year would be KRW3 trillion.

(Interpreted). Heedo Yun, Korea Investment Securities.

(Interpreted). I have a short question on the emission trading cost. Are you going to not recognize that emission trading cost in the fourth quarter? How is it going to proceed and what is your expectation by -- is there going to be any decision by end of December?

(Interpreted). To answer your question on the trading -- emission trading cost, we are going to -- there has been an accounting method determined for the reflection of this emission trading cost. And when the emission exceeds the allocated charge, allocated by the government, the costs will be recognized to our book.

But by end of this year, we have no visibility into how much we're going to exceed outside of what has been allocated by the government for free of charge. So we won't be able to give you a clear a number on that.

(Interpreted). What we have been hearing from KEPCO is that in the initial three years we will be recognizing about a few hundred billion won in costs. Is it safe for us to then say that we won't be recognizing any cost whatsoever regarding the emission trading this year?

(Interpreted). We do believe that there will be some costs incurred related to the emission trading. But, at this point, we are not in a place to calculate the number, or the costs involved in it.

(Interpreted). Seong-Jin Kang, KB investment Securities.

(Interpreted). I have four questions. Two questions is a follow-up question to what has already been asked. First is on your accumulated operating profit. You mentioned that it will slightly go down in the fourth quarter. Does it mean that you will have deficit in your operating profit in the fourth quarter, or does it mean that your growth rate for the operating profit in the fourth quarter will be limited?

Second question on the dividend payout is when you say although you have not decided on whether you're going to maintain the payout ratio, when you say that you're going to look at the dividend payout ratio, does it mean that the dividend payout ratio is expected to go down to an extent because you're including the huge gain from the headquarter sales, or does it mean that excluding the headquarter sales, that you will be maintaining this payout ratio to your revenue?

The third question is in the third quarter we have seen some reflection or impact on your financial book on the tariff discounts. So what was the impact on this tariff discount on your financial performance?

And fourth quarter -- fourth question is on if you look at the fact sheet, your IPP power purchased cost does not break the number down between LNG and others. Could you give us some numbers, if possible?

(Interpreted). To answer your question on the operating profit, it will definitely be lower than the third quarter in the fourth quarter. If you look at our typical sales pattern, the fourth quarter operating profit has declined over the past few years. And will it reach a point where we create deficit? That is something that we need to wait and see. We also need to see the numbers that comes in when we do the accounting procedure for the REC for our gencos.

At the end of the year, we recognized the purchased power cost and REC accounting procedure is something that we need to look at. And depending on the magnitude of that, that's going to have some impact on our operating profit. Also, we need to wait and see the provisioning liabilities and depending on these numbers, the magnitude would be different. So I'm sorry to say at this point that we won't be able to have a visibility into that.

On the dividend payout, if you look at this year's KEPCO's financial performance it's somewhat different from previous years. Considering those differences, we are looking at various approaches to looking at our dividend payout whether we include the land sales or whether we exclude it.

So at this point because nothing has been determined, we're sorry to say that we're not in a position to further comment on that.

To give you an answer on your question on tariff discount, starting in July we've had three categories of special discounts. Our first one was on house, residential households and that discount has been finished, completed by end of September. And another two other categories has been discount on the welfare households and also industrial discount for light load.

Considering the unique factor that metering is not aggregated on the first day of the month until the end of the month, it's very difficult for us to have an accurate number for how the metering is aggregated.

But as far as the residential sector is concerned, we expected the discount size to be somewhere around KRW130b to KRW150b. But the discount amount ended out to be larger than our expectation.

To answer your fourth question on the breakdown between LNG and others, our system is now in the process of upgrading, so it has not been able to segment those two different numbers. Once we normalize our system, we will be providing that breakdown to you.

(Interpreted). Boris Kan, JP Morgan.

Hi. Good afternoon, management. Thanks for the excellent presentation. I've actually got three questions. My name is Boris Kan from JP Morgan.

The first question is actually regarding the IPP purchase amount. Just wanted to check with you on a full year basis what percentage of the power sales will be coming from IPP this year. And I just want to see if there's any percentage estimate for next year as well.

And also in particular for next year, is there any corresponding power demand growth that you have based upon in meeting the percentage for next year? That's the first question.

The second question is actually on the dividend. I know that there's no further comments that will be provided. But as a general principle is it fair to say that the payout would be -- at least be in the unconsolidated profit on the core profit, excluding the land sales on 30% payout ratio?

The third question is actually on the Shin Kori number 4 nuclear unit. Just wanted to see if there's any update on the commence of operations timing. Thanks.

(Interpreted). To answer your first question on IPP breakdown, for 2015 full year the power purchased from IPP will be 18% and next year we believe there will be a slight decline from that level. Overall demand growth for power we expect it to be somewhere around 15% level. Although we are adding some power plants in nuclear and coal next year because we're not increasing the power purchase from IPPs, the growth will remain at that.

For Shin Kori 3 we expect the operation to begin in April of 2016 and Shin Kori number 4 in the first half of 2017.

On the dividend payout, in the past we have been -- we've strived to maintain the 30% payout ratio in the past. But this year, because of some variables, nothing has been determined on the overall payout ratio. So we regret to say that we won't be able to give you any further comment on that.

Okay. Thank you. There's no other questions. Thank you.

(Interpreted). In the interests of time we will accommodate one last question.

(Interpreted). Minho Hur, Shinhan Financial.

(Interpreted). One last question. You mentioned about the REC purchase cost being reflected on your book. But I believe the REC settlement cost will be only reflected on the gencos and not on a non-consolidated KEPCO financial performance. So my question is then there won't be any -- there won't be I believe, a significant time in the operating profit level on a non-consolidated basis. Is that a correct way of looking at this?

(Interpreted). According to the power market rules, the gencos' REC cost will be paid out separately, or paid out as a power purchase cost on a non-consolidated book. So there will be costs incurred on our non-consolidated financial book. So we are setting aside that cost on an accounting book.

So for gencos it is possible for us to accurately calculate those costs involved. So we will fully reflect that REC cost on our book. But for non-gencos, there is no way for us to calculate yet. But we will start reflecting and forecasting that number starting this year to reflect that number.

(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 third quarter earnings results by KEPCO. Thank you for your 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.