Korea Electric Power Corp (KEP) 2015 Q4 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 will begin the conference of the fiscal year 2015 fourth-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 fourth quarter earnings results by KEPCO.

(Interpreted). Good afternoon. This is Jong-soo Kim, 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 fiscal year 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 proceeded 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 this call will be made based on our current expectations and plans. Please be noted that such statements may involve certain risks and uncertainties.

Now, Ms Cecilia Oh, Senior IR Manager will begin with an overview of the earnings results for 2015, first in Korean and repeat in English.

Now we will provide the overview in English, starting with operating income. In 2015, KEPCO recorded a net operating income of KRW11.35 trillion.

Taking a closer look, operating revenues increased 2.6% to KRW58.96 trillion. This was attributable mainly to 1.1% increase in power sales revenue totaling in KRW53.23 trillion and 31% increase in revenue from the overseas business amounting to KRW4.23 trillion.

Moving on to main operating costs, COGS SG&A expenses decreased 7.9% to KRW47.61 trillion.

Fuel costs decreased 26.4% to KRW15.16 trillion. The unit cost of fuel dropped 24.7% and the amount of power generated by our generation subsidiaries fell 2.3% due to the increase in purchased power from IPP.

Meanwhile purchased power decreased 9.3% to KRW11.43 trillion. Introduction of new highly efficient IPP power plants caused the power purchased volume to increase by 16.7%. However, such increase was more than offset by 22.7% decrease in the unit cost of purchased power thanks to reduced SMP and LNG price.

Depreciation cost rose 5.3% to KRW7.28 trillion mainly due to the newly constructed power plants and substations.

Now let me explain KEPCO's non-operating segment. Other income rose to KRW8.61 trillion, up by KRW8.5 trillion from last year mainly attributable to gains from the sale of former headquarters.

Net financial loss was KRW1.83 trillion in 2015 which improved by KRW0.4 trillion compared to net loss of KRW2.25 trillion last year.

As a result of the foregoing, we recorded a consolidated net income of KRW13.41 trillion in 2015 which was a significant improvement of KRW10.61 trillion from KRW2.8 trillion in the previous year.

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

Now let us move on to the Q&A session. Q&A session will be hosted by Treasurer Kim.

(Interpreted). This is Jong-soo Kim. 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.

(Interpreted). (Operator Instructions). Pierre Lau, Citibank.

Hello. Good afternoon, management. This is Pierre Lau from Citibank. I have three questions. The first one is what is management's expectations about unit coal and unit LNG cost for 2016?

Second question, what is the generation mix in 2016? I mean how many percent from coal, how many percent from nuclear, how many percent from LNG and also how many percent from IPP?

And final question, what is the Company expectation regarding tariff change in 2016? Thank you.

(Interpreted). To answer your first question on the unit price of our fuel in 2016, our expectation is for LNG we expect KRW654,000 per tonne and for coal KRW93,800 per tonne. And oil would be KRW323 per liter.

On our generation mix for 2016, to answer your second question, our expectation is that for coal we will have 48%, for nuclear 40% and LNG is 9%. And our expectation for the IPP mix in 2016 will be 17%.

To answer your third question on the tariff changes, the tariff changes will take place after our financial settlement takes place. All the gencos will -- costs will be reviewed based on the total cost of their service and product after considering fair return. In those process we also need to consider our accumulated debt as well as our costs that is expected to be increased due to greenhouse emission cost as well as our increased investment around [TMB] and new business going forward. So we also have to take into consideration our mid- to long-term investment needs.

Okay. Thank you very much for your questions -- for your answers. One follow-up question. So you said in 2016, 17% of your energy sale will be from IPP. So for this year we will have quite a lot of new nuclear and coal-fired power plants to commence operations. Why KEPCO is not target to reduce the purchase from IPP further instead of 17%?

(Interpreted). Most of our baseload generators are being [adopted] after June in terms of timeline. So the decline in IPP generation mix is going to be slightly declined and we expect that to be around the 1% level.

Okay, thank you very much.

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

(Interpreted). I have three questions. First, regarding your financial performance, I have a question on your other sales. In third quarter, year-on-year basis, you had a big surge in that number. But if you look at the fourth quarter number alone it declined by 2.3%. Why did the direction of growth has changed in this quarter? Could you elaborate on the reasons for this?

Second question, you mentioned that all your baseload generators will be adjusted after June time period. There has been a recent fire in one of the generation that is being built and with that in mind, when do you believe your nuclear power plants and coal-fired power plant will be in operation? Could you share the updated schedule behind that?

And third question, I looked at your financial Excel sheet and it seems that this year and next year, the CapEx amount will decline. We heard from KEPCO that the tariff will not be declined and you will be further investing into the new business looking forward such as ESS and portable [paid] and smart grid. How much do you anticipate for the CapEx to be for those new businesses? Could you share the guideline around that?

(Interpreted). To answer your first question on other sales item, in the fourth quarter we have seen a decline in the other sales of KRW33b. The biggest contributor in this number on a year-on-year basis are heat supply, our heat supply business has declined in this quarter significantly by KRW50b leading to a decline in our other sales number.

To share with you our schedule for further adoption of our generators, by April of this year we are going to adopt one nuclear power plant, Shin Kori Number 3 with 1,400 megawatts and three more coal-fired power plants by June time period, with additional 4,442 megawatts. And we plan to adopt two more coal-fired power plants by October, one more coal-fired power plant by December this year with a capacity of 1,050 megawatts.

To answer your third question, if you look at the combined number between KEPCO and our gencos, the number does seem to decline slightly. That is natural when you look at our subsidiary, our genco numbers, because as a part of the long-term generation development plan, we will naturally decrease the number of new construction moving forward. So that has been reflected. But if you look at the new investments going into the energy new business as well as refurbishment of our facilities, the number for KEPCO and our gencos combined, goes up dramatically.

(Interpreted). One follow-up question on that third question is it says in 2016 guidelines that your CapEx will be KRW14.9 trillion. Does this number include all your new business for ESS, smart grid and photovoltaics?

(Interpreted). It is included.

(Interpreted). So the number is reflected and included. And we're going to further discuss additional incremental investment with the Ministry of Industry to invest into new business such as ESS.

(Interpreted). So at this point, do you know how much will be further invested after that discussion?

(Interpreted). Currently we are in discussion with the ministry and we have formulated a task force team with KEPCO and our gencos to discuss this amount.

(Interpreted). Choi Jaehyung, Goldman Sachs.

I have three questions. First is on the CO2 emission cost. What was the emission-related cost for 2015?

Second question, if you look at KEPCO corporate profit, it's KRW1.7 trillion and if we assume the dividend payout ratio to be 30%, it would amount to KRW800 per share. Could you share with us your guidance for dividend payout for 2015?

Third question is on the consumption tax for coal and energy. Have you -- can you share with us the latest update on that?

(Interpreted). To answer your first question, the CO2 emission-related costs for 2015 amounted to KRW78.9b and the number is reflected in our other operating cost.

To answer your second question on dividend, currently we have finalized the dividend payout proposal with Ministry of Industry, Commerce and Energy and submitted our proposal to Ministry of Planning and Strategy.

Currently it is being reviewed by the Ministry of Planning and Strategy and because it is in review, it is very -- we regret to say that it is too early for us to reveal the level of dividend payout ratio at this point. The final proposal will be confirmed by -- after mid February and we will be able to share afterwards.

(Interpreted). To answer your third question on the individual consumption tax for coal and LNG, the tax rate will not be changed. However, the individual consumption tax [phase] for coal will be further divided into three level versus two level at this point, which will be further rationalized. This plan will be discussed at the national cabinet meeting and will be finalized and we have reflected the movement in our cost.

(Interpreted). A follow-up question first on your second answer. You mentioned that the dividend proposal will be finalized in the mid February. Would that be before the tariff plan confirmation or which will come first? Do you have any -- could you share with us your perspective on that?

And you also mentioned in your answer that the consumption tax will be divided into three tiers rather than two tiers for coal. If it is divided into three tiers, does that mean that it will add cost to your numbers or have you already provisioned for those numbers that there won't be any impact on the cost?

(Interpreted). To answer your second question, the tariff adjustment will be taking place after our final settlement and that will be also reflected in the total cost considering the fair return. In all those process we need to consider the debt that we need to reimburse in the due time as well potential cost increase drivers that might add to the tariff structure moving forward. So all these will be considered in the due process.

(Interpreted). To answer your question on the consumption tax for coal, current tax structure is that for low calorie coal, we are charged KRW22 per kilogram and for high calorie coal it's KRW24 per kilogram.

If we shift to the three tier program, the low calorie coal will be KRW21 per kilogram and mid calorie coal will be KRW24 per kilogram and high calorie coal will be KRW27 per kilogram. But in this process, the overall tax rate does increase on an average, but the overall coal cost has already been provisioned in our balance sheet and has been reflected.

And there won't be changes to LNG tax rate.

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

(Interpreted). I have two questions. First if you look at your standalone performance for the fourth quarter, it seems that it on a year-on-year basis has declined. Is this because you had to reflect your adjustment coefficient this quarter or was there any other driver leading to this decline?

Second question is on a consolidated basis, if you look at the fourth quarter number, the growth or the magnitude of growth for your other operating cost has somewhat slowed down and is at a standstill. Why did the cost start to increase highly for this quarter? Please share some perspective on that.

(Interpreted). To answer your first question, if you look at our fourth quarter standalone financial performance, our operating profit has declined by about KRW300b. The reason behind that is our -- or if you look at our product sales by end of December 2015, it has declined by about KRW200b year on year because of very warm temperature during this season.

The second reason behind that is if you look at our power purchase cost, by end of 2015, we had to reflect the CO2 costs on our book which is about KRW100b. And this number has been included in our power purchase costs. And we also have seen some increase in our repair and maintenance costs, which is all leading up to increase of our cost.

To answer your second question on the fourth-quarter operating profit -- other operating profit for the fourth quarter is that the cost contributor for the decline that we have seen in this is contributed by liabilities or provisioning for the nuclear power plant decommissioning and the declined amount is about KRW300b.

(Interpreted). I have two follow-up questions. First could you share with us the utilization rate for your nuclear power plant by quarter?

And if I calculate -- I would like to verify whether my calculation is correct on the dividend payout level. If I assume the dividend payout ratio to be 30%, the dividend will amount to KRW1,700 to KRW1,800 minus the property sales. Is that correct?

(Interpreted). To answer your first question, we don't currently have the quarterly basis utilization number for our nuclear power plant. But at an annual level we would like to maintain 85.5%.

Let me just share with you the breakdown. For the first quarter it would be 89.3%, second quarter 85.1%, third quarter 85.2%, and fourth quarter would be 82.5% utilization and the average then would be 85.5%.

(Interpreted). So if we assume the dividend payout ratio to be 30%, KRW1,700 per share would be the right calculation yes. But as we have mentioned forehand, that the dividend payout ratio level has not been determined yet.

(Interpreted). Hur Minho, Shinhan Investments.

(Interpreted). I have five questions. First is if you look at -- you mentioned that the fourth quarter provisioning for nuclear plant decommission has declined by KRW300b. Why did this number decline?

Another question is what is the 2015 total liabilities or provisioning for the nuclear power plant decommissioning?

Could you also share with us the [REC] purchase cost as well as the 2016 generation tax that you have paid out for the full year?

And also could you share with us whether the CapEx for this year plus the mid- and long-term CapEx has been reflected in your overall tariff plan that you have submitted to the government. We have heard from the Ministry of Commerce and Energy's report to the president that the KEPCO will invest about KRW1.5 trillion in 2016 to 2017, in new energy businesses and combined with gencos KEPCO together will invest about KRW6.5 trillion. Could you share with us your position on this direction by the government?

And also we have heard that the R&D costs will be increased from KRW500b to KRW1 trillion in this year. So could you share with us your perspective on that? And also share with us the quarterly based coal utilization rate for this year.

(Interpreted). To share with you our nuclear power plant decommissioning provisioning, which is included in our other operating costs it's as follows. In 2015 the number was as high as KRW529.5b. And the reason for that is that we had to pay out one-time compensation for those residents or regions that belong to the area where we build our nuclear power plant disposal facility. And that one-time amount was KRW320b.

And in 2015 this decommissioning provisioning was KRW274.6b and in 2016, the number that we have reflected in our tariff proposal plan is KRW320b.

To answer your second question on the REC cost on a consolidated basis, reflecting the RPS costs is as follows. In 2014 the number was KRW404.3b and 2015 the number was KRW534.3b. Our expectation for 2016 is that although we have to do this on a consolidated basis including the gencos numbers, so we don't have the number yet. But if you look at our historical trend, the amount will be somewhere between KRW500b to KRW600b which is expected to be somewhere in the mid KRW500b range.

(Interpreted). So when we do the tariff filing, the numbers are based on the year or annual budgeting plan. However when we adjust our tariff, it starts to reflect the mid- to long-term investment plan.

To answer your question on the MOCIE's report to the president and the plan includes the aggressive investment by the public sector to invest in new energy business in Korea. The KEPCO's position is that we want to play a pivotal role in investing into the energy new business in Korea and create a momentum in this industry. So our stance is to proactively invest in this new business.

And also on R&D investment, our plan is to continuously increase our investment into our R&D.

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

(Interpreted). A follow-up question on the CO2 emission cost is that I want to check whether the number is correct. On a consolidated basis you said the number was included in your other operating costs for fourth quarter and the number amounted to KRW78.9b. But on a standalone business, you also said the CO2 related cost has been included in the power purchase costs and the amount is around KRW100b. How should we interpret this? Could you elaborate on these numbers?

(Interpreted). To answer your question, the number KRW78.9b that appeared on our consolidated balance sheet is the cost that we have set aside and anticipated to be the additional incremental cost that will be incurred once KEPCO and our gencos start buying the emissions right from the market for the additional CO2 emissions that we might have in the future.

For the separated or standalone based number which is KRW103.8b which has been set aside as part of the power purchase cost is to compensate for the additional cost that is incurred on our gencos. And this compensation will be paid by KEPCO to compensate for additional costs in our gencos by participating in the power market as part of participating in the CO2 emission trading.

So this trading off number which is KRW103.8b is the transaction between our gencos and KEPCO. So the number has not been -- the number has not appeared in our consolidated balance sheet.

(Interpreted). A follow-up question to that is what we heard last year is that in the first three years since the adoption of this CO2 emission program, the total cost impact on the balance sheet will amount to about KRW1 trillion. But given the current number that is being reflected which is about KRW100b, and if we assume the number does increase in the second and third year, still is it safe for us to assume that the number, the total number in the first three years, will be far less than KRW1 trillion?

(Interpreted). So in the past we anticipated KRW1 trillion for the first three years which was a very rough estimation. In 2015 when we projected the number our anticipation for that year would be -- was KRW230b and the actual turned out to be lower than that.

But at that time, our assumption per tonne was KRW10,000 per tonne. But currently we are facing a lot uncertainties around the transaction price of the emission rights as well the required volume. So although it's very difficult to anticipate accurately towards the future, we believe the government quota will decline over time and inevitably our emission cost will surge.

(Interpreted). In the interests of time, we will be only able to accommodate a few more questions.

(Interpreted). Kang Seongjin, UBS.

Yes, hi. Thank you for the call. This is Josh Bae from UBS. I have two questions. First is regarding the coal consumption tax that you mentioned. You said that you're expecting a shift to a three-tier system. When do you expect this to take place?

Second question is regarding the dividend. If you can't share with us the dividend outlook for 2015, could you please share with us your long-term plans for the dividend payout ratio? I understand that the government has a plan to increase the dividend payout ratio of state-owned enterprises to 40% from 25% over time. Considering KEPCO is paying 30% now which is higher than the SOE average of 25%, does that mean KEPCO will increase its dividend payout ratio to over 40% or will KEPCO just go to 40%?

(Interpreted). On the three-tier system that you asked, this has been already discussed in the cabinet meeting on February 2 of this year. This will be formally announced by the government in the near future and once it is finally announced it will be implemented.

So it should be fairly soon, then?

(Interpreted). Yes, that's correct.

(Interpreted). To answer your second question the government has announced that they plan to increase the SOEs dividend payout ratio to 40% by 2020, increasing about 3% every year. This is a target of dividend payout ratio given by the government. But when the final dividend payout ratio is determined it has to consider the unique characteristics and situations by each of the state-owned enterprises.

In other words, for KEPCO, the biggest determinant will be the CapEx size for us and the relevant environment has to be taken into consideration. So we will not -- or so the number is not the end in itself. So, each of the institutions or the enterprises' situation will be put into consideration in determining the final dividend payout ratio.

Regarding the coal tax, could you please share with us how much costs increased related to this change you've reflected in the 2016 business plan?

(Interpreted). So the additional cost coming from these changes in individual tax for coal is going to be determined by the fuel mix that is executed by our gencos. So it is difficult for us to give you an accurate number but the cost size-wise I believe it will not be all that significant.

Thank you.

(Interpreted). Let us have one last question.

(Interpreted). Kang Dong-Jin, HMC Investment Securities.

(Interpreted). I have two questions. First, could you share with us the utilization rate for -- on a quarterly basis for the coal-fired power plants?

And the second question, you mentioned that the investment into renewable energy will increase significantly. Is that investment going to be limited to Korea only or do you also plan to invest outside of Korea? We have seen in the article that you will potentially acquire overseas business. Does that include -- is that included in your overall investment?

(Interpreted). For the utilization for coal-fired power plant it will be somewhere around mid 80% level. We don't have the quarterly basis number.

(Interpreted). So our investment into the renewable energy sector is mainly focused around domestic business. Our eventual goal is to help our renewable businesses to go overseas in the long run.

We will conclude this conference call. Once again thank you for joining us today.

(Interpreted). This concludes the fiscal year 2015 fourth quarter earnings 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.