Korea Electric Power Corp (KEP) 2016 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 will begin the conference of the fiscal year 2016 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 2016 first-quarter earnings results by KEPCO.

(Interpreted). Good afternoon. This is [Jeong 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 first quarter of 2016. 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 last year and this year. 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 Ms. Cecilia Oh, Senior IR Manager, will begin with an overview of earnings results 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 2016 KEPCO recorded a net operating income of KRW3.61 trillion.

Taking a closer look, operating revenues increased 3.7% to KRW15.69 trillion. This was attributable mainly to 2.3% increase in power sales revenue, totaling in KRW14.18 trillion, and 35.3% (sic - see slide 12 "19.3%") increase in revenue from the overseas business, amounting to KRW1.1 trillion (sic - see slide 12 "KRW1.5 trillion").

Moving on to main operating cost, COGS/SG&A expenses fell 6.2% to KRW12.1 trillion. Fuel cost decreased 19.9% to KRW3.71 trillion. This was mainly due to 20.5% drop in unit cost of fuel and a 12.2% rise in nuclear generation, thanks to increased nuclear generation capacity.

Meanwhile purchased power cost decreased 15.3% to KRW3.1 trillion. Introduction of new highly efficient IPP power plants caused the purchased power volume to increase 9.6%. However, such increase was more than offset by the 24.8% decrease in the unit cost of purchased power, thanks to reduced S&P and fuel price.

Depreciation cost rose 5.6% to 1.7 -- KRW1.87 trillion, mainly due to the newly introduced power plant and transmission facilities. Maintenance cost went up 9.6% to KRW362b, attributable to increased facility investment and scheduled overhaul.

Now let me explain KEPCO's non-operating segment. Net financial loss was KRW0.37 trillion which improved KRW0.13 trillion compared to net loss of KRW0.49 trillion last year.

As a result of the foregoing, we recorded a consolidated net income of KRW2.16 trillion which improved KRW0.94 trillion from KRW1.22 trillion in the previous year.

This concludes the overview of KEPCO's earnings results for the first quarter of 2016.

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

(Interpreted). This is Jeong Soo Kim. I am joined with our IR Committee Members in charge of major business areas at KEPCO. We are prepared to take any question. Since we will proceed in both Korean and English, all of the Q&A will be interpreted. Please make sure your questions and answers are brief and clear. Please begin.

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

(Interpreted). I have two questions. The first question is regarding the power purchase cost. If you look at the overall PPA volume, it has increased by 25%. As far as I know, as far as the PPA is concerned, I am aware that it will be consecutively expired moving forward and there won't be any renewal of purchasing. Why was this 20% increase happening this quarter? Is this a one-time event or something that we would expect to see in the future?

The second question is on other operating cost. We see an increase of KRW500b, an increase in other operating cost. Outside of UAE project, what are some of the cost drivers that is increasing this cost related to the business environment or policy such as RPS cost or emission trading cost?

(Interpreted). To answer your first question first on why the purchase from IPP has increased this quarter, it is because the [GS] power combined cycle power plant in Pusan is up and running again. It was closed down for planned maintenance throughout January and March of last year in 2015. But this year it has normalized its operation again and that's why we're seeing this increase.

To answer your second question on other operating cost increase. From the overseas CapEx or cost in equipment and facilities we are seeing about KRW300b in operating -- other operating cost. And as far as the other environment or policy-related cost is concerned, we see about KRW27.9b increase in greenhouse gas trading -- emission trading cost on a year-on-year basis. And for RPS, on a consolidated basis, we see an increase of the other operating cost of KRW500m. And outside of that we don't see any other policy-related or business environment-related cost increase.

(Interpreted). [Ju Chen Huang], Mirae Asset Securities.

(Interpreted). My first question is regarding the nuclear power plant utilization. This year it seems the utilization rate is very good. What would be the guideline moving forward as far as the nuclear power plant utilization is concerned? I know you've begun commercial operation (inaudible) nuclear power plant in July. So with that in mind, could you share with us your guidance for the nuclear power plant utilization?

And also, there has been talks around carbon emission trading and reducing cost -- reducing carbon emission in the long run. But we are also using bituminous coal and would that change our investment into such a fuel mix? And also, how would the base load generation mix change this year and could you share your guidance on that?

(Interpreted). To answer your first question, in 2016 our guidance for the nuclear power plant utilization would be 85.5% throughout the year. As you have mentioned, Shin Kori 3 nuclear power plant will have its commercial operation start in July of 2016 with capacity of 1,400 megawatt.

To answer your second question in terms of our generation mix for 2016, if we have six GenCo as the basis amounting to 100%, we believe the coal mix would be about 50%.

And to add on to your questions, in terms of generation mix we haven't reflected the change in -- the delay of constructing our coal-fired power plant. Initially, the coal-fired power plant was going to be launched with a capacity of 7,530 megawatt through eight power plants, but that has been reduced to six power plants with a capacity of 3 -- 5,462 megawatt.

And to add to that, our [Tayun] 10 coal-fired power plant and Samchok number 2 power plant will be delayed to next year's March and June respectively.

(Interpreted). To answer your second question on our stance on using fossil fuel or mainly coal in our fuel mix, is that although our fuel -- our coal mix -- coal usage in our fuel mix is large at the moment, but compared to our sixth power supply and demand plan it has gone down -- it has decreased. And in the long run our stance is to reduce the use of coal and also increase the use of renewable energy.

(Interpreted). I have some follow-up question to that. So your plan is to replace coal with renewable energy moving forward, but would nuclear power be part of that? Because considering the cost implication, one would think that a nuclear power plant has to be part of that plan. Could you share your stance on that?

And also, on a consolidated -- excluding -- compared to the consolidated basis, your standalone financial or P&L looks really good at the moment. So how would you anticipate your financial betterment with your subsidiary GenCos in the second half or in the second quarter? Could you share your perspective on that?

(Interpreted). To answer your second question first, we are planning to look at our adjustment coefficient to calculate our power purchase cost. And after doing that, we are going to look at the P&L and try to understand the fair rate of return gap between KEPCO and our GenCos. If the gap is big, then we will be going through recalculating the adjustment coefficient at the end of June.

To answer your first question, although nuclear power would not be classified as renewable energy source, but it does emit little carbon. So the generation volume would be likely maintained moving forward.

(Interpreted). (inaudible), Citi.

Hi. Hi. Good afternoon, KEPCO management. I'm Pierre Lau from Citibank. I (Technical difficulty) your generation 2016 and 2017 for different kind of fuel, including coal, [LNG] and nuclear. That's the first question.

My second question is your (technical difficulty) for unit fuel cost in (technical difficulty)? Thank you.

(Interpreted). To answer your first question on generation mix for 2016, LNG will be 6%, coal 50% and nuclear power plant will be 39%. And for 2017 in the same order it will be 4%, 53% and 41% for nuclear.

And for the fuel unit cost for 2016 for coal it will be 930 -- I'm sorry. It will be KRW93,200 per ton, and for LNG it will be KRW653,000 per ton, and for oil it will be KRW283 per liter.

So [because] you said for this year [will be 50] but in (technical difficulty).

(Interpreted). Currently, the phone connection is really bad and we are unable to hear you. And could we take this question offline? And we would like to answer that question later.

(Interpreted). [Sun Sin Chun], Goldman Sachs.

(Interpreted). I have three questions. The first is on your CapEx. Compared to the previous quarter, your CapEx has increased by 3 -- KRW900b, despite the delay in coal-fired power plant construction. I believe the increase in CapEx is mainly coming from the thermal power plant area and also other (background noise). So what is driving this CapEx increase?

And during the CEO forum, the CEO mentioned that there will be a CapEx of KRW6.9 trillion that will be executed. So we are trying to calculate the cash flow at the end of the year for KEPCO. And could you share with us how you are going to execute and use this KRW6.9 trillion of CapEx?

The second question is on greenhouse gas emission cost. You said on a quarter-on-quarter basis it has gone up by KRW27.9b. I would like to understand the absolute amount of this cost and also, if you could share that number, how many tons are you emitting at the moment in this quarter?

And also on the news article there was mention on selling directly to the large enterprises would make up 30% of your power sales. By doing this direct sales or direct purchasing for large enterprises and also reducing T&D fees for these enterprise, we believe that there would be a -- will be an impact of KRW3 trillion in your operating profit. Is this the correct way of seeing this?

(Interpreted). To answer your first question, the differences in the CapEx projection for the first quarter is coming from the fact that our GenCos has readjusted their mid- to long-term forecast moving forward. So that number has been reflected and updated.

And the remaining question on energy and new business will be answered by our responsible team.

And for the new business for energy sector in 2016 we have set up KRW6.9 trillion in CapEx for this area. Some of this amount or number has been reflected on -- is reflected on our budget. But also some has to come as an incremental CapEx by end of this year. We will be reviewing the economics of these new businesses thoroughly before executing any investment and also closely working with the government in coordinating these processes and also working with this administrative process.

(Interpreted). To answer your question on the greenhouse gas emission cost, in 2015 first quarter we did not recognize any cost in this line item. But in 2016 first quarter we have recognized KRW27.9b in greenhouse gas emission cost. And if you look at how this greenhouse gas cost is allocated, we only allocate and list in our accounting book when there is excess of the cost that we have allocated for the greenhouse gases.

That's why in the first quarter of 2015 there wasn't any cost that was recognized as greenhouse gas emission cost. But however, in 2006 after we have forecasted and projected these numbers and settled this number with the actual number at the end of the year, we had settled -- closed the book with KRW27.9b.

And on your question on the emission volume, we regret that we are unable to share that number, because that is a rather strategic decision item that needs to be decided in the exchange market.

On your third question on the direct purchasing by large enterprises, this direct sourcing by large enterprises is something that we are providing at the moment. So this is not a new scheme that is going to be introduced. But the government at the moment is trying to promote and expand this system. However, there has not been any direction on how to improve these kinds of schemes in the future has not been decided yet. So at the moment we are unable to provide how much impact that will have on our overall operation.

(Interpreted). A follow-up question is, first, in those KRW6.9 trillion CapEx you said some of it is reflected on the budget and some is excluded. Then is it safe for us to assume that the free cash flow at the end of this year will be negative?

And also, you said that excess of the allocated greenhouse emission amount has been recognized on the books this quarter which is KRW27.5b. Then with that number in mind, is it safe for us to assume that the price for emission would be KRW10,000 per ton?

(Interpreted). To answer your first question, as we may need additional CapEx to execute our plan, the free cash flow at the end of the year could potentially be a negative number.

To answer your question on the greenhouse gas emission cost, the 200 -- KRW27.9b that was recognized in the first quarter is not the emission cost for 2016. Rather, it is the settled amount between the actual greenhouse gas emission cost versus our forecast for 2015.

And also you have asked a question on the unit cost of emission cost. And if you look at the market average emission cost for 2016 March, it has been -- it is 1,200 -- KRW12,000 per ton. But our cost can -- it could be slightly different than that, because we are going through the different accounting process and also different GenCos have different purchasing cost at the moment. So it would not be right to apply this average market price.

(Interpreted). Boris Kan, JPMorgan.

Management, good afternoon. I've got three questions. The first question is I just wanted to check with you on your comments on the reported potential spinoff of GenCo. I just wanted to see if there's any colors on that.

The second question, especially related to the first question, is is there any plan on a potential change in the tariff formula for the GenCos, namely the coal-based pool system as well as the vesting contract. Are there any plans to change this regime which may or may not be in line with the potential spinoff?

And lastly, I just wanted to check on the latest development on the Company's negotiations with the government on the potential tariff change. Thank you.

(Interpreted). To answer your first question on the potential listing of our GenCos, currently the government policy has not been determined on this issue. So we are not ready to comment on this. But our stance is that we will be proactively engaged in voicing our stance and reflecting KEPCO's profitability as well as protecting our shareholder value.

To answer your second question on the vesting contract, we will be launching our [Fuchan] number 4 thermal power plant -- Fuchan number 1 power plant in July which is our private power plant. And that will be based off of our vesting contract. Currently, we are calculating the fair rate of return and the relevant cost involved to come up with the right amount of the cost. And that is being reviewed at the moment. By end of May we will be publicly notifying those power plants that will go through the vesting contract and also the actual contracting will take place sometime in July.

To answer your question on the vesting contract for our subsidiary GenCos, currently no concrete plan has been determined yet.

(Interpreted). To answer your third question on a potential change of our tariff and negotiation with the government, there has not been any decision to lower tariff as of now. But considering the greenhouse gas emission cost and the energy industry investment, we believe the tariff calculation should be based off of mid- to long-term performance rather than short-term performance.

Thanks very much. I have no further questions. Thank you.

(Interpreted). (Operator Instructions). Min-Ho Hur, Shinhan Capital Investment.

(Interpreted). I have three questions. The first question is out of your overseas revenue how much is coming from the UAE project?

And the second question is on RPS cost. Could you share with us the actual RPS cost on a consolidated basis as well as a standalone basis?

And the third question is regarding repair cost of power plants. As there will be an increase in maintenance days or plant stoppages for our coal-fired power plants, do you see any increase in the repair cost in the second quarter moving on to the fourth quarter?

(Interpreted). To answer your first question on the UAE revenue from our overseas revenue, in the first quarter the amount that we have recognized on our books is KRW939.4b.

And for RPS cost, on a standalone basis our Q1 number stands at KRW247.9b and on a consolidated basis the number is KRW34.5b. The reason that the consolidated basis is much smaller is because we have removed all costs related to internal transaction with our subsidiary.

(Interpreted). A follow-up question to that on the UAE revenue. Last year we heard that the revenue from the UAE project will (technical difficulty) peak and will slowly decline (technical difficulty). But in the Q1 the number has grown significantly. Is this something that we are going to see throughout this year?

(Interpreted). To answer your follow-up question for UAE project, in terms of overall progress, this year will be actually the peak in terms of the progress of the project. So our revenue target for 2016 is somewhere around KRW3.3 trillion to KRW3.5 trillion.

To answer your question on the repair and maintenance cost, last year the overall repair and maintenance cost was KRW1.8 trillion. This year due to increase in our facility and also because we are planning to execute this repair and maintenance on time, we believe the number will be bigger than last year.

(Interpreted). To add on to your question on RPS cost, on a consolidated basis I stated that the RPS cost is KRW34.5b and also this is not in consideration of the RPS provisioning. And if you consider all the outside purchasing of [REC] of trade emission right, the number will increase to -- number would be KRW186.2b.

(Interpreted). In the interest of time we will conclude our Q&A session at the moment. If you have any further questions, we will happy to accommodate these questions through our IR team. Thank you.

This will conclude our IR conference call. Thank you very much for attending our conference. This concludes the fiscal year 2016 first-quarter earnings results by KEPCO. Thank you all 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.