Korea Electric Power Corp (KEP) 2016 Q2 法說會逐字稿

(Interpreted) Good morning and good evening, first of all, thank you all for joining this conference call. Now, we will begin the conference of the fiscal year 2016 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 2016 second quarter earnings results by KEPCO.

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 our earnings results for the first half of 2016.

We will begin with a brief presentation on the earnings results which will be followed by a Q&A session. This call will be presented in both Korean and English.

Please note that financial information to be disclosed today is on a preliminary unaudited and consolidated basis in conjunction with KIFRS. 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, Mr. Jung-in Yun, Senior IR Manager will begin with an overview of the earnings results, first in Korean and repeat in English.

(Interpreted) Now we will provide the overview in English starting with operating income. In the first half of 2016, KEPCO recorded a net operating income of KRW6.31 trillion. Taking a close look, operating revenues increased 0.6% to KRW28.96 trillion. This was attributable mainly through 0.7% increase in power sales revenue totaling in KRW26.84 trillion and 0.7% increase in revenue from overseas business amounting to KRW2.12 trillion.

Moving on to main operating costs, COGS/SG&A expenses fell 7.4% to KRW22.7 trillion. Fuel cost decreased 17.8% to KRW6.56 trillion, this was mainly due to 18.5% drop in unit cost of fuel and a 10.1% rise in nuclear generation thanks to increased nuclear generation capacity.

Meanwhile, purchased power costs decreased 15.3% to KRW5.2 trillion. The introduction of new highly efficient ITP power plants caused the purchased power volume to increase by 6.7%.

However, such increase was more than offset by the 24.4% decrease in the unit cost of the purchased power thanks to the reduced SMP and fuel price. Depreciation cost grows 4.9% to KRW3.72 trillion mainly due to the newly introduced power plant and transmission facility. Maintenance costs ramped up by 4.1% to KRW857 billion, attributable to increased facility investment and scheduled overhaul.

Now, let me explain KEPCO's non-operating segment.

Net financial loss was KRW0.77 trillion, which was improved by KRW0.23 trillion compared to the net loss of KRW1 trillion last year.

As a result of the foregoing, we recorded a consolidated net income of KRW3.93 trillion, which improved KRW1.37 trillion from KRW2.57 trillion in the previous year. This concludes the overview of KEPCO's earnings results for the first half 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 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.

Please begin.

(Interpreted) (Operator Instructions).

Jung-Hoon Bae, UBS.

(Interpreted) Yes, I would like to ask three questions. Thank you for the opportunity to ask a question, first of all. The first question that I have is could you explain about the difference between the profit and loss and on the consolidated basis and the non-consolidated basis?

Because if you look at the results for Q2, the consolidated basis is 30% higher than the previous year, whereas for the non-consolidated, it's actually about minus 10% or so. So could you elaborate on what explains that difference between the consolidated results and the non-consolidated results.

The second question is about your forecast regarding the usage of nuclear and coal as fuel. As far as I remember, according to your last forecast, it was about 85% to 86% for nuclear and the mid to late 80s figure for coal. Has there been any change since the last time this has been forecasted? And if so, could you elaborate on that?

The third question is I'm actually looking at the data that you have sent regarding the power sales and for Q2, it seems like there is quite a bit of difference compared to the same period last year in terms of the other adjustment areas and the consolidated or --linked adjustment areas.

So could you explain how that is actually set up and if you could give us some information about how we can rationally come up with a forecast for those areas. That would be helpful. Thank you.

(Interpreted) Let me answer your first question regarding what you see for the profit results or the earnings results for the non-consolidated figures for Q2. If you look at that figure, as you have mentioned, there is quite a bit of a drop compared to the previous year, it's actually about KRW240 billion decrease and the main reason behind that is the RPS which is included in the purchased power costs has actually gone up this year because the RPS portion has been recognized within this item. That amounted to about KRW300 billion and that explains the difference.

Regarding your second question, about our forecast about the different generation mixes, there is no change since our last forecast. So we forecast nuclear to take up 85.5%, coal 80% to -- mid to late 80 figure, and for LNG combined, about 30 percentage level or the front part of the 30 percentage level. However, of course, according to any maintenance or overhaul type of situations that may occur, or some of the unexpected situations that may occur. Those figures may be subject to change.

Yes, I would like to answer the third quarter, I believe it was related to the consolidated or linked adjustments that are in the power sales revenue area, there are several elements that can actually influence the difference in the numbers there. For example, the revenue or the profits coming in from the pumped electricity power side, and the regular type of power plant and also some of the internal sales in these areas may be deducted from the final figure which may create that difference.

Another element is actually trial operations which are also deducted from the total amount as well. The difference that you see for this year is mostly due to a high rise compared to the previous year, same period, in the trial operations side.

(Interpreted) (Inaudible) Citibank.

Thank you, management. I have three questions. First of all, in terms of the generation mix, I believe you just talked about the utilization. But for generation mix, in terms of coal, nuclear and LNG, in the full year 2016 and 2017, what is the guidance?

Secondly, in terms of coal, LNG, and oil, what is the forecast for the full year 2016?

Thirdly, we noticed the overseas revenue came down 21% year-on-year for the quarter, which was quite surprising, so what is the outlook for the rest of the year and the profit outlook for this segment?

Thank you.

(Spoken in Korean).

(Interpreted) Allow me to answer your first question regarding the generation mix. The forecast that we have for the year 2016 is nuclear 40%, coal 47%, and LNG, 8%. As for 2017, we expect nuclear to be 41%, coal 52% and LNG, a little bit lower than the 2016 figure, 4% for 2017.

Going on to your second question regarding the unit cost forecast for fuel for 2016, for coal, our forecast is per tonne, KRW91,700, for LNG, the unit cost is forecasted at KRW624,500, and for oil, the forecast is per liter, KRW311.8.

I would like to go answer the third question, and answer that question regarding our overseas business revenue side. For our UAE related project business, compared to last year, there has been quite a lot of progress and therefore, the profit and revenue have increased to a record KRW98.5 billion. Now the reduction that you see for the earnings results of this quarter right now, is mainly due to some of the EPC projects that are going through a completion period which means that the revenues coming from those EPC projects are not being incurred and therefore, that is having a reduction effect on the profit of our overseas business

However, if you look at our forecast for year-end, I don't believe that there will be a major difference or gap compared to previous years because the UAE business actually takes up a significant portion of our overseas business activities.

Can I just clarify? That means management forecast the overseas revenue rather flat year-on-year and at full year 2016 or increasing?

(Spoken in Korean).

(Interpreted) Similar as last year.

Thank you.

(Interpreted) Heedo Yun, Korea Investment & Securities.

(Interpreted) I also wanted to ask a question related to the overseas business and I think the bulk of the questions that I have already been answered but I would like to just add on one additional question.

You mentioned earlier that the UAE nuclear power plant projects takes up a large and significant portion of the overseas business, at what point in time do you believe that in terms of revenue, the UAE business will touch its peak and start to fall in terms of the revenue generation?

So that timeline, if you could forecast that for us?

The second question that I have is looking at your other operating cost area that you have printed from your Excel file, we see that for the first quarter, it was 23.9% increase but if you look at the first half of 2016 in total, we actually see that it has gone down somewhat.

So it seems that the second quarter related other operating costs must have been significantly reduced to come up with this kind of a result. It was down by 7.7%, so what kind of a difference can explain the situation between the first quarter and the second quarter?

(Interpreted) I would like to answer the first question, in terms of the revenue of our UAE nuclear power plant related business, I believe that the revenue size itself will be quite similar this year compared to last year. I believe that last year and this year will more or less be the peak of the revenue growth. Of course, on a quarterly basis, due to the characteristics inherent in the overseas businesses, we are not able to give you any forecast on a quarterly basis but only on a yearly basis.

We believe that it is possible that next year, revenue for our UAE business will be decreased to about KRW2 trillion rate.

I would like to answer the second question regarding the decrease of the other operating costs which has been decreased compared to last year. This is actually mainly due to what we have just mentioned now about the UAE program. The UAE program related actual construction progress have gone on quite a lot during this period. So since that progress has been gone to a later period of the overall construction process, we see that the related activities have been decreased and that means less purchasing-related costs for materials.

So that ended up in KRW240 billion which was lower than the previous year.

(Interpreted) [Seung Shin], Goldman Sachs

(Interpreted) I have three questions, first of all, recently, we have read in the media about the changes in the consumption tax related to coal. I would like to ask if there will be any adjustments or changes foreseeable for LNG in the future as well?

The second question is regarding your CapEx related figures, the original forecast that we were given regarding your CapEx was KRW1.3 trillion but there was also a total figure of KRW6.9 trillion for additional CapEx related to your announcements.

I believe that out of that KRW6.9 trillion, KRW1.3 trillion that was already forecasted is probably included in that so the remaining KRW4.6 trillion, I believe, will be the amount that is additionally going to be invested for CapEx. I would like to confirm whether my understanding is correct and how much of that has actually been spent during the first half of 2016 and do you expect to consume the remaining portion of that amount in the second half of 2016 completely.

The third question is about any changes that you foresee for SMP in the second half of this year? The adjustment coefficient for SMP?

(Interpreted) I would like to answer the first question, as you have mentioned, and as also, as we have all heard, in April of next year, 2017, there will be an increase of KRW6 per kilogram due to the current bill that has been proposed for the changes and amendments for the tax bill. I understand that as of now, it includes only coal so I do not believe as of now, that there will be any changes for LNG.

I would like to answer the second question; this is regarding CapEx specifically related to the energy new business areas the KEPCO Group is entering into. The figure that you mentioned, KRW6.9 trillion, I would like to actually clarify, but actually, it is KRW6.4 trillion and as for how much of that has been executed for the first half of this year, KRW1.2 trillion has already been spent this first half.

For the second half, unfortunately, I don't think that I will be able to give you any specific forecast for how much of the CapEx will be carried out in the second half because much of the situation is quite fluid.

(Interpreted) For clarification, additionally, it was about whether the KRW1.3 trillion in the existing guidance was included in the KRW6.4 trillion?

(Interpreted) It is KRW1.2 trillion, and that has been confirmed. Yes, it is included in the KRW6.4 trillion.

I would like to answer the third question, in the first half of this year, because of the efforts to rationalize LNG cost reflection within the overall SMP, the cost for KEPCO has actually increased and this will probably also be increased in the second half of this year as well. Therefore, in terms of the initial guidance that was given at the end of last year, there is quite a bit of a discrepancy between what we see in the actual figures so in the future, we would probably come up with an adjusted coefficient that will be announced.

(Interpreted) By saying that the cost is going to increase, does that mean that the coefficient itself will be increased?

(Interpreted) Because each of the individual companies calculate the coefficient differently and the figures that they have are all different, we cannot really say that as a general figure, it is either going up or down but there will be discrepancies among individual companies.

(Interpreted) [Anna Park], Macquarie Securities.

(Interpreted) I would like to ask two questions, first of all, regarding the baseload generation operations plan, if you look at the detailed figures that you have sent ahead of time, we see that there has been a bit of a delay in terms of the coal-based and the nuclear-based versus the original plan.

I would like to ask what the reason behind that was and adding on to that, I would like to ask whether there is any possibility of additional delays in the future?

(Interpreted) I would like to answer that question for you. For the base load operation plan that we have, some of the delays that have occurred have mostly been due to issues in trial operations that have been identified. So in order to correct those identified issues, there has been a certain degree of delay.

However, for any possibility of additional delays, well, as of now, it is difficult to predict any such things.

(Interpreted) [Jae-Hyun Ryu], (inaudible)

(Interpreted) Yes, I have three questions, today, in the news, we heard about the news regarding refunds for specific electronic appliances and there has been some negative view about what this could mean for KEPCO's profit and earnings.

I would like to ask if you have any possibility of introducing similar types of program or plans in the future, whether this will have an impact on your dividend and how and when it will actually be reflected in your P&L sheet?

The second question that I have is about the fund, the power generation related fund. I would like to ask since there hasn't been a lot of information that we have access, whether what is going on right now, how much it has developed so far, and what you see happening in the near future?

The third question is related to the coal-related new tax that is going to enter into effect next year, whether this is going to increase the cost for you and whether this will mean a rise in [CP]? Could you give us a forecast regarding these areas for the second half of 2016 and year-end total year 2016 as well as the next year?

(Interpreted) I would like to answer your first question. The program that you have specifically mentioned is something that is being done on a one-time basis for this year only.

Of course, at KEPCO, we do have continuous projects going on within the overall framework of efficiency improvement which is being conducted year-on-year and there are many areas that it touches, this happened to be one of them that was [introduced] this year but as I mentioned, it is actually a onetime type of a product program for only this year.

Regarding your add on question about how this is going to be reflected in the [books] and where, actually, this will be included in our SG&A and as for the period or the timing, it will be recognized in the third quarter.

I would like to answer your third question regarding the impact of the increase in tax for coal. As we know, it has been announced that the increased portion will be KRW6 per kilogram, this will translate to approximately KRW500 billion to KRW600 billion increase in cost on an annual basis.

Regarding the [CP], well according to what government officials have stated so far, they expect an adjustment of about KRW2 to KRW3 which will translate to about KRW200 billion to KRW300 billion per year, but as for the actual timing of if there will be a [CP] increase, when it will take place and what portion it will be, nothing has been completely announced and confirmed as of yet.

Could we clarify your second question, what the fund that you are referring to is actually about?

(Interpreted) What you are referring to as the energy new businesses or new industries fund, I understand that the figure was about KRW2 trillion?

(Interpreted) Yes, thank you for clarifying the question once again. For the new energy business fund, which indeed, as you have mentioned, was announced with the size of KRW2 trillion, KRW500 billion from that amount will be executed this year and the remaining KRW1.5 trillion actually will be conducted next year, 2017.

(Interpreted) In that case, as of present, has the actual fund been used or not?

(Interpreted) This year, the execution of that fund portion will be conducted in November -- end of November.

(Interpreted) I would like to add on one additional question for the first question that was already answered in terms of the efficiency improvement project. You mentioned earlier that KEPCO is actually introducing these on a continuous basis year-on-year, in that case, what was the budget for this project -- this type of project last year and what is the budget for this year?

(Interpreted) Yes, allow me to answer the question. The efficiency improvement related projects are going to be conducted from -- actually have started from 2013 and will be conducted until 2017. So during that period, a total budget of KRW500 billion was set so that means each year, approximately KRW100 billion is being spent on these business areas.

(Interpreted) So you said 2017, up to 2017, does that mean that next year, we will be seeing something similar as well?

(Interpreted) Next year, we will also be actually implementing about KRW100 billion for this category and next year, 2017 will be the last year that we do this.

(Interpreted) [Steve Ju], [Novel Investment Advisory Group].

(Interpreted) I have a relatively short and simple question. I see that the corporate tax category item takes up 33% of the profit report has so I would like to ask why that portion is so high?

(Interpreted) Allow me to answer that question. On the consolidated financial statement, you will be able to see that the corporate tax related cost is very high and the reason behind it is that any increase in asset value of the subsidiaries will be recognized and be subject to that corporate tax.

(Interpreted) Minho Hur, Shinhan Financial Investments.

(Interpreted) I have five questions. The first question is if you look at the cost related to [RC] purchases, has increased significantly, is this because of the increase in the [RC] prices itself or is because of there has been an increase in the purchase volume. Could you clarify and also, on an annual basis, how much that would mean. If you could explain that, that would be helpful.

The second question is related to SMP adjustment coefficient related changes, you mentioned earlier in your previous answer related to this, but as we have seen in July with the actual tariff changes like we have been able to see. Is there a possibility for the normal coefficient to be adjusted as well? That is reflecting the changes of the SMP.

The third question is we also expect some warm weather to continue in the future as well so what do you forecast in terms of increase of sales volume for the third quarter?

And my fourth question is related to CapEx, if you look at the first half CapEx related figures in 2016, it has been increased but in 2017, it is expected to stay at similar levels. The details behind the increase for 2016 tends to be some really important related CapEx investments made for the thermal power plant. It doesn't seem like it includes any of the new energy businesses. Am I correct in understanding it that way, if you could clarify that for me, that would be helpful.

The last question that I have is if [CP] is increased, I understand that it will be retroactively reflected to July, is that correct?

(Interpreted) Allow me to answer your first question. The cost related for RPS in the second quarter was consolidated KRW272.3 billion and for non-consolidated, KRW531 billion.

The reason behind the increase that we see is two-fold. First of all, the mandatory rate that has been given to us has been increased from the existing 3% to 3.5% and another reason is that the solar and the non-solar have been combined together, thereby increasing the unit cost related to the RPS.

So that explains the increase in RPS related cost.

On the annual level, we believe for the non-consolidated, the figure would be KRW1.4 trillion and if the trends that we have seen in the past continue, that means on a consolidated basis, the figure would be about KRW800 billion for the year end.

I would like to answer your second question from KEPCO's perspective, the normal coefficient is to make certain that the return on investment rates stay at a fair rate and therefore, according to changes that occur for the SMP, recalculation of this may happen.

I would like to answer the third quarter due to the hot weather, the sales volume for July of this year haves actually increased 5%. So looking at the third quarter, the initial forecast was 2.3% increase but this forecast was made at the earlier part of this year which means that there may be some changes that occur to this figure.

So electricity consumption increase for the month of July was not only for residential, but for overall.

And it is difficult for us to give you some figures separately for the residential because we do not have the figures and data at hand yet.

Answering your fourth question, the CapEx trends for 2016 have increased due to our plans to expand more of the work that is going to be done to reinforce our T&D network and the KRW1.2 trillion included in the energy new businesses has been reflected in there and that explains the 2016 figures.

For the 2017 forecast, actually, what we have had as existing forecast was set up last year as part of our mid to long-term plan. So for 2017, we are actually going to work on some more forecast for that year starting from the end of September. So we are going to go into that planning stage at the end of September.

Regarding your fifth question for the [CP] tariff increase whether it will be retroactively applied from the middle of this year, well, nothing so far has been decided or confirmed regarding that.

(Interpreted) Allow me to ask one additional question regarding the answer that was given previously for another question. For the energy-efficient household appliance products, the refund that is going to be given out, you mentioned earlier that that is going to be recognized within the SG&A. Theoretically, is that the right way to recognize this or does it have to go into the COGS?

(Interpreted) Yes, I would like to answer that question. We have currently under review for that item, as of now, we believe that it should be included in the overall cost -- the comprehensive cost.

(Interpreted) Due to time constraints, we would like to entertain one more question during the conference call, but of course, if you have any additional questions, please feel free to contact the IR team.

(Interpreted) Jiyoon Shin, KTB Investment Securities.

(Interpreted) I think there have been a lot of questions regarding the effect of an increase in [CP] and you mentioned earlier in general that an increase of KRW2 to KRW3 will have an effect of KRW200 billion to KRW300 billion but that would be on a KEPCO consolidated basis. For the non-consolidated basis version, for each of the subsidiaries, it would have a larger impact, am I correct in understanding that?

(Interpreted) For the [CP] increase, it is actually -- does not include any of the pure cost or the SMP related fluctuations and it just reflects the normal adjustment coefficient so it should not have an impact as you have mentioned on the non-consolidate basis for KEPCO.

We will actually have to get back to you on the figures that you mentioned and to clarify whether your understanding is correct or not. If you would permit, we will get back to you regarding that question.

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.