Korea Electric Power Corp (KEP) 2016 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 2016 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 2016 third quarter earnings results by KEPCO.

(Interpreted) Good afternoon. This is Jong-soo Kim, Treasurer of KEPCO. On behalf of KEPCO, I'd like to thank you all for participating in today's conference call to announce the earnings results for the third quarter of 2016.

We will begin with a brief presentation on earnings result 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 KIFRS. Any comparison will be on a year-on-year basis between last year and this year.

Any strategies, plans, financial estimates and other forward-looking statements included in today's call will be made based on our current expectation and trends. Please note that such a statement may involve certain risks and uncertainties.

Now Mr. Jung-in Yun, senior IR manager, will begin with an overview of earnings result first in Korean and repeat in English.

(Interpreted) Now we will prove an overview in English, starting with operating income. In the third quarter of 2015, KEPCO recorded a net operating income of KRW10.73 trillion.

Taking a closer look, operating revenue increased 1.4% to KRW44.9 trillion. This was a attributable mainly to 1.6% increase in power sales revenue, totaling in KRW40.59 trillion and 3.6% increase in revenue from the overseas business, amounting to KRW3.27 trillion.

Moving on to main operating costs, COGS SG&A expenses fell 4% to KRW34.17 trillion. Fuel cost has decreased 14.2% to KRW10.07 trillion. This was mainly due to 15.2% drop in unit cost [to procure] and a 5.8% rise in nuclear generation thanks to the increased nuclear generation capacity.

Meanwhile, purchased power cost has decreased 10.9% to KRW7.66 trillion. Introduction of new additional IPP power plants caused the purchased power volume to increase by 10%. However, such increase was more than offset by 23% decrease in the unit cost of purchased power thanks to reduced SMP and pure price.

Depreciation costs rose 6.8% to KRW5.72 trillion, mainly due to the newly-introduced power plants and transmission facilities.

Maintenance costs went up 7.7% to KRW1.29 trillion, attributable to increased facility investment and schedule overhaul.

Now let me explain KEPCO's non-operating segment. Other income decreased by KRW8.49 trillion to KRW0.12 trillion mainly due to the gain from the headquarter land disposal in the previous year. The financial was KRW1.2 trillion, which improved by KRW0.25 trillion compared to net loss of KRW1.45 trillion last year.

As a result of the foregoing, we have recorded a consolidated net income of KRW6.87 trillion, which has decreased KRW4.97 trillion from KRW11.84 trillion in the previous year.

This concludes the overview of KEPCO's earnings result for the third quarter of 2016.

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

(Interpreted) This is Jong-soo Kim. I am joined with IR committee members in charge of major business areas of KEPCO. We are prepared to take any questions.

This will proceed in both Korean and English. All the Korean 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). The first question will be given by Mr. Pierre Lau from Citibank. Please go ahead, sir.

Hi. Good afternoon KEPCO management. I am Pierre Lau from Citibank. I have three questions. The first question is what is your estimate for unit coal, unit LNG and unit oil cost of KEPCO in 2016?

The second question is what is your expectation of your generation mix by fuel type in 2017?

And the third question is at current fuel prices, do you expect KEPCO to have tariff high or tariff cut in 2017? Thank you.

(Interpreted) Maybe I can address the first question that you have, which is the unit cost of the different fuel types for 2016. To start with coal, for coal per tonne we estimate that the cost will be KRW92,700. For LNG we estimate that it would be KRW598,000, and for oil we believe that per liter it would be KRW359.1.

And maybe to address the second question that you asked, which was the generation mix breakdown that we would estimate for 2017. As of now, for 2017, our estimate is that nuclear will account for 41%, coal 52%, LNG 4% and oil 1%.

Maybe I can address the third question that you asked about our tariff outlook for 2017. Basically speaking, with regards to electricity tariffs, they are based upon a wide variety of cost factors which not only include the fuel cost but other factors also.

So, therefore, as of now it is very difficult to say whether we believe tariffs will rise or tariffs will fall under the current environment.

As you are probably aware, including the electricity tariffs themselves, the government is currently reviewing the overall progressive tariff system that we have for electricity fees and therefore, alongside that overall revamp of the structure in itself, probably the tariff prices for the future will also be a point of consideration.

Thank you very much.

(Interpreted). The following question is by Mr. Jiyoon Shin from KTB Investment Securities. Please go ahead, sir.

(Interpreted) So there are three questions that I would like to ask you. First, if you look at the generation volume that we see from nuclear and also coal-fired power generation in this quarter, it seems to be trending a bit down whereas in the case of LNG and IPP, we have seen double-digit growth in these areas.

If we look behind the reason why, in terms of nuclear power and coal-fired power, it has not increased. If we would account for the planned outages and also some of the delay in the construction completion for some of the power plants, is there any other reason that we should be aware of, for example, any one-off factors that have been behind this situation?

The second question that I would like to ask you is with regards to coal prices. If you look at the recent trend in coal prices, it has actually surged. So for the third quarter in terms of the actual unit fuel price, it seems that on a quarter-on-quarter basis it's actually very flat versus the previous quarter. However, in terms of the expectations that you provided for 2016, I do believe that we do have the numbers. But what are your expectations for 2017 in terms of the unit price for coal?

The third question that I would like to ask you is about your independent or non-consolidated performance. If you look at your non-consolidated or cumulative profits, you have KRW4.4 trillion in profits that you have recorded. However, I understand that recently the adjusted coefficient has actually been adjusted upwards. So therefore for the fourth quarter what should we expect in terms of fourth quarter performance? Do you believe that it will be similar to the fourth quarter of 2015 or do you actually believe that it could be less than what we have seen last year?

(Interpreted) So maybe I can take the first question. First about the first question that you have asked, in terms of our baseload capacity, which would be the nuclear power and also the coal-fired power, the reasons why we have seen less power generation is because across July to August we actually had some planned outages of some of our facilities, so that was one factor.

In addition to that, in September, there were some earthquakes that we experienced in the Gyeongju region. So as a result of that, our works on number one to number four units have been shut down, and as a result of that, that is why on the plus side of that we have seen more power generation coming from LNG and IPP.

With regards to the third question that you had about our non-consolidated performance and the adjusted coefficients, as of now for the fourth quarter, because we do see some volatility in the fuel costs in general, taking that into consideration, as of now we do believe it is difficult to give you what our expectations would be with regards to the fourth quarter performance.

So, with regards to coal prices and in terms of the outlook going forward, actually it's very challenging or difficult to provide you a clear outlook as of now. There are various factors that we are taking into consideration right now.

For example, it is the season in which prices are being negotiated for Japan and also Australian coal. In addition to that, for China they are reducing their production of low-efficiency coal and therefore there are a lot of factors that we believe will actually depress any increase in the supply for coal.

However, taking that into consideration and also the overheated market situation right now, in 2017, as of now, we very cautiously expect that prices may decrease or weaken from where they are right now and trend a bit down. But that's a very cautious estimate. And within our budget for 2017, what we have assumed the coal price to be is $70.

In addition, if I could add on one more comment. In terms of the coal price increases right now, we have seen the trend spiking up from the second half of this year. And according to our analysis for bituminous coal, for the actual price of the market to be reflected in our own fuel cost, there is a five-month time lag that we have experienced. So therefore, as a result of that, the current price increases is something that we do believe will start to impact our performance during the first quarter of next year.

(Interpreted). The following question is by Mr. [Jay Hun Yu] from Mirae Asset Securities. Please go ahead, sir.

(Interpreted) So there are a couple of questions that I would like to ask you as a follow-up. There seems to be a lot of questions that have already been asked and answered, so maybe I can just add on a few.

The first is probably a question that you might not be able to answer but just to throw it out there. As you said before, there is a review that is ongoing right now with regards to the progressive tariff system.

Even if you can't provide the details about what the discussions are currently, do you have any timeline that you could provide to us in terms of when we can actually see an outcome? And in addition to that, if you could provide any color about the actual discussions or any update with regards to this issue that would be appreciated.

The second question that we would like to ask you is also related to that. There is some talk that there could be a possibility of industrial tariffs increasing, especially on the lower load side. Right now, within industrial what percentage would the actual lower load side account for?

And thirdly, if you look at your non-consolidated performance in the third quarter on an accumulative basis, the profitability seems to be much stronger than what we see on a consolidated basis. So again, I would like to ask you what your fourth quarter outlook is.

I do believe that you answered that it is difficult to foresee as of now, but do you believe that there could be, taking into consideration your very strong performance right now, another adjustment of maybe the adjusted coefficient, and if so, what would be the overall outlook for the fourth quarter?

(Interpreted) So maybe I can answer the first two questions and thereafter will take the third.

For the first question, in terms of the update about the progress of the discussions, as you are aware, this is something that is still ongoing in terms of the discussions themselves. So no final decision has been made yet. However, in terms of the timeline, the general consensus between the government, the National Assembly and also KEPCO is to try to come to a conclusion before we enter into the cold, full-fledged winter season. So that would be an update.

With regards to the industrial tariffs, it is -- there seems to be the view that industrial tariff or electricity tariff levels are low or are cheap. However, recently there has been a number of hikes in that tariff in themselves. So we do believe somewhat that these tariff levels now can be regarded as a normalized level. So therefore -- however, it is something also that is under review right now.

With regards to the specific data that you asked about, the breakdown of the low base volume of sales that we have, in actuality we don't have any separate numbers about that. And the reason for that is because we don't have a separate tariff for low base electricity, so therefore this is something that we cannot break down for you.

And maybe I can take the last question that you had asked. With regards to our fourth quarter performance in terms of the current trend on a non-consolidated basis in terms of our overall performance continuing or not, it is something that is very difficult to answer as of right now. But what we can say is that in terms of the adjusted coefficient and the adjusted coefficient being readjusted one more time before the end of the year, as you are aware, the adjusted coefficient itself was adjusted in September.

And then in October we actually increased the capacity payment. So therefore, after the effects of the capacity payments do take place, we will actually look at the difference in the profit margins between the gencos and KEPCO. And there is a possibility that there could be one more adjustment before the year as a result of that review.

[Spoken in a foreign language]

(Interpreted) Currently, there are no participants with questions. (Operator Instructions) Currently four participants are waiting with their question. The following question will be given by Mr. Jay Hun Yu from Mirae Securities. Please go ahead, sir.

(Interpreted) So maybe to provide the translation of the question, in terms of the question, the question that I would like to ask as a follow-up is with regards to the impact of the capacity payment increase that you have just mentioned, this was something that was in the press in themselves and I do believe that overall it will have the effect of increasing your cost. Maybe if you could breakdown the cost increase effect between the IPPs and also the gencos. If that would be possible, that would be appreciated. And also, what the overall impact will be on your fourth quarter performance is also a question that I would like to ask.

(Interpreted) So maybe I can answer your question. The capacity payment was increased in October. And if we look at how that was actually done, the capacity came -- the standard capacity payment was something that was set in 2004 and since it has been set in that time, for the past 15 years it had not been changed. So this is the first increase in the capacity payment in itself that we have been -- that we have made during the past 15 years.

So that being said, the way that we changed the capacity payment in itself in terms of the structure is a bit different. Before there was one capacity payment that was applied across the board for all of the different types of generation facilities.

However, according to the new structure that we are using, what we are actually doing is giving a different capacity payment according to when the actual facility went online. So according to the year that it went online there is a separate capacity payment that is being made on a yearly basis -- on a per-year basis.

And as a result of that, if you look at the overall blended average, it has the effect of increasing the capacity payment by around KRW2. So as of now, as the result of that, we do believe that the amount that we will be paying will increase. However, as mentioned before, there was also an adjustment in the adjusted co-efficient.

So if you look at the cost effect ,or the overall effect of this change from the genco level, we will be paying the gencos more, but we do have more savings on the fuel cost in itself, so we do believe that these two cost items will be offsetting one another. Therefore, the overall impact on our side to the gencos is something that we do not believe will be significant.

So the increase in the capacity payment will be only something that actually has an impact on our performance on the IPP side. So the capacity payment to the IPPs, however, in general is something that is not very significant, so therefore we don't believe that the overall impact will be very large. However, as of now it is difficult to give you a specific number.

(Interpreted) The following question is by Mr. Byung Hwa Han from Eugene Investment Securities. Please go ahead, sir.

(Interpreted) The question that I would like to ask you is that if you look at recent press reports, there has been mentioned that there is going to be a modification or some revisions made to the Electricity Business Act in itself. And therefore as a result of that, that when taking considering the order in which you put orders in, that the environmental impact will be one of the factors of consideration, which would change the order and give a higher weighting to LNG. So what do you think the actual impact will be on your business?

(Interpreted) To maybe address the question that you have asked. If you look at the current proposal for the revised regulation, in actuality, it says that for the seller of electricity, which would be KEPCO, that in terms of actually purchasing power it needs to take into consideration the safety to the people of Korea and also environmental impact when purchasing power.

However, in actuality, if you look at how power purchases actually take place, the order in which the orders are actually given to the power generators is determined by KPX and it is done by power source. So therefore, between the proposal and what is actually done, there is some conflicts in terms of the two different methodologies that are being used right now.

So therefore, for the new revision to effectively or efficiently be implemented, there needs to be some further modifications to the proposal of the Bill in themselves. Right now the Bill is pending at one of the sub-committees at the National Assembly that looks over the legal contents of each of these proposals, so therefore it still is in the very early stages. So therefore, as a result of that, it is difficult to say as of now what the actual impact will be once the formal proposal has been made by the National Assembly.

(Interpreted) The following question is by Mr. Minho Hur from Shinhan Financial Investment. Please go ahead, sir.

(Interpreted) So there a few, as well, data points that I would like to ask with regards to the third quarter and also what your outlook would be going forward. The first is that in terms of revenues from your UAE project, how much revenue was booked in the third quarter and what do you believe the revenue outlook would be going forward?

In addition, for your renewable energy certificate, what's the purchase cost in the third quarter and what would be the REC purchase cost going forward?

In the same light, for your carbon trade outlook, what was the third quarter overall performance and what is your expectations going forward?

(Interpreted) So maybe to give you some of the data points, first starting with the UAE project revenue. If we work at the cumulative first to third quarter revenue, it's KRW2,817.6 billion. If we look at the third quarter only, which would be July, August and September, it's KRW986.2 billion.

In terms of the actual cost that has gone into our ETC in terms of the greenhouse gas emissions, this is something that for the fiscal year of 2016 will be actually all settled in the fourth quarter at once, so that cost is something that will be booked at that time for the full year.

However, in terms of what we have accumulated up until the third quarter, it is KRW45.5 billion. And this is actually a cost that we have in relation to our 2015 related ETC costs. In the settlement process in themselves, there was some difference of opinions with the gencos and, therefore, there was some cost adjustment that took place, so that is the cost related to that.

With regard to our REC purchasing cost for the purchases that we did outside of the Company, on an accumulative basis it was KRW635.4 billion. And if we look at the third quarter alone, it was KRW212.7 billion.

So maybe we can translate first and then answer the question. First, with regards to the RPS I would like to change one of the numbers that I had given you. For the third quarter for the REC cost -- purchase cost in itself it wasn't KRW212.7 billion, but it was actually KRW176.9 billion.

In addition to that, there was a follow-up question asking about what the non-consolidated REC cost would be. For a non-consolidated basis, the REC cost on a accumulative basis would be KRW1,137.4 billion. And for the third quarter alone it would be KRW362.5 billion.

(Interpreted) HIn addition to that there was also a follow-up question about CapEx for 2017, because it looks like that the numbers for 2017 versus that of 2016 show a decline in the actual CapEx budget. Is this because the numbers for the new energy industry development have not been requested into the CapEx budget, is the question.

(Interpreted) Maybe I can ask -- answer you a question -- answer your question about the 2017 CapEx budget. For the KEPCO Group as a whole, the 2017 KEPCO Group CapEx budget was KRW14,400 billion. However, we have modified that to KRW13,900 billion. And this is actually a reflection of the changes that we have made to our mid- to long-term business plan. It is a rolling plan, so we have rolled it over and as a result of that, our CapEx budget has gone down.

(Interpreted) The following question is by Mr. Seong-Jin Kang from KB Investment Securities. Please go ahead, sir.

(Interpreted) So, there are three questions that I -- excuse me. There are three questions that I would like to ask you. First is with regards to the first half of 2017. If you look at the schedule that you have for base load capacity buildout, what is the actual schedule? If you could provide an update about what the construction schedule is like. In particular with regard to the GS facility, have you started to purchase the fuel that is needed for this facility? That is the specific question that I would like to ask you about that.

The second question is, right now you do have the Wolsong units on hold because you are looking into the maintenance of that. When do you believe that these facilities will restart?

And the third question that I actually have is with regard to the outlook for the fourth quarter. If you look at your actual electricity purchase, it seems that for LNG and IPP that there was a significant increase in purchase volume in the third quarter. Is this something that you believe will continue in the fourth quarter, or is it something that will actually trend out?

(Interpreted) Maybe if we talk about the first question in terms of our capacity schedule in terms of construction, first, talking our [coal fire] power plants. First, for the Dangjin number 10, it actually went into commercial operation as of the end of September. In addition for the 10, number 9, also this was something that was completed in October of 2016.

For the Samcheok Green number one, it's actually going to be something that will go online in January 2017.

And for the Poryong number one, it's actually going to start in December of 2016.

In addition, on the nuclear side, if we look at our Shin Gori number three, this is something that will go online in December of 2016.

Maybe one clarification for Samcheok. It's actually not -- it's not January of 2017, but it's the end of 2016.

(Interpreted) For the second question that you asked -- excuse me -- about Wolsong, this is something that we have not put on hold because there was actually some functional issues with the facilities themselves, but rather, because in the Gyeongju area there tends to be follow-up earthquakes. And as a result of that there is some anxiety that the people are fearing as a result of that. So to actually ease their anxiety we have put this facility on hold.

So it actually boils down to an issue of when people will be more comfortable about having a nuclear facility up and running that will actually determine when the actual Wolsong power plant will actually go back online. So as of now, it's difficult to estimate what that actual time will be.

To answer your third question for our LNG generation volume, this is actually that -- an issue that is tied in with the Wolsong facility. So when the Wolsong facility actually goes online, that would have an impact on the amount of LNG generation that we have. But as of now, as mentioned before, because this schedule is something that is still up in the air, it would be difficult to forecast what the LNG volume will be for the fourth quarter.

(Interpreted) Maybe to ask a follow-up question. In terms of the capacity that you will be adding on in terms of your coal fire and also nuclear power plant, could you provide the schedule for the first half of next year? If I remember correctly, there was a significant amount of capacity that you were expecting to complete within the first half. Is that still on schedule, or is there anything that changed versus the original schedule?

(Interpreted) So maybe to give you an update about our schedule for the first half of next year, on the coal fire thermo side for the 10 -- number 10 unit it is expected to go online in August -- April, sorry. For the Samcheok number two, in June, and also for the Shin Kori number one that also would be June. On the nuclear side, we expect the Shin Gori number four to go online in April.

(Interpreted) The following question is by Mr. Dong Jin Kang from HMC Investment Securities. Please go ahead, sir.

(Interpreted) I would like to ask you a follow-up question about the Wolsong facility. You talked about it a bit before. Is this something that you believe will be actually reflected into your electricity supply and demand plan? And, if so, do you think that it could have an impact in actual -- on electricity tariffs? What do you believe the overall situation will be?

(Interpreted) We to interpret the answer first and then we can also interpret the follow-up question. If we address the first part of your question about the nuclear facilities and what the expectations are for next year, whether it would be something that would be factored into the electricity supply and demand plan for next year, as of now, as mentioned before, this is something that has been put on hold because of the aftermath of the earthquakes that are taking place here in Korea right now. So as of now it's actually difficult to say whether this is something that would be or would not be reflected into the electricity supply and demand plan for next year.

That having been said, if we talk about the impact that it would have on electricity tariffs themselves, of course, if there were some facilities were to go back online, then that would actually lower the overall comprehensive cost. And therefore, as a result of that, that could be a downward pressure factor for tariffs to go down.

However, as mentioned before, electricity tariffs are based upon a wide variety of factors, not just how much base load there is. So what the actual end-of-the-day decision would be is something that is difficult to discuss as of now.

The follow-up question to that is, in light of the Wolsong situation, I do believe that there could be a change in your energy mix based upon the different types of fuel type and as a result of that there could a change into your tariffs. What would that actual implication would be?

(Interpreted) In terms of maybe adding on to what was said before, for -- the class B Wolsong facilities right now are halted. As a result of that, of course, that does not lower the cost of electricity for us. It actually increases the cost.

However, that having been said, factors that contribute to increasing the overall tariff at the end of the day would not only be this cost, but a wide variety of factors, as mentioned before. So as of now it would be difficult to say which direction tariffs will end up going.

(Interpreted) So due to the current time constraint I do believe that we need to wrap up our conference call here. Once again I would like to thank everyone who took time out of their schedule to participate in today's call. Thank you very much.

(Interpreted) This concludes the fiscal year 2016 third-quarter earning 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.