Korea Electric Power Corp (KEP) 2016 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 2016 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 2016 fourth quarter earnings result 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 earnings results for the fiscal year of 2016.

We will begin with a brief presentation on the 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 financial information to be [disclosed] today is on a preliminary unaudited and consolidated in accordance with K-IFRS. Any comparison will be on a year-on-year basis between 2015 and 2016. 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 note that such statements may involve certain risks and uncertainties.

Now Mr. Jung-in Yoon, senior IR manager, will begin with an overview of the earnings results for 2016, first in English and repeated in -- first in Korean and repeated in English.

(Interpreted) Now we'll provide the overview in English, starting with operating income. In 2016 KEPCO recorded net operating income of KRW12 trillion. Taking a closer look, operating revenue increased 2.1% to KRW60.19 trillion. This was attributable mainly to a 2% increase in power sales revenue totaling in KRW54.3 trillion and 5.3% increase in revenue from the overseas business amounting to KRW4.45 trillion.

Moving onto main operating costs. COGS SG&A expenses increased 1.2% to KRW48.19 trillion. Fuel cost decreased 7.2% to KRW14.07 trillion, mainly due to a 7.8% drop in unit cost of fuel.

Meanwhile, purchased power cost [decreased] 5.9% to KRW10.76 trillion. Introduction of new highly efficient IPP power plant caused the purchased power volume to increase by 13.2%. However, such increase was more than offset by 20.4% decrease in unit cost of purchased power, thanks to reduced SMP and LNG price.

Depreciation cost rose 8.1% to KRW7.87 trillion, mainly due to newly introduced power plants and substations.

Maintenance cost went up 6.8% to KRW1.97 trillion, attributable to increased facility investment and scheduled overhaul.

Now let me explain KEPCO's non-operating segment. Other income decreased by KRW8.54 trillion to KRW0.7 trillion, mainly due to a gain from the [headquarter land disposal] in the previous year.

Net financial loss was KRW1.65 trillion, which improved by KRW0.19 trillion compared to the net loss of KRW1.83 trillion in 2015.

As a result of the foregoing, we recorded a consolidated net income of KRW7.31 trillion, which decreased KRW6.11 trillion from KRW13.42 trillion in the previous year.

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

(Interpreted) Now let us move onto Q&A session. Q&A session will be hosted by Treasurer, Kim.

(Interpreted) This is Jong-soo Kim. I am joined with our 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&A 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 Citigroup. Please go ahead, Sir.

Hi, thank you management for your time. I have three questions. The first question is what is your unit coal and unit LNG cost for first quarter 2017 and 2017?

Second question, what is your generation mix in 2017?

And question number three, what is the tariff hike -- tariff change outlook in 2017? Thank you.

(Interpreted) I would like to first answer your first question and begin with the fuel unit cost for the fourth quarter of 2016.

So by different fuel, first coal is KRW105,000 per tonne for coal and for LNG it is KRW610,000 per tonne, and for oil it is KRW421 per liter.

And our estimation for 2017 is as follows. As for coal, it will be KRW113,000 per tonne, and for LNG it is expected to be KRW661,000 per tonne, and for oil it is expected to be KRW480 per liter.

Our generation mix for 2017 for KEPCO and our six subsidiary companies will be as follows. As for nuclear power plants, it is expected to be 41%, coal 53%, and for LNG 4%, for oil 1% and for other generation mix, including renewables, will be 2%.

(Interpreted) As for your question pertaining to the tariff change outlook for this year, as at of September 2016 we've had the changes in tariff. There has been requests to change tariffs for residential and education purposes and these changed tariffs will be reflected in the tariff system starting in 2017.

In the first half of this year, we will be reviewing further adjustment to the tariff system for further -- for changes in tariffs.

Thank you. I have one follow-up question. For the unit coal and LNG cost, do you have the forecast for first quarter this year?

(Interpreted) Yes, for the first quarter of 2017 our outlook for coal unit cost would be KRW110,000 per tonne; for LNG, it's expected to be KRW688,000 per tonne, and for oil KRW416 per liter.

Did that answer your question?

Yes. For coal first quarter, can I confirm it's KRW110,000?

(Interpreted) KRW110,000, that's correct.

Okay, thank you.

(Interpreted) The next question will be presented by Mr. Shin Ji-yoon from KTB Investment Securities. Please go ahead, Sir.

(Interpreted) My first question is regarding the consolidated earnings statement for the fourth quarter. Your other operating cost has climbed significantly year-on-year to KRW787 billion. I'm aware that it's regarding -- the hike has been regarding the provision -- increase in provisioning and labor cost and some from UAE business, but could you elaborate on the details of the increased operating cost?

(Interpreted) On your question regarding the increase of our other operating cost, as you have mentioned, some has been driven by the labor cost increase. We've had to hire a significant amount of manpower for UAE project, which is about 1,000 people.

The amount from the labor cost and the retirement payout amounted to KRW314.5 billion. And as the Government allocation and the emission right reduces, our cost for emission right has increased on a year-on-year basis to KRW151.5 billion. And the cost of the UAE project has also increased year-on-year by KRW72.4 billion.

(Interpreted) I have a follow-up question regarding the emission cost. Last year the emission cost, was it KRW79.8 billion? Is this the correct number?

(Interpreted) The number, I'm sorry, is KRW78.8 billion for the emission cost for last year.

(Interpreted) So how much of the revenue recognized in the fourth quarter for UAE -- fourth quarter cost for UAE project?

(Interpreted) The revenue for UAE project for the fourth quarter of 2016 is KRW979.6 billion.

(Interpreted) (Operator Instructions). The next question will be provided by Mr. Kim Joon-sung from Meritz Securities. Please go ahead, Sir.

(Spoken in Korean).

(Interpreted) The next question will be given by Ms. [Pac Sai Yung] from Nomura Securities. Please go ahead, Ma'am.

(Interpreted) My question is regarding REC cost. It seems that the year-on-year cost for REC has increased by twofold. What is your guideline for the year 2017?

(Interpreted) It's very difficult to have a firm guideline at this point. The base price will be determined somewhere around May 2017 so we will have to wait until May to have a good outlook on that. However, our emission volume will increase from 3.5% to 4%, which will further drive up the REC cost.

(Interpreted) The next question will be provided by Mr. Boris Kan from JPMorgan. Please go ahead, Sir.

Thank you, management. My name is Boris Kan from JPMorgan. I've got three questions. First, is actually on the renewable and clean energy CapEx. I just want to see if there's any guidance for this year?

Second question is I just want to check on any guidance for the dividend for this year?

Last one (inaudible) is on the other operating costs that we have seen, which is a significant increase, I just want to see how much of that is actually recurring and how much of that is one-off? Thank you.

(Interpreted) Let me please answer your second question first on dividend. For the fiscal year 2016 dividend, we are currently discussing with our Government, who is our largest shareholder. The details of the dividend payout will be determined somewhere around end of February, so we'll have some ideas then. But nothing has been determined and confirmed at this moment.

(Interpreted) To answer your first question on the CapEx for the renewable energy, currently what has been fixed and confirmed for the investment is KRW320 billion. The remaining is further in review at the moment and we plan to continue to expand our investment moving forward.

(Interpreted) To answer your third question on other operating cost increase, the cost on the increasing trend is the greenhouse gas emission cost. Our allocated quota for emission is going to increase and therefore the price of emission is going to increase alongside with it.

However, aside from that, the recurring cost and one-off cost for other operating costs is very difficult to segregate. I hope you understand.

Okay, thank you. Just one short follow-up question on the power -- purchased power. I just want to check for this year versus last year what will be the year-on-year change?

(Interpreted) To answer your question on the purchase -- power purchase, in 2016 the purchase power from the private sector has been 20%, but this year we believe there will be slight decrease to that because we're going to introduce some new base load, or base load generations for this year. However, currently there is a law that is pending in our national parliament regarding the power -- Electricity Business Act, so the future direction is currently not determined and it's to be seen.

Okay, thank you. I've no other questions. Thank you very much.

(Interpreted) Next question will be provided by Mr. Hur Minho from Shinhan Investment Corp. Please go ahead, Sir.

(Interpreted) I have five questions. First is on your other operating cost. You -- I missed the number, but you said -- what was the item for KRW151.5 billion in other operating cost? And what is your cost for the annual emission purchased cost -- or emission carbon cost for the -- this year?

The second question is regarding the other operating cost. You have explained about -- you explained KRW400 billion, but year-on-year your increase other operating cost was KRW800 billion, so how would you explain the remaining KRW300 billion to KRW400 billion? Where are these costs being incurred?

And third question is that there has been some news about limitation in the T&D capacity. Therefore, this might hamper your operation of five coalfired power plants. But you're also anticipating the energy mix of 53% to come from coalfired power plant. What is the rationale for that when your T&D capacity is expected to be limited? And for 2017, what do you believe would be your utilization for the coal power plant?

And fourth question is on the Shin Kori 4 nuclear power plant. When do you believe this power plant will be in operation?

The fifth and last question is regarding the IPP in Bupyeong. I believe that the contract has not been signed yet, but -- for generation -- when do you believe that this contract will come through?

(Interpreted) To answer your first question, the KRW151.5 billion for the fourth quarter was the cost from the greenhouse gas emission cost. On our annualized number for 2016, the number is KRW275.8 billion, which year-on-year increased by KRW197 billion.

(Interpreted) Follow up question to that is I heard that the carbon emission cost was KRW788 billion, but is this greenhouse gas emission cost different from the carbon emission cost?

(Interpreted) So the KRW788 billion that I mentioned is the emission cost for 2015.

On your second question, about other operating cost increase, you asked -- you enquired about if the remaining line items driving up the cost. Currently there are many line items involving other operating cost and we will -- I will be happy to get these numbers after this conference call. Thank you.

(Interpreted) Then is it true that there hasn't been a stiff increase in one-off cost in the fourth quarter?

(Interpreted) Yes. As of now there hasn't been any -- or one-off cost increase that we have seen for the other operating cost.

(Interpreted) Regarding your question on Bupyeong power plant, IPP, it's -- the date for its operation or introduction is rather being delayed at the moment, and it's difficult to forecast when it will be in operation.

And on your fourth quarter (sic - "question") regarding when Shin Kori 4 nuclear power plant will be in operation, the scheduled date as of now is November 2017.

(Interpreted) To answer your third question, we believe that with the introduction of the new coal power plant there would be some limitation in the transmission and distribution capacity of somewhere around 2,500 megawatt to 3,000 megawatt. This is expected T&D capacity limitation, but this will also be influenced by the load of the time and also the availability of other power plant.

(Interpreted) The follow up question to that is that in your generation mix forecast of 53% of coalfired power plant are you incorporating this 2,500 megawatt to 5,000 megawatt into this assumption? What is your assumption for coalfired power plant and nuclear power plant utilization?

(Interpreted) To answer your question, the overall generation capacity derived from the coalfired power plant in 2016 to 2017 was 8 gigawatt to 9 gigawatt. So with this 250,000 -- 2,500 megawatt to 8,000 megawatt capacity I believe the impact will be minimal to overall capacity that is available through coalfired power plant. Therefore, the generation mix increase for coalfired power plant is expected for this year.

And as for the utilization, it's very difficult to have an estimation for that, but looking at our historical numbers, we believe it will be somewhere around mid-80% level.

So the assumption of 53% generation mix for coal includes, I believe, 2.5 gigawatt to 3 gigawatt of our power capacity, but I will check on that number and get back to you.

(Interpreted) Another follow-up question is on the REC annual purchase cost. Could you give us the number for it consolidated and non-consolidated number?

(Interpreted) To give you the number -- annual number for REC purchase cost for 2016, the non-consolidated number is KRW1.4104 trillion, and for -- and our consolidated number it's KRW8.8 trillion (sic - "KRW883.6 billion") -- I'm sorry, for the consolidated number it's KRW883.6 billion.

(Interpreted) Next question will be given by Ms. Pac Sai Yung from Nomura Securities. Please go ahead, Ma'am.

(Interpreted) I have a follow-up question. In the last month, our CEO forum, your CEO stated that the operating profit for 2017 compared to 2016 will be high by about KRW2 trillion due to tariff decline as well as emission cost increase. Is this number still valid at this point?

(Interpreted) At the forum CEO raised concern for the skyrocketing coal price for 2017, which might negatively impact our financial performance. However, if the coal price stabilizes, along with the foreign exchange rate, yes, that is the level of performance we're expecting.

(Interpreted) Next question will be provided by Mr. Ryu Jae-hyun from Mirae Asset Daewoo. Please go ahead, Sir.

(Interpreted) My first question is regarding the nuclear power plant. It seems that the utilization rate of the nuclear power plant is lower than anticipated. Recently the number was higher than the 80% level, but the number as I calculate it is not to that level. I'm sure this number would increase gradually, however, why do you believe that it is down, and what is your guide? My question is regarding the guideline for nuclear power plant utilization for the first quarter and throughout the full year next year.

And second question is although I believe that this is not an easy question to answer, but currently your amendment on the Electricity Business Act is pending in the National Assembly. Do you know the rough timeline as to how this will proceed?

(Interpreted) To answer your first question, due to the earthquake in Gyeongju area, we had to stop operation of works on Number 1 and Number 4 power plant until mid of November, which was actually a delayed -- [than] delayed than plan.

That's why in the fourth quarter the nuclear power plant utilization number was as low as 66%, contributing to 2016 overall nuclear power plant utilization number to low 80% level. And that also had driven up our purchased electricity cost.

In 2017 we anticipate the nuclear power plant utilization to be at 83% level, but we don't currently have the breakdown level by each quarter.

As for the [fourth] quarter, there still is a concern over the earthquake, therefore it will take some time for us to recover the utilization level to the mid-80s level. So in the [fourth] quarter we still expect the number to be around 83% level.

So this amendment of the Electricity Business Act proposed by National Assembly man Byoung-wan Chang, is currently pending in National Assembly. In the ad hoc National Assembly session in February, the current agenda for that ad hoc session has not been determined yet, so we do not currently know when the amendment will be in review within the National Assembly.

(Interpreted) Next question will be given by Mr. Hur Minho from Shinhan Investment Corporation. Please go ahead, Sir.

(Interpreted) I have a follow-up question and if there is someone from KHNP, I hope you can pick up this question. You said that you have hired a UAE project human resource by 1,000 this year, resulting in a total of 3,145 people within the Company. So, was this increase in human resources limited to this quarter alone?

And if I may just calculate the overhead is about KRW300 million per headcount. So I do not understand how this -- I don't have visibility into how this number could be so large. And this year there has been some report that there will be additional 600 recruitment of manpower, so how would that impact your overall cost structure?

(Interpreted) To answer your question, the KRW314.5 billion is an annualized number, including both the KEPCO and all our subsidiary companies. As limited to KHNP, we have added 1,048 manpower to the Company, but this number is an annualized number, which is then higher for throughout the year, so the overall KRW300 billion increase in manpower includes both KHNP as well as the overall Group.

(Interpreted) Currently there are no participants with questions. (Operator Instructions).

(Interpreted) We will be accommodating one last question before we close our session.

(Interpreted) The last question will be given by Ms. [Pum Sujin from K1]. Please go ahead, Ma'am.

(Interpreted) I have a follow-up question regarding the KHNP's increased labor cost. As far as I understand, the operation contract between UAE and KHNP, state that -- according to a news article -- that all the labor cost will be absorbed by the UAE side. And there has been report that the compensation will be KRW300 million per headcount. I know that this contract will be enacted as of May of next year. So after May of next year, will this cost be waived from your accounting book? How will that be reflected?

(Interpreted) On that question, we would like to get back to you in a follow-up session, after receiving an answer from KHNP side.

(Interpreted) Thank you for attending today's conference call. With that, we would now like to conclude our earnings session. Thank you.

(Interpreted) This concludes the fiscal year 2016 fourth quarter earnings result by KEPCO. Thanks 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.