Korea Electric Power Corp (KEP) 2017 Q2 法說會逐字稿

(foreign language) Good morning, and good evening. First of all, thank you all for joining the conference call. And now we'll begin the conference of the fiscal year 2017 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 2017 second quarter earnings results by KEPCO.

(foreign language) Good afternoon. This is Jong-Soo Kim, Director General of Treasury Department 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 half of 2017.

(foreign language) We will begin with a brief presentation on the earnings results, which will be followed by a Q&A session. Today's call will be proceeded in both Korean and English.

(foreign language) 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 are based on our current expectations and plans. Please be noted that such statements may involve certain risks and uncertainties.

(foreign language) Now Ms. Yoonhye Cho, Senior IR Manager, will begin with an overview of earnings results for the first half of 2017, first in Korean and repeat in English.

(foreign language) Now we will provide you overview in English starting with operating income. In the first half of 2017, KEPCO recorded a net operating income of KRW 2.31 trillion. Taking a closer look, operating revenues decreased by 3.1% to KRW 28.07 trillion. This was attributable mainly to 1.7% decrease in power sales revenue, totaling in KRW 25.65 trillion and 15.8% decrease in revenue from the overseas and other business, amounting to KRW 2.42 trillion.

Moving on to main operating costs. COGS and SG&A expenses increased by 13.7% to KRW 25.76 trillion. Fuel cost increased by 16.7% to KRW 7.66 trillion, mainly due to a 20.2% rise in unit cost of fuel. Meanwhile, purchased power cost increased by 32.5% to KRW 6.94 trillion. Introduction of the highly efficient IPPs and decline of utilization ratio of nuclear power plants caused the purchased power volume to increase by 21.2%. Moreover, the unit cost of purchased power also rose by 9.2% due to the rise of unit cost of fuel and SMP.

Depreciation cost rose by 14.2% to KRW 4.25 trillion, mainly due to the newly introduced power plants and transmission and substation facilities. Maintenance cost went up by 10.3% to KRW 945 billion, attributable to increased facility investment and a scheduled overhaul.

Now let me explain KEPCO's nonoperating segment. Net financial loss was KRW 723 billion, decreased by KRW 47 billion compared to net loss of KRW 770 billion of last year. As a result of the foregoing, we recorded a consolidated net income of KRW 1.26 trillion, decreased by KRW 2.67 trillion from KRW 3.93 trillion in the previous year.

(foreign language) This concludes the overview of KEPCO's earnings results for the first half of 2017. Now let us move onto the Q&A session. Q&A session will be hosted by Director General, Jong-Soo Kim.

(foreign language) 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. (foreign language) Since we will proceed the Q&A session in both Korean and English, please make your questions and answers brief and clear. (foreign language)

(foreign language) (Operator Instructions) (foreign language) The first question will be given by Michelle Ho from Citigroup.

I have 4 questions. The first question is regarding the unit cost for coal, LNG and oil in 2007, in 2018 -- 2017 and 2018. And the second question is regarding the generation mix breakdown by fuel in 2017 and 2018. And also the power purchase mix from IPP this year and next year. The third question is regarding the nuclear and the coal utilization rate this year and next year. And my last question is there are some news that there might be industrial commercial tariff hike next year, so I'm wondering if you could share any of your opinions on the progress or any details that have been released. (foreign language)

(foreign language) To answer your question on the fuel unit cost by different fuel types, for coal, I would believe the unit cost in 2017 will be KRW 119,900 per ton. For LNG, it is KRW 668,800 per ton. And for oil, it is KRW 519.7 per liter. (foreign language) And as for 2018 numbers, currently, we do not have concrete numbers for 2018 yet. (foreign language) As for your second question on generation mix, for 2017, nuclear power will be 28%; coal, 42%; LNG, 19%; and oil, 4%. And for other generation such as hydropower and renewables, it will be 8%. (foreign language) So the numbers that I have just shared is based on capacity mix. In terms of generation mix, nuclear will be 40%; coal, 53%; LNG, 5%; oil, 1%; and other types such as hydro and renewable will be 2%. (foreign language) As for now, we do not have forecast for 2018. (foreign language) As for your third question on the power purchase from IPPs, if you look at our power purchase mix from IPPs in the first half of 2017, it was 23%. And moving forward, we believe the power purchase from our GENCOs will increase, and therefore, purchase from IPPs will decline over time. (foreign language) As for the utilization for nuclear and coal-fired power plants for 2017, we believe utilization for nuclear will be 17%. Coal will be 77%; and for coal-fired power plant will be somewhere around early 80s percent level; and LNG and combined generation power plants will be 20% to 30%.

(foreign language) As for your last question on the likelihood of increasing tariff for the industrial sector, and to answer that question as well as our forecast for ongoing tariff adjustment for the future, this will be determined mainly on the eighth power supply plant that will be -- going to be finalized soon. So once that eighth power supply plant is finalized, we will be able to have visibility into how the tariff will be adjusted. And our increasing industrial sector tariff will be based on various consideration such as improving excessive use of industrial sector usage at the moment and trying to curve that excessive use in the industrial sector. And we will be also considering burden on the Korean people, as well as KEPCO's financial ability to cover this kind of cost as a burden.

(foreign language) The following question is by Anna Park from Macquarie Securities.

(foreign language) I have one question, and thank you for giving me the opportunity to ask question. In the second quarter, your utilization for coal-fired power plant, it was as low as 69.4%. And what is the reason behind that? If you can share insight into the reason behind it. And in the third and fourth quarter, do you -- how much of this utilization rate will pick up? And if so, what would be the magnitude of increased utilization?

(foreign language) To answer your question on why the utilization for coal-fired plant was low in the second quarter, it's actually based on how we calculate utilization. But to answer that, in the second -- in the first half, if you look at the utilization, we had to go through preventive maintenance for the spring season. That's why the utilization was lower. And also, we had to suspend operation of old coal power plant in the first half. (foreign language) And second, for statistically -- for statistics purpose, if we introduce a new power plant during the quarter, we reflect the utilization rate climbing back to the earlier quarter from the beginning of the quarter. So that's why the numbers might seem little bit higher than anticipated. However, the exact and concrete numbers will be given to you after we calculate this.

(foreign language) And in -- going forward, in the fourth -- third and fourth quarter, we believe the utilization will increase compared to the first half because the nonpeak season is relatively shorter than the first half. Therefore, the preventive maintenance period will be shortened.

(foreign language) The following question is by Boris Kan by JP Morgan.

I actually got 2 questions. One is, I just wanted to see if you could repeat the unit fuel cost guidance for each of the coal, LNG as well as oil. As I wasn't able to actually catch up the numbers earlier. Sorry about this. Second question is actually regarding the tariff situation. I understand that you mentioned earlier that the tariff will likely be decided after the eighth LNG plant. But I just want to see, as far as I know, the normal progress for tariff negotiations actually starts now as been previously, so I just want to see are there any changes on the logistics this year? And how is the development goes? And any chance of a tariff hike for this year? (foreign language)

(foreign language) To answer your question on the unit price of different fuels, as for coal, for 2017, the unit cost will be KRW 119,900 per ton, and this price includes special consumption tax for bituminous coal as well as other related taxations. And the base calorie involved is 5,500 kilocalorie. (foreign language) For LNG, the unit price for 2017 is expected to be KRW 668,800 per ton. (foreign language) And for oil, the price will be 919 -- KRW 519.7 per liter.

(foreign language) To answer your second question on the tariff and possible changes involving logistics around tariff process is that as far as at this stage, there isn't going to be changes in how we proceed with tariff calculation and tax filings. Recent issue has been that government has policy to grow free-of-nuclear power and expand renewable energy. But all these recent (inaudible) you need to consider alternative power source as well as demand in the market and also the overall energy market and energy price trend. So at this moment, all of these issues are not being reviewed. But details of these issues will need to be reviewed alongside with the eighth power supply plant that was going to be pursued by the government. That eighth plant will reflect all the government policies around nuclear free policy as well as expanding renewable energy source. So everything will come after the eighth power supply plant is finalized.

(foreign language) The following question is given by Minho Hur from Shinhan Investment.

(foreign language) The following question is by Yang Jihae from Samsung Securities.

(foreign language) I have 3 questions. First is, during this weekend, there was a news article describing that we will recommence the construction of Shin Kori No. 5 and sixth nuclear power plant, and there -- instead shutting down the nuclear power plant No. 1 and No. 2 as well as Hanbit nuclear power plant. How feasible is this new -- this scenario? And if this is feasible, and if this is to proceed, how would you treat the depreciation cost of these 4 reactors that is going to be terminated? And second question is, could you share with us the revenue and operating profit from UAE business? And third question is on the unit cost of fuel. Could you share Q2 specific unit cost for fuel, not an aggregate fuel cost for each of the fuel units?

(foreign language) To answer your first question on the nuclear power plant, the current discussion is between the ruling party and the government. So the discussion -- question is going on at the moment, and KEPCO has not reviewed or have had any discussion around that topic yet. (foreign language) To answer your question on UAE's revenue and operating profit, the revenue for Q2 was KRW 731.3 billion and operating profit is KRW 56.8 billion. (foreign language) To give you the answer for the Q2 unit cost of fuel, coal was KRW 121,000 per ton; LNG, KRW 629,000 per ton; and for oil, it was KRW 520 per liter.

(foreign language) The following question is by (inaudible) from T. Rowe Price.

I just have 2 questions. One was on the nuclear utilization rate. So last quarter, company had guided that utilization rate will move up to 83% and then 85% to 88% Q3 and Q4. But Q2 is still only comes 75%. So can you explain what is the problem there, and is it a temporary problem or will take longer? And how do they see the utilization rate in nuclear for Q3 and Q4 and also Q1 2018? My second question is on overseas revenues and profits. I remember, in Q1, there was an issue with the ForEx translation. So profits were not as good. I just wanted the idea of how the profit has come through in Q2. (foreign language)

(foreign language) To answer your first question on why the utilization of nuclear power plant was so low in the first half of this year is that we had to go through some safety measures, take care issues such as corrosion issues within our hangar facility And therefore, our plant stoppage or plant maintenance stage was increased by incremental 531 days from 549 days. (foreign language) As for our forecast for the second half is that -- or in the third quarter, we expect the utilization to be 73%. And in the fourth quarter, the utilization is expected to be 85%. (foreign language) The reason the utilization is low in the third quarter is that we have a continued safety measure taken place in the conversion of our hangar facility, but this will be concluded within third quarter. And starting within the fourth quarter, we believe the utilization will pick up and recover to its normal level.

(foreign language) In the second quarter of 2017, our overseas revenues stands at KRW 885 billion. And year-on-year basis it's -- if you look at the previous year's revenue, it was KRW 1,020,900,000,000 so it's down by some KRW 130 billion at the moment. The reason behind that is the revenue from UAE project was down by KRW 16.7 billion due to delayed progress.

So I just wanted to check because (inaudible) was saying that the UAE revenue has to come down because what is -- I guess based on the execution rate. But the other cost was also supposed to come down in proportion. So even after KRW 130 billion is down, why are the other cost not down by KRW 130 billion? (foreign language)

(foreign language) To answer that question, if you look at the revenue for UAE, last year, in the second quarter -- compared to the last year's second quarter, it is down by KRW 160.7 billion. And the COGS for UAE project is also therefore down by KRW 146.4 billion as well.

(foreign language) The following question is by Hur Minho Hall from Shinhan Investment.

(foreign language) So I have a couple of questions. Following the first quarter, if you look at the second quarter, the power sales number and power metered number has some gap. Is it because there has been a lot of test trial run in the (inaudible)? So what is the reason behind this discrepancy? Second question is, so there have been some question -- the question is around the utilization of the nuclear power plant, and there has been numbers in the data sheet that Shin Kori No. 2 will commence its operations in September, but there was no number for Shin Kori No. 4. If Shin Kori No. 4. commencement will be pushed out to next year, how would that affect the -- is there any likelihood that it will be out next year affecting the overall nuclear utilization? Next question is that there was a talk that in this year we'll be recalculating and resetting the nuclear power plant decommissioning or some provisioning for decommissioning of nuclear power plant. So there might be some cost increase regarding the nuclear power plant decommissioning. And if this calculation were to take place in the fourth quarter, is there any possibility that this provisioning number will significantly increase? Also, we need to have some -- do some forecast into dividend payout trend. So could you share with us some of the adjustment coefficient number for July? At least, share some directions on how this is going. And also, the last question is on the REC and carbon emission cost and provisioning numbers for the second quarter.

(foreign language) So to answer your first question on why the revenue on the consolidated financial statements and stand-alone financial statement is different is because when we convert this to a consolidated financial statement, we have to reflect the tier 1 profit of the GENCOs. And compared to last year's Q2, the overall cost increase is KRW 28.7 billion. (foreign language) To answer your last question first. On RPS cost, on a consolidated basis. Q2 cost of RPS is KRW 331.8 billion. And on a stand-alone basis, the RPS cost is KRW 399.1 billion. (foreign language) As for the cost of greenhouse gas emission on a consolidated basis, in this quarter, our cost is negative KRW 20.5 billion. On a stand-alone basis, it's KRW 71.6 billion. (foreign language) The reason the number for the consolidated emission cost is negative it's because we have to settle 2016 actual emission in 2017 account books. So our forecast and the GAAP for our forecast versus the actual emission was reflected in a consolidated statement. (foreign language) To answer your second question on introducing base generation capacity, as for Shin Boryeong coal-fired power plant for 2017, it is correct that we will be adopting and introducing that in September of this year. As for Shin Kori No. 4, the initial schedule was to introduce this power plant in November of 2017, but it was pushed out to September 2018 due to reasons as delay in overall construction progress as well as delay in getting permission for operation.

(foreign language) The following question is by Shin Jiyoon from KTB Securities.

(foreign language)

(foreign language) To answer your third question on the accounting procedures and processes for nuclear power plant, decommissioning provisioning is that we believe once these accounting procedure changes by end of this year, inadvertently, there could be some increase or upward increase for nuclear power plant decommissioning per nuclear or power plant unit. However, we also have to think about how we reflect and recognize cost for the inflation as well as discount rate as well. So there's still some open questions there. So currently, we do not have focused ability into how this will unfold.

(foreign language) The following question is by Shin Jiyoon from KTB Securities.

(foreign language) The previous question on the adjustment coefficient number was not answered, but I'm also curious about those numbers because that gives us some views into stand-alone profit level and income level of different subsidiaries. So it will be great if the management can share that number. My second question is on the unit sales price of each of the power usage. In Q2, for residential sector, the sales -- unit sales price was brought down by negative 13%, while industrial sector price was increased by 2%. There has been some rollout of progressive tariff structure for residential usage, which was reflected and applied in second and third quarter of last year and we believe these numbers will reflect in the third quarter, but -- and therefore, that will reduce the overall unit sales price. That was the anticipation. But if you look at the core -- 4 quarters on a consecutive level, the unit sales price has increased on a 4 consecutive quarter level as well. So in the third quarter, should we expect this unit sales price to also go up as well?

(foreign language) To answer your question on the adjustment coefficient. In the first half, what we have seen unexpected maintenance issue with the -- maintenance problem with nuclear power plants. So the planned stoppage for nuclear was prolonged. And inevitably, we had to readjust the adjustment coefficient. However, in the second half, we believe compared to the first half, the coefficient will be downwardly adjusted. Therefore, overall profit will be improved.

(foreign language) To answer your second question. The summer discount for power price was conducted between July and September of last year, and in the end of last year the progressive system was introduced and we expected to see the unit price or sales price to go down by 14.9%. And including the [wealth] there and discount for unprivileged sector, we believe the further discount or decline will be 17% to 18%. We believe the overall unit sales level, price levels will be somewhat similar to last year's level, but we do not -- unfortunately, we do not forecast such price level within KEPCO. (foreign language)

(foreign language)

(foreign language) To answer your question on the industrial sector price increase is that the price increase for industrial sector could be somewhat driven by overall power assumption and power consumption pattern going up for the industrial usage. But recently, there hasn't been any adjustments when it comes to industrial tariff. So it's difficult for us to anticipate and predict why this has been the case, and we do not have any unit sales price forecasted for the third quarter yet.

(foreign language) Currently, there are no participants with questions. (Operator Instructions) (foreign language) The following question is by Shin Seung Yong from Goldman Sachs.

(foreign language) I have 2 short questions. The first question is on your progress to date on public offering of your subsidiary. How is that going so far? Second question is on Shin Kori No. 5 and No. 6 power plant. How much CapEx has been injected to date? And if this construction is suspended, what will be the impact or debt borne by KEPCO if this construction is to be suspended.

(foreign language) To answer your question on the progress of public offering of our subsidiary is that we have selected the lead underwriters, and they have done due diligence and public offering preliminary review process but for the KOSEP Korea Southern power plant as well as Korea's East and West Power plant, EWP. However, there needs to be adjustment for the adjustment coefficient as well as we have to take into consideration the suspension of coal-fired plant operation. So all of these outstanding issues will be closely coordinated and reviewed with the government, and we will proceed after considering all factors with the public offering.

(foreign language) To answer your second question. for Shin Kori No. 5 and No. 6, the existing CapEx injected for this power plant is KRW 1.6 trillion. At the moment, we have the ad-hoc special committee discussion going on, and we haven't still decided on who would bear the cost of the construction suspension yet. So I regret to say that it's very difficult to share with you the level of debt that will be involved once this is haulted in the process.

(foreign language) We will be accommodating just one more question before we close this earnings conference call.

(foreign language) The following question is by Tina (inaudible) from T. Rowe Price.

I just wanted to ask about the progress of the policy to close the old coal-fire power plant for 1 month this year, 4 months next year. Have anything been decided yet on that policy? And assuming it's not incremental in second half this year, what coal-fired utilization rate can we expect for second half '17? And the second question was just on the U.K. nuclear power plant as well whether there's any update on KEPCO's due diligence regarding that deal? (foreign language)

(foreign language) To answer your first question on shutting down old coal-fired power plant is that we have a spring shutdown for coal-fired power plant. But however, this is not scheduled for the second half of this year. Next year, in the spring season, we will also have temporary shutdown for coal-fired power plant -- for old power plant. And our annualized impact on overall utilization, I believe, will be 2.5% to 3%.

(foreign language) To update you on our progress with the U.K. nuclear power plant is that currently, we are in the process of conducting due diligence. The final findings of that due diligence and reports, relevant reports will be released in October.

(foreign language) With this, we will do now like to conclude our earnings conference call. Thank you for your attendance.

(foreign language) This concludes the fiscal year 2017 second quarter earnings results by KEPCO. Thanks for the participation.