Korea Electric Power Corp (KEP) 2017 Q3 法說會逐字稿

(foreign language) 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 2017 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 2017 third quarter earnings results by KEPCO.

(foreign language) 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 earnings results for the third quarter of 2017.

(foreign language) We will begin with a brief presentation on the earnings results, which will be followed by our 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-over-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 third quarter of 2017, first in Korean and repeat in English.

(foreign language) Now we will provide the overview in English, starting with operating income. In the third quarter of 2017, KEPCO recorded a net operating income of KRW 5.08 trillion. Taking a closer look, operating revenues decreased by 1.4% to KRW 44.26 trillion. Our sales revenue increased by 0.4% to KRW 40.77 trillion, while revenue from the overseas and other businesses decreased by 19.1% to KRW 3.49 trillion.

Moving on to main operating costs. COGS SG&A expenses increased by 14.7% to KRW 39.18 trillion. Fuel cost increased by 19.2% to KRW 12.0 trillion, mainly due to a 21.9% rise in unit cost of fuel. Meanwhile, purchased power cost increased by 35.7% to KRW 10.39 trillion. Introduction of highly efficient IPPs and decline of utilization ratio of nuclear power plants caused the purchased power volume to increase by 22.8%. Moreover, the unit cost of purchased power also rose by 10.3% due to the rise of unit cost of fuel and SMP.

Depreciation cost rose by 12.6% to KRW 6.45 trillion, attributable to newly introduced power plants and transmission and distribution facilities. Maintenance costs went up by 13.2% to KRW 1.46 trillion, mainly due to increased scheduled overhaul with newly introduced power plants and preventive inspection of transmission and disposition facilities.

Now let me explain KEPCO's nonoperating segment. Net financial loss was KRW 1.17 trillion, decreased by KRW 24 billion compared to net loss of KRW 1.19 billion of last year. As a result of the foregoing, we recorded a consolidated net income of KRW 2.88 trillion, decreased by KRW 3.99 trillion from KRW 6.87 trillion in the previous year.

(foreign language) This concludes the overview of KEPCO's earnings results for the third quarter of 2017. Now let us move on to the Q&A session. Q&A session will be hosted by Jong-Soo Kim.

(foreign language) This is Jong-Soo Kim, I'm joined with our IR committee members in charge of major business areas at KEPCO. We are prepared to take any questions. (foreign language)

(Operator Instructions) (foreign language) The first question will be given by Pierre Lau from Citi.

I have 3 questions. The first one is what is your unit fuel cost guidance for 2017 and '18 in terms of unit coal, unit LNG and unit oil costs? And also, why your unit purchased power cost was up in the first 9 months year-on-year when unit LNG cost was down year-on-year? Second question, what is your generation mix in 2017 and '18 in terms of percentage from coal, nuclear, LNG and oil? And finally, question number 3, what is your expectations for your -- the utilization rate of your nuclear power plant in fourth quarter 2017 and 2018? (foreign language)

(foreign language) To give you guidance for the unit fuel cost in 2017. For coal, it's KRW 120,500 per ton, LNG is KRW 665,201 per ton and for oil, it's KRW 481.5 per liter. (foreign language) And for 2018, currently we do not have the guidance for unit fuel costs for 2018 at the moment. (foreign language) And the reason that the coal unit fuel costs for the third quarter is still high is that last year, we experienced a massive surge in the coal price, and that price trajectory is currently maintained until this year. (foreign language) It seems that the LNG price is currently going down as a trend, but if you look at the LNG purchase cost, it is linked and connected with the oil price -- international oil price, and there is certain time gaps for this fuel price to be reflected in our current LNG purchase cost, which is about 5 to 6 months in terms of time gaps. (foreign language) So the international oil price has been at a very high level, but in the first half of this year, it has somewhat lowered to a lower level, and that's why LNG seems -- LNG purchase cost seems to have a lower trend in terms of purchase cost because of this factor. (foreign language) Our generation mix expectation for 2017 for nuclear is 36%; coal, 53%; and LNG, 8%. (foreign language) For our nuclear power plant utilization rate, for fourth quarter, we expect the utilization rate to be at 70% level and on an annualized number, it will be 72.3% (foreign language) And we do not have the forecast for 2018 for nuclear power plant utilization at the moment.

Okay. Just one short question, although you do not have nuclear power plant utilization for next year, do you expect the utilization next year to be higher or lower than 2017? (foreign language)

(foreign language) So I believe the utilization level will increase from the low level we have at the second half of 2017 and recover in the coming years.

Okay. And for the generation mix that you just said: 53% for coal, 46% for nuclear, are they for 2017 or 2018? (foreign language)

(foreign language) Yes, it's for 2017.

Okay. And do you have a number for 2018? (foreign language)

(foreign language) Currently, we do not have the forecast for 2018.

(foreign language) The following question is by -- okay, currently there are no participants with questions. (Operator Instructions) (foreign language) The following question is by Jay Yoo from Merrill Lynch.

(foreign language) So first question is regarding the nuclear power plant. There would be a commencement of the power plant project for Shin Kori 5 and 6, and there will be also new projects being announced as -- the eighth power electric supply and demand plan will be announced by the government. Mainly, I'm now talking about costs involved with Shin Kori 5 and 6 nuclear power plants. When and how do you believe these costs will be accounted on your books? And after Shin Kori's project, you will be launching a Shin Hanul project, and how do you view that this project will proceed going forward? And there has been some taxation issues with KHNP where the government is now charging additional taxation for KHNP to recall on the tax that is needed to be paid. When do you believe that this tax will be reflected? And will it be reflected in the third quarter or the fourth quarter? The second question is on the increase of oil price. When do you believe that an increased oil price will be reflected on your fuel cost as the -- and when do you believe the government will restart this fuel cost pass-through system? And the third question is on the tariff increase prospects for industrial usage. When do you believe that this industrial tariff will be increased? Will it be next year?

(foreign language) So first of all, on Shin Kori 5 and 6 nuclear power plants, there has been suspension of the project for almost 3 months and the expected loss amount from that is expected to be somewhere around KRW 100 billion. We're currently discussing with our vendors and partner companies to listen to their request and having legal review to come up with final compensation for the suspension of the project. (foreign language) Currently, we are discussing ways and methods to reflect this loss on our accounting books, so it has not been determined. But the timing for reflecting this on our book will be -- could be as soon as December. (foreign language) And as for the new nuclear power plant projects, such as Shin Hanul 3 and 4 and Cheon-Ji 1 and 2, and following the cancelation of these new power plant projects, nothing has been determined yet. But however, we are going through legal review, and we're going to do some detailed diagnosis and evaluation to come up with a number if necessary. (foreign language) And as for the loss and cost incurred due to suspension of the project, the cost incurred in principle will be supported and supported by the government. So this is something that we will have to wait and see how it unfolds. (foreign language) Regarding the tax payment, we've gone through the tax audit in 2017, and the expected tax addition of -- due to that audit would be KRW 37 billion and this will be accounted for through our deferred corporate taxation.

(foreign language) Currently, as for the cost pass-through tariff system, we have -- we are currently conducting a consulting project to come up with a detailed implementation plan. Once it's completed, we'll be going through some pilots to simulate the cost pass-through tariff system. And once that approach is finalized, we'll be discussing with the government for final rollout. (foreign language) As for the industrial tariff, we believe it has normalized to a reasonable level as of now. But in times of low peak area, we believe the tax rate is still low, so there is some controversy over excessive consumption of -- during the low peak area. So when the tariff is recalculated, we would like to rationalize to a different time level to make it reasonable even during the low peak area. Such method will be reviewed but, however, the timing of that is still undetermined.

(foreign language) The following question is by Sanghi Han from Deutsche Securities.

This is Sheena from T. Rowe Price. Yes. I just want to ask you on the coal power plant as well. What's the utilization in quarter 3? And what do you expect utilization in Q4 and in 2018? And also if you could talk about IPP purchased power percentage?

(foreign language)

(foreign language) As for the coal power plant utilization, the utilization rate for the third quarter has been 83.1%, and we expect the utilization to be around -- somewhere around 80% in the fourth quarter. (foreign language) For IPP purchase ratio, accumulated level up until third quarter has been 23%, and we expect 23% to be the level until the end of 2017.

Okay. And 2018 guidance on coal utilization and IPP percentage? (foreign language)

(foreign language) We currently do not have the guidance for 2018 at the moment.

Okay. And I guess, given this outlook, coal cost, LNG cost, oil cost has been going up. And also President Moon has made some changes to the fuel mix, reduced the coal nuclear percentage. So KEPCO's fuel costs have gone up. So what is the outlook into next year for compensation for change in fuel mix? When will they do the tariff review? And what is the company's confidence in the adjustment of the tariff? (foreign language)

(foreign language) So in principle, every year, we submit our total cost. And if there is factors that used to drive the tariff up, we will discuss that with the government to adjust tariffs.

Okay. And the same procedure for next year, when will we be doing this exercise? (foreign language)

(foreign language) So every year at the end of June, we are expected to submit our total cost to the government. And after the total cost budget is submitted to the government, then we will have discussion with the government whether to adjust tariff or not.

Okay, so this year's exercise has been completed? (foreign language)

(foreign language) So we did submit the total cost budget for this year at the end of June, and the government is currently in the process of reviewing this document, and nothing has been confirmed or finalized yet.

Okay. And just one last question, so is the company having to review its dividend payment, the dividend policy as a result of this increase in cost this year? (foreign language)

(foreign language) As for dividend payout, the dividend payout policy is not determined or reviewed by KEPCO but the government sets targets when it comes to dividend payouts and they also consider KEPCO's current business environment and the CapEx situations to come up with the final decision.

(foreign language) The following question is by [Er Ma] from Citibank Hong Kong.

This is [Er] from Hong Kong. And just now you mentioned that maintenance cost has increased in third quarter. And I would like to ask for the status of the unit clear -- the nuclear units undergoing overhauls. Is there any new plans suspended for maintenance or any previously suspended plans has resumed operations in third quarter? (foreign language)

(foreign language) Regarding the repair and maintenance cost increase in third quarter, the increased amount is KRW 82.8 billion on a year-over-year basis. KEPCO-driven increase was KRW 58.2 billion and GenCos-driven increase was KRW 29.2 billion. And the reason, the drivers of this cost increase for KEPCO was that the overall maintenance of volume as well as labor cost, labor unit cost has increased. And for GenCos, they have been launching new coal-fired power plants, therefore, their maintenance volume has also increased as a result. But the increase in maintenance and repair cost has not been driven by the overhaul in nuclear power plants.

(foreign language) The following is Seong-Jin Kang from KB Securities.

(foreign language) I have 3 questions. The first is that at the end of the year, do you plan to readjust the adjustment coefficient? And second question is that the consumption tax for bituminous coal has increased. And was that increased taxation reflected in your unit coal cost in the third quarter? If not, when do you believe that this increased consumption tax will be reflected on your unit coal fuel costs? Third question is Wolsong 1 plant is going to be shut down in 2023, according to current schedule. But there is likelihood that it could be shut down earlier than its useful life. If so, from a technological standpoint, when do you believe it is feasible to shut down Wolsong 1?

(foreign language) On the adjustment of coefficient, we -- currently, there has been an increase in plant maintenance for nuclear power plants. So we're planning to do the recalculation of the coefficient again in December, but nothing has been confirmed yet. (foreign language) Regarding Wolsong 1 plant, we -- currently, we haven't received any official request or notification from the government to shut Wolsong 1 earlier than scheduled. When the notification does arrive from the government, we will conduct our legal review and come up with the relevant plan. (foreign language) Regarding our coal consumption tax, we -- the consumption tax has been inactive since 1st of April this year.

(foreign language) A follow-up question to that is that, first of all, if the coefficient is going to be adjusted, do you believe the coefficient will be increased or decreased? If you can talk about the trend, that would be great. Second is if the consumption tax for bituminous coal started 1st of April, do you believe there will be a 5- or 6-month gap to reflect this consumption tax? Or will it be effective immediately?

(foreign language) On the direction for the coefficient level, currently, we have gone through -- we're going through the overhaul of the nuclear power plant, and we need to compare the fuel cost of GenCos as well as KEPCO's purchase cost. And depending on whichever is higher, we will decide on the side of -- the favorable side. But currently, the -- nothing has been decided when it comes to suspension of nuclear power plant operations, so it's very difficult for us to say whether it will increase or decrease at this moment. (foreign language) On the consumption tax for bituminous coal, the cost just starts when the coal is imported through our customs. And usually, the coal is coming through our shores. And when it comes through our shores, it takes about 5 to 20 days until it is included into our generation -- power generation plants. So there's about 5 to 20 days of lapse.

(foreign language)

(foreign language) So for the coal consumption tax, it has been reflected starting April of this year, and there is also a reform -- there is also an amendment to the -- coal consumption tax amendment that is currently going through the National Assembly at the moment.

(foreign language) The following question is by Dong Jin Kang from Hyundai Motors Company Investment Securities.

(foreign language) I have 2 questions, one is on your depreciation cost going up on a year-on-year basis. And next year, we're -- there's also expected to see some baseload generation coming in, so do you believe that depreciation cost for next year will also go up? So it would be great if you can share depreciation cost guideline for next year. And second question is any -- is there anything that you can update us on the U.K. on nuclear power plant due diligence?

(foreign language) On your first question, currently, we don't have any guidance for depreciation cost at the moment. (foreign language) On the updates of the U.K. project, currently, the U.K. government has selected ARR of 1,400, and this was selected July of last year. Currently, we are conducting due diligence through our advisers, and we have received our -- we have submitted our indicated offer at the moment.

(foreign language)

(foreign language) The following question is by Giuseppe Jacobelli from Bloomberg Intelligence.

First question is do you have any outlook on the unit price for the fourth quarter? It was KRW 106.7 in the first half. Is there any likelihood of -- because it makes a lot of reasons that they may go down in the fourth quarter? And do you see -- yes, just on the tariffs. And then on the coal purchasing, is there any certain amount of the coal that you're purchasing that you actually are able to lock in 6 months or 1 year contracts? So what percentage is spot and what percentage are you able to lock in some longer duration contracts for your coal purchases, please? And the last question is do you have any updated guidance with regards to your capital expenditure in 2017 and 2018? (foreign language)

(foreign language) Just look at the fuel unit cost. For coal, it's KRW 120,500 per ton. And for the fourth quarter, the unit cost for coal is KRW 119,300 per ton. For LNG, it's KRW 693,600 per ton. And for oil, it's KRW 479.4 per liter. (foreign language) As for bituminous coal contract, our long-term contract volume would be 85% of the total volume in 2017. So that is the volume basis. On the price basis, we conduct quarterly contract negotiation for 90% of the coal that we purchase. (foreign language) As for CapEx guidance for 2017 for KEPCO, plus 6 GenCos, is KRW 18.8 trillion. For 2018, the guidance is at KRW 18.6 trillion. But currently, we're going through the budgeting process, so this is not a final number. (foreign language) Just to add to that, these numbers which has just been presented includes equity investments as well. For any direct investments, the guidance is, for 2017, it's KRW 15.3 trillion; and for 2018, it's KRW 16.8 trillion. (foreign language) So there -- any gap with the previous number is that the previous -- any addition or differences will be going into equity investment. And depending on the feasibility and business case of such equity investment, the final investment amount could be changed.

Can I have a quick follow-up question? What was your average interest rates realized in the first 3 quarters? And what was the increase versus the first 3 quarters last year, please? (foreign language)

(foreign language) So the low interest rate trend continues at home and abroad. And currently, most of our funding and financing comes from our electricity bond. For any new investment, the interest rate has been 2% to 2.5% level. The maturation for the bond is 5 years maturation. (foreign language) Please proceed with the next question.

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

(foreign language) I have a question on the total REC purchase cost. Could you share the cost of REC purchase on a consolidated basis as well as on a standalone basis as well as for the carbon emission cost as well? Another question is on UAE revenue. How much is the revenue? And we believe that it will go into operations starting next year, and you are expected to have 18% of equity investments according to what has been announced by the news articles. When do you believe that this will take place?

(foreign language) First of all, on the RPS-related cost. In the third quarter, it has been, for nonconsolidated basis, it's KRW 454.3 billion. And on a consolidated basis, it's KRW 313.6 billion. (foreign language) And as for the carbon emission-related cost for the third quarter, it's minus KRW 2.6 billion for nonconsolidated basis. And for consolidated basis, it's minus KRW 21.9 billion. The reason the numbers are negative is because we are settling what has been predicted as the carbon emission cost in 2016 and actually settling that with the actual carbon emission cost that was incurred in 2016. So the difference has been negative. (foreign language) And on the UAE-related revenue for the third quarter, it's KRW 579.8 billion. (foreign language) And on the equity investment profit, I regret to say that currently, we're discussing on whether -- when would be the completion date for the power plant #1. And once that is determined, we'll be able to then have some visibility into equity investment returns.

(foreign language) I have 2 follow-up questions. First is on, if you look at your CapEx plan, it seems that there is increase in CapEx for nuclear power plant and coal-fired power plants compared to -- so it will increase in 2018 compared to '17. However, one can expect the utilization rate to actually go down. So should we view this trajectory on a separate and isolated basis whereas this CapEx is going up for power plants while the utilization is going down on the other side? Another follow-up question is on Shin Hanul 3 and 4, so there's likelihood that these projects will be suspended. But it seems that your construction CapEx is still expected to go up. And what is the reason behind that?

(foreign language) So to answer your first question, the CapEx for power plant and the utilization rate is actually irrelevant of each other. And on the second question on Shin Hanul 3 and 4 and additional 4 power plants that is in the pipeline is that currently the CapEx is reflected in our budget plan because KHNP currently still books that as CapEx because nothing has been determined yet as of how the project will go forward in the future. (foreign language) In the interest of time, we will accommodate one last question before we close.

(foreign language) Currently, there are no participants with questions. (Operator Instructions) (foreign language) The last question will be by Jiyoon Shin from KTB Investment Securities.

(foreign language) So the last question would be, so you pay out dividend on a nonconsolidated statement basis. And it seems that in the third quarter, you've been catching up with the performance that you've had on a year-on-year basis on a nonconsolidated basis. So could you then share with us your guidance for the dividend payout for this year?

(foreign language) Currently, we are not approaching the dividend payout season, and nothing has been discussed or determined with the government. But as part of government effort to increase the public institutions' dividend payout policy, we hope that the dividend payout policy will head towards the higher level. (foreign language) This will conclude our Q&A session (foreign language) And thank you very much for taking the time to participate.

(foreign language) This concludes the fiscal year 2017 third quarter earnings results by KEPCO. Thank you for the participation.