Korea Electric Power Corp (KEP) 2018 Q1 法說會逐字稿

(interpreted) 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 first quarter of fiscal year 2018.

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.

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.

Now, Miss Yoonhye Cho, Senior IR Manager, will begin with an overview of earnings results for the first quarter of 2018, first in Korean, and repeat in English.

(spoken in Korean) Now we will provide the overview in English, starting with operating income. In the first quarter of 2018, KEPCO recorded a net operating loss of KRW128 billion. Taking a closer look, operating revenues increased by 3.7% to KRW15.71 trillion. Power sales revenue increased by 5.6% to KRW14.72 trillion while revenues from overseas and other businesses decreased by 17.9% to KRW988 billion.

Moving on to main operating costs. Cost of goods sold, selling, general, and administration expenses increased by 15.7% to KRW15.83 trillion. Fuel costs increased by 26.6% to KRW5.44 trillion, mainly due to a 29.3% rise in unit cost of fuel. Meanwhile, purchased power costs increased by 27.4% to KRW4.87 trillion. Introduction of the highly efficient IPPs and decline of utilization ratio of nuclear power plants caused our purchased power volume to increase by 23%. Moreover, the unique cost of purchased power also rose by 4.6% due to the rise of unique cost of fuel and SMP.

Depreciation cost rose by 7.8% to KRW2.29 trillion, mainly due to newly introduced power plants and transmission at the station facilities. Maintenance costs went up by 4.3% to KRW434 billion, attributable to increased facility maintenance costs by newly introduced power plants.

Now let me explain KEPCO's nonoperating segments. Net financial loss was KRW458 billion, increased by KRW46 billion compared to net loss of KRW412 billion on last year. As a result of the foregoing, we recorded a consolidated net loss of KRW251 billion, decreased by KRW1.15 trillion from KRW900 billion of consolidated net income in the previous year.

(spoken in Korean) This concludes the overview of KEPCO's earnings results for the first quarter of 2018. Now let us move on to the Q&A session. Q&A session will be hosted by Treasurer Kim.

(interpreted) This is Jong-Soo Kim. I am joined with our IR Committee members in charge of major business areas at KEPCO. We are prepared to take any questions.

(spoken in Korean) (Operator Instructions). Pierre Lau, Citigroup.

I'm Pierre Lau from Citibank. I have four questions. The first question is about your utilization of your nuclear power plant. It was 54.9% in first quarter. What is your guidance for the utilization in second-quarter 2018, third-quarter 2018, and fourth-quarter 2018?

And second question's what is your guidance for unit fuel costs in 2018 for your coal, LNG, and oil costs in this year? And from your result, I think there's a -- the number for unit oil costs in the first quarter, KRW489.2, seems -- I think there's some mistake there. Please take a look, because that number should not increase by 32.1% year on year. So please let me know the correct number.

And the third question: what is your expected generation mix by different fuel types in 2018?

And lastly, the fourth question: your overseas revenue dropped in first quarter this year. Do you expect the declining trend to continue for your overseas revenue, and what is the reason? Thank you.

(interpreted) Now, first of all, about your question on the unit oil cost, in the first quarter of 2018 it was KRW489.1 per liter; and year-on-year, last year, it was KRW460.8.

And with regards to your first question about the nuclear power plant utilization rate, now there have been some gaps between the outlook and the actual, so we have done some estimation based on the maintenance schedule that we have received from the Korea Hydro & Nuclear Power. And according to this, our projection is in the second quarter it is going to be between mid to high 60%, and in the second half of this year it will be between high 70% to low 80%. Notwithstanding the above, I also hope that you take into account the possibility of any unplanned maintenance events.

Now, with regards to your second question on the guidance for the unit cost of fuel, for coal it is KRW127,000 per tonne; for LNG, KRW743,000 per tonne; for oil, KRW519 per liter. And then the generation mix for 2018: nuclear, 35%; coal, 53%; LNG, 10%.

And with regard to your last question about the overseas business revenue: now, in the first quarter, about 70% of our overseas revenue is from the UAE nuclear power plant. And as the construction completion period is nearing, meaning that the progress rate continues to increase, so this means that this will also keep reducing our overseas business revenue. So barring any other factors, we expect this decline to continue.

[Yoo Jae Han], (inaudible).

(interpreted) Now, my question is with regards to the apparent difference between the nonconsolidated and consolidated earnings. So of course it actually depends on quarter-on-quarter basis, but still I would just like to know the major reasons why there are discrepancies between the nonconsolidated and consolidated earnings. And also if you could just shed light on the outlook for the adjusted coefficient.

And the second question is I understand that there would also be some discussions about the possible adjustment in the weight for the [RAC] within this week. So if the government's proposal is accepted, then what do you foresee as the possible impact on KEPCO? And also because of the sluggish earnings, I do believe that there would be some discussions of tariff adjustment. So how should we understand the government's direction or government's position regarding tariff adjustments?

(interpreted) With regards to your first question, now in terms of the differences between the nonconsolidated and the consolidated basis, now, I would say that it actually depends on the seasonality. Because every first quarter, there are some discrepancies between the nonconsolidated and the consolidated, meaning that the consolidated earnings are a bit higher than the nonconsolidated. And that is because for the nonconsolidated, for the SMP, so the gas corporation's LNG unit price for generation. Now, for the first quarter they apply the unit price of the winter season, and that is why there are -- that leads to the difference in the nonconsolidated and consolidated, usually in the first quarter.

And for the adjusted coefficient, it is being modified to be more in line with the government's policy. So whereas it has been focused more on the nuclear generation and coal-fired generation so far, we want to move more toward eco-friendly, environmentally friendly, renewable energy sources. So there are going to be discussions between the government, power trade, the Korea Power Exchange, and also the related organizations and agencies on July 1.

Now, as you would now, there is a plan to adjust the industrial tariff system. So according to the government's policy as well as the five-year plan for gov -- national agenda, and the basic plan for long-term electricity supply and demand, there would be some adjustments on the tariff for the -- the industrial tariff for light load hours.

And regarding the potential adjustment in the RAC weight, as you have rightly mentioned, there is going to be a public hearing on Friday this week. So after decisions are made in that public hearing, then we will also let you know.

(spoken in Korean) Kang Seong-Jin, KB Securities.

(interpreted) The first question is with regards to the utilization rate of the nuclear power plant. So you have just given the guidance for the second half of 2018. But then, given the government's current policy direction as well as the construction of the power plant, what is your view -- so what is your guidance in 2019 and beyond? So if you could share that with us.

And the second question is with regards to tariffs. So you just mentioned your plan for industrial tariff adjustment which has been reported in the media, and there are also expectations of that. But given the pace of or worsening of the financial performance, it seems as if adjusting the industrial tariff alone will not be enough, so perhaps you also need to adjust the commercial tariff. So I wonder for -- in 2018, have you had any concrete estimation of how much the tariff adjustment is going to be? So what is the stage of tariff adjustment as of now? Then also for the commercial tariff, is there also a plan to make adjustment for that? So what is your overall tariff adjustment plan for 2018?

(interpreted) With regards to your first question, although we do not have official guidance on the utilization of the nuclear power plants in 2019 and beyond, given the fact that the recent safety inspection on the nuclear power plants was a temporary measure in order to ensure safety for the people, we believe that the utilization rate will normalize in 2019 and beyond.

Now, as for the tariff adjustment for 2018, there are no additional plans as of yet. Now, usually how it works is that we would first come up with the total comprehensive cost by the end of June, and the said cost would be then reviewed by the government. And then afterwards, we are going to make some comparisons with the expected sale revenue and then see if there are any needs for adjustment. And if there are, then a possible adjustment would follow. Given this, then, any potential adjustment could be reviewed only in the second half.

(interpreted) Then what do you see in terms of the possibility for adjusting tariffs, not only for the industrial tariff, but also in other usage types?

(interpreted) Well again, it is hard to tell, at this point. Because how it works is that we need to first come up with the total comprehensive cost, to be followed by a government vetting. And then we can consider any potential adjustment in the tariff.

(spoken in Korean) [Sin Soon Jun], Goldman Sachs.

(interpreted) Now, I have three questions. Now first is -- so we've discussed the utilization rates for nuclear power plants for this year. And you mentioned that you had your estimation based on the estimation from the KHNP. And then so I would just like to ask: what was the KHNP's estimation of the utilization in the first quarter? And what was the actual? So if there have been any differences, then what do you believe are the reasons for the differences between the KHNP's estimation and actual utilization rate of the nuclear power plants?

And the second question, you also gave us your guidance about the fuel cost for 2018. And it seems as if the fuel cost for LNG and oil would be lower than the cost in the first quarter. But given the first-quarter spot price, it seems as if for the LNG and oil, the fuel cost will start to rise in the second quarter as well. So why do you believe that's the -- for the year, the fuel cost is going to go down for these two types of fuel?

And the third question is the oil-fired generation. So it seems as if the oil-fired generation utilization rate is also going up. So can you also give us some guidance for the third quarter?

(interpreted) Now, for the first question on the potential discrepancy between the estimation and the actual of the utilization rate of nuclear power plants by KHNP in the first quarter, as well as the reasons, I will have to get -- we will have to get back to you on that. So we will do some research and get back to you. And then likewise for the third question about the oil-fired generation utilization rate, we will have to get back to you on this one as well.

And then your second question was about the fuel costs in the second and the third quarters. But then what we have given guidance for earlier was the unit cost for the year. And on a year-on-year basis, it's actually an increase.

(interpreted) Now, then, a follow-up question to the second question. So for the first quarter, the unit cost for LNG was KRW742,000. And then for the year, your guidance was KRW743,000, so almost flat. But then now the data from [KOGAS] is flagging data by about 1 to 2 quarters. So when we look at the pricing now, then it seems that starting in the next quarter there's going to be a very sharp spike. So do you believe -- don't you believe that in the second half, perhaps the oil and the LNG fuel costs will start to go down very quickly?

(interpreted) Well then we would also have to get back to you on this one. With regards to the unit costs of the fuel by the GenCos, then what we do is we first look at their unit cost of fuel per quarter, as well as the usage volume of the fuel per quarter, and then do the calculation. But then of course it differs by company. So we would have to look into the details of how the calculation has been done. So once we do that, then we'll let you know.

(spoken in Korean) Shin Jiyoon, KTB Investment & Security.

(interpreted) I have three questions. First is about your CapEx plans. Compared to the information that you have given us in the fourth quarter of last year, I can see that the CapEx planning for 2018, 2019, and 2020 has gone up by over KRW2 trillion. And then looking at the breakdown, I thought that perhaps it would be only in the renewable sector where you would have increased CapEx. But then I also see that there is a plan for construction and reinforcement of thermal power plants, as well. So I'm just wondering why there has been an increase in the CapEx planning.

And then the second question is about the coal-fired power plants; and the utilization rate for coal-fired power plant was 82%. But then of course in the second quarter there would also be some shutdowns of those power plants. And this being already mid-May, I wonder what your expectation is in terms of the utilization rate of coal-fired power plants in the second quarter.

And the third question, I do understand that this might be a bit too premature for you to respond; but then with regards to inter-Korea economic cooperation. So there are already talks of KEPCO being involved, perhaps, in building a new power plant in North Korea or trying to rehabilitate some of the outdated power plants, or getting involved in building or maintaining transmission and distribution networks. So is there any, let's say, internal planning or review with regards to the possible inter-Korea economic cooperation?

(interpreted) As you have rightly mentioned, in terms of the actual construction of the nuclear power plant equipment, it is -- the CapEx for that is down and also construction of renewable facilities, so the CapEx for that increased. And also there is the increase for a thermal power plant equipment, and that is especially for the LNG facilities. And actually there has been some reinforcement of the nuclear power plant facilities as well. And that is the addition of the fuel costs for the Shin Hanul units.

Now, once the nuclear power plant is completed, then the fuel cost is included in the CapEx. And that is why, as the years go on, you can see that the CapEx number is going up.

For the coal-fired power plant utilization rate in the second quarter, there is no official forecast yet. But then year-on-year -- so last year, the utilization rate was 69.4%. And then now there was a one-month shut down some of the outdated coal-fired power plants. And therefore, this year, given that there have been shutdowns from March up until June, so when we take this into account then we believe that it will be in the low to mid-60% level.

And for your third question, as you have also rightly pointed out, there is no official response that we can give you at this point.

(interpreted) A follow-up question to your response. Now, for the coal-fired power plant, you mentioned that there would be shutdowns from March to June. And then the average utilization rate between January to March of this year was 82%. And then you mentioned that the outlook for the second quarter is from low to mid-60%. But then given the fact that there have been shutdowns from March this year, this means that perhaps then in the January to February period, the utilization rate would have been over 90%.

And then it seems as if even with the shutdown in -- but then, when we look at the actual numbers from January to February, then that is actually not that case. So it seems as if the impact of shutdowns on the utilization rate are very small. So maybe your estimation for the second quarter utilization rate is too low?

(interpreted) Now, as I had mentioned earlier, there is no official guidance for the utilization rate of the coal-fired power plants for the second quarter yet. But then we just have done some rough estimation based on the fuel usage volume. And then when we look at the impacts on the shutdowns -- and usually it's about 2% to 2.5% -- so for the quarter then we would amount to about 6%.

Having said that, once again, please understand that it is very difficult to predict the impact of the shutdowns. And also all the more so, because it's also difficult to predict the period of the shutdowns. Anyway, so because of that, we currently estimate that it would be in the low to mid-60% level.

(spoken in Korean) Currently there are no participants with questions. (Operator Instructions).

(interpreted) If there are any further questions or requests for information, then please contact the IR team. And with that, we are going to conclude the earnings conference call for the 2018 first quarter.

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.