Korea Electric Power Corp (KEP) 2018 Q2 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'll begin the conference of the fiscal year 2018 second quarter earning 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 2018 second quarter earning 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 first half of 2018.

(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-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 first half of 2018, first in Korean and repeat in English.

(foreign language) Now we will provide the overview in English, starting with operating income.

In the first half of 2018, KEPCO recorded a net operating loss of KRW 815 billion. Taking a closer look, operating revenues increased by 3.5% to KRW 29.04 trillion. Our sales revenue increased by 5.8% to KRW 27.13 trillion, while revenue from overseas and other businesses decreased by 21.9% to KRW 1.91 trillion.

Moving on to main operating cost, COGS SG&A expenses increased by 15.9% to KRW 29.8 trillion. Fuel cost increased by 26.7% to KRW 9.71 trillion, mainly due to a 32.2% rise in unit cost of fuel.

Meanwhile, purchase power cost increased by 29.8% to KRW 9.01 trillion. Introduction of highly efficient IPCs and decline of utilization ratio of nuclear power plants caused the purchase power volume to increase by 25.9%. Moreover, the unit cost of purchase power also rose by 3.9% due to the rise of unit cost of fuel and SMP.

Depreciation cost rose by 8.7% to KRW 4.62 trillion, mainly due to newly introduced power plants. Maintenance costs went up by 7.4% to KRW 1.02 trillion attributable to increase in transmission and disposition facilities and increased maintenance cost by newly introduced power plants.

Now let me explain KEPCO's nonoperating segment. Net financial cost was KRW 873 million, increased by KRW 127 billion compared to net loss of KRW 723 billion of last year. As a result of the foregoing, we recorded a consolidated net loss of KRW 1.17 trillion, decreased by KRW 2.43 trillion from KRW 1.26 trillion of consolidated net income in the full year.

(foreign language) This concludes the overview of KEPCO earnings results for the first half of 2018.

(foreign language) Now let us move on to the Q&A session. I'm joined with our IR committee members, in charge of major business areas at KEPCO. We are prepared to take any questions. And we will proceed the Q&A session in both English and Korean.

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

I have 3 questions. The first one is that your company had a KRW 6.8 trillion, the lowest in second quarter, what was the reason? Second question, the utilization of your coal-fired plant was only 64% in second quarter. Why was it so low? And what would be the utilization of your coal-fired plant in second half this year? And the third question, what is your expectation of KEPCO generation mix for 2018? And what will be the purchase volume from IPP this year? (foreign language)

(foreign language) To answer your first question, actually, the main reason for the increase in other losses for the second quarter are related with the GENCO's performance. The GENCOs have not yet publicly released its business reports. Actually, the release will be just tomorrow. So we are not able to disclose ahead of the GENCOs, so please refer to the release of the GENCOs coming up tomorrow for the details. (foreign language) To answer your second question, yes, I should mention our coal-fired utilization in Q2 was low at 64%. (foreign language) The main reason why our coal-fired utilization was low in the second quarter was, first of all, there was the suspension of operation of some of the older coal-fired generators during the spring season due to air quality. Second was there were some maintenance of coal-fired generations during the offpeak season in second quarter. (foreign language) And though because these factors were limited to the second quarter, we believe that from the second half, the utilization for coal-fire will return back to normal. And for the full year, we're expecting utilization of coal-fire to be around mid- to high-70%. (foreign language) To answer your third question, you asked about the generation mix for KEPCO for 2018. (foreign language) As of first half, nuclear was at roughly 30%; coal, 54%; LNG, 12.5%. (foreign language) Looking for the second half, because we're expecting utilization for nuclear to improve, to come up, we're also expecting the nuclear in the generation mix to also increase. (foreign language) Regarding the generation ratio, our share between KEPCO versus IPP, we do not have detailed numbers to share. (foreign language) However, in the first half, our generation, KEPCO's generation accounted for about 72% of total generation volume. Looking towards the second half, because we're expecting the utilization of nuclear to come up and, therefore, the share or mix of nuclear generation also to increase, we're expecting that overall, KEPCO's share would be similar or slightly lower versus last year.

Okay. I have a follow-up question. You said, so the second quarter, the other loss, KRW 6.8 trillion, was it a one-off loss? Or you expect similar loss in second half this year? (foreign language)

(foreign language) If you look at our other losses for second quarter, on a year-on-year basis, actually, it decreased by KRW 784.3 billion on year-on-year basis. For details, once again, please refer to the releases of the GENCOs coming up tomorrow. In terms of the nature of the cause of the other losses in this quarter, we see it as a one-off rather than a recurring.

(Operator Instructions) (foreign language) The following question is by (inaudible) from [Maryland Securities].

(foreign language) I have 2 simple questions. First of all, it seems that the maintenance for Hanbit No. or Unit 3 is supposed to be over, but we're not hearing that Hanbit Unit 3 is back online. Can you share with us your schedule for when Hanbit No. 3 will be back online? Second question is about the coal unit cost. Actually, in the first quarter, you gave the full year unit cost guidance for coal to be around KRW 125,000 per ton. Actually, the unit cost has been above that level. Do you see a need to upward adjust your full year guidance on full unit cost?

(foreign language) To answer the first question, yes, I should mention Hanbit Unit No. 3 was supposed to be back online as of August 8. That was the original plan. Regarding the revised schedule, we will have to come back to you with that after checking. (foreign language) Regarding your second question about full unit cost guidance for the full year, currently, it stands at KRW 128,000 per ton. (foreign language) Looking at the coal prices, actually, you would have noticed that coal prices have gone through quite a fluctuation from end of 2017 throughout first half of this year. The price curve delta is more of an N, letter N-shaped curve. And due to the volatility in international coal prices, some of the GENCOs actually see -- currently, is they're trying to maintain its original guidance for the second half and they have not yet revised their unit coal cost guidance for the remainder of the year.

(Operator Instructions) (foreign language) The following question is by (inaudible) From Shinhan Financial Investment.

(foreign language) I have 4 questions. The first question is about the corporate tax. It seems there's a negative corporate tax recognized in the current period, so there seems to have been a reversal or a tax reimbursement. Can you give us the reason why there was the corporate tax reimbursement? Second question is about your coal import country mix. Where -- what is the coal source mix? I'm asking this question because we're noticing that especially Australian coal prices on a year-on-year basis have jumped quite a lot, up by about 30% year-on-year, whereas your coal unit cost does not seem to have increased that much. So can you share with us your sourcing mix for your coal imports and the reason why your costs have not gone up as much as 30%? Third question is, can you share with us the REC as well as carbon emission rights-related cost both on a stand-alone, that's nonconsolidated, as well as the consolidated basis? The fourth question is how much of the impact do you think would have that would be on your third quarter revenue from the discount on the progressive rate as well as the welfare benefits related with tariffs that were extended?

(foreign language) To answer your first question, yes, if you look at our second quarter numbers, there is a minus or negative KRW 781.5 billion recognized as corporate tax. Actually, this is more of an accounting number on accrual basis. This is not actually an actual tax payment cash flow in or out. There wasn't an actual reimbursement in cash. The reason why the number on the books is a negative number for corporate tax is because our pretax income for the second quarter was a negative number. (foreign language) The second question about our coal sourcing mix for the first half, first half mix was, we imported 35% from Indonesia, 27% from Australia and 13% from Russia. (foreign language) To answer your second -- third question regarding the greenhouse gas emission, on a stand-alone basis, on the second quarter, it was KRW 58.8 billion. On a consolidated basis, it was a minus KRW 35.1 billion. (foreign language) The reason why on a consolidated basis, we recognized a negative figure for greenhouse gas-related cost is because our actual exceeded emissions were less than what we had originally planned. (foreign language) And for the RPS on the second quarter, nonconsolidated, the cost was KRW 546.1 billion. On a consolidated basis, it was KRW 411 billion.

(foreign language) Regarding the fourth question about the easing of the progressive rate temporarily and also the extension of welfare benefits related with electricity cost, as you know, there has been unprecedented heat wave throughout the country this summer, and it's reaching almost disaster levels. And at KEPCO, in order to fulfill its social responsibility as well as to support the customers, have -- has decided to ease the stages or threshold for the progressive rate temporarily and also extend welfare benefit. We're expecting this to have an impact, negative impact on our revenue at about the level of KRW 300 billion.

(foreign language) I have an additional question about your nonoperating cost, which actually decreased. The other operating cost decreased by about KRW 200 billion on a year-on-year basis. Was the decrease in other operating cost because of cost-saving efforts internally? Or is this decrease in other operating cost just in line with a decrease of overseas revenue? And while you were answering the question, can you give us also some update on your overseas revenue?

(foreign language) Yes, if you look at both our other revenue and other cost, other operating cost, both have decreased by a similar size. This is because the UAE project is reaching its completion, and therefore, the level or the piece of progress is leveling off. Because both the revenue and the cost just decreased by a similar size, the impact on bottom line is minimal.

(foreign language) The following question is by Young Suk Shin from Morgan Stanley.

(foreign language) I have 2 questions. The first question is actually a follow-up to the previous question of roughly, approximately KRW 300 billion of negative impact you're expecting on your revenue due to, for example, decreasing of the progressive rate temporarily. Would it be correct to assume that you're expecting to recognize all of this KRW 300 billion in the third quarter? Second question is, can you share with us the utilization for nuclear you're expecting in the second half?

(foreign language) To answer your first question, because these discounts would be for July and August, they will be reflected during the third quarter results. (foreign language) To answer your second question, yes, during the first half, due to a longer-than-usual preventive maintenance period of the nuclear facilities, the nuclear utilization in the first half was lower. However, in the second half, according to the preventive maintenance schedule that KHNP have, we're expecting the utilization of nuclear to gradually come up third quarter and fourth quarter so that it will be around -- it will recover gradually to mid- to high-70% levels.

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

(foreign language) I have 2 questions. First question is, when I look at your performance or results this quarter, there is, under the revenue, there is a power sale per type that changed, and there was an improvement on a year-on-year basis. If I compare that item, there was an improvement of about KRW 390 billion on a year-on-year basis, and that's I think one of the main reasons why your results are not as bad as I had expected to be. Is this related, for example, with test operations or commissioning? And would this be continuing in the second half? The second question is, this may be a bit of a detailed question, but if you go into the fuel cost, the subitems under fuel cost, there is others. I've noticed that, actually, you may have changed your classification of what goes under these other fuel costs because usually, it used around -- at around KRW 50 billion to KRW 100 billion per quarter. But since last quarter, I'm noticing it is up to about KRW 420 billion, around that range. So can you give us what has changed or why this classification is changing?

(foreign language) First question, actually that adjustment is related with, yes, income or revenue from commissioning at the GENCO level. If you look at our second quarter 2017 numbers, there was a minus or negative KRW 380 billion recognized under that item. In the second quarter this year, it's actually negative KRW 20 billion. And so that has overall resulted on a consolidated basis increased effect on the revenue. (foreign language) Regarding your second question of what stands under the others under the fuel cost, we will check the details and come back to you.

(foreign language) Currently, there are no participants with questions. (Operator Instructions)

(foreign language) Since there's no further questions, this ends the Q&A session. But before we end today's conference call, I would like to offer a few comments to shareholders regarding the weak performance. (foreign language) First of all, we find it deeply regrettable how our share price continues to remain weak due to weak company earnings caused by challenging external environment, including higher fuel prices together with strong dollar. (foreign language) In order to overcome such difficult business conditions, KEPCO has already started an emergency management system under the new CEO's leadership, including the operation of an emergency committee dedicated to financial wellness. At the same time, we will exert all efforts to maintain our positive operating profit on a full year basis by implementing aggressive cost saving and program improvements amounting to KRW 1.1 trillion on a full year basis and also successfully winning new overseas projects. (foreign language) In the short term, we expect second half results to improve versus the first half given that seasonally, third quarter is a period with strong profitability and also as we see nuclear utilization recovering. (foreign language) In the mid- to long term, we will focus on further diversifying our profit sources by actively developing overseas projects, including successful implementation of the UAE nuclear project and efforts to win the Saudi project. (foreign language) Lastly, the soft price has remained the key focus of the CEO's attention ever since his inauguration. And once again, we would like to emphasize that various approaches are being considered currently to support the stock price. As well, all employees of KEPCO are fully devoted to effectively overcoming the current challenges. (foreign language) Well, thank you very much for attending the conference call, and we will end the conference call here. Thank you.

(foreign language) This concludes the fiscal year 2018 second quarter earning results by KEPCO. Thank you for your participation.