Korea Electric Power Corp (KEP) 2018 Q3 法說會逐字稿

(foreign language) Good afternoon. This is Kab-soon 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 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-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 third quarter 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 third quarter of 2018, KEPCO recorded a net operating income of KRW 581 billion. Taking a closer look, operating revenues increased by 2.7% to KRW 45.45 trillion.

Power sales revenue increased by 4.6% to KRW 42.64 trillion, while revenues from overseas and other businesses decreased by 19.3% to KRW 2.8 trillion.

Moving on to main operating costs. Costs of goods sold, selling and general administrative expenses increased by 14.5% to KRW 44.87 trillion.

Fuel costs increased by 25.6% to KRW 15.07 trillion, mainly due to a 27.5% rise in unit cost of fuel.

Meanwhile, purchased power cost increased by 28.6% to KRW 13.36 trillion. Introduction of highly efficient IPPs and decline of utilization ratio of nuclear power plants caused the purchased power volume to increase by 21.9%. Moreover, the unit cost of purchased power also rose by 5.7% due to the rise of unit cost of fuel and SMP.

Depreciation cost rose by 6.4% to KRW 6.86 trillion, mainly due to newly introduced power plants.

Maintenance costs went up by 6% to KRW 1.55 trillion, attributable to increased maintenance costs by newly introduced power plants.

Now let me explain KEPCO's nonoperating segment. Net financial loss was KRW 1.31 trillion, increased by KRW 135 billion compared to net loss of KRW 1.17 trillion of last year. As a result of the foregoing, we recorded a consolidated net loss of KRW 432 billion, decreased by KRW 3.22 trillion from KRW 2.79 trillion of consolidated net income in the previous year.

(foreign language) This concludes the overview of KEPCO's earnings results for the third quarter of 2018.

(foreign language) Now let us move on to the Q&A session. I am 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 Korean and English. Please make your questions and answers brief and clear.

(foreign language) (Operator Instructions) (foreign language) The first question will be given by Jiyoon Shin from KTB Investment Securities.

(foreign language) I have 2 questions. Now first, about the other operating expenses, I see that it's KRW 2.074 trillion, which is down by KRW 394 billion year-on-year. I'm sure that this is also related to the other operating revenue and year-on-year, there is also -- there's a decline of KRW 163 billion. So it probably means -- so my assumption is that for the other operating expenses, then there was a reduction -- there was a decline in many one-off expenses, so if you could explain about the breakdown of the other operating expenses. And then the second question is about the nuclear power plant utilization rate. So what is your outlook for the fourth quarter? And also, can you give us some guidance for the, at least, first half of 2019?

(foreign language) Now first, your first question on the other operating expenses. Now yes, it did go down by 16.0%. And now first, there is the decline of the overseas -- from the overseas business, for example, the UAE. And then also for the fixed assets, so there was also the fixed asset related expense that was reduced by KRW 50 billion and then also a reduction of about KRW 60 billion for -- and also the decline of KRW 60 billion for the company employee benefits costs. And also in addition to that, there were the outsourcing costs and also other related costs.

(foreign language) Now next is about your question on the nuclear power plant utilization rate. Now in the third quarter, there has been an increase in the utilization rate year-on-year by 3.5 -- 3% up to 73.2%, and this is because of the increase in the normal utilization after the safety monitoring and maintenance. (foreign language) And given the KHNP's planning, we believe that the nuclear power plant utilization rate will remain more or less similar in the fourth quarter. (foreign language) And as for the guidance for 2019, please understand that we do not have the numbers at this point.

(foreign language) Currently, there are no participants with questions. (Operator Instructions) (foreign language) The following question is by Jae-Hyun Ryu from Mirae Asset Securities.

(foreign language) So then I have a follow-up question to your response to the first question, and that was about the fixed assets. So the property, plant and equipment removal loss on the fixed assets, so could you elaborate on that further? And what was the size of that operating expense decline? And also, for the UAE, so you talked about the KRW 50 billion in declines. So can you also explain about that? And also, what is your guidance for the fuel cost? So fuel, like LNG, oil, coal and so forth. And also, for the nuclear power plants, so we believe that there would be a new facility that have been completed, so they are presumed to be completed, but then there are no news of their operation yet. So I wonder where there are some issues with the approvals. Or are there any issues with that?

(foreign language) Now first, about the property, plant and equipment removal loss on the fixed assets, now this is -- now in the course of some, let's say, reinforcement or improvement construction, then in the course of such construction, we would remove some of the existing facilities or equipment. And then now, there would be some difference between the booked price and then also the cost that is reversed into the account. So it is -- so in this case, it is the loss of that difference between the booking price and the reversed accounting price. And then -- so this -- there has been change in this because of the change in the construction schedule. So there are no other reasons for that. It's only that there has been some changes in the construction schedule. And then as for the KRW 250 billion coming from the overseas businesses, that is because of the reduction in the cost of the project for the UAE as the progress continues on. (foreign language) And then for the fuel costs, so the unit cost of fuel. So for the coal, it is KRW 131,900 per ton; for LNG, it's KRW 749,400; and oil, KRW 542.9 per liter. (foreign language) And as for the newly introduced nuclear power plant, so there is the Shin Kori No. 4, which is scheduled to be completed by September 2018. And then Shin Hanul number 1 and 2, which was slated to be completed by December this year but then, with the earthquake in Pohang recently, there have been some additional monitoring requirement for the safety aspects. And because of that, the operation approval deliberation has been made more strict. So now since then, the new logistic schedule is August 2019 for Shin Kori No. 4 and the Shin Hanul numbers 1 and 2, completion schedule is still being adjusted.

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

(foreign language) Now first, about the -- now first question is about the coal power plant utilization rate. So what is your guidance for the fourth quarter? And then also, in terms of the depreciation cost, I see that it went up only by KRW 40 billion, and that probably has to do with the shutdown of the #1 Wolsong NPP. So what is your expectation of the depreciation cost for the year? And then also, going into next year with the delayed operations of the Shin Kori No. 4 as well as the Shin Hanul power plant, I believe that the depreciation cost will not go up as much as initially expected. So if you could give us some guidance on the depreciation cost for next year. Then also, for the CO2 emission and the IPS (sic) [RPS] provision, so what was the cost for each in the third quarter, respectively?

(foreign language) Now first, about the coal power plant utilization rate in the fourth quarter of 2018. Now in the third quarter, the coal power plant utilization rate went up to 81.4% after reutilization of the old coal power plant in the second quarter. (foreign language) And as for the outlook for the fourth quarter, we expect that this will go down slightly from the 81.4% of the third quarter, mostly due to the planned maintenance. But then for the year, we believe that it will be at around mid-70% level.

(foreign language) And as for the depreciation cost, yes, it is true that in the third quarter, there has only been a slight increase in the cost. And that is mostly because of the fact that many of the new power plants, the newly introduced power plants, were completed in the first half of 2017, meaning that the depreciation cost therefore accrued in the third quarter was not much because of that fact. And then as for the outlook, we don't have the specific number yet, but we believe that this trend will continue unless there are other additional newly introduced power plants. (foreign language) And then next is about the RPS and the CO2 emission cost. Now in the third quarter, for the RPS on an unconsolidated basis, it was KRW 500.9 billion. And then on a consolidated basis, it was KRW 439.3 billion. And for the CO2 emission cost, on an unconsolidated basis, it was minus KRW 8 billion; on a consolidated basis, it was minus KRW 4.1 billion. The reason why there was a minus number for the CO2 emission cost is because for the year 2017, the CO2 emission cost, there has been a discrepancy between the estimate and the final number. So the discrepancy was the difference in the estimate and the final number was reflected in the net income of the third quarter.

(foreign language) Currently, there are no participants with questions. (Operator Instructions) (foreign language) The following question is by Minjae Lee from NH Investment Securities.

(foreign language) Now my first question is about the UAE revenue. So can you give us a number for the revenue coming from the UAE? And then the second is about the tiering pricing. So because of the ease in the -- some of the segments of the tiering pricing, I believe that they also had an impact on the revenue and also, it probably lowered the unit price. And so do you believe that the impact is completed in the third quarter so there will be no more impact to be reflected in the fourth quarter? And then the next question is about the coal-fired power plants. So in terms of the coal power plants, the retrofitting, what are you -- can you give us an update on the retrofitting?

(foreign language) Now first of all, about the revenue from the UAE. So as of the third quarter, revenue from the UAE NTP project was KRW 312 billion, which is a decline by KRW 270 billion year-on-year. (foreign language) Now second, about the tiering pricing or the progressive pricing. So in terms of -- now because of the easing of the progressive pricing segment as well as the welfare discount, as for the power sales revenue, we believe that for the year, it is going to have an impact of about KRW 394 billion. (foreign language) The tariff adjustment this year in the summer, that is owed to the near catastrophic heat wave in the summer of this year, and so -- which had caused great inconvenience to the people. So this was done as a planned government effort to ease the people's inconvenience. And so part of it would be compensated from the reserve. And also, as for the loss coming from the easing of the progressive pricing segment, we are currently discussing with the government on how to ease that loss.

(foreign language) And as to your question on whether it will -- the impact will be completed by the third quarter of this year, we believe yes because the temporary adjustment in the progressive pricing scheme has been completed.

(foreign language) And as for your question on the retrofit for the coal power plants. So the planning that was initially completed in July 2016 by the different GENCOs, now the planning has changed since then. So we are currently collecting all the revised plans from each of the GENCO, and once we complete the collection and then we are going to do the aggregation and then send this to you by e-mail.

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(foreign language) Now then my follow-up question is, again, about the government -- possible subsidies coming from the government. So there was a recognition of the costs coming from the tariff adjustment. So do you believe that there could also be subsidy payments from the government for this?

(foreign language) Now to respond to that question, first, about the so-called welfare discount. For this, it has been confirmed that there would be support coming from the reserve fund. And as for the tariff adjustment, in other words, the adjustment of the progressive pricing schemes, in terms of how we are going to ease the loss from this, it is currently under discussion with the government. So nothing has -- nothing is decided yet.

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(foreign language) Currently, there are no participants with questions. (Operator Instructions) (foreign language) The following question is by [Jeong Lee] from Merrill Lynch Securities.

(foreign language) Now I have one question on dividends. So it seems that in terms of the net income, you will be seeing a net loss on an unconsolidated basis. So given this, what is your dividend policy for this year?

(foreign language) Now since KEPCO's major shareholder is the government, we would be influenced by the government's dividend policy. And the government's dividend policy so far has been that there would be no dividend payout from the companies that have seen losses or deficits. (foreign language)

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(foreign language) The following question is by Cindy Park from Nomura Securities.

(foreign language) What is your outlook on the operating environment in the fourth quarter? Now given that the nuclear power plant utilization rate has gone up year-on-year, so for the fourth quarter, can we look forward to more constructive results?

(foreign language) Now for the fourth quarter, yes, for example, the energy prices like oil price, yes, they are stabilizing. But there are also other factors which solidify any prediction on our part on the fourth quarter. So I ask for your understanding.

(foreign language) So the unpredictable factors, are they more related to the operating side or the nonoperating side?

(foreign language) I must say that it is difficult to make prediction on both the operating and the nonoperating side. But I would say that it is more on the operating side.

(foreign language) So this concludes the Q&A session.

(foreign language) So this concludes the Q&A session. We would like to close this conference call with the following views and guidance for our shareholders and investors. (foreign language) The company turned around its profits in the third quarter of 2018 after 3 consecutive quarters of operating loss since the fourth quarter of last year. This is largely owed to the seasonally high unit costs, increase in sales volume due to the heat wave and the company's push for high efficiency. (foreign language) But downside risks remain, such as the persistent high fuel cost in the international markets and rising currency volatility due to global financial market uncertainty. KEPCO will keep focusing on overcoming such business challenges. We will keep monitoring the changes in and outside, maintain strong extraordinary management stance and broaden our overseas business, such as the Saudi Arabian nuclear power plant. (foreign language) More recently, the company has secured a new driver to address the current changes in the power industry by installing the ESOP. (foreign language) The KEPCO ESOP, officially launched on the 12th, was planned to improve the company's value by aligning employee's goals with the company's. Employee participation level is quite high. (foreign language) So far, around 3,800 employees have joined the KEPCO ESOP, with around 1,700 applying to acquire shares. (foreign language) The KEPCO ESOP plans to acquire KEPCO shares at market price with voluntary participation by the employees. (foreign language) As the ESOP purchase grows, it is expected to lead to positive results, such as improving the demand and supply dynamics for KEPCO's stock. (foreign language) Going forward, we at KEPCO will strive to overcome the current challenges by exploring different ways to improve shareholder value.

(foreign language) In closing, once again, we thank everyone for your participation at this conference call. And this concludes KEPCO's 2018 third quarter earnings release conference call. Thank you very much.