Korea Electric Power Corp (KEP) 2020 Q2 法說會逐字稿

Good afternoon, this is (inaudible), Head of IR team in KEPCO. On behalf of KEPCO I would like to thank you for participating in today's conference call to announce the earnings results for the first half of 2020. We will begin with a brief presentation on the earnings result 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 KIFRS. Any comparison will be on a year-on-year basis between last year and this year. Business strategy, [gross] 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 Mr. Sihyung Park, Senior IR Manager, will begin with an overview of the earnings results for the first half of 2020 (inaudible) in Korean and repeat in English.

Now we will provide the overview in English starting with operating income. In the first half of 2020 KEPCO recorded an operating profit of KRW820 million. Taking a closer look, operating revenue decreased 0.5% to KRW28.17 trillion. Power sales revenue decreased by 0.8% to KRW26.6 trillion and the revenues from overseas and other businesses increased by 4.6% to KRW1.57 trillion.

Moving on to main operating costs, costs and SG&A expenses decreased by 6.5% to KRW27.35 trillion. Fuel costs [increased] by 15.5% to KRW7.56 trillion due to an increase in nuclear power generating volume and decrease in (inaudible) power generation volume and a drop in fuel prices compared to the previous year.

Also the purchase power cost decreased by 12.4% to KRW8.3 trillion due to the drop in the unit price of LNG fuel. Depreciation cost rose by 6% to KRW4.9 trillion mainly due to an increase in depreciable assets resulting from the acquisition of electric facility assets including Shin Kori #4 which was completed in August last year.

Now let me explain KEPCO's non-operating segment. The net financial loss was KRW897 billion, increased by KRW31 billion compared to the net loss of KRW866 billion of last year. As a result of the foregoing, we recorded a consolidated net income of KRW257 billion, increased by KRW1.43 trillion from a consolidated net loss of KRW1.17 trillion in the previous year. This concludes the overview of KEPCO's earnings results for the first half of 2020.

Now let us move on to the Q&A session. Since we will proceed the Q&A session in both Korean and English, please make your questions and answers brief and clear.

(Operator Instructions). Pierre Lau, Citigroup Global Markets Asia Limited.

Good afternoon. Thank you for management time today. I have three questions. The first one is could you give us a guidance of your unit coal LNG and oil [clauses] for 2020? Second question, your purchase power volume was down 9.6% in second quarter. Could you guide us what would be the purchase power volumes in 2020? And final question is what was the KEPCO generation mix in 2020? Thank you.

(Interpreted) To answer your first question for the unit fuel cost, for coal the unit cost guidance for 2020 would be [KRW123,500] per ton and for LNG it would be KRW597,000 per ton, and for oil it would be KRW596.3 per liter. As for external power purchase cost for this year, we anticipate that the cost [forward] volume would be at par with the previous year.

And as for KEPCO's generation mix going on in 2020, we believe the utilization for the nuclear power plant will slightly go up, therefore the mix for our nuclear power plant will go up as a result. And for coal power plant, we believe it will stay the same or there will be a slight decline.

Okay. For the second question, I am asking what is the guidance of the external power purchase volume in 2020 compared to last year. So, I am asking about the volume, not the prices.

(Interpreted) When I said that the volume would be -- the level would be similar I meant to say that it will be for the overall power purchase volume. We anticipate that there will be a slight increase of nuclear power plant utilization, although there will be a slight decline in demand.

When you look at the first half of this year, there has been some decline in our core utilization. But when you look at the overall trend for 2020, we believe the overall purchase volumes for external power would stay somewhat similar to the previous year.

Kang Dong-jin, Hyundai Motor Securities.

(Interpreted) Good afternoon. I have one question. Recently, although KEPCO has carried out power generation separately outside of the firm, there has been some law that was put on the table in the national deployment to directly generate renewable energy. And also there is a bill on the table that allows companies to directly trade their renewable rights, or RAC, between each other through a PPA agreement. Could the management share with us the potential impact from this new bill once it is passed?

(Interpreted) To answer your question, there has been a new amendment act on the power business law that was put on the national deployment as a new bill and recently it covers the two major points.

First, it was -- first, which is on the renewable energy. A power supplier or KEPCO can carry out power generation or power business in more than two types of energy and that will allow us to do a direct generation of renewable energy. This will allow us to have a pivotal role in expanding renewable energy in Korea. And with the strong financial capability that KEPCO possesses we will be able to contribute in reducing cost.

And last but not least, we could also enhance our competitiveness for overseas business with this experience that we build with this renewable energy generation. The private sector, however, has some worries around declining RAC price as well as there are concerns about the network neutrality, which is something that we need to resolve as we carry out the discussion.

And to cover the second point on PPA, which does not go through the power market, but it allows one to directly contract with the power supplier. Our stance on this new proposal is that we need to protect the interest of our consumers and allow the cost to be fairly distributed, and that needs to be institutionalized through a series of discussions.

There are -- however, these two bills are being proposed at the moment, so we need to carefully monitor how this bill is being discussed and pushed through the legislation process going forward.

[Shin Jae Yun], KP Securities.

(Interpreted) I have two questions. The first one is on your net profit for the first half. There has been some accumulated net profit that you created in the first half of the year. And also, considering the fact that the third quarter will be a peak season, we believe that your standalone financial performance would also be profitable in Q3.

Then that brings us to the question of whether the dividend could be paid out in the coming year. In the last two years we have not been able to hear from the KEPCO management on your dividend policy or the dividend payout ratio. And could you share some light into this issue as we experience our profitability.

And second question is on RAC. The RAC mandate is increasing year-on-year by 1% and we understand that you need to purchase more RACs as we move along. But when you look at first half of this year, we have already executed half of what needs to be purchased and the price of RAC ranges from (inaudible) KRW40,000 to KRW60,000 with a variation.

And to me, given the market transaction and purchase volume, this seems rather too big for KEPCO to purchase. So, I would like to understand whether this RAC purchase trend will continue into the second half of this year as a way to check the risk going forward, because this will then amount to KRW2 trillion RAC purchase cost on an annual basis which seems rather huge.

(Interpreted) To answer your first question, our dividend policy is strongly based on the government policy. And the current government stance on the dividend payout ratio is 40%. So, when we consider our dividend payout ratio, this standard or criteria by the government will be considered.

Historically when you look at the RPS increase, it has been increasing year-on-year by 1 percentage point, which adds to about KRW300 billion to KRW400 billion in cost. Next year, unlike year 2020 which was a 7% ratio for RPS, 2021 will be the first year where we see 2 percentage points increase to 9%. And when we consider this hike, we believe the RPS and RAC costs will further go up in the following year.

(Interpreted) I have one follow-up question. When you say 7% to 9% RPS mandate, I believe that it has not been confirmed. But can we safely say that you are considering this 9% to be concrete going forward and that's how you are basing your purchase volume, is that correct?

(Interpreted) So, whether we are assuming that there will be a 9% requirement is something that we have not been able to confirm. We will follow-up with you on this number off-line.

Currently there are no participants with questions. (Operator Instructions). [Lisay Hunt], (inaudible).

(Interpreted) I have a question on the nuclear power plant utilization. It was as high as over 80%, but there has been a recent decline in the utilization. We would like to understand the overall utilization ratio for the second half of the year for coal, nuclear power plant and also [LNG also] has been declining.

(Interpreted) So, I would like to then talk about the utilization rate on an annual basis. Our outlook for the nuclear power plant is somewhere between mid to late 70% and for coal we anticipated earlier this year to be early 70% level. But looking at this changing market situation and our actual numbers, we believe the number could potentially go down going forward. And for LNG we have not had the demand forecast yet, so this is a number that I don't currently have.

Currently there are no participants with questions. (Operator Instructions). Lee Min-Jae, NH Investment Securities.

(Interpreted) I have three questions. First is on [Shin Hanul #1], when will it start its operation? Second question is on paid commission. The paid commission has gone down by KRW100 billion and why is this the case?

And the third question is on the coal price. The coal price has not changed in the last two quarters. And when you have the annual guidance of KRW123,000 unit coal price, we believe that the number really needs to go down in the third quarter and fourth quarter. So what is your view on that?

(Interpreted) To answer your first and third question first, as for Shin Hanul #1, the plan is still for October this year for commercial operations. And to answer your third question on coal unit price forecast, this forecasted annual guidance is generated earlier this year when we come up with our budget plan. And throughout the year we adjust considering the overall fuel and coal cost forecast as well as market situation and currency exchange rate.

To answer your second question on the paid commission, we are in the process of converting contract workers to our full-time employee which is for our cleaning service and security service. And we have set up an affiliate company to have this business set up for KEPCO. So, that has had an impact on our balance sheet of about KRW112.6 billion decline in paid commissions.

(Interpreted) I have two follow-up questions and the first question is on the paid commission. So, can we then basically assume that this level of paid commission would be the commission that you will maintain going forward?

Second question is on Shin Hanul #1. Is then the Shin Hanul #1 plant on pilot operation at the moment?

(Interpreted) To answer your first question on the paid commission, it is very difficult for us to anticipate (audio ends abruptly).

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.