Korea Electric Power Corp (KEP) 2020 Q1 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 2020 first 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 2020 first quarter earning results by KEPCO.

(foreign language) Good afternoon. This is (inaudible), General Manager of KEPCO. On behalf of KEPCO, I'd like to thank you for participating in today's conference call to announce the earnings results for the first quarter of 2020.

(foreign language) We will begin with a brief presentation on the earnings results, which will be followed by 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 the K-IFRS. Any comparison will be on Y-o-Y 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) Mr. (inaudible), Senior IR Manager, will begin with an overview of our earnings results for the first quarter of 2020, first in Korean and repeat in English.

(foreign language) Now we will provide the overview in English, starting with operating income. In the first quarter of 2020, KEPCO recorded an operating profit of KRW 431 billion.

Taking a closer look. Operating revenues decreased by 1% to KRW 15.09 trillion. Power sales revenue decreased by 0.9% to KRW 14.3 trillion, and revenues from overseas and other businesses decreased by 2.7% to KRW 789 billion.

Moving on to main operating cost. Cost, SG&A expenses decreased by 7.7% to KRW 14.66 trillion. Fuel cost decreased by 17.6% to KRW 4.14 trillion due to an increase in nuclear power generation volumes and decrease in coal-fired power generation volume and the drop in fuel prices compared to the previous year. Also, though the volume of purchase power from independent power producers increased compared to the previous year, purchase power costs decreased by 13% to KRW 4.82 trillion due to the drop in the unit price of LNG fuel. Depreciation cost rose by 5.8% to KRW 2.43 trillion, mainly due to the increase in depreciation assets resulting from the completion of a new nuclear power plant, the Shin Kori No. 4 from last year, and the acquisition of facility assets.

Now let me explain KEPCO's nonoperating segment. The net financial loss was KRW 623 billion, increased by KRW 226 billion compared to the net loss of KRW 397 billion last year. As a result of the foregoing, we recorded a consolidated net profit of KRW 54 billion, increased by KRW 815 billion from a consolidated net loss of KRW 761 billion in the previous year.

(foreign language) This concludes the overview of KEPCO's earnings results for the first quarter of 2020.

(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. Since we'll proceed the Q&A session in both Korean and English, please make your questions and answers brief and clear.

(foreign language) (Operator Instructions) The first question will be given by Hwang Sung Hyun from Eugene Investment Securities (sic) [Eugene Investment & Securities].

[Interpreted] Now I have 4 questions. Now first is about the fuel cost. And I see that the fuel spend has gone down considerably in the other areas. I wonder why. So if you could explain.

And the second question is about the unit price of coal. And right now, it stands at KRW 135,000. And it appears as if it has not gone down as much as was expected. Can you explain the background for this? I presume that there would also be exchange rate effect and others, but if you give us an explanation, including the lagging effect.

And the third question is I understand that because of the [ESS issue], now perhaps the coal-fired generation plant, they could also be, let's say, a burden on the total assets. So can you tell us about the share out of the total assets?

And the fourth is about the RPS. So can you explain a bit more about the RPS cost as well as the -- and in comparison to the coal -- sorry, the RPS cost and also in consideration of the carbon charge?

[Interpreted] Now first, about the question on the fuel cost and the variations in the other categories. So in this case, they would include, like, the wood pallets and also the organic -- organic solid fuel. And as for the Y-o-Y variations, we have not analyzed the causes yet. And once we do that, then we will communicate them with you.

[Interpreted] Now first, about the -- in response to the second question about the coal and the fuel cost. So yes, it is true that the spot price of the coal has gone down. But then compared to the coal price itself, the fuel cost has not gone down as much as expected, and there are some factors to that. One is the increase in the consumption tax and coal starting from April of 2019. And also, as you have observed, there is the exchange rate effect. And also, the source of our coals are various. So for example, we have coal coming from Australia and also from Indonesia. And as for the Indonesian coal, the drop in the price was not as steep as the ones that we have seen in the Australian coal.

And also, another factor is the reduced utilization of the coal-fired generation because of the government's constraints on coal generation usage. And because of that, in terms of the fuel cost, there has been some lagging effect in reflecting the coal -- reflecting the fuel costs required for the coal generation.

And then the third is -- was about the stranded assets in relation to the coal-fired generation. And it's about 59% currently, and at this point, we do not see much difference.

[Interpreted] And then in response to your fourth question, as of the first quarter of 2020, the GHG emission cost, so on a nonconsolidated basis, it is KRW 162.3 billion; consolidated basis, KRW 112.6 billion. And for the RPS cost, on an unconsolidated basis, it is KRW 472.8 billion; consolidated basis, KRW 366.1 billion.

[Interpreted] The following question is by Kang Dong Jin from Hyundai Motor Securities.

[Interpreted] My first question is about the GHG emission cost. You did give the rough costs in both in terms of the consolidated and nonconsolidated basis. But can you also give us the Y-o-Y variation?

And now in terms of the electricity demand, there has been a slowdown in demand in the first quarter. What is your outlook for the electricity demand in the second quarter of this year? And also, because of the COVID situation, we see that, overall, the electricity demand would be down. And then also, there is the plan to exit from coal-fired generation. So it seems as if the LNG portion is increasing. So do you believe that they will serve to further reduce the GHG emission cost down the road?

[Interpreted] Now in response to your first question about the demand. Yes, about the GHG emission cost on a Y-o-Y basis, in the first quarter of 2019, the GHG emission cost was KRW 45.3 billion on a nonconsolidated basis and minus KRW 7.8 billion on a consolidated basis. The reason why we have a minus number on a consolidated basis is because now for the emission volume in 2018, we had our own estimation at the end of 2018. But then in the course of settlement with the government, in the end, the total estimation had gone down, and that is why the number ended up as a negative number.

[Interpreted] And about the GHG emission volume, now this would be dependent on the generation mix, but the generation mix is not determined yet. So at this point, it is difficult for us to foresee how much the GHG emission cost is going to be. At the same time, the -- in the market, the emission rate continues to go up in price. So given that we are not clear about the pricing as well as the emission volume yet, it is difficult to tell how much the GHG emission cost is going to be.

And about the electricity demand, yes, in the first quarter, largely because of the COVID-19 impact, we have seen slowdown in demand growth for the power in the first quarter. But now for the year, of course, it also depends on how long the COVID-19 is going to last. But we see that from the first quarter, the coal-fired generation portion is going down, and LNG portion is going up. And that is actually mostly because of the constraint on the coal-fired generation due to the high concentration of fine dust at that time. And so for the year, we expect the nuclear power plant usage to go up, while the coal-fired generation ratio to be maintained in general. And also, for the LNG cost, now because of the increase in the nuclear power plant usage, we believe that the LNG cost would also go down.

[Interpreted] The following question is by Pierre Lau from Citigroup Global Market Asia Limited (sic) [Citigroup Global Markets Asia Limited].

I have 3 questions. The first one is about the coal cost in the first quarter 2020. We saw that the coal cost did not [grow much] in the first quarter. Was it because of much of the coal used in the first quarter came from contract, and contract price did not drop yet? And also, usually, we have the contract for coal price negotiations in March and April. So can we expect a sharp decline in contract coal price in the second quarter compared to first quarter? And if that is expected, what would be the decline percentage for the coal price in second quarter versus first quarter?

The second question is, in view of the oil price decline recently, are you expecting further unit LNG price drop in the second quarter versus first quarter? And what is your expectations regarding your unit LNG cost for 2020?

And the last question is you discussed about the power demand and also generation mix this year seems to have no early guidance at the moment. But do you mind to give us some range, say, for power demand growth? If you expect a decline or there will be a decline between 3% to 5% or 5% to 7% generation mix? What will be any number that you can give for this year?

[Interpreted] Regarding the first question about the coal price, for us, not being as low as anticipated. As explained earlier, there was the application of the consumption tax on coal starting last year. And also, there was the exchange rate effect and also the difference in the countries where we source the coal from. And in terms of the contract price, we have both the long-term contract and also we do some spot purchasing as well. So we have a mixture of them. And in terms of the contract now, because it's a long-term contract, we do not expect the kind of -- for the long-term contract, we have a quarterly to -- so we have the negotiation on a quarterly basis as well as a half-year basis. So we do not expect the kind of effect that you were asking about.

And regarding the oil price, and yes, it is true that since the early part of this year, the oil price has gone down considerably. And given the lag time of about 5 to 6 months for the international oil price to be reflected into our fuel cost, we believe that by the second half of this year, we would also be seeing the positive effect on our fuel cost from the oil price decline.

And as for the power demand, yes, because of the COVID-19 situation, we do foresee some decline Y-o-Y in terms of the power demand. But please understand that in terms of the specific outlook, it is difficult for us to disclose that at this point. And for the generation mix, the nuclear power plant utilization rate is going to go up, as explained earlier, and the coal-fired generation is going to remain largely similar. And also, because of the increase in the utilization rate of the nuclear power plant, we believe that the LNG usage is also going to go down Y-o-Y.

Okay. And I have one follow-up question. What is your view regarding any tariff change for 2020?

[Interpreted] As we had announced last year, we are going to make a rational improvement on the essential guarantee system. And we would also -- we are currently working on a way to improve the tariff system that would also include the seasonal and hourly tariff system. So this would be put into implementation after we discuss this thoroughly with the government.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions) The following question is by Lee Minjae from NH Investment Securities (sic) [NH Investment & Securities].

[Interpreted] Now I have 3 questions. Now first, in the month of March, we see that the coal generation utilization rate was about 50%, which appears to be quite low, even considering the various factors. So for example, the outdated coal-fired power plants and also the suspension of the utilization of these outdated facilities as well as the scheduled maintenance. So even if we take into account these factors, it appears as if the coal generation utilization rate is quite low. So do you foresee this to be a temporary phenomenon, so that the number is going to pick up after the scheduled maintenance? Or do you expect this number to continue into the second quarter and on, so for example, into April and May?

And the second question is about the staffing plan. So what is the plan to recruit more human resources, including the -- each of the GENCOs?

And the third question is about the capacity -- reserve capacity, which stands at about 7% -- which stood at about 7% in August. And now this year, they say that this summer is going to be one of the hottest ever. So this would also bring into question the reserve capacity because when we think about -- even when we look into the, for example, the coal-fired generation and also the nuclear power plant and utilization rate, so given the current circumstances, it seems as if there is not much room to increase the supply capacity. So then you have already announced the plan to start the operation of the Shin Hanul No. 1 plant in October this year. So perhaps the starting schedule for the Shin Hanul plant can be pulled up. Could this be one of the considerations?

[Interpreted] With regards to the first question about the coal generation utilization rate in the first quarter of this year being lower Y-o-Y. Now looking back to last year, the -- because of the fine dust, the constraint on the usage of the coal-fired generation was concentrated in the springtime, which was from March to June. But then in this case, the high concentration period of fine dust was more concentrated in the wintertime. So we see that there has been a drop in the utilization rate of the coal-fired generation because of the different season of the fine dust. And also, in terms of the usage suspension of the outdated coal-fired generation, that again was concentrated in between March to June last year, whereas for this year, it was between December to March. So again, there was a difference in the season. And given this, now -- because in the second quarter, the usage constraint, because of the fine dust high concentration, is going to be eased in the second quarter. We do believe that this factor is going to partially improve; meaning, that the coal-fired generation would also partially go up.

[Interpreted] And to your second question about staffing. So yes, it is true that at KEPCO as well as the GENCOs, recruitment is underway. But then in terms of the specific size or the number, we do not have the information at this point, so we will have to get back to you.

And to your third question about the power demand. Now the power demand is hard to predict because it largely depends on the economy as well as the temperature. Now for the Shin Hanul No. 1 plant, it is scheduled to go into commercial operation at the end of October this year, and that is the current plan. And as for the reserve capacity or the preparation for the expected heat in the summer this year, we would make utmost preparation so that we will be able to handle the demand.

[Interpreted] Now then one follow-up question then for the Shin Hanul No. 1 plant. Now whenever a new nuclear power plant goes into operation, then you have the trial run period. So perhaps that could start in July. So let's say, if there is -- there are problems this summer in terms of the reserve capacity, then perhaps you could address that -- the incremental demand by the trial run of the Shin-Hanul No. 1 plant. Could we understand it that way? That's the first question.

And the second question is I do understand that a lot of questions have been asked about the coal price, but let me reiterate that because I still don't understand. So looking back to the price -- looking back to the cost last year, then in the third quarter of last year, it was KRW 137,000, whereas this quarter, it was KRW 135,000. While we see that the exchange rate between that period and this period is largely similar, so then still there is about a 30% difference in terms of the coal price between then and now. So then the current coal cost for the company cannot be explained unless there was an increase by 30% in the coal coming from Indonesia. So then perhaps other than the 4 factors that you have explained earlier, maybe there are some other issues that affected the coal cost for the company.

[Interpreted] Now first, about the nuclear power plant operation. This also depends on the permit and approval from the relevant authorities. So right now, the plan for us is to start the commercial operation by the end of October, and that is all we can say at this point.

And about the coal cost and why it did not go down as many believe should have gone down, other than the 4 reasons that we had stated earlier, there is nothing else that we have identified so far.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions) The following question is by [Park Se Young] from Nomura Financial Investment.

[Interpreted] Now KEPCO being -- KEPCO suffering losses for the past few years was not a very good environment for the investors and the shareholders. But then now, this year, we see the oil price continue to decline, and you did mention that the decline in the oil price will start to be reflected into the company's balance sheet in the second half of this year. And also, you have mentioned how the nuclear power plant utilization rate will go up, whereas the coal-fired generation utilization rate will be maintained. So then given the fact that in the first quarter, you have seen a profit, then it seems that, overall, there is improvement in the profit and loss situation for the company. So then does this mean that we can expect continued profitability coming from the company? And also, of course, normally, in the third quarter, because of the increase in power demand, the company turns to profit. But -- so what is your expectation for the second quarter and the third quarter of this year?

[Interpreted] Yes. The NPP realization rate this year will go up, and the fuel cost continues to go down. So we do believe that these factors will be a positive factors for the company's financials this year. But at the same time, we have to keep an eye on the other costs. So for example, RPS and EPS, we see that they continue to go up, so we have to also be mindful of these factors.

[Interpreted] Currently, there are no participants with questions. (Operator Instructions)

[Interpreted] With that, then we will conclude the Q&A session. Once again, I would like to thank everyone for your participation at the conference call of the earnings release in the first quarter of 2020. And with that, we conclude the conference call for 2020 first quarter KEPCO earnings release. Thank you.

[Interpreted] This concludes the fiscal year 2020 first quarter earning results by KEPCO. Thank you for your participation.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]