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Edited Transcript of 015760.KS earnings conference call or presentation 14-May-19 7:30am GMT

Q1 2019 Korea Electric Power Corp Earnings Call (English, Korean)

Seoul May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Korea Electric Power Corp earnings conference call or presentation Tuesday, May 14, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Oobi Pae

Korea Electric Power Corporation - Director General, Finance and IR

* Yoonhye Cho

Korea Electric Power Corporation - Senior Manager of Finance & IR Team

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Conference Call Participants

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* Pierre Lau

Citigroup - Analyst

* Jay Ryu

Mirae Asset Financial Group - Analyst

* Anna Park

Macquarie Securities Korea Ltd. - Analyst

* Minseok Won

HI Investment & Securities Co., Ltd. - Analyst

* Minho Hur

Shinhan Investment Corp. - Analyst

* Young Suk Shin

Morgan Stanley - Analyst

* Seongjin Kang

KB Securities Co. ,Ltd - Analyst

* MinJae Lee

NH Investment & Securities Co., Ltd. - Analyst

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Presentation

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Oobi Pae, Korea Electric Power Corporation - Director General, Finance and IR [1]

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This is [Oobi Pae], Director General of Finance and IR team of KEPCO. On behalf of KEPCO, I would like to thank you for participating in today's conference call to announce earnings results for the first quarter of 2019.

We will begin with a brief presentation on the earning results, which will be followed by question-and-answer 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 year-on-year basis between last year. [Even] strategic plans, financial estimates, and other forward-looking statements including in today's call are based on our current expectation and plans. Please be noted that such statements made involve certain risks and uncertainties.

Now Ms. Yoonhye Cho, Senior IR Manager, will begin with an overview of earning results for the fourth quarter of 2019, first in Korean and repeated in English.

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Yoonhye Cho, Korea Electric Power Corporation - Senior Manager of Finance & IR Team [2]

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Now we will provide the overview in English, starting with operating income. In the first quarter of 2019, KEPCO recorded an operating loss of KRW630 billion.

Taking a closer look, operating revenue decreased by 2.9% to KRW15.25 trillion. Power sales revenue decreased by 1.9% to KRW14.44 trillion, and the revenues from overseas and other businesses decreased by 17.9% to KRW811 billion.

Moving on to main operating costs, cost of goods sold, selling, general, and administrative expenses increased by 0.3% to KRW15.88 trillion. Fuel costs decreased by 7.7% to KRW5.02 trillion as utilization rate of nuclear power plants increased by over 20% (inaudible) and the electricity generation from coal decreased compared to the previous year.

Meanwhile, purchased power cost increased by 13.7% to KRW5.54 trillion. Utilization rate of nuclear power plants rose and caused the purchase power volume to decreased by 0.7%. However, the unique cost of purchased power rose by 13.4% due to the rise of unique cost of fuel and SMP. Depreciation cost rose by 0.7% to KRW2.3 trillion, mainly due to additional facilities purchased for newly added power plants.

Now let me explain KEPCO's non-operating segment. Net financial loss was KRW397 billion, which improved by KRW60 billion compared to net loss of KRW458 billion of last year. As a result of the foregoing, we recorded a consolidated net loss of KRW761 billion, widened by KRW511 billion from KRW251 billion of consolidated net loss in the previous year.

This concludes the overview of KEPCO's earnings results for the first quarter of 2019.

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Oobi Pae, Korea Electric Power Corporation - Director General, Finance and IR [3]

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Now let us move on to transition. I am joined with our IR committee members in charge of maintenance area for KEPCO. We are prepared to take any questions. Since we proceed to translation in both Korean and English, please make your question and answers brief and clear.

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Questions and Answers

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Operator [1]

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(Operator Instructions) [Leslie Lee], Citigroup.

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Pierre Lau, Citigroup - Analyst [2]

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Hi. Thank you, management. This is Pierre Lau from Citibank. I have three questions. The first one is the utilization rate of your nuclear compound was 75.8% in the first quarter. What is your guidance for the utilization for the full year 2019?

Second question: what is your generation mix target for 2019? I mean, how many percent from coal, how many percent on nuclear, how many percent from oil, etc? The final question is is there any chance to reduce your power purchase from IPP? I mean, you have increased the percent margin to 18% in the first quarter. Whether you have any chance to reduce buying power from IPP. Thank you.

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Unidentified Company Representative [3]

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(interpreted) Regarding your first question, yes, in the first quarter of this year the NPP utilization rate recorded 75.8% and for the year our guidance was 77.4%. So looking at the utilization rate in the first quarter of this year, then we believe that it is largely in line with our projections.

And regarding your second question about the generation mix plan for 2019. From the nuclear power plants, there is going to be an increase Y-o-Y. And from coal, it is going to be flat Y-o-Y, and for LNG, it is going to decrease. And then from the renewable source, it is going to show the increased rate that is on par with previous years.

And regarding your third question, now, in the power market, the pricing is determined by the supply and demand dynamics. So there is really limited room for us to try to deliberately reduce the price. But then if the IPPs were try to increase the power purchase price with unreasonable demands, then we would also try to make improvements through discussions.

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Pierre Lau, Citigroup - Analyst [4]

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Thank you for your answer. Thank you.

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Operator [5]

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Jay Ryu, Mirae Asset.

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Jay Ryu, Mirae Asset Financial Group - Analyst [6]

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(interpreted) Now our first question. So out of your purchase power cost, the RAC also increased by 10%. So what is your outlook for this year? And then also the carbon related cost. So for example, the ETS, it also went up. So what is your guidance for this year?

And the second question is about the selling price or the drop in the selling price. So I would imagine that there would be a number of reasons to the drop in the selling price, so for example residential service or the industrial. But can you just elaborate on some of the elements that led to the lower selling price as well as the lower sales volume?

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Unidentified Company Representative [7]

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(interpreted) Regarding the first question, so for the ETS cost, in the first quarter on a consolidated basis, it was minus KRW7.8 billion. And for the RPS, again on a consolidated basis in the first quarter, it was KRW325.3 billion. But then as for the guidance, please understand that we are not able to give you the guidance for this year because of the uncertainties in the calculation.

And the second question, in terms of the sales volume and the selling price, for the sales volume on a non-consolidated basis, now, the sales volume went down by 1.4% due to the base effect from the PyeongChang Olympics and also due to the lower average of the higher average temperature during the wintertime by 2.5 degrees Celsius. And as for the selling price, it was largely flat Y-o-Y.

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Operator [8]

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Anna Park, Macquarie.

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Anna Park, Macquarie Securities Korea Ltd. - Analyst [9]

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(interpreted) My first question is of the power purchase volume. So despite the fact that there was a lower demand for power and also the NC nuclear power plant utilization rate went up considerably. But despite this, the purchase power volume did not decrease from last year when there was a historic low of the nuclear power plant utilization rate.

I wonder why there this purchase power volume did not go down compared to last year. And the second question is can you give us a guidance for this year's dependence on the IPPs?

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Unidentified Company Representative [10]

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(interpreted) Now first about the purchase power. So for the purchase power volume, it went down by 0.7% Y-o-Y. But then for the unit cost of purchase price of the purchase power, so the unit cost of purchase power went up by 13.3% and that is why the total cost of purchase power went up by KRW666.4 billion.

Regarding your second question on the dependence on the IPP, as I explained earlier in the power market, it's moved by the demand and supply dynamics. And because of that, we are almost -- it is almost impossible for us to deliberately reduce the purchase volume and so forth.

And also for the reliance on the IPP. So for our subsidiaries, it is 7 and then to the IPPs it is 3. So we have that 7 to 3 dependence on the IPPs. And in terms of reducing the dependence on the IPPs, it is also very difficult for us to deliberately try to increase or reduce that dependence. But as I have also explained earlier, if there are any unreasonable demands from the IPPs or if there is an opportunity for us to reduce the power purchase cost, then we will try to do so.

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Operator [11]

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Minseok Won, HI Investment & Securities

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Minseok Won, HI Investment & Securities Co., Ltd. - Analyst [12]

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(interpreted) First is there were some talks of an environmental dispatch within this year. So what is the progress on that front, if you can update us on that. And also if we do have this environmental dispatch, then what you believe is going to be the impact on the Company's cost?

And the second question is because of the fine dust problem in springtime, it is expected that 50 out of the 60 coal-fired power plants would be suspended. So then what is your guidance for the coal-fired power plant utilization rate for the second quarter of this year?

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Unidentified Company Representative [13]

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(interpreted) Regarding your first question about the environmental dispatch, now, the power exchange, so the electric trading exchange, now they have commissioned a study on how best to implement this. And we understand that that study has been completed. So apparently they are having a discussion with the participants in the power exchange on how we are going to make the best approach for this.

So once there is a consensus among the participants, then they would also try to revise both the cost evaluation rules under the power exchange market operation rules. And then, so after the appropriate revisions are made, then they will proceed with the environmental dispatch.

Now having said that, because the discussion is still underway, nothing is definitive yet. And at this time, there is no knowing of what kind of a net impact this is going to have on the Company.

And regarding your second question, this is pertaining to preventive maintenance. Now, it is not that we will be suspending 50 power plants all at once out of the 60 coal-fired power plants. It is just that they will be going into preventive maintenance.

And then the gist of this plan is that usually in the springtime, 37 would go through preventive maintenance. But then this time it is going to be 48. Now, at the incremental, the 11 acquired power plants that would go through the preventive maintenance in the springtime this year, now that is actually the schedule being adjusted from the fall preventive maintenance that is planned. In other words, it is -- we have -- so we are going to pull up the preventive maintenance for 11 power plants to be conducted in the springtime instead of the fall time.

So at this time, utilization rate for the second quarter, it is difficult to tell because it would move by the market dynamics. But then for the year, because it is a switching in the timing of the preventive maintenance from the full period to the spring period, we believe that in terms of the financial impact it is going to be negligible.

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Operator [14]

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Minho Hur, Shinhan Investment.

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Minho Hur, Shinhan Investment Corp. - Analyst [15]

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(interpreted) The first question was of the drop in the power tariff. So it went down by 0.5% Y-o-Y. And so it seems as if there was a drop in the selling price for industrial service and it seems as if it had an impact of KRW70 billion to KRW80 billion. So what were the main reasons for the fall in the industrial service power tariff?

And then the second question is about the IPP power purchase. So it seems as if the purchase of power generated by LNG, so that has gone down. But then in terms of the power generated from other sources, it seems as if that has gone up for the Company. So for example, by 900 gigawatts Y-o-Y. Can you explain why that was?

And then another question is about the revenue coming from overseas business. So out of the revenue coming from overseas business, then what were the operating costs related to construction for the overseas business? And then the last question is about the carbon emission rate and the RPS cost. So can you give us the guidance for these costs for the year on a non-consolidated basis?

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Yoonhye Cho, Korea Electric Power Corporation - Senior Manager of Finance & IR Team [16]

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(interpreted) Now regarding your first question about the main reason for the drop in the industrial service rate, and that is because of the increase in the industrial usage during the off-peak load time. As a result of that, the selling price on average went down by 0.3%.

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Unidentified Company Representative [17]

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(interpreted) Regarding your second question, we would have to get back to you after checking the information. And then your second question, so that is about the overseas business. So for example, the equipment and facilities as well as the construction cost in the -- for overseas business. And as a result of this, the operating expense went down by KRW180 billion Y-o-Y, and for the total volume, it was KRW200 billion.

And for the fourth question, so on a non-consolidated basis, the ETS cost in the first quarter of this year is KRW45.3 billion. For RPS, it's KRW387.1 billion.

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Operator [18]

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Young Suk Shin, Morgan Stanley.

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Young Suk Shin, Morgan Stanley - Analyst [19]

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(interpreted) I have some follow-up questions about the coal-fired power plants operations. So you explained earlier the original plan for this year was to have maintenance on 37 power plants in the second quarter of this year. But then you mentioned that 37 would be suspended, but then there is going to be incremental power plant maintenance for a total number of 48 power plants in the second quarter.

So then I understand that in the second quarter you would be doing maintenance work because of the low utilization anyways. But then I would like to know -- understand the specific reasons why you have pulled up the maintenance date from autumn to the second quarter.

And then a related question to that is then in the second quarter of last year, the coal-fired power plants utilization rate was 64.3%. So then can we expect the utilization rate for the second quarter of this year to be much lower Y-o-Y? And then by autumn time, it is going to [suppily]. So then can you also give us the guidance for the coal power plants utilization rate for the year?

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Unidentified Company Representative [20]

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(interpreted) Regarding your question on the reason for increasing the preventive maintenance in the second quarter of this year, the main reason for that is the fine dust problem that arises over the springtime, especially in March.

So that was part of the government's plan against fine dust and that is why the number has increased from 37 to 48 power plants. So 11 have been added, meaning that the maintenance schedule has been shifted from fall time to springtime.

And because it is a simple adjustment in the maintenance schedule, we believe that the overall power supply and demand dynamics are largely going to be the same for the year, while we will be able to help reduce the fine dust generation. And also the maintenance is going to be completed by May, so we are not sure whether it is going to really significantly lower the utilization rate of the coal-fired power plants Y-o-Y.

As for the guidance for the year, please understand that we are not able to give you that guidance. But then having said that, because it is a simple adjustment in the maintenance schedule from fall time to springtime, we believe that overall the utilization rate is going to be similar. And also because of that, we believe the financial impact is also going to be minimal.

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Young Suk Shin, Morgan Stanley - Analyst [21]

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And one follow-up question to that is last year, the coal power plants utilization rate was 74.5%. So can I take it that the number for this year is going to be similar?

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Unidentified Company Representative [22]

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(interpreted) Now then, in response to your question, again we cannot give you the guidance for this. But then our current expectation is to be around mid-70% level. And since you have mentioned the number 74.5% of last year, we do not expect at this point any major factors that would alter that number considerably.

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Operator [23]

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Seongjin Kang, KB Securities.

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Seongjin Kang, KB Securities Co. ,Ltd - Analyst [24]

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(interpreted) I have four questions. First is it seems that the main reason for the sluggish performance in the first quarter is the 14% hike in the purchase power cost of the IPPs. And I think that now we are seeing data for this indeed for the second quarter and we see that this [NP] keeps declining. So what is your guidance for the decline in -- what is your guidance for the fall in the power purchase cost for the second quarter?

And then the second question is can you give us a guidance for the nuclear power plant utilization rate for the second quarter as well as the second half of this year? And the third question is in terms of the tariff adjustment, so for example, calculation of the total comprehensive costs, so what is the progress? If you can just give us an update on the tariff adjustment. And the fourth question is have there been any changes to the SMP adjusted coefficient?

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Unidentified Company Representative [25]

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(interpreted) On the first question about the first-quarter earnings, now, you pointed to the hike of 14% for the purchase power cost of IPPs. But then we would actually have to point out the fact that the operating revenue fell Y-o-Y by KRW460 billion. Then you ask for the unit cost -- the guidance for the unit cost of purchase power. But then please understand that we are not able to disclose that guidance.

And then regarding your second question about the nuclear power plant utilization rate for the second quarter and the second half of this year. Again, please understand that we are not able to disclose that number for the quarter or for the half of the year. But having said that, I can tell you that the nuclear utilization rate is going to be higher in the second quarter than the first quarter of this year.

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Unidentified Company Representative [26]

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(interpreted) Regarding your second question about the cost calculation, so in order to make sure that we have objective calculation of the cost, we have formed a cost evaluation committee consisting of members from the academia and from consumer groups. Once that evaluation is completed, then we will disclose that as soon as possible. But then at this point, we do not know when such evaluation work will be completed.

And as for the tariff adjustment, because the power supply for this year has not been determined yet, we do not know how much the cost for the year is going to be. And because of that, there is no plan to adjust the tariff at this time.

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Unidentified Company Representative [27]

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(interpreted) And regarding the fourth question about the adjustment coefficient, at this time there have been no changes to the adjusted coefficient. As you would know, the adjusted coefficient for the year 2019 is determined in December 2018 by the power exchange based on the expected supply demand for 2019.

And if there are significant changes to the actual versus the projection, then they would do the recalculation. So if there is such recalculation, then we would disclose it as soon as possible.

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Operator [28]

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(Operator Instructions) MinJae Lee, NH Investment & Securities.

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MinJae Lee, NH Investment & Securities Co., Ltd. - Analyst [29]

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(interpreted) I have two questions. First is about the increase in the excise tax for coal. So when was this reflected? And then the second question is about the RAC purchase volume in the first quarter. So can you give us the number in terms of the RAC purchase volume or can you at least give us the Y-o-Y variation?

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Unidentified Company Representative [30]

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(interpreted) So for the first question, the excise tax on bituminous coal, the revision went into effect as of April 1. But then in terms of the reflection in the unit price to be used in the power exchange, because of the two months' time lag, it will start to be applied in June this year.

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Unidentified Company Representative [31]

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(interpreted) And for the second question about the RAC purchase volume. So on a consolidated basis, it was KRW225.2 billion in the first quarter, increasing KRW54.3 billion Y-o-Y.

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MinJae Lee, NH Investment & Securities Co., Ltd. - Analyst [32]

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(spoken in Korean)

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Unidentified Company Representative [33]

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(interpreted) We will get back to you on that. Thank you.

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Operator [34]

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(Operator Instructions) Minho Hur, Shinhan Investment.

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Minho Hur, Shinhan Investment Corp. - Analyst [35]

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(interpreted) Just a follow-up question on the reflection of the excise tax change for coal. So what you're saying is that it has gone into effect for generation companies starting in April, so it is already being captured in your account.

But then now in terms of the reflection to the variable cost from the power exchange, you are saying that -- so that would be reflected into the SMP. So you are saying that that would begin to be reflected in June.

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Unidentified Company Representative [36]

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(interpreted) So for the change in the excise tax for coal, so this has been reflected into the fuel price of the generating companies. But then because the moving average is applied, not the unit price at the time, it is the moving average that we apply, so we will actually be seeing it not in April but sometime in May more likely.

And then also from the previous answer about this being reflected into the power exchange two months later, that is when the power exchange when they calculate the variable cost. So that is when this will be reflected.

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Operator [37]

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(Operator Instructions)

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Oobi Pae, Korea Electric Power Corporation - Director General, Finance and IR [38]

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This is the end of our Q&A session. We thank you, everyone, for your participation in this conference call. And this concludes KEPCO's financial results conference call for the first quarter of 2019. Thank you very much.

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Editor [39]

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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.