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Edited Transcript of 015760.KS earnings conference call or presentation 13-Nov-19 7:00am GMT

Q3 2019 Korea Electric Power Corp Earnings Call (English, Korean)

Seoul Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Korea Electric Power Corp earnings conference call or presentation Wednesday, November 13, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Woo-ki Baek

Korea Electric Power Corporation - Head of Finance & IR Team

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Conference Call Participants

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* Anna Park

Macquarie Research - Analyst

* Jay Yoo

BofA Merrill Lynch, Research Division - VP

* Jiyoon Shin

KTB Investment & Securities Co., Ltd., Research Division - Analyst

* Minho Hur

Shinhan Investment Corp., Research Division - Research Analyst

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Presentation

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Operator [1]

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[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now, we will begin the conference of the fiscal year 2019 3 quarter earnings resulted by KEPCO. This conference will start with a presentation followed by divisional Q&A session. (Operator Instructions)

Now we shall commence the presentation on the fiscal year 2019 3 quarter earnings resulted by KEPCO.

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Woo-ki Baek, Korea Electric Power Corporation - Head of Finance & IR Team [2]

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[Interpreted] Good afternoon. This is Woo-ki Baek, Director General of Finance and IR Team of KEPCO. On behalf of KEPCO, I would like to thank you all for participating in today's conference call on our earnings result for the third quarter of 2019.

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 presented in both Korean and English.

Please note that the financial information to be discussed 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 this call are based on our current expectations and plans. Please note that such statements may involve certain risks and uncertainties.

Now (inaudible) Senior IR Manager, will begin with an overview of earnings results for the third quarter of 2019, first in Korean and repeat in English.

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Unidentified Company Representative, [3]

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[Interpreted] Now we will provide the overview in English, starting with operating income. For the first 9 months of 2019, KEPCO recorded an operating profit of KRW 311 billion.

Taking a closer look, operating revenues decreased by 2.7% to KRW 44.23 trillion. Our sales revenue decreased by 1.4% to KRW 42.04 trillion, and the revenues from overseas and other businesses decreased by 22% to KRW 2.2 trillion.

Moving on to main operating costs. Cost of goods sold, selling, general and administrative expenses decreased by 2.1% to KRW 43.92 trillion. Total cost decreased by 8.1% to KRW 13.84 trillion as utilization rate of nuclear power plants increased and coal power generation decreased compared to the previous year. Meanwhile, purchased power cost increased by 3% to KRW 13.77 trillion. Notwithstanding improved utilization rate of nuclear power plants, utilization rate of coal power plants decreased and the purchased power volume increased by 0.2%. Moreover, the unit cost of purchased power rose by 2.3% due to the rise of unit cost of fuel. Depreciation cost rose by 1.6% to KRW 6.97 trillion, mainly due to additional facilities purchased for newly added power plants.

Now let me explain KEPCO's nonoperating segment. Net financial loss was KRW 1.49 trillion, increased by KRW 181 billion from net loss of KRW 1.31 trillion of last year. As a result of the foregoing, we recorded a consolidated net loss of KRW 932 billion, widened by KRW 500 billion from KRW 432 billion of consolidated net loss in the previous year.

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

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Unidentified Company Representative, [4]

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[Interpreted] 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. This will proceed the Q&A section in both Korean and English. Please make your questions and answers brief and clear.

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Questions and Answers

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Operator [1]

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[Interpreted] (Operator Instructions) Currently, there are no participants with questions. (Operator Instructions) The first question will be given by Anna Park from Macquarie.

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Anna Park, Macquarie Research - Analyst [2]

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[Interpreted] I don't know whether this question is appropriate or not, but if you can comment on it, it will be highly appreciated.

My first question is on LNG. When you look at the commodity price of LNG on an annual average basis, what would that be? And what is a proportion of long-term contracted amount out of this purchase? And if you can, can you please share Q3 numbers as well?

And also, in addition to that, was there any non-operational one-off event or costs that incurred during this period?

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Unidentified Company Representative, [3]

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[Interpreted] So to answer your first question, currently, I don't have the accurate or the exact ratio between how much is commodity versus long-term contract. But currently, the Korea Midland Power Co., one of our genco is the only power co that is purchasing directly from the market, and the ratio is 40%, but I will get back to you on the exact number offline.

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Unidentified Company Representative, [4]

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[Interpreted] To answer your second question on one-off events or expense event for 2019, the mining right by the Byron mine in Australia has been suspended and terminated based on their national assessment process. And because of that, impairment loss was incurred at about KRW 450 billion.

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Operator [5]

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[Interpreted] Currently, there are no participants with questions. (Operator Instructions) The following question is by (inaudible) from Hyundai Motor Securities.

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Unidentified Analyst, [6]

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[Interpreted] My first question is on low utilization for nuclear power plant. What is the reason behind that? And what are your projections for the Q4 as well as next year?

My second question is on the schedule for newly introduced nuclear power plant. If you can share the timeline or when -- on when it will be adopted, they'll be highly appreciated.

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Unidentified Company Representative, [7]

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[Interpreted] To answer your first question on the reason why the utilization of nuclear power plant has declined in Q3, it's because at the time when we gave out the guidance for the annual utilization of the nuclear power plant, it was 77.4%. But at the time, we did not anticipate a prolonged planned maintenance for Hanbit No. 1 and No. 3 in Q4. There has been some delay due to early discovery of some problems with these 2 nuclear power plants. So the duration of maintenance for a planned outage has gone up. So as we start these 2 nuclear power plant, the impact on overall utilization was negative 10%, which drove our overall utilization to 65% in Q3. Our projection for Q4, although we do not have any official number, with the delay of Hanbit No. 3 and 4 maintenance, this will definitely have negative impact on overall utilization. And as for the next year's projection, I regret to say that we don't have the numbers at this point.

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Unidentified Company Representative, [8]

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[Interpreted] To answer your second question on overseas nuclear power plant business or projects, currently, the nuclear power plant for Saudi Arabia project is going on at the moment. By the end of this year, out of 5 bidding projects, we believe, we'll be selected as one of the project as a shortlisted providers. We need to closely monitor the development. And there is a possibility that this process might be delayed. So we're closely monitoring how this is developing. But we have submitted our bidding paper to Saudi Arabian government, and we're also conducting communication with the government to better explain our proposal.

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Operator [9]

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

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Unidentified Analyst, [10]

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[Interpreted] I have a question on the short-term operating or sales environment for KEPCO. The utilization, as you mentioned, is going down for nuclear power plant due to this planned maintenance and it will further drop in Q4, but what is the situation for coal-fired power plant by the end of this year? How do you see the projections or utilization for coal power plant? Although the policy direction is to reduce coal-fired power plant usage, what is your forecast for Q4 and for the next year?

And also the ninth electricity supply and demand plan is going to be announced before the end of the year. Compared to the eighth plan, how do you see the overall direction changing? And if you can comment on the overall direction, that would be great.

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Unidentified Company Representative, [11]

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[Interpreted] To answer your first question on the utilization of coal-fired power plant is that if you look at the first half of the average utilization for coal-fired power plant, the utilization has dropped by 10% year-on-year ratio. And in Q4, it has been at par with year-on-year numbers, and it's very difficult to project what it will look like in Q4. There is planned maintenance going on for coal power plant at the moment, but the overall progress to date is only half of what has been in the previous year. So if you look at the previous year's annual utilization rate for coal, it has been 73.3%. And for this year, when you look at this on a year-on-year basis, it will be difficult to forecast that the utilization rate will be about the same as last year, given the first half of this year's performance. But it's very difficult to make that projection at this point.

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Unidentified Company Representative, [12]

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[Interpreted] And to answer your second question on the ninth electrical power supply and demand plan, which is scheduled for announcement by end of this year, it's something that currently KEPCO do not have details on at the moment. So we regret to say that we don't have anything to share at this point.

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Operator [13]

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[Interpreted] The following question is by Shin Jiyoon from KTB Investment Securities.

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Jiyoon Shin, KTB Investment & Securities Co., Ltd., Research Division - Analyst [14]

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[Interpreted] I have 2 questions. The first question is on coal. And on coal price, it seems that the spot price has been going down. And if you look at Q3's coal unit price for KEPCO, it has also gone down despite the tax increase in Q2. So do you foresee that this trend will continue on to Q4 and carry out throughout the next year? Can we continue to expect that the coal price will -- coal unit price will continue to be lower than as it is? It will be great if you can share guidance. And I would assume that would be rather difficult, but if you can some -- share some perspective, that would be great.

Second question is also on cost. If you look at the REC trading at spot price, the price is actually going down and it's as low as KRW 50,000 and even moving closer to KRW 40,000. But REC is definitely a purchase cost for KEPCO. And what is the impact of REC purchasing cost? And is there any time lag? And what is the impact from time lag? And how do you foresee this going forward.

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Unidentified Company Representative, [15]

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[Interpreted] To answer your first question, as you know, that the spot price of coal has been gone down and creating favorable environment for us. Even according to our internal data, the unit price of coal for Q3 has gone down. An annual number per ton would be KRW 133,100 per ton. And given the increase of individual consumption tax effect, which would be about KRW 10,000 increase in overall coal price, and if you multiply it by that -- multiply that by 9 months, which will be reflected by this increase of consumption tax, divide it by 12 months, they will have about a minus KRW 70,500 effect -- I'm sorry, plus incremental [KRW 7,500] effect on the overall coal price. So that will bring us to an annual coal price of KRW 125,600 per ton.

If you compare that to the last year's coal price, which was KRW 132,400, it's actually lower than that number. And given the fact that there is about 5 months lagging impact from this spot price to KEPCO's number, we believe the current spot price will be reflected in Q1 of this year. So until Q1, we believe that we will be able to enjoy this positive coal price.

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Unidentified Company Representative, [16]

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[Interpreted] Just to add to that point, if you look at the Australian outright coal price, the Q4 average number that was predicted by Bloomberg was $115. But if you look at the actual Q4 number, it is now being put forth at $74. So when you look at the Q4 spot price, it's going down as far as 30% to 40%.

And to answer your second question on REC cost or RPS impact, in Q4, if you look at the REC cost itself, it's at par with year-on-year number, but REC price or unit price has gone down over time. And if you consider the fact that RPC mandatory reflection will go up by 1% per year, although the unit price might go down, it will either hold at some point or the unit price would go up continuously in the future because there will be some limitation in dropping the REC cost.

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Operator [17]

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[Interpreted]

The following question is by Yoo Jay from Merrill Lynch.

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Jay Yoo, BofA Merrill Lynch, Research Division - VP [18]

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[Interpreted] I have 2 questions. First question is regarding regulation. So the climate agency -- or international agencies are pushing to reduce the use of coal-fired power plant, and the government is planning to come up with a plan to do so. Do you have any insight into when and how it's going to unfold going forward?

And second question is on Q3 power purchasing price. It seems that the S&P unit price is higher than we anticipated. But if you compare the market price, it was at somewhere -- similar level as Q2. I may be wrong in looking at these numbers, but any -- can you share any perspective on this?

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Unidentified Company Representative, [19]

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[Interpreted] To answer your first question, after the climate environment conference, out of 60 coal-fired power plant, during the winter season, the decision has been made to shut down 14 of them. And for remaining other coal-fired plant, the utilization is sealed or curbed at 80% of utilization. So currently the government and the power exchange is reviewing the impact that this kind of measure will have on our grid system, looking at the winter demand and supply. So after the review, we will be announcing the overall plan. The overall schedule is currently not decided, and it's difficult to know when that will happen. But I would anticipate that the plan will be available sometime before we announce the winter electricity supply and demand plan.

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Unidentified Company Representative, [20]

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[Interpreted] To answer your question -- on the second question is, although the S&P unit price has gone down and overall unit price for our power purchase cost has also gone down, but with some difference. So when you look at the S&P price decline year-on-year, it has gone down by 10%, while the power purchase unit price has gone down by 7.5%. However, the purchase of power from IPPs has gone up by 5.7%. So the overall power purchase unit price decline was limited to 1% to 2% only. The reason behind that is because we had those lower utilization for nuclear power plant. And if you look at the overall sales volume, it has dropped from [1,370 291] gigawatt watt per hour to [134,000 and 175] gigawatts per hour. And for KEPCO, our volume has further gone down by 3,000 kilowatt per hour. So we had to buy the -- we have to buy more from IPPs from outside, which has limitation in terms of bringing down the overall power purchase unit cost.

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Operator [21]

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[Interpreted] The following question is by Hur Minho from Shinhan Financial Investment.

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Minho Hur, Shinhan Investment Corp., Research Division - Research Analyst [22]

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[Interpreted] So my question is that for the -- we still need to wait for the tax reform for energy or tax change for energy for next year. But what is the possibility of consumption tax for coal going up next year? Do you believe that it will go up? Can you share some perspective on that?

Next question is on Shin Kori No. 4. It seems that the depreciation cost is actually not going up compared to Q3. So what would be the depreciation cost that will take place in Q4? And how much will it increase?

And next question is on ETS and RPS. Can you share the numbers for ETS and RPS from a consolidated standpoint as well as standalone standpoint and could you also share some UAE revenue numbers?

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Unidentified Company Representative, [23]

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[Interpreted] To answer your first question on the likelihood of increasing the coal consumption tax next year. Clearly, we don't have any information on how this will unfold. As soon as we get any intelligence on that, we will be communicating on that to you as soon as we get the numbers.

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Unidentified Company Representative, [24]

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[Interpreted] To answer your second question, for Q3, for the 3 months, the depreciation cost year-on-year has gone up by 5.0%, and this is because our TMT asset has gone up and KEPCO's depreciation cost increase was KRW 40 billion and our coal-fired power plant or gencos increased depreciation cost was KRW 60 billion due to additional purchase of equipment and facilities.

As you said, due to the commercial operation of Shin Kori No. 4 by the Korea Hydro and Nuclear Power Plant, it started to be reflected on our accounting books starting in November. That is why there hasn't been any number that showed up in Q3 in terms of depreciation cost. We believe that the number will start coming up in our books in Q4.

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Unidentified Company Representative, [25]

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[Interpreted] We can share with you the ETS cost for Q3 2019 for 3 months. On a standalone basis, it was KRW 16.9 billion. And on a consolidated basis, it was a negative KRW 6.2 billion.

And for RPS cost, on a standalone basis, it was KRW 466.4 billion. And for a consolidated basis, KRW 437.2 billion.

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Unidentified Company Representative, [26]

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[Interpreted] And on your fourth question on the overall revenue for UAE power plant construction, I'm sorry to say that we have signed an NDA with the project owner of UAE not to share revenue or operating cost number with outside. And we won't be able to share that number.

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Operator [27]

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

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Unidentified Company Representative, [28]

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[Interpreted] If there's no further question, we will now conclude our IR session.

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Operator [29]

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[Interpreted] This concludes the fiscal year 2019 3 Quarter Earnings Resulted by KEPCO. Thanks for the participation.

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