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Edited Transcript of 015760.KS earnings conference call or presentation 22-Feb-19 1:30am GMT

Q4 2018 Korea Electric Power Corp Earnings Call (English, Korean)

Seoul Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Korea Electric Power Corp earnings conference call or presentation Friday, February 22, 2019 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Changyoung Ji

Korea Electric Power Corporation - Senior IR Manager

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Conference Call Participants

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* Anna Park

Macquarie Research - Analyst

* Jae-Hyun Ryu

Mirae Asset Daewoo Securities Co., Ltd., Research Division - Research Analyst

* Minho Hur

Shinhan Investment Corp., Research Division - Research Analyst

* Pierre Lau

Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head

* Young Suk Shin

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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(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 2018 Fourth Quarter Earning Results by KEPCO. This conference will start with a presentation followed by a [Q&A] session. (Operator Instructions) Now we shall commence the presentation on the Fiscal Year 2018 Fourth Quarter Earning Results by KEPCO.

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Unidentified Company Representative, [2]

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(foreign language) Good morning. This is [Jungin Yoon] Manager of IR team of KEPCO. On behalf of KEPCO, I would like to thank you for all participating in today's conference call to announce the earnings results for 2018. (foreign language) We will begin with a brief presentation on the earnings results which will be followed by the 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 preliminary unaudited and consolidated basis in accordance with the K-IFRS. Any comparison will be on 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 Mr. Changyoung, Senior IR Manager will begin with an overview of earnings results for 2018, first in Korean and repeat in English.

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Changyoung Ji, Korea Electric Power Corporation - Senior IR Manager [3]

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(foreign language) Now we will provide you overview in English, starting with operating income.

In 2018, KEPCO recorded a net operating loss of KRW 208 billion. Taking a closer look, operating revenues increased by 1.4% to KRW 63 trillion, 6-3 trillion. Power sales revenue increased by 4% to KRW 56.84 trillion, while revenues from overseas and other businesses decreased by 26.7% to KRW 3.79 trillion.

Moving on to main operating costs. COGS and SG&A expenses increased by 10.9% to KRW 60.84 trillion. Fuel costs increased by 21.6% to KRW 20.09 trillion, mainly due to our 23.2% rise in unit cost of fuel.

Meanwhile, purchase power cost increased by 28.3% to KRW 18.31 trillion. Introduction of highly efficient IPPs and decline of utilization ratio of nuclear power plants caused the purchased power volume to increase by 18%. Moreover, the unit cost of purchased power also rose by 9% due to the rise of unit cost of fuel and SMP.

Depreciation cost rose by 4.6% to KRW 9.09 trillion, mainly due to newly introduced power plants. Maintenance costs went up by 5.1% to KRW 2.22 trillion, attributable to increased maintenance caused by newly introduced power plants.

Now let me explain KEPCO's nonoperating segment. Net financial loss was KRW 1.67 trillion, increased by KRW 76 billion compared to net loss of KRW 1.6 trillion of last year. As a result of the foregoing, we recorded a consolidated net loss of KRW 1.15 trillion, decreased by KRW 2.59 trillion from KRW 1.44 trillion of consolidated net income in the previous year.

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

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Unidentified Company Representative, [4]

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(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. Thank you.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) (foreign language) The first question will be given by Jae-Hyun Ryu from Mirae Asset Daewoo.

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Jae-Hyun Ryu, Mirae Asset Daewoo Securities Co., Ltd., Research Division - Research Analyst [2]

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(foreign language) Yes, I have 3 questions. The first question is about the REC purchasing cost, which in 2018 was about KRW 1.5 trillion. I noticed that this is about a KRW 300 billion increase year-on-year. So the pace or the amount of increase is slowing down a bit. But in that context, can you share with us your expectations outlook for the 2019 REC purchasing cost? My second question is about the nuclear power plant, nuclear utilization. It's now coming up as fast as people have been expecting, but I do hear that you have several units that are scheduled for operation this year? And so in that context, can you share with us your outlook for the nuclear utilization this year? And also, we've been hearing that there have been some output decreases in certain units. Does that imply that you have future plans for those power plants that have been recently declining in their output? Third question, this may also be a sensitive question, but recently, there has been some press reports about possibilities of increasing the electricity rates, the tariffs, especially given that KEPCO is recording a loss. I think there is an increasing hope -- expectation that this would happen. Can you give us an update on where it stands or at least when you expect to see a result on that decision?

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Unidentified Company Representative, [3]

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(foreign language) To answer your first question, you asked about the REC purchasing cost. I guess, we repurchased that as an RPS cost. On a consolidated basis 2019, we're expecting our RPS cost to run a little bit higher than KRW 2 trillion.

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Unidentified Company Representative, [4]

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(foreign language) Your second question, even though it is a bit early in the year, to give you an exact utilization expectation for our nuclear units, we are operating with a plan of around 77% utilization for the new [5] units this year.

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Jae-Hyun Ryu, Mirae Asset Daewoo Securities Co., Ltd., Research Division - Research Analyst [5]

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(foreign language)

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Unidentified Company Representative, [6]

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(foreign language) And the follow-up question was whether that was -- it will be possible to break down that utilization into first half and second half, which at this point, is not available.

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Unidentified Company Representative, [7]

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(foreign language) Regarding the third question about the electricity rates, there is various options, structures that are being currently considered regarding the change of the tariffs for residential as well as industrial power. But currently, it's difficult to know exactly when that would happen.

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Operator [8]

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(foreign language) The following question is by Anna Park from Macquarie Securities.

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Anna Park, Macquarie Research - Analyst [9]

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(foreign language) I have one question and in the recent press conference, there was a mention once again of adopting a fuel cost adjusted or a wholesale price linked; a pricing scheme for the power, the electricity within this year, I think, what was the comment during the press conference. This item itself has been talked about for quite a long time. Do you see any new developments on the adoption of this linked or adjusted scheme? Or can you give us an idea of when it would be introduced?

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Unidentified Company Representative, [10]

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(foreign language) Regarding the electricity tariffs or power tariffs that are linked, so -- to various factors, including a fuel cost as well as other policy costs. And to have that reflected, the cost factors reflected and the power reach more flexibly, is a necessary approach in various reasons because that would give a signal to the market of the users in terms of a price signal so that it would encourage consumers to use energy more efficiently and reasonably, and also would raise the overall energy efficiency of the country. So there is a need to adopt this new approach. However, in order to get there, there has to be a broad social discussion, including the process to listen to the opinions of the academia as well as consumers. And the adoption of this new policy will be reviewed after such social consensus has been processed. (foreign language)

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Operator [11]

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(foreign language) The following question is by Pierre Lau from Citigroup Global Market Asia Limited.

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Pierre Lau, Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head [12]

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Capital Management. I have 3 questions. The first one is what is your guidance for KEPCO unit coal, oil and LNG cost in 2019? And how would they change compared to 2018? Second question, what is your expectations of your generation mix by fuel type in 2019, in particular from coal and nuclear? And the third question is, how much purchase power volume that you are expecting in 2019? And what would be the change compared to 2018? (foreign language)

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Unidentified Company Representative, [13]

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(foreign language) To answer your first question about our fuel unit cost expectations for 2019, we're expecting coal to be KRW 137,601 per ton; LNG, KRW 730,300 per ton; and oil to be KRW 580 per liter. Compared to 2018 unit cost, this means that coal was lightly increased. LNG unit cost was slightly decreased, and on the oil side, it has remained at a similar level within about 5% change of what we saw last year.

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Unidentified Company Representative, [14]

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(foreign language) Regarding your purchase power volume in 2019, we want to make it clear, are you asking about consolidated basis or stand-alone basis of KEPCO?

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Pierre Lau, Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head [15]

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Consolidated basis.

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Unidentified Company Representative, [16]

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To answer your second question about the power generation mix guidance for 2019, because we are utilizing so many units, it's difficult to give an exact expectation of how that would be broken down. But roughly, we're expecting that the share of nuclear will increase versus 2018 given that we're expecting higher utilization of nuclear power this year. As a result of that relatively LNG share, we're expecting to decrease and this share of renewable to maintain its pace of increase as we saw in 2018.

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Unidentified Company Representative, [17]

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(foreign language) To answer your third question about our power purchases, well, if we start from the top end, we're expecting our overall power sales to increase by about 1.5% to about 1.6% year-on-year. And we're expecting our power generation volume also to increase in line with that. And because we're expecting higher nuclear utilization this year, as a result of that, our purchases from the private sector we're expecting would decrease at least a share with decrease versus 2018.

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Pierre Lau, Citigroup Inc, Research Division - MD, Head of Regional Utilities Research Hong Kong, China & Korea and Deputy Head [18]

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Okay. I have a follow-up question. For the changes in mix, you mentioned the nuclear would rise, LNG was down, but what about coal? Would it be -- would it goes up or go down? (foreign language)

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Unidentified Company Representative, [19]

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(foreign language) To answer your question, coal, we're expecting, in terms of generation mix, we will maintain a similar share or actually decrease slightly compared to 2018 even though the amount of decrease we're expecting for coal is less than that for LNG.

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Operator [20]

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(foreign language) Currently, there are no participants question. (Operator Instructions) (foreign language) Your following question is by Minho Hur from Shinhan Finance Investment.

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Minho Hur, Shinhan Investment Corp., Research Division - Research Analyst [21]

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(foreign language) I have several questions. First of all, in terms of your results, can you give us the breakdown on a consolidated basis as well as a stand-alone basis the amount of cost related with carbon emission rates? Also, stat breakdown for the RPS provisioning, both on a consolidated as well as a stand-alone basis. How much was that last year? Also can you give us, for example, the revenue from UAE and other overseas businesses, also how much of overseas business-related expenses did you report in the fourth quarter? The third question is about the settlement adjustment coefficient. Can you share with us your outlook for that this year? I think recently, the President of KEPCO sort of alluded that he is now thinking of increasing the coefficient. What would be the company's position regarding the outlook for the coefficient this year? The fourth question is about your CapEx, your investments. The company didn't spend all that it had planned for CapEx last year. How much of the planned CapEx or investments this year do you think will be executed? And what are the visibilities of those?

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Unidentified Company Representative, [22]

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(foreign language) To answer your first question, our fourth quarter greenhouse gas-related cost, emissions cost was, on a stand-alone basis, around KRW 60 billion. On a consolidated basis, a little bit above KRW 100 billion. (foreign language) For the RPS cost on a stand-alone basis, nonconsolidated was around KRW 550 billion, and on a consolidated basis, around KRW 400 billion. (foreign language) For the UAE-related revenue, fourth quarter was around KRW 450 billion and a similar amount of costs were also incurred related with UAE.

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Unidentified Company Representative, [23]

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(foreign language) Regarding the settlement adjustment coefficient, whether -- you've asked whether it will be calculated differently from previous years. As you know, in principle, the coefficient is calculated by considering the financial situations of KEPCO as well as the subsidiaries in order -- and based on established rules and regulations about the power market as well as the costs related with power generation. And as you know, the coefficient that will be applied for 2019 was already calculated as of December 2018, and that calculation was according to the established standard aimed at striking a balance between KEPCO and the power -- the GENCOs. And the standards that were used to calculate the 2019 coefficient was the same as the 1 used in previous years.

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Unidentified Company Representative, [24]

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(foreign language) About your fourth question about our CapEx, actually, we think that we executed the CapEx as planned in 2018. We were on plan in terms of investments into transmission facilities as well as generation facilities last year. This year, we will continue to invest especially in transmission as well as power generation facilities, including all of the GENCOs as of the power group, our expected CapEx for this year is around KRW 16 trillion. And for example, there is continued demand for expansion of our transmission facilities, especially in the context of needing connections to renewable assets.

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Minho Hur, Shinhan Investment Corp., Research Division - Research Analyst [25]

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(foreign language) I have a few follow-up questions. I noticed that your depreciation in 2018 increased by about KRW 400 billion. How much of a depreciation are you expecting in terms of an increase this year? Also on the cost base, in terms of labor cost, what was your labor cost last year? And how much are you expecting this year given the fact that there were, for example, conversions into regular employees and the government is very keen on increasing employment overall? The other question is a follow-up to the fuel unit cost. I think, according to the information you provided earlier, you're expecting coal unit cost prices to increase slightly. Can you explain this despite the fact that recently coal prices on the market have been declining?

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Unidentified Company Representative, [26]

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(foreign language) To answer your first question. For 2019, we're expecting our depreciation would increase by about KRW 600 billion. This is -- one factor is that the single unit number 4 will be completed as of August, and once that's completed, then it will be counted into depreciation. So that's one of the factors contributing to the increase.

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Unidentified Company Representative, [27]

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(foreign language) To answer your second question about labor costs. The full year 2018 labor cost was KRW 4.63 trillion, including severance-related payments. (foreign language) Now the labor cost that we're expecting for 2019, actually we haven't done that calculation on a consolidated basis. But I guess, a good way of estimating labor costs for 2019 will be counting in the 1.8%. Roughly, I think that's the number I remember off the cuff. I may have to verify this, but I think 1.8% is what the government is budgeting in terms of wage increases this year. So reflecting that to our existing headcount and then accounting for any new hires that we will have this year. (foreign language) And to answer your question of why we're expecting our coal unit price or cost to increase is because of the specific consumption in tax that will be kicked in from April this year. Due to that, there will be an increase of KRW 10,000 per ton.

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Unidentified Company Representative, [28]

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(foreign language)

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Minho Hur, Shinhan Investment Corp., Research Division - Research Analyst [29]

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(foreign language)

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Unidentified Company Representative, [30]

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(foreign language) So the follow-up question was, if we check out that tax effect, the specific consumption tax increase, does that mean that actually you're expecting the coal unit price itself without the tax to be decreasing? And the company's answer is that, yes, overall international coal price expectations is that this year, coal prices will either stabilize or slightly decline. And that is also the view that our working level people at the GENCO levels are having as well.

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Minho Hur, Shinhan Investment Corp., Research Division - Research Analyst [31]

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(foreign language) Follow-up question is, once again, the fourth quarter overseas business-related cost, including the UAE cost?

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Unidentified Company Representative, [32]

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(foreign language) And actually that number is not, as of yet, available.

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Operator [33]

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(foreign language) The following question is by [Chae Hyup Nyon] from Lazard Asset Management.

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Unidentified Analyst, [34]

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(foreign language) My follow-up question is about the nuclear utilization of 77% that you provided as guidance for this year. Is this the normal level of utilization that the company expects, for example, excluding possibilities of force majeure such as earthquakes or natural disasters? Because if we count 77% utilization, that means that for units, it's going to be in maintenance for about 90 days out of 365. So is this usually normally what happens for units?

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Unidentified Company Representative, [35]

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(foreign language) To answer your question about that 77% utilization, I guess the way of answering your question was it will be to explain how the 77% was calculated. It's actually based on the annual suspension, the nuclear-generated suspension plan that are posted by KHNP hydro nuclear power at the KPS as of January 2019. So start of the year, KHNP issues its plans of what units will be shut down when, and we take that plan and we calculated 77% utilization for this year. Of course, as you notice, this is a plan, and therefore, the suspension schedules can be adjusted flexibly throughout the year, depending on the situation that actually unfolds. But banning or excluding special factors that you mentioned, according to this plan, the utilization this year would be around 77%. There were times when in 2013 and '14 periods where nuclear utilization was higher, around 85%. And so in terms of what is our normal nuclear utilization, I think it depends on how you see it. But right now, we're going through a process where we are taking safety measures to our nuclear units because of issues that were discovered regarding the concrete as well as steel in it. So we're in this space where we're taking the safety measures, we have been for the past several years. It's not complete yet. So this safety measure program will have an impact on utilization at least until this year. But once this phase is past, I guess, we will enter the next step where we could actually start to recover closer to previous utilization levels.

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Operator [36]

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(foreign language) The last question is by Young Suk Shin from Morgan Stanley.

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Young Suk Shin, Morgan Stanley, Research Division - VP [37]

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(foreign language) I have 2 follow-up questions. One is about your coal utilization this year. I think, previously, you expected your coal usage in terms of volume to be similar or slightly declined from previous years or last year. Would it be then safe to assume that your coal utilization would be somewhere similar to last year at 74%? Second question is about the Shin Kori unit No. 4, which you said will be completed in August. Can you give us exactly when you think the unit 4 will go into operations?

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Unidentified Company Representative, [38]

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(foreign language) To answer your first question. So to clarify what we mentioned in terms of coal share remaining similar or slightly decreasing was in terms of generation mix that we're expecting coal share to be even to last year or slightly decrease. In terms of coal utilization, even though it's difficult for us to predict the actual utilization because it will be determined by various factors, I guess, I'm expecting that coal utilization may decrease due to, for example, strength in regulations on operation for air quality controls that there is more stricter rules that are imposed regarding suspending coal power generation during air quality issue periods. But actually, we're expecting -- when we look at previous data, this air quality control measure doesn't really affect the coal utilization days as much. And so we're expecting coal utilization to stay somewhere similar to last year.

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Unidentified Company Representative, [39]

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(foreign language) Regarding the schedule for Shin Kori unit No. 4, construction completion is expected to be in July 2019, and it will be connected to our grid starting August. (foreign language) To clarify the schedule of Shin Kori unit 4, we need to count in the concept of commissioning, which actually occurs before the construction is completed. So commissioning of No. 4, unit No. 4 at Shin Kori will start in April this year. So it will start operation, but not commercially. And then we will have the completion of the construction phase officially in August, and that's from when it would start to officially operate commercially.

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Unidentified Company Representative, [40]

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(foreign language) Now that ends the Q&A session. Before we end the call, I would like to offer few comments to our shareholders and investors. (foreign language) We find it very unfortunate that in 2018, despite the increase in our power revenue due to the rapid increase in international fuel cost and the increase of the specific consumption tax for the bituminous coal, we ended up recording an operating loss. (foreign language) But we do expect there to be positive factors going forward in our financial performance especially given that international fuel prices have been stabilizing since December last year, and the planned preventative maintenance for our nuclear units are gradually one by one being completed, and this is resulting in higher utilization of our nuclear units. (foreign language) At the same time, KEPCO will continue to implement its intensive emergency management system in order to maintain our strong financial soundness despite such difficult business environment.

(foreign language) And we will continue to exert our utmost effort to overcome the challenges that we're facing and deliver higher shareholder value.

(foreign language) Thank you very much for attending our conference call. And this ends the 2018 Fourth Quarter Earnings Conference Call of KEPCO. Thank you.

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Operator [41]

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(foreign language) This concludes the Fiscal Year 2018 Fourth Quarter Earning Results by KEPCO. Thank you for your participation.