Jong Soo Kim - Head of Finance and IR Jungin Yoon - Senior IR Manager

Pierre Lau - Citibank Jiyoon Shin - KTB Investment and Securities Yeonjung Lee - HSBC Securities Cindy Park - Nomura Securities Dong Jin Kang - HMC Investment Securities Minho Hur - Shinhan Financial Investment Kan Boris - JPMorgan

Good afternoon. This is Jong Soo Kim, Head of Finance and IR team.

On behalf of KEPCO, I would like to thank you all for participating in today's conference call to announce earnings results for the first quarter of fiscal year of 2017. 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 disclosed today is on a preliminary, unaudited and consolidated basis in accordance with K-IFRA.

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 today's call are based on our current expectations and plans.

Please be noted that such statements may involve certain risks and uncertainties. Now, Mr.

Jungin Yoon, Senior IR Manager, will begin with an overview of earnings results for the first quarter of 2017, first in Korean and repeat in English.

Now we will provide the overview in English, starting with operating income. In the first quarter of 2017, KEPCO recorded a net operating income of KRW 1.46 trillion.

Taking a closer look, operating revenue decreased by 3.4% to KRW 15.15 trillion. This was attributable mainly to 1.7% decrease in power sales revenue, totaling in KRW 13.94 trillion and 30.1% decrease in revenue from the overseas business, amounting to KRW 771 billion.

Moving on to main operating costs. COGS SG&A expenses increased by 13.3% to KRW 13.68 trillion.

Fuel cost increased by 16.8% to KRW 4.3 trillion, mainly due to a 19% rise in unit cost of fuel. Meanwhile, purchased power cost decreased by 23.4% to KRW 3.82 trillion.

Introduction of new highly efficient IPPs and a decline of utilization ratio of nuclear power plant caused our purchased power volume to increase by 18.4%. Moreover, the unique cost of purchased power also rose by 3.6% due to the rise of unit cost of fuel and SMP.

Depreciation cost rose by 13.3% to KRW 2.12 trillion, mainly due to the newly introduced power plant in transmission and substation facilities. Maintenance costs went up by 14.8% to KRW 400.16 billion, attributable to increased facility investment and scheduled overhaul.

Now let me explain KEPCO's non-operating segment. Net financial loss was KRW 412 billion, increased by KRW 4.5 billion compared to net loss of KRW 3.6 billion last year.

As a result of the foregoing, we recorded a consolidated net income of KRW 902 billion, which decreased by KRW 1.26 trillion from KRW 2.16 trillion in the previous year. This concludes the overview of KEPCO's earnings results for the first quarter of 2017.

Now let us move on to the Q&A session. Q&A session will be hosted by Mr.

Jong Soo Kim, Head of Finance and IR team.

This is Jong Soo Kim. I am joined with our IR committee members in charge of major business areas at KEPCO.

We are prepared to take any questions. We will proceed in both Korean and English, all the Q&A will be interpreted.

Please make sure that your questions and answers are brief and clear. Please begin

I'm Pierre Lau from Citibank. I have three questions.

The first one is, tomorrow you will have your Presidential election. Mr.

Moon seems to have good chance to win the elections. So if he is going to be your next President, would it be a good or bad result?

And how do you see his proposal to reduce the use of coal and nuclear ahead, and to use more natural gas for power generation? Second question.

What is your current forecast for your unit coal and unit LNG cost for 2017? And third question.

What is your expected generation mix for 2017?

To answer your second question first. Our 2017 unit coal forecast is based on SOP.

We believe coal unit cost will be around mid $75 range. And for LNG, the unit cost will be KRW 659,600 per ton, and for oil, it will be KRW 508 per liter.

For generation mix for 2017, we expect the nuclear power point of Macau -- nuclear power plant would be 40%; coal fire power plant to be 53%; LNG, 5%; and oil would be 1%.

To answer your first question, on the view on our next administration is that, if you look at the administration impact on our overall tariff and electricity-related policy, it hasn't had a significant impact depending on the type of presidential administration that comes in. And as for our view on the possible regulation on the coal-fired power plant and nuclear power plant is that it's rather difficult for us to predict the policy of our presidential candidate at this point, but we have a firm stance that we will try to minimize the impact on the overall KEPCO.

Okay. And for the unit LNG and oil cost.

Would you mind repeat the number? And for the unit coal costs, $75 to return the FOB basis.

Could you give us a number comparable to the KRW 119,000 per ton in first quarter, but for the full year 2017?

In our first quarter conference call. We said that the unit cost for coal was KRW 120,000 for -- in the KRW 120,000 range, and that would be $75 for -- when converted to dollar amount.

In the second quarter, our forecast, based on the data we received from 6 GENCO, it is based on calorie level. So it's rather difficult for us to give you an accurate number on that, but we have tried to convert that number using a 6 0, 8 0 kilo calorie, and came up with early $70 range number.

So from second quarter and on, we will try, we will use this calculation for unit cost forecast for throughout the year. And the number for second quarter and on will be slightly higher or at similar level.

To give you the unit cost number for LNG and oil again. For LNG, it's KRW 659,600 per unit.

And for oil, it's KRW 508 per litter.

I have three questions. First question is on the power profit.

The power profit level has been converted to a metering basis, on a consolidated financial sheet basis, and it seems that the deducted or decreased amount is actually larger compared to the same period by about KRW 200 billion. Could you please explain the reason for such a larger discount or this decrease in this number?

And second question is in overall power purchase volume. There is power purchase for IPP and PPA.

And PPA seems to have had 30% increase year-on-year, but the contract volume seems to be the same. Why is this PPA for our volume increase for this quarter?

Is this something that is temporary? The third question could be a rather sensitive question, regarding UAE project.

There has been official announcement or by the private project owner on the possible delay of Barakah nuclear power plant in UAE. Is there any possibility that KEPCO will be carrying out the delay -- the compensation for project delay?

The answer to your first question on the consolidated adjustment for the power sales profit is that, in the -- compared to the first quarter, we have had -- we have seen increase in our 6 GENCOs pilot operation cost increase -- profit increased by 184.6 billion. So in the previous quarter, there has been about 1.9 billion in this line item.

But with the 186.5 billion from the first quarter and this pilot operation, we've seen such further decrease in overall consolidated adjustment.

To answer your second question on the increase of PPA volume compared to year-on-year basis. In the first quarter, there has been planned downtime for our coal and nuclear power plant, and this is going to be temporary.

So on the project completion date, the UAE Nuclear Power Plant Corporation has not given us an official notice on the final conclusion of the project yet. So the delay or extension of the project is under discussion and in progress at the moment, and we haven't had any official notification from the corporation itself.

So it's very -- I regret to say that it's very difficult for us to predict the possible compensation that may be involved and our future plans for our manpower dispatched in the project.

I have a follow-up question on the pilot operation revenue from the GENCOs. I believe there are some generation that is going to be in commercial operation within this year, and this will further increase the revenue for this pilot operation then that would mean that further deduction on the overall power revenue.

Would that mean -- would that have overall negative impact on the overall top line? Or do you believe there are other positive revenue drivers can offset this decrease?

To answer your follow-up question on the GAAP and the overall revenue from the pilot operation, is that as you have increased term compared to your previous year because in the previous term, it was only 1.9 billion, and this, I believe, in this time was rather temporarily increase for overall pilot operation. If you look at the newly introduced generators for KEPCO, it's mostly coal and nuclear based.

And on a consolidated base, that would increase our overall base generation and thus, will have positive impact.

So we will move onto the next question, and we'll be happy to take this question off-line for further detail.

I have one question. Compared to the previous term or year-on-year, your nuclear power plant utilization has dropped, and what is the reason for such a decline?

To answer your question on why the utilization of our nuclear power plant has gone down in the first quarter is that if you look at our Hanbit 1 and 2, Hanul 2 and Kori 3 nuclear power plant, we have discovered some corrosion in the [Hanger] building, and we need to upgrade and refine that problem. Also we also have to upgrade our earthquake-resistance design of the building and facility, and it is has increased our plant downtime or maintenance days from 192 days to 521 days in total.

If you look at this first quarter operating profit and net profit, it has actually underperformed market expectation. But our expectation was somewhere around 10 trillion.

In the first quarter, we've seen a decrease in cost and also are you predicting that in the second quarter, the unit coal price would remain at the similar level? Should we adjust our expectation, coming from the market?

Because last year, KEPCO CEO said that there will be about 2 trillion decline from 12 trillion in revenue, and that was his guideline, but what is KEPCO's position now?

KEPCO doesn't usually give out guidance for the overall performance. But given the external conditions and different variables, there could be slightly a negative factor affecting our overall performance.

We believe therefore, we will have slightly less than -- less performance than what has been shared and forecasted previously.

A follow-up question to that is that this year, you have significant amount of CapEx planned for investment. If you are unable to source that with your own cash flow, would that imply that you will have increased debt going forward?

On a consolidated basis, our funding would be about KRW 12 trillion with amortization or payback being KRW 8 trillion. So towards the end of this year, we believe, our borrowing would slightly go up.

I have three questions. The first is on the overseas revenue.

It seems that there has been decline of KRW 400 billion from overseas revenue, and I think it's mostly coming from the end of project in UAE. Having said that, accordance with the UAE project completion, we believe EPC costs would also have to come down alongside with the project completion, but it seems that relevant cost is not reflected because most of this cost is reflected in your other operating cost.

But if you look at quarter-on-quarter, this cost has not gone down. Is there a reason that it is other cost is not coming down?

Or is it other line item reflected in this other cost? Second question is regarding S&P.

On a quarter-on-quarter basis, we've -- I've seen KRW 8 increase on S&P cost. And if you look at IPP purchase unit cost, on a quarter-on-quarter basis, the increase amount is about KRW 15, and that's a significant amount.

What is the reason behind that? And the third question is on decreased inflation cost.

It seems that you're entering the upward cycle for depreciation costs, and you're introducing 4 coal-fired power plant and one more nuclear power plant within this year. So should we expect the depreciation cost to go up from second quarter and on?

If you can give us the guidance for depreciation cost until the end of the year, that will be very much appreciated.

So for the overall EPC cost, I believe the other cost reflected would be compared to the previous year's first quarter, so it's on year-on-year basis, and the amount was 2.6 trillion, but we're still seeing the similar level of cost incurring for this quarter.

To answer your question regarding the UAE business. The revenue for UAE business is calculated based on the progress rate of overall project.

So as our progress rate decreases, the overall revenue is therefore, calculated as a decreased amount. And we apply the end-of-month foreign exchange rate for this calculation.

But there has been severe fluctuation in the exchange rate at the end of the month. If you look at the foreign exchange rate at the end of the month, compared to December, there has been about to close to 100 decline, so that has been reflected.

To add to that, if you look at the overall revenue for UAE, we have seen a slight decline in first quarter revenue coming from UAE project, compared to overall project cost. However, if you look through the whole year for 2017, the overall gross margin or the revenue cost -- gross margin for this project is to be expected at 5% to 6% level.

To answer your question on the depreciation cost. We believe, second quarter and beyond compared to first quarter, will have increased depreciation trajectory, and that's our expectation for this second quarter and on.

However, if the [indiscernible] our base generation will come to completion after June time period. So when you look at the overall decrease in cost increase, the timing of that will come after the third quarter.

For your second question, we will be following up with you on the answer, for the second question.

I have a couple of question. First question is regarding the utilization.

It seems that the nuclear power plant utilization has declined this term. But the fourth quarter guideline has been that there will be increased utilization for the nuclear power plant from the first, second and third quarter, on and on.

Is this view still valid? Or should to expect a decline in nuclear power plant utilization?

And also, we've seen coal-fire power plant utilization going down. Even if we exclude the pilot operation, what would be your outlook for this coal-fired power plant utilization?

And for oil utilization, it seems that the oil price have gone down. Then would that imply that the oil utilization will go up going forward?

Could you share your view on that? And second question is, I would like to also understand the IRC purchase cost.

And also, there has been provisioning for carbon emission trading. And could you share that provisioned number for both, consolidated and stand-alone basis.

And the third question is, there has been some decline in the revenues reduction of KRW 200 billion, and discussion came up earlier and you've also talked about increasing fuel cost and power purchase cost. Having said that, we are also seeing increased fixed cost on the accounting books.

So do you also believe that -- and we've seen repair cost go up and labor cost go up? Do you believe that our cost will continue to go up?

And what are some of the cost driving -- that is going up going forward? And the third question is on the adjustment coefficient on a stand-alone basis, how much of the dividend payout and also stand-alone coefficient to be reflected to have significant voice or basis for change in tariff?

To answer your first question on the nuclear power plant utilization. In the first quarter, as I've mentioned, there has been fluctuation in the Hanbit building and -- but we believe that the guidance that we have given earlier this year will not be changed.

And the reason for that is this corrosion issue has been solved for most of our nuclear power plant. Out of 4 power plant that has been affected, 3 has already completed the upgrade and is in full operation at the moment.

So we don't believe there will be critical issues going forward, in using these power plants. So we believe, we expect the nuclear power plant utilization for 2017 to be 82.4%, as we have mentioned.

On the coal-fired power plant utilization, the utilization for the first quarter has been 87%. This is 2.4% down year-on-year.

But given the overall plant downtime or maintenance days, we believe the overall utilization level would be about -- would be the mid-80% level, throughout second quarter and fourth quarter.

Oil-fired power plant, it's rather difficult for us to give you an outlook at this point. But as you have mentioned, if the unit cost for oil goes down, we believe the utilization would slightly go up for oil.

To answer your second question, on the overall greenhouse gas emission cost for first quarter consolidated basis, the overall cost, is KRW 90.6 billion. And on a stand-alone basis, based on our purchased power plant -- power cost, it will be KRW 48.8 billion.

However, this cost is not the initial trading cost for 2017. We have recognized the estimated initial trading cost for 2016 and reflected that on this term.

And on RPS related costs, on a stand-alone basis for the first quarter, the overall RPS cost was KRW 314.5 billion. And on a consolidated basis, it's KRW 248.7 billion.

On your third question on the overall cost. As I have mentioned, the overall depreciation cost is going to be slightly increased compared to the first quarter.

And on the repair and maintenance cost, we have seen increase in repair and maintenance cost in the first quarter because of increased maintenance days. But this is going to be temporary.

And on the details of other cost line items, I regret to say that we cannot be -- we won't be able to share any outlook for detailed line items.

Regarding your question on the likelihood of adjusting the overall adjustment coefficient. Within this year is -- or we will usually calculate the coefficient number based on last end of the year or this year's economic outlook and market conditions.

If those economic outlook and market conditions do change within this term, there is a likelihood that we will adjust this coefficient. Given the historical practices, we believe it is likely that you may go through one adjustment for this coefficient.

I just had two questions. I guess, one within the overall revenues.

Revenues were also light for Q1, I understand that was power demand was a bit lower but neck-neck, we didn't expect more than always thought a 1% decline in revenues -- power sales for Q1. Could the company to just explain that and how they expect power revenues for the rest of the year to be fixed, like down year-on-year?

Or it will be flattish, in-line with 3%, 2% power demand growth and then 2% tariff cut, that comes through from residential? And the second question is just on the ITP purchase cost.

So the company had guided that will go down from sort of 20% of power last year to about 16%, 17% this year. So is that still on track?

Should we expect that in coming quarters? Or is there still some issues with the coal and the nuclear plants such that we can't meet that guidance?

To answer your first question. According to the forecast by the National Meteorology Agency, this summer is expected to be hot.

And given also the economic growth rate, which is going to be slightly higher than last, which is going to be slightly higher than last year's growth rate, we believe the overall sales growth will remain, will be at 1% to 2% level for this year.

To answer your second question on overall IPP generation mix, we're going to be introducing more waste generation this year. So we can expect that on a year-on-year basis, there could be slight decline in IPP proportion.

But we're also expecting amendments in overall, our power business act and other pending variables that may affect this mix for IPP.

Okay. Could you give more clarity on what you mean by that, amendment in power business act and other pending variables that affected generation mix for IPP?

So earlier this year, there has been amendment on the overall power business act, and this will come into effect. And in the amended power business act, there is a clause on the emergency power supply for -- there is an emergency power supply clause, and we don't know how that would play out in actual operations.

So we'll need to wait and see how that decree unfolds and then we'll be able to understand how that will impact our IPP generation.

I actually got three questions. First, is actually on the second quarter.

Just want to see if there's any chance you can provide us with the generation mix across different fuel sources, such as nuclear, coal and fire-operated. Also, on related nuclear, what percentage of the power would be coming from IPP?

Second question is actually, regarding the recent talks of even more gas-like power and less based low power, particularly, coal. My question to you is, do you -- could you be able to actually provide some rough numbers on the average tariff that you paid through the GENCOs on coal-fired power, nuclear power?

Say 2016 numbers, so that we could have a rough comparison with the power purchase cost for IPP. The third question is actually on the GENCOs spinoff, just want to see if there's any colors on the update on the latest timetable.

To answer your question on the overall generation mix for the second quarter. We don't usually provide guidelines on a quarterly basis.

But having said that, our overall generation mix for utilization for the nuclear power plant in the first quarter was 74.2%, which was slightly lower than the usual. And the second quarter, we expect it to normalize at 83% level.

So if you go to our website and refer to our monthly report, KEPCO monthly report, we have these numbers specified. But in 2016, the number for nuclear power -- nuclear was KRW 68 per kilowatt hour, and for coal, it was KRW 74 per kilowatt hour.

Our initial plan was to list our GENCOs in the first half of this year but there has been consideration or careful consideration, rather, on the adjustment coefficient on the GENCOs. So we believe this thing would move to the second half of this year.

Thank you, this will close our earnings conference call, and thank you for joining us despite your busy schedule.