Weon-Gun Ko - Vice President and Treasurer Changyoung Ji - Senior IR Manager

Pierre Lau - Citibank Heedo Yun - Korea Investment Securities Jae-Hyun Ryu - Daewoo Securities Sujin Bum - Samsung Securities Jiyoon Shin - KTB Investment Securities Minho Hur - Shinhan Financial Investments Seong-Jin Kang - KB Investment & Securities Boris Kan - JPMorgan

[Interpreted]. 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 2015 Third Quarter Earnings Results by KEPCO. This conference will start with a presentation, followed by a detailed Q&A session. [Operator Instructions]. Now we shall commence the presentation on the fiscal year 2015 third quarter earnings results by KEPCO. Weon-Gun Ko: [Interpreted]. Good afternoon. This is Weon-Gun Ko, Vice President and Treasurer of KEPCO. On behalf of KEPCO, I would like to thank you all for participating in today’s conference call to announce earnings results for the third quarter 2015. 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-IFRS. Any comparison would be on a year-on-year basis between 2014 and 2015. Business strategies, plans, financial estimates and other forward-looking statements included in today’s call will be made based on our current expectations and plans. Please be noted that such statements may involve certain risk and uncertainties. Now Senior IR Manager, Mr. Changyoung Ji, will begin with an overview of earnings results of the third quarter of 2015, first in Korean and repeat it in English.

[Interpreted]. Now we will provide the overview in English, starting with operating income. In the third quarter of 2015, KEPCO recorded a net operating income of KRW8.67 trillion. Taking a closer look, operating revenues increased 4% to KRW44.27 trillion. This was attributable mainly to 2% increase in power sales revenue totaling KRW29.96 trillion, and 36.6% increase in revenues from the overseas business amounting to KRW3.16 trillion. Moving on to main operating costs, cost of goods sold. SG&A expense decreased 5.5% to KRW35.6 trillion. Fuel costs decreased 24.3% to KRW11.74 trillion. Power generation affected by the low power demand, decreased 2.3%, and unit cost of fuel declined by 22.5%. Meanwhile, purchased power cost decreased 3.4 % to KRW8.95 trillion. Unit cost of purchased power decreased 22.3% because of the decrease of S&P, caused by the increase of new highly efficient power plants, and purchased volume increased 24%. Depreciation cost rose 5.8% to KRW5.36 trillion, mainly due to the newly constructed substations and new facility addition by power plants. Now let me explain KEPCO’s non-operating segment. Other income rose 7,637% to KRW8.61 trillion mainly due to the gain from third quarter rent disposal. Net financial loss was KRW1.45 trillion in the third quarter of 2015, which was improved by KRW268 billion. As a result of foregoing, we recorded a consolidated net income of KRW11.84 trillion in the third quarter of 2015. This concludes the overview of KEPCO’s earnings results for the third quarter 2015. Now let me move on to the Q&A session. Q&A session will be hosted by Mr. Weon-Gun Ko. Weon-Gun Ko: [Interpreted] This is Weon-Gun Ko. I’m joined with our IR committee members in charge of major business areas at KEPCO. We are prepared to take any questions. Since we are presenting in both Korea and English, all the Q&As will be interpreted. Please make sure your questions and answers are brief and clear. Please begin.

[Interpreted]. [Operator Instructions]. Currently, four participants are waiting with their question. The first question will be given by Pierre Lau from Citibank. Please go ahead sir.

Hi. Good afternoon, KEPCO management. I’m Pierre Lau from Citibank. I have three questions. The first question is why your unit coal cost in the third quarter this year was higher than that in the second quarter and what is the outlook for the full quarter? Second question, what is your company’s net profit sensitivity to 1% Korean won depreciation against U.S. dollar? And number three, what is your expected generation mix in 2016 from different kind of fuel? Thank you. Weon-Gun Ko: [Interpreted]. So, to answer your first question, in the third quarter we’ve seen a slight increase in the unit coal cost that is because there has been 30% increase on the coal taxation during the year. The expected unit cost, average unit cost is expected to be KRW98,000 per ton. On the sensitivity to the interest rate regarding your second question, the impact on our financial statement on a consolidated basis would be KRW160 billion per KRW10 of depreciation. And as for the generation mix outlook for 2016, will be as follows. Coal would be 51%, nuclear 40%, LNG 7%.

Okay. Thank you. For the first question, why the new plant have higher unit coal cost than the old one? Weon-Gun Ko: [Interpreted]. As I mentioned, starting in the second half of this year, the taxation for coal has been increased. It used to be KRW18 per kilogram of coal or it has been increased to KRW24 per kilogram.

Okay, thank you.

[Interpreted]. The following question is by Yun Heedo from Korean Investment Securities. Please go ahead sir.

[Interpreted]. Congratulations on your great financial performance this quarter. I have three questions. The first question is on the tariff filing. And at the end of July you have completed tariff filing report to the government and as far as I know there hasn’t been feedback from the government side yet. Could you give us an update on the overall progress of the tariff filing? And second question, what is the gain from the, your headquarter land sales. And as far as I know, the financial performance is being reflected on the third quarter. So how much of that financial gain is reflected on your balance sheet and what is your impact on the net overall, what is the amount that is actually going to impact your overall net profit? Third question is on the maintenance provisioning. If you compare the first half of this year with the last half of the year, there has been about 32% increase in the provisioning. But on the third quarter, on a quarter-on-quarter basis, there has been 5.7% decline in the number. Could you give us a perspective on this? Weon-Gun Ko: [Interpreted]. To answer your second question first, the impact on our net profit excluding the corporate taxation would be KRW6.4 trillion. To update you on the overall tariff, first, in the summer season we have launched the new regulation regarding the tariff. So we have to reflect that in our overall administrative system. We’re reflecting a segment accounting into our profit. So as a follow-up process, we’ve had some administrative work that has been attached to this new accounting that is being applied. So there has been some time gap with initial June timeframe. And also within that, during those periods, we’ve also tried to update the new foreign exchange rate status and oil price differences. So the overall cost, total cost has been calculated based on the September number. And we are proceeding with that basis. So, on the net profit KEPCO will get back to you with the updated number later on.

[Interpreted]. A follow-up question to the tariff process is that when do you expect the cost review will be completed. Weon-Gun Ko: [Interpreted]. At this point, I regret to say it’s very difficult for us to foresee when this outcome will be coming to us.

[Interpreted]. The following question is by Jae-Hyun Ryu from Daewoo Securities. Please go ahead sir. Jae-Hyun Ryu: [Interpreted]. Also congratulations again for your great performance. In the second half of the year there has been mention that there will be adjustment to the normal coefficient. How is that coefficient adjusted in the third quarter and what were the factors driving that adjustment? And also, considering the differences and impact on the net profit and the financial gain from your headquarter building and land sales it seems that still your net profit was less than what someone, one would have expected. Could you also give us a perspective on that? Weon-Gun Ko: [Interpreted]. Well, to answer your question on the coefficient adjustment, typical process will be there. We will look at the quarterly performance first and then go into the review of the overall normal coefficient adjustment. So we are releasing our financial performance this week. And review on adjusting the coefficient will start subsequently.

[Interpreted]. Answer to your second question, if we exclude the gains from the third quarter land sales on an unconsolidated basis, we have created approximately KRW3.5 trillion which isn’t less than anyone’s expectation I believe. And this number is based on accumulative basis, not just third quarter.

[Interpreted]. Currently four participants are waiting with their question. The following question will be given by Bum Sujin from Samsung Securities. Please go ahead, madam.

[Interpreted]. I have four questions. First question is on the completion of the power plant for the base load. In the third quarter, if you look, and the second question is on the coal price, if you look at the price in the third quarter, considering that there has been an increase in the consumption tax and also impact from foreign exchange rate, it seems that the increase has been somewhat limited to one’s expectation. Given that factor, how do you expect your fourth quarter average coal price to develop moving forward? Third question is you talked about adjusting the overall, normal adjustment coefficient moving forward. Does that mean that a separated proportion or the baseline for the fourth quarter will be reduced? How do you foresee that evolving? And also the fourth question would be on the dividend. Could you give us any comments regarding dividend? Weon-Gun Ko: [Interpreted]. To answer your third question first, on the adjusting of the coefficient, nothing has been determined whatsoever whether to increase or decrease or even adjusts the coefficient at all. The agenda has been escalated to our cost evaluation community who will decide after looking at our third quarter financial performance. So nothing has been determined yet.

[Interpreted]. To give you numbers for our power plant construction plan, the Shin Kori number 3 power plant will be completed in the first half of 2016. And as for coal fired power plant, we plan to complete seven plants with overall capacity of 6,500 megawatts. Weon-Gun Ko: [Interpreted]. To answer your second question on the unit price for our fuel cost, for the unit price for the core in the third quarter has been KRW9,000 per ton. And in this quarter we expected the number to go down to about 98% to KRW98,000. And for LNG, our expectation for the fourth quarter is that the price will remain at KRW700,000 to KRW750,000. And before that, there is one adjustment to make. For the LNG, the third quarter was KRW750,000 and fourth quarter would be KRW700,000. And for dividend payout that has been determined. And we haven’t had any discussion with the government yet. As for our schedule for the coal fire power plant in 2016 would be, in the first half of the year we will have Dangjin number 10 and Samcheok Green number 1 and Taen number 9 and Shin Poryong number 1 coming in the first half of the year. And Yeosu number one would be completed in August. Samcheok number 2 in October and Taen number 10 in December.

[Interpreted]. The following question is by Shin Jiyoon from KTB Investment Securities. Please go ahead, sir. Weon-Gun Ko: [Interpreted].

[Interpreted]. I also have four questions. First question is in the third quarter alone your debt has been reduced by KRW4 trillion. How much, to what extent do you believe you can reduce that debt further by the end of this year? That’s the first question. Second question is on the equity method. The valuation on equity method seems to be in deficit. Is that loss coming from the Kogas or could you give us some perspective on that? Third question is we’ve been talking about dividend payout and also adjustment coefficient. And I think all these questions are coming from the fact that your dividend will be based on an unconsolidated basis. Your guidance, I remember, was around KRW3 trillion on overall profit, excluding the land sales of your headquarter. It seems that your numbers will amount to KRW3.5 trillion. So on a KEPCO unconsolidated basis, what is your guidance and expectation by end of this year? Fourth is on the coal consumption tax. It has been applied since July and I believe the number has only been reflected for a month or two. So how is that being applied? Weon-Gun Ko: [Interpreted]. So, on the debt, by end of this year, we expect to have debt of KRW5.8 trillion. On your second question on the equity method, the coal gas has not released earnings release yet. So, we’ll have to update you the number afterwards. On your question on the overall profit outlook on unconsolidated basis, if you look at our accumulated operating profit up until third quarter is KRW4.2 trillion. But because of the seasonality, we believe the sales margin moving forward will decline slightly. And towards the end of the year, the cost does seem to rise. And there is also provisioning that we have to do aside. So, the number would slightly go down by the end of this year and that’s our anticipation from that. To answer your question on the tax consumption rate and its impact on our gencos when we calculated the adjustment coefficient as the end of June all of that has been reflected. So you can say the all the numbers are fully reflected starting in July.

[Interpreted]. The following question is by Hur Minho from Shinhan Investment. Please go ahead, sir. I’m sorry, as the connection at the host line is not buffer. We’re connecting the host line again. Please wait a moment until the line is connected again. Thank you.

[Interpreted]. I have three questions. The first question is if you look at your unconsolidated profit for this year, excluding the headquarter sales it’s still a very significant number. Are you still going to maintain the 30% dividend payout ratio that you’ve been maintaining in the past and is that the stance that you’re going to maintain when you discuss this dividend payout ratio with [indiscernible]? Second question is you are going to launch many nuclear power plants and coal-fired power plant next year. Could you share with us your forecast for the utilization of these power plants? Third question, looking at the UAE construction progress, how much of that revenue has been realized in the third quarter on your book and what do you expect at the end of this year? And what is the expectation for the full year next year? Weon-Gun Ko: [Interpreted]. To answer your question on the dividend, we have maintained a 30% payout ratio until last year. And we have been trying to maintain that level. This year we do have some variables that may affect us regarding our performance and also some policy compliance cost that we need to take into consideration. So, when it comes to dividend and when we talk with our government, we will try to discuss the matter to our investors to as much as we can. But nothing has been determined whatsoever in our discussion with the government on whether to maintain that payout ratio that we have. And as for the power plant utilization rate, it won’t be that much different from this year’s actuals and forecasts that we’ve been releasing. For nuclear power plant it would be somewhere between mid 80% level and for coal fire, our power plant, it would be about 90%. So, to answer your question on the UAE revenue, the third quarter revenue that has been realized was KRW852.6 billion, by the end of this year, overall progress has been progressed further than our initial plan. So the revenue would be slightly higher than expected. For your information, our accumulated revenue from UAE project has been KRW2.5 trillion until third quarter of this year. And our anticipation for the end of the year will be KRW3 trillion.

[Interpreted]. The following question is by Korea Investment Securities, Yun Heedo. Please go ahead, sir.

[Interpreted]. I have a short question on the emission trading cost. Are you going to not recognize that emission trading cost in the fourth quarter? How is it going to proceed and what is your expectation by, is there going to be any decision by end of December? Weon-Gun Ko: [Interpreted]. To answer your question on the trading, initial trading cost, we are going to, there has been accounting method determined for the reflection of this emission trading cost. And when the emission exceeds the allocated charge, allocated by the government, the cost will be recognized to our book. But by end of this year, we have no visibility into how much we’re going to exceed outside that has been allocated by the government for free of charge. So, we won’t be able to give you a fair number on that.

[Interpreted]. What we have been hearing from KEPCO is that in the initial three years we will be recognizing about a few hundred billion won in costs. Is it safe for us to then say that we won’t be recognizing any cost whatsoever regarding the emission trading this year? Weon-Gun Ko: [Interpreted]. We do believe that there will be some costs incurred related to the emission trading. At this point, we are not in a place to calculate the number of the cost involved in it.

[Interpreted]. [Operator Instructions]. The following question is by Kang Seong-Jin from KB Investment Securities. Please go ahead, sir. Seong-Jin Kang: [Interpreted]. I have four questions. Two questions is a follow-up question to what has already been asked. First, is on your accumulated operating profit. You mentioned that it will slightly go down in the fourth quarter. Does it mean that you will have deficit in your operating profit in the fourth quarter, or does it mean that your growth rate for the operating profit in the fourth quarter will be limited? Second question on the dividend payout is when you say although you have not decided on whether you’re going to maintain the payout ratio, when you say that you’re going to look at the dividend payout ratio, does it mean that the dividend payout ratio is expected to go down to an extent because you’re including the huge gain from the headquarter sales, or does it mean that excluding the headquarter sales, that you will be maintaining this payout ratio to your revenue? The third question is in the third quarter we’ve seen some reflection or impact on your financial book on the tariff discounts. So what was the impact on this tariff discount on your financial performance? And fourth question is on if you look at the fact sheet, does your IPP power purchased cost does not break the number down between LNG and others. Could you give us some numbers, is it possible? Weon-Gun Ko: [Interpreted]. To answer your question on the operating profit, it was definitely lower than the third quarter in the fourth quarter. If you look at our typical sales pattern, the fourth quarter operating profit has declined over the past few years. And will it reach a point where we create deficit? That is something that we need to wait and see. We also need to see the numbers that comes in when we do the accounting procedure for the policy, for our gencos. At the end of the year, we recognized the purchase to power cost and obviously accounting procedure is something that we need to look at. And depending on the magnitude of that that’s going to have some impact on our operating profit. Also we need to wait and see the provisioning liabilities and depending on these numbers, the magnitude will be different. So I’m sorry to say at this point that we won’t be able to have a visibility into that. On the dividend payout, if you look at this year’s KEPCO’s financial performance, it’s somewhat different from previous years. Considering those differences we are looking at various approaches to looking at our dividend payout whether we include the land sales or whether exclude it. So, at this time, because nothing has been determined, we’re sorry to say that we’re not in a position to further comment on that. To give you answer on your question on tariff discount. Starting in July, we’ve had three categories of special discounts. Our first one was on house, residential households and that discount has been finished, completed by end of September. And another two other categories have been discount on our welfare household and also industrial discount for light load. Considering the unique factor that metering is not aggregated on first day of the month and until the end of month, it’s very difficult for us to have accurate number for us how the metering is aggregated. So as far as the residential sector is concerned, we expected the discount choice to be somewhere around KRW130 billion to KRW150 billion, the discount amount. And it’s tough to be larger than our expectation. To answer your fourth question on the breakdown between LNG and others, our system is now in the process of updating. So it has not been able to segment those two different numbers. Once we normalize our system, we will be providing that breakdown to you.

[Interpreted]. The following question is by Kan Boris from JPMorgan. Please go ahead, sir.

Hi, good afternoon, management. Thanks for the excellent presentation. I’ve actually got three questions. My name is Boris Kan from JPMorgan. The first question is actually regarding the IPP purchase amount. Just wanted to check with you on a full year basis what percentage of the power sales will be coming from IPP this year? And I just want to see if there’s any percentage estimate for next year as well. And also in particular for next year, is there any corresponding power demand growth that you have based upon in meeting the percentage for next year? That’s the first question. The second question is actually on the dividend. I know that there are no further comments that would be provided. But as a general principle is it fair to say that the payout would be, at least be in the unconsolidated profit on the core profit, excluding the land sales on 30% payout ratio? The third question is actually on the Shin Kori number 4 nuclear unit. Just wanted to see if there’s any update on the, commence of operations timing. Thanks. Weon-Gun Ko: [Interpreted]. To answer your first question on IPP breakdown, for 2015 full year the power purchased from IPP will be 18% and next year we believe there will be a slight decline from that level. Overall demand growth for power we expect it to be somewhere around 15% level. Although we are adding some power plants in nuclear and coal next year because we’re not increasing the power purchase from IPPs, the growth will remain at that. For Shin Kori 3 we expect the operation to begin in April of 2016 and Shin Kori number 4 in the first half of 2017. On the dividend payout, in the past we have been, we strive to maintain the 30% payout ratio in the past. But this year, because of some variables, nothing have been determined on the overall payout ratio. So we regret to say that we won’t be able to give you any further comments on that.

Okay. Thank you. There’s no other questions. Thank you.

[Interpreted]. In the interest of time, we will accommodate one last question. The last question will be given by Hu Minho from Shinhan Financial Investment. Please go ahead, sir.

[Interpreted]. One last question. You mentioned about the REC purchase cost being reflected on your book. But I believe the REC settlement cost will be only reflected on the gencos and not on a non-consolidated KEPCO financial performance. So my question is then there won’t be any, there won’t be I believe, a significant time in the operating profit level on a non-consolidated basis. Is that a correct way of looking at this? Weon-Gun Ko: [Interpreted]. According to the power market rules, the gencos’ REC cost will be paid out separately, or paid out as a power purchase cost on a non-consolidated book. So there will be costs incurred on our non-consolidated financial book. So we are setting aside that cost on an accounting book. So for gencos it is possible for us to accurately calculate those costs involved. So we will fully reflect that REC cost on our book. But for non-gencos, there is no way for us to calculate yet. But we will start reflecting and forecasting that number starting this year to reflect that number.

[Interpreted]. All right. Then we will conclude this conference call. Once again, thank you for joining us today.

[Interpreted]. This concludes the fiscal year 2015 third earnings results by KEPCO. Thank you for your participation.