Korea Electric Power Corp (KEP) 2011 Q4 法說會逐字稿

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 2011, fourth quarter earnings results by Kepco. This conference will start with a presentation, followed by a [divisionary] Q&A session. (Operator Instructions).

Now, we shall commence the presentation on the fiscal year 2011, fourth quarter earnings results by Kepco.

Good afternoon, everyone. I'm Cecilia Oh, Senior Manager of Kepco's IR team. It's a pleasure to have this opportunity to announce Kepco's earnings results for the fiscal year 2011. On behalf of Kepco, I would like to thank you all for participating in today's conference call. Today's call will begin with a brief presentation on our earnings results, followed by a Q&A session.

Please note that the financial information to be disclosed today is on a preliminary and consolidated basis. Any comparison will be on a year-on-year basis between the full year of 2011 and 2010.

Business strategies, plans, anticipated [fiscal] numbers and other forward-looking statements included in this call are made based on our current expectations and plans. Please be noted that such statements may involve certain risks and uncertainties.

Now, let me provide you with an overview of our earnings results, starting with the operating income.

For 2011, Kepco recorded a net operating loss of KRW685 billion, which fell KRW2.9 trillion compared to last year's net operating gain of KRW2.3 trillion. This was mainly due to the fact that increases in operating revenues were offset by operating expenses, such as fuel costs and power purchase costs, despite an increase in productive revenues brought on by tariff hikes and increases in power sales volumes.

Taking a closer look, operating revenues rose 10.2% to KRW43.5 billion. Power sales revenue gained 9.8%, totaling in KRW40.9 trillion. This increase was mainly attributable to a 3.7% increase in unit tariff, as well as 4.8% growth in power sales volume, driven by strong demand from the industrial sector.

Moving on to main operating costs, COGS, selling and administrative expenses rose 18.5% to KRW44.8 trillion, of which fuel costs jumped 17.4% to KRW21.7 trillion in 2011, primarily due to a 1.8% increase in power generation, affected by increased power demand and a 15.3% hike in unit costs of fuel, such as coal and LNG.

Meanwhile, purchase power costs increased 46.1% to KRW7.5 trillion. Such a rise is attributable to a 6.6% increase in purchase power expenses and 37.1% jump in purchase power volume, due to rising power demand, together with the increased LNG prices.

Now, let me explain Kepco's financial income and expenses. Our net financial loss is KRW1.9 trillion in 2011, which is a KRW56 billion decrease compared to KRW2 trillion in the previous year.

Looking into the main components; interest expense rose 3.8% to KRW2.1 trillion, mainly due to a rise in interest bearing debt. Also, we recorded KRW98 billion of net equity loss in 2011, where KRW174 billion loss on FX translation and transaction was considerably offset by KRW75 billion of valuation gains and financial derivatives.

As a result of the foregoing, we recorded a net loss of KRW3.4 trillion in 2011, down by KRW3.25 trillion compared to a KRW120 billion net loss in 2010.

This concludes my overview of Kepco's earnings results for the fiscal year of 2011.

Now, let me move on to the Q&A session. I, with Kepco's higher committee members in charge of finance, tariffs, overseas business, etc., would prefer to take any questions. So now please begin.

Now the Q&A session will begin. (Operator Instructions). Mr. Pierre Lau, Citigroup.

I have three questions regarding your results. The first one is, you mentioned three months ago that you have booked a benefit of the fuel financial mechanisms in your account receivables. So I would like to know how much you have booked in your account receivables for the benefit of fuel pass-through mechanisms that you assume implementations from August last year?

And whether there's any update on this regard; when you can expect that this amount would be received in your cash flow.

And second thing is, what is the tariff hike outlook? Are you going to apply more tariff hike or not, and what would be the magnitude?

And the third question -- the last question is that what will be the Company fuel cost outlook for your coal prices, LNG and oil prices? Thank you.

(interpreted) Good afternoon. My name is Shin and I am from the Tariff division. I would like to give you the answer to the first question that you asked.

From August until so far, the accounts receivable that have been accumulated due to the fuel cost pass-through system, amounts to KRW357.1 billion.

Concerning your second question about the outlook for tariff increases, we have just now closed our quarter and, therefore, we are going to go through calculation of the actual production cost, and then we will calculate how much of an increase will be required. So, therefore, we don't have the accurate figures, as of yet, but our approximate outlook for the 2012 price hike -- tariff hike, we expect it to be somewhere around the 10% to 11% level.

In the near future, we will go through appropriate discussions with the government so that we can go ahead with the necessary tariff hike, possibly within the first half of this year; that is what we expect to achieve.

Does that answer your question?

For the first question regarding the KRW357 billion, when do you expect that you can increase the tariff so that you can get cash from your customer for this amount?

Second question; for the tariff hike 10% to 11% that you expect, do you think this is too large magnitude compared to your previous hike?

(interpreted) The main reason behind putting the fuel cost pass-through system on hold, and that decision was made by the government to do so, the main reason behind that was due to the high oil price. And currently, it is still at a high level of more than $100 per barrel.

So what we expect, that the current system, which has been put on hold, will be actually implemented from the time when the high oil cost comes down to below $100 level. So that would be about the time when we can start to receive that amount.

To answer your second question, the 11% level that I mentioned is the amount that is required for us to reflect the -- all of the cost. So it is our target for tariff hike. We cannot say that this is the actual hike level.

Regarding your answer to get back the fuel surcharge when the oil price down to $100 per barrel. So, because the time is uncertain when the oil price go back to that level, so how could you certain that you can get back that amount, because the amount could become even bigger and bigger?

(interpreted) As you say, currently, it is not easy for us to make a forecast about when that can happen, so all we can do is discuss with the government continuously in close coordination to make it happen.

So as we have booked KRW375 billion in our accounts receivables, does this mean that -- in case if we cannot get back that amount from the end user in future, we have to write back that item from our income statement, because we have included amount in our revenue at the moment.

(interpreted) Actually, until the government changes this new system, we will have to continue to book the accounts receivables until that system has been abolished. And if the oil cost gets reduced and the fuel cost goes down, then it may be that the other situation occurs, where the accounts payable portion will increase. And, in that case, the accounts receivable amount will be decreased.

In the case of coal gas, a similar situation occurred where, in 2008, 2009 and 2010, for three years, their cost pass-through system was put on hold.

Thanks for your answer. For the question that I have asked before, there's one question regarding the fuel cost outlook in 2012. What is your expectation for your coal and LNG and oil unit costs in 2012?

(interpreted) So the forecast that we have for fuel cost is KRW23.56 trillion, which is compared to previous year 6.0% increase. The contribution to that, we expect 40% to be taken up by coal, 41% by LNG and 11% by oil. And the unit cost for the fuel will be forecasted as follows. For coal, $120 per tonne; for oil, $110 per barrel; and for LNG it is at KRW950,000 per tonne.

Okay. Thanks very much. And this is on an assumption of how many percent how demand grows this year?

(interpreted) Approximately 4.3% increase.

4.3%. And what is your expectation regarding the generation mix in 2012?

(interpreted) I'm talking about generation mix for 2012. In terms of nuclear, it will account for 36%; coal, 44%; LNG, 17%; oil, 2%; and hydro, 1%.

Thanks a lot. Sorry for asking so many questions. Thank you.

Tien Doe, GIC.

The first question is just on your tax. You've taken a tax expense in your consolidated income statement for 2011, even though you've made a pre-tax loss. Could you explain the thinking behind that?

Normally, that would happen if you don't think that you'll have profits in the future to recover your tax losses against. Have you taken that kind of conservative view of your future profitability in assessing that tax expense for 2011?

The second question is just, I guess, a follow-on from Pierre's question on your volume growth. Within that assumption of 4.3%, are you assuming that industrial volumes continue to grow at double digits? Or you've got a reduced forecast for those industrial volumes? Thank you.

(interpreted) First of all, to answer your question about the income tax expense side, it is true that we are taking a conservative view for the growth for next year because the deferred tax asset that was set in 2008 period was taken up due to the fact that we believe the profit for 2012 and 2013 will not reach the KRW3 trillion which is the amount that was set at 2008.

I see. So the tax expense in this year is just a write off of that deferred tax asset in previous years. Is there an element of current year -- the tax losses in the current year? You're not trading a deferred tax asset for this year as well. Or is it all due to a past -- a write off of the past deferred tax asset rated in 2008?

(interpreted) The current year portion is also reflected.

Okay. All right. Thank you.

Geoffrey Boyd, CLSA.

Actually, before we get the question, I'd like to answer the remaining question about the demand growth rate. Actually I would like to revise our forecast to 4.4% from 4.3% and, based on that forecast, we included the industrial growth assumption at 5.9%. So it's not a true digit number, actually.

Okay. All right. Thank you.

Geoffrey Boyd, CLSA.

I did have some of my questions answered, but just one quick question on the assumption on the KRW23.56 trillion fuel cost for this year. What FX rate are you assuming for the won?

(interpreted) The FX rate assumption is KRW1,050 to $1.

Okay. And then just following up on that, the power purchased went up quite a bit last year versus the year before. What are your expectations for that in terms of the cost and the amount that you'll be purchasing?

(interpreted) The power purchased amount expected for the year 2012 is approximately KRW8.9 trillion.

KRW8.9 trillion?

Yes.

Okay. And do they have the volume that they expected to purchase?

We'll get back to you later, we don't have that number right now.

Okay. And just to clarify, I just want to make sure I understand this. The KRW375 billion in accounts receivable, has that gone through the operating income line? Is that included in operating income or is it [backed out]?

(interpreted) It is included in the operating revenue.

Operating revenue. So I guess what I am saying is if you hadn't had done that, then the operating income would have been worse? It would have been KRW375 billion lower.

Yes.

Okay.

(Operator Instructions). Tien Doe, GIC.

Cecilia, the generation mix that you gave, I think it was 36% nuclear, which I think is a bit of an improvement over 2011. That increase in the nuclear percentage is because you've got a nuclear power plant coming on stream, or you've got lower maintenance days during 2012. That improvement is due to what?

In 2012, we expect to have additional nuclear units by June of 2012. The capacity is 1,000 megawatts each.

Right, okay. Do you have any other capacity coming on stream on that coal side?

Coal, no.

No, okay. Thank you.

(Operator Instructions). Pierre Lau, Citigroup.

I have two more questions. The first one is, you mentioned regarding the FX rate assumptions in your fuel cost calculation is KRW1,060 versus US dollar. Have you done any calculations if at this ForEx rate, what would be the net ForEx or ForEx loss for 2012? So this is question one.

Question two is (inaudible) apply for a tariff hike, do you think that you will be able to get tariff hike only after the election in Korea this year?

And one more question, the last question, is what was the reserve margins of 04 quarter last year? Thank you.

(interpreted) I would like to answer your second question first concerning the tariff hikes. At present, we believe that it will be difficult to have a tariff hike before April due to the election period and also our financial closing period as well.

And if we were to take into consideration the element of election timing, I think that it would be best to go ahead with a hike as soon as the general elections are over in April because we have presidential elections coming up in December.

Talking about (inaudible) margin, it was 5.5% last year.

In terms of the currency, we just mentioned that the currency assumption is KRW1,051 to $1 and let me give you the sensitivity analysis. Assuming KRW10 versus $1 moves, that will affect the total fuel cost by KRW198 billion before tax. Does that answer your question?

So I would like to confirm; the exchange rate you say is KRW1,061. Is it correct?

The assumption KRW1,050.

KRW1,050. And you said for every KRW10 versus $1, the fuel cost exchange will be KRW191?

KRW198 billion.

KRW198 billion. Okay. But I suppose that you have some financial derivative for the hedging. Is this KRW98 billion before hedging? And if this is before hedging, what would be the amount after hedging?

KRW198 billion includes only the fuel cost impact including the accessibility impact. It's going to be KRW260 billion including the fuel cost impact and also the FX-related impact.

Including fuel costs change and also the hedging?

Yes.

So the reserve margin last year was 5.5%. What do you expect for this year 2012, and how many percent capacity increment for our economy as well as the whole Korea this year?

So we will follow through with new margins and capacities and plans later.

Okay, thank you.

Currently, there are no participants with questions. (Operator Instructions). Mark, Fidelity.

I just have a question on what you said to answer one of the questions earlier that the 2012 tariff hike required you said was 10% to 11%. Can I just confirm that that 10% to 11% includes the necessary tariff hike to recoup the KRW357 billion that's already in accounts receivable, combined with the necessary tariff hike to ensure that you're earning your fair rate of return? Or is it something different to that? And if it is different, what would be the total tariff hike required?

(interpreted) First of all, the fuel cost tax rule system related to accounts receivable is set separately; this is not included. So once the system that has been put [off] as for now is fully implemented, then that will be collected through a separate accounts receivable type of billing.

So the 10% to 11% tariff hike that is required, that I mentioned earlier, is reflecting the fair rate of return.

Does that answer your question?

Yes.

And now to go back to the previous question. The total capacity at the end of 2012 is expected to be 68,879 megawatts, up by 1,873 megawatts compared to last year. The main increases from the generation nuclear unit is 2,000 megawatts but some power plants will retire, so net increase will be 1,873 megawatts.

Maybe we can have one or two more questions.

Currently, there are no participants with questions. (Operator Instructions). Pierre Lau, Citigroup.

Thanks for replying to new capacity additional 1,873 megawatts for this year. So I just calculate, this is [equal] to an increment of less than 3% capacity addition for this year, but as you forecast power demand growth of 5.4% for this year, so do you mean that the reserve margin is going to become even lower in 2012 -- power demand growth of 4.4%. So do you expect power reserve margin to be even lower in 2012?

(interpreted) Allow me to answer that question. First of all, the concept of reserve margin is related to a peak at a [moment] level, not in total. So according to the calculation that you mentioned in your question, with a power demand rise of 4.3% or 4.4% and a net capacity increase of 3%, it may seem on the outside that the reserve margin is slightly lower.

However, due to the characteristics of power generation facility, we have output that is higher on some seasons, rather than others. And also because we are adopting Kepco's own load management system, we are able to manage the peak demand quite well. So the reserve margin would be at around 10%.

Do you mean that the reserve margin would double from last year, 5.5% to 10% this year?

(interpreted) Last year, we had a reserve rate that was lacking, however this year, due to load management and load control systems, we believe we'll be able to get a margin of 10%.

Okay, thank you.

Currently, there are no participants with questions. (Operator Instructions).

I think there are no further questions.

Yes, currently there are no participants with their questions.

Okay. Then we will conclude the conference call now, and if you have additional questions or require any assistance, please do not hesitate to contact our IR at any time.

Once again, thank you for joining us in the conference call today. Thank you.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.