Korea Electric Power Corp (KEP) 2012 Q1 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 2012 first quarter earnings results by KEPCO. This conference will start with a presentation followed by a Q&A session. (Operator instructions). Now we shall commence the presentation for the fiscal year 2012 first quarter earnings results by KEPCO.

[Interpreted] Good afternoon, this is Cecilia Oh, Senior Manager of KEPCO's IR team. On behalf of KEPCO, I would like to thank you all for participating in today's conference call. I will begin with a brief presentation on our earnings result 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 IFRS. Any comparison would be on a year-on-year basis between the first quarter of 2011 and 2012. Business strategies and 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 risks and uncertainties.

Now, let me begin with an overview of our earnings results, first in Korean and repeated in English. Now we will provide the overview in English starting with operating income.

In the first quarter of 2012, KEPCO recorded a net operating loss of KRW105 billion which improved KRW317 billion compared to operating loss of KRW476 billion in 2011. Our continued operating loss was mainly due to increases in operating expenses such as fuel costs and power purchase costs which were not fully offset by increases in operating revenues relating to increases in power sales revenues from tariff hikes and increases in power sales volume.

Taking a closer look, operating revenues rose 23.2% to KRW13.3 trillion. Power sales revenue increased 20.9% totaling KRW12.5 trillion. This increase was attributable mainly to 12.2% increase in unit tariff, 2.5% power sales volume growth driven by increase in demand from the industrial sector as well as [recognition] of account receivables related to the fuel cost adjustment amount.

Moving on to [the main] operating costs, (inaudible) and administrative expenses went up 18.8% to KRW13.6 trillion, of which fuel costs jumped 16.6% to KRW6.9 trillion, primarily due to 0.6% increase in power generation, affected by increased power demand, a 15.9% hike in unit cost of fuel, such as coal and LNG.

Meanwhile, (inaudible) power cost surge 41%, to KRW2.9 trillion. That rise is attributable to 21.7% increase in unit cost of purchased power and 15.9% hike in purchased power volume, due to rising power demand.

Now let me explain KEPCO's financial income and expenses in the non-operating segment. Our non-financial loss stood at KRW428 billion in the first quarter of 2012, which is KRW151 billion up, compared to KRW277 billion in 2011. This was mainly due to the interest expense, which went up 9.8% to KRW561 billion, impacted by an increase of interest [endearing] debt and a decrease in (inaudible) gain, impacted by the present decline in FX rate in 2012.

We had KRW66 billion income tax expense, which was KRW131billion rise, compared to the year before, mainly due to a raise in corporate tax rate and improved net income of our subsidiaries. As a result of the foregoing, we reported consolidated net loss of KRW538 billion in 2012, which slightly improved by KRW12 billion, from net loss of KRW550 billion in 2012 -- 2011.

This concludes the overview of KEPCO's earnings results for first quarter of 2012. Now let me move on to the Q&A session. I'm joined with KEPCO IR committee members, in charge of finance, tariffs, (inaudible) business et cetera. We're prepared to take any questions.

This will proceed in both Korean and English, all the Q&As will be interpreted. Please make sure your questions and answers are brief and clear. Please begin with your questions.

[Interpreted] (Operator instructions). The first question will be given by (inaudible) [Securities]. Please go ahead Sir.

[Interpreted] Yes I have four questions. The first one is in the operating losses, are the accounts receivable reflected or will we have to add on additional (inaudible) the accounts receivables to come up with the total operating loss?

The second question is can you give us the figures segregated by month from the month of January to March.

Third question is specifically for the month of March we see that the SMP prices have been increased. Is this possibly due to the interrupted operations of (inaudible) unit and the incident [emporium] as well as (inaudible) nuclear power plant [unit 4] and that caused the power purchase to be increased in volume and therefore costing up the price?

The fourth question is in terms of sales related cost, could you give us the segregated figure for the sales and administrative cost -- SG&A cost?

[Interpreted] Taking your first question -- I'd like to answer the first question. Concerning the operating profit and loss related to that question. Included in that figure is the -- included in the revenue figure, excuse me, are the accounts receivable from the fuel cost adjusted amount. Therefore within the first quarter figures there is actually KRW437 billion of that is reflected in there. So if we take that out then the loss would be that much bigger.

And for your second question concerning the figures on a monthly basis, we don't have that information with us right now, we will get back to you with the information.

[Interpreted] Concerning the third question about the rise of SMP prices in the month of May, I would like to answer that question. So in March of 2012 -- the month of March, yes, I'd like to make that correction. The SMP price rose by about 11% to KRW177.53, that's an 11% rise versus the previous month and it is mostly attributable to the increase of the fuel costs involved, as well as the factors mentioned in your question about the various plants and units being interrupted in terms of the operation for maintenance related issues and therefore that increased the purchase amount of power to 3.3 million kilowatts.

[Interpreted] I'd like to answer your question regarding the fourth question. In terms of UAE, nuclear power plants related facilities and equipment. In the first quarter of 2012 we had about KRW345 billion incurred and for the benefits and welfare related cost we had about KRW100 billion and taxes and duties amounted to KRW41.1 billion.

[Interpreted] Did that answer your question?

[Interpreted] (Inaudible).

[Interpreted] Currently five participants are waiting with their questions. The following question is by (inaudible) from Goldman Sachs. Please go ahead Sir.

[Interpreted] Yes, I have two questions. First here, what additional maintenance related shutdown events do you expect for the remainder of the year and secondly, out of a total portion of coal that are needed for this year, how much, or what percent, has been contracted?

[Interpreted] I believe that the main portion of your first question is related to nuclear power plants, so I'd like to give you the forecast on the usage rate or the operation rate of nuclear power plants for this year. In the first quarter of 2012 it was at 87.4%, but for the second quarter, all the way up to the fourth quarter, we expect it to range somewhere between the 83.3% to the 85% range.

The reason that there has been a little bit of a decrease in terms of the operation rate of nuclear power plants compared to the past is that there have been numerous detailed maintenance related checks, as well as safety related checks that are being continued, due to the Government's policies that are strengthening the safety requirements of nuclear power plants.

[Interpreted] I'd like to answer the second question regarding the coal. The overall requirement for coal over the whole year of 2012 is 78 million tonnes roughly. As of the end of March we have acquired 65.3% of that total volume on the [CFR] basis at a price level of -- at around $110 -- at around $115 range, excuse me.

Next question please.

[Interpreted] The following question is by (inaudible) from Citigroup. Please go ahead Sir.

Hi, good afternoon. I have three questions. The first question is in the first quarter the unit coal cost, unit LNG cost and unit oil cost also went up quite sharply compared to the same period last year. Also for the unit coal and LNG cost also higher than fourth quarter last year. Do you expect the second quarter this year, whether the unit coal, LNG and oil costs higher or lower than that in the first quarter and how much would it be higher or lower in your forecast? That's question number one.

Question number two is that you mentioned about the lower utilization rate of nuclear power. Do you expect to have higher or lower volume of power purchase in second quarter, compared to first quarter?

The third question is for the power purchase cost, would it be higher or lower in the second quarter, compared to with the first quarter? Thank you.

[Interpreted] I'd like to first of all answer your question regarding the fuel cost unit price. The coal unit cost forecasted for the month of April, May and June is to be within the range of KRW120,200 to KRW121,500 range.

As for the LNG unit cost for the same period of April to June, we expect it to fall in the range of KRW965,000 to KRW970,000.

Now we'd like to answer your question about the second quarter power purchase related forecast.

As a general I can mention that for the base load related maintenance related activities they do not take place during the winter and the summer months but mostly in the spring and the autumn months. Therefore in the second quarter we expect some increase to take place in terms of the power purchase.

Does that answer your question?

Yes. I would like to follow-up two points on this. How many percent do you expect for the power purchase amount in the second quarter, compared to the first quarter? Secondly for the unit oil cost in second quarter, do you think -- what would be the range in the second quarter?

[Interpreted] First of all answering your question about the unit cost for oil related forecast. The unit share used is 1 per kiloliter and we expect the unit cost for oil to be in the range of KRW857 to KRW862 per kiloliter.

[Interpreted] Please wait while we confirm one more thing.

[Interpreted] Actually the unit used here was 1 per liter, sorry. In terms of our forecast for what percentagewise we expect for the second quarter of (inaudible) we would need to get back to you because we do not have the figures on hand right now.

Thank you.

[Interpreted] Next question, please.

[Interpreted] The following question is by [Kin Zangu] from (inaudible) Securities. Please go ahead, Sir.

[Interpreted] I have three questions regarding the cost of power purchase from the IPPs and their related generational cost. It is shown here that they have increased their generation by 24% in terms of the volume but if you look at the gas consumption of IPPs in the process of generation, that gas consumption has gone up 73%. So could you give us an explanation on what was the cause of this increase of consumption of gas?

The second question is if they were doing this in order to prepare for an increase in electricity demand and that was the reason behind the increase of gas consumption then outside of the actual volume that was traded if they -- are the IPPs -- do they have the possibility of getting that cost factor paid through KEPCO? Is it -- I don't know what the details are within the related regulations and laws but is there a requirement for KEPCO to pay for this portion? And thirdly is it possible for the IPPs to claim this additional fuel cost to KEPCO?

There was an additional question from the side of KEPCO about clarification regarding the question that was asked, what exactly was meant by the increase of gas consumption as well as where the source of that information was?

[Interpreted] The gentleman answered that this was actually from the statistics of the IPP company and not from the KEPCO documentation or figures. So that was the clarification and now we will go on to the answer of that question.

Concerning the information that you mentioned in terms of increase of gas consumption for the IPP, actually there may be other purposes that gas consumption was used for outside of power generation. For example regional heating related purposes and self-generation types of purposes may be included in there. So there may not be a direct correlation between the increase of power generated by that IPP and its gas consumption. Did that answer your question?

[Interpreted] The additional question that I had was if in order to maintain a certain level of reserve the IPPs have to incur additional fuel cost outside of what was actually traded, in that case are they able to claim that fuel cost or not? That was the question.

[Interpreted] Actually, not just the IPP LNG power plants but all power plants in general. In order to respond to any surges in demand they, in order to maintain a certain level of credibility in operations they always maintain a certain level of reserve. Next question please.

[Interpreted] The following question is by (inaudible) from (inaudible) Securities. Please go ahead, Sir.

[Interpreted] Yes, I have two questions. First of all do you have any figures for the accounts receivable for the month of April and if you do have those figures could you release how much it is? I understand you probably have the second quarter forecast in terms of any increase of sales volume. In that case that could be the basis for the forecast for accounts receivable for the second quarter as well, so could you let us know about that question?

Second question I have is that yesterday we had some announcements coming up from the Ministry of Knowledge Economy about the energy supply and demand related issue for the summer period of this year as well as energy conservation related policies and policy direction. The main line of the announcement is that the preventive maintenance related shutdowns have been postponed from the spring period to the autumn period to make certain that supply is fully maintained during this period and there was also mentioning about shifting to high calorific coal usage.

Regarding these types of announcements by the Ministry what do you believe will be the increase forecasted for coal unit costs in the second quarter?

[Interpreted] Concerning your first question, sales volume is expected to increase in the second quarter by about 4.4% versus the same period of the previous year. However, we do not have the same kind of forecast given for accounts receivable as of yet. On the overall general trend we expect that compared to the months of January to March the second quarter accounts receivable will probably rise slightly but we do not have the exact figures as of yet. When we do we will get back to you with those figures.

Concerning the other question with the overall utilization rate of nuclear power plants decreasing as well as the peak (inaudible) for the summer to increase, I think that it is the right direction to go in terms of postponing the maintenance related shut-downs to the autumn period. However, that announcement has not been fully confirmed by us yet.

As for your question regarding any increase in coal related fuel costs, of course with more power generated through the coal power plants, the unit costs -- the costs will actually rise in terms of the coal fuel. However, that also increases the overall power generated and also LNG side related costs will decrease on the other side of the coin.

Therefore with that in total we believe that it will be actually beneficial for our overall income statement related figures, however we do not have the actual figures on hand yet.

[Interpreted] I'd like to add on to that answer because I think that my question needs to be clarified a little bit further. The figures that I have for -- the figures of fuel unit costs for coal, oil and LNG are a little bit different from the forecast that you have given, so I wanted to make certain if our understanding was correct? Because based upon the figures that I have I cannot fully understand how you expect the accounts receivable to increase.

Concerning the answer that was given to the coal related cost issue, I understand that with the generation of coal power plants increasing it will mean more usage of coal and therefore costs related to fuel will increase, that's normal, I fully understand that. However, the point of my question was the government policy direction in terms of favoring high calorific coal and plants in that regard. So what I wanted to know was if there is a price difference in the unit costs of the general types of coal versus high calorific, and if so do you have any percentage figures that you can give us so we can better understand what that would mean for the future results?

[Interpreted] As for your question about the price difference between high calorific and low calorific coal prices, we do not have those exact figures on hand, I apologize, and we will get back to you later about that difference rate. Concerning your other questions about accounts receivable, the previous figure that we had mentioned in terms of the forecast for fuel costs, that was based upon the monthly figures that have been the actuals recorded by the power plants themselves.

For the accounts receivable what usually happens is that we reflect the amount of the previous year, that is to say for the month of April the accounts receivable will reflect the base fuel costs of what we experienced from July to September of last year. So we make a moving average of those three months to be reflected as the base fuel cost. We also take into consideration the average unit cost difference of the fuel cost in the month of November, December and January. So we take those two into consideration in the (inaudible).

Who will have next question?

[Interpreted] The following question is by (inaudible), please go ahead Sir.

[Interpreted] I have two questions, first one is concerning the Government's plans for tariff hikes there's been an announcement about 13.1% of a tariff hike to be planned. How does that reflect in terms of your IRR rate, fare rate of return and actual rate of return? So could you give us what that represents in terms of fare rate of return and actual rate of return, and also what will the accounts receivable -- what kind of influence would the accounts receivable have on the actual rate of return side?

The second question is I believe that there are proposals for increase the tariff for the industrial usage. Could you give us any additional information that you have about how that will differ by season, if any? The third question is I understand that for the reserve electricity level there are four levels starting from safe rate, all the way up to emergency rate. So there are four levels, could you tell us what each of those levels represents in terms of figure or percentages or whatever it may be? So at what point of data do you change from one level and go up to the next level?

[Interpreted] I'd like to answer your first question about the tariff hike related issue. For the fare rate of return in 2010 it was at 6.11 percentage level. For the year 2012 we do not have the actual figures as of yet, but probably due to an increase of borrowings we expect the rate of return to be a little bit lower.

Concerning your additional question about any differentiation or different levels being applied by season, well actually the overall policy direction is being considered by the Government. But the Government is also looking into many possible policy directions, so we don't have a one fix decided direction set as of yet. But it is highly likely that they will take into consideration some different degrees to be applied, especially for the summer and winter periods.

[Interpreted] Now I'd like to answer your question about the levels included in the reserve alert system and its (inaudible) levels. There are actually three levels here to take into consideration. The level that requires attention is 4 to 3 million kilowatts, attention level is 3 to 2 million kilowatts and alert level is 2 to 1 kilowatts. We would like to get back to you with some more detailed information at a later period.

[Interpreted] I'd like to ask one more add-on question, as well as a reminder of a previous question that was left unanswered as of yet. The accounts receivable and the affect that that will have on the actual rate of return was the question that still has not been answered, and the additional question that I'd like to ask was last year in September when there was a black-out, at that point in time what was the reserve rate, so that we can reference, that we can use as a reference?

[Interpreted] Is your question asking about whether accounts receivable is included in the revenue for the actual rate of return calculations?

[Interpreted] That is correct.

[Interpreted] Accounts receivable is not reflected in the actual rate of return.

[Interpreted] For the September last year black-out, at that moment in time we do not have the actual reserve level figure on hand as of yet, but we believe that it was not the lowest, because at another period in November when the reserve level at that moment fell down to 5.5%, so that I believe was the lowest. But during the black-out incident it was not that low. We would like to get back to you with an answer on that question after fully verifying the details.

Next question please.

[Interpreted] The following question is by (inaudible) from KB Investment and Securities. Please go ahead Sir.

[Interpreted] Yes I have two questions, the first one is regarding other sales, I believe that the figure here is KRW400 billion and amount that I'd like to ask how much revenue was generated by the UAE project? The second question, I don't know if you'd be able to give me an answer right now, but if you look at the nuclear power project's unit costs, I think it exceeded KRW50 from the month of January to March period. So what do you expect this to be, looking forward will there be any additional increases or other differences in trends of the purchase and the unit cost compared to what we saw prior to 2007 that attributed to this?

[Interpreted] Concerning your first question about UAE related revenue generated, or profits generated, in the first quarter it was KRW443 billion from the UAE project.

Please wait while we gather the information for the second question.

Yes I'd like to answer your question about the nuclear power cost. In the first quarter of this year it was KRW50.53 so exceeding KRW50 as you have mentioned, compared to the same period last year, which was KRW42.58.

In terms of calculating the appropriate unit cost of purchase for nuclear power, we actually apply the SMP coefficient, and as you know the SMP increased, and due to that the unit price also increased. However in the second half of this year we expect that to be adjusted and so the price level will also be recovered.

[Interpreted] The additional question to that was UAE related revenue and the figures for that for first quarter of the previous year, 2011, and the answer was for Q1 of 2011 it was KRW126.3 billion.

[Interpreted] And a clarification concerning the nuclear power-related cost as you mentioned that the SMP has increased but it will be decreased or lowered and the answer was yes.

[Interpreted] The additional question was do you have information on the operating profit of [KHMC] for its first quarter?

[Interpreted] [KHMC's] operating profits for Q1 of 2012 recorded KRW504.2 billion which is a 26.4% increase compared to the previous year.

[Interpreted] The following question is by (inaudible) from (inaudible) Securities. Please go ahead, ma'am.

[Interpreted] Yes I have three questions. The first one, you have already given us information about the UAE project revenue and cost. Do you have any specific figures by quarter?

I'm sorry. The question was -- excuse me, I would like to correct that.

[Interpreted] Is that level of revenue and cost for the UAE project similar quarter to quarter? Do you have any figures for the overall annual budget and if so could you give that to us?

The second question is what has been budgeted for this year for maintenance and repair related costs, and the third question is in the fuel cost adjusted system, the fuel cost adjustments are not directly reflected into the accounts receivable as far as I understand. I understand that the estimated generation mix is taken into consideration so the fuel cost is being applied in a per calorie type of analysis. So looking into that situation, could you give us a breakdown of what is expected in terms of the fuel mix, energy, oil and coal and others, because I believe that the base load of the nuclear power plant side has become lower, so is that expected also?

[Interpreted] First of all, concerning your first question about the UAE project cost and forecast. In Q1 the cost for the UAE project was at around KRW374 billion and it is expected to be remaining at similar levels for the second quarter to fourth quarter period. For revenue as well we expect it to be similar for the upcoming quarter.

For the second question concerning repair and maintenance related costs, the total repair and maintenance related costs for KEPCO and the 6 generation companies all together record about KRW2.3 trillion. However, one thing to take into consideration is after the consolidated bases we actually apply some adjustments, and in 2011 alone the adjustment was at negative KRW633 billion.

So based upon the forecast for 2012 being a simple KRW2.3 trillion, an addition of all of the companies as I mentioned earlier, we do not have that adjustment level as of yet. We don't know what that will be but if we were to simply impose last year's figure on that then it will probably mean it will come to KRW1.67 trillion.

[Interpreted] Concerning your question about the fuel mix by generation plants actually we get that figure from the KPX, however we do not have the specific figures as of yet so we will get back to you once we have them on hand.

[Interpreted] One thing that I would like to add concerning the previous question and answer related to the UAE project's revenue and costs involved. Actually the revenue and cost for the UAE project will be different depending on how much progress has been made within the actual project itself. So the actual figures may be quite different, so please take that into consideration.

Given time constraints we will take maybe one additional question before we conclude.

[Interpreted] The last question is by [Hinzan Gu] from (inaudible) Securities. Please go ahead sir.

[Spoken in foreign language]

[Spoken in foreign language]

If you have no further questions we will complete the conference call. Once again, thank you for joining us 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.