Korea Electric Power Corp (KEP) 2012 Q2 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 second quarter earnings results by KEPCO. This conference will start with a presentation, followed by a divisional Q&A session. (Operator Instructions). Now, we shall commence the presentation on the fiscal year 2012 second quarter earnings results by KEPCO.

(interpreted) Good afternoon, this is Cecilia Oh, Senior Manager of KEPCOs 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 results, which will be followed by a Q&A session. Today's call will be proceeded 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 will be a year-on-year basis between the second quarter of 2011 and 2012. 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 risks and uncertainties.

Now, let me begin with an overview of our earnings results, first in Korean and repeated in English.

Now we'll provide the overview in English, starting with the operating income.

In the second quarter of 2012 KEPCO recorded a net operating loss of KRW1.96 trillion. The amount of loss of which increased KRW1.16 trillion compared to operating loss of KRW798 billion in 2011. Deterioration in 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 revenue from the increase in power sales revenue, due to tariff hikes and increases in power sales volumes.

Taking a closer look, operating revenues increased 16.4% to KRW10.6 trillion. Power sales revenue increased 16.7%, totaling in KRW9.9 trillion. This increase was attributable mainly to 10.5% increase in unit tariff, 2.6% growth in power sales, driven by an increase in demand from the industrial sector, as well as recognition of account receivables related to the fuel cost adjustment system.

Moving on to main operating costs, COGS selling and administrative expenses, went up 25.9% to KRW12.7 trillion. Fuel costs accounted for the major reason for the jump, which went up 30.1% to KRW6.3 trillion primarily due to 2.3% increase in power generation volume, affected by increased power demand, and 2.1% and 29.3% hikes in unit cost of fuel costs, such as coal and LNG respectively.

Meanwhile, purchased power costs [surged] 95.5% to KRW2.9 trillion. Such rise is attributable to a 35.9% increase in unit costs of purchased power and 17.7% hike in purchased power volumes, due to rising power demand.

Now let me explain KEPCO's financial income and expenses in the non-operating segments.

Our net financial loss stood at KRW492 billion in the second quarter of 2012, which is slightly improved compared to KRW511 billion loss in 2011. This was mainly a result of increases in net assets-related gains, including translation and transaction-related gains and increases in financial derivative gains.

The interest expense was up 3.8% to KRW575 billion.

Due to increased amounts of pre-tax loss in 2012, income tax expense increased minus KRW374 billion from minus KRW223 billion in 2011, to minus KRW597 billion in 2012.

As a result of the foregoing, we recorded consolidated net loss of KRW1.78 trillion in 2012. The amount of loss increased by KRW698 billion from a net loss of KRW1.09 trillion in 2011.

This concludes the overview of KEPCO's earnings results for the second quarter of 2012.

Now let me move on to the question and answer session.

(interpreted) I'm joined with KEPCO's committee members in charge of finance, tariffs etc. and we are prepared to take any questions.

Since we'll proceed in both Korean and English, all the questions will be translated, so please make sure your questions and answers are brief and clear. Please begin.

[Young-suk Kwon], Morgan Stanley.

(interpreted) I have two questions. The first question is what is the amount of account receivable you have accumulated until the second quarter of this year?

Second question is what is the time lag between the actual fuel cost and the market price of the spot commodity?

(interpreted) So in the second quarter, that is from the April to June of this year, the accumulated account receivable will be from the cost [cash-in] system is KRW613.5 billion.

(interpreted) Next is answering your second question.

(interpreted) My name is [Pad Jang-Soo] from the Group Support Team. To answer your second question, I will base my number on the purchase unit price of bituminous coal for the first half of this year, which is at $120.47. This level is a mix of long-term and short-term purchase price, which is significantly different from international spot price. But, generally, we can safely say that there is about $2 to $4 gap.

Sujin Bum, Samsung Securities.

(interpreted) I have three questions. First question, looking at the Dubai oil price in the April, it seems to go down a little bit. Then why is KEPCO's oil prices at similar level with the first quarter numbers?

Second question, although you're implementing the fuel cost adjustment tariff system, your fuel mixed target is somewhat defined already. So if energy and oil price deteriorates, you will not be able to cover that loss, because this mix target is fixed. Is there any potential possibility that this mix target of fuel will be changed?

And third question is on the nuclear power plant of Shin-Wolsong and Shin-Kori. Shin-Wolsong Unit 2 and Shin-Kori Unit 3 will be opened next year in January and June. The first unit -- nuclear power plant in Shin-Wolsong and Shin-Kori successfully opened this year. So my question is there any possibility of delay in the next rollout of these nuclear power plants?

To answer your first question on the oil price, earlier this year, because of the Iran crisis, the oil price in March 14 was at its peak since the Lehman Brother's crisis at $124.22 per barrel. And, recently, it is true that oil price has gone down rapidly, because of the economic crisis stemming from European region.

So your question was why was the sale price at the same level between the first quarter and the second quarter. And the reason is because the plunge or the drop in the price is still at a very minimal level.

To answer your question on the fuel cost tariff adjustment system and its link with the fuel mix, is that our fuel mix is defined by the forecast by KP and that forecast is maintained for the following one year. Because of that, we cannot reflect change in any fuel mix on our tariff adjusted system. We can only reflect the price change. So it's not like the gas where we divide the total cost with the total volume.

(interpreted) And on your third question about the establishment of nuclear power plant of Shin-Wolsong Unit 2, which is of 1,000 megawatt in capacity, that will be launched in January of next year. Shin-Kori Unit 3, with 1,400 megawatts in capacity, is planned to open by September of next year. So the scheduled time line is set that way and until today, there is no reason or issue at the moment for us to delay that launch.

(interpreted) To add to the first question, we do buy from the spot market, but there is this issue of delivery and storage, so there is typically one, two, three months in time lag.

(Operator Instructions). Deok Sang Yoo, Dongbu Securities.

(interpreted) I have three questions. First question is [what is really the cost] of developing the six power plants? And what is the CapEx planned for KEPCO going forward to be reflected in the sixth plant?

And second question, I believe the performance in the second quarter was very much influenced by the purchase power price of KEPCO and the private sector is announcing that they would build more generations in the private sector. So, having considered this, what is your forecast for the power purchase cost going forward?

Third question is on the nuclear power plant utilization rate. The utilization rate in the second quarter was about 84%, but with recent launch of nuclear power plant, what is your forecast for the nuclear power plant utilization?

(interpreted) So the nuclear power plant utilization rate in the second quarter was 84%. And our forecast for the third quarter and the fourth quarter is it at 83.9% and 82.1% respectively.

The Shin-Kori Unit 2 and Shin-Wolsong Unit 1 was launched in July 20 and July 30 respectively and began its commercial operation. But Ulchin Unit 3 and Ulchin Unit 4 nuclear power plant will be going through their planned maintenance. And the planned maintenance for Ulchin Unit 3 will continue until the end of this year and for Ulchin Unit 4 will even go after this year, so the utilization is to be -- remain at low level.

On the sixth power supply and demand plant for KEPCO, that is to be released by end of December, so it's rather early for us to disclose that before the official disclosure.

To answer your second question, you probably heard that the IPPs, or the private power providers, is to get into the coal and nuclear-fired power generation business. And for IPPs for fire power plant, we have decided to apply adjusted coefficient for these power plants, so that will serve as a way to curb down the power purchase price for KEPCO.

Having said that, we don't know how much of the business intent that are filed by the private sector the government will accept. We don't know whether they will accept all of it or not. So it's very difficult for us to forecast the long-term purchase portion for our powers, going forward.

[Young-suk Kwon], Morgan Stanley.

(interpreted) My question is, you have just mentioned that there is about one to three months' time lag between -- within the oil price, between the stock market and your purchase price. Would that time lag apply identically to LNG and coal?

(interpreted) For LNG, we buy 100% from KOGAS under our long-term supply plan, so our price is linked to KOGAS purchase price, and their purchase price is linked to the oil price, and there is typically about 1.5 months to two months' time lag.

For bituminous coal, we typically have long-term supply contract and short-term contracts. For long-term contract, there is typically three months' time lag and for spot contract, or short-term contract, we order quarterly or on a two to three month basis. So the time lag is also two to three months.

[Sung-jin Hwang], KB Investment Securities.

(interpreted) I have two questions; first question is on the fuel cost adjustment -- fuel cost-adjusted tariff system. It seems that the base timeline has changed from March, April, and May to calculate your fuel cost. And to my calculation, the expected fuel cost unit price would be KRW370, is that right?

Second question, in the second quarter your account receivable outstanding is negative KRW1.4 trillion. What is your forecast for the end of this year in account receivables?

I have one clarifying question, maybe I have missed your comment, but you mentioned that you are planning to apply adjusted coefficient for private coal IPP providers when they do get appointed by the government and I'm sure that will be low -- that coefficient will be lower than one that you applied to KEPCO subsidiaries, is that right?

(interpreted) To answer your first question, the fuel cost that we used until the end of last year, which was the most recent one, was KRW351. And the change fuel cost, based on March, April and May, is increased to KRW389, which is up by 11%.

To answer your second question, our initial forecast for the account receivables standing at end of this year was at KRW2.4 trillion. But because of change in fuel cost, we anticipate that additional KRW1.3 trillion will be added to that account receivable.

I'm sorry, one adjustment, KRW1.3 trillion would not be added, but it would be -- KRW1.3 trillion would be reduced.

For the full year, the account receivables to be added to the revenues will be KRW1.3 trillion. Our expectation was KRW2.4 trillion, but it will down to KRW1.3 trillion.

STS Power and [Tung Bu Power] has filed for coal-fired power generation for 2014 and 2015. And that plan was included as part of the first power supply plan under KEPCO. And in last May, there was the power market regulation committee that was held and they decided to apply adjustment coefficient to the IPP.

The objective of applying this coefficient is, of course, to stabilize our power price. How much will be stabilized -- or how much coefficient will be applied is now under consulting project, and the result of that consulting project will be available by end of this year. We don't know, at this point, as whether to that coefficient level will be lower than our six subsidiaries or higher.

Ji-hwan Yang, Daishin Securities.

(interpreted) The first question was on your performance gap and the official -- there is some gap in the actual performance between the official disclosure with the actuals or the earnings call.

For this quarter, in the second quarter, I see some gap of KRW450 billion between the disclosure and what has been announced. As an analyst, how can we reduce this gap or try to reduce this gap when we make earnings forecasts to give us an idea?

Second question is that your account receivables that you have anticipated for end of this year were KRW2.4 trillion, but you have reduced that forecast level to KRW1.3 trillion. With the fuel cost unit price including KRW389, I believe some time in October, there may be some pressure or there may be some factors to even decrease the fuel cost or tariff cost. So, having said that, what is the process for offsetting account receivables with account payables? And how does that process work?

(interpreted) So on the first half of this year, the account receivables from the fuel cost adjustment tariff system was KRW1.2 trillion. There has been tariff change in August 6 of this year and the revenue from that adjustment for July and August 6 is about KRW300 billion.

From September to October, we'll be generating some revenue again. And in November and in December, we will have another round of application of this fuel price adjustment tariff and that will somewhat offset account receivables to date. And if we net that, we believe that we'll be generating KRW1.0 trillion in revenue from the fuel cost adjusted tariff system.

(interpreted) On the -- on our accounting process to offset account receivables, we don't put the account payable on our books. Rather, we would deduct that from our receivables and then deduct it from account receivables.

(interpreted) So you asked about the difference between the metering -- difference between the power sales from our metering statement versus our consolidated basis. For the previous one, we add all our accrued metering actuals and reflect our fuel cost adjustment tariff system. And also, we try to forecast unmetered power consumption based on accrued basis. That's the first set of numbers that we release.

And apart from that, we also have a consolidated basis where we adjust the numbers based on internal transaction; internal transaction from water pumping and [pipes] within KEPCO's subsidiary companies. That's why after consolidation basis, the number is changed.

(Spoken in Korean).

(interpreted) We regret to say that because we settle our balance sheet on a quarterly basis, we are not able to offer that adjusted metering result on a monthly basis, because it is only on a quarterly basis we reflect this internal transaction. And also, the numbers after the accrued -- numbers forecasted based on accrued basis.

(interpreted) Then can you give us a number -- two different set of numbers for the ones that have been adjusted with accrued accounting basis and one that is based on the metering basis?

(interpreted) So if you refer to the presentation we sent out with the earnings conference call, there is a line item on the adjustment for the fuel cost account receivables and revenue forecasted and also adjusted on a consolidated basis. So if you look at these three line items, you'll be able to separate those two numbers.

(spoken in Korean)

Sungmin Chang, JPMorgan.

(interpreted) So my first question is you have given us some guideline on the nuclear power plant utilization rate for the third and fourth quarter. What is your forecast for the next year, and when do you anticipate that the utilization rate will recover to the previous level which is at 90% to 95%?

Second question, you have achieved this tariff increase and there is also talk of increasing tariffs once again by end of this year. Is this a position or commitment by the management team, or has there been any buy in from the government, or some exchange of intent from the government on this count?

(interpreted) On your first question on the forecast for the nuclear power plant utilization rate for 2013, we don't have resources data, we don't have the number with us at the moment, but we will get back to you with that later.

On the tariff system after the increase of tariffs by 4.9%, we still have over 10% increase remaining for us. So we also anticipate that this winter will be a difficult season for us again, so we do need to manage the demand, signaling that demand through high price and we need to also -- that's why we believe that this kind of measurement is necessary in the future. And that's why we want to rigorously manage demand based on seasonal factor and also on the timeline factor.

Pierre Lau, Citibank.

I have three questions, the first question is regarding the LNG unit cost, in the second quarter the LNG unit cost was up about 14% compared to that in the first quarter, so that increment was higher than the (inaudible) [previous] guidance. What was the reason for the sharp increase in LNG unit costs in the second quarter and what's the management expectation for the LNG unit costs in the third and fourth quarter this year? That's question number one.

Question number two is that for the power generation from nuclear power plants, it was 40.8% of your total output in the second quarter. As we have two nuclear power plants each 1,000 megawatt to start operation in the second half this year, so what's the expectation for this percentage in third quarter and fourth quarter?

And the last question is that I would like to confirm the account receivables under the fuel pass-through mechanism. By the end of the first half this year was the outstanding KRW1.4 trillion? And for the second half this year does management guide an increment of KRW300 billion, so that by the end of this year the outstanding will be KRW1.7 trillion, I would like to confirm these three numbers? Thank you.

(interpreted) To answer your question about the power plant output, we regret to say that we don't have numbers for the second, third and fourth quarter of 2012. However our numbers for the first half of this year, which is from January to June, for our six GENCO was 33.6%. Our annual number for 2012 is at 34% level, that's our forecast. And our forecast for 2013 is increased at 38%.

To answer your second question on the LNG unit cost for the second quarter, in the second quarter LNG unit cost has increased by 29% year-on-year basis and we purchased our LNG from KOGAS in our contract, with have contract with them and that purchase price is linked to the oil price and JCC.

If you look at JCC price trend, it has maintained a very high level throughout April up until May and is at a trend of declining.

If you look at JCCs trend they are about three months lagging index in terms compared to Dubai oil prices. So for KEPCO we believe that the LNG unit price in this third and fourth quarter will decline, and the number is currently at KRW1,080 million per ton, but in the fourth quarter we believe that will decline to KRW880 thousand.

As you have heard that we believe that LNG and oil price will start declining in the second half of this year and accordingly the fuel costs from the fuel cost adjustment tariffs system will peak in October and start declining in November and in December. So the outstanding account receivable we anticipate at the end of this year will be at KRW1.3 trillion.

I would like to confirm if by the end of this year, KRW1.3 trillion. So what's the amount at the moment?

(interpreted) Let me summarize that. By end of 2011, the total accumulated account receivable was KRW358.3 billion. The total accumulated account receivable during January to June of 2012 was KRW1.5 trillion. So if you add those two numbers, it will be KRW1.4 trillion up until today.

Our anticipation for the account receivable accrued, during January of this year 'til December of this year, will be KRW1.3 trillion. So the outstanding account receivable from last year, which is KRW358.3 billion, will still be made.

Can I confirm again during this year KRW1.4 trillion and you just said that by the end of this year was KRW1.3 trillion. So the change in the second half this year, was this minus KRW0.1 trillion?

(interpreted) So up until the first half of this year, the total account receivable that was added to the book was KRW1 trillion. So all you need to do for the second half of this year is to add another KRW300 billion.

Okay so by the end of this year, it should be KRW1.7 trillion?

(interpreted) Yes, that's right.

If we have tariff high say, early next year, would this amount be reduced?

(interpreted) Well, all the account receivable that we have accrued until today will not be changed. It is a rather fixed amount. However, going forward, we may accumulate account payable instead and that may be applied as a deduction.

And one number that you just mentioned regarding output from nuclear plant, did you mention it would be 38% next year. So it would be 4 percentage points higher than this year, 44%? Am I right?

(interpreted) Yes, that's right.

Okay. Thanks a lot.

(interpreted) Sujin Bum, Samsung Securities.

(interpreted) The first question is you have mentioned that Ulchin Unit 3 and Ulchin Unit 4 is at its planned stoppage and will got to maintenance and repair until the end of this year. Then how -- do you believe that they will be ready to start operation in next year? What is the possibility of these two nuclear power plants being in operation early next year?

Second question is on your generation volume and sales volume. If you look at the gap between the generation volume with the sales volume, there is about 7% difference, whereas the generation volume is higher. Typically, we see this kind of gap in the fourth quarter, but it's unusual to see this kind of huge gap in the first, second or third quarter. Why is this? Is it because of the power shortage and because there are many power generations waiting to supply? What would be the reason behind this?

(interpreted) To give you our plans for the nuclear power plant maintenance, Ulchin Unit 4 is scheduled for its plant maintenance and repair until December of 2012, whereas -- and Ulchin Unit 4 is scheduled to be under maintenance and repair until August of 2013.

(interpreted) The generation -- the gap between the generation volume and the actual sales volume arises from mainly two factors; first factor being the generation of loss inside of our power plant; and second, from the transmission loss. Typically, transmission loss ratio would be 2% to 3%. But I don't have the number for the lost power loss ratio for power lost within the generation, power plant generation.

(interpreted) I have one follow-up question. The first is that how do you forecast power supply going forward? How do you anticipate the power supply for the next year? Do you think the power shortage issue would improve?

(interpreted) We anticipate that the power supply until winter of 2013 will be very challenging, but afterward, we will be having additional base generators. So I believe, starting in summer of 2014, the situation will significantly improve.

Because of the time constraint, we will accommodate just a few more questions.

(interpreted) Deok Sang Yoo, Dongbu Securities.

(interpreted) I have three questions. First question is on the fuel cost adjusted tariff system. When we first set out to implement this new system our initial intention, I believe, was to give you a fair value in the invested value, to give you your captive margin, that is. But we don't see that on your financial performance.

When we had this 4.9% tariff hike, or increase, what was the implication of this? Is it to guarantee a fair rate of return to KEPCO? Or was it to merely cover the fuel cost that you're buying from the market? How do you interpret an implementation of fuel cost adjusted tariff system?

And second, I believe Japan is implementing a similar system. Do you believe this fuel cost tariff system is in line with trends in other markets?

And third, on the fuel cost portion, if this fuel cost adjusted tariff system is implemented to cover the fuel cost, what is the difference you see now that you have this new system in place? What was the difference from before implementing the system and after implementing?

(interpreted) To answer your first question, I believe it was not implemented to compensate or give us a fair rate of return on our capital in the first place. It was merely to reflect the change in fuel cost on our tariff system.

And you mentioned about similarities with Japan. Japan first adopted this system in 1996 and went through amendment in 2009. We have benchmarked the Japanese case and we are similar in implementing the fuel cost adjusted tariff system.

When I say we are similar with Japan, we used the concept of base fuel cost and actual fuel cost with three months' revolving average fuel cost applied to all of this concept. And we apply that with two months' time lag.

The difference with the previous system is that, in the past, we reflected this new fuel cost once we settled that on our accounting book and the adjusted fuel cost was only applied in the following year. So there was typically six months to a one year time lag.

And one key change would be that with the implementation of fuel cost adjusted tariff system, we can signal the market with changing fuel price. The fuel price is reflected every two to three months and that will be reflected in the tariff.

Second is that we're seeing the regulation acting in two different aspects by implementing this new fuel cost adjusted tariff system. First, we are able to reflect the changing fuel cost in our cost structure on a regular basis, therefore get a fair compensation for changing fuel cost. And also the remaining compensation will come from our total fuel cost basis. So separating these two functions, from a regulatory perspective, is the impact we gain from this new system.

(interpreted) We will accommodate one last question.

(Operator Instructions). [Song-ji Yin], UBS Securities.

(interpreted) You have mentioned the LNG unit price forecast for the third and fourth quarter. Can you also share us the unit price numbers for bituminous coal and oil?

(interpreted) For coal, our forecast for the third and fourth quarter is at KRW117,000 and KRW111,000 respectively. For oil, we anticipate the oil price to be KRW850 per liter in the third quarter and KRW818 per liter in the fourth quarter.

We will now close our second quarter earnings conference call, if you have no further questions. And, once again, thank you for joining us today.

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.