Korea Electric Power Corp (KEP) 2012 Q3 法說會逐字稿

(Spoken in Korean)

Good morning and good evening. First of all, thank you all for joining this conference call, and now we will begin the conference of the Fiscal Year 2012 Third 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 of the Fiscal Year 2012 Third Quarter Earnings Results by KEPCO.

(Interpreted) Good afternoon. This is the 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 to announce our Third Quarter Earnings Results.

(Interpreted) 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 preceded 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 on a year-on-year basis between the third 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 will provide the overview in English starting with operating income. In the third quarter of 2012 KEPCO recorded a net operating income of KRW1.98 trillion up by KRW556 billion from KRW1.42 trillion in 2011. Taking a closer look, operating revenues increased 17.1% to KRW13.72 trillion. Power sales revenue increased 17.6% totaling in KRW12.99 trillion. This increase is attributable mainly to 11.6% increase in unit tariffs, 2.9% growth in power sales driven by increasing demand from the industrial sector as well as recognition of accounts receivables related to the fuel cost adjustment system amounting to KRW419 billion.

Moving on to the main operating costs COGS S&A expenses rose 14.7% to KRW11.89 trillion. Fuel costs accounted for the major reason for the jump which increased 15.2% to KRW5.78 trillion primarily due to a 16.3% increase in power generation of LNG and oil affected by increased power demand and decrease in [base] power generation as well as 17% and a 4.6% hike in the unit costs of LNG and oil respectively. Meanwhile, purchased power costs increased 35.1% to KRW2.27 trillion. Such rises are attributable to a 22% increase in unit costs of purchased power and a 10.7% rise in purchased power volume due to rising power demand and reduced base load power generation. Depreciation costs rose 3.9% to KRW1.56 trillion mainly due to two newly constructed nuclear power plants

Now let me explain KEPCO's income and expenses in the non-operating segment. Net financial loss stood at KRW545 billion for the year which includes KRW372 billion compared to KRW917 billion one loss last year. This was mainly due to changes in net asset related gains including gains on as such inflation and financial derivatives transfer appreciation of Korea won. Interest expense rose KRW101 billion to KRW 617 billion due to increasing debt. This resulted in the pre-tax income of KRW1.39 trillion up by KRW937 billion from KRW457 billion. Income tax expense increased KRW273 billion from KRW164 billion to KRW437 billion in 2012.

As a result of the foregoing we recorded consolidated net income of KRW940 billion in 2012, which improved KRW673 billion from KRW266 billion net income in 2011. This concludes the overview of KEPCO's earnings results for the third quarter of 2012.

(Interpreted) Now let me move on to the Q&A session. I am joined with KEPCO's IR committee members in charge of material matters related to KEPCO. So we are prepared to take any questions. Since we'll proceed in both Korean and English all the joinee's will be translated, so please make sure your questions and answers are brief and clear.

Please go ahead with your questions.

(Operator Instructions)

(Interpreted) The first question will be given by Mr. Yoo Deok-sang from Dongbu Securities. Please go ahead, sir.

(Interpreted) My name is Yoo Deok-sang from Dongbu Securities thank you for giving me the opportunity to ask a question. I have four questions, the first question is in the third quarter of your nuclear power plant utilization rate is high at 88%. What is the driver for maintaining such a high utilization rate and tell me where there is high demand for power? The second question in the third quarter what is the utilization rate for the Shin-Kori 1 and Shin-Kori 2 nuclear power plants. And third question is if you were to replace the nuclear power plants with power supply, what would be the external replacement costs for replacing nuclear power. And the fourth question, in the fourth quarter what is your expected liability for the decommissioning costs of nuclear power plants and what is the feasibility of that?

(Interpreted) To answer your first question, I am sorry to say that there has been some confusion in the utilization number. It is not 88% but we need to revise that number down to 84.4% and I apologize for the revision but the number stands at 84.4%.

To answer your second question on the utilization rate for Shin-Kori 2 and Shin-Kori 1 nuclear power plants. Those two nuclear power plants began its commercial operation in July. Although I don't have the actual number for the utilization rate with me at the moment. But since there has not been any stoppage of its operation I believe the number will be above 90% plus the utilization rate. We will send you the detailed data later on.

And on your question about the allowance or liability that we accumulate to de-commission the nuclear power plant. According to the Ministry of Knowledge Economy guidelines they have a goal to calculate the number within the fourth quarter of this year and change the allowance for that. But there is also a high possibility that this could be delayed until next year. This special number is adjusted and changed before March of 2013. That number will be reflected in the 2012 fiscal year.

As for the services and cost for the liabilities for decommissioning the nuclear power plant it is likely the number will be increased. And especially we expect that the number will be increased significantly. But in terms of the timing and the total amount of actual liability it is something that is very open at this moment.

Under current state we accumulate the costs or allowance under other operating costs. And quarterly we accumulate about KRW23 billion. If the Ministry of Knowledge Economy were to change that number the number will go up as high as KRW850 billion in the fourth quarter but the amount itself is still very open and will need to be fixed.

Okay.

(Interpreted) So if the nuclear power plant operation is stopped that will influence the overall power supply and cost and we need to run alternative power plants using LNG or other sources of fuel which will drive up the overall fuel cost. That will also impact the market price and also the settlement price with our IPPs.

(Interpreted) So if one of the nuclear power plants is stopped with about the capacity of one million for the full year, the impact on the overall power purchase cost will be on a daily average KRW3.4 billion. And if we annualize that number it will amount to KRW1.2 trillion.

(Interpreted) A follow up question to the liability for the decommissioning of the nuclear power plant., Is that -- or will that -- that number a recurring number on an annual basis or is this number reflected on an off basis?

(Interpreted) Well according to the law the Ministry of Knowledge Economy will change the number and requirement every two years. The number has been changed once last year but it originally had been planned to be changed the year before. And also according to the plan this year is also the time for the regular update of the number, but there is a high possibility that the process will be delayed to next year.

(Interpreted) Currently three participants are waiting with their questions. The following question is from Mr [inaudible] Chung of [inaudible] Investment and Securities. Please go ahead, sir.

(Interpreted) I have three questions. First at the end of this quarter what is your stand on your accounts receivables? The second question we have seen the stoppage of nuclear power plants and as an alternative energy how much of the other LNG volume do you foresee will be increased in the fourth quarter? And the third question LNG unit price has gone down in the third quarter, do you believe this trend will continue throughout the fourth quarter? What is your outlook on the unit price of LNG?

(Interpreted) In the third quarter of the additional accounts receivable reflected in our revenue is KRW418.5 billion and the total accounts receivables stand currently is KRW1.82 trillion.

(Interpreted) As for your second question on how much increase of LNG volume there will be due to the stoppage of the nuclear power plant is something that we need to update going forward. So as soon as we do that, we will follow up on that question.

(Interpreted) Next question is from Mr [Yan Ji Wan of Teshin Securities]. Please go ahead sir.

(Interpreted) My name is Yan Ji Wan from Teshin Securities. I have three questions. First question is, we have seen the unplanned maintenance of Yeongheung 5, 6 and 3 because of the [stoppage] of your power plant. When do you foresee that these nuclear power plants will be in operation again?

Second question is, the [Shingori] nuclear power plant 2 and Shingori 1is scheduled to be in operation some time through January and September 2013. When do you believe that these two nuclear power plants will be in operation? It seems that the operation of these new power plants is being rather delayed, so do you believe that other nuclear power plants such as those that is planned for the year after will also be delayed as well?

Third is that we've seen the decrease of coal price in the market recently. What is your forecast for the coal unit price in the fourth quarter and your outlook for the next year?

(Interpreted)As for the maintenance timeline for Yeongheung 5 and 6 and 3 nuclear power plant, we have planned the plant maintenance to prepare for the nationwide peak season in the winter. As for the Yeongheung 5 and 6, all this maintenance and replacement work will be finished within one week and they will be in operation as soon as possible. The Korea Hydro and Nuclear Power is doing its best to prepare for that at the moment and as for Yeongheung Nuclear Power Plant 3, presently at this point the maintenance timeline and method is not fixed yet. But this power plant would also be in operation to prepare for the winter peak season so you will see that it will be in operation soon, although we have not set a time as of yet.

As for the operation of the new lease at our nuclear power plant, according to the first power plan provided by the government, Shin Ulchin 2 will be in operation as of January and Shingori 3 is scheduled to be in operation in September. But for Shin Ulchin 2 we believe it can be in operation in April the soonest, if everything goes well. Shingori 3, I cannot say that it will be delayed beyond September at this point.

For Shingori 2, it is definitely not going to be January of next year and conservatively speaking we believe it will be some time during May and July of next year. However all these operation commencements will also depend on the approval point by the Korea Power Safety Corporation [KSAO] so we need to wait and see for that as well.

The reason for the delay is because the nuclear safety [inaudible] review [inaudible] and requirement are to have this nuclear power plant in operation. Another new power plant in the pipeline is Shingori 4, scheduled to be opened in September of 2014, with capacity of 1400 megawatts. At this point we cannot say the exact time of the opening.

(Interpreted) This is on our forecast for the unit price of coal. After the third quarter of 2012 our expected coal price, based on the Australian bituminous coal, we believe it will be somewhere around $115 - $120 per tonne.

As for the coal price going beyond 2013, we believe the price will be around $100 - $110 per tonne based on CFR.

(Interpreted) Because we also have other coals [inaudible] in from different geographies, such as Indonesia, our forecast for the bituminous coal in 2012 would $109.6 per unit and for next year it is forecasted at $99.5.

(Interpreted) A follow up question to that is that in the third quarter it seems that the coal price stands at KRW116,000 and it seems that it doesn't drop significantly after fourth quarter. Why is that?

(Interpreted) Because of the European crisis and the high demand in the winter, we believe the price will continue for some time for 2012.

(Interpreted) The following question is given by Miss [Pon Su Chen] from Samsung Securities. Please go ahead ma'am.

(Interpreted) First question is what is your forecast for the nuclear power plant utilization rate for the fourth quarter and for next year? Second question is, you have shared your fuel unit cost for coal, but what about other fuel mixes such as LNG and oil? For third question, it seems that in the third quarter your AMP number has gone up significantly and it may be due to the tariff and the summer and also your progressive tariff for your power. How can you explain this?

(Interpreted) To answer your first question on the utilization of nuclear power plant. For the fourth quarter our forecasted number stands at 77.5 percent, assuming that Yeongheung 3, 5 and 6 and [Wolsong] 1 is stopped until the end of this year.

Interpreted) The next is on the fuel cost or forecast, for LNG for this year the number is based on the coal gas purchase cost which stands at KRW1.06. As for next year, our forecast for the oil price is at $105 with a foreign exchange rate of KRW1,080. Having said that, the LNG purchase cost is expected to stand at KRW894,000.

(Interpreted)So the follow up, to clarify my question, if you look at the average tax increase rate from December of last year to August of this year, it is on average 9 percent, but in the third quarter it seems that the growth of AFP has been 11 percent. So would this be a seasonality reason? What drove this higher than the tariff height?

(Interpreted) As you have mentioned, as for tariff, there has been one increase in last year December 5 at [KRW] 4.5 percent and this year on August 6th we have had another tariff increase of 4.9 percent. Combined together we have 9.6 percent increase of tariff altogether, but as you have mentioned the AFP increase has been 11 percent and there is about 1 percent plus gap. That has been mainly driven from the 15 days of the hot days continued within the August and also the progressive tariffs that we have applied.

(Interpreted) One last follow up question is that having said that we will maintain the fuel cost forecasted at this point for next year, what is the expected, the public ratio for -- in order to have the fair return for KEPCO, what is the amount of required tariff increase for KEPCO?

(Interpreted) So until this year we have anticipated a two digit number for the tariff increased. But because next year we expect the fuel price to go down, although it's rather early to say and too early for us to finalize and confirm anything, we believe we can drop that number to a one digit number. But in terms of the magnitude of the number, nothing can be decided at this point and we need to see the fiscal settlement and how our budget is set up for next year.

(Interpreted)Next question is by Mr [Chao Hun San] of Chemical Energy Investment Advisory. Please go ahead sir.

(Interpreted) First I would like to congratulate you on your excellent performance for this quarter. I've been following KEPCO for 11 years, but it's been, I mean the recent performance is actually very good news and a very rare thing that we've seen for some time.

I have four questions. First question is that, do you believe this performance can continue throughout fourth quarter and also in 2013 and 2014. What is the perspective within KEPCO?

Second question, do you believe that you will continue to maintain the current nuclear energy mix going forward? How would that change with time?

Third, we see very little proportion of renewal energy. When do you foresee that will start to increase? I mean market is talking about green parity, but we're not seeing that so what is the perspective that KEPCO has on this issue?

Fourth question is, many are talking about the Shell gas coming from the US. Does KEPCO have a plan to utilize Shell gas?

(Interpreted) To answer your first question, you mentioned that we haven't had such a performance for the last 11 years. But looking back there was some time where we've had a fair rate of return at KEPCO, especially with the seasonality factor driving our performance. Though having said that, if the similar condition is maintained going forward we believe we can see the same performance level and beyond 2012, going into 2013 and 2014. Of course all these depend on the energy demand and our capacity mix, so it's rather early for us to say because everything also depends heavily on those factors.

As for the utilization of nuclear power, we have not had the sixth energy supply plan fixed yet, so it's too early for us to comment on that. But according to the fifth plan, the nuclear power utilization is expected to go up.

As for the renewable energy, because we're seeing decrease in coal-fired power plant, expect to see increase in the use of renewable energy going forward.

On Shell gas, Ministry of Finance and Economy has launched a task force team as of May 14, together with the private sector, and they're reviewing the LNG prospects as well as the prospects for COGAS utilizing this Shell gas, also the required volume as well as economics. There are various types of study conducted at the moment and once that review is done we will work together with the project GenCos and also private sector to use Shell gas.

So COGAS has planned to adopt a 3,500 tons of Shell gas in 2017, with 10 percent share.

(Interpreted)The following question is from Mr Pierre Lau of Citigroup. Please go ahead sir.

Hi KEPCO, thanks for your conference call today. I am Pierre Lau from Citigroup. I have three questions. The first question is about your forecast for the unit coal, unit LNG and unit oil cores for fourth quarter this year and 2013. I'm sorry that I think you have mentioned some numbers but I could not get those numbers, so would you mind repeating those numbers -- the unit coal, LNG and oil cores fourth quarter this year and also 2013.

The second question is about your generation mix in fourth quarter. What do you expect the generation mix in fourth quarter this year?

Lastly, what do you expect about the power purchase expenses in fourth quarter this year? Thank you.

(Interpreter) First on the fuel unit cost; as for the fourth quarter number we are in the process of revising and updating the number, so we will follow up with you on that question.

That goes the same for the 2013 numbers -- we will follow up on that.

Also for the generation mix for the fourth quarter is also linked with your first question, so that is also something that we can provide later once we [unclear] number.

One thing to keep in mind is that because in the fourth quarter we foresee the utilization rate for the nuclear power plant to drop to 77.5% we may need to utilize other peak load power plants, so that will also drive up our overall number.

We will give you the number for the power purchase unit costs for the fourth quarter.

So in the fourth quarter we foresee that the fuel cost, including LNG, will go down, so compared to the previous quarter SNP would also drop as well. So for IPPs we believe the number would be in the early 151 range.

Did that answer your question?

Yes, but one follow up question is that you said the total sales cost in fourth quarter to be lower; do you mean that the unit coal, or the unit LNG, or unit oil costs to be higher or lower than that in third quarter?

(Interpreted) Compared to the third quarter we believe it will go down in the fourth quarter.

Do you mean for all coal, LNG and oil -- to go down?

Yes.

Okay. Thank you.

The next question is by Mr [Cho Enyara of KV Investment] and Securities. Please go ahead sir.

(Interpreted) I have two questions. First question -- for the newly planned nuclear power plant for next year, typically you would have a trial run before your actual commercial operation, and that's typically two months before the actual operation. Would it be the same for this time as well?

Second question -- I'm sorry to keep asking about the coal price, but you usually have your long-term contract ranging from three months to six months contract; is that included in your annual number or did you just consider this a long-term contract only when you gave your coal unit price?

(Interpreted) In order for the new nuclear power plant to be in commercial operation we need to obtain operation approval from [inaudible] and with that approval we would input the fuel and have a trial run.

Typically a trial run would take place six months prior to the actual commercial operation.

(Interpreted) The number I gave you -- the $109.28 for 2012 includes all long-term and short-term volume.

(Interpreted) Follow up question -- you said it is six months, so if we were to be in operation in April you would probably have started your trial run; is that true?

(Interpreted) That is why I said that we will have the actual commercial operation some time during May or July of next year, and as far as I know [inaudible] is going to soon organize a meeting to have this approval.

(Interpreted) The next question will be given by Mr [Yu Dok Sun from Tungu] Securities. Please go ahead sir.

(Interpreted) I have one more question. It seems that the unit price for oil is more expensive than LNG when it comes to peak load, so what would be the proportion of contribution of this oil price to SNP price? Could you give us the range of the power reserve margin so that how much of the oil price actually determines or influence SNP price?

(Interpreted) To answer your question -- we actually do not keep statistics on how much of the oil price effects SNP when it comes to reserve margin, because when it comes to the reserve margin of power, the actual fuel mix or generation mix influence that number more than the fuel itself.

So there could be influences such as the base load and if the coal fired gen is stopped, then the oil leverage -- utilization of oil would increase to set off the number.

So if you look at the accumulated number for the third quarter, the oil price affected about 11% to SNP and LNG's effect was 86%.

(Interpreted) The following question will be given by Miss Bum SuJin from Samsung Security. Please go ahead ma'am.

(Interpreted) What is your expected account receivable at the end of this year?

(Interpreted) As you know that in the fourth quarter the fuel cost is expected to go down, so in the fourth quarter alone we expect account receivable to be KRW100 billion. If we annualize that number and include the number that we have deferred from 2011 -- which is KRW358.4 billion -- the total will amount to KRS1.8 trillion.

(Interpreted) Currently there is no participant with a question. (Operator's instructions).

Next question will be given by [Mr Yu Dok Sun from Tungu Securities]. Please go ahead sir.

(Interpreted) The sixth power supply plant, basic plant, is scheduled to be developed in December of this year. Any outlook or forecast you can share with us on that?

(Interpreted) The sixth plant developed by the government, which is in the process of being developed by the government, is confidential so there is no way for us to know what is going on on that.

Currently there is no participant waiting with a question. (Operator's instructions).

Alright then, we will conclude this conference call. Once again thank you for joining us today. Thank you.