Korea Electric Power Corp (KEP) 2012 Q4 法說會逐字稿

(Interpreted) Good morning and good evening. First of all, thank you all for joining this conference call, and now we'll begin the conference of the Fiscal Year 2012 Fourth 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 Fourth Quarter Earnings Results by KEPCO.

(Interpreted) Good afternoon, this is [Keun-Shin Chang], Vice President and Treasurer of KEPCO. On behalf of KEPCO I would like to thank you all for participating in today's conference call to announce earnings result for the fiscal year of 2012. We will begin with a brief presentation of the 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 K IFRS. Any comparison will be made on a year-on-year basis between 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 Senior IR Manager, Mr. [Chang-Yun Chi] will begin with an overview of earnings results of 2012 first in Korean and then repeated in English.

Now we will provide the overview in English starting with operating income. In the fiscal year of 2012 KEPCO recorded a net operating loss of KRW818 billion, improved by 19.8% from net operating loss of KRW1.02 trillion in 2011. Taking a closer look, operating revenues increased 13.7% to KRW49.42 trillion. Power sales revenue increased 13.5%, totaling KRW45.98 trillion. This increasing is attributable mainly to 11.1% increase in unit tariff and 2.7% growth in power sales, driven by an increase in demand from the industrial sector.

Moving on to main operating costs, cost of goods sold, SG&A expenses, rose 13% to KRW50.24 trillion. Fuel costs accounted for the major reason for the jump which increased 11% to KRW23.82 trillion, primarily due to 1% increase in power generation affected by increased power demand as well as 14.8% and 9% hike in unit cost of LNG and oil respectively.

Meanwhile, purchased power costs increased 32.4% to KRW9.8 trillion. Such rise is attributable to 20.1% increase in unit costs of purchased power and 13.9% rise in purchased power volume. Depreciation costs rose 1.5% to KRW6.21 trillion, mainly due to two newly constructed nuclear power plants such as Shin Kori number 2 and Shinwolseong number 1.

Now let me explain KEPCO's non operating segments. Other loss increased KRW1.95 trillion, mainly because of account receivable of KRW1.8 trillion caused by the fuel cost adjusted tariff [system] was written off. The account receivable was reclassified into other assets and it was recognized as impairment loss due to uncertainty of the [relevant] tariff collection.

Net financial loss stood at KRW1.94 trillion in 2012, which rose KRW29 billion compared to KRW1.91 trillion loss in 2011. This was mainly due to interest expense. Interest expense rose KRW221 billion to KRW2.34 trillion due to increase in debt. As a result of the foregoing, we recorded consolidated net loss of KRW3.17 trillion in 2012, which improved KRW204 billion from KRW3.37 trillion net loss in 2011. This concludes the overview of KEPCO's Earning Results for the Fiscal Year of 2012.

Now let me move on to the Q&A session. Q&A session will be hosted by Mr. Keun-Shin Chang.

(Interpreted) This is Keun-Shin Chang. I am joined with our IR committee members in charge of major business areas at KEPCO. We are prepared to take any questions. Since we will proceed in both Korean and English, all the Q&As will be translated, so please make sure your questions and answers are brief and clear. Please begin.

(Interpreted) Now Q&A session will begin. (Operator Instructions). Currently three participants are waiting with your questions. The first question will be given by Deok-sang Yoo from Dongbu Securities. Please go ahead, Sir.

(Interpreted) I have three questions. First of all, in the item of other expenses, we see that the accounts receivable that has been created through the fuel cost adjusted tariff system [marks] up to KRW1.9 trillion. Could somebody elaborate further on this amount and whether you believe that this will be collectable or not? We would appreciate some more information regarding this issue.

Secondly, concerning coal, in the fourth quarter we see that coal related costs has been decreased by [18.4%] or so. Is this reflecting the international price levels and how would the prices be calculated if you reflected the international price levels of coal?

Additionally to that question, for 2013, what is the expected unit price as well as the volume that has been already acquired?

Last question is it seems that the nuclear power plant usage rate has been decreased to 76%, so could you give us an update on what the utilization rate of nuclear power plants is from the beginning of 2013 until the present point?

(Interpreted) Yes, allow me to answer the first question concerning the accounts receivable of the fuel cost pass through adjustment amount in the other loss item in our consolidated income statement, which amounts to KRW1.9 trillion. As you probably know, the fuel cost adjusted tariff system which was introduced already, in 2011 that brought about an accounts receivable amount of KRW358.4 billion and then last year KRW1.5 trillion. However, even after the adoption of this new fuel cost adjusted tariff system, the actual implementation had been put off, therefore we were not able to actually bill for that portion and also collect that amount.

With the prolonged situation where we were not able to actually go into billing and collection of this amount we were not able to see any foreseeable plans being established, or ready to be implemented. Therefore, we have decided that such a long term prolonging would be, from our perspective, something that we cannot continue to hold onto. So therefore, from an accounting perspective, we have decided to write that off and include it into the loss side.

That does not mean that we have given up completely on the collection and the billing of this amount. As soon as the actual system can be acted upon with full implementation in that case we will be going ahead with the billing and the collection and it will be recognized as our revenue side.

(Interpreted) How is this reflected in the financial statement?

(Interpreted) When the income statement -- you will be able to see that this amount has been included as KRW1.9 trillion within the other loss item. And compared to 2011 and 2012 where in the previous year it was recorded as non -- other non-financial asset, now it has been recognized in 2012 and therefore, for this item in the 2012 financial statement we can see that it is -- the KRW358.4 billion which was recorded in 2011 is no longer showed in 2012.

Allow me to answer the second question regarding the coal unit price. The current base price that we are using as unit price is $95 per tonne. As for your question regarding the volume for 2013, the required volume for coal for this year is 78 million tonnes, and among that about 45%, that is to say 35 million tonnes, have already been acquired with the unit price of $97.5 per tonne. The remaining 43 million tonnes will be acquired throughout the year as needed and we expect the price to be reflected will be $106.6. As a reference, the spot price of Newcastle coal is $92.

(Interpreted) Yes, regarding the last question which is the utilization rate of nuclear power plants, the average utilization rate in 2012 was 82.27%. And this year, taking into consideration all of our plans, the forecasted utilization rate is expected at 83.38%.

(Interpreted) One more additional reference to the second question about coal unit price is that compared to the fourth quarter the coal unit price has been decreased by 18.4%.

(Interpreted) Regarding 2013 utilization rate for nuclear power plants for at least the first three months, does KEPCO have any data regarding that?

(Interpreted) We do not have that data as of yet.

(Interpreted) The following question is by Pierre Lau from Citibank. Please go ahead Sir.

Hi, good afternoon. I'm Pierre Lau from Citigroup. The first question is about the coal unit cost that you've just mentioned. You said that unit costs will be average $95 per tonne, including 45% has acquired at $97.5 per tonne and you expect the other to buy at $106 per tonne. Why the average is only $95? Because the 45% acquired was $97 and the other would be more than $100. So I don't know how you calculate that $95. That's question 1 -- number 1.

Number two is that last year you mentioned there would be increase in nuclear decommissioning cost. [Do you take] that impact in the fourth quarter results? And what do you expect your nuclear decommissioning cost this year, in 2013?

And the last question is, what is your view of the possibility of more tariff hikes this year? Thank you.

(Interpreted) First of all allow me to answer the question regarding the coal unit price. The $95 per tonne unit price was referring to the average as the fourth quarter of 2012. So that was the prices that have been already recorded.

Regarding the second question about allowances for decommissioning cost, in 2012 KRW670.9 billion was already recorded and it has already been reflected and for 2012 (sic - "2013") we expect a range -- 2013 excuse me, we expect that kind of decommissioning cost to be between KRW100 billion to KRW200 billion (sic - " KRW750 billion").

Going onto the last question regarding any plans for tariff hikes this year. Already on January 14th we have conducted a 4% tariff hike, but we believe with the fuel cost, this may not be enough. Therefore, depending on the volume that we will acquire, as well as the exchange rate fluctuations, we will have further discussions throughout the year with the government.

Okay, thank you. One more follow up question is you mentioned coal cost is 18.4% lower than fourth quarter 2012. Is it correct?

Yes. Yes, that's correct.

Fourth quarter 2012 it was $95, so it's 18.4% lower. That means the current coal cost would be only $78 per tonne. Is it correct?

(Interpreted) The 18.4% decrease for coal price refers to the decrease between fourth quarter of 2011 to fourth quarter of 2012 in coal unit price.

Oh, okay. Okay, thank you.

(Interpreted) The following question is by Hee-do Yoon from Korea Investment Securities, please go ahead Sir.

(Interpreted) Yes, I have three questions. First of all with the changes of the accounting standards and basis that you have used, as well as movement of items from one to the other it is quite difficult for us to understand the actual earnings results for the fourth quarter. So would you be able to clarify which parts were changed and what that signifies?

Secondly, if in the future you may have increased levels of accounts receivable or accounts payable that may be incurred, how will it be dealt with and when and in what manner will that decision take place?

Third question is, in the first quarter of this year already I believe that accounts payable may be increasing. So how is that going to be handled within the accounting?

(Interpreted) Let me answer your first question. For the fourth quarter of 2012 the earnings results for the fourth quarter only is negative KRW1.8 trillion.

(Interpreted) Would it be possible to mention also the revenue as well as operating income for the fourth quarter only?

(Interpreted) We do not have the data on hand at present but we will get back to you.

Allow me to answer the second question regarding the accounting methodology for 2013. For the first month of this year the accounts payable has been increased to KRW200 billion and we expect this kind of situation to go on until around the second quarter. But unless we have any changes taking place in the postponing of the implementation of the fuel cost adjusted tariff system we expect that this kind of situation may go on, but the loss that we have recognized at the end of 2012, the KRW1.9 trillion, we believe it will not be reflected any further for 2013's accounting.

As for the method to be used and how the decision will be made, we are actually going through a new series of audit because we have recently employed a new external auditor, so after discussions we will be able to have some kind of decision take place. We expect that at the time that we have the earnings results release for the first quarter of 2013 we may see some reflected areas.

(Interpreted) Currently two participants are waiting with their question. The following question is by Geoffrey Boyd from CLSA. Please go ahead Sir.

Yes, hi, thank you for the call. Just -- yes, I had a question. First of all when we look at the income statement on the Excel file that was sent around it says -- for the fuel cost it says KRW23,823 billion, but then when we look at the details of the fuel expense later in the Excel file it says, for the total for the year, it says KRW24,810 billion, which is a difference of about KRW1 trillion. Then likewise in the purchase power on the income statement it says KRW9801 billion but then on the Excel file it says KRW10,257 billion, so higher by KRW400 billion. So I'm just trying to understand that because the KRW23,823 billion looks a little bit low for the fourth quarter. Can you explain which numbers are correct?

(Interpreted) The difference that you have mentioned between what is written in the Excel file compared to what is written on the first sheet, the consolidated income statement, is actually the reflection of the fuel cost pass-through adjustment amount.

This is why that fuel cost pass-through adjustment amount which was recorded as accounts receivable previously, that has been reflected and therefore, for the fuel cost, KRW1 trillion has been deducted, making it to KRW23.8 trillion. And for the purchase power also KRW450 million was deducted from the KRW10.2 trillion, to be recording KRW9.8 trillion.

Okay, then I'm a little bit confused. Because I mean when the fuel cost pass-through is going on it shouldn't affect the fuel cost itself, it should be coming through the revenue line. So the revenue's going to be higher or lower than the actual and not -- I mean the fuel cost is basically the fuel cost that you're paying, so why would that change?

(Interpreted) Until now the fuel cost pass-through adjustment amount has been recorded as financial assets. That is to say, until 2011 results we have recorded it as revenue and financial assets. However, with the similar case of coal gas, where the fuel cost adjustment of coal gas were no longer recorded as sales but put on as other assets or a sales cost deduction, it has been reclassified. And in the similar manner we have also reclassified and put that amount into other assets and the deduction in the cost and that is why you see this difference.

I mean yes, okay. You -- basically you're saying that you have KRW1.8 trillion or KRW1.9 trillion in other losses that is a negative but then you're also taking it out of your cost side, so then the two would net off. Or are you also taking it out of the revenue line as well? So it's coming out of three different spots?

(Interpreted) Yes, actually it is reflected in those three areas.

Okay. So the revenue -- okay. And then just -- moving on then, like on the decommissioning costs you mentioned it was KRW670 billion in 2012 but only expecting KRW100 billion to KRW200 billion this year. I'm just wondering like why is that? Because I mean shouldn't it be an annual accrual that is very similar each year. Like why would it come down that much?

(Interpreted) Yes, please allow me to correct what was mentioned previously regarding decommissioning for this cost this year, for 2013. It is KRW750 billion, not KRW100 billion to KRW200 billion.

Okay, okay. And then just moving on to a next question. Like basically what I'm trying to understand is for 2013 what is KEPCO expecting for their own income statement for the full year? Like what are you expecting for your fuel and your power purchased and your operating income?

(Interpreted) Yes, allow me to answer your question. Due to various external factors that are continuing to rise it is quite difficult for us to comprehensively make an estimate for the fiscal year 2013. However, we believe that in general with the tariff hikes that will be implemented, as well as the one that has already been implemented, we expect that sales profits will increase and with our own internal efforts to decrease cost we believe that the operating profits will be increased in 2013.

Okay. And then just -- I mean one comment that I noticed is that in the news flow in January was just about the government was looking to do a bit more in terms of moving industrial rates to a market price for next year. And I didn't quite understand it entirely but it sounded like they were trying to move to more of a market based system of pricing electricity. Is that still moving ahead and what are the implications of that?

(Interpreted) Yes, I'd like to answer that question. The tariff hikes that have been approved by the government and therefore implemented, have been focused around the industrial rates and that is how the government has chosen to go ahead with tariff hikes, that is to say have a differentiated tariff hike implemented for the sectors.

In the future, this kind of tariff hike is expected to be maintained and, in the case of KEPCO where over 50% of its sales is in this sector, of course it will have positive implications for our financial status.

Okay, thank you very much for all the answers. Thank you.

Thank you.

(Interpreted) The following question is by [Hwang Sung-jin] from KB Investment Securities. Please go ahead Sir.

(Interpreted) Although it may be more of a repetitive question, could you clarify whether I have understood correctly that the fuel cost pass-through adjustment amount which was previously recognized as revenue has been excluded and that that excluded amount has been reflected in the cost of sales as well, and that the difference between the case of coal gas is that it has been recorded as other losses?

(Interpreted) That is correct. The difference between coal gas and our situation is that for coal gas they have been able to get some kind of plan ahead for collection of that amount to be received and, therefore, they did not have to adjust. However, in our case, at the end of 2012 the possibility of us collecting that amount may be weak and, therefore, we have recognized that amount as loss.

(Interpreted) If in the case that these accounts receivable can be collected throughout next year, then will that amount in -- getting an increase in the other profit?

(Interpreted) If it is able to be collected then that amount will go into other income items and that will, in the end, result in increasing the operating results for that quarter. Yes, if collected, that will be reflected.

(Interpreted) Regarding your clarification about a previous question, regarding January and February and having an increase of accounts payable?

(Interpreted) That was due to the difference between the standard fuel price that was expected versus the actual. When the actual was lower, then that amount was creating that difference.

(Interpreted) The last question was the KRW1.9 trillion of fuel cost pass-through adjustment amount that has been accrued so far, could you give us an update of how big that amount is as of end of February?

(Interpreted) We do not have the data yet for February, but by the end of the first quarter we will be able to give you more accurate amounts.

(Interpreted) Currently three participants are waiting with their question. The following question will be given by SuJin Bum from Samsung Securities. Please go ahead, Madam.

(Interpreted) The first question that I have -- I actually have three. The first question is regarding the fuel cost adjusted tariff system. From the accounting basis in the future as well, will we still see this being portrayed within the revenue side as well as the cost side?

(Interpreted) I think that this is similar to a previous question that was asked about how we will be dealing with this portion in 2013 and I believe that we have partly answered that question already. Right now the KRW1.9 trillion that has already been recognized as losses for 2012 we expect that it will not be reflected in our financial statements for the future. But as I mentioned earlier, we are currently -- we have recently appointed a new external auditor, so we are in discussion with the auditor about how we will proceed for the year 2013.

And if this postponement of implementation for the pass-through system continues, we will continue to, on the accounting level, deal with it by putting it into the other assets side and also reflecting it on the other side of the ledger for cost of sales.

(Spoken in foreign language).

(Interpreted) In 2013, as was mentioned earlier, the KRW1.9 trillion that was already reflected and recognized as losses will not be reflected for the 2013 financial statement. It will not be included in our financial statement whether it's -- the adjustments for the revenue side or the cost side. But as I mentioned earlier, we are actually discussing with our new external auditor and how it will be exactly reflected will be decided when we release our results for the first quarter.

(Interpreted) Does this mean that what will be recognized in revenue will be the actual build rates and build amounts only? And also costs, will it be just the actual fuel cost?

(Interpreted) Yes, that is correct.

(Interpreted) Concerning the power purchased, in 2013 I believe that it was expected to have both Shinwolseong 2 and Shin-Kori 3 included. However, it seems that only Shinwolseong is reflected. So I'd like to ask about what is the schedule and plan for Shin-Kori?

(Interpreted) Yes, actually it is true that compared to our original plans the current situation is experiencing some delay. Shinwolseong 2 is expected to be completed in its construction in October of this year and Shin-Kori 3 in December of 2013.

(Interpreted) The following question is by Pierre Lau from Citibank. Please go ahead, Sir.

Hi management, I have some follow up questions. The first question is for 2013 what do you expect your generation mix in terms of fuel costs compared to that in 2012? I mean, which type of fuel like coal, nuclear or LNG, which type of fuel is going to increase in terms of generation mix and which type is going to go down? That's question 1.

Question 2 is regarding the CapEx. So CapEx last year about KRW13.2 trillion was lower than budget, so what do you expect CapEx for this year and what were the reasons for the lower than expected budget -- lower than expected CapEx last year?

And the last question is in 2012, 12.8% of your sales came from purchased power. What will be the percentage in this year, 2013? Thank you.

(Interpreted) First of all let me answer your first question regarding the expected generation mix for this year. For 2013 we expect coal to take up 44%, nuclear to take up 32%, LNG 20% and oil 2%.

For the first half of your second question regarding CapEx, last year's actual CapEx was a little bit lower than budgeted because of decreased CapEx for the overseas side, especially regarding [bidding] related costs for overseas businesses, KRW1 trillion was reduced and that's what was reflected in the decrease of CapEx.

Regarding the second part of your second question for 2013 CapEx expected, we expect it to be KRW19.8 trillion. However, as you would probably know if you see the data that we have given until now, usually the actual CapEx executed is usually at around 80% to 85% of what was budgeted. Therefore, this year also we expect the actual CapEx to be at around KRW16 trillion to KRW17 trillion.

The last question was regarding purchased power. Of course this would all depend on the basic assumptions that we take, so one of the basic assumptions that we have adopted for oil price is at around $105 and for LNG KRW900,000 per tonne and at the exchange rate of KRW1060 to the dollar we expect it to be about KRW10 trillion. Does that answer your question?

Yes. One follow up question is for your answer for the first question regarding generation mix, what is your power demand growth assumption in 2013? Thank you.

(Interpreted) We have the expected basis of power demand growth to be 3.8%, but this is under the assumption that the actual GDP growth rate is 3%.

Thank you.

(Interpreted) The following question is by [Hun San Chao] from [Chemical] Energy Investment Management. Please go ahead, Sir.

(Interpreted) I have two questions. The first one is there has been a lot of discussion about usage and introduction of shale gas. Could you explain your plans regarding shale gas adoption?

The second question is, is the current energy mix expected to be continued at the relatively similar levels as of now? What about any changes that may take place, increases or decreases, regarding the nuclear power?

(Interpreted) Yes, I'd like to answer your first question regarding shale gas related plans. For the introduction of shale gas there will have to be a lot of consideration put onto the table, including the overall international LNG market trends, how KOGAS plans to go ahead with adoption of shale gas, as well as economic viability assessments, as well as the review into the stability of supply and demand for shale gas. Since all of these factors will have to be taken into consideration before any decision is made about adopting shale gas, we expect that these items will be dealt with one by one before the final decision is made.

For your reference, we have some information regarding KOGAS' plans which state that they plan to introduce about 3.5 million tonnes of shale gas from the year 2017.

Concerning your second question about any increases or decreases expected for nuclear power plants' contribution to the energy mix, well as you know, with the new government taking office, in the six energy plans put forward nuclear-related parts were not visible. And therefore we expect that although any policy decision regarding nuclear energy has not been officially stated by the government yet, we expect that in the future the overall direction will be focusing on confirming the safety and the stability of nuclear facilities, while pursuing some level of nuclear power due to the fact that even after the Fukushima accident, in the case of Korea we do not have the availability of many other alternative energies. So it is our cautious expectation that the government will continue with a stable nuclear power-related policy in the future.

(Interpreted) Currently two participants are waiting with their questions. The following question is by Deok-sang Yoo from Dongbu Securities. Please go ahead, Sir.

(Interpreted) Yes, I'd like to ask three simple questions. The first one is concerning the interest rates that have been put in here. The fixed rate here in your statement is 4.5%, which seems different from the market interest rate. So what is your rollover policy? Could you explain that?

The second question is clarification about treating your accounts receivable in the cost side you mentioned deduction but shouldn't it be an increase for cost? So I'd like to clarify that terminology.

The third question is could you give us some information about any projects that you can share with us regarding your overseas nuclear power plant?

(Interpreted) Let me answer your first question. The total borrowings amounts to KRW50.3 trillion and the average interest rate that is reflected is 4.5%. This is due to the fact that the previous borrowings that we've had in the past have been done with relatively high levels of interest rate. This explains why 4.5% is higher than the market interest rate level.

Looking forward for the next 15 years we expect to pay back KRW6 trillion to KRW7 trillion per year for the borrowing side, so most of this will be rolled over.

To answer your second question, previously we have been reflecting the accounts receivables coming from the fuel cost pass-through adjustment amount in the sales side. That is to say we've increased the revenue side continuously. However, since it has been reclassified into other assets, it is correct for us to deduct from the cost side.

Concerning your last question about the direction forward for overseas nuclear business, well there has been some talk about Turkey and Vietnam, but as of now we do not have any specific announcements to make.

(Interpreted) The final question is by SuJin Bum from Samsung Securities. Please go ahead, Madam.

(Interpreted) Yes, my question is regarding the nuclear power plant utilization rate. You mentioned earlier that in 2012 it is 82.27% and you expect this utilization rate for 2013 to be 83.35%. However, if you look at the Excel sheet for the generation amount for nuclear power plants, it seems that the generation amount is actually lower versus the previous year. So could you explain this?

(Interpreted) I believe that there may have been some inconsistencies in the data that has been collected regarding the utilization rate of nuclear power plants and the generated amount in nuclear power plants. So we would like to review this once again and confirm to you at a later date if possible.

We would now like to conclude this conference call. 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.