Korea Electric Power Corp (KEP) 2013 Q1 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 2013 First Quarter Earnings Results by KEPCO. This conference will start with a presentation followed by a (inaudible) Q&A session.

(Operator instructions).

Now, we shall commence the presentation on the Fiscal Year 2013 First Quarter Earnings Results by KEPCO.

(Interpreted) Good afternoon, this is [Ke She Kan], 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 results for the first quarter of 2013.

We will begin with a brief presentation on 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 unconsolidated basis in accordance with K-IFRS. Any comparisons will be on a year-on-year basis between 2012 and 2013. 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 a statement may involve uncertain risk and uncertainties.

Now Senior IR Manager, Mr. Changyoung Ji will begin with an overview of earnings results for the first quarter of 2013, first in Korean and repeat it in English.

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

In the first quarter of 2013 KEPCO recorded a net operating gain of KRW658 billion, improved by 372% from a net operating loss of KRW242 billion in 2012. Not only KEPCO has turned into black, in five years since (inaudible) operating gains the first quarter of 2008.

Taking a closer look, operating revenues increased 6.6% to KRW13.8 trillion. This was attributable mainly to a 7.5% increase in power sales revenue, [following] KRW12.92 trillion, an 18.2% decrease in revenue from the overseas business, amounting to KRW104 billion.

Moving on to main operating costs. Costs of goods sold, SG&A expenses, declined 0.3% to KRW13.14 trillion. [Fuel] costs of tariffs accounted for the major reason for the decrease, which declined 3.8% to KRW6.37 trillion. Power generation, affected by sluggish power demand, decreased 0.3% and unit cost of fuel declined by 8%. However, such decrease has been somehow offset by the reclassification of (inaudible).

Meanwhile, purchased power cost increased 4.4% to KRW2.84 trillion. Such a rise is attributable to KRW190 billion cost increase caused by the reclassification of (inaudible) and (inaudible) purchase.

Depreciation costs rose 2.2% to KRW1.64 trillion, mainly due to three new [infrastructure power plants] such as (inaudible) number 3, Shin-Kori number 2 and Shin Wolsong number 1.

Now let me explain KEPCO's non-operating [segment]. Net financial loss stood at KRW623 billion in 2013 which (inaudible) at KRW195 billion. This was mainly due to [weakened] Korean won and [raising] interest expense caused by the increase in debt. As a result of the foregoing we recorded consolidated debt income of KRW160 billion in the first quarter of 2013, which improved KRW673 billion from KRW513 billion net loss in 2012.

This concludes the overview of KEPCO's earnings results for the first quarter of 2013.

Now let me move onto Q&A session. Q&A session will be hosted by Mr. Ke She Kan.

(Interpreted) This is She Kan, I am joined with our IR Committee members in charge of major business areas of KEPCO. We are prepared to take any questions.

Yes, we will proceed in both Korean and English. All the [Korean answers] will be translated. Please make sure your questions and answers are brief and clear.

Let's begin.

(Interpreted) Now Q&A session will begin.

(Operator Instructions).

Currently five participants are waiting with their questions. The following -- the first question will be given by Deok-sang Yoo from Dongbu Securities. Please go ahead Sir.

(Interpreted) I have three questions, I am Yoo Deok-sang of Dongbu Securities. My first question is related to the overall period of your nuclear power generation [plant]. I have (inaudible) it [achieved] more than 400 [days] where normally it's 340 [days]. And so basically you have a long [overall] period, but at the same time your total operation [of the plant] have come up relatively high at 82%. So please explain this relationship.

And my second question is, excluding the Hydro Nuclear power gen as well as South East power gen, the other four gencos that (inaudible) power generation have shown a reduction in (inaudible) walk us through the cost of this?

And third, I want to better understand the time lag between the decrease of fuel costs and how this is going to be recognized on the revenue side.

(Interpreted) Regarding your first question about the number of days that overall will take place for the nuclear power generation, we need to follow up with that -- we need to follow up on that to you later at this time.

And going to your second question regarding the performance of the four [therma] gencos, what we did was that there was a reduction of the adjusted coefficient for the price that we pay to buy power from the gencos compared to Q1 of this year to what we paid for 2013 for the first quarter. And that is the main reason for the underperformance of the Company.

And to answer your third question about the time lag, the period actually varies very much, it could be as short as 20 days, but from time-to-time it could be as long as three months, even six months.

(Interpreted) I have a follow up a question. So since you mentioned that there could be a time lag of three to six months, the purchasing price that you have for your fuel for February and March will be reflected in, for example, Q2, Q3.

(Interpreted) To answer that question for us you also have to look at different fuel types. In the case of (inaudible) coal it could be -- it is around three months. But when it comes to LNG it could be from two to four months' time gap. And you also have to understand that LNG price is pegged to the fuel price. And so depending on the price that is given to us by KOGAS we could have an overall time lag of two to four months.

(Interpreted) The following question is by [Je-Yun Shin] from KTB Investment Securities. Please go ahead Madam.

(Interpreted) I am Shin Je-Yun from KTB Investment Securities, I have three questions. The first question is related to the coal prices. Q1 2013 our coal price was higher than what was the price in Q4 2012. I want to understand the Company's forecast for coal price for Q2 and Q3.

My second question is regarding the possibility of tariff increase this summer and if there will be an increase, by how much.

And my third question is related to data that you have provided to me (inaudible) file which shows the overall sales price of electricity. And based on what I see and the price that was applied for Q1 2012 versus Q1 2013, despite the fact that there really has not been a significant change in the selling price of electricity for the same period year-over-year I still need to hear the Company's clarification to why there has been such a huge adjustment for the other adjustment accounts that goes to -- that amounts to more than KRW500 billion.

(Interpreted) I will answer the first question related to our coal price forecast. In Q1 business call the price was $95 and we expect the price to be -- to remain stable in Q2 and Q2. And so we have an annualized forecast for 2013, the price is $96.

And regarding your second question related to how much the tariff will increase, overall in order for us to assess how much would be required we not only look at the actual performance for 2012 but we also have to put in some forecast of what we expect that -- what we expect would be the overall earnings. And so basically we have not yet determined what would be the right increase -- right amount of increase to be applied going forward.

To answer your third question related to the decrease of the overall amount on a consolidated basis, you also -- you need to recognize that we have changed our accounting methods from Korean GAAP to K-IFRS. In the past our recognition of revenue was based on meter readings but we have now changed that to an accrual basis. And so what we have previously recognized as a portion for Q1 that -- a portion that we recognized for December, which has a higher selling price compared to the spring season, we were -- we had to take that portion out. And we also in the past did not include the March portion that we have not actually done the meter reading, but that we had to actually put in as an estimate for the March portion.

And so as a result of having to take out certain portions in December, but also to add in a certain portion for March this year, this also contributed to the fall in the overall consolidated based earnings. But at the same time our volume for electricity sales had been much -- is also less in March -- March 2013 compared to what we recorded in December 2012.

But on a full year basis we will not have a different price for the year-end December portion. And so if you look at the full year performance you will not see a difference in the overall selling price.

(Interpreted) The following question is by Hee-do Yun from Korea Investment Securities. Please go ahead Sir.

(Interpreted) I am Yoon Hee-do from Korea Investment Securities. I have three questions. My first question is a follow-up question to what has just been asked with respect to the Company's first quarter performance. The performance was far less in respect to market expectations and the main reason for this was the adjustment made to the -- on the power sales revenue. Now you have given us a very -- an explanation but I still do not really understand the logic or the accounting relationship of how this is applied when you're saying to us that the meter portion for December 2012, the portion has been taken out but you had to also add in the unmetered read portion for March 2013. So could you please further elaborate?

Also I really didn't understand the explanation that was given earlier about how the price -- the selling price difference will not be -- there will not be a difference in selling price if you look on a full year basis because there's a catch-up overall in December. So I just need to get an additional explanation to how this works.

My second question is the utilization -- expected utilization rate for the nuclear generation for Q2/Q3 going forward?

My third question is related to the earnings from the overseas business. We see that in Q1 there was a decrease. What was the main reason for this? Also what will be the future (inaudible)?

(Interpreted) Let me once again explain how the revenue recognition works now. As we do our meter readings, to take an example that we will read -- do a meter reading on January 15. In this case what we have recognized as revenue was the used portion from the period of December 16 to January 15. If we take March 15 as an example then we would have used the period of between February 16 to March 15 as the actual time that we apply for revenue recognition.

But as we moved onto the accrual basis and now in our accounting we could only recognize as revenue the things that had occurred between January 1 to March 31 2013 or the first quarter earnings. So as a result of this we had to take out the portion that has been read by the meter from December 16 to December 31 2012 as well as the portion and at the same time we have to include as an estimate of what would be the read portion for March 16 to March 31. That's one explanation.

At the same time we also have to factor in the difference of the unit price because the price for December was KRW107 versus the March price of KRW97.

Also, just to further explain about what I meant earlier about the effect that will take place at the year-end, now we will also be able to include the estimated portion for the second half of the December of 2013. So on an accrual basis we will no longer see the difference in the unit price as we do a full-year calculation.

Just to follow up, just to explain more about the different unit selling price that we apply, you just need to look at the overall [current] revenue and your comparison between Q4 and Q1. There is clearly a difference in our revenue because of the selling price. But at the same time you also should recognize that the estimate that we have put in for March for the unmetered read portion, because the overall demand in March is smaller than what we had in December, that we'll have to take a larger portion out but at the same time add in a smaller portion.

As a follow-up, so if you look at the forward (inaudible) there will be no difference, yes. You should also look at our historical performance. For example in 2011 we recorded minuses in Q1, Q3, Q3 but recorded a revenue plus, a positive revenue in Q4 of KRW100 billion. In 2012 the same thing happened. For the first three quarters of the year we recorded a negative but in the last quarter we posted a positive revenue of KRW180 billion. Thus in 2013, as we get to the year-end December, we will -- we estimate that we will also see a higher number showing in the fourth quarter, assuming that there will be not a significant change to the overall sales volume compared to the previous year.

Going to your second question about nuclear generation utilization rate, in Q1 it was 81.7%. Full year estimate is 84.8% and last year the full year utilization rate was 82.6%.

(Interpreted) Because most recently you had some breakdowns, you also have (inaudible) period coming very shortly and if you're looking at the full year utilization at 84.8% is it correct to assume that there will be a drop in the utilization in Q2 but a pick-up again towards the second half of this year to estimate roughly that in Q3 the utilization will go as high as 86% to 87%?

(Interpreted) Yes, that is correct. In respect to our earnings for the overseas business, the lion's share is comprised of our earnings that is driven from our UAE nuclear generation plant construction and we have had a huge portion -- a huge milestone payment that had come in last year compared to (inaudible). We had a huge milestone payment that came towards the end of last year and as a result we had a high payment for 2012. But in terms of the overall progress of the project, there isn't a major delay causing the difference in our earnings for the overseas business. We are on schedule and we're getting paid according to the scheduled milestones.

(Interpreted) The following question is by (inaudible) from (inaudible) Securities. Please go ahead sir.

(Interpreted) I am (inaudible) from (inaudible) Securities. I have two questions. We're seeing a relative slowdown of the demand for power in recent times and as we look at the overall performance of the nuclear power generation in the future in Q2 how do you see the supply and demand and your reserve rate to be this year compared to what you have reported in 2012?

My second question is, as the Company continues to perform very positively and with a positive earnings for 2013 what is the expectation of the Company in terms of the dividend payout ratio?

(Interpreted) I will answer the first question related to the Company's forecast for electricity demand and this is based on a full-year basis. At the beginning of this year the Korean economy GDP was expected to grow at 3% and based on that we anticipated that the demand would be growing at 3.8%. However, recently Korean government has changed its GDP forecast from 3% to 2.3% and likewise we have downward adjusted our demand forecast from 3.8% to 3.3%.

For your reference, our (inaudible) reserve ratio for the first quarter was 5.5%.

For the dividend forecast, for the past five years the Company has recorded net loss and thus we were not able to pay out dividend. But on a non-consolidated basis for this year we anticipate that with a positive earning the payout ratio could be at 30%.

(Interpreted) The following question is by Cathy Chan from Citigroup. Please go ahead madam.

Hi. This is Cathy from Citigroup. I have one question. I think you have mentioned the unit fuel cost guidance for coal. Do you have a similar guidance for LNG for 2013? Thank you.

(Interpreted) In respect to our full year price unit cost forecast for LNG, we use as a basis our fuel price estimate (inaudible) per barrel is $105 and our applied exchange rate to the dollar is KRW1,077 to the dollar. So based on this reference we believe that the LNG cost would be per ton KRW945,000.

Thank you. That's all for my questions.

(Interpreted) Currently seven participants are waiting with their questions. The following question is by SuJin Bum from Samsung Securities. Please go ahead madam.

(Interpreted) I am Bum SuJin from Samsung Securities. I have two questions. First question is could the Company give me a full-year guidance related to your earnings from the UAE project?

Moving to my second question, can you also give us a quarterly amount for the [RAC] purchasing price and is it also possible to give us the next year guidance at all?

(Interpreted) First our expected earnings from UAE project are full year KRW1.8 trillion. Regarding the RAC cost, the time when the gencos are in recess is not fixed and so rather than speaking on a quarterly basis for the full year, the estimate is KRW510 billion. And I just wanted to also add that the KRW510 billion that I had just mentioned is very much tied to the overall government target to have the REC purchase on an annual basis, but at the same time this could change and at the end of the day -- but in the end, in accounting what we do recognize is only the actuals, not the targeted amount. So your question is that you're not obliged to just mandatorily recognize KRW510 billion, correct. We will only record the actual.

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

(Interpreted) I'll ask you a question. The first question, as you now create electricity tariff compared to the price that is offset price for Europe and Japan, and so do you believe that there is a possibility of a charge increase?

And my second question is with the introduction of shale gas, what will be the shale gas impact compared to your overall power generation mix including the nuclear portion as well as the renewable portion?

(Interpreted) Regarding your first question, we already have a [curb] increase in January and so at this time it is too early for us to give you a definite answer that there could be a price or curb increase. But because of that other fact that the tariff and the overall cost to generate power there is (inaudible) to be made that we will continue to have the pressure with the Government regarding this point.

In relation to your second question regarding shale gas introduction, we do not yet have a fixed policy direction related to the shale gas. And so how the generation mix will take place in the future is really up to additional consultation that we will need to have with the Government, as well as the role of coal gas as well.

(Interpreted) The following question is by Deok-sang Yoo from Dongbu Securities. Please go ahead, Sir.

(Interpreted) I have two questions I will relay. My question is just whether or not the information that I have with me is correct. If I look at the overall schedule of maintenance for the hydro nuclear power gen, I just want to make sure that all of these things that are shown here are set plant maintenance period. I see that the utilization for April is 73%. I also see that in Q3 it goes up to 89% and also in Q4 as high as 90%. And so just to confirm whether or not these numbers are correct.

And moving to the second question, with the reserve power -- with the power reserve rate at 10% what is the expected -- expectation of the Company for the power (inaudible) price for Q2?

(Interpreted) To answer your first question and I've already mentioned this at the beginning of our Q&A session, that we will get back to you regarding the actual number of days that will be applied that we will use for the overall maintenance.

And regarding the utilization, as you have stated, we see that it falls in Q2 but there is a gradual pick up again from Q3 all the way to Q4. And so for the full year our expected utilization rate is 84.8%.

We are in the process of calculating the purchase power price and so please wait just a little bit.

Regarding your question related to the map for Q2 for the purchase power price, assuming that we -- our assumption for fuel price is $105 per barrel and exchange rate of KRW10 -- KRW1091 to the dollar. And with these assumptions and the marginal to KRW2800 billion and for the S&P for the period of April and May it is at $161 but in June it's $141, so for the three month average we see it as $151.

(Interpreted) Our follow up question is that we see that the utilization group is actually very high in the second half of this year, so does the Company also take into consideration that in the future (inaudible) nuclear power gen our utilization could go above 90%, yes?

(Interpreted) The following question is by (inaudible) from Deutsche Securities. Please go ahead, Madam.

(Interpreted) I have two questions. My first question is a clarification, because in March what I heard from the Company for the annual guidance for 2013 for the nuclear generation utilization rate was 80%. But if I run the calculation using the Excel file the rate is only 77%, and so which is correct, the former or the latter?

And I just want to understand that now the Company has a new guidance, is it correct that the guidance is now updated to 84.8%?

(Interpreted) In March in the conference call and the number that you are talking about in the Excel file, that is really based on the Company's worst case scenario calculation, and the Company has recently delayed its update to its forecast for the 2013 utilization. And so the figure that we have shared with you, 84.8%, this is the latest number from the Company.

(Interpreted) The following question is by Won Yeol Choi from KB Investment Securities. Please go ahead, Sir.

(Interpreted) My first question is related to the coal and the Company has said that you have raised (inaudible) and so can you tell me by how much?

(Interpreted) I will answer this question related to the adjusted coal efficient that was in the first quarter of 2012, the number was [EUR0.156], but for the first quarter 2013 it was lower at 0.1352% and -- but we also have to take into consideration the settled coal efficient -- adjusted -- adjustment coal efficient for last year was 5.5 percentage points but this year it was 1.62 percentage points.

(Interpreted) And I have two follow up questions related to the purchase of renewable energy certificate REC. Is this the first time the Company is recognizing this REC purchase?

And my second question is you mentioned that in respect to the REC purchase there's an annual target of KRW500 billion but at the same time you also have to factor in the fact that we will still have very limited (inaudible) providing our renewable energy, and so that is why in Q1 what you have recognized was just off KRW50 billion. So is it correct for us to just do -- rough estimates -- available in the market versus your target?

(Interpreted) So regarding the REC purchase amount, in 2012 the government target was KRW250 billion but what we actually recorded for 2012 was KRW100 billion. And so for this year we do have the government target of KRW500 billion but the actual REC purchase amount for 2013 will be the actual amount and it will not be as high as the government target.

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

(Interpreted) My question is related to your equity holdings in LG Uplus. There has been a recent share price increase for the LG Uplus shares and so I just want to understand if the Company has any plans to sell its position of LG Uplus.

(Interpreted) Regarding our interest in LG Uplus, we have already (inaudible) our equity, our stake in the Company to [CHEM CO] in August 2012. And so the CHEM CO is looking into divesting the shares in the market, but how this is done and when it takes place is really up to CHEM CO, not KEPCO.

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

(Interpreted) My question is what is your accounts receivable balance as of end of Q1?

(Interpreted) Your question is related to the accounts receivable for Q1 and to answer that question, for the first quarter 2013 we did not have any accounts receivable because of the overall downward trending of the fuel cost, but we have recognized our accounts payable which was KRW550 billion. And we have written off accounts receivable of KRW1.9 trillion last year and our practice that we will not recognize the accounts payable of KRW550 billion in our financial statement.

And so there was a follow up question and the question was that the reason for the relative fall in the part revenue should be (inaudible) the growing of your accounts payable, and the answer was that that is not correct because this will not be recognized in our financial statement. What we will do is that we had written down KRW1.9 trillion on accounts receivable last year and any accounts payable that we will be accruing will be set off against the accounts receivable that we have written off last year.

(Interpreted) The last question will be given by (inaudible) Securities. Please go ahead, Sir.

(Interpreted) I have two short questions. You already mentioned that your expected earnings from [UA] projects was KRW1.8 billion. Can you also talk about the full year costs?

And my second question is that in respect to the introduction of new nuclear power sites, can you tell us roughly whether -- when you will be able to give the RFP for the [Shingori] number 5 and number 6?

(Interpreted) And so regarding the UA project our revenue would be KRW1.8 trillion, as you have just mentioned. Our cost is KRW1.7 trillion and so our profit, our earnings would be KRW100 billion.

Regarding the RFP period for the Shingori 5, 6 project, we will have different RFP based on what will be our (inaudible). For example, there's the core system as well as non-core system. There's also the civil hearing portion and so I will just mention the core system and as soon as the Government approves the implementation side, we'll be able to issue the RFP and we expect that this could take place in September this year.

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