Korea Electric Power Corp (KEP) 2013 Q2 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 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 2013 Second Quarter Earnings Results by KEPCO.

Good afternoon, this is Changyoung Ji, Senior IR Manager 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 half 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 consolidated in accordance with K-IFRS. Any comparison 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 statements may involve certain risks and uncertainties.

Now we will begin with an overview of our earnings results of the first half of 2013, first in Korean and repeated in English.

Now we will provide you a review in English, starting with operating income. In the first half of 2013 KEPCO recorded a net operating loss of KRW436 billion, improved by 81% from that operating loss of KRW2.3 trillion in 2012. And in the second quarter KEPCO recorded a net operating loss of KRW1.09 trillion, improved by 46.9% from net operating loss of KRW2.76 trillion in 2012.

Taking a closer look, operating revenues increased 10.7% to KRW25.48 trillion. This was attributable mainly to 11.2% increase in power sales revenue following in KRW23.72 trillion, and a 5.4% increase in revenue from the overseas business amounting to KRW1.08 trillion.

Moving on to main operating costs, costs of goods sold, SG&A expenses increased 2.4% to KRW25.91 trillion. Fuel costs declined 2.2% to KRW12.2 trillion. Power generation, affected by power demand increased 7.3% and unit cost of fuel declined by 7.9%. However, such a decrease has been somehow offset by the reclassification of account receivables on the fuel cost of (inaudible).

Meanwhile, purchased power cost increased 8.2% to KRW5.58 trillion. While the unit cost of fuel declined 6.9%, purchased volume increased 4.9% and the reclassification of account receivables on the purchased power cost of 2012 and [our easy purchase card] cost increase.

Depreciation costs rose 3.8% to KRW3.23 trillion, mainly due to three newly constructed power plants such as [Incheon] 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 KRW1.36 trillion in 2013, which (inaudible) KRW436 billion. This was mainly due to a weakening Korean won and raising interest expense caused by increase in debt. As a result of the foregoing, we recorded consolidated net loss of KRW1.46 trillion in the first half of 2013, which improved by KRW854 trillion -- KRW854 billion from KRW2.28 trillion net loss in 2012.

This concludes the overview of KEPCO's Earnings Results for the First Half of 2013.

Now let me move onto the Q&A session.

I am joined with Mr. [Jong-Ho Kim], General Manager of Finance and IR Team, together with our IR committee members in charge of major business areas of KEPCO. We are prepared to take any questions. Since we will proceed in both Korean and English, all the questions and queries will be translated. Please make sure your questions and answers are brief and clear. Please begin.

(Interpreted) Now Q&A session will begin. (Operator Instructions). Currently one participant is waiting with his questions. The first question will be given by Pierre Lau from Citigroup. Please go ahead Sir.

Hi, hello. Good afternoon management, this is Pierre Lau from Citigroup. I have three questions. The first question is would you mind to let us know the Company unit coal and unit LNG cost in second half 2013? This is the first question.

The second question is recently we have some rumors about tariff hike, so I would like to know what would be the tariff hike outlook in second half this year?

And thirdly, the last question is in the second quarter this year the nuclear unit of KEPCO's utilization was only 67.9%. I would like to know what will be the utilizations x-factor in the third quarter and fourth quarter this year? And also we have up to 10 nuclear units where their operations are suspended in the second quarter, so how many of these units will resume in third quarter and how many will resume in the fourth quarter? Thank you.

(Interpreted) Allow me to answer the first question regarding coal and LNG prices forecast for second half of this year. Coal would be in our case bituminous coal, and versus last year it is true that on the international market bituminous coal prices have been decreased. However, since the GENCOs have already concluded long-term contracts with their coal suppliers last year and those contracts remain in place, it is true that the unit price of coal has not been lowered as much as what we see on the actual market prices because of that reason. And I believe that that situation will more or less persist for the second half as well.

On the whole, coal prices on the international market tends to be on the lowering trend and stabilizing and we foresee that to continue in the near future.

As for LNG prices, well LNG for power generation is supplied through KOGAS and therefore depending on what kind of purchase agreement KOGAS has in place and will have in place in the future, depending on that we may foresee some changes of LNG prices, but it depends on what happens through KOGAS.

(Interpreted) I would like to answer the question regarding the tariff hike. It is true that there has been a lot of discussion specifically in the press about the possibility of tariff hikes, and the reason behind that is that a while ago the Minister of Industry of the Republic of Korea has mentioned about how there is a need to reform the current tariff system. However, what he was mentioning in that announcement was mostly in terms of strengthening the current system in order to better manage the demand rather than anything else. And therefore, although all is in agreement about the necessity for tariff increase, we are not yet in any specific discussions with the Government regarding possible tariff hikes in the near future.

(Interpreted) I would like to answer the question on the utilization rate of nuclear power plants and the forecast that we have regarding that. It is true that as you mentioned in your question, for the second quarter utilization rate was somewhere at around 68% to 69% range. In the third quarter we expect that figure to be 78% and for the fourth quarter we expect it to be 92%. So that on the whole, yearly average will turn out to be somewhere around 80% level.

And I would like to correct one thing in your question, that the nuclear power plants that are currently not being operated due to maintenance is not 10 units but five units.

As for the additional question that you had, nuclear power plants in question. For example, [Hanoi 4] will be resuming operations from mid-August, that is to say this month, and also for the nuclear power plants in question such as Shin-Kori 1 and 2 and Shin-Wolsong number 1 that have been related to the components-related incidents in the press, that have been mentioned in the press, we expect those units to resume operation in early October.

Thanks for your reply. So two follow-up things. One is for the unit coal cost, can I assume the unit coal cost in second half this year to be same as that in the first half, that means KRW103,000 per ton?

And second follow-up question is you just replied that some nuclear units will resume operation in August. Is it one unit or two units? Thank you.

(Interpreted) I would like to answer the question that you had for the coal unit cost. As for coal, it is true that quite a bit is pushed up into the long term contracts but there is a certain volume that is being purchased in the spot market, so that portion exists as well. So even for the first half of this year versus the previous year, we have seen a coal unit cost decrease of around 20% and we expect similar things to be applied to the second half as well. And for the nuclear power plant that will resume operation in mid-August, it is one unit Hanoi 4.

Okay, thank you.

(Interpreted) Currently two participants are waiting with their questions. The following question is by Mr. [Young Ji-Hwan] from Taishin Securities. Please go ahead, Sir.

(Interpreted) Good afternoon, I have a couple of questions. First one regarding maintenance costs. We see that for the second quarter of this year already, maintenance costs related to Shin-Kori 1 and 2 as well as Shin-Wolsong 1 could be seen quite visibly. So do you expect for the third quarter that maintenance-related expenses will become higher? That's my first question.

Secondly is regarding actually the coal-fired plants as well. In those cases we see that the number of maintenance days is quite significant, so in the second half do you believe that this will increase as well?

Last question is there are forecasts about coal gas getting more financing, is KEPCO planning to participate in investing (inaudible)?

(Interpreted) First of all, regarding your question about third quarter forecasts regarding maintenance costs and activities as well as plans for the coal-fired power plants maintenance activities, we will need to confirm with the GENCOs and therefore we will get back to you with the follow-up data afterwards.

(Interpreted) With regards [talking] about coal gas, nothing has been decided to be announced as of yet because coal gas itself has not come up with an accurate announcement about its plans for further financing. Therefore, once coal gas makes its announcement then we'll have to go through thorough review of that announcement and then we may come up with some decisions at a later date, but as of yet there is nothing to announce.

(Interpreted) For your reference, there is an add-on answer relating to maintenance and repair costs. Maintenance and repair costs for the first half of this year has been increased about 25% but that does not come from KEPCO's activities itself but mostly due to increased plant maintenance days for GENCOs.

(Interpreted) The following question is by Mr. [Ta Hung Sun] from [Chemical Energy Investment Advisory]. Please go ahead Sir.

(Interpreted) First question is the tariffs of electricity for Korea is only at around one-third the level of that of Europe or Japan, so would there not be the possibility that Europe and Japan see this as a way of the Korean Government trying to protect its own industries?

And the second question is related to the generation fuel mix, with the current increase of development in shale gas that is happening, we see that trends are moving more and more towards gas away from coal. So what is the case for KEPCO in the future? Will the generation fuel mix change in the future so that gas will take up a bigger portion while coal and nuclear will be decreased?

(Interpreted) I'd like to answer the first question. It is true that the electricity tariff for the industrial usage is quite low here in Korea, and due to this there has been some voices of concern about how the other customers are having to cross-subsidize for industries. However, we have not had any complaints or those type of voices of concern being expressed from the international arena.

I'd like to answer the second question. As for shale gas, it is true that there is a lot of talk currently about introducing shale gas. However, this issue is something that needs to be discussed under the big umbrella theme of national energy policy. It is not something that we at KEPCO alone can establish as our own plan or policy. Therefore, it would need to be discussed with the Government within the overall framework of plans for establishing the national energy policy. As for plans for introduction of shale gas or reducing the proportion of nuclear and coal, that is something also that needs to be discussed and agreed upon with the Government. As of now we have not had any specific discussions regarding this issue.

(Interpreted) Currently six participants are waiting with their questions. The following question is by Ms. Cathy from Citigroup. Please go ahead, ma'am.

Hi, this is Cathy from Citigroup. I have two questions. The first question is can you tell us why the average tariff in second quarter is lower than that in first quarter 2013?

And my second question is can you tell us the coal proportion which is purchased from the long term contract and the percentage of coal which you've purchased from the spot market? Thank you.

Sorry, what was the first question again? Are you asking the average tariff?

Yes, that's right. My first question is about the average tariff [rate] in second quarter 2013 is lower than that in first quarter. Taking industrial as an example, the tariff for industrial user is 89.671 per kilowatt hour in the second quarter but in first quarter the rate is much higher at 103.25. So can I know the reason?

(Interpreted) Yes, I'd like to answer your first question regarding the difference between the first quarter and the second quarter industrial usage electricity tariff. This is due to our seasonal and time-based tariff system. In cases of specific seasons and timings, the sales -- the unit price is higher than other times.

(Interpreted) Yes, I'd like to answer your second question regarding the percentage or the rate between long term contract-based coal purchase and spot market purchase. In general it is our goal to have the ratio of 80%/20% approximately, 80% from long term contracts and 20% from the spot market. We have continued to strive to maintain that percentage rate and that has been the case until now and I believe currently that is the case as well.

Okay, that's all for my questions. Thank you.

(Interpreted) The following question is by Ms. Bum SuJin from Samsung Securities. Please go ahead, ma'am.

(Interpreted) Yes, I have two questions. First of all, regarding maintenance and repair cost, is component replacement cost included in that overall item, and can I know the yearly budget for this item?

And secondly, it seems that the equity incoming loss from affiliates has been changed, so could you explain what are the reasons behind that?

(Interpreted) Yes I'd like to answer your two questions. First of all regarding maintenance and repair costs, yes indeed nuclear power plant components and parts replacement cost is included in that cost item. And secondly regarding the equity loss of affiliates that you see currently, that is mostly due to the fact that the earnings for KOGAS has been decreased from what we saw last year; last year it was at around KRW450 billion, whereas this year it has been decreased to KRW250 billion.

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

(Interpreted) I have two questions. The first one is up to early October, that is to say the 3rd of October, but due to the nuclear power plants I believe about four months has been affected and that amounts to about KRW950 billion. We are assuming that that can be made -- naturally broken down (technical difficulty) to about KRW250 billion each. Could you elaborate on the actual breakdown of what you see as the effect coming from the suspended operation of nuclear power plants?

And secondly for the compensation of fuel costs, how is that going to be dealt with in terms of accounting in a consolidated system?

(Spoken in foreign language)

(Interpreted) Yes, to clarify the second question, the second question was regarding due to the suspended operation of nuclear power plants, how will that cost be introduced or reflected in the overall accounting, that it's true for KHNP that would mean a loss of revenue, and for KEPCO it will mean a reduction of the purchase power. So how is that going to be reflected in the overall consolidated results?

(Interpreted) To answer your first question, due to the suspended operation of nuclear power plants, it is true that for us fuel costs related to coal and LNG will be increased and purchase power from IPPs will also be increased. We do not have an exact breakdown of what we forecast as the increased cost, but we expect it to be somewhere around the KRW1 trillion level. And it is important to note that that KRW1 trillion figure will not be affected only for the second quarter results but will be spread out across the year.

To answer your second question, the penalty amount that will come from KHNP can be included as revenue for KEPCO on an independent accounting basis, however, for consolidated it will be off-set and therefore it will have no effect.

(Interpreted) An add-on question is compared to last year, for this year do you see the maintenance and repair number of days reduced compared to last year?

(Interpreted) Well as I've mentioned earlier, to answer that question, three nuclear power plants so far have been suspended since the end of June and we expect the re-operation to begin on the 4th of October, so we expect about three months of that maintenance and repair work. Four months, I'm sorry, starting from end of May, four months.

(Interpreted) The following question is by Mr. [Har Mi No] from (inaudible) Investment Corporation. Please go ahead Sir.

(Interpreted) Yes, I have two questions. First of all regarding maintenance-related costs, I think that quite a bit of that came not from KHNP but from the South-East and East-West power plants. So these would be coal-fired, so the operating or utilization rates for these power plants have been quite high, but nevertheless maintenance-related costs I think were quite high. So could you explain why this happened?

And secondly, I'd like to ask about the accounts receivable. In the first quarter, how did the accounts receivable improve, and what do you expect for the second quarter? Accounts payable, I'm sorry.

(Interpreted) Regarding your first question about maintenance costs, I think we will have to get back to you after confirming with the GENCO.

Regarding your second question about accounts payable, in the first quarter of 2013 it was at KRW550 billion and for the second quarter KRW360 billion.

(Interpreted) Lastly I would like to ask about the tariff hikes. I believe that there is talk about -- discussions with the government regarding tariff hikes going on from September of this year. Does this mean that it is possible to have an earlier tariff hike foreseeable in maybe the October timeframe, or will it be as expected at the timeframe of late this year, that is to say December or early next year?

(Interpreted) As I mentioned earlier, there are no concrete plans as of yet about any timing or specific plans for tariff hikes. However it is important to note that the government seems to have a very strong commitment on reforming the current tariff system.

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

Hi, I would like to have two follow-up minor questions. The first question is what is the Company forecast of the power [data] of the sales -- of your electricity sales volume growth in 2013?

And the second question is what would be the reserve margin in this year?

And the last question, number three, is what would be the generation mix in 2013 by fuel type? Thank you.

(Interpreted) First of all regarding your first question about sales volume forecast, our forecast based upon the assumption that the Korean national GDP growth rate will be at 2.7%, we expect our sales volume increase to be at 3.1%.

As for the reserve margin, as of end-of-June our current reserve rate was 9.4%.

Lastly concerning your question about 2013 generation mix, we forecast it to be nuclear 31%, coal 42%, LNG the remaining 19% for the year.

Does that answer your question?

Yes, thanks a lot.

Thank you.

(Interpreted) The following question is by Mr. Shin Ji-Yoon from KTB Investment Securities. Please go ahead Sir.

(Interpreted) I would like to ask four questions. First of all concerning the electricity sales revenue. It seems that the Excel sheet data for -- from my perspective, seems a little bit misleading, because the figures don't seem to match. The calculations that I have made based upon the second quarter results of this year and last year's comparison of that it seems that it would come to a net positive of KRW300 billion, but the -- in the Excel sheet in the [delta] column, it is at KRW68.7 billion. Is this my mistaken calculation? Could you clarify why that mismatch is occurring in the figures?

The second question is regarding the utilization of nuclear power plants. Once again, looking at the Excel sheet, it says that Shin-Wolsong 2, it's operation has been postponed to November, but I have heard that after completion of the construction, which will happen in October, when I made a telephone call earlier, it seems that there is a possibility of delay of actual commercial operation for about a three month period. So could somebody clarify that?

Third question that I have is, we keep talking about coal prices and we have questions about coal occurring again and again, due to the fact that I think that the answers were not as clear as what we had heard in previous sessions. In previous times, at these types of announcements of results, you have always given us information about how many months of coal supply you already have in hand and what your forecasts are to be for prices and unit prices, whether it be $96 or $97. But this time around the answers were not very clear. So could you give some more specific figures about the unit price of coal?

Fourthly, regarding tariffs, I know that the overall line of policy is in terms of pursuing strengthening of season and time varied tariffs, but according to my calculation, my guess is that the necessary amount of tariff hike will somewhere around the 6% to 7% percentage. So could you clarify if that calculation is correct? I am sure that there are ways of absorbing that by reduction of costs or any other types of measures that can be (inaudible) internally. So taking all of that into consideration, could you specify what level of tariff increase can be expected?

(Interpreted) Yes, I'd like to clarify regarding your first question. If you look at the Excel spreadsheet, I think you'll be able to see this that the initial line for the revenue is based upon the meter figures, but after that you have additional adjustments and also revenue coming in from sales of pump -- pumping -- pump storage and then there is also the deduction that is taken for the electricity utilized within the Company itself.

So taking those three elements into consideration, compared to the first half of 2012, in 2013 it has been increased by KRW68.7 billion, which is the figure that you see in the column in the spreadsheet. Additionally, if you look at the independent and the consolidated figures, in the consolidated, it is at KRW36.3 billion. This is deducting the internal transactions as well as the pumping storage that we mentioned earlier. So all of that taken into consideration, has been a bit lower versus 2012. So in 2013 it is at KRW36.3 billion.

Regarding your second question about the commercial operation start of Shin-Wolsong number 2, when we had discussed earlier on the phone, some time ago, at the time there was a mention that a postponement or delay could happen until December. However, when we had recent discussions, we heard that it is possible to have operations from November. So we will have to wait and see the actual timeline but it will be somewhere around the November to December period we believe.

Additionally, for your reference, what we are referring to in terms of the timeframe of late November to early December, that will be test running of Shin-Wolsong 2.

I'll next answer your third question about coal prices. For the first half of last year, the coal price, or unit price, was $118 per ton but for the first half of 2013 it was at $94 per ton. We expect for the second half that to be maintained at similar rates to what we have seen in the first half of this year.

(Interpreted) Regarding your fourth question about tariff hikes, I would like to answer. The internal calculation and review work has already been completed for what we believe is the required tariff hike rate for 2013. However, we still have not gone through the review with the government and have not had a validation process with the external parties. So we are waiting for that process to be completed.

As for the range, it would not be very different from what the range that you have mentioned and although I would like to be able to give you some accurate figures, there are still a lot of variables and elements to be taken into consideration during the discussion process with the government. So we are not at liberty to give you any accurate figures as of yet. I ask for your kind understanding.

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

(Interpreted) Yes, I have three questions. First of all do you have any expected timeline for the commissioning of the Shin-Kori 5 and 6?

Second question is regarding the equity income and loss of affiliates. You mentioned earlier in the other two previous questions that that is due to coal gas. Could you explain what specifically in figures how much that was?

And the third question is the fuel cost pass through system, when do you believe it will be actually introduced? Do you have any forecast internally as to when that system will be fully introduced?

(Interpreted) Concerning your first question about Shin-Kori 5 and 6, I think that the answer we can give you is not very different from what we had mentioned in the first quarter earnings results session. Based upon the main equipment, we expect that the commissioning of the project may begin from the timeline of September. But it will have to go through an approval process with the government planning authorities and therefore we will have to wait and see when that will take place.

(Interpreted) Yes, I'd like to answer your second question as was introduced earlier in a previous answer the equity loss of affiliates is mainly due to coal gases earning reduction that took place. Last year it was KRW450 billion but this year coal gases earnings was KRW250 billion, so there is a KRW200 billion loss factor that has been taken into consideration. And we have applied that to our equity rate of 24.5% and that comes to about KRW50 billion to KRW60 billion that has been loss incurred due to coal gas loss. The other remaining portions are coming from the other affiliates.

(Interpreted) I'd like to answer your third question regarding the fuel costs pass through system. As you probably know in January of 2013 the Ministry of Knowledge and -- Knowledge Economy has given us a request to review the overall fuel costs pass through system, so we have been going through an internal process of complementing and improving the proposed system.

However, as of now the most urgent issue on hand is the adequate supply and demand that needs to be established. So right now all our efforts are focused on the supply and demand matching issue and not many activities are being pursued as of now regarding the fuel cost pass through system.

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

Hi, I have two follow up questions. The first one is you have 5% of this borrowing in US dollars. May I know how many percent of them have been [hashed] by currency swap? So that means no impact from Korean won depreciation.

And the second question is, in the first half of this year, your power purchase amount from IPP increased by 5% year-on-year, what would be the full year out of all the power purchase volume in 2013? Thank you.

What was the first question again?

The first question is you have 5% of your borrowing in US dollars, what is the proportion of those US dollar loans with currency swap? Which means that no ForEx gain or loss from those loans due to currency depreciation.

(Interpreted) Allow me to answer your first question regarding borrowing. The total amount of borrowing is KRW57.6 trillion, an amount that about 5% is nominated in foreign currency but that is based on [after] swap.

(Interpreted) Regarding your second question for the 2013 year forecast for purchases from IPP we expect it to be increasing to about 14% higher than what we saw in the previous year. For your reference last year's figure was 60,392 gigawatts. And this year we expect it to be 69,140 gigawatts.

Thanks a lot. Sorry for so many questions. Thank you.

(Interpreted) Currently there are no participants with questions. (Operator Instructions). The last question will be given by Mr. [Hum-in Ho] from Shinhan Securities. Please go ahead Sir.

(Interpreted) The last question was a clarification on the nuclear power plant utilization rate for third quarter and fourth quarter, [was] that referred to those figures and those figures refer to the nuclear power plant utilization rate?

(Spoken in foreign language)

All right then we will conclude this conference call. Once again thank you for joining us today, thank you, bye.

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.