Korea Electric Power Corp (KEP) 2013 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 2013 fourth quarter earnings results by KEPCO. This conference will start with the presentation followed by a divisional Q&A session. (Operator Instructions). Now we shall commence the presentation on the fiscal year 2013 fourth quarter earnings results by KEPCO.

(Interpreted). Good afternoon. This is [Won Geun Goh], 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 fiscal year of 2013. 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 presented 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 KIFRS. Any comparison will be on a year-on-year basis between 2012 and 2013. Business strategy, 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 Manager, Ms. [Yang Jong Li], will begin with an overview of earnings results of the fiscal year of 2013, first in Korean and repeated in English.

(Interpreted). Now we will provide the overview in English, starting with operating income. In the fiscal year of 2013 KEPCO recorded a net operating income of KRW1.52 trillion. Taking a closer look, operating revenues increased 9.2% to KRW54.38 trillion. This was attributable mainly to a 9.1% increase in power sales revenue totaling in KRW50.17 trillion, and 12.1% increase in revenue from the overseas business amounting to KRW2.39 trillion.

Moving on to main operating costs, COGS, SG&A expenses increased 4.5% to KRW52.52 trillion. Fuel costs increased 1.6% to KRW24.2 trillion. Power generation affected by the low power demand decreased 0.1% and unit cost of fuel declined by 2.6%. Slight increase of total fuel cost was mainly due to the reclassification of accounts receivable on the fuel cost of 2012.

Meanwhile purchased power cost increased 15.6% to KRW11.33 trillion. While unit cost of purchased declined [3.5%], purchased volume increased 12.1% and the reclassification of account receivable on the purchased power cost of 2012 and [REC] purchase cost increase.

Depreciation costs rose 5.6% to KRW6.55 trillion mainly due to the newly constructed substations and power plants, such as Incheon Unit 3, Shin-Kori Unit 2, Shin-Wolsong Unit 1, [Dangjin] Unit 5 and 6, and [Ubdan] Unit 7 and 8.

Now let me explain KEPCO's non-operating segment. Net financial loss stood at KRW2.3 trillion in 2013, which was worsened by KRW352b. This was mainly due to the reduction of Korean won appreciation against US dollar, resulting in the (technical difficulty) FX translation gain. As a result of the foregoing, we finally recorded a consolidated net income of KRW185b in the fiscal year of 2013, which was the first turnaround in the past six years since 2007.

This concludes the overview of KEPCO's earnings results for the fiscal year of 2013. Now let me move on to the Q&A session. Q&A session will be hosted by Mr. [Won Geun Goh].

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

(Interpreted). (Operator Instructions). Yoo Deok-sang, Dongbu Securities.

(Interpreted). I am Deok-sang from Dongbu Securities. I have two questions. The first is regarding the corporate-tax-related item on the bottom of the sheet. We see that this has been relatively low compared to previous years. I would like to ask how this was taken into consideration in the overall accounting and is this a rare occasional event or is this something that can be expected in the future as well?

Secondly, if you look at the item regarding equity income and loss of affiliates, this seems to be recorded as KRW47.7b. Could you give us the breakdown of what that is composed of?

And the third question is, could you explain, including the amount, for the investment plan for the year 2014?

(Interpreted). So regarding the corporate-tax-related question, I would like to respond. If you look at the corporate tax cost for the year 2013, it is at KRW482.2b. This was mostly done by changing the method of tax reporting that we have included in order to make certain that the deferred amount coming in from the 2008 period could be taken into consideration.

(Spoken in Korean).

(Interpreted). As I mentioned earlier, by applying a different tax policy what we were able to do is take in the deferred tax asset and thereby lowering the corporate tax cost by KRW418.8b. So in the end ultimately it came to a tax refund type of an effect. And, additionally, this is something that has happened in 2013 in order to offset what was created in 2008 so this was a one-time type of effect.

(Interpreted). Yes, I would like to answer your question regarding equity income and loss of affiliates. The size of the equity loss incurred was KRW166.5b. And the major factor behind that was first of all domesticated fuel gas, with a loss of KRW26.8b, and overseas buy-in, which recorded loss of KRW64.4b.

(Interpreted). Yes, I'd like to answer your third question regarding investment plans for 2014. As you probably know, KEPCO usually has very conservative forecast for investment. For this year we expect the investment size to be about KRW90 trillion but, as you probably know, in terms of the investment executed, on an average basis it's relatively at around 75% to 80% of the original planned amount. So we expect that for this year the actual investments that will be executed will amount to something between KRW14 trillion to KRW15 trillion.

For your reference, if you look at what happened last year for 2013, the original plan was KRW18 trillion to KRW19 trillion of investment for the year, but if you look at the actual amount that was executed, it was KRW15 trillion.

(Interpreted). (Inaudible), [USB].

Yes, hi. Thank you for the opportunity. I have three questions. First is on the earnings results. If you could please share with us what drove the increase in the operating cost items, the commissions and the R&D expense last year, that would be very helpful.

Second is on the nuclear utilization rate. Based on the file you circulated, the utilization rate was 75.5% in 2013. What are your expectations for this year?

Thirdly, if you could please remind us of your dividend policy. You turned to a slight positive net profit in 2013. Does this mean you'll resume paying out a dividend based on 2013 net income or should we wait for 2014 when you generate a more substantial earnings, or is dividend not a priority for the management at this stage given the focus on deleveraging? Thank you.

(Interpreted). Yes. I'd like to answer your first question on the increased item including the operating cost. As you can see, fuel cost and purchased power costs have both increased. For maintenance-related costs, it has increased 2.3% compared to the previous year, recording KRW33.8b. For the commissions it was recorded at KRW102.1b. And for the development cost it was an increase of 14.5% compared to the previous year, recording KRW73.1b. Additionally, regarding the decommissioning cost for NPP, for the previous year it was KRW670b, and for the year 2013 it was KRW181.4b.

(Interpreted). I would like to answer your second question on the nuclear utilization rate. As you have mentioned, for the 2013 year it was 75.5% and our forecast or expectation for 2014 is 87.5%.

(Interpreted). And I would like to answer your last question regarding the dividend policy. The turnaround that we have made in 2013 and whether are going to link this to a dividend payout, we are currently in discussion with the customers, which is the largest shareholder of KEPCO, and therefore we are currently in the review stage.

Alright. Thank you. Just on the first question, could you please share with us any details on what drove the higher commissions and the higher R&D expenses?

(Interpreted). I apologize, but I do not have the exact details and figures with me right now. We will get back to you via email regarding that question.

Okay. Thank you.

(Interpreted). Pierre Lau, Citibank.

Hi. Hello. Good afternoon. This is Pierre Lau from Citigroup. I have three questions. The first one is about your nuclear power unit. You have three nuclear power units suspended in operation at the moment. Would you (technical difficulty) of those three units? This is question one.

Question two is (technical difficulty) full-year net profit. So what is your expectation of more than (technical difficulty) in 2014?

And lastly, the third question, what do you think of your fuel-cost outlook in 2014? Thank you.

(Interpreted). Yes, I'd like to answer your first question on the operation or de-operation of the suspended three nuclear power units. On January 2 of 2014 the KINS has approved the safety for re-operating of these three units and therefore they are back in operation.

(Interpreted). Regarding your second question, despite the fact that we have had two tariff increases in 2013, we believe the related cost increases that are expected for 2014 will make it inevitable for us to go ahead with additional tariff increases. We do not have specific plans that have been established as of yet. However, we will continue to have discussions with the government regarding finding a more appropriate and rationale tariff, reflecting also the customer price increase as well as the overall economic situation.

(Interpreted). Yes, I'd like to answer your third question regarding forecast or outlook for fuel costs for the year 2014 for the GenCos. We expect that in total the fuel price will be at around KRW21.57 trillion.

Okay. So regarding the KRW21.57 trillion of the fuel cost, would you mind if I ask for the unit coal, unit oil, unit R&D costs, and also your exchange rate assumption? Thank you.

(Interpreted). Yes, I'd like to give additional information and the breakdown of our fuel-cost breakdown forecast by the fuel type. First of all, for coal we expect unit cost to be KRW102,500 per tonne, for LNG the unit cost is KRW1.022m per tonne and for oil KRW768 per liter. And the exchange rate that we have taken into the assumption is KRW1,060 to the dollar.

Does that answer your questions?

Thank you.

(Interpreted). [Too Ik-seong], IM Investment & Securities.

(Interpreted). I have three questions. First of all, regarding the corporate tax that was reflected in 2013, but that went back to 2008, do you expect any similar changes to take place that will happen instead for the 2014 results from what you have accumulated since the 2009 period?

The second question is could you tell us about the decommissioning costs for NPP that you expect for 2014 and 2015?

And the last question is, you mentioned earlier about the increases of fuel costs as well as the purchased power costs, could you tell us a little bit more about what changes have been made in the sub-items in these two areas?

(Interpreted). I'd like to answer your first question regarding the accumulated loss amount from the 2009 period and whether that will have an effect on the corporate tax area for 2014 onwards. Well, what we have calculated at the end of our calculations for 2013 was that the accumulated losses that have been seen from the 2009 period totals up to KRW10.28 trillion.

However, we believe, taking into consideration the plans for 2014 as well as our mid- to long-term financial plan for 2017 period, we believe that the actual tax-related effects will not be seen because of the fact that, compared to the accumulated loss amount, the actual financial results will be much higher. So we do not expect similar types of tax refund effect to take place in 2014.

(Interpreted). I'd like to answer your second question regarding our forecast for decommissioning costs for nuclear power plants for the year 2014. We expect that to be KRW273b. However, one thing to note is the fact that for this year we expect the decommissioning unit cost to be readjusted and therefore the actual figure may be changed in the future.

(Interpreted). In 2012 we have had a reclassification of the accounts receivable on the fuel costs because some of the accounts receivable that were supposed to be included in the revenue was actually reflected in the fuel cost and the purchased power cost.

(Interpreted). Shin Ji Yoon, KTB Investment Securities.

(Interpreted). Yes, I have two questions. The first one is a set of questions regarding the UAE business and the revenue coming from that. Please elaborate for us what the fourth-quarter revenue for the UAE business was, what the revenue was for the total year and what your forecast for the UAE business revenue is for 2014.

The second question is regarding tariff increase. I know that you have already answered about the basic principle of tariff increases being possible for this year as well. However, if you have taken to consideration the fact that fuel cost is decreasing and also the fact that the operating profit is increasing for KEPCO, we believe that the operating profit for the Company could be increased up to KRW5 trillion to KRW6 trillion for the next year and this does not seem to provide a logical background for having another tariff increase.

So whether it is from the perspective of fair ROE or what other type of logic you may have, what would be the logic that supports an possibility of additional tariff increases?

(Interpreted). Yes, I'd like to respond on your question for UAE business revenue for 2013. The fourth-quarter revenue figure is KRW475m. As for forecast of revenue for 2014, we still do not have any of those figures yet.

(Interpreted). I would like to answer your second question regarding the tariff increase. As I mentioned earlier, if I may add more on what was discussed earlier, currently we do not have any specific plans about tariff increase. However, it will be in discussion with the government because the final establishment of the tariff increase plan will be depending on what our final results calculations will be and after looking into what additional cost factors have been expected for the future. So there are several things that need to be clarified and identified before we go into any specific plans about tariff increase.

But, as you have mentioned, it is true that with the tariff increases that have been conducted the situation financially has been improved compared to the previous years. However, nevertheless, we expect some changes to take place this year including the energy taxation regulation that may incur additional cost increases. So there is still the possibility of discussing with the government about possible tariff increases.

(Interpreted). [Ta Hung-soo], Chemical Energy Investment Management.

(Interpreted). Yes, I have two questions. First of all is do you have any forecast for the P&L for 2014.

And secondly, regarding the nuclear area, it seems that even Japan, which had already announced many times for closing down all of the nuclear facility, there seems to be some changes of movement going on where the governor of a prefecture who had been proponent of reopening or reoperating nuclear facilities has been elected. So do you believe that on a global basis nuclear is once again on the rise or is it still on the downward trend?

(Interpreted). Yes, I'd like to answer your first question regarding general forecast for 2014. Since we only have the output of the earnings results for 2013 very recently, we are still going to the recalculation and we do not have the actual forecast figures as of yet.

(Interpreted). Now I'd like to answer your second question regarding policies or movements that we see for the nuclear power. As you know, since the Fukushima accident in Japan there has been quite a bit of controversy and discussion about the safety of nuclear power facility and some countries have gone into a policy review regarding nuclear power.

However, since even at a global level there is not a visible or viable alternative to nuclear energy at this point in time so we do not expect to see a major change in the nuclear power market on a global basis. And similarly the Korean government and KEPCO, we are still maintaining the same types of policies.

(Interpreted). [Yang Dae-yoo], Daishin Securities.

(Interpreted). First of all I would like to congratulate you on making the turnaround from 2008 and I have three questions that I would like to ask. First one is do you have any forecast for demand for this year, 2014?

And the second question is regarding the forecast of fuel cost, it seems that on the unit price level they do not seem to be very different from our forecast. However, the overall total sum seems to be lower than what we have in mind. So maybe is was a difference in the purchase power cost which may be a discrepancy from what we had in our view. So could you elaborate on the purchase-power-cost-related forecast for 2014?

The third question is what forecast do you have for operating rate of -- utilization rate of the coal-fired power plants?

(Interpreted). Yes, I would like to answer your first question regarding the forecast regarding demand growth. For 2014 we expect the sales volume to increase by about 3.3%, recording 490.5b kilowatt per hour. And the assumption that we took in the GDP growth rate is 3.5% GDP growth.

Regarding the second question, we do not have specific forecasts fr purchased power cost as of yet. As soon as we get the updated statistics we will get back to you.

And also for your third question, regarding the utilization rate of the coal-fired power plant, we do not have specific figures that we have set as the forecast yet. However, for your reference, the figure for 2013 was 93.8% so we expect that it will be priced similar this year as long as there are not dramatic changes that may occur that we do not foresee.

(Interpreted). Bum Su-jin, Samsung Securities.

(Interpreted). Yes, I have three questions. First of al, regarding the fuel cost that you have mentioned at KRW21.67 trillion, has the coal-related taxation that started from July, has that new tax been reflected in this figure, is my first question?

The second question is when do you expect the newly constructed nuclear power plant and additional coal-fired power plant to actually enter into operation?

And third question is what is the forecast that you have for the 2014 [REC] purchase price?

(Interpreted). To answer your first question, the fuel-cost forecast that we had given you earlier, that does not take into consideration coal tax.

Considering your second question about the new nuclear power plants and the timeline of the operation of these new power plants, as you know, this timeline has been delayed due to the changing of the control cable that has been going on. So it is difficult to give you an exact date of when these will be entering into operation. We can only say that we have a large timeframe of end of 2014 to mid-2015. We expect it to be somewhere around that period of time. But of course, that timing is subject to changes or alterations into the details as well. For the [Yang Jong] coal-fired power plant, that will be in June and December.

(Interpreted). I'd like to answer your first question regarding our [REC] purchase cost forecast for this year. In 2013 the mandatory amount was actually 2.5%. However, that has been increased to 3% so we expect the overall figure to be increased; that is true.

However, if you look at what happened last year for REC purchase and also for overall cost of RPS, it was originally expected to be KRW500b. However, after actual execution we saw that the figure was only about KRW200b. Some of those have been deferred and in some cases where we did not have to completely pursue the amount. So although we expect to be for 2014 KRW700b, the actual cost that will be incurred after execution may be lower than that.

(Interpreted). Yoo Deok-sang, Dongbu Securities.

(Interpreted). I'd like to ask two additional questions just to clarify my understanding. First of all, you mentioned about the utilization rate of nuclear to be 87.5%. Is this correct?

And if so, this would mean that there would be almost full operation and full utilization of the plan. What is the reason behind that? Is that because that there were already a lot of maintenance activities in the previous year so that for this year you do not have much planned maintenance operation?

The second question is for [Yang Jong], with that coming online, we believe that the base load is quite strengthened for KEPCO and this would lead me to believe that the proportion taken up by LNG generation will become lower in the future. So would you agree that my understanding is correct in that the purchase power related dependency in the mid to long term for KEPCO will continue to decrease?

(Interpreted). I would like to answer your first question regarding utilization rates for nuclear power plant. It is, as you have mentioned and as we have earlier answered, 87.5% for this year and this is due to the fact that compared to the year 2013, this year, in 2014 the number of planned maintenance days is much lower.

(Interpreted). I would like to answer your second question regarding the purchase power proportion. Well, in 2013 and 2014 period there are many high-efficiency ITP-type of private sector funds coming into the market and therefore the ratio is actually going to increase quite a bit, from 13% to 17%. However, after the 2016 and 2017 timeframe we believe that with the entry of our new coal-fired power plants coming into operation, the proportion of purchased power based on LNG will be reduced in the mid to long term.

(Interpreted). Additionally, I would like to ask about the [BP] utilization rate for LNG in KEPCO. What is that figure?

(Interpreted). We will have to get back to you after confirming. Thank you.

(Interpreted). Pierre Lau, Citibank.

Hi. Hello, can you year me?

Hello. Go ahead sir.

The first follow-up question is could you let us know the update expected commissioning day of your new nuclear plant to start operations in 2014 and 2015?

The second question is what is your expected power generation mix in 2014 in terms of your guide? Thank you.

(Interpreted). With regarding your first question about the commissioning state of the new nuclear power plant, as was mentioned earlier in the previous question, for Shin-Kori Unit 3 and Unit 4, we expect them to enter into operation in the second half of 2014 or first half of 2015. Unfortunately, we are not able to give you an exact date as of yet as that period that we are forecasting may be subject to change later on as well.

Secondly, regarding the generation by fuel type, your second question, these are the figures that we have, nuclear is 36%, coal 44%, LNG 18%.

And how about commissioning date of Shin-Wolsong number 2?

You mean the commissioning date?

Yes.

(Interpreted). For Shin-Wolsong number 2 the commissioning date is July of this year.

Okay. Thank you.

(Interpreted). Josh Bae, UBS.

Thank you. Just a follow-up question regarding your comment about the high efficiency new LNG power plants by the IPPs, is it correct to understand that with these new plants coming on line, it is cheaper to buy from these new plants compared to the existing LNG and heavy-oil plants of your GenCos?

(Interpreted). Yes, that is correct. Because when you look at the new LNG facilities coming into the market, their generating efficiencies are higher even though they are using the same fuel LNG. Therefore, this means that we will be able to purchase at a lower cost.

Thank you.

(Interpreted). Shin Ji Yoon, KTB Investment Securities.

(Interpreted). I think my question will be similar to what was previously asked by others but let me just confirm that if you say that the IPP portion of the purchased power using LNG facilities will be increased for the near term, does that mean that KEPCO's own LNG utilization proportion will be lower?

(Interpreted). Yes, we still have to take into consideration what new LNG facilities will be entered into the base-load generation and we will also have to see just how much contribution will be made by the new nuclear facilities coming online. However, in principle we expect that our own LNG generation portion will be decreased, as you have said in your question.

(Interpreted). Yes, I have a rather simple question. You mentioned about the forecasted utilization rate of nuclear power plants on a year basis. Would you happen to have those figures by quarter?

(Interpreted). Yes, I would like to give you those figures by each quarter. The first quarter 87.2%, second quarter 86.4%, third quarter 90.7%, fourth quarter 85.9%.

(Interpreted). We would like to entertain one more question.

(Interpreted). (Operator Instructions). Bum Su-jin, Samsung Securities.

(Interpreted). Yes, I'd like to ask one additional question. You mentioned about with the new private sector GenCos coming in that have more effective facilities, you expect the cost to be lowered. In that case do you have any internal guidelines for the [SNP] for 2014?

(Interpreted). For 2013 the [SNP] was KRW152.11 and what we forecast for 2014 is in the KRW140, the early KRW140s.

(Interpreted). We will 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.