Korea Electric Power Corp (KEP) 2014 Q1 法說會逐字稿

(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 first quarter of 2014.

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 presented 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 KIFRS. Any comparison will be on a year-on-year basis between 2013 and 2014. 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. Changyoung Ji, will begin with an overview of earnings results of the first quarter of 2014, first in Korean and repeated in English.

(Interpreted). Now we will provide the overview in English, starting with operating income. In the first quarter of 2014 KEPCO recorded a net operating income of KRW1.23 trillion. Taking a closer look, operating revenues increased 7.1% to KRW14.77 trillion. This was attributable mainly to 6.4% increase in power sales revenue totaling in KRW13.75 trillion and 29.4% increase in the revenue from the overseas business amounting to KRW608b.

Moving on to main operating costs, costs of goods sold, SG&A expenses increased 3.1% to KRW13.55 trillion. Fuel cost decreased 3.5% to KRW6.15 trillion; power generation, affected by the lower power demand, decreased 3% and unit cost of fuel declined by 0.5%. Meanwhile purchased power cost increased 15.6% to KRW3.28 trillion. Unit cost of purchased increased 0.1% because of the increase of unit cost of LNG, and purchased volume increased 12.5%. Depreciation cost rose 4.8% to KRW1.69 trillion, mainly due to the newly constructed substations and new facility additions by power plants.

Now let me explain KEPCO'S non-operating segments. Net financial loss was KRW524b in the first quarter of 2014, which was improved by KRW99b. This was mainly due to the reduction of Korean won depreciation against US dollar resulting in the decrease of FX translation loss. As a result of the foregoing, we recorded a consolidated net income of KRW561b in the first quarter of 2014.

This concludes the overview of KEPCO's earnings results for the first quarter of 2014. Now let me move onto the Q&A session. The Q&A session will be hosted by Mr. Won Geun Goh.

(Interpreted). This is Won Geun-Goh. I'm 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. Please make sure your questions and answers are brief and clear. Please begin.

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

(Interpreted). I have three questions. The first one is regarding the cost of power purchased. It seems that the PPA portion has been reduced. So could you elaborate on the reason behind that situation?

The second question is regarding plans for opening of the new nuclear power plant. It was expected that all of the new units will start their operations and be open in the third quarter of this year. So I'd like to confirm with you whether these plans are on track and if they will indeed start operation from the third quarter.

The third and last question that I have is will the second half rate be applied from July of this -- June of this year? Thank you.

(Interpreted). I'd like to answer your question. First of all, regarding your question about the decreased PPA portion in the decrease of the purchased power cost, well, the reason behind is that there have been many new high efficiency power plants that have expanded their new facilities among the IPP and that is the reason behind the reduced PPA portion of the genco.

Regarding your second question about the entry into operation of the new nuclear power plants, specifically Shin-Wolsong unit number two, it was originally expected to finish its construction by July of 2014 and afterwards go into operation. I understand that the actual operation related permit processing is currently underway but is going through some delay during this process. So as for the estimated period of going into operation, we will have to wait and see how the regulators decide on their policies of investigating into how to evaluate and grade the foreign companies who are related to this overall project.

As for your third question about entry into fourth of seasonal tariffs that was already dealt with in November of last year. As you have mentioned in your question, the seasonal tariff will enter into effect from June of this year.

(Interpreted). I would like to ask two additional questions regarding the answers to the previous three questions. First of all, you mentioned about the reduction of the PPA portion. Does this have anything to do with the fact that the PPA contract regarding POSCO will be nearing an end? Did that have an effect in the situation?

And also regarding your third question, if you look at what happened in the last year, from June to July of 2013 there was a unit cost difference of about 20%. Will that be the degree of difference which we will see with the new tariff being adopted?

(Interpreted). Yes, I'd like to answer your first question, your first additional question. For POSCO number one and number two, their PPA contracts will be ended and concluded respectively for the months of July and December. Therefore, this will not have an effect on the result of the first quarter.

I'd like to answer the second question regarding the tariff difference. From June 1 the summer season tariffs will be applied, and if you look at the difference that we saw last year in the second quarter, there was about a 20% delta that was seen at that point in time. And we expect the difference this year around to be similar for the unit price.

(Interpreted). (Operator Instructions). Yun Heedo from Korea Investment Securities.

(Interpreted). I have four questions. The first one is for the corporate tax rate. It seems to have been increased from the previous 23% to 38% so could you elaborate on the reason behind that increase?

Secondly, looking at your overseas business revenue, there has been quite a bit of an increase there and I expect that the UAE project is included in that area. So could you elaborate further on the reasons and factors behind the increased revenue for overseas business?

My third question is regarding the increase that we see in the purchased power cost. Among that portion we see the [REC] percentage or the portion reaching KRW93.3b. So could you just elaborate a little bit on why that happened?

And fourth, if you look at the second quarter growth of sales volume, it's at around 0.5%. In the beginning of the year your forecast for the year was an increase of 3%. So given that the result of the second quarter is only 0.5% growth, do you have any plans to readjust your forecast for sales volume increase for this year?

(Interpreted). I'd like to first of all answer your question regarding the corporate tax. Regarding the decrease of profit coming from corporate tax, it is mostly due to the increase of pure asset value of KHNP and also KOSEPCO.

I'd like to now go onto your second question regarding the overseas business. The biggest portion within the increase of overseas business revenue and profit is due to the UAE project which has recorded KRW112.4b. There has also been an increase of KRW18.4b for the consolidated overseas and international business.

I'd like to answer your question regarding the costs related to REC. The government-owned or the State-owned REC portion has been allocated to the companies in the first half of this year and this is behind the increase of purchased power.

I'd like to answer your question regarding the sales volume. Actually compared to the previous year during the same period, the sales volume did increase slightly, and this is mostly due to a reduction in the load for heating due to the temperature differences compared to the previous year. For the second half of your question, as of yet we do not have any plans to adjust our forecast.

(Interpreted). Could you repeat once again the answer that you gave regarding the REC purchase cost increase portion?

(Interpreted). Yes, allow me to repeat that answer and elaborate a little bit further. For REC there are portions that have been owned by the government through FIT and other measures, but that portion, given the fact that the generating companies may not be able to fulfill the full load, has been allocated according to the mandatory percentages. And that is behind the increase.

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

(Interpreted). I'd like to ask three questions. First of all regarding REC, I think it was mentioned during the last conference call as well that you expect for this year to be -- or you have estimated it to be about KRW700b. But in real term expectations you believe that this will be below KRW500b. And also at the end of last year, when you made your announcement, there was also a mention about how that is going to be pursued. But given the fact that in the early half it's already KRW200b, do you have any expectations of what it will actually be for this year compared to what you have announced at the end of last year?

The second question is regarding the purchased power which has been higher than expected and IPPs ended up having a quite high ratio of 12.5%. This means that the overall situation is quite flat while this is happening so KEPCO's generation portion may be decreasing while the IPPs have increased to a two-digit level. This was something that was already mentioned by KEPCO previously, that the IPP portion may increase to anything from 13% to even 17% in the short term. Of course, the current figure is more close to 13% or 14% so it's not as drastic as 17%, but in the future, with increased implementation of high efficiency facilities that will be adopted more and more by these IPPs, does this mean that the purchased unit cost for KEPCO will be increased and the cost side of the profit and loss for KEPCO will be increasing in the future? That seems to be my guess. Could you confirm whether this is true?

The third question that I have is regarding tariff. This year with various programs that will be implemented, including a review of the taxation system and so forth, can we expect that the tariffs for electricity will be increased once again, maybe at around the same rate that we saw happening at the summer season? Or will it be any other portion that we can expect to see? So could you elaborate as much as you can regarding any possible plans for tariff hikes?

(Interpreted). I'd like to answer your questions number one and number two. Regarding the forecast for REC, we believe that our previous forecast will remain valid. For the second question, for this year we expect an increased capacity of about 5 gigawatts, and in that respect 70% of that will be coming from the IPPs. So we expect that the IPP portion will continue to increase in the future as well.

Regarding your question about tariff hikes or possible plans for tariff hikes, currently the government is doing a verification and validation of our costs and as of now for 2014 we do not have any specific plans for tariff increases.

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

(Interpreted). Yes, I have three questions. The first question is could you give us a utilization rate forecast for throughout the year of 2014 for your nuclear power plants, coal-fired power plants and LNG power plants?

The second question is regarding the UAE revenue. On a yearly basis compared to the previous year, how much of an increase in UAE business revenue do you expect to see?

The third question is regarding time schedules for opening of the new plants, specifically Yeongheung thermal units 5 and 6. It says on the Excel spreadsheet that they will be completed in terms of the construction in December of this year, whereas the original announcement that we had received was that the Yeongheung thermal unit number 5 would be open in June of this year. So does this mean that the schedule has been delayed and it will actually open in December?

(Interpreted). I would like to answer your first question regarding the utilization rates for the different power plants. For nuclear we expect the utilization rate to be 85% to 88% for the year of 2014. For coal-fired power plants we expect it to be similar to the previous years, ranging from 92% to 95%. And for LNG combined it is at around 60% plus or minus [alpha].

Regarding your second question about revenue for UAE business for this year 2014, we expect it to be KRW130m. I'm sorry, let me correct that figure and that answer. The UAE revenue is expected to be KRW2.7b for this year.

As for your third question, for Yeongheung number 5, we will have to get back to you on that after confirmation.

(Spoken in Korean).

(Interpreted). There was a clarification on the second question's answer. For last year UAE business revenue was KRW1.7 trillion. For this year it is expected to be KRW2.7 trillion.

(Interpreted). The following question is by Nicole from Citibank. Please go ahead, madam. Nicole from Citibank, please ask your question.

Hi, can you hear me?

Yes, please go ahead.

I have three questions, mostly on nuclear. First, how many nuclear units are there in operation right now? Is it 23 units in total?

And second, are there any suspended nuclear units right now? If so, what are they?

And third, in terms of generation mix, how much goes to -- comes from nuclear are you expected in 2014 and how much was there in this quarter?

(Interpreted). Yes, allow me to answer your questions. For the first question regarding nuclear power plants that are in operation, you are correct, there are a total of 23 units that are in operation presently. And currently there are three nuclear power plant units that have been suspended, Wolsong 1, Hanbit 3 and Hanbit 6. I'm sorry, Hanul 3 and Hanul 6. And for the first quarter, nuclear took up 33.2% of the generation mix. And our forecast for generation for nuclear power plants is 37%.

Does that answer your questions?

Yes. Thank you.

(Interpreted). The following question is by [Tae Hung San] from [Chemical Energy Investment Advisory Group]. Please go ahead, sir.

(Interpreted). Yes. I would like to ask two questions. The first one, in a bigger picture level, I understand that you have given us a lot of figures, but in terms of KEPCO's policy regarding electricity tariff. In the past, it was mostly to keep it low in order to contribute to national economic growth. But now can we say that KEPCO's current policy for tariff is to manage the demand by focusing on appropriate levels of tariffs? That's my first question.

The second question is, on a worldwide basis I think that there's a discrepancy that we can see in each nation's policy regarding nuclear energy. For example, in the case of Germany, Germany has declared that it will reduce the nuclear portion to zero percent by 2020, while China has announced that it will aggressively go forward with its plan for building nuclear power plants. So, does it mean that, on a global level, every country has its own separate policy regarding nuclear power? Or do you believe that there is some kind of a global trend that can be identified?

(Interpreted). Yes, I'd like to answer your first question regarding tariff. As you have mentioned, this focus towards managing demand has already been pursued by KEPCO for a while.

As for any questions regarding specific policies of tariff, I think that it would be more appropriate to pose that question to the government authority rather than KEPCO.

(Interpreted). Yes, allow me to answer your second question regarding policies about nuclear power. Of course, the world has seen quite alongside the Fukushima accident in Japan, and there has been a lot of weariness about nuclear power. However, as for the Korean situation, the government in its second energy basic plan has already stated that, by the year 2013, our nuclear power portion will be maintained at around 29%. So it will not be greatly decreased.

We are currently operating 23 units of nuclear power plants, but by the year 2024, we expect 11 additional nuclear power plants to enter into operation. So that will be a total of 34 units that will be operated.

As for the global trend, which was the final portion of your question, I believe that the situation varies according to each country. However, with the current situation of very steep competition for energy resources, I believe that even the -- some of the advanced nations who had opted to reduce or had a negative position about nuclear power are now rethinking their position and starting to view nuclear power more positively. So there are some cases of that happening as well.

(Spoken in Korean)

(Spoken in Korean)

(Interpreted). The following question is by Bum Su-jin from Samsung Securities. Please go ahead, madam.

(Interpreted). I'd like to ask three additional questions. First of all, regarding the price difference between the IPP power purchase cost and the SMP price. Usually we have seen the discrepancy of about 10 to 21. However, for the first quarter results that we see today, there doesn't seem to be that difference. So, could you elaborate on the reason behind that? Is this due to some structural reasons, now that the cost difference is becoming lower?

The second question that I have is regarding coal price. If we look at the global situation and also the spot market coal prices in Australia or Newcastle or Indonesia, it seems that there has been quite a bit of a drop for the spot prices for coal, but that doesn't seem to be the case in the results that we see from KEPCO and your costs incurred for purchasing of coal. Do you believe that in the second and third and fourth quarters, a further drop in fuel costs, namely for coal, can be expected?

The third question is, you mentioned earlier in one of your answers that, with the newer facilities coming online by the IPPs, the IPP portion of the purchase power will continue to increase for KEPCO. Does this mean that, on a cost comparison aspect, it would be more attractive for you to purchase from IPPs rather than from your existing plants?

(Interpreted). Yes, I'd like to answer the first and third question together because I believe that they are more or less related. Your first question regarding reduced gap between the IPP prices and the SMP. Well, this is mostly due to the fact that the newer IPP facilities are at high efficiency and therefore the fuel costs and other types of costs are becoming more similar to the SMP. With the introduction and the entry of high-efficiency generation facilities, we see that the overall purchase power related costs are being reduced, so there is a cost reduction effect that we are experiencing.

However, regarding your third question, I believe that this is not just a simple comparison between gencos and the independent IPPs but this is more of an industry-wide trend that we are witnessing.

(Interpreted). So just to answer your question, there is actually a bit of a time difference between the fluctuations that we see in the international coal market price and our fuel costs that we can see in our financials. But if this trend continues in a positive manner, that is to say coal prices on an international market level become more and more attractive, in that case, I believe that our fuel costs will be lower from the second quarter onward.

(Interpreted). The following question is by Shin Ji Yoon from KTB Investment & Securities. Please go ahead, sir.

(Interpreted). Yes, I'd like to ask an additional question just to clarify whether my understanding is correct. I have looked into the figures once again after listening to the previous answers, and somehow the figures don't seem to match correctly, so that's why I would like to ask you to clarify this. Regarding the question that was posed earlier regarding the IPP portion, you mentioned that on the whole KEPCO intends to increase additional facilities or capacity by 5 gigawatts for this year, and that 70% of that will be coming from the private companies. In that case, it means that the subsidiaries of KEPCO's portion will be about 1.5 gigawatts.

However, if you look at the figures on the Excel sheet and what has been announced earlier as well, for this year the capacity increase was announced to be at 6.7-gigawatt level. And that means that there's about a 5-gigawatt difference that cannot be accounted for. Does this mean that all of the plans that were mentioned previously about the entering into operation of the newer units, including Shin Wolsong and Shin-Kori, all of that will be delayed, and that is why there is this gap?

(Interpreted). Yes. I apologize for the delay. We were confirming our figures. And in the 5-gigawatt increase that we mentioned --

(Interpreted). Yes. Allow me to clarify regarding the 5-gigawatt increase that I mentioned earlier. The 5 gigawatt is net of the portions that will be going offline. So, 1.5 gigawatt of capacity that will be going offline has been reflected in the net 5-gigawatt increase figure.

(Interpreted). And clarification on those that will be going offline are [Inten 1 and 2] and POSCO 1 and 2?

(Interpreted). The following question is by Yoseop Han from Daewoo Securities. Please go ahead, sir.

(Interpreted). Yes, I would like to ask three more additional questions. First one is, the units that are not included in the 5-gigawatt of capacity increase that you mentioned, does this mean that this year's CapEx figures will be adjusted? And if so, do you believe that that variation or adjustment of CapEx figures will happen this year?

The second question is, regarding the utilization rate forecast that you mentioned earlier for nuclear power plant. Could you give us those figures by quarter additionally?

And the third question is, regarding interest rate, we see that the capitalization rate related costs are a bit higher. So, could you give us the factors or the reasons behind the situation?

(Interpreted). Yes, I'd like to give you the answer regarding your first question about utilization rate for the nuclear power plant. For the first quarter, it was recorded 84.4%. But the figures for the second quarter onward will be higher. Second quarter 87.4%; third quarter 91.4%; fourth quarter 86.8%.

(Interpreted). I'd like to answer your first question. The confusion that we had earlier regarding the capacity of generation facilities was due to a misunderstanding regarding the reflection of the figures regarding those that will be going offline. So the overall plans will continue as was announced, and therefore we do not expect to be any changes or adjustments for CapEx figures.

(Interpreted). Allow me to add one more fact for clarification. Shin-Kori 3 and 4, if you look at the Excel sheet, it is mentioned that they are expected to be completed this year. However, the current situation is that the schedule may be delayed somewhat to the middle of next year.

(spoken in Korean)

(Interpreted). The utilization rate that was mentioned momentarily earlier, they reflect this delay of schedule as well.

(Interpreted). Allow me to answer your third question. On a non-consolidated basis, the interest-rate-capitalization-related portion has been increased from 4.44 to 4.73. And mostly this is due to assets under construction and the increase that we have seen there.

(spoken in Korean)

(Interpreted). The following question is by [Jack Rovelli] from Bloomberg Industry. Please go ahead, sir.

Hi, good afternoon. Thank you very much for taking my question. Just a quick question with regards to debt reduction plans and debt refinancing. What are the plans for this year? Thank you.

(Interpreted). For the year 2014, the amount that will need to be financed, that is to say the portion that we are lacking right now, including KEPCO and six gencos combined together, it is a total of KRW19.1 trillion.

Yes, I would like to answer your question once again regarding the debt reduction plan. For debt reduction, we'll be implementing various efforts including some restructuring efforts for our business, reduction of costs for our Company, and also some sales of assets. So on the management-wide level, these types of efforts will be pursued in order to achieve debt reduction.

Just to clarify the last answer. Does this mean that you may have to forgo some of your overseas investments such as those investments to secure resources, whether it's coal or gas or other -- well, coal, specifically? Or would you have to kind of divest from some of your overseas investments? Thank you.

(Interpreted). For your additional question and comment about our investments overseas regarding coal, well, this is something that is being reviewed under the overall review for our business efficiency, and we don't have any specific plans to announce as of yet. This will be looked into in a more wide manner, looking at the overall trends of resource prices on the global market, and it will be subject for further review.

Thank you very much. Very clear. Thank you.

(Interpreted). The following question is by [Pae Dong Win] from UBS Securities. Please go ahead, sir.

(Interpreted). Yes, I would like to ask two simple questions. The first one is regarding the effective tax rate for this year. What is your expectation for that?

The second question is, can you give us an update on the sales effort of the headquarter real estate?

(Interpreted). For your first question regarding the effective tax rate, we will need to get back to you with the specific figures. Thank you.

(Interpreted). Regarding your second question about the sales effort of the land and real estate for headquarters, well, this is something that we are reviewing on a multifaceted level. Currently we are undergoing various efforts including reduction of debt for public companies in Korea, and there are many government policies as well as review of related regulations and laws underway. So, all of these efforts are being pursued in order to identify the most appropriate direction forward.

(Interpreted). Additionally, I would like to ask if there is any specific timeline that you have set for sales?

(Interpreted). The schedule related to sales of KEPCO real estate has been set by the government and the deadline is by 2015.

(Interpreted). We will take one more question due to time constraints.

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

(Interpreted). Yes, I would like to ask three questions, and I would like to ask that you answer them to the extent that is possible from your perspective.

First one is that, I have visited the Global Energy Expo in Houston last week, and I see that the views that have been expressed by entities in Korea seem to be quite different from what the global views were. Even coal and LNG related perspectives and views were very different I thought. So in that perspective, what I would like to ask is the basic supply and demand plan that you set into place every two years or so. Taking that into consideration, do you have any expected plans for increasing your facilities or forecast regarding prices and costs that you could share with us?

Secondly, regarding the global trend that I mentioned earlier, it may be possible, if I have understood the global trend correctly, that KEPCO will be faced with more profit than in the past. If that is the case, could you tell us, in the last 20 years, has there been cases where KEPCO actually lowered your tariff when you had more profit than was expected?

And the third question is regarding the dividend -- investment from income of affiliates. Could you elaborate on that increased portion?

(Interpreted). Yes. We would like to answer the first question that you had, first for coal and then next for LNG.

For coal prices, compared to 2013, this year Newcastle Index is a little bit lower. However, for the gencos related to 2014 as a whole compared to 2013 as a whole, we believe that the price will be relatively remaining at the similar level.

For LNG, our LNG prices are mostly dependent on the price that KOGAS introduces LNG at. And for Russian Sakhalin gas, we expect that for this year, KOGAS is expecting a bit of an increase, and that will probably be reflected for us as well. However, on the long haul, due to shale gas, we believe that the energy prices would probably fall rather than jump.

Yes, I'd like to answer your second question regarding previous adjustment cases of tariff. Looking at the period of 1982 to 2013, during that entire period there has been a total of 30 adjustments made for our tariffs. Among them there have been 17 tariff hikes and 11 tariff lowering types of adjustments. The two additional that remain were mostly same price levels but minor adjustments between the categories.

(Interpreted). Yes, I'd like to answer your third question regarding the interest coming from affiliate companies. The biggest portion was due to KOGAS because KOGAS recorded KRW91.1b, and some companies in the Philippines and China also recorded some net profit, which contributed to the situation.

(Interpreted). All right. We will conclude this conference call. Once again, thanks for joining us today. Thank you. Bye.

Editor:  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.