Korea Electric Power Corp (KEP) 2014 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 2014 second quarter earnings results by KEPCO. (Operator instructions).

Now we shall commence the presentation on the fiscal year 2014 second-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 first half 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 consolidated basis in accordance with K-IFRS. 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 include certain risks and uncertainties. Now Senior IR Manager Mr. Changyoung Ji will begin with an overview of earnings results of the first half of 2014, first in Korean and repeated in English.

(Interpreted) Now we will provide you with the English, starting with operating income.

In the first half of 2014, KEPCO reported a net operating income of KRW2.06 trillion. Taking a closer look, operating revenues increased 8.6%, to KRW27.66 trillion. This was attributable mainly to 6.9% increase in power sales revenue following in KRW25.37 trillion and 41% -- 22% increase in revenue from the overseas business amounting to KRW1.5 trillion.

Moving on to the main operating costs, SG&A expense decreased 1.2% to KRW25.61 trillion. Fuel costs decreased 11.7% to KRW10.77 trillion. Power generation, affected by the low power demand, decreased 0.7% and unit cost of fuel declined by 11.1%.

Meanwhile, purchased power cost increased 7.2%, to KRW5.98 trillion. Unit cost of purchase decreased 3.9% because of the decrease of unit cost of oil and purchase volume increased 8.5%.

Depreciation costs rose 4.2% to KRW30.37 trillion, mainly due to the newly-constructed substations and new facility additions by power plant.

Now let me explain KEPCO's non-operating segment.

Net financial loss was KRW1.13 trillion in the first half of 2014, which was improved by KRW228b. This was mainly due to the Korean won appreciation against US dollars, resulting in the decrease of FX translation loss.

As a result of the foregoing, we have reported a consolidated net income of KRW753b in the first half of 2014.

This concludes the overview of KEPCO's earnings results for the first half of 2014.

Now let me move on to 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 higher 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 interpreted. Please make sure your questions and answers are brief and clear. Please begin.

(Operator Instructions). (Interpreted). Pierre Lau, Citigroup.

Hi. Good afternoon, management. Thanks for your time hosting this conference call. I'm Pierre Lau from Citigroup. I have four questions.

The first one is that in your first-half 2014 result, the item called other operating expenses increased 16% year on year in the first half to KRW4.18 trillion. It has increased a lot. And also, if you look at second quarter, that item increased by 35% year on year to KRW2.4 trillion. So what was the key reasons for the sharp increase in other operating expenses for your Company? This is question one.

Question two is what is your target generation mix in 2014, including -- how many percent from coal, percentage from nuclear and percentage from LNG, etc.?

The third question is about your coal cost. In the second quarter your coal cost was average KRW91,600 per tonne. So what is your forecast for the third quarter as we have the coal import tax effective from early July?

And the last question is how much money that you plan to raise from disposal of non-core asset in 2014 and, in first half, how much has been raised so far? Thank you.

(Interpreted). Allow me to answer your first question regarding the other operating expenses that was the main point of your first question. The majority of that was attributed to the expenses related to facilities and materials, which amounted KRW455b, a 6.7% ratio. And outside of that, the additional expenses that were incurred were related to the EPT business and other Group Company business-related expenses.

Now I'd like to go on to answering your second question regarding the generation mix for the year 2014. Our estimate and expectations for the 2014 generation mix are as follows. LNG 16%, coal 46%, nuclear 36%, and the remaining 3% will be attributed to oil and hydro.

Regarding your third question about coal, for the first quarter the coal cost per tonne was KRW90,000, for the second quarter KRW87,000 per tonne and for the third and fourth quarter estimates we expect it to be at around KRW107,000.

Regarding your fourth question that is related asset disposal and how much finance we expect to raise with the disposal of the assets, well, for this year we expect to dispose of 12% of our shares in KPS and 19.9% of KEPCO E&C. With those two disposals we expect to raise about KRW720b.

Regarding the other affiliate companies, for LG Uplus where we have an investment, we expect to dispose 8.8% of our shares there raising KRW390b. And, for KSPC, 29% asset disposal is expected for this year amounting to KRW37.8b.

Okay. Thanks for your reply. For the first question you said most of the increase of that other operating expenses, including about of KRW455b from some facility. Could you be more specific about what kind of facility for that, and whether we should expect similar expenses in second half this year?

(Interpreted). Allow me to elaborate further on the answer to the first question. The initial answer given about an increase compared to the previous year of KRW455b was mostly related to the UAE business-related material purchasing which amounted to KRW1.129b. And in the second half of this year, because the UAE-related operations -- I'm sorry -- the UAE-related construction will proceed and progress even further, so we expect these related costs to increase even further during the second half of this year.

Outside of that, we have additional expenses, including the tax-related areas and welfare, cost-related areas and RPS and all of this will amount to KRW2.4 trillion for the second half of this year.

Okay. Thank you very much.

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

(Interpreted). Yes, I have three questions. First of all regarding the purchase power. I think that the volume purchased from LNG facilities was decreased by 28% and from PPAs also it was decreased by 27% versus purchasing from market IPPs. That portion grew by 22%. So I would like to ask what was the reason behind that. Is it due to the fact that the newer market IPP facilities are of high-efficiency type? Is that the main reason, or is it because of more aggressive utilization rate of the IPPs in the beginning of introducing these newer facilities? That is my first question.

Second question is related to the utilization rate of nuclear power plants. It seemed quite positive until the second quarter. But I'd like to ask about what you expect for the third quarter and beyond.

Compared to the initial phase of 2014, when the utilization rate seemed to be at around 90%, I think for the second half the expectations are a bit lower, 3 to 4 percentage points lower. So I'd like to ask -- what is the reason behind that difference?

The third question that I have is the equity income and loss of affiliates. Could you give me an update on what you foresee and any increases or differences out there?

(Interpreted). I'd like to first of all answer the first question. Yes, as you have rightly noted, the portion from PPAs has decreased and that is mostly due to the introduction of high-efficiency facilities by IPPs.

SMP area, the SMP has actually fallen. For the PPAs, the LNG price has increased but the actual generation volume has decreased.

(Interpreted). Allow me to answer your second question regarding the generation from nuclear power plants. Currently, the Nuclear Safety Committee is going through strengthened reviews and audit processes and, therefore, the plant maintenance periods have been extended more than the past.

For example, currently Hanul Unit 3, which was supposed to enter into activity from end of July, that portion has been actually delayed until the month of October. So, due to those situations, the utilization rate of the NPPs has been lower than previously.

(Interpreted). Yes, I'd like to answer the third question regarding the equity income of affiliates. This was mostly attributable to the income of affiliates that are overseas. For example, KSPC and NPP of the Philippines, they had an increase of KRW13.1b, and also our affiliate company in China raised KRW23b.

(Interpreted). I'd like to add an additional question, regarding the first one that I had asked earlier. So according to the answer that you have given, it is expected that more additional high-efficiency facilities of the market IPPs will be increasing. Does that mean that in the foreseeable future you expect that the portion of LNG energy facilities in KEPCO will continue to decrease?

(Interpreted). Allow me to answer that question. First of all, to begin with, due to the characteristics of generation facilities, as the facilities get older their efficiencies are bound to get lower. So that's one main context to take into consideration as a background.

However, looking ahead into the future, whether it be from the IPPs or from the KEPCO gencos, if the facilities are older then of course they will be lower in our priority in terms of outsourcing.

However, recently, if you look at the LNG-based facilities, even if they are from the private sector, they tend to come in as a joint venture with our genco. So it is very difficult to give you just a flat definitive answer in one way or another.

(Interpreted). Shin Ji Yoon, KTB Securities.

(Interpreted). Yes, I have three questions. The first two will be related to some of the previous questions. The first question is regarding the expenses incurred in the UAE business. If you look at the figures for the first half, I think that amounts to about KRW1.1 trillion or above that, but revenues coming in from the UAE business is also approximately similar in size. So I would like to ask how much exactly was the revenue coming in from the UAE business. And I would assume that it is more or less a breakeven point, or a little bit of a minor loss. But, in the future as well, I would like to identify how much would be the margin in terms of the UAE businesses -- business going on forward. So, if you could give us some guidance as to what level you see as being the appropriate level of revenue and cost for the UAE business, I believe that would be helpful.

Secondly, I would like to ask a question about the NPP utilization rate. You have provided previously guidances by quarter. But could you give me some more exact figures for what you see for NPP utilization rate in the third quarter and the fourth quarter?

The third question is related to the foreign currency -- ForEx-related gains and losses as well as derivative-related gains and losses. We -- it seems that looking at the figures for the first half they come to almost zero in terms of the net amount. Does this include the hedging results coming from the FX exchange rate calculations that you have already taken into consideration within the hedging?

(Interpreted). Allow me to answer your first question regarding the UAE businesses' revenue. For the first half the revenue was KRW1.137 trillion, which is a KRW395b increase versus the same period of the previous year.

We are able to disclose the expenses and the revenue figures. However, for the margin it would be quite difficult for us to disclose that figure specifically due to the fact that this will have an impact or an influence on other nuclear power facility overseas businesses that we are pursuing. So I would like to ask you kindly understand that we are not able to disclose the margins.

(Interpreted). Yes, I'd like to go on to your second question. If you remember the answer to a previous question that I gave, and especially about Hanul Unit 3 and the situation there, this situation has brought about the fact that, for the third quarter, the utilization rate for the nuclear power side will be a bit lower than originally forecasted.

The second-half average that we forecast as of now is 84% to 80% -- 88% -- between 84% and 88%.

(Interpreted). Regarding your third question, the foreign currency denominated borrowings that we have were 87% of that portion has actually been hedged. So the situation that you mentioned, about the size of the FX income loss, and derivatives income loss, that doesn't necessarily have to be the same size. However, it just happened to be coincidental this time around that the size was similar.

(Interpreted). Heedo Yun, Korea Investment Securities.

(Spoken in Korean).

(Interpreted). Yes, there are two questions. Allow me to interpret the two questions initially and then I will interpret the answer to the first question.

The first question was regarding the PPA side. The gentleman with the question had explained that it was difficult to understand according to his current understanding of the agreements with PPA because the PPAs that already have that contract with KEPCO have the right to sell what they have generated and KEPCO has the duty to purchase what has been generated by the PPA companies. But his question was that it was difficult to understand why there was a 27% decrease in the first half for the PPA portion.

The answer to that question was even among the PPA companies there has been new facilities that have come online that have a higher level of efficiency, which means that the existing older facility portion has been decreased. And, specifically, some PPA companies, namely Parco Energy and GS Tower, their utilization rate of facilities has been decreased in the same period and that what has attributed to that decrease.

Allow me to interpret the second question that was given. For the first half on an accumulative basis if you look at the non-consolidated result, we see that there was a loss of KRW540b, whereas for the consolidated there was a profit of KRW752b. So, from the perspective of making some forecast and expectations about dividend, of course, in the third quarter and the fourth quarter, the gap between these two figures will probably be narrower. But what kind of guidance can you provide in terms of expectations for dividends?

(Interpreted). Yes. I would like to answer your second question regarding the gap or the difference between the consolidated and the non-consolidated earnings results. You have mentioned the gap and that is true. But for the first half of this year, there was actually amongst the gencos, KHNP and also Korea Southeast Tower, these two companies had very good earnings for the quarter. They recorded, I believe KRW1 trillion and KRW300b, respectively. So, those two companies recorded earnings of KRW1.3 trillion and for the other gencos in total, they recorded about KRW120b. So, that portion needs to be taken into consideration and I believe that for the dividends as well, that portion should be reflected.

For the second quarter, another thing to take into consideration is the electricity tariff or the price. There is a difference in the unit price of electricity depending on the season. There may be up to 30% to 40% of a difference, depending on which season, especially if you look at the spring time versus the winter period peak team they may be up to twice or three times the price different.

So, in the third quarter, I believe that due to these elements, the gap between non-consolidated and consolidated -- I mean results will be narrower than what we have seen. And in the consolidated side for KHNP especially Shin Kori 1 and 2 and Shin Wolsong unit 1 they have gone into full operation for a while now, so I believe that those have had an influence on the earnings result.

(Interpreted). Regarding your question about dividend related guidelines, I would like to answer that question. Last year, our dividend ratio was 23.5%. For this year, it is true that we expect that our earnings results to be very much improved. And taking into consideration the level of dividends that we had maintained prior to the 2008 timeline which was at around 30%, it may seem like we can increase this.

However, the government policy has a lot to do with what will be decided. The government policy right now, as you have probably read in stories and heard on the news has a policy of increasing the dividend, the ratio. But the ultimate decision will have to be done after we have discussions with the government because although it is forecasted that our earnings results will be more positive this year, the actual decision will have to be made by the government, depending on what trends we see throughout the year about our earnings result.

(Interpreted). Josh Bae, UBS.

Yes. Hi. Thank you for the opportunity. I have two questions. First is on the three nuclear plants that are scheduled to start operation -- the Sing Wolsong number 2 and Shin Kori number 3 and 4. I think you mentioned last time that these plants would start operation sometime next year. If you could please give us an update on the progress and your expectation on when the operations will start?

The second question is on your effective tax rate. For the first half it seems the effective tax rate was over 40%. And when looking at just the second quarter it was above 50%. If you could let us know what the reason was for this high tax rate and also tax rate you expect for the full year. Thank you.

(Interpreted). Regarding your first question for the progress relating to the nuclear power plants that will enter into operation, for Shin Wolsong 2, the situation is that the regulatory body has still not made a definite decision on the policy regarding the trials and tests for the companies that are coming in and that has been delaying the overall project.

For Shin Kori 3 and 4, regarding the replacement of cable project that is going on right now, that period has also been postponed compared to the original plan. So, the permit has -- initially been expecting that the power plants will go into operation after being construct -- after the construction is completed in August or September of 2014. However, as of now, that timeline has been delayed so we do not have a definitive expectation of when the operation will begin for those power plants. We expect it to be after 2015 or somewhere in 2016.

(Interpreted). So, I would like to answer your second question regarding the tax rate specifically for the consolidated earnings result. In this case, it includes the tax rate not only for KEPCO itself but also for the gencos and the subsidiaries of the gencos as well as the companies that our Company has made investment into. And therefore, combined together, that has resulted in a high level of tax rate.

Does that answer your questions?

Yes. What effective tax rate should we expect for the full year?

(Interpreted). I think it is difficult for us to give our estimates about the effective tax rate yet. I think we still have to keep an eye on the trends.

And can I just confirm your answer on the first question? So, for Shin Wolsong number 2 and Shin Kori number 3 and 4, we should expect all three to start operations in mid-2015 or later. Is that correct?

(Interpreted). Yes. Allow me to answer that question for Shin Wolsong unit 2 we expect operations for Shin Wolsong 2.

Yes, allow me to answer that question once again. For Shin Wolsong 2, the timeline that we expect for Shin Wolsong 2 to go into operation will be after February of 2015 because still it is expect -- it is waiting for the permit for operation.

Does that answer your question, Mr. Bae?

Yes. Thank you.

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

(Interpreted). Yes. I have two questions. The first one is the generation from coal for the second half seems to be quite low. Could you give us a guideline for the third quarter and fourth quarter coal generation portion? Do you expect that to increase?

And the second question that I have is the estimates of revenues for the first and second quarter has been at a minus. But compared to what we have seen in last year or similar to what we have seen in last year, do you expect it to turn around to a plus from the third quarter onwards?

(Interpreted). Yes. Allow me to answer your first question regarding the power plants operated with coal. The utilization rate for the first quarter was 95.4% and for the second quarter was 85.5%. Therefore, the CF for first half of this year was 90.5%. That was the utilization rate.

Of course, the coal price level seems to be stabilizing on a lower trend. However, due to the increased utilization rate of nuclear power plants and the proportion that it takes up means that the other proportion is coming from oil, coal and LNG are decreasing. So, although it is difficult for us to give you an exact figure of estimates for the second half, it is possible that that will decrease in the second half.

(Interpreted). The second question was repeated once again. The second question was if you look at the revenue portion, especially for the electricity sale portion, there is the additional or other revenue. And quarter by quarter that portion seems to fluctuate more or less. In previous years, we have seen how, in the first half it recorded a minus. But in the second half it recorded a plus and that tended to compensate for the sales side in previous years. So what my question was, was do you expect similar things to happen for second half of 2014?

(Interpreted). Concerning your second question, we not have any forecast for the second half as of yet. If you would allow, we would like to follow up with you later after looking into it further.

(Interpreted). And if I may add on for your first question -- or the answer to your first question, related to your answer then does this mean that the coal generation side will decrease even further in the second half?

(Interpreted). Yes, allow me to answer that question. Regarding the coal generation facilities, last year the utilization rate for coal facilities was higher than the usual due to the specific supply and demand situation. This year we have also had the new facilities -- new coal-based facilities coming online and there we have seen some overall -- overhaul occurring more than what we had expected. So that may be a reason behind the figure that we have seen in the first half.

For the year-wide basis, for 2014, we believe that the coal facilities utilization rate will be more similar to 2012 figures rather than 2013 figures. In 2012, the coal generation facilities reported utilization rate of 92.6%. So this year, we expect it to be 92% to 95%.

(Interpreted). Tae Hung San, Chemical Energy Investment Advisory Group.

(Interpreted). Yes. I have two questions. The first one is related to tariff increases and the second is related to what you forecast for earnings results for next year.

The first question, if I may elaborate further, do you believe that increase or hikes of tariffs is necessary in order to prevent excessive consumption of electricity energy among the population?

And the second question, if I may elaborate further, do you believe the cost decrease and generation mix -- the current situations will continue to develop so that next year's earnings results will be more positive?

(Interpreted). Regarding your first question about tariff-related forecast, well looking at the second-quarter results, I believe that for this year our KEPCO earnings results for 2014 will be very positive, especially taking consideration the tariff hike that took place in November of last year. We have had not only the actual tariff increase of 3%, we've had additional factors making an influence such as expanding the peak period to include the month of June and also the peak load time has been expanded one hour. So those will also have an influence and that influence will be respected.

Additionally, we have the full operation of nuclear power plants that will have a positive effect on our earnings results as well.

However, there are some elements that we can foresee. For example, the increase of carbon consumption tax, which will be applied from the second half, that will create some tariff hike factors. However, tariff increases are not to be decided by us alone. This has to follow the government policy and, therefore, depending on the second-half results and looking at the overall costs related to our operations, if there is a factor that requires the tariff increase then we will discuss this with the government and follow the government policies regarding that.

And allow me to go on to your second question, which may be linked to my previous answer, and that is regarding our earnings results and what we forecast there. Currently, given the fact that the fuel costs are relatively lower level than previously and being stabilized, especially for coal prices. And additionally, if you consider the fact that the NPPs are being operated fully, this means that we are quite confident that our results will be even more positive in the future.

In addition, the foreign exchange rate with the Korean Won appreciation, this is a favorable situation for us and with newer and nuclear power plants coming online and going into operation from 2015 onward that will have a favorable effect as well. So we believe that after 2015, we'll be able to once again recover the rate of return that was seen prior to 2008.

(Interpreted). Min Ho Hur, Shinhan Financial Investments.

(Interpreted). Yes, I have two questions. First of all, regarding the coal cost. If you look at the third quarter coal cost, in your previous answer you mentioned that that will be at KRW107,000 per ton. And it seems that the consumption test has been reflected into that figure. If that is the case, if what I assume is actually correct, does that mean that the actual purchasing unit price for coal is not much different from the second quarter and third quarter? Could you clarify that?

And the second question is regarding the TNG lines and the work related to those lines. It seems that that is adding some more additional delays. Do you expect that after Shin Kori 3 and 4 go online, those types of TNG issues will not be increasing?

(Interpreted). Regarding the coal cost, for 2014 we already have acquired 96% of the annual required volume for bituminous coal. So that is already more or less acquired. And for the second half of this year, the question that you mentioned about that tax rate has been included in the purchasing cost, well that will be reflected from September onwards so we can assume that it is already reflected in the second-half figures.

(Interpreted). Yes, if I may elaborate further on the answer to that question, the consumption test portion has already been included by the gencos in their price from July. Therefore, on a consolidated basis it is true that they have been reflected from July. However, in terms of fixing the SMP, that timeline was the September that was mentioned earlier.

Regarding your question about the TNG lines, for Shin Kori 3 and 4 we expect the medium construction to go on ahead and therefore, we do not foresee any specific problems with Shin Kori 3 and 4.

However, for the lines related to the metropolitan area, I think there will be possible resolution in terms of how we operate those lines. Currently, KPS as well as some other related institutions are researching those avenues.

(Interpreted). All right. Then we will conclude this conference call. Once again, thank you for your generosity. Thank you and 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.