Bon-Woo Koo - VP and Treasurer Changyoung Ji - Senior IR Manager

Pierre Lau - Citibank Yun Hee-do - Korea Investment Securities Joseph Jacobelli - Bloomberg Intelligence Sujin Bum - Samsung Securities Bon-Woo Koo: Good afternoon. This is Bon-Woo Koo, 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 fourth 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 consolidated 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 fourth quarter of 2014, first in Korean and repeated in English.

Now we will provide the overview in English, starting with operating income. In the fourth quarter of 2014, KEPCO recorded a net operating income of KRW5.78 trillion. Taking a closer look, operating revenues increased 6.4% to KRW57.47 trillion. This was attributable mainly to 4.9% increase in power sales revenue, totaling in KRW52.62 trillion and 34.7% increase in revenue from the overseas business amounting to KRW3.22 trillion. Moving on to main operating costs, cost of goods sold, SG&A expenses decreased 1.6% to KRW61.68 trillion. Fuel cost decreased 14.9% to KRW20.59 trillion. Power generation affected by the lower power demand decreased 1.4% and unit cost of fuel declined by 13.7%. Meanwhile, purchased power cost increased 11.2% to KRW12.60 trillion. Unit cost of purchase power decreased 5.6% because of the decrease of S&P caused by the increase of new highly efficient top line and purchase volume increased KRW16.1 trillion. Depreciation cost rose 5.3% to KRW6.09 trillion, mainly due to the newly constructed power substations and new facility additions by power plants. Now let me explain KEPCO’s non-operating segment. Net financial loss was KRW2.25 trillion in the fourth quarter of 2014, which was improved by KRW47 billion. As a result of the foregoing, we recorded a consolidated net income of KRW2.79 trillion in the fourth quarter of 2014. This concludes the overview of KEPCO earnings results for the fourth quarter of 2014. Now let me move on to the Q&A session. Q&A session will be hosted by Mr. Bon-Woo Koo. A - Bon-Woo Koo: This is Bon-Woo Koo, 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 Q&As will be interpreted. Please make sure your questions and answers are brief and clear.

Now Q&A session will begin. (Operator Instructions). The first question will be given by Mr. Pierre Lau from Citibank. Please go ahead, sir.

I have three regarding your 2014 results. The first one is regarding your unit LNG cost, in the fourth quarter it is up 7.3% year-on-year. So I would like to know why your unit LNG cost increased in the fourth quarter year-on-year despite of the lower oil prices. And also what is your guidance for your unit LNG cost in 2015? That's question number one. Question number two is what is your guidance for your unit coal cost in 2015? And question number three is what is your expected generation mix for coal and nuclear in 2015? These two kinds of fuel generate 35% and 46% of your total generation in 2014 respectively. And also will you buy net IPP next year -- this year in 2015 given that you have more capacity now. Bon-Woo Koo: To answer your first question first we have witnessed the drop in the oil price starting in September and October last year and there is inevitably time lag between oil and LNG price decrease and we expect the time lag to be about four to six months' time. Having said that, we saw the oil price drop in the fourth quarter or starting in October last year and we expected to see that impact on LNG unit price in early 2015. On our guidance for the fuel unit cost for 2015 is as following. For coal, we anticipate the coal price should be KRW120,000 per ton and for LNG, we expect the LNG price to be KRW820,000 per ton. And on the fuel mix to answer your third question, on the fuel mix we believe the LNG to be 10% of overall fuel mix and quarter reporting 9% and nuclear to be 38%.

Okay if LNG 10%, nuclear 48% and coal how many percent? Bon-Woo Koo: Coal 49%, nuclear 38% and LNG 10%.

And lastly we will finance output from IPP in 2015. Bon-Woo Koo: To answer your question on the energy mix if you look at the IPP proportion, the current number for IPP from 2014 was 14% of overall volume. But in 2015 we expect the number to go up to 19%. And the reason for that is that we are going to increase the co-generation for the high efficient power generation in 2015. Did that answer your question.

Yes thank you.

Currently four participants are waiting with your question. The following question is by Mr. Hee-do Yun from Korea Investment Securities. Please go ahead sir. Hee-do Yun: Thank you for giving me the opportunity to ask the question. I have two questions first it seems that your operating profit performance is slightly less than we have expected. We believe the reason for that is because executed about KRW350 billion to 3 billion [ph] nuclear waste of Korea Hydro and Nuclear Power Generation Corp. Could you elaborate on what that is really and the back ground of it? Is it going to be a one-time expense for KEPCO? We understand that we launched a project to have a treatment facility for the nuclear waste in [indiscernible], we spent KRW300 billion as a one-time investment. Is this investment by KHNP a similar type of investment or a different one? That’s question number one. The second question is on the dividend payout ratio. Coal gas has just announced that their dividend payout would be about 25%, which is lower than what market has expected. How is KEPCO doing in terms of your discussion with the government in determining your dividend payout ratio? Bon-Woo Koo: So clearly our operating profit is lower by about KRW300 billion than market expectation and that is because we have allocated additional cost for trading the waste of nuclear power plant which was ordered by the government. All of that expense was executed in fourth quarter alone and we didn’t have an expense allocated for the first quarter to third quarter of this year. So hence the accumulated expense that we have set aside for this quarter was KRW320 billion and which has resulted in KRW300 billion GAAP in our expected operating profit. This is one-time expense that we have accumulated and moving forward we'll be accumulating about KRW50 billion per year moving forward under this same expense category. This is however different from the liability for commissioning the nuclear power plant cost, which is a separate line item on our accounting book. To answer your second question, we're currently in discussion with the government in terms of determining our dividend payout ratio. Current estimation is that our dividend payout ratio will be higher than previous year and we're discussing with the government to have this impaired ratio higher than 25%. Follow up question for the first question is that will the KRW320 billion for this fourth quarter this year will no longer take place in the subsequent year and going forward there will be only KRW50 billion expense allocated for this category? Is that correct? And what was the reason behind accumulating KRW350 billion this year? And the answer is because we are adding incremental cost to that waste treatment cost because we want to support the region that is going to set up this facility for shipping nuclear waste. And as part of that we have increased the budget in the fourth quarter of this year to support those regions.

The following question is by Mr. Shin Ji Yoon from KTB Investment Securities. Please go ahead sir.

I have two questions. First is on the dividend payout ratio. You have stated that you are going to discuss with the government to maintain about 25% dividend payout ratio. Is that going to consider the consolidated balance sheet fees? That's question number one. Second question is on your generation mix. You said that KEPCO will have a percent LNG and its lower than previous year and IPP ratio will be 19%, which is higher than year-on-year. Is those numbers correct? I would like to verify those numbers. Having said that in 2015, it seems that the base load will be also coming from the new nuclear power plant as well as in the core power plant. What are the neutralization assumptions you're taking into for 2015 in terms of overall coal generated power and nuclear generated power? Bon-Woo Koo: To answer your first question on dividend payout ratio it will be based on the individual Company, not consolidated leases. And because of that the dividend payout will be slightly lower or decreased than previous payout ratio which is before we were introducing the KIFRS in our accounting system. That's why we're discussing with the government to maintain 25% or above at the minimum. However the details haven’t been determined and we will let the market know as soon as something has been decided. To answer your second question on the generation mix where the LNG proportion will slightly go down and IPP will go up to 19%, we will verify those numbers for you and get back to you with the accurate number later on and communicate back to you on that. On the utilization rate for different energy mix is that for nuclear it will be about the similar level with 2014 at 84.4%. For coal however there will be slight decrease from 2014 to 93.2%.

On the question on the coal and the nuclear energy mix, so there won’t be any additional increase for coal power plant but for nuclear power plant are we going to consider both Shin Wolsong and Shin Kori or just one of them? Bon-Woo Koo: To answer that question in 2015 we said the utilization rate will be 84.4% and that number considers both Shin Wolsong No. 2 and Shin Kori No. 3 facility.

The following question is by Joseph Jacobelli from Bloomberg Intelligence. Please go ahead sir.

I wanted some clarity with regards to power plants commissioning schedule in 2015 and 2016, including nuclear and another other coal or gas plants that you maybe commissioning during the period. And the second question is with regards to the debt management. How are the other assets sales going and the overall debt management going? Bon-Woo Koo: To answer your first question, for nuclear power plant we are going to add two nuclear power plant in the second half of 2015 which is Shin Wolsong No. 2 and Shin Kori No. 3 power plant. As for coal power plant in 2015 we expect to have 2 power plant within 1000 megawatt capacity by end of the year and in 2016 we expect to add six more on coal powered power plant which will be providing capacity of 8000 megawatts in total. On our equity sales plan, we plan to sell the equity of our KEPCO KPS equity, which we own about 3% and for KEPCO EMC company we plan to sell our 50.4% of the equity that we own and for KEPCO industry development that we own, we planned to sell our 29% of our equity that we own, which is all the equity that we own for that subsidiary.

If I may just a supplement question with regards to the first answer. What about outside Korea? Any commissioning of invested power plants outside Korea please? Thank you. Bon-Woo Koo: The new power plant for the overseas office, we're currently pursuing the project at the moment, but nothing has been determined looking here at the moment.

The following question is by Mr. [indiscernible] Private Investor. Please go ahead sir.

Your overseas revenue has gone up by 6% - 7%. What has driven this increase in revenue coming from overseas margin? Could you share with us your revenue trend in overseas market in the last five years and what is your expectation for just here? Bon-Woo Koo: To answer your question on the overseas business, most of our revenue generated in overseas market is coming from our projects in UAE which has contributed by KRW780 billion this year in revenue. There are other revenues coming in from our outsourcing work from transmission and distribution projects, as well as pipe construction projects. But most of our revenue from overseas market is coming from our UAE project. To elaborate on our overseas business performance, we are seeing our business grow in the Philippines. Also in the second half of last year we have seen the commercial operation of our Mexican power plant in Norte. That has also contributed in our increased revenue. We're also seeing revenue growth in our China project as well. Also we had a commercial operation for the Amman Asia project in April of 2014. To share with you the profitability level coming from our overseas business is that for our hydraulic and thermal power energy, we're seeing the profitability compared to our revenue at 15% to 20%.

Could share with us the trend for the last five years in terms of your overseas revenue and your expectation for this year? Bon-Woo Koo: The numbers that we have shared with you at the moment is our historical revenue for the last three years. We don't have the numbers for the past years. We will be more than happy to share that with you when we have those numbers. To give you a brief trend on our five year performance for the overseas business is that our revenue in 2011 for the overseas revenue was KRW1.7 trillion whereas this it's KRW3.2 trillion. In terms of revenue mix overseas business was 3.9% in 2011 but now it's 5.6% which is based on a consolidated basis.

And what is your expectation for this year? Bon-Woo Koo: Let us follow up with you on that question. Currently we do not have the numbers for this year's items.

The following question is by Ms. Sujin Bum from Samsung Securities. Please go ahead madam.

First question is on the operating expense for the UAE project. Can you share with us the operating expense? And second question, although it could be difficult for you to share the information regarding this at the moment, but could you if possible share with us your timeline for adjusting tariff this year? Is there any information that you can share with us at this moment? Next question is on the CapEx, it means that there are additional CapEx set aside for the nuclear and coal-fired power plant facility enhancement in 2015 and that's a significant amount. What is the nature of this CapEx this year? Bon-Woo Koo: To answer your first question on the cost of revenue for UAE project, we have seen the cost of revenue go up by -- cost of revenue to be KRW2.2617 trillion for this year because we have seen significant progress into the project. To answer your second question on the tariff adjustment discussion with the government, we see that market has had a significant interest in the tax adjustment since the old price of trench [ph] starting in the fourth quarter in 2014. Although the fuel cost decrease is a factor that [indiscernible] have significantly, we're also seeing some of the factors that drive up tariff such as the Transmission Act as well as the tax rate which is part of the policy cost that is raising tariff. We're going to submit report on tariff to the government in June of this year and the tariff adjustment will take place afterwards. To answer your question on the CapEx on the power plant is for Thermal power plant, we plan to spend KRW3.3 trillion in construction of thermal power plant and for new renewable energy we have allocated KRW820 billion in CapEx for the new renewable energy. And in refining the power plant facility for thermal power plant the CapEx amounted to KRW1.4 trillion for this year. Just for your information when it comes to our power plant construction if you consider the overall approval process that we have to go through with the government for power plant construction, we assume that about 80% of the CapEx allocated with the project will be executed.

The following question is by Mr. [indiscernible] from Shinhan Finance Investment. Please go ahead sir.

First I have question on the CapEx following up the previous question. It seems that there is significant purchase set aside for the refinement of nuclear power plant facility and that number increases this year. Do you believe that the nuclear power plant utilization rate of 88% is feasible this year with such a large investment in enhancing these nuclear power plant? Because if you look at previous year, without such a huge CapEx being executed, we only saw 85% of utilization rate for the nuclear power plant. Also last year it seems that you're setting a sight KRW2 trillion for additional power plant set up. Could you elaborate on those numbers? And third question is on the traffic adjustment. You're going to be reporting on the total cost of power supply this year and will that include the investment coverage for the subsidiary as well? If not could you be able to share that with us? Bon-Woo Koo: To answer your first question, on the nuclear power plant facility enhancement, the number does increase by about two fold this year compared to 2014. But the utilization rate is not 88%. It's actually 84.8%. On the reason why we're seeing the increase in CapEx for nuclear power plant is because to give you a high level answer that we are seeing enhanced criteria coming from the government side on the safety of these nuclear power plant which is leading to a higher quality requirement. We would like to share with you the details of that in a separate session. On the 2015 profit guidance, if we exclude the profit coming in from the headquarter sales in last year, we anticipate the number to be at similar level with 2007 at about KRW2 trillion. On our total cost of energy supply calculation, that is actually based off of our regulations set off Ministry of Trade Industry and Energy and KEPCO will be listed as an independent separate entity. Therefore we will not be considering the cost and CapEx on five GENCOs or our subsidiaries. However there our numbers will be reflected in terms of purchased energy cost only.

It's not on a consolidated basis. It will be very difficult for us to anticipate a fair rate of return on your investment. Having said that is there any possibility that you'll be willing to share with us this separate data for all the GENCOs? Bon-Woo Koo: To answer your question the cost and the rate of return for our GENCOs is not directly reflected on the cash calculation of KEPCO. That is done independently by KEPCO. However the adjustment coefficient from the power market will be reflected.

The following question is by [indiscernible] from UBS. Please go ahead, sir.

First question is on your power demand or cash flow 2015. It seems that your CapEx is less than about KRW800 billion compared to last year. But having seen the enhanced fixed requirement on your facility and new project that is planned in your Company, we see about KRW2 trillion increases in those investment. So could you elaborate on that and is it safe to understand that the investment increase CapEx from KEPCO is offset by decreasing CapEx in the subsidiaries or GENCOs. Second question is on the utilization rate or your coal fired power plant. I would like to clarify the utilization rate. In 2014 you said 88% and in 2015 you anticipate the number to go up to 93.2%. Is that right? Bon-Woo Koo: On our 2015 guideline on the power sales is that we see a 2.3% increase year-on-year in terms of power sales and our assumptions for GDP growth is at 3.7%. With the revenue increase at 2.3% we believe the profit to increase by 3.2% year-on-year. On your question on the CapEx, earlier this year yes, we did announce to the media that there will be KRW2 trillion in increase in our CapEx on the facilities. But however the total CapEx so much goes down when we consider the long term transmission and distribution investment cost on a year-on-year basis. When you translate that on our account that will actually decrease the overall CapEx investment and you're right intense of our subsidiaries' CapEx decrease offsetting our increase in CapEx by KEPCO. On your question on the coal-fired power plant utilization the rate was 88% in 2014. However we do not have the actual forecast number for 2015. So we use the five year average for the utilization rate for the coal-fired power plant. Our generation mix in 2015 is going to be 49%, which is an increase from 46%. So we also assume that the utilization rate will therefore increase.

Another follow up question on the dividend payout ratio. You said it's going to be over on 25%. It seems up until 2007 your dividend payout was up to 30%. Is it safe for us to assume that level this year? But having had the consolidated basis, is it going to be much higher than the 25% level? Bon-Woo Koo: The dividend payout ratio target for the government this year is 25%. However KEPCO is targeting 30% in discussing with the government. So we will do our best to have our dividend payout ratio at 30% level. Just to add to that we are aiming for 30% ex minimum, however currently we haven’t fully discussed this with the government yet. So we will let the market know as soon as something becomes concrete. Because we are approaching the end of our allocated time. We will accommodate just one last question.

Currently there are no participants to question. (Operator Instructions). Last question will be given by Pierre Lau from Citigroup. Please go ahead sir.

I have two follow up questions. The first one is your early guidance for coal cost in 2015 will be KRW121,000 per ton. But I find this number even higher than your actual coal cost KRW104,000 per ton. So why the guidance for coal cost unit cost in 2015 higher than the actual number in fourth quarter last year? And the second question is you just mentioned that you will submit your tariff review proposal to the government in June 2015. Why it takes so much time to submit only in June? Bon-Woo Koo: To answer your question on the coal unit price, the last year the unit cost price for coal has dropped to a level that is very close to the production cost level. So there is actually no room for the coal price to drop further even if we see the huge drop in the oil price. That is why our guideline for 2015 is slightly above the unit cost of last year. And on your second question on why the submission to the government on the total cost of energy supply is scheduled in June, it is because the cost, although it is based on our budget base, we also have to reflect the previous year's financial performance into those numbers. So once that financial statement is settled in March and finalized, then we need to do a separate accounting for calculating the tariff calculation, which will be done as a separate effort. Once that is done, we have to go through another auditing process and because of the series of administration process that we have to go through, is it only scheduled to be done in June.

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