Korea Electric Power Corp (KEP) 2005 Q2 法說會逐字稿

Morning, good afternoon and good evening, ladies and gentlemen. First of all, thank you for joining this conference call and now we begin the conference of the fiscal year 2005 first half earnings results by KEPCO.

This conference call will commence with a presentation followed by a Q&A session. [OPERATOR INSTRUCTIONS]. Now we shall commence the presentation on the fiscal year 2005 first half earnings results by KEPCO. Please go ahead, sir.

Good afternoon to those of you in Asia, and good morning to all of you in the Far West. This is Eunice Lee, Assistant Manager, and together with me I also have Mr. Changyoung Ji and Mr. T W Huh, Managers in charge of Investor Relations.

Hello everyone. This is Changyoung Ji. On behalf of Korea Electric Power Corporation I would like to thank you for participating in our conference call today to brief you on the financial results of the first half of 2005. Please note that the financial result is called today a preliminary, unaudited, and not reviewed by KEPCO's independent accountants or any other accountants.

The financial data to be discussed today - the financial information - they are made by adjusting for inter-company transactions among KEPCO and its 6 generation subsidiaries only, and to help investment community to better understand KEPCO's financial results after the first 6 months of 2005.

As such, the financial information may not have been prepared according to the general accepted accounting principles of any country and may not necessarily be indicative of the result of operations of KEPCO and its 6 generation subsidiaries as a group. And more importantly, these should not be relied upon or form a basis of entering into any contract for the proposal of buying or selling any securities of KEPCO or any other investment decisions in the stock or securities of KEPCO.

Now Eunice will lead you through [indiscernible] for a few minutes and then we will open up in Q&A session. And the periodic comparisons for the first half of 2005 over the same period of 2004.

The operating revenues were up by 24%. This was mainly because the sales of [indiscernible] electric power, the principal component of our operating revenues, increased by 5.9% to KRW11.7 trillion from KRW11 trillion in 2004. This resulted that due to inter-company transactions [indiscernible] primarily in a 6% increase in sales volume of electricity, which was offset by [indiscernible] of end of March 2004.

The overall increase of sales volume was mainly attributable between 9.3% increase in the commercial sector and 6% increase in the residential sector.

Operating expenses increased by 7.8% to KRW9.7 trillion, as compared to KRW8.9 trillion in 2004. This was mainly due to a 6.4% increase in bill expenses as a result of the increase in unit price of coal, oil and LNG, and the increase in depreciation expenses.

In the first half of 2005, the unit price of coal increased by 8.1%. The unit price of oil increased by 7.4%, and the unit price of LNG increased by 8.5%. However, we decreased consumption of expensive LNG and the total cost of LNG was down by 7.4%.

As for the nuclear consumption, the commercial operation of Ulchin Number 5 and Number 6 contributed to the increase of nuclear plant generation, and the total cost of nuclear increased by 13.3% to KRW238b. A 12.1% increase of depreciation expense was mainly due to the commercial operation of Ulchin Number 5 and 6, yahoo number 1 and 2, and additional changing facilities.

As a result, operating income was slightly increased by 0.4% to KRW2.21 trillion in 2005 as compared to KRW2.2 trillion in 2004.

Non-operating income was up by 6.5% to KRW782b from KRW735b in 2004, mainly due to the increase of other gains such as collective swap translation gains.

The interest expense decreased by 17.3% to KRW310b in 2005, from KRW375b in 2004, because the cost of that was decreased to 4.1%.

The total interest-bearing debt was KRW18.5 trillion and those figures at the first half of 2004 were 5.1% and KRW20.5 trillion respectively.

As a result of the above factors, net income increased by 7.2% to KRW1.57 trillion in 2005 as compared to KRW1.46 trillion in 2004.

This concludes our presentation and now we are open to your questions. Thank you.

[OPERATOR INSTRUCTIONS]. The first question will be by Mr. David Clark from Deutsche AG Hong Kong company. Please go ahead, sir.

Thank you, Eunice, and Mr. Huh and Mr. Ji. I think everybody in this call will probably appreciate an update on the tariff situation, especially given a story on the web this morning regarding the energy minister's comments saying that it's not the right time for a tariff hike.

Well, actually, we have our conference for the first half financial result, so as for the tariff, I will get back to you after this conference call.

So -- Sorry, that wasn't very clear. You said you're not prepared to discuss the tariff during this call?

Yes.

Okay. Understood. Then, in that case, would you just be able to explain to me the first half fuel expense as shown in 2004 in the numbers that were released today - KRW3.6 trillion, which are a little different to the numbers shown in the first half of 2004, when those numbers were actually released, of KRW3.49 trillion. So is there an obvious reason why that's been restated?

Well, actually, when we released our figure in 2004 it was forecast numbers.

Forecast numbers. Okay. So there hasn't been any accounting restatement there that we should be aware of?

No.

Okay. Thank you.

Before persons that are waiting with their questions the following question is by Mr. Edmond Lee from J P Morgan company. Please go ahead, sir.

Next question will be by Mr. Christopher Huang from Morgan Stanley company. Please go ahead.

Hi. I'm afraid I'm going to have to ask another question relating to tariff. I understand you don't want to comment about the tariff hike or decrease, which is the outcome of the rate review, but I also understand that the government is thinking about the rate rebalancing exercise. And considering that KEPCO had a rate rebalancing in each of the last 2 years, we were just wondering if there will be a rate rebalancing some time in the second half? And if so, could you give us some details on when we might expect that news to come out?

Together with tariff rebalancing and tariff adjustments, government -- hope that there are announcements so at this moment we have nothing to say about that. So, as I mentioned earlier, we will get back to that problem after this conference call.

Thank you.

And talking about the question Mr. David asked. The fuel cap in 2004 was slightly changed because there was a current restatement of the [indiscernible] costs.

Next question is by Mr. Edmond Lee from JP Morgan company. Please go ahead.

Yes, I have a few questions. First of all, for first half '05, the average interest rate - I think you mentioned that number but I didn't catch it, so that's the first question.

Then secondly, just wondering whether you have the power generation figure for first half by KEPCO plants, and also power pressures from the non-KEPCO plants?

Okay. We -- as for the interest rate, it was 4.1%.

On our power generation, the coal was 38% and oil was 6%. LNG was 13% and nuclear was 43%.

Yes. How about the total amount of power output generated? Actually, by the way, are you going to send out the full database, as before? In that case, maybe I could --

We will send out those data after this conference.

Okay, okay. That's fine then.

In terms of the cash on hand, would you have that number as well?

At this moment we don't have the balance sheet number, so --

Okay. Thanks a lot.

You're welcome.

Next question is by Mr. Stephen from Goldman Sachs company. Please go ahead, sir.

Yes, I have 3 questions. Firstly, could you please give a breakdown of the -- Can you give us the total kilowatt hour sales in terms of gigawatt hours for the first half and then perhaps give us a breakdown of that by the category? I understand you gave the volume change, but if you could give the actual amount that would be useful.

Could you also explain why the power purchased for resale fell from KRW681m -- KRW681b to KRW629b? Can you explain how much of that is volume versus price and why, presumably, if volumes fell, why?

Could you give us an update on the CapEx expectations for the full year? Not your official forecast, but what you expect realistically to spend?

And then also, again on the tariff, I understand you don't want to discuss that now, but can you confirm when you will be able to discuss the tariff? It's clear that that's probably the most important issue on people's minds, and we really need to have a conversation about the tariff issue. Thank you.

Okay. Hold on.

Okay. I answer your question - first 2 questions. The coal was increased by 3%, and the oil increased by 26%. LNG decreased by 70% and nuclear increased by 20%.

As for the nuclear facilities, new facility Ulchin number 6 was added this year, and we decreased the consumption of LNG, and the while increase in oil. So actually the oil price hasn't been increased dramatically recently, but when you compare the LNG unit price, it is still lower than LNG, so we increased [indiscernible] oil.

And in the case of coal, there were regional [indiscernible] number 1 and 2 despite coal was slightly increased.

And you asked for the power pressure numbers? Because of the warm weather and, as I mentioned, the production by LNG was decreased, that's why the power purchased for sale was decreased.

And as for the CapEx, as we formerly mentioned, our initial projection number was KRW8.2 trillion. By the [indiscernible] we revised it to a KRW7.7 trillion, so we put that, that will be this year's number.

And your last question, regarding the tariff - as announced by the government, their whole plan was to hold back and so at this moment we do not have any comments for that. So we will talk about it later, after this conference.

Okay. Can I just clarify my first question - I actually wanted to know the gigawatt hour sales in terms of sales to your customers, not the breakdown of the generation done via plant, although that's nice to have too. Could you actually give us the actual sales volumes by category, please - industrial, residential, commercial, etc, and the total gigawatt hours?

Okay. Residential - 37,170 million kilowatts. Commercial - 35,040 million kilowatts. Industrial - 85,815 million gigawatts -- sorry, kilowatts. Does that answer to your questions?

Yes, thank you.

2 participants are waiting with their questions. Next question is by Mr. [Chong] from HSBC company. Please go ahead, sir.

Hello, hi. I've a few questions. 1 is on fuel prices. Oil prices has gone up quite a bit. I just want to know, in the first half, how much was allocated for coal price?

And then second, given the oil prices, coal prices have been going up quite dramatically as you mentioned, how does that impact your second half outlook and your business plan as you are going forward?

And finally, Can you give a bit of color on the economic outlook of -- the domestic economic outlook. What do you see from our domestic economy and as far as how it impacts power consumption second half and 2006, if possible? That would be great. Thanks.

Talking about the coal price and the compare with the first half of 2004, the unit price was increased by 8.1%, and in case of oil price, it was -- the unit price was increased by 7.4%.

Talking about the economic outlook, basically we expect that the main growth rate for this year will be at 6%, we expect. And there is a 1.3% to 1.5% correlation to GDP, so maybe you can calculate our -- forecast our economic outlook using our growth rate.

Okay, great. Thank you.

Thank you.

Next question is by Mr. David Clark from Deutsche Security of Hong Kong.

Thank you. Just a couple of relatively simple questions. Just on maintenance - I was wondering if you could explain why that went down and what the outlook is for the rest of the year?

And if there was any possibility of making a comment on full year dividend per share, that would be helpful?

And lastly, any update on the potential for KEPCO to invest in infrastructure for distribution into North Korea - that would also be helpful. Thank you.

As to the increase of our maintenance costs, so schedules of maintenance work are decreased. That's why the total maintenance for this half was decreased compared with last year.

On the dividend, as we mentioned -- just mentioned, the capital forecast that [indiscernible] there will be an increase, but actually we don't have any specific dividend policy at this moment.

And talking about investing in North Korea, it is basically decided by the Korean government, so we don't have any specific plans for our investment in North Korea or any other acquisition in North Korea, at this moment.

Okay, thank you. That's helpful. But just back on the maintenance, should we be maybe factoring in a decline on a full-year basis for maintenance expense, or do you think it may bounce back a little bit in the second half?

I think you have to look over the data in this case so I'll -- we will get back to this after the conference. Is that okay for you?

That's fine. I'll give you a call later on tonight. Thank you very much.

Thank you.

Currently 1 participant is waiting with his question. Next question is by Mr. [Tien Zhou] of [Alliance Keplow] company. Please go ahead, sir.

Thank you very much for the call. Just carrying on the cost questions from David Clark. The labor expense - that went up significantly Q on Q. Any particular reason for that?

The tax charge - any guidance for the full year? I think before you were expecting a decline in the effective tax rate versus 2004. Do you still expect that?

And on the fuel costs, again the restatements. What specifically was the accounting change? Thank you.

Talking about labor costs, I think it was about -- it was an increase of about 18.7%. There was a new hiring this year, and also the previous year's old labor salary increases are also reflected, and also there was some incentives. Last year, KEPCO rated number 1 in our government evaluation and because of that we received some incentives and then there was a -- some, as I mentioned, salary increase for the previous year.

Talking about tax, as you know the corporate tax rate has been decreased about 2% so we expected the tax rate would be around 34% to 35% for this year.

Fuel costs - last year there was an account [indiscernible] commission costs, but as of this year these commission costs are divided into 3 parts - fuel costs, depreciation and contingent costs. So that's why, when you get the numbers of 1Q of 2005 and 2004, the fuel cost was increased and depreciation was also increased. It was restated in 2004 numbers and that's why the numbers released in 2004 was somehow changed.

Okay. Thank you.

Thank you.

Currently there are no participants with their questions. [OPERATOR INSTRUCTIONS]. Currently there are 3 participants with their questions. Next question is by Mr. Boyd from CLSA company. Please go ahead, sir.

Thanks for the call, guys. Just quick questions. Number 1, just on the unit price. That is in won terms, when you mention that cost is up 8%, that is in won terms, not U.S. dollar terms - I just want to confirm that?

Yes [indiscernible] Won terms.

Won terms, okay.

And then on the head count, you mentioned that you had some new hiring. What would be the current head count increase versus this time last year, do you know? Is it 3%, 5%, 8%?

About 5% increase, compared with last year.

And on the first half, do you know roughly what the cost per kilowatt hour was for hour for oil versus LNG versus coal? Do you know what the cost per kilowatt hour was? For the fuel costs?

Hold on. As for the third question, we send out the raw materials and I can tell -- you can get the answers.

Okay.

And then, also maybe, this you might not know as well, but just in terms of the coal cost per ton. Do you know what your U.S. dollar coal cost was in the first half?

Actually, no. Not on the dollar basis, we do have only won -- Korean won basis.

Okay.

But maybe you can calculate by the exchange rate.

What was it in won terms, then?

KRW57,900 per ton.

KRW67 --

KRW57 -- 5 7 -- KRW57,900 per ton.

Okay. That's it, I guess.

Actually, 1 quick question. In terms of guidance for fuel costs, in the past when we've had some calls, I think maybe a year ago or something, that they were talking about full year guidance being 37% of sales, being fuel costs. Do you have any rough idea for this year in terms of your fuel costs as a percentage of sales or total costs, or anything like that?

When we look at the historical data, the range around 37% to 44%, so roughly we will be able to say that it's about 40% of the total operating costs.

Okay, because in the first half it was closer to 32%, but I guess you're saying it'll go up in the third quarter, like it normally does. Okay.

Okay?

Yes. Thank you.

Next question is by Mr. Stephen from Goldman Sachs company. Please go ahead, sir.

Yes, if I could just follow up on the question that Tien Zhou --

Hello?

Yes, if you could just explain -- follow up on Tien Zhou's question earlier, you mentioned that the tax rate should fall a couple of percentage points this year compared to last year. Yet in the first half it really has not. And can you please maybe explain why, year on year, the tariff -- the effective tax rate is basically unchanged, therefore?

Hold on. When you look at historical data - the 2004 number and maybe compare with 2004 and 2005, based on -- according to our calculations the effective tax rate is 34.3% this year, and it was 36.4% last year, so [indiscernible] decreased.

Thank you.

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. Next question is by Mr. [G Tong] from HSBC company. Please go ahead, sir.

Hi. I have 1 more question. Can you give me the color on your CapEx plan as in your foreign international investment, that is your investment in China all inner region?

And also, just a follow-up on fuel costs. Can you -- in your business plan for second half, and going forward, are you expecting fuel costs to go up, given that, again, all pressures accruing and expectation of coal prices. When do you need to renew your contract, and how will -- what's the expectation on your overall fuel cost? Thanks.

Talking about CapEx in international business, actually the proportion is very small and, actually, we don't have any specific --. We just have an initial plan for expanding our [indiscernible] business into China.

As for fuel costs. Actually, the contract was made -- the negotiation was settled as of June. As for the coal price, the contract price of -- for Australian was AUD51, and Chinese $57.5, Indonesian $45.

The forecast figures - actually it depends on the average price of Dubai oil. As you can see, the oil price is increasing these days, so we carefully expect that our -- talking about total costs, it will be increased about 13% to 15%. This is our -- just our internal forecast figures.

13% --

13% to 15%.

This is for the first half or for the full year, fiscal or final?

On a full year basis.

Okay. Then you mentioned that your coal contract is as of June -- July?

As of June.

As of June. Okay. Thank you.

Thank you.

Currently there is 1 participant with a question. Next question is by Mr. David Clark from Deutsche Security Hong Kong company. Please go ahead, sir.

Thank you. This is hopefully my last question. I'm just looking at the labor expense again, and I'm wondering if you would be able to break down the increase that we see in the first half, year on year, into an amount that might represent the bonus amount, so that we can compute the full year number.

Okay. In the case of the new hiring, this took about 5%, and previous year's salary increase, 4%. Incentives were 5%. And there was -- the method has been changed - the basic wage. The standard wage -- per person, the standard wage has been increased, so this affected another 4% increase in labor costs.

Sorry, that last -- I didn't understand the last point. What was -- The basic wage has increased?

Yes. Per person, the standard wage was increased.

Okay. So basically 5% of the -- and the bonus was paid in the second quarter, I presume?

Yes.

Okay. Thank you very much.

Thank you.

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. Currently there is 1 participant with a question. Next question is by Mr. Tien Zhou from Alliance Keplow. Please go ahead, sir.

Sorry, just 1 question on the fuel cost again. You mentioned 13% to 15% increase. Is that in won terms or is that in U.S. dollar terms?

Won terms.

Okay, thank you.

Thank you.

[indiscernible]

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. Next question is by Mr. Stephen from Goldman Sachs company. Please go ahead, sir.

Yes, just a follow-up on the earlier question regarding the coal contracts for 2005/6 - the new pricing. Could you confirm if that is including or excluding the transport costs and then, for each of Australia, China, and Indonesia, could you tell us what the coal -- the transportation cost expectation is, either to add on or within the number is, please?

The numbers I mentioned is excluding transportation costs. And the transportation for Australia is around $7 to $8. In the case of Chinese, $4 to $5.

And Indonesia?

Between those 2 numbers.

Okay, thank you --

Around $6 to $7.

Your final question is by Mr. Boyd from CLSA company. Please go ahead, sir.

Yes, sorry about this. I just didn't quite write it down fast enough on that answer. So you're saying that the June contract price for coal was around $45 per ton from Indonesia? Is that what you said?

Yes, that is correct.

And this 13% to 15% increase in won terms on oil price, that is what you expect for the second half versus the first half, or the second half year-on-year?

It's full year-on-year.

Full year-on-year?

Yes, comparing year 2004 and 2005.

Okay, because -- So basically what you're saying is that in the first half, the unit oil price was hiked -- was up 7.4%. But you're expecting it to be up 13% to 15% for the full year.

That is the total costs.

The total costs, not the unit cost.

Not unit costs. In total costs, I totally expect that the total fuel costs will be increased by 13% to 15% year-on-year.

So this is the total fuel line, not just the oil price?

Yes.

Okay. Okay, great. Thanks.

If you have no more questions, we will finish Q&A session and conclude the conference after any comments of KEPCO. Thank you.

Well, if you have no further questions, we will conclude the conference call. Once again, thank you for your participating in our conference call today, and tracing KEPCO. Thank you. Goodbye.