Korea Electric Power Corp (KEP) 2006 Q1 法說會逐字稿

Good morning, good afternoon and good evening, ladies and gentlemen. First of all, thank you for joining this conference call. This conference call will commence with our presentation on the 2006 first quarter earnings results by KEPCO, followed by a Q and A session. Now we shall commence the presentation on the 2006 first quarter earnings results by KEPCO. Please go ahead.

[Inaudible] 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. CY Ji, the manager in charge of investor relations.

Hello everyone, this is CY Ji on behalf of Korea Electric Power Corporation. I would like to thank you for participating in our conference call today, to review on the financial results of the first quarter of 2006. Please note that the financial results discussed today are preliminary, unaudited, and not reviewed by KEPCO's independent accountant or auditors. The financial data to be discussed today are the financial information that are made by adjusting for inter-company transactions among KEPCO and six generating subsidiaries only, and to help investing public better understand KEPCO's financial result of the first quarter of 2006.

As such, this financial information may not have been prepared in accordance with the Generally Accepted Accounting Principles of any country and may not necessarily be indicative of the result of operation of KEPCO and six generating subsidiaries as a Group, and more importantly these should not be relied upon, or form a basis of entering into any contract, or the proposal of hiring or of selling any securities of KEPCO or any other investment decision in respect of securities of KEPCO.

Now Eunice Lee will run through the results for a few minutes, and then we will open up a Q&A session. Any periodic comparison is year-on-year basis between 2006 and 2005.

The operating revenues were up by 9.4%. This was mainly because the sales revenue of electric power, the principal component of our operating revenues increased by 10.3% to 6.74 trillion won, from 6.11 trillion won in 2005. This result is after adjusting inter-company transactions reflecting primarily a 7.4% increase in sales volume of electricity. The overall increase of sales volume was mainly attributable to a 5% increase in the commercial sector and 7.5% increase in the industrial sector.

Operating expenses increased by 19.1% to 5.84 trillion won, as compared to 4.92 trillion won in 2005. This was mainly due to a 25.5% increase in fuel expenses, a 48.1% increase in power purchase for resale and 45.8% increase in maintenance expense.

In the first quarter of 2006, the days of scheduled maintenance for nuclear power, the base load were increased by 65%, and this resulted an increase of LNG generation. The unit price of LNG was increased by 32.8%, mainly due to a recent oil price hike and the total cost of LNG was increased by 54.1%. LNG price hike also affected the increase of power purchase for resale. The increase of maintenance was mainly due to the timely settlement of KEPCO and the increase of maintenance by nuclear power. KEPCO started making timely settlement for the maintenance performed as of this year. Settlement used to be delayed and made around end of the year until last year.

A 1.5% increase of depreciation expense was mainly due to the commercial operation of Yonggwang No. 1 and additional T&D facilities. As a result, operating income was decreased by 25.7% to 1.01 trillion won in 2006, as compared to 1.36 trillion won in 2005.

Non-operating income was down by 20.3% to 407 billion won from 511 billion won in 2005, mainly due to the decrease of investment income from affiliates and others, such as translation gains from currency swaps.

The interest expense increased by 7.2% to 174 billion won in 2006, from 162 billion won in 2005 because the cost of debt was increased to 4.6% from 4.3%. The total interest-bearing debts were 18.7 trillion won and that of 2005 was 18.5 trillion won.

As a result of the above factors, net income decreased by 34.3% to 732 billion won in the first quarter of 2006 as compared to 1.11 trillion won in 2005.

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

Thank you. Now we will take your questions. [OPERATOR INSTRUCTIONS]. The first questioner will be Mr. Joseph Jacobelli from Merrill Lynch's company. Please go ahead.

Good afternoon, and thank you for hosting the call. Could you please give us some guidance on your expectations with regards to fuel costs over the next three quarters, please. Thank you.

Okay. As you may know it is really hard to project the fuel costs because actually we're projecting a total fuel cost for this year based on our budgeting numbers. So this is just our forecast -- internal forecast, and there are [several other] functions also. And according to our budgeting numbers we expect the total fuel cost will be increased by 14% this year, and there are two assumptions; the average price of Dubai maintains US$60 dollars per barrel, and FX rate for Korean won against the US dollar is 1,000. But it could be changed based on the market conditions, such as oil price and FX rate.

Thanks Mr. Ji. Could you just repeat the number prior to the ForEx number? The bunker oil price?

The overall fuel cost excluding nuclear will be increased by 14% this year we expect.

And how are your negotiations on the coal front?

Well in case of our Austrian coal, about half of the gencos are already complete their contract price negotiation. But the things that we cannot actually -- we could not received the contract price because others were still in the middle of negotiation, and the increase of our Chinese negotiation is somewhat delayed, because their offering price and our asking price, there is a huge gap between offering and asking price. And an increase of Indonesian also, about half of the gencos already complete their contract, and the contract price is around lower US$40 per ton. 42, US$41 per ton.

Thank you. And the second question is much easier. Have you adjusted any CapEx numbers for 2006?

We recently revised our CapEx number. We expect CapEx for this year will be about 8.6 trillion won, and this one is also calculated based on our budgeting numbers, though probably could be lower than this level when you look at our past history.

Thank you very much.

Thank you. Next question please?

Thank you. Next questioner is by Mr. Dave from Deutsche Bank company. Please go ahead.

Hi Eunice and CY. Just a couple of questions. Firstly, I'm looking at the fourth quarter and also the third quarter depreciation expenses in 2005 and it seems as though the first quarter this year is somewhat lower than in the second half of last year. Do you have any reason for that that you could point to?

Well the major reason is that new capacity added during first quarter of this year was pretty much lower than last year, but this level -- the increased [demand] of depreciation will get back to normal level, like 8% per year on year-on-year base.

So you expect it to rise over the next few quarters quite significantly?

Yes, yes.

Okay. And then another question. I'm sorry to go into these details, but I'm looking at the first quarter 2005 fuel breakdown that was released this time last year, and it seems like you've done something to the coal expenses, because it doesn't match.

[inaudible] we released the coal price last year, it was kind of rough numbers.

Right, okay. Okay, and then nuclear as well looks to have been restated? Is there any -- ?

Yes total -- well as you can imagine total numbers were somehow restated.

Okay, is there any reason for why that's been restated or -- ?

There isn't any specific reason why -- I mean at the point we released last year we just roughly calculate the [inaudible].

Okay. I guess there has been no change in the way you account for these things, it's just -- .

Yes, no change in accounting.

Okay, thank you.

Thank you. Next question please?

Thank you. Next questioner is by Mr. [inaudible] from CLBB company. Please go ahead.

Hello. Please go ahead.

I've got a [goods] question on the -- just wanted to find out when the next tariff review will be, and when do you expect -- what's the outlook?

As you may know, today we are releasing and discussing about our first quarter financial results, so why don't you get back to that issue after this conference, and at this moment I can tell you that we don't have any specific timeframe or plan to discuss about the tariff with the government at this moment.

Okay. Thank you very much indeed.

Thank you. Next question please?

Thank you. Next questioner is by Mr. [inaudible] from Morgan Stanley company. Please go ahead.

Hello. Okay, I have two questions. The first one is, I think you mentioned that you have not finished your coal price negotiations. So what kind of price have you used just to book in the first quarter numbers?

The second question is, is there any update on the redevelopment of your headquarters? Thanks.

Well, answering to your first question, the coal price mentioned in our data, this price is last year's contract price, and you can see the decrease in the unit price. This is mainly because of the Korean won appreciation against the US dollars.

And is there any news for the headquarters movement? As you may know, we are planning to move our headquarters by year 2012, and there isn't any specific changes. And we are still working on the headquarters movement at this moment.

Okay, thank you.

Thank you. Next question please?

Thank you. Next question will be by Mr. Dave from Deutsche Bank company. Please go ahead, sir.

CY and Eunice, just another question on some of these details. But I'm looking at the investment income from affiliates, and there are a number of losses in there on some of these smaller affiliates. Is that something we should be looking for over the full year, or are these pretty much just one-off items?

This is just one-off item, and the main reason is from KPS in KEPCO Hong Kong. The internal -- the profit from the [inaudible] transaction has been moved from KPS, and because of the [effect of] translation lost on KEPCO Hong Kong showed some losses, but on your base it could get back to normal level.

Okay, and then just quickly do you have any update on the new -- any new IPPs coming on over the next 6 to 12 months and the timing of that?

Yes we do have a schedule for the new IPPs, can I send it to you through e-mail after this conference?

Yes, that would be great, thank you very much.

Okay thank you. The next question please.

Thank you, currently there is no questions. [OPERATOR INSTRUCTIONS]. Currently three participants are waiting with their questions. First question will be by Mr. Joseph Jacobelli. Please go ahead.

Yes hi, I just wanted to -- sorry go back to the first quarter fuel cost situation which obviously is of concern. Based on kind of some rough numbers that we calculated would you agree that it would be very difficult for you to push more generation from coal and more generation from nuclear given [inaudible] rate for both were very, very high and so you have -- you don't have a choice but to generate power -- more power if needed from the more expensive oil and LNG?

Are you talking about full year base and for the next five years or --?

That's what happened in the first quarter, I mean the first quarter --

Actually in the first quarter because of the increase in the maintenance for our nuclear power, we have no choice but to consume LNG more than last year's level, but on the full year base the operation of nuclear power will get back to normal level. So I guess this is a kind of a one-off issue for our project generation, not the proportional generation of our nuclear and coal and others, but the real problem is the oil price, I mean that directly affect our fuel cost.

Right.

So talking about generation mix, the -- I guess we will be able to get back to our current level, I mean last year level.

And I know it's difficult to predict the weather, but do you expect that in the summer, given your reserved margins are so tight, you're going to have to purchase more from the more expensive IPPs, or you don't really see a year-on-year basis this year purchasing a lot more electric power from the IPPs?

Well totally it depends on the weather. As you know, during our peak load like cold winter season or hot summer season we have no choice but to use our -- I mean peak load our generators like LNG and oil. Also, we have to buy electricity from IPPs, so it's really hard to answer to that question at this moment.

Right, so there is a possibility that year-on-year you will have to purchase more from IPPs?

Well as I mentioned it depends on the situation like weather, but when you look at our schedule for the maintenance, what you see on, full year based, the level is on the same as last year's level. So assuming we have same maintenance as much as last year level then probably we might not have to buy more electricity from IPPs if the weather -- if the weather goes off.

And Mr. Ji, last year your reserve margins were around about 11/12%, what is the internal forecast for reserved margins for 2006 please?

In our first quarter the reserve margin was 17.1% and as I already explained, we feel very comfortable at this level, from 10 to 15. We feel that this is very comfortable level, we think, so we will be able to maintain this level.

Thank you and one final question. The 8.6 indicative CapEx for 2006, this is a revised number. Can you just remind me what was the original number please?

The original number was about 9.2 trillion won.

Thank you very much.

Thank you. Next question please.

Thank you. Currently six participants are waiting with their questions. The following question is Mr [inaudible] from JP Morgan company, please go ahead.

Hi there, thanks for the presentation. I have a couple of points or questions here. First on the IPPs, just a follow-up question. Just wondering the Yonggwang power plant, the IPP project by KPower, whether that has commenced commercial operation as yet? And as a result, because I understand it was originally scheduled for completion in March, if that has already been achieved should we expect the increase in IPP purchase to actually persist during the second quarter? That's my first question.

They're not in the course of operation yet, they are supposed to be in operation in the coming December this year.

Is that the first unit you're talking about?

The Yonggwang.

Yes Yonggwang, unit number one.

That will be coming in December this year.

So that's been delayed then because originally it was March?

Let me check out whether it has been delayed, but according to our data they are supposed to be in operation in the coming December this year.

Okay, and in terms of the coal price situation, now that the Indonesian coal price will be set a low 40s, and given that Indonesian tends to me on significant discount to the Australian coal prices, so should we expect the Australian coal prices -- that the original guidance of $40 that probably would not be achievable then?

Well at this moment hopefully I expect that contract price could be lower than last year level, but I cannot tell you that, could be more than --

Understood, understood. And you mentioned the reserve margin situation for first quarter, did you say that it was 11.11%?

17.1%.

For which month?

17.1%, in the first quarter of this year.

Okay was that the highest for the three month or the lowest for the three month?

Hold on I'll check it up. Highest was in January, it was 17.1% and lowest was in March 11.1%.

How about the same period of last year, the lowest for the last year? [inaudible] margin just for a like-for-like comparison.

Actually I had the last year's average number it was 12%, last year in the first quarter.

Okay. Thank you.

Thanks. Next question please.

Thank you. Next question will be by Mr Dave from Deutsche Bank Company. Please go ahead.

Okay thanks. CY and Eunice it would be great if you could send that IPP schedule out because I think I'm, just getting back on this, I also have a schedule here which shows the first unit KPower in March and the second unit of KPower actually in December, so it would be great if you could confirm whether the whole plan has been pushed back by nine months?

Okay I will follow up on that.

Great thank you. And then just two bigger picture questions, but firstly I've been reading some press reports about potential acceleration of the restructuring of the distribution businesses and I'm wondering whether there's anything in that? And if you could also comment on press reports regarding the government's intention to sell down a small stake in KEPCO?

Well our intentions of the restructuring plan are -- actually we tried to introduce internal [divisional] system within this year. As you may know the Korean government cancelled the plan for separating our distribution assets. And we are, as an alternative way, we are trying to introduce internal divisional system. And also -- what was the second question okay?

Just on the government sell down of the small stake in KEPCO.

Yes, already this year the Korean government announced that they were planning to sell down their stakes for KEPCO. So actually we are in the middle of a study for preparing for the counter reaction for that.

Okay, and what do you think the most likely way of then doing that is?

Hold on. Let me -- hold on. Well nothing has been decided yet, but we are still in the middle of discussion with the Korean government. And even though Korean government will maintain the 51% as a shareholder.

Okay. Alright, thank you.

Thank you. The next question please.

Thank you. Next question is by Mr. Henry Cobbe from [CLBB] Company. Please go ahead.

Hi there. It's Henry Cobbe from Thames River Capital. Thanks for the follow-up question. Two questions. First is just on the labor expense which you didn't disclose. I just wanted to know if you can now disclose the number for the full year of 2005 for KEPCO plus genco, and for the first quarter of 2006. The second question is just on LNG pricing. It seemed like the unit cost of LNG purchases rose 10% quarter-on-quarter. And I just really want to see what your outlook is for the full year, whether you see LNG prices staying at these levels.

Hold on. Hello?

Hello, yes?

Yes, can I get back to the labor cost after this conference? Actually we are including in our others our operating cost, so I will get back to that after this conference.

And then to the LNG price projection. Well based on our budgeting numbers, we already see -- really expected that LNG unit price will be increased by 10%, but now, as you can see, over 30%. So I think we have no choice but to revise our forecast for the full year.

Sorry, could you repeat that please.

Okay. As a full year, LNG price, all of this year we expected that the unit price of LNG will be increased by 10% this year. And this is numbers based on our budgeting numbers. But as you may know, the current spot price is over 30% compared to last year levels. So we have no choice but to revise our forecast for the full year base.

Okay. On a separate issue, Powercom. Are you looking to exit your stake in Powercom?

Yes, yes. We plan to sell down our stakes of Powercom, and we are considering our -- we are considering -- after we are considering our IPOs in the Korean stock market or other -- [Inaudible] Hello?

Hello, yes? [Inaudible]

Yes, I'm told condition of the line was not so good so I couldn't hear you. Could you repeat?

Sorry, you hold 30% and would you look to sell the entire stake?

Not entire stakes. I mean we have to maintain 10%, and the rest of them will be sold out. That's our plan.

Okay, thank you very much.

Thank you. Next question please.

Thank you. Next question will be by Miss [Allison] from UBS Company. Please go ahead.

Hi, good afternoon. I have several questions for you. First, could you update us your nuclear joint venture plan in China? Second, any other overseas expansion plan with you right now? And third, could you give us your CapEx numbers for three years? And fourth, how much new capacity that the gencos are planning to add this year, and also 2007? Lastly, what is your expectation of the unit cost for power purchase for the full year? Thank you.

Okay. Well. Hold on. Let me answer to the power purchase for resale first. In the first quarter of this year, because of the new addition from PPAs, it was increased by 48.1%. But actually there were two units, [Maya Yuchong] and GSEPS. [Maya Yuchong] was in commercial operation as of July of last year and in the case of GSEPS, it was in the middle of May since last year in the first quarter. So considering these new capacities, on a full year base I think the level of power purchased for resale will be kept back to last year level.

And in case of CapEx for this year, we expect that CapEx will be around 8.6 trillion won this year, and for the next five years. Our projection numbers are over 9 trillion won, but in reality, when you look at our actual numbers in the past four years, we spend about 80 to 90% out of our predicted amounts. So considering this trend, our actual number for next three years will be around 7 to 8 trillion won for CapEx.

And as for the nuclear project in China and other overseas plant, actually we are talking about the financial result first quarter this year, so can I get back to this issue after this conference, the overseas project?

And [capacity provision]. For this year we expect that there will be about 2,240 megawatts, and year 2007 there will be about 1,622 megawatts, and 2008 there will be about 2,800 megawatts.

Okay, very good.

Thank you. Next question please.

Thank you. Next question is by Mr. [inaudible] from the [WestLB] Company. Please go ahead sir.

Thank you. I also have a question on overseas project, but I think you will prefer to answer it later. Actually on the capacity additions you've just mentioned in the next three years, can you give a breakdown on the fuel type, nuclear, coal and gas? Thank you.

Okay. Yes, actually we have a capacity addition plan for the next 15 years. Can I send it to you through e-mail?

Sure, thank you.

Okay, thank you. Next question please.

Thank you. Next question is by Citigroup Company. Please go ahead sir.

Hi there it's Samir from Citigroup. I have two questions. One is on the net debt side, if you could tell us what the net debt was as of March? As of end of last year the gross debt was 18.7 so the gross debt seems to be the same [principle]. And second is on the [tariff] side, I want to confirm whether we can assume the 2.7% tariff is for the rest of the year as well?

Well net debt as of first quarter we are still looking on the -- balance sheet so I will send it to you as soon as we get provision numbers and in case of gross debt last year it was 18.5 trillion won, and as of our first quarter this year the total borrowing was 18.7 trillion won.

And on the tariffs?

On the tariffs?

We -- the 1Q I think because of some change on the development fund side the effective tariff seems to be 2.7% not 1.9. So I am just wondering is that what we should use? And also is there any other offsetting factor on the cash flow side which could offset the 2.7% tariff increase on the revenue side?

Well first of all the tariff was increased by 1.9% also the rate for the industry basis fund was decreased by 7.9%. That resulted in about 2.8% tariff increase, and as you may know when you look at our tariff structure those tariff adjustment is based on previous year's financial result which is year 2004. So according to the current tariff system, the regulations are -- as you may know we -- every year after getting our actual return and governments target return we adjust our tariffs.

So my point is should we use 2.8% or should we 1.9%?

You should use 2.8% tariff increase.

And this 2.8% that you got extra on the lower development charge is that a gain for -- a real cash flow gain for KEPCO or you get more development fund, but you also get lower grants and therefore the cash flow impact is the same?

No because of the 2.8% tariff increase we could get more cash flows of course.

Right. One last thing on the LNG side, is there any --

Hello? I couldn’t hear -- I can't hear you.

Sorry is this better?

Yes it's okay, yes.

Okay, great. I'm just wondering on the LNG side is there any possible benefit KEPCO might have in terms of how the prices are set and purchased from KOGAS? Could we see some sort of a respite in the coming year or should we just be looking at spot prices?

I don’t think there will be any benefit from our range of price -- well actually we made about 20 year contract with KOGAS and this contract is expiring this November so we had to start renegotiations is KOGAS and we may have to set up another contract. At this point, well probably it depends on the negotiations and the market conditions whether we can get more or lower contract price or not. Anyway I don’t see any benefit from the LNG which we buy from KOGAS. But actually we performed our internal analysis in year 2004 and according the analysis if we buy LNG directly from suppliers we could save about -- if we -- for example if we import 3 million [total] LNG per year there is about 250 billion a [quarter] cost savings so that’s the main reason why we are trying to import our LNG directly from suppliers at this moment.

Right Thank you.

Thank you. The next question please.

Thank you. Next question is by Mr. Joseph Jacobelli from Merrill Lynch Company. Please go ahead.

Hello again and Eunice and Mr. Ji. Just had three quick things. One is on demand, have you revised officially your electric power consumption outlook for 2006? Secondly the new IPPs which are going to be commissioned, do they have also PPAs or those coming through do not have PPAs? And also the last question is with regards to utilization rates, do you have a rough number for [installation] of nuclear and coal in the first quarter and what do you expect those to be for the rest of the year? Thank you.

Well demand forecast for this year; we expect that the demand growth rate will be about 5.9%, this is our official forecast at this moment, and new IPPs, there will be no PPA for coming new IPPs. This is our basic policy for that. And installation rate for nuclear, it was 93.2% in the first quarter of this year and utilized [installation] rate for coal it was 90.1% in the first quarter of this year.

And do you expect that to remain for the rest of the year or --

I guess the utilization rate for nuclear could be increased. Usually we get back to the last level around 95%. Because of the maintenance for nuclear power in the first quarter the rate hasn’t been decreased, but on year-on-year base it will get back to the normal level.

Right and coal should remain at --

Probably coal could be somehow decreased.

Decreased?

Yes. Next question please.

Thank you. Currently there is no questions. [OPERATOR INSTRUCTIONS]. Next question is by a Mr. [Soonho Chung] from Samsung Securities. Please go ahead.

Would you please repeat that the utilization number again that nuclear and coal and oil, please, explain that if that utilization number is excluding the facilities under maintenance?

Well the utilization rate for coal was 90.1% and nuclear was 93.2% and this number includes maintenance.

Okay thank you.

Thank you. Well let me have one more last question please?

Currently there is no questions. [OPERATOR INSTRUCTIONS].

Okay, 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 also thank you very much for your interest in KEPCO. Thank you. Bye bye.

Thank you and have a good day. See you next time sir.