Korea Electric Power Corp (KEP) 2006 Q2 法說會逐字稿

Good morning, good afternoon and good evening, ladies and gentleman. First of all, thank you for joining this conference call. This conference call will commence with a presentation of the 2006 second quarter earnings results by KEPCO, followed by a Q&A session. Now we shall commence the presentation for the 2006 second quarter 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 Seong Hee Yang, Assistant Manager, and together with me I also have Mr. Changyoung Ji, the Manager in charge of Investor Relations.

Hi, everyone. This is Changyoung Ji. On behalf of KEPCO I would like to thank you for participating in our conference call today to brief you on the financial result of the first half of 2006.

Please note that the financial results discussed today are preliminary, unaudited and not reviewed by KEPCO's independent accountants 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 gen cos only, and to help investing public better understand KEPCO's financial result of the first half 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 its six gen cos 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 hiring or selling any securities of KEPCO or any other investment decision in respect of securities of KEPCO.

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

The operating revenues were up by 8.5%. This was mainly because the sales revenue of electric power, the principal component of our operating revenues, increased by 9.1% to KRW12.73 trillion, from KRW11.67 trillion in 2005. This result is after adjusting inter-company transactions reflecting primarily a 6.1% increase in sales volume of electricity. The overall increase of sales volume was mainly attributable to a 7.4% increase in the commercial sector and 5.8% increase in the industrial sector.

Operating expenses increased by 18% to KRW11.45 trillion, as compared to KRW9.71 trillion in 2005. This was mainly due to a 25.3% increase in fuel expenses, a 59.7% increase in power purchased for resale and a 33.9% increase in maintenance expense.

In the first half of 2006, the days of scheduled maintenance for nuclear power, the base load, were increased by 98%, and this resulted in increases for the LNG generations. The unit price of LNG was increased by 28.7% and the total cost of LNG was increased by 70.7%. LNG price hike also affected the increase of power purchased for resale. The increase of maintenance was mainly due to the timely settlement by 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 0.2% increase of depreciation expense was mainly due to the commercial operation of Yonggwang No. 123 and additional T&D facilities. As a result, operating income was decreased by 33.2% to KRW1.48 trillion in 2006, as compared to KRW2.21 trillion in 2005.

Non-operating income was down by 21.6% to KRW619b from KRW789b in 2005, mainly due to the decreases of investment income from affiliates and others, such as translation gains from currency swaps.

The interest expense increased by 12.5% to KRW348b in 2006 from KRW310b in 2005 because the cost of debt was increased to 4.6% from 4.1%. The total interest-bearing debts were KRW19.4 trillion and that of 2005 was KRW18.5 trillion.

As a result of the above factors, net income decreased by 43.2% to KRW892b in the first half of 2006 as compared to KRW1.57 trillion 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 question is from Mr. David from Deutsche Bank. Please go ahead.

Thank you very much for the conference call. Just a couple of questions on fuel. Firstly, could you please tell us on what basis you booked the coal expenses in the first half? And also an outlook with respect to contract prices and just an update on where you are with respect to signing contracts for the rest of the year?

Well, as for the fuel costs, our contract -- sorry, our coal price in the first half, that was up about 8% in unit price, mainly because of the Korean won appreciation. And in Korean won account the unit price for the coal was about KRW571,000 per ton. As you may know, our contract price for this year for Australian coal in U.S. dollar a ton is about US$46 per ton for Australian coal and it’s $53 for Chinese coal and around $42 for Indonesian coal. So roughly here we are going to be about 7 to 8% increase compared to last year.

Okay. Sorry, but have all of those contracts been signed yet, particularly with the Chinese, or are some still outstanding?

Several contracts are still outstanding but I guess most of the contracts will be completed within this month.

Okay, okay. And then in the second quarter, did you book the coal expenses on the basis of these contract prices or --?

Not yet, not really.

Not yet, okay.

Our contract price will be selected in the second half.

Second half. Okay. Okay, thank you very much.

Thank you. Next question please.

Thank you. [OPERATOR INSTRUCTIONS]. The next question is by [inaudible]. Please go ahead, sir.

Hello? Hello?

It’s [Stephen Old].

Do you mean Stephen Oldfield? Because it’s Stephen Oldfield here. Don't know if you can hear me because I'm not sure if that's my name or what, but a question here on the breakdown of the income statements for the gen cos. I’m very curious -- I understand why nuclear is down but I'm confused why Korea South-East Power’s power costs -- fuel costs would only be up 4% where all the other companies are up like 30, 50 or so. What is it about Korea South-East Power’s fuel mix that it didn't see an increase in fuel prices? Or alternatively, is it that you haven't got a complete estimate of what those costs are and this is maybe not all of the fuel at this point?

Well, in case of our Korea South-East, mainly they operate a coal-fired power plant and others are operating LNG power plants more than Korea South-East. That is the main reason why the fuel cost increase in Korea South-East is lower than other gen cos.

Okay, thank you.

Thank you. Next question please.

Thank you. Next question is Mr. [inaudible]. Please go ahead, sir.

Okay, thank you. I have two questions. The first one relates to the others cost, which increased by 11%. Could we get a breakdown of what’s included?

My second question is related to the investment loss from affiliates. Could you tell us what it is and what do you expect for the full year? Thank you.

Well, it’s sort of the others cost. That includes labor costs and the welfare and development costs. So, well, I ought to give you the more detailed breakdown after this conference, especially on the labor costs. And as for the investment income from affiliates, well, there was a kind of judgment in the [inaudible] our associates, especially KOPEC and KPS. We adjusted inter-company transaction profits. That's the main reason why there was a loss in our income -- investment loss from affiliates. And on a full-year base, well, could be -- there could be a kind of decrease compared to last year.

And what's the main reason for the increase in the others expense? Is it because of the dollar increase?

Not really. Well, there are several reasons. [Inaudible] costs have been increased and there was losses on removal of fixed assets, and also the welfare costs have been increased. Those are the major reasons for the increase in others.

Okay, thank you.

Thank you. Next please.

Thank you. Next question is by Mr. Henry Cobbe. Please go ahead, sir.

Hi there. It's Henry Cobbe from Thames River Capital. Thanks for the call. Just a quick question on when the next tariff review will take place. Will it also be a December decision to reflect the rising fuel costs in 2005 -- sorry, 2006?

Well, I know that many people are interested in our next tariff adjustment. But, well, today we are having a conference for our first half results, so let me get back to that issue after this conference. Okay?

Okay. And the other question, just looking at the purchase power costs, it seems like a large volume of your requirements are from purchased power. How long do you think that is going to continue?

Well, the major reason for the increase in power purchased for resale is that when you look at our maintenance schedule, especially for the nuclear power, most of the maintenance days were concentrated on the first half. And because of that the generation, from nuclear was decreased while the consumption of LNG was increased. But year-on-year base, I guess the generation for nuclear will get back to normal level. It used to be -- the generation from the nuclear used to be around over 40%, around 43, 42%, so in the second half I guess the generation from the nuclear will get back to normal level. And I guess consumption from -- for consumption of LNG then will be decreased, so I guess the power purchased for resale will get back to normal level in the second half.

Thank you. Thank you very much.

Thank you. Next please.

Thank you. Next question is coming from [Jacobelli company]. Please go ahead.

Yes, hi. This is Joseph Jacobelli from Merrill Lynch. I just have a couple of very quick questions. One is what is the change in the policy estimate for your Capex? I know in the sheet that you provided to us you have a forecast CapEx this year of KRW8.6 trillion but do you think that you will be able to spend slightly less than that? And then I've got another two minor questions, if you could answer this question first, please.

Well, as for the CapEx, as you may know, our actual number used to be around 80 to 90%, our projected amount. At the moment our projection for this year is about KRW8.6 trillion. But as you can see, in the first half we spent about KRW3.8 trillion. So I guess the actual number will be around KRW7.5 to KRW8 trillion, lower than our current projection of KRW8.6 trillion.

Thank you. The other question is I'm not sure if you have the data with you right now but there should be a split among the IPP power purchase that should have split between the power purchase agreement based power purchase and then the [QTX] price based power purchase. Do you have any rough idea of the split in the first half for that?

I'm sorry, I couldn't hear you. You want all the breakdown of the PPAs and non-PPAs, right?

That's correct, yes.

Well, in the first half the cost from IPP was about KRW310b and cost from PPA was KRW693b.

So the PPA was KRW693b?

Yes.

Great. Okay. That is it for now. Thank you very much.

Thank you. Next please.

Thank you. Next question is by Miss [inaudible] Please go ahead, ma’am. Next question is by Mr. [Geoff Boyd]. Please go ahead, sir.

Hello?

I just wanted to ask a couple of questions. I missed one question and it may have been asked, but on the labor costs, they used to break it out of others. Is there a reason why we are not seeing the details on labor costs or why is it being lumped into other?

Labor costs is included in others.

Yes, I know. Why is it included in others? Like why don't we break it out, like we used to?

Let me follow up on that after this conference, okay?

Okay. But do you have any good idea as to what the labor cost growth was in the first half of the year? Do you know or --?

Well, as for the labor costs, the increase of man hours are pretty much lower than last year level.

Okay. And in terms of the maintenance costs, for the full year what do you think it will be in terms of growth year on year, like will it be 10%? Or it is going to come down in the fourth quarter, presumably.

Definitely it will come down in the second half. But, well, I cannot say the exact amount at the moment but if you look at our maintenance schedule for full year, that will [inaudible] decrease in the second half.

Okay, okay. Okay, that's fine. And also I didn't quite catch all that on the coal costs. Can you just elaborate a bit? On the -- you’re saying that the first half, the unit cost that was booked was not the contract cost that you are going to book for the second half. And is that because you were still using up the inventory of coal that you had bought from last year or why is that?

The major reason is that we completed our coal price negotiations around end of June. That's the main reason why this year’s contract prices will be reflected in the second half.

Well, you mean you could have reflected in the second quarter, right? Because if you completed it in June, right?

Well, on the second quarter we used a preliminary contract price with our suppliers.

And how different is that preliminary price from the current price?

The preliminary contract price is lower than last year’s contract price but higher than the final price.

Okay, okay, okay, then understood. And my understanding is that there’s like quite a bit of growth right now in terms of the electricity demand, perhaps with the heat wave that is going through Korea. But don't you think it’s like the LNG that will -- usage in the third quarter will also pick up versus last year? I know you are saying that the maintenance for nuclear power was high in the first half of the year, but the second half of the year you don't have any new capacity and you have demand growth going on. So don't you think that the total volume of LNG bought in the second half of this year should be equal if not more than last year?

Well, I guess you have to consider two things. First is that, well, it totally depends on the weather. Also, when you look at our capacity addition plan, one [inaudible] the top plan was in commercial operation as of June this year. So we have about 400 megawatts of new coal-fired power plants.

Okay.

And also the operation of nuclear power and coal power will be increased compared to the first half. Well, I guess in expecting the second half cut, I guess you have to think about these two issues.

Okay, okay, fair enough. Okay, thanks very much.

Thank you. Next please.

Thank you. Next question is by Mr. Stephen Oldfield. Please go ahead.

Yes, hi. Sorry, one more question I had was on the power purchased for resale. Given that -- I noticed that the unit price of power purchased from IPPs only came to about 8.7% in terms of won per kilowatt hour. Now, given, I presume, the core price was going up to reflect the higher LNG prices, given that that would be the price setting fuel in most cases, and also given a fuel cost [par two] arrangement in the PPAs as far as I am aware, I am surprised as to why the unit price isn't going up in a similar order of magnitude to what we saw for LNG costs. Can you explain why it is so low?

Well, basically, as you may know, most of IPPs are LNG-fired power plants, so there should be a kind of linkage on the unit price. You were also surprised that there was only a 8.7% increase in the unit price. So let me get back to this matter after this conference, I guess I have to think about that more. Okay?

So do you mean that you actually think that that might actually be too low? Because it does seem wrong, right?

It's not wrong. This is the right data but we are actually working on it, so why there was a kind of small increase in the IPP unit price.

Okay. And then the volume increase of 46%, is that entirely because of the nuclear maintenance, so that you purchased more, or were there some new IPPs that came on line compared to the first half of last year [inaudible] capacity?

Two reasons. Because of the frequency of nuclear generation. Also, there was a new PPA called [Mayanuchan]. They were in commercial operation as of July last year. So when you compare the first half result, so the number for this year looks somehow higher than last year’s. So did you understand what I’m saying?

Yes, I understand.

Two reasons. Okay? Next please.

Thank you. Next question is by Mr. [inaudible]. Please go ahead, sir. His line is [inaudible].

Hello? I cannot hear you. The condition of the line’s not so good, so could you repeat?

Okay. I think Mr. [Ken Morey], his line is unconnected. [OPERATOR INSTRUCTIONS]. Next question is coming from Jacobelli Company. Please go ahead, sir.

Yes. Hi. It’s Joseph again. Mr. Ji, would you happen to know, you’ve just told me that on [inaudible] price wise, KRW693b was PPA related [bridged out]. Do you know what the actual volume was on PPA purchases now?

Sorry, I couldn’t hear you, so could you repeat?

Sure. Do you know what the -- you told us what’s the amount that you spent for power purchase agreement based purchased power, which was KRW693b the first half of 2006. Could you tell us what was the amount, the volume, of PPA-based purchased power?

Okay. Hold on. Hello? Hello?

Yes. Yes.

Sorry for that. Well, total amount from IPP was 9,285 gigawatt hours.

Yes.

[Inaudible], 6,054 gigawatt hours was from PPA.

6,064?

6,054.

54, okay.

Okay?

Yes. Thank you very much.

About 55% was generated by PPA.

That’s great. Do you have any rough guidance as to whether your full-year 2006 unit price for purchased power will remain relatively at the 108 level, or if there is any chance that that number could go up in terms of unit price?

Well, frankly speaking, we have no idea about the unit price forecast. But based on our budgeting numbers, I might be able to tell you the total power purchased for resale for this year. But the important thing is that this is a kind of budgeting number, so the actual number could be lower than this number. Do you understand what I’m saying?

Yes. Do you have the number?

Well, this year we expect that the full cost for PPA will be about KRW1.2 trillion.

KRW1.2 trillion?

So, as I mentioned -- but as you may know, the proportion of PPA out of total power purchased for resale is about 70%. So you might be able to calculate the total power purchased for resale.

That’s great. Thank you very much.

But, Mr. Jacobelli, but you have to notice that this is a kind of budgeting number, so the actual number will be different.

Right. But it could be lower rather than higher, right?

It’s actually lower than this number, I guess.

Right. Okay. That’s great. I understand. Thank you very much.

Thank you.

Next question is by Miss [Gilbert]. Please go ahead, ma’am.

Hello?

Ma’am? I will connect to the next question. The next question is by Mr. Stephen Oldfield. Please go ahead, sir.

One question from me. On the front page of what you have given as the provision for income taxes, the effect -- just getting the provision divided by the ordinary income gives me an effective rate of 36.9% this year. Last year it was 34.3%. Wondering if you can explain what the 2.5 percentage point difference in effective rate.

Well, mainly because of the deferred tax liabilities from last year. That’s the main reason why the effective tax rate first half is a little bit higher than the previous year. But year-on-year base, I guess it will be back to normal level, around 34%.

I don’t understand. You said different liabilities. I don’t understand what you mean by that.

Deferred tax liabilities. Deferred tax liabilities.

Can you elaborate what you mean by different tax liabilities? I don’t get it. Do you mean the tax rate has changed or --?

No, no, no. Deferred.

Sorry, deferred tax liabilities?

Yes, deferred tax liabilities. Sorry for my pronunciation.

Okay. But your deferred tax liabilities, if you’ve got a change in deferred tax liability, it should be offset with the -- the effective tax rate shouldn’t be changing here, right? If we’ve got more deferred tax, that would mean that we’ve got less current tax. It shouldn’t change the effective overall tax rate.

Well, when you are calculating the tax --

It will be [taken off the accounting] income, right?

Yes, we use 27.5% corporate tax rate to ordinary income, plus deferred tax which was deferred from last year.

So you mean this is actually under accruals from the previous year? Okay. So it’s not -- okay, so it’s actually prior year -- changes in prior-year estimates?

Hello? Hello? Next please.

Thank you. The next question is Mr. David from Deutsche Bank Company. Please go ahead, sir.

CY, hi. It’s David. Sorry, I missed some of the answer on the tax. But should we also be looking at the profit split between the parent company and the gen cos, because that would affect the amount of double tax that is paid? Is that what you mean by an increase in deferred tax?

But as for the income from dividends, the double-tax issue was cleared. But still we have a kind of double-tax issues on the retained.

Retained? On the retained portion. Okay. Okay, so that explains it. Thank you, Mr. Ji. Thank you.

Thank you. Next please.

Thank you. Next question is by Mr. Stephen Oldfield. Please go ahead, sir.

Sorry to do this to you, but I’m confused now on the tax because you just told me it was under provisioning of liabilities in the prior year. Now you’ve told David -- as a response to David Clark’s question, you said it’s actually to do with between the mix of the gen co profits versus parent company profits. Can you clarify which one of the answers is the correct one?

Well, as I said, there is a kind of double-tax issue on our gen cos. The profit from gen cos -- the taxes are imposed on the profit from gen cos also. Tax is imposed on KEPCO’s profit. So there’s a kind of double-taxation issue. And those taxes will be recognized when we sell our gen cos, so we recognize a kind of profit.

Okay. Yes, I understand all that. So the question that -- the answer to the question you gave me earlier, where you said it was a revision to prior-year estimates, that’s not correct at all then?

So I actually said the condition of the line was not so good, so I couldn’t hear you well.

Okay. So it’s nothing to do with the prior year? Thank you.

Thank you.

Next question is from [Mrs. Emberley]. Please go ahead, ma’am.

Hello?

I will connect to our next question. [OPERATOR INSTRUCTIONS]. Next question is Mr. David from Deutsche Bank Company. Please go ahead, sir.

Thank you, Mr. Ji. My very last question, but can you just give me a quick update on the status of the pump storage capacity which is meant to be coming on line this year? I think it’s six units for a total of 1,600 megawatts.

About three units of 800 megawatts were in commercial operation as of June this year and the rest of them will be in commercial operation around August.

August. Okay. Okay. Sorry, is that -- that 800 megawatts is -- you said in June?

In June, yes. As of June, I said.

Okay.

And the one -- some are [inaudible] coal-fired power plant was in commercial operation at the end of June.

The 500 megawatts? Okay. Thank you.

Thank you.

Currently there is no question. [OPERATOR INSTRUCTIONS]. Next question is from Mr. James Bennett from UBS Company. Please go ahead, sir.

Yes. Hi. Thank you very much for the call. I have a couple of questions. First is on the coal plants. Could you please tell us the utilization ratio in the first half and what you expect for the second half?

And also if you could just remind us of the coal contract prices last year and if it is fair to assume that the difference between the contract prices and the preliminary prices you’ve been using will be reflected retroactively from the first half of this year?

Well, as for the utilization rate, the rate for coal was 84.8%, as of June. As for the contract price for last year, the [wholesale] on coal was about US$50 per ton, and Chinese was about US$55 per ton and Indonesian was US$45 per ton.

And what was the third question?

Yes. Is it fair to assume that this -- the new contract prices will be applied retroactively from the first half?

Not really, because they are contract -- the actual contract price will be reflected in the second half, from third quarter.

I see. Okay. Thank you.

Thank you.

Next question is by Jacobelli Company. Please go ahead, sir.

Yes, hello, Mr. Ji. Sorry to pick up on a couple of the questions that were already asked, but the difference in the price, say for example the Australian coal which was last year $50 and this year is $46, so you will be paying $46 for the second half. What will you actually be paying in the first half? Will you be paying retroactively $46 or will you be paying $50?

In the first half we paid around $50.

That’s what you paid but will you get a discount back?

Of course. Of course.

As in --

Probably in the third quarter.

So the effective price for FY06, for the full year, you will actually, in terms of out of your own pocket, you will have paid $46, not $50.

Yes, of course.

Right. And the other question -- thanks for clarifying that. And the other question is with regards to maintenance. If I remember correctly, in the first quarter you had given a rough guidance of round about 10% increase year on year. Do you still have a rough guidance for full-year maintenance increase, or you don’t have a number now?

You mean the maintenance cost for full year?

That is correct, yes.

Well, only the -- I guess around 10% increase is about the rough number that I mentioned earlier this year, right?

That’s what I remember, yes.

Well, at the moment I don’t have the exact forecast for the maintenance, so it’s really hard to tell you the exact forecast number for the maintenance at the moment.

Understood. Thank you very much.

Thank you.

Currently there is no questions. [OPERATOR INSTRUCTIONS]. Next question is from Mr. James Bennett from UBS Company. Please go ahead.

Yes. Hi. Thank you. Just a couple more. Regarding your long-term LNG contract with COGAS, when do you expect a conclusion? And do you expect a big change here?

Also I understand you introduced independent divisional system for your T&D part. Do you -- what kind of impact do you expect from this? Thank you very much.

Well, as you may know, the LNG contract is expiring coming November. So we are going to start negotiations with COGAS around September or October. But nothing has been decided yet. But, as far as I understand, COGAS is asking another long-term contract. Our gen cos, we are trying to make a private bid to long-term contracts.

And then, in terms of the independent divisional system, we are trying to introduce this system and we are expecting a kind of half reduction from our divisions. We are trying to introduce competition among each division, so that we might be able to have some kind of cost reductions. But at the moment I can’t give you the exact expected cost reduction. Okay?

Yes. Thank you.

Thank you.

Next question is by Mr. Henry Cobbe. Please go ahead, sir.

Hi there. Just a follow-up question. Just looking at your coal fire capacity, looked like another 1,000 megawatts came on stream in the second quarter. So are you expecting utilization rates in coal-fired contribution to increase in the second half?

We expect that the generation from coal-fired power plants be increased. When you look at our figure for nuclear and coal [on special coal], most of the maintenance has been done in the first half. So there’s a kind of increase for our power plant generation.

Okay. Thank you very much.

Thank you. Next please.

Currently there is no questions. [OPERATOR INSTRUCTIONS].

Well, maybe have one more last question.

Thank you. Last question is calling from Jacobelli Company. Please go ahead, sir.

I believe the last question’s pretty easy, Mr. Ji. Is there -- is it possible for you to actually offer an interim dividend this year, or is it now just too late? Will there be an AGM or a general meeting where you will decide whether you pay an interim dividend, or that will not be the case?

Well -- hold on. Well, first of all, if we are going to introduce interim dividend, we have to change our regulations also. Second, our long-term strategy on dividend policy, so as we are setting on our long-term dividend policies.

Does that answer your question Mr. Jacobelli?

Yes, very much indeed. Thank you.

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

Thank you and bye-bye.

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