Korea Electric Power Corp (KEP) 2006 Q3 法說會逐字稿

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.

Hello everyone. This is Changyoung Ji. On behalf of Kepco I would like to thank you for participating in our conference call today to review on the financial result of the first nine months 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 its six generating subsidiaries only and to help investing public better understand Kepco's financial results of the first nine months of 2006. As such, this financial information may not have been prepared in accordance with the general accepted accounting principles of any country and may not necessarily be indicative of the results or operations of Kepco and its six Canadian subsidiaries as a Group. And more importantly, data should be not relied upon or form a basis of entering into any contract for the proposal of acquiring or selling any securities of Kepco or any other investment decision in respect of securities of Kepco.

Now Seong 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 8.0%. This was mainly because the billed revenue of electric power, the principal component of our operating revenues, increased by 8.6% to KDW20.19 trillion from KRW18.59 trillion in 2005. This result is that of just the inter-company transaction, reflecting primarily a 5.7% increase in sales value of electricity. The overall increase over sales volume was mainly attributable to a 6.2% increase in the commercial sector and a 5.5% increase in the industrial sector.

Operating expenses increased by 14.5% to KDW17.21 trillion as compared to KDW15.03 trillion in 2005. This was mainly due to a 19.7% increase in fuel expenses, a 48.9% increase in power purchase for resale and a 23.6% increase in maintenance expense.

In the first nine months of 2006 the total cost of bitumen of coal and nuclear reduced by 4.8% and 1.7% respectively. However the unit price of LNG increased by 25.7% and the total cost of LNG increased by 54% because of the concentration of maintenance for nuclear power in the first half and recent oil price hikes.

The increase of maintenance was mainly due to the [ten-year] settlement by Kepco and an increase of maintenance by nuclear power. Kepco started making [ten-year] settlements with the maintenance performed as of this year. Settlement used to be delayed and made around end of the year until last year.

A 0.8% increase of depreciation expense was mainly due to the decrease of a commercial operation of new facilities by Gencos. As a result, operating income decreased by 16.7% to KRW3.28 trillion in 2006 as compared to KRW3.94 trillion in 2005. Non-operating income increased by 3.3% to KRW838b from KRW811b in 2005, mainly due to the increase of foreign exchange translation gains. The interest expense increased by 9.6% to KRW511b in 2006 from KRW466b in 2005 because the cost of debts increased to 4.7% from 4.2%. The total interest-bearing debt was KRW18.9 trillion and that of 2005 was KRW18.4 trillion.

And as a result of the above factors net income decreased by 18.9% to KRW2.1 trillion in the first nine months of 2006 as compared to KRW2.59 trillion in 2005. This concludes our presentation and now we are open for your questions.

[OPERATOR INSTRUCTIONS]. Currently there are two participants waiting with their questions. The following question is [Josh Bay] from UBS. Please go ahead sir.

Yes hi. Thank you very much for the call. First of all could you please share with us the number of maintenance days for your coal plants during this year by quarter, and also your schedule for the fourth quarter? And also if you could tell us the numbers from last year as well?

Secondly, there were press reports regarding Kepco's interest in some power plants in the Philippines. Is there any information you could share with us or when you expect a final conclusion on the issue?

Okay. Hold on please.

So let me start with the maintenance days for coal. Until third quarter the total maintenance days for coal-fired power plants was, I think was increased by 1% compared to last year. And first quarter about 343 days are scheduled. And that of last year was 356 days.

Yes. Could you please share with us by each quarter? Would that be possible?

Okay. In the first quarter for this year maintenance days were 204 days and 345 days in 2005. In second quarter days were 496 days in this year and 203 days in last year second quarter. And during third quarter days were 170 days and 89 days in third quarter last year. And fourth quarter, last year was 356 days and this year scheduled maintenance days are 343 days. So on a year-on-year base this year's maintenance days for coal-fired power plant will be increased by 11% compared to last year. Does that answer to your question?

Yes, thank you.

Also, as for your second question, actually we are preparing to participate the bidding for Mirant, it's a power plant in the Philippines. And bidding -- the deadline is middle of November so we are still working on it and we are trying to [participate] that bidding. Okay?

Yes, thank you.

Thank you.

The next question is Henry Cobbe from Thames River Capital. Please go ahead sir.

Hi there. Thanks very much for the call. I just wanted to ask about the coal price and the outlook for negotiations with -- for the contracts for next year. What's your view on pricing given the weakness in Newcastle's coal prices?

Well as you can imagine the spot price of coal is lower than our contract prices here so if these kind of trends are maintained I guess next year our coal price will be lower than this year.

And the contracts run from March to March? Is that right?

Well it depends on -- basically it depends on each contract. Normally we start negotiation around March and it takes about one to two months. But in case of this year we completed contract negotiation around September.

And you completed them in September 2006 for the pricing for the coal delivered over the last 12 months or for the next 12 months?

For the next 12 months.

Okay. So the USD52.5 price in this quarter we can expect to see that for the next year or so?

Yes, that's correct.

And then in March we'll see it step down perhaps for starting from second half '07?

Yes, you're right.

Okay. Okay. Thank you very much. Thank you.

You're welcome.

Currently there are one participant waiting with their questions. The following question is [Ed Mally] from JP Morgan. Please go ahead sir.

Hi, thanks very much for your presentation.

You're welcome.

My question is regarding the supply -- demand-supply situation in Korea. Given that the reserve margin dropped below 10% and then also demand growth has been stronger than expected. So in terms of guidance on fuel mix for '07 onwards, given that there is a lack of nuclear units for completion until'10 as well. So will you expect -- actually the peaking output contribution to -- actually to go further?

And also secondly, related to that is that whether we should expect further of extra power plants to be built by Kepco because of the falling reserve margin?

Well basically we expect demand growth for the next year will be around 5.2% and the reserve margin in the third quarter was about 10.5%, and well -- we feel very comfortable about this level. We are trying to maintain over 10%, between 10 and 15%. And if you -- as you may know, every year we are planning to add about 2,000 megawatts of power plants and most of them will be coal-fired power plants. And so I guess the current generation mix, about 80% generation from nuclear and coal, will be maintained until year 2010. And also we are planning to build about eight new nuclear power plants from the year 2010. So from the time I guess the proportion of nuclear will go up. So at the moment basically we don't see any problem for the demand growth or reserve margin.

I see. And when does the -- associated with that, when does the KPX -- the reports or the revision on long-term demand-supply report, when does that come out?

[Inaudible] discuss about that with the government officials at MOCIE and they told me that they are planning to release the newest version of long-term power supply plans during November this year. So probably around I guess end of the month.

I see. Okay. Thank you.

Thank you.

Currently there are two participants waiting with their questions. The following question is by Henry Cobbe from Thames River Capital. Please go ahead sir.

Thank you. My question has been answered actually. Thank you.

Hello.

Hello, yes, my question has been answered. Thank you.

Okay. Thank you. Next question please.

The next question is [Inaudible] from HSBC. Please go ahead sir.

Hi. Thanks for arranging the call. I'm just wondering, in view of the high fuel costs, what the management's view on the possibility of a tariff hike in the future?

Well as for the tariff adjustment, we started a discussion about that from September and so we are still discussing about that with government officials. So at the moment it's really hard to tell you when can we get [inaudible], but what I can tell you is that we are still in the middle of discussing it with our government.

So does -- do you have actually a time schedule for that discussion, for that --

Practically speaking, we don't have any specific time schedule for that.

Okay. The second question, I was just wondering would there or will there be any disruption in the power generation or supply given the tense relationship between South Korea and North Korea now?

Well, actually last year the minister of reunification proposed that South Korea is willing to provide about 200 megawatts of electricity but it was a kind of proposal to North Korea but we didn't answer to that proposal yet. So.

So there should be no impact on your power generation?

No problem. Well actually we project our [inaudible] from that and if we supply those amounts North Korea, even so our reserve margin will be maintained around 10 to 15%. So there's no problem for that.

Last question. I'm just wondering can you give us a guidance about the generation mix and the fuel cost mix for the full year of 2006?

Well until first half, mainly because of the increase in maintenance days for nuclear power, proportion of nuclear was reduced. But from third quarter the generation of nuclear power got back to normal levels. So I guess year-on-year base, I guess the generation mix will be almost same as last year.

So you actually expect [your] generation from the LNG will be around the 14% like last year?

Yes.

Okay. Thanks.

Currently there are two participants waiting with their questions. The following question is by [Ed Mally] from JP Morgan. Please go ahead sir.

Hello.

Hello.

Yes sorry, I have follow-up questions. One is on the dividend payout policy and I was wondering whether there is any comment from you guys on it?

Secondly on the effective tax rate, there was a slight reduction during the third quarter, whether that's sustainable?

And then number three is -- did you mention that the -- from now onwards every year Kepco would be building about 2-3,000 megawatts of capacity. But actually when we look at the extent of peak demand growth or peak demand addition for the past three years has been -- this year in particular versus last year has been something like a 4,400 megawatts. Does that mean the gap will have to be met by more of the IPP capacity then for the next few years?

Well first of all, talking about dividend policy, as you may know we are focusing on the absolute amount of dividends, so like EPS. So this year we're going to secure the previous year's level of 11.50, and if it allows -- if financial performance is better than last year then we're going to increase the dividend.

And secondly, you talked about the effective tax rate. It was about 33.9%. There was a slight decrease compared to last year. The main reason for that is, as you can see, our income has been reduced compared to last year.

And lastly you talked about the capacity addition plan. Well, yes you're right. In Kepco's [inaudible] we are adding about 2,000 megawatts. And also -- and that doesn't include the new capacity addition by IPPs. So as far as I understand there is additional 2,000 megawatts from IPPs. So together is that a total new capacity addition will be around 4,000 to 5,000 megawatts.

So roughly speaking every year we should expect maybe 2,000 from Kepco and another 2,000 from the IPPs.

Yes, you're right. So based on that, if we have no [chase-backs] to use more LNG then our margin will be somehow deteriorated.

Yes of course, then there's then the need for tariffs to be raised further?

Yes, you're right. Okay.

Thank you.

Thank you.

Next question is Henry Cobbe from Thames River Capital. Please go ahead sir.

Hi there, just a few follow-up questions. You stopped disclosing labor cost and I think for the last four or five quarters now. And is -- would you be able to give us an update perhaps on what the 2005 labor expense was and also include in the quarterlies because it's quite a major OpEx component?

Secondly, just on Powercom, whether that your stake in Powercom is up for sale and what kind of gain you could possibly realize on that?

And the last question is, I don't know, I couldn't find it on the website, but I don't know if the first-half consolidated and unconsolidated balance sheets and cash flow full financial statements have been published, but it would be great to see those when they're available.

Well talking of labor costs, well last year it was increased by around 14.9%. And this year actually we included in our other cost and -- let me answer to that question in this way. Recently Korean government gave us a kind of guideline. So we decided to -- our maximum increased amount of the maximum [inaudible] around 2%. And we -- until third quarter [new] hiring was about 1.4%. So together with that I guess labor costs for this year will be increased by around 4-5% compared to last year. Okay?

And last year was 14.9% relative to the previous year, which is the last bit of data we have.

Yes.

Okay. Thank you.

And talking about the Powercom, actually we tried to list Powercom in Korean stock market this year but, as you may know, the Powercom recently started new business and because of that their performance, bottom line, is negative so we couldn't get a fair valuation from the market. So we delayed the plan until next year. So -- we still have a plan to list Powercom, but our plan has been somehow delayed.

Or would you consider selling it to LG Dacom, selling the stake?

Well, we are holding about 43% of the total shares and we are planning to sell about 32%.

32?

Yes, 32% to public, not Dacom.

So that isn't to the public.

Yes.

I see. And that's to -- okay. And then the balance you would sell to Dacom so they could get control?

Well [inaudible]?

Your 43% stake presumably you'd sell -- you're saying you'd sell 30 to the public and 13 to Dacom because they want control presumably?

Yes you can say that.

Okay. Okay.

And on your last question, well actually we post those on our balance sheet and other financial statements on our website.

I couldn't find it but I'll have a look.

Okay. And if you cannot find it just give me a call and I will send you. Okay?

Okay. Thank you very much.

Thank you. You're welcome, bye bye.

[OPERATOR INSTRUCTIONS]. Currently there are two participants waiting with their questions. The following question is by [Simon Li] from Morgan Stanley. Please go ahead sir.

Hello.

Hello.

Yes. Thank you very much for the call today. I have a follow-up questions regarding the news regarding the government disposal of stake in Kepco?

And also the news about Kepco issuance of convertible bonds. Is there any update on this too? Thank you.

Yes it is true that our government have decided to sell down their stake by around 3%. So we decided to buy back those shares from the government and actually we are discussing about the timing with the government at the moment. So nothing has been decided yet. We don't have any specific timeline but we are still discussing about that. Okay?

I have follow-up questions. One about the issuance of the convertible bond. So that will be issued right after you and the government decided that the timing of the disposal?

Yes you can say that. But altogether issuance [EV] and also the disposal of government shares, we are discussing about those issues.

Are we talking about the disposal will take place this year or next year?

It's really hard to tell you at the moment. It depends on the discussion with the government. Well, I would say that it all depends on the government decision.

Okay. Thank you.

Thank you.

The next question is by Josh Bay from UBS. Please go ahead sir.

Yes, thank you. I'd just like to follow up on my previous question. I just wanted to double check the coal contract that you have completed in third quarter of this year, is that being retroactively applied from the beginning of this year until the end of this year, or is it being applied from third quarter of this year until third quarter of next year?

Well it is a kind of very complicated question. In importing coals we make a lot of contracts with suppliers. So some contracts it starts from March to next February and some others start from July to next June. So basically, as you may know, we make a one-year contract and if our final contract price is lower than the preliminary contract price then we put back the amount we take. [Technical difficulty] So I would say it depends on each contract.

Yes, could you provide some kind of a rough portion so we could have some idea?

Well about 50%, about 50% is from March to next February and the rest amount is very, is spread out through the whole year.

50% from March to next February.

Yes.

I see. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. Currently there are one participant waiting with his question. The following question is by [inaudible] from HSBC. Please go ahead sir.

Hello. Can management share us -- share your view on the future of average fuel costs and the future expansion rate of LNG and oil prices?

Well it's a kind of very, very difficult question to answer because it all depends on the global oil price. But talking about the recent trend, the oil price has been reduced when you compare that of early this year. So well I would say that the oil price in a kind of down trend these days. That means that the LNG price will also go down. But it all depends on the global oil price which is really hard to forecast.

So do you expect that average price for LNG or oil for the whole year will be lower than the first nine months of 2006?

Do you mean between the [fourth] quarters?

Yes.

Yes. I would say yes.

Okay.

But you should -- it should be noticed that in case of LNG price there's a kind of two to three month time lag. So I guess you should consider there is a time lag of LNG price.

I actually have a follow-up question about the generation mix. You mentioned that your -- the management expect the generation mix for 2006 will be similar to last year. But given that LNG now accounts for more than 15% of the generation mix and there will be more demand of electricity in the winter, do you think Kepco can achieve the target of 40% LNG in the generation mix?

Well, yes, you're right. Actually it sort of depends on the weather, especially during the first quarter. I think this last year we had very cold days during our December and because of that we consumed a lot of LNG compared to the previous year, and that has deteriorated our financial performance and that increased proportion of LNG. So generally speaking I expect that the generation mix will be same as last year. But, as you may know, it all depends on the weather.

Yes, okay. Thanks a lot.

Thank you.

[OPERATOR INSTRUCTIONS]. If you have no more questions we will finish Q&A session and get through the conference after ending 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 interest in Kepco. Thank you. Bye bye.