Korea Electric Power Corp (KEP) 2006 Q4 法說會逐字稿

Good afternoon to those who are in Asia. And good morning to all of you in the [far] West. I'm 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 our financial results of the fiscal year of 2006.

Please note that the financial results discussed today are preliminary, [inaudible] and not [inaudible] by KEPCO's independent accountant or arbiters. The financial data to be discussed today are the financial information that are made by adjusting for inter-company transactions on KEPCO and it [inaudible] only and to help the industry better understand KEPCO's financial results of the fiscal year of 2006.

And such, this financial information may not have been prepared in accordance with the generally accepted accountancy principles of [inaudible] country. And they may not necessarily have been [inaudible] results of operation of KEPCO and its [inaudible]. And, more importantly, this should not be relied upon on a basis of entering into any contracts for the proposal of acquiring or selling securities of KEPCO or any other investment decisions in respect of -- in securities of KEPCO.

Now, Seong Hee Yang will run through results for a few minutes and then we will have a Q&A session. If you are comparing [inaudible] basis between 2006 and 2005.

The operating revenues were up by 7.3%. This was mainly because our sales revenues of electric power, the principle component of our operating revenues, increased by 7.7% to KRW26.56 trillion from KRW24.67 trillion in 2005. This is a result [inaudible] of Company transactions, reflecting primarily a 4.9% increase in the sales re-bundles of electricity. The overall increase of our sales volumes was mainly attributable to a 5.6% increase in the Commercial sector and a 4.6% increase in the Industrial sector.

Operating expenses increased by 11.2% to KRW23.8 trillion as compared to KRW21.46 trillion in 2005. This was mainly due to a 15% increase in fuel expenses, a 39.5% increase in power purchase versus sales and a 14.5% in maintenance expense.

In the fiscal year of 2006, the unit price of the LNG increased by 19.3%. And the consumption of LNG increased by 12.3% which caused a 34% increase in total LNG expense.

The increase of maintenance was mainly due to the [inaudible] by KEPCO and the increase of maintenance contract price between KH&P and KPS. A 2.4% decrease of our depreciation expense was mainly due to the decreased [inaudible] costs by [gencos]. As a result, operating income decreased by 14.7% to KRW3.22 trillion in 2006 as compared to KRW3.77 trillion in 2005.

Non-operating income increased by 2.5% to KRW1.22 trillion from KRW1.19 trillion in 2005, mainly due to the increased level foreign exchange in translation gains.

The interest expense increased by 8.4% to KRW678b in 2006 from KRW625b in 2005, because the cost of debts increased to 4.5% from 4.4%. The total interest bearing debt was KRW19.22 trillion and debt of 2005 was KRW18.3 trillion.

As a result of the above factors, net income decreased by 15.4% to KRW2.07 trillion in the fiscal year of 2006 as compared to KRW2.442 trillion in 2005.

This concludes our presentation. And now we are open for your questions.

Now the Q&A session will begin. [OPERATOR INSTRUCTIONS]. The first question will be given by Jacob from Merrill Lynch. Please go ahead sir.

Hi good afternoon. And thanks for hosting this conference call and for your time. It's Joseph Jacobelli from Merrill Lynch. I just have three very quick questions.

One is I just want to double check that actually generation costs for the Company on a per unit basis have actually increased by around about KRW4.11 from 20 -- round about KRW28 to about KRW32. That's just providing fuel plus power purchase for resale divided by the generation amount. That's the first question.

The second question could you talk a little bit about CapEx for 2006, you're projections at the beginning of the year versus the realized CapEx?

And finally just incase you have the number, would you have an estimated number for the shareholders' equity as at the end of 2006? Thank you.

What was the first question again please?

The first question, I just wanted to double check the mathematics, pretty simple. It's adding the fuel and the power purchase for resale, divided by the total amount of power generated. If you divide one by the other you get around about KRW32 and the corresponding amounts for the previous year was about KRW28.

Okay. Okay, let me start with the CapEx. Well, as you can see here, in our asset, the actual or CapEx was about KRW8.3 trillion in 2006, which is a little bit higher than we expected. A major reason for that is, first of all, CapEx from KHNP, the nuclear power company, was slightly increased because they paid about KRW300b for the nuclear waste storages. They started building nuclear waste storage in [local area] in Korea and because of that they had to spend about KRW3,000b for that.

And also, the CapEx from [KEPCO] and [KIMICO] was more than expected, plus they are now building three units of coal-fired power plants at the moment and in 2006, they spend some money for the [equipment]. And that's the main reason why the actual CapEx in 2006 was somehow higher than we expected.

Sorry. Could you clarify again, does that mean KIMICO were building coal-fired power plants anyway right? So, why the higher CapEx from 2006?

Well, in building three units of coal-fired power plants because of the construction period, they incurred a lot of equipment and materials during 2006 for new facilities. So, I -- they spend about KRW200b each. So, their spending was a little bit higher than we expected.

Could you just clarify. Is it the spending for the three units will be higher than originally planned?

No. No.

Or they're just early -- they're just completed the work earlier than expected, so that was booked into 2006?

Well, yes. They're spending was earlier than expected, that's the main reason why. I don't mean that they were spending -- their costs increased -- I mean their spending for the equipment was increased.

And was the nuclear CapEx, as well, expected and came in earlier than expected? Or was that --

No, not really. In the case of our nuclear Company, they were supposed to spend about this amount for the new nuclear waste storages. And as you know, recently -- I guess it was in late 2005, we chose the place for the nuclear waste storages in the local area and they spend about KRW300b for those areas.

Thank you. Okay.

And what -- sorry, what was the first question?

In terms of the unit generation costs, based on your calculations, how much did that increase on its per kilowatt hour -- Korean won per kilowatt hour?

Okay. Well, in 2006 it was about KRW53.62 per kilowatt hour. And then in 2005 was KRW51.27 per kilowatt hour.

So, KRW53.62 against KRW51.27 and that's for KEPCO only, not for the IPPs?

Yeah. Only for KEPCO.

Okay. And on the shareholders' equity, if you have a number by any chance?

Let me [follow with that later]. I don't have that data at the moment.

Thank you.

Thank you.

Currently one participant is waiting -- is waiting with his question. The following is question is by Steven from UBS. Please go head sir.

Yes. Good afternoon. Steven [Alter] from UBS here. A short question on the fuel costs. I see there's no breakdown, or I can't find the breakdown at least, in the pack that you sent out regarding fuel. And I was wondering if you could give us an estimate roughly of the cost of the coal purchases for this year -- for last -- for 2006? Or if you don't have that, at least if you could give us maybe the cost -- average cost per ton of the coal purchased including transportation?

Well, the average -- the unit price of coal in 2006 was KRW65.1 -- KRW55,100 per ton and that of 2005 was KRW51,000 per ton. So, the units per ton decreased by 9.7% in 2006. Okay?

Yes. And if you could have a look at the -- if -- do you have a sense for the context for the coming year, what kind of level context and sort of pricing do you see coming out compared to the pricing on your context in 2006? For like your coal from Australia and Indonesia and to the extent you can do it in China?

Well, as you may know, we start the contract negotiations for coal around March. So, we didn't start negotiating yet. So, I cannot give you the detailed information on that at the moment. But what I can give you is that based on the provision figure for 2007, we have the fuel cost projection. Based on our internal projection, we expect about 6.9% decrease in unit price of coal this year. And there are two major assumptions. The first one is that the average price of oil maintains $60 per barrel and the second assumption is that the FX rate -- Korean won maintains -- the average FX is KRW930 per U.S. dollar.

Okay. So, you're basically -- that $60 is a delivered price right, including transportation?

You mean the forecast or the --

Yes. The forecast target that you're using of $60 per ton includes the transportation?

Yes. It includes everything.

And do you see any change in the relative sources, like if you compare with how much you bought from China versus Australia versus Indonesia last year, do you anticipate that could change? Or do you think --

Well, when you look at our historical data the proportion of Chinese used to be over 40%. But in the past four years we tried to reduce the exposure to China and tried to increase the proportion of Australian. So, in 2006, the proportion of Australian is about 40% and Chinese is about 17%. So I guess this kind of trend will be maintained.

Do you think it will fall further in 2007? Okay. Thank you very much.

You're welcome. Goodbye. Thank you.

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. The following question is by Jacobelli from Merrill Lynch. Please go ahead sir.

I'm sorry one more. Just a follow up on Seven's question on -- he was asking about coal. I would like to ask about LNG. If you have some kind of sense where you see LNG prices in 2007 against 2006, knowing that there's a lag effect and everything?

Well, Joseph, as you may know, that kind of forecast is very difficult. But what we have also forecast for LNG this year, based on the two major assumptions that I mentioned, we expect about 2% increase in unit price of LNG this year.

Thank you.

Thank you.

Currently two participants are waiting with their questions. The following question is by Tindle from GIC. Please go ahead. Please go ahead sir.

Hi. Good afternoon. Thank you for the call. Just one question. Would you have a split out of your labor costs for 2006 from the other expenses please?

Well, let me follow up on that labor cost later. Actually we won't disclose that at the moment. Can I have your contact point or -- so that I can forward it to you later?

Okay. Sure. Aright.

Thank you.

Thank you.

The following question is by [Jack] from [CISC]. Please go ahead sir.

Hi. Thanks for the call guys. Just two quick questions. On the fuel expense, somebody had told me form the Korean call that you're basically budgeting for a 7.6% rise in fuel costs for this year. So, it's first of all, can you confirm that, is that right? And then do you have a breakdown of that by fuel type?

And then my second question -- well, why don't we start with that one? Is that --

Are you talking about coal price forecast for this year?

No. I'm talking about your overall fuel costs forecast for this year. Like I was told that you're forecasting it to be 7.6% higher in '07 versus '06 at a $60 a barrel price of oil. Is that right?

That's correct. Yes. Well, at the moment based on the two major assumptions that I already mentioned, we expect about 6.9% decrease in unit price of coal, around 4.1% decrease in [inaudible] and 2% increase in unit price of LNG. And, overall, we expect the total fuel costs will be increased by 7.6% in 2007 compared to 2006.

Okay. Okay.

Okay?

Mr. Jack. Yes. That's fine. Thank you.

currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. The following question is by Jacobelli from Merrill Lynch. Please go ahead sir.

Sorry to do this, keep on asking for clarification. The 7.6%, what is the underlying demand -- electric power demand you based that on please?

A 5.8% increase.

Great thanks then. And will you be sending out the breakdown for November and -- sorry, for December? Do you use an accumulated monthly sheet?

Sure. I guess we've already sent it to you, no? Okay, after this conference call, I'll send it to you.

Please?

Thank you.

Thank you.

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. The following question is by Jack by CISC. Please go ahead, sir.

Yes. Sorry, just one follow-up question. They were mentioning -- you were mentioning earlier in the call about KRW300b being spent on nuclear waste clean up and I didn't quite catch all of that. But basically what have you got for that KRW300b, like that's $350m. Like what's that actually been spent on?

And then, secondly, what is the forecast for that particular area for this year? How much more are you spending in the next few years on nuclear waste clean up?

Okay. Hold on. Well, the amount of KRW300b for nuclear waste, storage is a -- well, according to the agreement between KEPCO and the local Government we decided to put about KRW300b per year for -- to help the resident -- residential areas in those nuclear waste storages. So, going forward, I guess we may have to spend this amount of money for coming years. But I'm not quite sure how much. So, let me follow up how much is total for those support.

Mr. Jack. Wait. But what you're saying is that it's a KRW300b just spent to the residents of that area. It's not like it's an -- actually a subsidy to the community, or it's not actually being spent on storing the waste or preparing a site for storage?

Yes. Not really. [Inaudible] needs for the people in those areas.

Okay. Okay.

Okay. So, I'll get back to you [inaudible] I'll check out how much is total and I'll [phone] you a bit later.

And you're saying that this was the first year that you did that or --

Yes. Yes.

Okay. Okay. Thanks.

Okay.

Currently four participants are waiting with their questions. The following question is by Tindle from GIC. Please go ahead sir.

Hi. Thanks again. Would you have any guidance for tax rate, CapEx and dividends in '07 please? Sorry, '08.

Well, as for the dividends, we didn't decide yet. We are planning to host a general shareholders' meeting around end of March. So, we might be able to give you the detailed information on dividend around that time. And I suppose the tax -- did you ask about tax rates?

Yes please.

You mean the effective tax rate?

Yes please.

Yes. That was 34.5% in 2006 and it was 36% in 2005.

Sorry. And in 2008, what would you expect your effective tax rates would be?

I guess around 35 to 36%.

35 to 36. Okay and CapEx guidance for '08?

Well, the initial forecast for CapEx in 2007 is KRW9.8 trillion and KRW10.1trillion in 2008. But as you may know, [inaudible] data, our actual CapEx has been around [80 to 90%] of our projected amount. So, I guess the actual CapEx will be around KRW7 to KRW8 trillion going forward.

Mr. Tindle. Alright. Okay. Thank you.

Thank you.

The following question is by Steven from UBS. Please go ahead sir.

Yes. Thank you. I just wanted to follow up on that previous question. The 1.5 percentage point decline in effective tax rate in 2006 versus '05. Can you just comment on the reasons for that? I see it happens at both the parent Company and the combined level. Thank you.

Sorry. I couldn't hear you. Could you speak a little bit slower with me.

Tax rates fell to 34.5% effective from 36% in 2005. Why?

Well.

Why the fall?

Well, as you know, the number for 2006 is preliminary figure. So, I guess that when we finish our -- the entire accounting and calculations, I guess that effective tax rate will go back to normal level of round 36%.

So, does that mean that when you have the final results announced in a few weeks' time then it's likely that the actual earnings will be lower than what you've announced so far, because of the higher -- you will have a higher level of tax?

Maybe the tax could be increased.

So that means that this level of earnings you've announced so far is higher than what the final number will be, is that correct, because the final number will include a higher tax expense that you currently reported?

So there could be slight changes.

I see, thank you very much.

You're welcome.

The following question is by [Mike Leigh] from HSBC. Please go ahead sir.

Hi, thank you. One follow-up question on the dividend. Any guidance on the dividend date? Thank you.

It was [December 27] last year. So, like other countries, like the U.S., we already have dividend [have] in our '06, it was December 27.

Okay, thank you.

Thank you.

The following question is by Jacobelli from Merrill Lynch. Please go ahead sir.

You said the -- just to make double sure that we understand what may happen in 2007. We do agree that in 2006 in terms of the -- basically demand was not on your side, because you had stronger than expected demand when LNG was very, very strong. And in the fourth quarter you had a slowdown in demand, where actually you could meet with other forms of energy like nuclear.

So, if that is correct, then what is the picture for 2007 in your view? What are the -- taking into account that the economy is seeing a little bit of a slowdown. And so, rather than just focusing on the overall number for the demand growth for the year, how do you see it panning out in terms of your equipment actually being able to meet that demand?

So, in short, should we -- where could we be surprised either positively or negatively in terms of the effect of demand on fuel costs, if that makes any sense?

Let me start with demand growth and the [base load] growth. In 2006 the major reason why we hired [depend] on the LNG consumption was that when you look at the new capacity addition plan, the growth rate of our base growth was only 1.4% but it used to be around 4%. So, our base load couldn't meet all the demand growth in 2006 that's why we had to use more LNG, and we had to buy more electricity from our IPPs.

But going forward, in 2007 and 2008, when you look at our new capacity addition plan the growth rate of base load will go back to normal level. In 2007 it will be around 4.1%, and then after 2008 will be around 7.6%. And we expect about 5.8% demand growth rate this year, and that will be around 4.5% next year. So, I guess you [we've] had a one off in 2006. We do have enough base load to meet the demand growth. But we can get back to normal level in 2007. So, going forward, we might be able to reduce the dependency of our IPPs and our LNG consumption going forward.

Should we expect flat purchases from IPPs which, in 2006, was 18.5 kilowatt hours? Should we expect that number to be flat or to be lower in 2007, against 2006, assuming this 5.6% growth in demand?

You mean the increased demand from our IPP?

Yes.

Well, as you may know, in 2005 it was about 3.4, 4% [equal] in 2005, but in 2006 it was an increased by 26%, mainly because of the shortage of base load in 2006. But, as I already mentioned, in 2007 and 2008 we can -- we do not plan to build more base load power plant, so we might be able to reduce the exposure to our IPPs.

So, to be cautious should we keep that the 18.5 kilowatt hours in 2006 purchased from IPPs, should we keep them flat, or should we assume maybe they could be a little bit lower?

I would say there will be slight decrease.

Thank you.

Thank you.

Currently there are two participants waiting with their question. The following question is by [Pedro Groom] from UBS. Please go ahead sir.

Thank you, just two questions. Firstly, could you give us some guidance on your maintenance expense and depreciation for 2007?

Secondly, could you please let us know of the maintenance days for your nuclear plants and coal plants for fourth quarter of '06, and also, if you could give us some guidance for 2007?

As for the maintenance, well, we started a [time resettlement] as of 2006, so that -- because of that region the amount has been increased compared to 2005. But going forward the current trend in this has changed. So, I cannot give you the exact amount of the expected [maintenance] cost for this year, but let me follow up on the [latest estimate] as I can get corrected data from our [Icepco] KEPCO.

And [as far] as depreciation, well, as you already mentioned even though we added about 2,000 kilowatt of facilities last year as [we have had] in the past. But when you look at the history past there was a huge decrease compared to the previous year, and that's the main reason why there was about [4%] decrease in depreciation.

But in case of 2007, when you look at our new [inaudible] plan, we are planning to build about 15,000 megawatts of coal-fired power plants. So, I guess, the depreciation goes -- or will go back to normal level around 5 to 10% increase.

As far as [maintenance] schedule, you want me to tell you the schedule for nuclear and coal?

Yes please.

In third quarter and fourth quarter?

Just third quarter, fourth quarter and if you have any guidance for '07 as well?

Well, [maintenance] schedule of nuclear in third quarter 2006 days were 36 days, and in the fourth quarter it was 80 days. And as for the coal, in the third quarter 170 days, and fourth quarter 293 days. And we also have a maintenance schedule for 2007 at the moment, so I will send it to you through email after the conference, okay?

Yes, thank you.

Thank you.

The following question is by [Ajay] from JPMorgan. Please go ahead.

Hi, just to clarify, I wanted to reconfirm that you mentioned that you expect a 6.9% unit price decrease in coal prices. How much are we talking about in U.S. dollar terms on a per ton basis for 2007?

Well, [talking] about the [unit] price coal we are expecting [KRW51,300] per ton. And the assumption for this forecast is KRW930 per dollar. So, if you divide -- in U.S. dollar terms, the unit price of coal will be $55.15 this year.

$55 and 15 right, $55.15?

Yes $55.15.

Okay. Just a second question. You've also mentioned earlier on in the call that you expect a slight decrease from IPP purchases. In terms of your underlying assets what -- where can we expect an increased utilization from your base load?

Well, what -- hello --

Yes, would this be -- the question I am asking is this going to be more driven by coal or more increase of utilization on the nuclear side?

Well the -- well, for the operating nuclear and coal, when you look at our utilization rate of nuclear and coal, as with the nuclear it was about 95% and coal was about 88%. So, well, I would say that we are already fully operating our base load [up front]. So, what we need to do is adding new capacities from April. So, [since] last year we added about 2,000 megawatts, but most of them, about 1,500 megawatts, was coal -- [pump] storages. I mean they are [inaudible] power plants. But in case of 2007 we are trying to add about 1,500 megawatts of coal-fired power plants.

Okay, thank you so much.

You're welcome.

The following question is by Joseph Jacobelli from Merrill Lynch. Please go ahead.

Yes, sorry about that, one more. Can you just go through what the Others item comprises this year? And is there any differences between this year and last year? Are there different thing about in the fourth --

Basically there are no significant difference. Others included labor costs, retirement benefits and stuff like that. And [I] will give you the details information on Others costs after the conference, okay?

Okay. And do you have any guidance as to -- maybe its too early, but as to what your actual return was, at least the spread between what your return was against what the Government permitted return was [inaudible]?

In 2006?

Yes.

Well, frankly speaking we didn't [calculate] it yet, so. So, let me get back to you later.

Thank you.

Thank you.

Currently there are no participants with questions. [OPERTOR INSTRUCTIONS]. Currently there are no participants with questions. [OPERATOR INSTRUCTIONS].

Well, maybe we have one more question for the conference call today.

Okay, well the final question will be given by Steven from UBS. Please go ahead sir.

Yes, I just want to clarify, you've been mentioning that depreciation expense fell last year because of a big reduction in historical cost of the [gencos]. Can you explain that a bit more, does that mean you actually have got some kind of fixed asset write-down occurring at some of the companies? And if so, could you quantify the amount and rationale for the write-down please?

Well, frankly speaking, I cannot [comprise] the amount at the moment, but the major reason for that is when you comparing 2005, in 2005 most of new -- of [past] added were nuclear and coal [inaudible]. And when you look at the cost for building a [one unit] of nuclear and coal-fired power plants, it costs about KRW1.5m for nuclear, and about KRW7.8m for coal-fired power plant.

But in case of -- in 2006, as I already mentioned, most of new capacities were [pump storages], and cost for building [one unit] of pump storage, it costs only just KRW0.4m per kilowatt hour. So, as you already mentioned, the historic cost hasn't been reduced compared to the previous year. And that was one of the major reasons why there was a depreciation expense.

Also, the [gencos] used accelerated [division] method for depreciation and that's also one of the reasons why there was a dip in depreciation.

Sorry I don't understand. You are saying that we built new power plants this year in 2006 which, per megawatt, were cheaper than what we'd been building in other years. [Now] I understand while that can reduce the capital expenditure amount, but I don't see why that would explain a year-on-year decline in depreciation expenses. Because we are talking about a reduction in the historical cost of the asset base, not a reduction in how much we added to that historical base 2006. It doesn't seem to reconcile to me.

Well, [assets] is a different one -- after completing -- building a unit we recognize those assets right, and also the assets depreciation. So, because of the lower historic cost compared to the previous one, there was a decrease in depreciation. But, in the case of CapEx the -- in building each unit we already stand CapEx in the past, so the amount of new capacity added does not equals to the actual CapEx.

Okay, but what I don't understand is that you said that the capital expenditure was about KRW4b, and yet depreciation is KRW500m. Sorry, sorry, the CapEx is about KRW8 trillion but depreciation is KRW5 trillion, which means that the overall capital -- historical costs are higher than they were in 2005 not lower, and it's off that value that the amount will be based.

Well, in case --

If the depreciation is not -- if the CapEx is higher than depreciation, I don't understand why depreciation would be lower as a result, because -- it should be growing as the overall investment and successes are growing.

Well the CapEx of KRW8 trillion in 2006 includes everything; the amount for the under construction -- the units were under construction as well as the depreciation of KRW5 trillion includes the CapEx they are already spent in the past.

Okay, so you are saying that the work construction in progress increased by more than KRW3 trillion this year compared to end of 2005 in that case?

Yes, right.

Okay, thank you.

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