Korea Electric Power Corp (KEP) 2007 Q1 法說會逐字稿

Good morning, good afternoon and good evening, ladies and gentlemen. First of all, thank you all for joining this conference call and now we begin the conference of the fiscal year 2007 first quarter earnings results by KEPCO. This conference will commence with a presentation followed by a Q&A session. (OPERATOR INSTRUCTIONS)

Now, we shall commence the presentation on the fiscal year 2007 first quarter earnings results by KEPCO.

Good afternoon to those of you in Asia and good morning to all of (inaudible). 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 brief you on the financial results of the first quarter of 2007. Please note that the financial results discussed today are preliminary, unaudited and not reviewed by KEPCO's independent accountant or auditor. The financial data to be discussed today are the financial information that are made by adjusting for intercompany transactions among KEPCO and its six generating subsidiaries only and to help the investing public better understand KEPCO's financial results of the first quarter of 2007. As such, the 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 of operations of KEPCO and its six generating subsidiaries as a Group and more importantly this should not be relied upon or form the basis of any entering into any contract for the proposal of acquiring or selling any securities of KEPCO or any other investment decision in respect of the securities of KEPCO.

Now Seong-Hee, we will run through the results for a few minutes and then we will have a Q&A session. Any periodic comparison is year-on-year basis between 2007 and 2006.

The operating revenues were up by 5.1%. This was mainly because the sales revenue of Electric Power, the principal component of our operating revenue increased by 5% to KRW7.08 trillion from KRW6.74 trillion in 2006. This result is after adjusting for intercompany transactions (inaudible) primarily a 3% increase in sales volume [of electricity]. The overall increase of sales volume was mainly attributable to a 4.1% increase in the industrial sector and 2.4% increase in the (inaudible) sector.

Operating expenses increased by 4.3% to KRW6.09 trillion as compared to KRW5.8 trillion in 2006. This was mainly due to a 4.4% increase in (inaudible) expenses, a 15.2% increase in (inaudible).

In the first quarter of 2007 the unit price of LNG increased by 2.7% while the consumption of LNG increased by 0.3%, which caused a 2.3% increase in total LNG [expense]. The unit price of (inaudible) oil increased by 8.2% while the consumption of (inaudible) oil increased by 26.9%, which caused a 16.5% increase in total (inaudible) oil expense.

The decrease of maintenance was mainly due to (inaudible) settlement. A 1.2% decrease of the depreciation expense was mainly due to the decrease of historic costs by KHNP, one of the gencos. As a result, operating income increased by 9.3% to KRW1.11 trillion in 2007, as compared to KRW1.01 trillion in 2006. Non-operating income increased by 6.5% to KRW434 billion from KRW407 billion in 2006, mainly due to the increase of investment income from (inaudible) and others. The FX loss increased to KRW56.8 billion in 2007 from KRW3.6 billion in 2006. Investment loss from (inaudible) increased by KRW39.3 billion in 2007.

As a result of the above factors, net income increased by 5.9% to KRW775 billion in the first quarter of 2007, as compared to KRW732 billion in 2006. This concludes our presentation and now we are open for your questions.

(OPERATOR INSTRUCTIONS). The first question will be given by [T M Dole] from GIC. Please go ahead, sir.

Hi, good evening. Thank you for the call. Just one question. You've got KRW315 billion of other income in non-operating income, a large increase year-on-year from the first quarter of '06's KRW28 billion. Could you tell me what that is, what is that due to?

Well, two things I want to mention about that. The first one is that there was a translation gain from derivatives. [Demand] was about KRW10 billion and the other one is a gain on prior period adjustment for deferred tax liabilities. The amount was about KRW140 billion. Well actually, this is related with our provision on income taxes because there was a kind of [occurring] changes as of this year.

Right. Did you say that the gain on translation on derivatives was about KRW10 billion?

KRW10 billion increase.

Okay, right. Thank you.

Currently three participants are waiting with their questions. The following question is by Edmond Lee from JP Morgan. Please go ahead sir.

Hi there. Thanks for the presentation. This is Edmond Lee here from JP Morgan. Two questions here. One is regarding the depreciation expense. You mentioned that the decrease is largely due to the decline in depreciation expense from the nuclear subsidiary in particular, but actually I missed the explanation in terms of why that has declined, whether there is any accounting or change in depreciation policy there? So that is the first question.

Question number two regarding the contract coal price negotiations. Just wondering whether there is any further update on the negotiations with the Australian suppliers and also the Chinese suppliers, particularly given the shortage situation there and also the extra price hike that the Chinese side is demanding.

And then the third question is actually I would just like to clarify you did mention that the gain in treasury derivative, you said it was up by KRW10 billion. Did you mean actually the gain was KRW10 billion now?

No, the increased demand is KRW10 billion. About KRW140 billion was from gain on prior period adjustment for [diverse] tax liabilities.

What about the rest? So the balance is about 160?

[Rest of others], if you want to have more detailed information I will follow on that later after the conference. Okay?

Thank you.

Well (inaudible) depreciation. Well, as you may know for depreciation, we use the straight-line method and accelerated method. So in terms of nuclear possibilities, we mainly use accelerated method and because of that the (inaudible) price cost has been reduced from nuclear side. Also, as of this year, we charge connection charge for our T&D facilities for gencos. I mean we started imposing this kind of charge to gencos as of this year, and actually we receive that amount as a concession grant. The amount was above KRW18 billion and we reduced that amount from our depreciation. That also affected depreciation decrease.

Thank you.

And talking about coal price contract, well we didn't start negotiation with Chinese suppliers yet. But in terms of Australian and Indonesian, Australian's asking price is about $53 per ton and that of Indonesia is above $51 per ton so there could be about 7% to 8% unit price increase compared to last year. This is on (inaudible).

On China's -- I thought the Chinese suppliers, they were asking for extra price hike for the remaining months of the old contract. So I was just wondering what is the situation then. Whether KEPCO is still importing any coal at all from China?

Not at all from Chinese at the moment. They are asking about $10 plus previous contract price. So we are still negotiating about that with Chinese suppliers.

Thank you.

Thank you. Next please.

The following question is by [Tardiq] from Lehman Brothers. Please go ahead sir.

Yes. Thank you very much for the call and my question is again in twofold. One is the IPP sourcing side because I find that in this quarter your offtake from the IPPs has increased by around 9%. This is in spite of the unit price increase. So can we conclude that going forward there could be some more rises in offtake from IPP?

And secondly, just to clarify on the coal costs, at present, can I say that you are not sourcing any coal from the Chinese suppliers and it will be predominantly from say Australia and Indonesia? Thank you very much.

Well let me start with coal contract. Well as for the Chinese, we are still in the middle of a negotiation, so I don't say that we are not going to buy any coal from Chinese. I mean, I guess we will be able to start negotiation around probably early May or middle of May, so Chinese could be one of our suppliers also.

And in terms of IPP, yes you are right, there was about 8.7% increase in volume, but if you look at last year's portion, [last year there] was increase by around 48%, there was a (inaudible) increase last year compared to this amount; this year's increased amount is much smaller than that of last year.

So going forward I guess, well actually forecasting the [process] for retail is very difficult because it depends on everything, weather, global oil price and everything. So you cannot provide any guidance on our cost for resale but under the same condition as last year, I guess this year the amount will be definitely lower than that of last year. Is that the answer to your question?

Thank you very much sir. Yes, just may be as a followup, will IPP's share in the total thing continue to be let's say in low single digits, around 5% to 6%, or can you provide any guidance at least from that angle?

Well I will say yes. I mean their market share will be around 5%. This is a kind of government policy. Korean government is trying to maintain this kind of structure about 95% market share from our gencos and rest amount by IPPs. So this kind of structure will be sustained going forward.

Thank you. Thank you very much.

You're welcome.

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

Yes sir, good afternoon and thank you very much for the call. Just a couple of quick questions. One is your mix, just looking at the generation contribution from LNG and from nuclear, compared to the average of last year or even the fourth quarter of last year, LNG was about 16.8% on my numbers, that is dividing 16 terawatt hours against 97 terawatt hours, and nuclear contribution actually went down from 40.5% in the fourth quarter to 37.2%. Again that is dividing 35.9 terawatt hours against the 96.7 terawatt hours. Could you explain why the shift? Why more LNG and why less nuclear please?

Well as you can recall, if you look at scheduled maintenance days for nuclear power during the first quarter was only 80 days last year, but if you look at first quarter of this year, maintenance days are about 152 days. That means we were able to operate more nuclear last quarter rather than this quarter.

And what is the expectation for the rest of the year in terms of contribution from LNG generation and nuclear generation?

Well frankly speaking it depends on the scheduled maintenance days and global oil price and LNG price, so it is really hard to challenge the exact figure for that but broadly speaking, I guess we will be able to achieve last year's level.

So the contribution from nuclear generation in 2007 should roughly be equal as the one in 2006?

Yes. I will say yes but as you may know, this is a kind of concern that Kori No. 1, the oldest nuclear power plant. Well actually we are waiting for the government approval for the [life] extension, so I guess it depends on the government approval. So in the worst case scenario, if we cannot receive any government approval for the extension before middle of June, that means, the portion of nuclear will definitely go down compared to last year.

Would you happen to know -- maybe it's a little bit too detailed a question, but out of the total generation from nuclear in 2006, what percentage was Kori No. 1?

Well, let me answer to that question in this way. The capacity is about 590 megawatts.

Okay. And you were running Kori No. 1 just like you were running all of the other units?

Yes.

Great. Sorry for the detailed question. Another very simple question. You had other expenses rising by 10.5% to KRW957 billion. Could you explain the rise of 10.5%?

Well, that includes labor costs and advertisements and stuff like that.

Was that an anomaly for the first quarter or is that something you expect for the rest of the year?

Well, incomes from last year I think were increased by 17.1% [but this] year only 11.4% so they are going forward I guess. Increased amount would be around 10%, I guess.

All the weight increases for 2007 have already take place?

Say again?

Have the weight increases for 2007 for the labor already taken place?

Well, last year's labor cost increased amount was reflected in this quarter. But, (inaudible) a month is not included yet.

Thank you very much. You have been very kind. Thank you.

Thank you.

The following question is by Henry from Nevsky. Please go ahead, sir.

Hello, it's Henry Cobbe from Nevsky Capital. Just a couple of questions, please. First, on the demand growth, I think your outlook for 2007 was 5.3% year-on-year growth. The first quarter seems a little bit low relative to that at 3% year-on-year. So, could you give us an update on the demand growth for the year, where that's going to come from?

Second, just on labor expense. Perhaps you could give just what the actual labor cost was in the first quarter in millions Korean won.

Thirdly, just remind me, the coal contract terms, they run from June to June or is it March to March?

And lastly, on Kori 1, perhaps just give us the timeline of when this decision will be made and if there are any other nuclear capacity that is coming on stream to replace it? I didn't notice any change in the long-term development plan in nuclear capacities.

Well, starting with the labor cost, as I mentioned, it is included in our others of operating costs and more detailed information [will] follow on that after this conference. And the (technical difficulty) coal contract, well, there are a lot of contracts so each contract has a different period. Some of them have from June to June. Others have March to February and stuff like that. So, I guess during our first (inaudible) year, last year's contract price was reflected. That's why you can see that there was a kind of decrease in unit price of coal.

And as for the Kori No. 1, well it's a very complicated situation we have. We are still waiting for the government approval for the extension of its life, but, practically speaking, we have no idea about when we get the government approval at the moment. And in relation to that, there are no changes on our long-term coal supply trend which was I believe late last year. So, as you may know, we are building about four new units of nuclear power plants and the first one will be commissioned in year 2010 as it is scheduled. Okay?

Okay. And on Kori 1, when is it due to be decommissioned?

Say again?

When is Kori 1 due to be decommissioned?

June 14.

June 14. Okay.

I am talking about the [demand growth]. At the moment, we expect demand growth rate to be 5.8% year-on-year basis and talking about the demand growth forecast, we expect residential to grow about by 5.6% and commercial by 5.5%, industrial by 5.8%. So maybe we can release a new forecast around July this year. But at the moment, we have the same forecast figure as we released only this year.

OK. Thank you very much indeed.

Thank you.

The following question is by Edmond Lee from JP Morgan. Please go ahead, sir.

Hello? Hi there. Actually, just two follow-up questions. One is on the CapEx guidance for this year and obviously, we realize that the budget at CapEx always tends to be a bit too conservative as in too high. But last year, actually we did have a bit of a surprise in terms of CapEx coming in higher than expected, obviously due to one-off reasons. But this year, I was just wondering whether you have any clearer guidance on it, whether it would be staying at over KRW8 trillion or below that? So that's a first question.

Second question regarding the overseas projects. Obviously, the CEO has talked about the capacity target of 10,000 megawatts in the medium term but just wondering whether there is anything more concrete in terms of earnings target on any particular focus markets in the nearer term.

And then lastly, just on the coal side, you did mention that for the past few months, KEPCO has stopped to import coal from China at all so presumably the spot coal portion has gone up as a result. So, I was just wondering whether you have a rough breakdown in terms of spot versus contract at the moment?

OK. Let me start with CapEx. Well, in terms of 2006, the actual CapEx was KRW7.8 trillion and then recently we released consolidated basis of financial statement. Well, many of you may know that our actual CapEx was about KRW8.3 trillion because we released that amount [only] this year but as I mentioned, that was a kind of preliminary figure and our actual CapEx for 2006 was KRW7.8 trillion including one-off, was by KHNP. And going forward, at the moment, for our future forecast for CapEx for this year is about KRW9.8 trillion. But as I already said, our actual (inaudible) CapEx will be around 75% to 80% of our forecast. So actual CapEx for this year will be around [probably] KRW7.6 trillion to KRW8.6 trillion.

And talking about international business, well, the major reason for doing international business is to diversify our source of revenue. So, as I made some strategy, we are planning to increase the portion of international business up to 8%. At the moment, revenue from international business out of total revenue is about only 3% but we are planning to increase up to 8% by year 2015.

And talking about coal, you are right. At the end of last year, we couldn't get any coal from China. So the portion of a spot was increased compared to previous year, I mean 2005. Well, the portion of a spot of 2006 was 20% and that of long-term contract was about 80%. And just for your information, portion of a spot of 2005 was 14% and that of a long-term contract was 86%. So, there was about a 6% increase in spot portion. But hopefully, the coal price was even lower than that of Chinese. So there was no financial burden on our side.

Okay. You did mention that the overseas earnings accounted for about 3% of total earnings right now, yes? So that's expected to go up to 8% by 2015?

Yes, in amount it will be around KRW8 trillion. At the moment it's about only KRW0.16 trillion but we are planning to increase it up to KRW8 trillion.

KRW8 trillion --

Sorry, sorry -- KRW3.8 trillion.

KRW3.8trillion is the target?

Yes, our mid-term target.

So the target on [SFAs] -- what is that figure, is that the revenue figure or the --

Revenue.

Revenue. So what is the figure right now?

The current figure is about KRW0.16 trillion.

KRW0.16 trillion, so from KRW0.16 trillion to KRW3.8 trillion revenue. Any comparable figure on earnings as well?

Say again?

Any comparable comparison on earnings contribution as well?

We don't have that kind of figure at the moment (inaudible).

Okay. But anyway, 10,000 megawatt is the target capacity for 2015 including minority interests, yes?

Yes.

Okay. Thank you.

Thank you.

The following question is by Henry from Nevsky Capital. Please go ahead, sir.

Hi there, I'm just coming back to capacity additions; in the long-term plan I think you had about 1,000 megawatts of coal capacity coming on stream this year. Could you confirm that that is the case?

Yes. Well, if you look at the long-term power supply [spend], well 1,000 megawatts of coal fire power plant was supposed to be commissioned in June but it was actually commissioned in March this year. All year. So -- and another 500 megawatts of coal fired power plant will be commissioned in June, and additional 500 will be commissioned in December this year. So in total 1,500 megawatts of coal fired power plants will be commissioned in 2007.

Sorry, how much -- March was how much?

500 megawatts.

500. Okay. So your total capacity of coal includes 1,500 megawatts. Okay. But that's -- that March capacity -- oh yes, it is included in the numbers you've given us. Yes, I see. Okay.

And that should partially offset the reduction in nuclear generation for (inaudible) is that right?

Well, you can say that. We are adding about 1,500 megawatt of coal fired power plants, so well, in the worst case scenario if we cannot get any approval for the life extension of nuclear power plants these three new units of coal fired power plants will replace those portion of nuclear power plants.

Okay.

Maybe you can (inaudible).

Okay. Thank you very much.

Thank you.

Currently there are no participants with questions. (OPERATOR INSTRUCTIONS). The following question is by Joseph Jacobelli from Merrill Lynch. Please go ahead, sir.

Hello?

Yes, hi. It's Joseph Jacobelli again from Merrill. Just a quick question with regards to unit fuel costs, if I may? So coal, based on just dividing the amount spent on coal by the amount generated using coal fire generation, I get a price of about KRW18.5 per kilowatt hour. For oil I get 78 and for LNG I get 87. For oil, do you -- that's come down quite -- using the same methodology for the last few quarters, that's come down quite drastically. Do you have any sense over the next couple of quarters where you see all unit fuel costs as well as LNG fuel costs, please?

Well, (inaudible) oil price and LNG fuel costs. As you may know it all depends on the global price, so the reason why there was a (inaudible) in oil price was that -- if you look at the average price of global oil it was down by around 4% on average, so I can say that it all depends on the global price trend.

Any sense for direction on LNG prices?

Well, if you look at our (inaudible) there was about 2.7% increase in unit price of LNG, and as you may know there's a kind of time lag between global oil price and LNG price, so I guess going forward there is a strong possibility of further decrease in the unit price of LNG going forward, probably in the second quarter. But (inaudible) if you look at the global oil price trends.

Okay, so for now the lag effect between oil and LNG right now, it used to be around about three months or so, is the lag effect still the same? I'm sorry?

Three to six months is maximum.

Three to six months. Thank you very much.

Thank you.

The following question is by Edmond Lee from JP Morgan. Please go ahead, sir.

Thank you. Actually it's just one last follow-up on the unit coal costs; actually as Joseph mentioned, the Q1 unit fuel cost figure seemed quite low at KRW18 -- below KRW19, so KRW18.5 per kilowatt hour, so now even compared to the same period last year. That, presumably -- is that before the new contract coal prices kicks in?

No. New contract price is not reflected in -- during our first quarter this year.

So from April onwards we should expect the coal prices -- the new contract coal prices to come in, yes? Or gradually from April to June?

Yes, you can say that.

Okay.

Well, I guess it all depends on the point that we make -- we finalize our contract negotiation. We are expecting around late May or early June, like last year, so that means this year's contract price will be reflected around third quarter this year rather than second quarter.

I see.

Okay?

Thank you.

Thank you.

The following question is by Henry from Nevsky Capital. Please go ahead, sir.

Hi there. Again on the coal price, you were saying the Australians are talking about a $53 price and that's an 8% increase. Is that the FOB price or is that your delivered price?

So you have to include delivery costs, and as you may know we have dedicated vessels so the impact of delivery costs is negligible.

I see, so the unit -- so you're saying the unit fuel cost for -- from third quarter onwards should be around the $53, $54 mark?

Plus our delivery cost.

And delivery cost is about how much, roughly?

Well in case of last year, delivery costs for Australian was about $10 per ton. And [delivery] Chinese was $4 per ton and Indonesian was $9 per ton.

Okay. And just to confirm again on what -- in 2006, what was the split of volumes from those three countries?

Australian was 31%, Chinese was 15% and Indonesian was 28% and [rest demand] from other countries.

Sorry, Australia was how much?

31%.

Okay. And the contract price before delivery cost for Australia was what, last year?

Last year it was $9.5. Sorry, last year's delivery costs for Australian coal, it was $10.

Okay, and the contract price last year for each of the countries?

Australian for $46 per ton. Chinese for $54 per ton and Indonesian for $43 per ton.

Okay, and rest of world? Does the balance -- and the rest?

We don't have any figures for that because the portion is very small.

Okay. Well it's still about 30% of the total volume, isn't it? Or 20% of the total volume, it's still quite substantial?

20% from spot and 80% from long-term contract.

Okay. Thank you very much indeed.

Thank you.

The following question is by Joseph Jacobelli fro Merrill Lynch. Please go ahead, sir.

Hello?

Yes, hi. Just to clarify with regards to the coal. So, for -- we're very clear for the Australian portion and for the Indonesian portion the contract price has already been negotiated and signed? Or the numbers that you gave us are just a preliminary indication but nothing has been signed as yet?

Well, about 50% were signed and [the rest of them] we are still in the middle of negotiation. In terms of Chinese as I said, we didn't start negotiation yet but for Australian and Indonesian about 50% of total contracts were already signed.

And the likelihood is that the coal price for the remainder of the 50% will be similar to the --

$53 for Australian and $51 for Indonesian.

Yes, is it likely it's going to -- that that's going to be the same price for the remainder?

Well, frankly speaking, it's really hard to predict because it depends on gencos' negotiation skills, so --

And sorry about the nitty gritty questions, but is it -- is each of the gencos individually negotiated last year, right?

Yes, for Australian and Indonesian each genco's individually negotiated, but in terms of Chinese they establish consortium. They (inaudible), they jointly negotiate the price [for] Chinese.

Understood. Thank you very much.

Thank you.

Currently there are no participants with questions. (OPERATOR INSTRUCTIONS).

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