Korea Electric Power Corp (KEP) 2007 Q2 法說會逐字稿

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

Good afternoon to those of you in Asia and good morning to all of you in the Far West. This is [Hungi Young], 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 half of 2007. Please note that the financial results [today] are preliminary, unaudited, and not agreed by KEPCO's independent accountant or auditors. In this regard, please take a careful look at the disclaimer on the top page of the financial package that we sent to you.

Now Han Joon-ho will go through the results for a few minutes and then we will open up a Q&A session. Any period comparison is year-on-year basis between 2007 and 2006.

The operating revenues were up by 6%. This was mainly because the sales revenue of electric power to print for components of our operating revenues increased by 6.1% to KPW13.5 trillion from KPW12.73 trillion in 2006. This result is after adjusting inter-company transactions reflecting primarily a 4.3% increase in the sales volume of the electricity. The overall increase of the sales volume was mainly attributable to a 5.3% increase in the industrial sector and a 3.9% increase in the commercial sector. Operating expenses increased by 6% to KPW12.14 trillion as compared to KPW11.45 trillion in 2006. This was mainly due to a 8.5% increase in fuel expenses or 15.4% in power purchase for resale.

In the first half of 2007 the unique price of coal increased by 1.7% while the consumption of coal increased by 6.4%. Total LNG expense increased by 3.2% due to 3.2% increase in LNG consumption. The unique price of bunker oil decreased by 5.9% while the consumption of bunker oil increased by 41.1% which caused a 32.8% increase in total bunker oil expense.

Maintenance expense increased by 2.6% mainly due to the increase in scheduled maintenance by gen co. A 1.1% decrease of the depreciation expense was mainly due to the decrease of [history] costs by KHMP (inaudible). As a result, operating income increased by 5.7% to KPW1.56 trillion in 2007 as compared to KPW1.48 trillion in 2006. Non-operating income increased by 2.3% to KPW633 billion from KPW619 billion in 2006, mainly due to the increase of the investment income from affiliates and others. The FX loss decreased to KPW13.4 billion in 2007 from KPW16 billion in 2006. Investment loss from affiliates decreased by KPW47.3 billion and others decreased by KPW68.8 billion in 2007.

As a result of the above factors, net income increased by 16.7% to KPW1.04 trillion in the first half of 2007 as compared to KPW892 billion in 2006.

This concludes our presentation. Now we are open to your questions.

Now the Q&A session will begin. (OPERATOR INSTRUCTIONS). The first question will be given by Mr. [Khadick] from Lehman Brothers. Now, the first question will be given by Joseph Jacobelli from Merrill Lynch. Please go ahead, sir.

Yes. Good afternoon. This is Joseph Jacobelli from Merrill Lynch. Thank you very much for hosting this conference call. I just would like to know, please, what is your outlook for the summer? We know that Kori-1 is temporarily down. We'd like to know the weather patterns year-on-year and whether the reserve margin also will be very tight as per last year? Thank you.

We'll talking about peak demand gross rate for this year. We expect peak demand gross rate to be about 4.3% and the reserve margin will be about 9.8%. Well, in the first half, reserve margin was about 10.1%. So we don't see any big problem for this year.

Also, I want to mention that, as you said, Kori-1 was shut down on June 9 but actually two units of Kori-5 power plants, [Tan No. 7] and [Tangin No. 7] which were in operation as of March and June. Also, [Tan No. 8], which is supposed to be in commercial operation on March next year, is supposed to be in operation August this year. So we expedited building this unit so it will be helpful for us. Thank you.

I'm sorry, Mr. Joon-ho, may I ask please to repeat the names of those plants? And also for the last one, the unit number 8, is that also coal fired? Thank you.

Yes. Tan No. 7, which was commissioned in March, and Tangin No. 7 was commissioned in June and Tan No. 8, which is supposed to be in operation March next year, will be commissioned in August this year. This is a coal fired power plant with 500 megawatt capacity. Okay?

Thank you very much.

Thank you.

Currently, three participants are waiting with their questions. The following question will be given by Mr. [Kardick] from Lehman Brothers. Please go ahead, sir.

Yes. Thank you very much gentlemen for the call. I just have three questions. My first question concerns your coal cost negotiations. I just want to know whether the coal cost for the rest of the year has been finalized and, if so, what is the potential unit cost increase?

And my second question concerns, is there any timeline that you're aware of regarding the KDIC's stake -- disposal of 5% stake?

And lastly, if you could some color on when you are going to make an application to the government for the next tariff hike for FY '08? Thank you very much.

Well, first of all, talking about coal negotiation, in terms of (inaudible) in Indonesia we completed negotiation. Contract price of Australian is $53 per ton. This is (inaudible) ton. And as for Indonesian, it is $50 per ton, and in terms of Chinese, we are still in the middle of negotiations. So during -- having negotiation with Australian and Indonesian, we are ready to increase the portion so that means the portion of Australian and Indonesian will be increased as compared to last year.

And talking about the KDIC issue I mean we don't have any specific timeline for the block trade at the moment. We are still discussing about that with KDIC. But I can tell you at the moment is that -- what I can tell you is that the block trade will be done within this year, probably September or October.

And as for the tariff discussion with the government, we have a plan to start the discussion around -- right after the Presidential election which is supposed to be held late this year, December 19.

And sir, just to reconfirm, what proportion of your coal requirement will come from China this year in your estimate?

Well in case of last year it was about 16% but we expect that it will be less than 15% for this year.

Thank you very much sir.

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

Hi there. Thanks very much for the call. Just a couple of questions if possible. The first is, is there any development on Kori-1 on the extension. When will that decision be taken on whether you get the extended life?

And the second question is just on the KDIC stake. You made a statement saying that you would be willing to buy this back effectively. Would you be looking to buy back the whole 5% stake and would you then cancel the shares? Would you just leave them as treasury for future acquisitions or funding?

And the last question. Could you just give us a bit more detail on the LNG costs for 2008? I've just read some reports saying that about 5 million tons, which is about 20% of annual Korean city in power demand is coming in on contracts signed in 2005 at around $4 per therm. And I just wanted to know whether that was the all-in cost, $4, or whether there would also be transportation costs on top of that? What would be a realistic -- what would be the impact on LNG prices for next year?

Well, first of all the Korean government has to make a final conclusion on Kori-1 by December 15 this year; actually it is regulated by law. And we strongly believe that the Korean government will grant us the extension of its life over the next ten years.

And talking about KDIC. As I said earlier we are still in the middle of discussion with KDIC and yes, we do have a plan to buy back shares from KDIC, but the portion is not decided yet. And we don't have any plan for cancellation and the portion will be kept as treasury stock. And talking of a funding plan, we have a plan to borrow in domestic market, I mean Korean won. And next (inaudible), yes. [Say again].

Sorry. Carry on.

Hello?

Yes, I'm listening.

And the cost, as you may know it totally depends on the global oil price. I mean normally we use JCC index and LNG price moved together with global price and there's about a [two to six] months of timelag.

Sorry I missed that question -- I missed that.

You are asking about the LNG price forecast for next year.

Yes.

At the moment we don't -- it is really hard for us to expect the price. All I can tell you is that LNG price is correlated with global oil price.

Okay. But my understanding is that you've got, well KOGAS has got a long term contract with Sakhalin and with Malaysia and also, I think another -- more Qatari that's coming on which were signed in the first half '05 with a long term contract price of around $4 a therm. And surely that means the weighted average material costs that KOGAS pass through to you will come down quite substantially, if you've got 20% of volumes coming in at this much lower price than the current material cost?

You can say that. Actually if you look at the LNG price structure, about 80% is variable cost and 15% is fixed cost. So once, as far as variable cost decreases, that means we might be able to have a decreased amount of LNG price.

Sorry, so 50% is fixed cost and 50% is variable cost?

15% for fixed cost and 85% for variable cost.

And 85% is variable because there's -- would there be contracts -- a clause that means that the price will fluctuate with the global oil price? Is that right?

Yes.

And the $4 per therm that was quoted, is that the CIF price or the FOB price?

The FOB price.

FOB. And what should we add on then roughly for transportation?

You mean transportation costs?

Yes. To get the landed price for KOGAS and re-gassified.

Let me follow on that question. Actually, can I follow the question after the conference?

Okay. But all in all what do you expect for the weighted average LNG price for next year?

Well, as I said, we don't have any specific forecast for LNG price for next year at the moment.

Okay. And is there any sign that demand growth is going to exceed 5.3% this year?

You mean the demand growth rate?

Demand growth for overall output.

We expect it to be about 5.8% for this year.

Okay. And for next year, following?

4.3%.

Okay. And you also raised your CapEx budget for 2007. And could you just explain where the rise -- was that to do with the additional coal capacity relative --?

Well you can see the CapEx, the actual CapEx and CapEx projection in our packet that we sent to you.

Okay. I was just interested in the increase relative to last quarter it's gone up.

Yes it's true because the major reason for our increase is that there's a facility called transmission connection facilities and gen co's are supposed to acquire those facilities. So some portion of CapEx were added to gen cos. That's why the total capacity was slightly increased. Even so, the actual CapEx for this year will about 75% to 80% of our projection figure of KRW10.6 trillion, so the actual figure will be about KRW8 trillion for this year.

Okay. And just lastly on the restructuring or asset sales. Does that refer to -- are we talking about the [kasepco] and the gen co's here or are we talking about much smaller sized sales of infrastructure companies and non-core assets? Could you just give us a bit more information about what these proposed asset sales are?

Well in case of gen co's, I mean [kasepco], well valuation from the market is pretty much lower than our expectation. So I don't think gen co will be sold within the next few years. But recently the Korean government decided to list two subsidiaries, KHC -- sorry, KDHC and KPS. And KPS will be listed within this year. And in terms of KDHC we will start discussion on that with the government.

And what kind of valuation are you seeing for KPS, is there any indication? What's the book value of KPS?

The book value of KPS is about KRW500 billion.

Sorry KRW5 --?

KRW500 billion.

KRW500 billion.

Yes.

And for KDHC?

Very small, around KRW300 million; let me check it out.

Okay. And a very last question just on the coal price and you've mentioned Australia, Indonesia. For the, on a weighted average basis, what's your unit coal cost going to increase next year in dollar terms? Let's do it in dollar terms.

For next year you say?

Yes.

Well, we don't -- at the moment we don't have the forecast for next year and we only have forecast for this year.

Okay, for this year?

We expect about 13% unit price increase in coal for this year.

In dollar terms?

In dollar terms?

Is that in dollar terms or in won terms?

In Korean won terms.

In Korean won terms. And what's your FX assumption, what's your --?

KRW930 trillion (inaudible).

Okay.

I'm talking about the book value of KPS it is about KRW305 billion and that of KDHC is about KRW184 billion.

Okay. And sorry, this 931 is that your average won forecast or is that the year end forecast?

That was forecast for this year.

Okay. Many thanks. Thank you.

The following question is by [Tien Doh] from [GIC]. Please go ahead, sir.

Hi, thank you very much for the call. Just two questions. Your coal inventories during the first half, how tight did that get at any stage during the first half? I'm just wondering how many days of coal did you actually get down to during the first half?

The second question is, looking out, say over the next three to five years, where do you expect your reserve margin trend to go over that period? Where do you expect to end, say in five years' time? Thank you.

Well talking about inventory for coal, normally we store about 21 days.

And talking about the margin, well if you look at long-term power supply plan which was released early this year, our target is maintaining around 12% to 15% and based on that we set up the new capacity [revision] plan.

And during the first half did you actually make -- were you actually able to maintain that 21 day coal inventory level or did it get tighter than that?

Yes, we were able to maintain 21 days.

And as far as you're aware over -- according to the current CapEx plans for the company, that 12% to 15% reserve margin, given your assumptions on volume growth, that that is what's likely?

Sorry, again?

Given the company's current CapEx plans and your forecast volume assumptions, that 12% to 15% reserve margin, that's likely over the next three to five years?

Yes, you can say that.

Alright. Okay. Thank you.

Currently there are no participants with questions. (OPERATOR INSTRUCTIONS). The following question is by Henry from Nevsky Capital. Please go ahead, sir.

Hi, sorry to come back to the coal issue. And you're saying 13% increase in average unit coal price for 2007. I think the average unit price for the blended bituminous anthracite was about $60 a ton in 2006 or KRW57,000 per ton, so you're saying it's going to KRW64,500 per ton which on your average FX assumption is $69 a ton? And just looking at the first half, it's more like $65 a ton. So are you saying that the coal cost is going to be running at second quarter rates for the rest of the year, around $69?

Yes. This is what we expect at the moment.

Okay.

Well, no if you look at the coal contract negotiations, most of the contracts were completed around the end of June and early July, so this year's contract price was not fully reflected in the first half of this year. So I mean this year's contract price will be fully reflected in the second half this year.

Okay. And how does it work on the timing of that contract? Will -- would you just start -- do you have to make an adjustment to -- does the contract run from June to June or do you make an adjustment for the first quarter retroactively?

Well actually we have a lot of contracts so it depends on each contract.

Okay. Many thanks.

Thank you.

(OPERATOR INSTRUCTIONS). The following question is from Tien Doh from GIC. Please go ahead, sir.

Sorry, just one follow up question. I guess you used to disclose the labor expense separately but you guys stopped doing that a few quarters ago. But in the last quarter, what was the labor expense for the second quarter versus the first quarter?

Can I answer the question after the conference?

Yes, sure. No problem.

Okay. Thank you.

Currently, two participants are waiting with their questions. The following question is by Geoff from CLSA, please go ahead, sir.

Okay, great. Thanks for the call. Just two quick questions. One, what is the latest status on the head office in terms of -- there's obviously been some speculation on selling down the buildings and creating a bit of a land value. Is anything actually progressing on that? Or -- what's the status?

Well nothing has been decided yet. What I can tell you at the moment is that we are moving our head office by year 2012 and as for the land in our head office at the moment, nothing has been decided. It depends on the government policies.

Okay. And also, looking at your tariff hike proposal for next year, it's going to be based on the 2006 results I believe is normally how it seems to be done. What sort of tariff hike would you have to get to get to your fair rate of return based on your initial calculations?

Well, in terms of tariff hike, like you said, we have to calculate the actual rate of return based on 2006 financial results and our relevant department is still working on it. And as far as I know actual rate of return of 2006 will be around 5.2, I mean definitely lower than that of 2005. So (inaudible) there should be additional tariff hike and in my calculation that should be around a 2% to 3% tariff hike for next year.

Okay.

But I'm telling you this, it is my personal calculation based on -- I mean based on my personal calculation.

Right. Okay, great. And yes, I guess that's it, that's fine. Thanks very much for that.

The following question is by [Pat Dolman] from UBS. Please go ahead sir.

Yes, thank you very much for the opportunity. The first question regarding your assets, apologies, I missed your answers. What are the dates that you expect that KPS and KDHC to be listed, again?

Also, if you could remind us what your latest thoughts on your Powercom stake is?

Secondly is on your maintenance day schedule for nuclear plants and coal plants, if you could let us know what the maintenance days for second quarter was and what the plan for third quarter and fourth quarter is?

Well talking about listing of KPS, it will be listed within this year. And in terms of KDHC, actually we have to start discussions on that with the government so we don't have any specific timeline at the moment.

Talking about the Powercom, well as we expected, I guess Powercom passed break even as of first half this year, so the idea of -- I mean the listing will be done probably next year.

And you asked about our maintenance schedule, right?

Yes.

Well maintenance days for nuclear in the second quarter was 250 days and this includes Kori-1. Kori-1 was shut down as of June 9 this year. In third quarter we expect it to be about 229 days and 176 days in the first quarter.

And the coal plant?

404 days in second quarter and 104 days in third quarter and 309 days in first quarter.

And has it been decided that you'll be -- you plan to list Powercom?

Sorry, again?

Your plan to list Powercom, has that been finalized?

Of course.

Okay thank you.

Thank you.

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

Hi there thanks for the additional question. Just on the tariff negotiations you said you would start discussions after the election. So I just confirm the timing of when you start talking and how long you think it will take to come to some kind of announcement and when it would be implemented.

Well the presidential election is supposed to be held on December 19 this year so prior to the election we will start this question. It normally takes about two to three months just for finalization so probably April -- around March or April next year.

And then will they -- if they do give a tariff increase will it be also retroactive for the first three months or would it just be from April gong forward?

Going forward.

Okay. Many thanks.

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.

Thank you, sorry Mr. Ji, I've got one more follow up question for you please. It's with regards to purchased power. Do you have a very, very general sense as to whether year-on-year purchased power in the second half will be flat, will be up, or will be down in terms of volume?

Well in terms of power purchase for re-sale, well as you may know, it is really hard to forecast but well at the moment we expect it to be about a 15% increase on a year-on-year basis.

Thank you very much.

Thank you.

The following question is by Tien Doh from GIC. Please go ahead sir.

Just one more question. On the Powercom listing are you intending to sell down all of your stake in that listing or would you still retain some of your stake?

10% will be retained.

10% will be retained, okay.

That means about 33% will be listed.

And do you have any ideas on the pricing value, how much you would actually gain from that sale?

Just a moment. We don't have any specific data on that at the moment but when we sold our stakes to Dacom in PBR terms it was about three times book.

Alright thank you.

Currently there are no participants with questions. (OPERATOR INSTRUCTIONS). The following question is by Mr. Kardick from Lehman Brothers. Please go ahead sir.

I just have one follow up question on your CapEx numbers given that CapEx has been revised for this year. Do you still expect to spend somewhere around 80% to 85% of the forecasted CapEx for the full year?

Yes.

Thank you

Thank you.

Currently there are no participants with questions. (OPERATOR INSTRUCTIONS). The following question is by Henry from Nevsky Capital. Please go ahead sir.

Hi there, just another little question just on the unit revenues. Just looking at your six months data that you've sent round. It looks like the average unit revenues per kilowatt hours increased only 1.4% in the second quarter versus 1.9% in the first quarter. So what's the outlook like for the unit revenues for the full year? My understanding was that the tariff hike that you received was 1.8% so I just wanted to check what the kind of -- why the cumulative revenue per kilowatt hour is slightly below that.

Well actually there was about a 2.1% tariff hike earlier this year but it was effective as of January 15. And if you look at our detailed information on tariff hike for this year, the only industrial sector was increased by 4.2%. And actually talking about this as a unit of revenue it depends on each customer but a yearly basis we expect it to be around 2.1%.

I see. So the tariff hike was only actually for the industrial sector and everything else was unchanged was it?

Yes.

Okay thank you.

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

Just a very quick one Mr. Ji if I may. I'm sorry but for power purchased, when you said 15% expectation for the full year did you mean both in terms of value and amount?

In terms of expense.

In terms of all expenses. Because in the first half the amount was only worth 10.9% and the unit price was up by 4.1%.

Yes.

So are we expecting unit price to remain roughly flat and the amount to be roughly the same increase, 10.9%?

Around 10%. Yes.

That's great.

Thank you.

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

Okay if you have no further questions we will conclude the conference call. Once again I thank you for your participating in our conference call today and thank you very much for your interest in KEPCO. Thank you and bye-bye.