Korea Electric Power Corp (KEP) 2007 Q3 法說會逐字稿

Good afternoon to all 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 for today to brief you on the financial results of the first nine months of 2007. Please note that the financial results discussed today are preliminary, unaudited, and not reviewed by Kepco's independent accountant or auditor. In this regard, please take a careful look at the disclaimer on the top page of the financial packet that we sent to you.

Now Seong-Hee will go through the results for a few minutes, and then we will [put up] a Q&A session. And make periodic comparison on a year-on-year basis between 2007 and 2006.

The operating revenues were up by 6.2%. This was mainly because the sales revenue of electric power, the principal component of our operating revenues, increased by 6.4% to KRW21.48 trillion from KRW20.19 trillion in 2006. [This] result is after adjusting intercompany transactions, reflecting primarily a 4.7% increase in sales volume of electricity. The overall increase of the sales volume was mainly attributable to a 5.5% increase in the industrial sector, and 4.7% increase in the commercial sector.

Operating expenses increased by 7% to KRW18.41 trillion as compared to KRW17.21 trillion in 2006. This was mainly due to a 10.3% increase in (inaudible), and a 16.2% increase in power purchased for resale. In the first nine months of 2007, the unit price of coal increased by 5.8%, while the consumption of coal increased by 8.1%. Total energy expense increased by 4.9%, due to 6.8% increase in energy consumption. The unit price of (inaudible) oil decreased by 2.9%, while the consumption of (inaudible) oil increased by 34.5%, which caused a 30.5% increase in total (inaudible) oil expense. Maintenance expense increased by 3.4%, mainly due to the increase in scheduled maintenance by [Genco].

0.2% increase on depreciation expense was mainly due to new facilities, such as Yonggwang Number One through Four, (inaudible) Number Seven, Eight, and (inaudible) Number Seven, acquired by [Genco]. As a result, operating income increased by 2.3% to KRW3.36 trillion in 2007, as compared to KRW3.28 trillion in 2006. Non-operating income increased by 1.5% to KRW850 billion from KRW837 billion in 2006, mainly due to the increase of investment income for affiliates and others.

The asset loss increased to KRW45.3 billion in 2007 from KRW11.6 billion in 2006. Investment loss from affiliates decreased by KRW28.1 billion, and others decreased by KRW154.1 billion in 2007. As a result of the above sectors, net income increased by 5% to KRW2.2 trillion in the first nine months of 2007, as compared to KRW2.09 trillion in 2006. This concludes our presentation, and now we are open to your questions.

Now we will start the Q&A session.

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Currently, one participant is waiting with a question. The following question is by Joseph from Merrill Lynch.

Hello, Mr. Ji, and thank you very much for hosting the conference call today.

Hi, how are you?

Very good, thank you. Just four questions, but they're very, very short. The first one is, I would have expected a higher impact on fuel costs from the higher coal prices in the third quarter, and it seems that actually the increase in the unit fuel cost is not as bad as expected. Could you please tell us if this is because the increase in the coal cost is not fully for the third quarter, but we should see a full impact in the fourth quarter? That's my first question.

The second question is, given as oil prices now are at all-time high, are you still guiding -- is KOGAS still guiding toward lower LNG prices for 2008, even the lower LNG [cargo]?

The third question is, when comparing your capital expenditure projected in the first quarter and the capital expenditure projected as of the end of the third quarter for 2007, we see an increase of about 9% to 10%. Could you explain why the increase?

And the last question is with regard to maintenance and depreciation, it seems that both -- that the depreciation was fairly flat for the first nine months, and that maintenance was under control at 3.4%. Could you please expand on that? Thank you very much, and sorry about all the questions.

Well, first of all, talking about coal price, it increased around 5.8% on the first nine months of this year, but as you may know, in the first half this year, the unit price increased by 1.7%, so that means during third quarter, the unit price of coal increased by around 10%, so from third quarter, this year's coal contract price has been reflected, and this kind of trend will be the same going forward.

And as for your LNG price, actually I talked about that a bit. I have people at KOGAS, and they expect about around 10% unit price decrease, compared to this year, and that portion will be imported from second half next year, so overall, we expect around, roughly speaking, there is about 5% decrease in unit price of LNG for next year. And talking about CapEx, well, as we already explained in first half this year, there is a facility called Transmission Connection Facilities. It is [sold] to Kepco about now, it was acquired by Genco, and Genco started investing money for those facilities. That's why CapEx is such a prompt (inaudible) has been somehow higher than we expected. But overall, this year's total CapEx will be around KRW8 trillion to KRW9 trillion, that means about 80% to 90% out of our prediction.

And lastly, talking about maintenance and depreciation, in terms of maintenance, maybe it's because of the [timely] (inaudible) by Kepco, and so it hasn't been very stable in the first nine months. If you look at maintenance scheduled by [Gencos] in first quarter, we don't think that there will be a sure increase in our maintenance cost, so yearly basis there will be about 5% to 6% increase in maintenance cost, and in terms of depreciation, as we already explained in the presentation, several [Gencos] acquired new possibilities, especially four or five (inaudible) plants, and that maintenance has been -- I mean, depreciation has been slightly increased. So yearly basis, we expect about a 1% to 2% increase in our depreciation expense.

Great. Thank you very much Mr. Ji, I appreciate it. Thank you.

Thank you.

Currently three participants are waiting with a question. The following question by is [Curtis] from Lehman Brothers. Mr. [Curtis], please go ahead, sir.

Thank you very much, gentlemen, for the call. And my question - I just had essentially three questions. I wanted to get more color on the coal costs going into FY '08. Is it possible to give us some guidance on what portion of the coal requirements have actually been locked in, and at what prices, and what that represents in terms of a unit price increase from '07 level.

Secondly, what kind of CapEx numbers are we guiding for '08 and '09?

And lastly, if you could give us some update on the status application for a tariff hike going into FY '08, and how you wish to place that before the government going into FY '08, and the election? Thank you very much.

Well, talking about coal cost for '08, well, as you know, we only start contract negotiation around -- only around March or April of the year, but this year, several Gencos started negotiation with suppliers, and about 50% have been very (inaudible), and the price ranges about -- in terms of Australian, the average price for next year is about $65 per ton, this is metric ton. In case of Indonesian, the contract price is set at around $61 per ton. And most of our Gencos are trying to make long-term contracts, about 80%, that means that the [first] long-term contracts will be at least 80% next year.

And talking about CapEx for 2008 and 2009, so you can see the number from our presentation material we sent out. In case of next year, we spend about a KRW10.7 trillion on CapEx, and for '09, we expect about KRW10.4 trillion, but as always about 80% to 90% of this amount will be the actual CapEx.

And lastly, talking about tariff adjustments, well, as you may know, there is a presidential election, late this year, so we plan to start official tariff adjustments right after the presidential election.

Okay?

Just to get a little more clarity, do you think the unit coal costs in particular have peaked in '07, or is there some room for it to go a little upward going into '08? Given that contract negotiations and the prices that you are seeing from, say, Australia and Indonesia, China.

Well, according to the recent trend, there is at the moment, there will be about 15% to 20% unit price increase in coal in '08.

Okay. 15% to 20% [decrease], okay.

15% to 20% increase, not decrease.

Oh, increase in unit price?

Yes.

Oh, okay. Thank you.

Next question is by Edmond Lee from JP Morgan. Mr. Lee, please go ahead, sir.

Hi, Mr. Ji, hi, Mr. Yang. Thanks for your presentation. Just on CapEx, you mentioned that KRW8 trillion to KRW9 trillion is the figure that you expect for the full year. When I actually look at the year-to-date number for the first nine months, it appears that KRW7.6 trillion has been spent, which means that the fourth quarter, there will only be -- based on KRW8 trillion to KRW9 trillion, the fourth quarter CapEx would only be KRW300 billion to KRW1.3 trillion for that quarter, which seems really low compared to the previous year. Last year, fourth quarter of '06, KRW2.7 trillion, fourth quarter of '05 was also above KRW2 trillion, and then fourth quarter of '04, about KRW1.8 trillion. So I'm just wondering, how confident are you in that KRW8 trillion to KRW9 trillion CapEx guidance, whether it may actually be significantly more than the KRW9 trillion figure. That's my first question.

And then second question is, I noticed that the average tariff increase for the third quarter of this year has only gone up quite a bit below expectation, only 1.3% compared to the (inaudible) tariff of 2.1%. So I was just wondering whether there is any specific reason for that?

Well, talking about CapEx, well, as I already explained, mainly because of the acquisition by Gencos, the actual CapEx has been somehow higher than what we expected. So going forward, probably (inaudible) -- well, as you may know, it's really hard to forecast the exact amount of the CapEx, but roughly speaking, we expect around KRW8.5 trillion to KRW9 trillion for this year.

And talking about tariff increase, well, there was about 2.1% tariff increase, but if you look at the breakdown, there was about 4.2% increase in industrial sector, and as you may know, a lot of variable factors affect tariffs and revenues, especially (inaudible) in terms of residential side, there's a forced payment system, so if you consume more electricity than (inaudible), you have to pay more tariffs. So, together we see these kind of factors, to actually impact (inaudible) in the 1.6% increase on the tariff side.

So, just on the CapEx front, you're confident about KRW9 trillion, yes, so, i.e. the fourth quarter we should see a significant reduction --

Well, I cannot tell you I'm confident, but roughly speaking, we expect around that amount.

Okay, okay. All right, yes, thanks.

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There are four participants waiting with their questions. The following question is by [Curtis] from Lehman Brothers.

Just to follow up on the coal cost, because for the first nine months, the unit price has actually gone up by 6%, so presuming for the full year it goes up by, say, around 7% to 8%, we were actually saying that going into '08 there could be another unit price increase of 15% to 20%. Is this price increase mainly occasioned because of supplies coming in from China, or is this actually seen across the region? And when do you think the unit coal price will actually start to peak out?

Well, as you may know, we have been trying to reduce the [order] to China, so the result of the third quarter -- the unit price of coal is the average cost from Indonesia to Australia. And as I said, we are in the middle of discussions on coal contracts with Australia and Indonesia, and the price ranges around $60 to $65 per ton, so (inaudible) we expect about a 20% increase in unit price.

Okay, but do you think that '08 will be a peak, or perhaps it's [a bit] too early to comment --?

Sorry, but that's a very difficult question. I mean, as you know, we still have to (inaudible) price.

And going into '08, you consider Australia, Indonesia, they will be somewhere around 70% to 75% of your total coal supply? Can I take it that way?

More than 80%.

More than 80%. Thank you.

Thank you.

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

Hello again, Mr. Ji. (inaudible) to us for a quick clarification. I was just comparing the -- and also following up on Edmond's question with regard to CapEx. There's still a little bit of a comparison. It seems that the biggest increase was on the part of what you call thermal to thermal, a portion of CapEx. Is this what you mean by the Gencos CapEx? And also, I'm sorry if I didn't listen carefully enough, but I didn't really understand the explanation of some assets were first owned or originally -- which assets were (inaudible) by Kepco and they were passed on to Gencos, and the Gencos decided to expand, or renew those assets, or could you kind of clarify that, please? Thank you.

Okay. Well, there is a -- there are facilities called Transmission Connection Facilities. Those facilities used to belong to Kepco, but those facilities are mostly used by Gencos, so as of this year, we decided to transfer those facilities to Gencos. So, the total amount about KRW2 trillion, so that means Gencos had to pay about KRW2 trillion, but there would be partial payments, so for the next 20 years, KRW2 trillion will be paid by Gencos. So Gencos reflected those amount of money in their CapEx, and that is why there has been a kind of big jump in CapEx by Gencos. Do you understand what I'm saying?

Yes. Thank you.

Currently there are two participants waiting with their questions. The following question is by (inaudible) from UBS. Mr. (inaudible), please go ahead, sir.

Yes, hi, thanks for the opportunity. I just wanted to ask a quick question. When you mentioned about the LNG price decline next year, what oil prices are you assuming?

Well, [talking about] next year's elevated price, we don't have any assumption. I mean, I just talked a bit (inaudible) guys at KOGAS, and they told me that when they made a contract with their suppliers in 2005, they were able to get a very cheap price. So overall, there will be about a 10% decrease in LNG compared to this year, but those amounts are expected to be imported in the second half next year, so the yearly basis we expect about 5% decrease in unit price of LNG, just roughly speaking.

Okay, thank you.

Thank you.

Currently there are one participants waiting with a question. The following question is by Edmond Lee from JP Morgan. Mr. Lee, please go ahead, sir.

Hi, Mr. Ji. Actually just to follow up on many other questions asked before. First, on CapEx, the way I understand it now is that you're saying that, basically, KRW2 trillion of CapEx paid by the generation subsidiaries, those are really just more transfer of assets. So the actual CapEx having been spent for the first nine months on a consolidated basis is actually more like KRW5.7 trillion, rather than KRW7.7 trillion? That's my first question.

Well, according to my calculation they are supposed to pay about KRW100 billion per year, right?

No, I'm not talking about -- you mentioned that KRW2 trillion amount --.

For the next ten years. So every year they have to pay about KRW100 billion per year.

Right (inaudible). So again, you mentioned KRW2 trillion.

Yes, KRW2 trillion. Total amount is about KRW2 trillion. So if you divide by 20 years --

Oh. So it's only KRW100 billion each year.

Each year, right.

So that's a small amount. So actually, we can almost ignore that.

You can say that.

So apart from that, what is the reason for the (inaudible) CapEx surge, then?

As far as we understand, that is the major reason why the CapEx has been slightly increased.

But it's only KRW100 billion. The other possible reason, I remember last year I asked this question, and then the year before that I asked this question, is that your reserve margin has been coming down, 11% two years ago, 9% last year, and now it's 7%, and every year (inaudible) also blames it on the weather, that peak demand growth has been stronger than expected, but unsustainable. But on the other hand, the fact is that peak demand has grown much more strongly than expected, reserve margin falling quite sharply, and also [Kepco] appears to be accelerating its [green-field] projects. At this point, it's the further downside risk coming from simply the [assorted] situation being worse than expected and Kepco having to further accelerate its [green-field] projects, and hence there'll be even more CapEx coming from what we are seeing so far.

(inaudible), I mean, because of unexpected high temperatures and high peak load, reserve margin has dropped lower than what we expected. But we don't see any problem for that in the -- and also we are implementing the transition of facilities, and for example (inaudible) Number Seven was in close operation as of June this year, actually, it was supposed to be in operation next year. But if you look at our new capacity plan (inaudible) [2010], I can tell you the CapEx are basically spent, based on the capacity plan, and we are adding several coal-fired power plants this year and next year, and that will be a major reason why [expedition] in construction of facilities, those could be the reason why our [actual] (inaudible) increased.

(inaudible). And then on the LNG cost, basically the -- I understand that basically a 10% reduction, that's based on the new energy supply contracts, but then these oil prices have [obviously] risen quite sharply recently, so maybe after a six-month (inaudible), it is possible that any benefit from the new LNG supply contracts cannot be offset, or may be offset by higher prices on the existing LNG supply contracts, yes?

Well, let's see what happens. It's really hard to predict at the moment, but as of now, what we are expecting is about around 5% to 10% price decrease next year, but well, it depends on the oil price next year.

And also on overseas, in the Philippines, I remember reading in the headlines saying that your power plant, there's been some change in state or transfer of state? Can you elaborate on that?

In terms of Philippine power plant?

Yes.

Well, there are about three projects in operation at the moment, and in the earliest one, called (inaudible), (inaudible) main contract with Philippine government, so we -- the contract period ends around 2010.

Is that what you're asking?

No, I thought -- maybe I must have misunderstood. It's okay. I thought there were some changes in ownership, and things like that.

No.

Okay. That's all my questions.

Next question is by Joseph by Merrill Lynch. Mr. Joseph, please go ahead, sir.

Sorry, just seems that we're all expanding on each other's questions. Just to go back to the CapEx. How easy and flexible is it for Kepco Gencos to accelerate the construction program of their new facilities? My understanding was, given the rules and regulations, and of the benchmarks that have to be met, there's not a huge amount of flexibility?

We don't have (inaudible) basically, we don't have much (inaudible) any more, at least -- at most, six months?

Right, so then going back to the CapEx, this KRW9.5 trillion differential between the projected CapEx, thermal CapEx, as at the end of the first quarter, and the projected CapEx for the full year as of the end of Q3, the differential is KRW9.46 trillion, so within KRW100 billion of that KRW9.5 trillion is this Transmission Connection Facilities, but it would be great maybe if later you could find out, maybe send us by e-mail, what exactly went up in terms of the CapEx?

Okay, I will follow up on that, or try to break down the CapEx by (inaudible) in our (inaudible).

Thanks very much.

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There is one participant waiting with a question. The question is from Edmond Lee, from JP Morgan. Please go ahead, sir.

Hi, just lastly, just wondering, is there any updates on plan to sell off the remaining stake in Powercom, the KPS, and also whether there's any (inaudible) capital to -- (inaudible) earlier proposal for capital to buy back the shares from KDIC, so I was just wondering, obviously that was rejected, but wondering whether there was any scope for changes, or what's the latest on that?

Well, there's no news on KDIC issue, and sale of Genco. But as you may know, we plan to split KPS in December this year. There will be about 2.5 to 1 stock split, and about 20% will be invested within this year, and the rest amount will be listed going forward, probably next year. In terms of Powercom, as you can see in our packet, the bottom line of Powercom has been turned into positive as of third quarter this year, so we might be able to (inaudible) the listing of Powercom next year.

I see. Thank you.

Thank you.

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