Korea Electric Power Corp (KEP) 2007 Q4 法說會逐字稿

Good afternoon, to those of you in Asia and good morning to all of you in the Far West. This is Seong-Hee Yang, the Fiscal 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 fiscal year of 2007.

Please note that the financial results discussed today are preliminary, unaudited, and not released 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 walk through the results for a few minutes. And then we will put up a Q&A session. Any periodic comparison is year on year basis between 2007 and 2006.

The operating leverages were up by 7.1%. This was mainly because the sales revenue of electric power, the principal component of our operating revenues increased by 7.5% to KRW28.56 trillion from KRW26.57 trillion in 2006. This result is after adjusting inter-company transactions, reflecting primarily a 5.7% increase in sales volume of electricity. The overall increase of the sales volume was mainly attributable to a 6.5% increase in the industrial sector and 5.7% increase in the commercial sector.

Operating expenses increased by 10.7% to KRW26.43 trillion, as compared to KRW23.87 trillion in 2006. This was mainly due to a 15.3% increase in fuel expense and a 22.9% increase in power purchase for resale.

In the fiscal year of 2007, the unit price of coal increased by 8%, while the consumption of coal increased by 10.8%. Total LNG expense increased by 14.8%, due to 13.3% increase in electric consumption. The unit price of bunker oil increased by 7.8% and the consumption of bunker oil increased by 9%, which caused a 17.4% increase in total bunker oil expense.

Power purchase for resale increased by 22.9%, mainly because of 22.5% increase in purchase demand.

Maintenance expense increased by 4%, mainly due to the expansion of the distribution related business and underground cable construction. A 2.5% increase of the depreciation expense was mainly due to new facilities, such as Yonggwang Number One through Four, [Tian] Number Seven, Eight and [Diamen] Number Seven, Eight acquired by Genco. As a result, operating income decreased by 19.8% to KRW2.58 trillion in 2007 as compared to KRW3.22 trillion in 2006.

Non-operating income decreased by 6.3% to KRW1.15 trillion from KRW1.23 trillion in 2006, mainly due to the decrease of FX gains.

The FX loss decreased to KRW143.2b in 2007 from KRW26.6b in 2006. Investment loss from affiliates decreased by KRW18.8b and others decreased by KRW205.8b in 2003.

As a result of the above factors, net income decreased by 24.8% to KRW1.56 trillion in the fiscal year of 2007, compared to KRW2.07 trillion in 2006.

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

Now Q&A session will begin. (OPERATOR INSTRUCTIONS) Currently, three participants are waiting with your questions. The first question will be given by Geoff Boyd from CLSA. Please go ahead, sir.

Okay. Good afternoon. Thank you for the call everyone. I just was wondering if you could elaborate a bit more on the coal situation. Obviously, we're curious to know how the Chinese seem to be curtailing exports of coal right now and does that mean that you are not getting any coal out of China right now? And does that mean that you're scrambling to get coal on the spot market? And what percentage of your coal requirement for that be? And what do you think the impact is going to be as you head into '08, in terms of relative to your budget?

Well this year our target for Chinese coal is about 10.9% out of total amount. And as you may know, recently Chinese government released that they would not allow any export of coal outside of China. And actually, we were supposed to receive about 650,000 tons during February and March. So we decided to buy from other countries like Indonesia and Australia.

So in the short term period there will be no problem for us to acquire those coals. But if this kind of containment by the Chinese government lasts long, there could be a -- it may be causing problems for us. Anyway, I think we will be trying to diversify our source of coal.

But that 660,000, are you paying the Australian, Indonesian contract price or are you paying a spot price?

These are the price we pay for the -- based on the loss of contract with China.

So you're paying the price based on the Chinese price or --

We're paying the Chinese price.

If you're buying it from Australia and Indonesia, they're not charging you the spot price? They're charging you the contract price?

Well about 8% is based on the local contract price and also about 20% we buy from the spot ma rket. So actually we have both.

Okay, so 20%.

20% from spot market.

Okay. And I know we had this discussion before, but basically the contracts generally run from June to June, right?

Right.

And so you feel that you're locked in until June '09 -- or June '08 or June '09?

Well last year's contract price is locked in June of this year. And actually, we already have started coal price negotiation around -- since last November. And we expect about 15% to 20% unit price increase in coal. And that will be reflected from second half of this year through first half 2009.

Okay. And just one final question is that -- I don't know. A week or two ago, I was just reading the Korean news and one of the comments was something coming from a newspaper saying the government was going to delay setting any tariff hikes on utilities until the second half of the year because of high inflation rates and concerns about that. Was -- what's the situation with the tariff and was this news report any truth to that?

Well in terms of tariff discussion, well why don't we talk about it after the conference. This is kind of a receptive issue to discuss at the moment.

Okay.

(Multiple speakers) I really think that financial results rather than other issues. So I guess it is better for us to talk about this after this conference.

Okay.

Okay?

Yes, thank you.

Thank you.

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

Sir, my question essentially was near term supplies of coal. Now we are hearing that there are some slabs in Australia that can stop sending supplies. So for the next coming two quarters, given that you're going to source a big portion of your coal from Australia, would there be any kind of difficulty in securing supplies because of which you may have to increase your sourcing from the spot market?

Not really at the moment. Our critical analysis, there will be no trouble for us to increase a portion of Indonesian and Australian.

Okay. So these Australian slabs are not disrupting your supplies in any way, at least for the next two quarters?

No.

Okay.

No.

And sir, a little more on the CapEx guidance. You're still guiding for CapEx of around KRW10 trillion for FY'08, right?

Well, as you may know, this is our official prediction figure. And well, our actual has been always about 80% to 90% on our prediction. So even though we provided about KRW10.7 trillion of CapEx for 2007, actual figure will be around KRW8 trillion to KRW9 trillion mark.

Okay, thank you. Thank you very much.

Thank you.

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

Hello.

Hi.

Hi Mr. Ji and Mr. Yang. Thanks for the conference call. On the -- just a little bit more on the coal sourcing side. I understand that last year you basically, because of the same difficulty in terms of sourcing coal from China, that some of the contracts were reneged upon. And subsequently KEPCO was having to import a bit more from outside of Yangtze. You mentioned Australia, Indonesia. But also a little bit from South Africa.

With the difficulties this year, should we expect more of the coal to be imported from -- so possibly from South Africa as well? And maybe -- and also related to that, in terms of the '08, the second half contract price negotiations, I understand about 80% of that has been -- has now been locked in. But I just want to clarify whether that 80% actually includes the 10% from China. So in other words, if you exclude the China portion, then it's more like 17%.

And also, I think last year, any comments on the remaining 20%, 30% portion? Any view on what contract pricing may be as the Australian suppliers are reportedly asking for significantly higher prices than what you guys have managed to secure.

Well talking about sourcing coal, rather -- except China, if you -- actually, we have limited figure on 2007 results. So I will tell you that these figures are preliminary figures. So we bought from Russia about 8% in 2007 and about 1% from South Africa. So we carefully expect them to be increased. In the case of Russia, probably around 10% and definitely that of South Africa would be slightly increased compared to 2007. And also, we mainly -- actually, we are mainly focusing on Indonesia and Australia.

Okay.

Okay? And talking about the 2008 contracts, as you said, about 85% are already locked in. And average contract price is about low $70 per ton, metric ton. And in case of -- and that excludes Chinese. In case of Chinese, we are in the middle of discussion on that.

And actually, last year, can you remind us, last year the average contract price was how much for '07? Wasn't it -- it was mid $50s?

Well in case of last year, the contract price of Australian was about $53 per ton. This is metric ton. And then on Indonesia it was about $51 per ton. And then Chinese was about $68 per ton.

And now you're saying that it's about low $70s for all -- for the three sources combined.

Yes, low $70s for Australia and Indonesian, and about 85% were locked in.

I'm actually just working out the rough calculation here based on low $70s and the year on year increase is actually more like over -- anywhere from 34% to 39%. But I think earlier on you mentioned about how you expect only 15% to 20% increase year on year. Well why the discrepancy?

Well about 38%, we were able to get around $55 -- around the middle of $50. And I'm not talking about the average price. Recently we were able to get around $70 per ton. Probably the average price will be around $67 or $68.

So $67, $68 would still be about 25% to 30% year on year increase compared to '07. So maybe actually 15% to 20% a year, the range that you mentioned may be a little bit too low?

Yes, you could say that.

Okay. And then actually, I think also on the IPT purchase amount, last year it went up so much, partly because demand growth picked up a lot and also supply within Korea was quite tight. Should we expect any meaningful improvement there this year?

Well talking about demand growth in our new plan, we plan to add about 2,300 megawatt of coal fired power plants in this year. So we will be able to come out -- cover those increases. But also, we have the revision on demand control systems within Korea, so we don't see any problem for maintaining about 10% of margin. And our target, the margin is about 15%.

So coal fired, the new capacity this year is 2,300 megawatt. Any gas fired power plants?

Well mostly coal power plants.

Okay. But actually, 23,000 megawatt, so that would be sufficient to meet maybe 4%.

No, not 23,000, 2,300 megawatts.

2,300. So that's -- I guess my question is, that 2,300 megawatts, that may be still sufficient to meet only, say, maybe 4% of demand growth. Is that going to be mostly completed in June or first half or first quarter, second quarter?

About 2,000 megawatts will be completed in June. And rest of that will be completed in December. Yes, December.

So 2,000 in June. Yes?

Yes.

300 in --

I also want to remind you that the Kori Number One is the nuclear power plant.

It will be running.

Yes, it's already running soon.

And actually, just one very last one. On the CapEx side, I noticed that if I break down the quarterly CapEx, the Q4 CapEx is very, very low at KRW700b. Is there any adjustment made for the fourth quarter, in particular?

Yes. Well in third quarter we included the investment on [trapeze] collector facilities. The total is about KRW1.6 trillion. But it should be deducted because it is a non-cash item. This is -- this item is a kind of internal transaction between [Capri] and KEPCO.

Okay.

So there has been some kind of -- this adjustment. Okay?

Okay. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) The following question is by Mr. Lee from JP Morgan. Please go ahead, sir.

Well actually, one more here. In terms of the -- I noticed the EPS has been -- declined very, very sharply. And I'm just wondering what may be the dividend payout policy for this year now.

Well currently we are targeting 30% of cap ratio, based on bottom line. We are in the middle of discussion on that with the Korean government at the moment.

So that would indicate if it is based on 30% that would indicate a pretty significant decline from that last year.

Yes, in terms of actual demand, yes, you're right. But we -- as we always said, we are trying to maintain a 30% cap ratio, based on the bottom line.

Okay. Thank you.

Thank you.

Currently there are no participants with questions. (OPERATOR INSTRUCTIONS) The following question is by Pierre Lau from Citigroup. Please go ahead, sir.

Hello.

Hello. Can you hear me?

Yes.

Okay. I have one question. Regarding the non-operating income for the others, it's increased by 90% year on year. So I just wanted to know, what's the main reason for the sharp increment?

Well there has been the gains from prior few adjustments. And the amount was about [KRW140 trillion]. And there was about interest -- gain from interest. The amount was about KRW67b. Those are the major factors that increased the non-operating income.

Okay, thank you.

Thank you.

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

So just another additional question on LNG. Now in the last quarter you had actually confirmed that you will be getting LNG shipments from Korea Gas at lower (technical difficulty). So can we say that going into FY'08, there might be a reduction in the unit cost for LNG? Hello? Hello?

Hello.

Yes.

Can you hear me?

Yes. Sir, my question essentially was on LNG cost.

Yes, yes. I know your question.

Yes.

Well based on our analysis, we still have a positive view on our unit price of LNG. But actually, last quarter we expected about a 5% unit price decrease in LNG in '08. But we recently -- we revised our view, so there will be about 0.6% decrease.

I see. So against your earlier assumption of 5%, there will now only be a 0.6% decrease in unit cost, is it?

Right.

Okay. Thank you, sir.

Thank you.

Currently, three participants are waiting with their question. The following question is by Geoff Boyd from CLSA. Please go ahead, sir.

Hi. Just following up on that, when you mentioned 0.6% decrease in LNG unit cost, what oil price are you assuming?

$90 per barrel.

$90. And would have any sense, if we used $80, what would that give you in terms of your decrease? What would it be then, do you think?

I may have to calculate on this, but well when we -- it should be at about 5% unit price decrease. We assumed about $58 per barrel. And now we changed our assumption to $90 per barrel and we came up with a 0.6% decrease.

Okay, because I'm kind of shocked if you went from $50 to $90 that you're only going from negative 5 to negative 1. I thought that it was a pretty strong correlation. I know it's not one for one, but --

Well according to our data, the coal gas made a kind of -- they were selling on the LNG price.

Okay.

So next year, about 5.5m tons will be imported and their contract price is about $210 per ton. And about 50% will be consumed by City Gas and 40% will be consumed by us, so which means that we will consume about 0.8m tons next year. Right?

Right.

And in total, we expect about 1m -- 10m tons next year. We plan to consume about 10m tons next year, so about 0.8m tons. The contract price will be about $210 and rest amount will be about $600 per ton -- I mean the current spot price of LNG is about [$600] per ton. So based on this kind of calculation, we came up with a 0.6% decrease in unit price.

So how much would coal gas be buying on the spot market? Of that -- I don't think they covered 100% of contract. Right?

Well I'm not quite sure about that, but as far as I know, they made very good contract in 2005. And they were able to get about $210 per ton. And total is about 5.5m tons per year for the next five years, so --

And by the way, you were increasing consumption of LNG for the F'08 over '07. What percentage increase does that work out to for that 10m that you --?

We are assumed about a 10% increase.

Okay. And what is your fuel -- your demand consumption increase for electricity in '08? Is it like 5% or something?

Under the assumption of 5% GDP growth, we expect it to be around 5.6%.

Okay. Okay, great. And I'm sorry. I might have even missed it at the start of the call because I didn't -- couldn't -- wasn't quite listening to all the things. But there was a comment on fuel costs. What then do you expect your overall fuel cost to be in '08? What's your budget?

Well this is a kind of conservative forecast, based on our budget targeting. We expect about 12% increase in total in '08. Last year, total fuel cost increased by around 15% and we expect about 12% increase in '08.

And would you put a number on the power purchase for resale? Would you be able to put a number on that?

Not right now at the moment.

Okay. And the depreciation cost rose a fair bit in the fourth quarter. Is there a -- is that going to be kind of an ongoing run rate, do you know, or is that sort of a one time thing? It was up --

Well we are adding about 2,300 megawatts of coal fired top line this year. So probably there will be additional 2% to 3% increase in '08.

Okay. Well thank you very much. Oh and one last question. What was the final percentage increase on labor cost last year over '07 -- or '06? What was the labor cost?

Can I talk to it` later?

Okay.

I will ring you after the conference, okay?

Okay, sure.

Thank you.

Thanks.

Our next question is by Pat Dolman from UBS Securities. Please go ahead, sir.

Yes, hi. Thank you for the opportunity. When you mentioned the 12% increase in the fuel price, can I just confirm one FX rate you're assuming? Also, for the oil price that you're assuming, can I just confirm if you said you're assuming $90 per barrel for the -- to buy oil?

No. In case of assumption of our forecast on fuel cost, we assumed about $75 per barrel. This is the average price of -- to buy for 2008. And we assumed KRW900 per U.S. dollars, the aggregate FX rate for 2008.

Thank you.

Thank you.

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

Hi. Hi there. Actually, just on the LNG calculation again, I would just like to understand this more correctly. When you mentioned that the reduction would be 0.6% compared to before, I just want to make sure that we have taken into account the fact that the -- clearly on the existing contracts by coal gas compared to last year, obviously that would have been a rather large increase given much higher oil prices right now.

And I think the reason why I'm asking about that is if I actually take the numbers that you just mentioned there, that the new -- actually the new volume to be consumed by capital is 0.8m tons, that would be about 8% of the total volume. And the price reduction would be 35%. So 35% of 8%, that's only a 3% reduction, one off. And then -- but then actually the remaining 92% of the volume we will still see a pretty significant increase on.

So I'm just wondering where is the -- whether we may be too overconfident here in terms of expecting a reduction in the FH energy price, given that the existing contracts will have gone up there?

Well can I send you my detailed calculation on LNG price?

Oh yes (multiple speakers).

Maybe you can discuss about that later at my [leisure].

Thank you.

Okay? Thank you.

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

Well if you have no further questions we would like to 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 and bye-bye.