Korea Electric Power Corp (KEP) 2008 Q1 法說會逐字稿

Hello, everyone. This is Cecilia Oh, Manager in charge of Investor Relations in KEPCO. Together with me, I also have Mr. Changyoung Ji, Manager also in charge of IR.

On behalf of Korea Electric Power Corporation, I would like to thank you for participating in our conference call today to announce our preliminary 2008 first quarter earnings results.

Before beginning the announcement, please note that the financial data to be disclosed today are preliminary unaudited figures and estimated by consolidating KEPCO and its six generating subsidiaries, or GENCOs, after adjusting for material inter-company transactions among KEPCO and the six GENCOs.

Such estimated information is to help investors better understand KEPCO's financial results, including its major subsidiaries. Consequently, such financial information may not have been prepared in accordance with the generally accepted accounting principles of any country, and may not necessarily be indicative of the consolidated results of operations of KEPCO and its six GENCOs. More importantly, these should not be relied upon or form a basis of entering into any contract for the purpose of trading any securities of KEPCO, or any other investment decision in respect of KEPCO's securities.

Now, let me briefly run through financial results, and then we will open up a Q&A session. Any periodic comparison is cumulative, year on year basis between 2008 and 2007.

The operating revenues were up by 12.1% to KRW8.08 trillion in 2008. This was mainly because the sales revenue of Electric Power increased by 12% to KRW7.93 trillion in 2008 from KRW7.08 trillion in 2007.

In terms of power volume, the overall growth was 9.4%, which was mainly attributable to a 7.7% increase in the residential sector, 12.2% increase in the commercial sector and 8.7% increase in the industrial sector.

Operating expenses increased by 23.3% to KRW7.5 trillion in 2008 from KRW6.1 trillion in 2007. This was mainly due to a 32.2% increase in fuel cost and 65.7% in purchased power costs.

Looking closely at the fuel cost by fuel type, fuel cost for LNG and coal increased by 43.5% and 62.7% respectively, while fuel cost for oil decreased by 70 -- decreased by 27.4%. The main reasons are first, 2,000 megawatts of coal power plant such as [Tian] number seven and eight units as well as Dangjin number seven and eight units were newly constructed. And second, due to the international oil price surging up, oil consumption amount decreased by 50.6%.

In terms of unit fuel cost, unit cost for coal increased by 41.9% and LNG and oil increased by 24.8% and 47% respectively.

Purchased power cost from IPPs increased by 65.7% to KRW975b from KRW589b. This was mainly due to 46.2% increase in power purchased amount and 13.3% increase in unit purchase price. Such IPPs include independent power producers participating in the power pool market as well as IPPs with power purchase agreements with KEPCO.

Maintenance costs increased by 2.9% to KRW3.88 trillion, mainly due to the fact that maintenance cost decreases of KEPCO and two GENCOs such as KHNP and KOWEPO were offset by four other GENCOs maintenance costs increases. In particular, due to a decrease in planned overhaul period of nuclear facilities, KHNP's maintenance cost decreased by 34.7%.

Depreciation cost increased by 3.3% to KRW1.24 trillion in 2008 from KRW1.2 trillion in 2007. This was primarily because depreciation cost of two GENCOs such as EWP and KOWEPO increased due to the additional construction of 2000 megawatts coal power plant, which were offset by decreases of four other GENCOs' depreciation cost, which was mainly caused by their accelerated depreciation effect.

As a result, operating income decreased by 49.9% to KRW562 -- KRW565b in 2008 as compared to KRW1.11 trillion in 2007.

Non-operating income increased by 44.9% to KRW628b in 2008 from KRW434b in the previous year. This was mainly due to 484.3% increase in FX gain to KRW14b from KRW2b in 2007, as well as 28.9% increase in investment income from affiliates to KRW149b from KRW116b in 2007.

Non-operating expenses increased by 103.4% to KRW739b from KRW363b mainly due to 497.9% increase in FX loss and 18.1% increase in interest expenses.

The significant increases in FX loss was mainly due to won depreciation against the U.S. dollar change of 5.7% in 2008 as compared to 1.2% in 2007.

Total interest bearing debt amounted to KRW21.4 trillion in 2008, increased by KRW1.9 trillion from KRW19.5 trillion in 2007. Also the average interest rate of our debt slightly increased to 5.01% in 2008 from KRW4.54 trillion in 2007.

As a result of the above factors, net income decreased by 61.3% to KRW300b in the first quarter of 2008 as compared to KRW775b in the first quarter of 2007.

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

Now the Q&A session will begin. (OPERATOR INSTRUCTIONS). Currently three participants are waiting with their questions. The first question will be given by Edmond Lee from JP Morgan. Please go ahead sir.

Hello, can you hear me?

Yes. Hi.

Okay. Hi, there. Thanks very much for the presentation and also the very detailed Excel file that you have sent out. The questions that I have, number one in terms of general cost savings, whether there's any specific plan there for the remaining part of this year and if so, any specific comments on the likely scope of that?

Second question also related to cost. On the maintenance side, obviously first quarter we've seen the nuclear side maintenance costs having come down and, at the same time, nuclear utilization also been running at over 100% for the past -- for the first three months of this year. So I just wonder whether that is sustainable. So i.e. whether we may see rebound in maintenance costs later on this year?

Third question regarding on the fuel cost side. On the LNG cost situation wondering whether there's any new guidance or expectation on that.

And then lastly, potential for tariff hike. Or maybe fuel cost pass through mechanism which has been much speculated or expected by the market, so if any comments on that?

Thank you. Let me briefly touch the maintenance cost first. At the end of last year, the total maintenance cost increased by 4%. And if you see the overall days of the generation sector, compared to 2006 in 2007 the overall period increased by 698 days. And compared to last year, this year we expect it to be increased by 309 days.

So we assume that the total maintenance cost maybe a little less than last year. I mean the --

The increase?

Increase, right. And if you look at KEPCO only maintenance cost, as we are in the first quarter of this year, it decreased by 1.5% from KRW149b to KRW151b. And this was mainly due to our cost control measure. Due to the oil price hike and everything we are trying to save our cost. And that result actually came out in our maintenance cost in the first quarter.

In terms of KHNP's maintenance cost, it decreased by 34.7%. And only for the nuclear overhaul period, it was 162 days in the first quarter of last year and it came down to 25 days. So you can see the reasons.

I think that will be all for the maintenance costs. Is that answer --

Yes. Thanks very much.

Enough? Okay.

And the second question --

Cost savings I believe. Any particular cost savings program?

In terms of cost saving strategy, actually we have internal strategy called a contingency plan. And there are two stages. And we are at the first stage. And we plan to decrease about KRW460b. And we are trying to induce GENCOs to reduce about KRW300b. So in total there will be about KRW760b cost savings.

And talking about more detail items, as Cecilia said we're trying to reduce our maintenance costs, R&D and other fees for consulting services. So we are very positive we might be able to achieve about KRW460b cost savings. And we are currently urging GENCOs to reduce their cost.

And then first quarter how much has been realized?

Actually this is KRW760b is yearly basis amount.

So would you say that first quarter the program has already started so --

Yes.

So there's already some impact there already, yes?

Definitely.

Okay. But any idea in terms of the size you mentioned?

We didn't calculate.

Okay.

And in terms of --

In terms of the tariff hike, actually the government officially mentioned that they will review the cost passed through system and also they will review the tariff change mainly due to the rational energy consumption nationwide because the oil price is surging up, right? This time it's actually a conference call for the financial results so --

Okay, understood, understood.

Separately we'll give --

Understood. But the feeling is that how big is inflation a consideration, a factor there?

At this point we cannot -- it is very difficult for us to officially talk about tariff hike.

Okay.

As you know it is decided by the government. So we will -- in detail we'll talk about it separately.

And in terms of fuel cost forecast, as you may know all this year we expect it to be about 14% increase in total. But recently we revised our forecast. So total fuel cost will be about -- increased by about 27.7%.

27.7%? Okay.

We're talking about fuel cost. We expect about 18.3% unit price increase in coal. And 37% unit price increase in bunker C.

Yes.

And 22.4% unit price increase in LNG. And there are two major assumptions. The average price of Dubai maintains $90 per barrel and we use KRW900 FX rate.

KRW900?

Yes.

Right, okay. And then the 14% -- sorry the 27.7% increase, is that before IPPs is it?

Yes. That's pure KEPCO, pure --

Okay. Understood. Great. That's all my questions there. Thanks very much.

Thank you.

The following question will be given by Geoff Boyd from CLSA. Please go ahead sir.

Okay great. Thank you for the call. Just quickly I'll follow up on that. When you're giving that fuel cost guidance you're talking about the overall fuel costs including the GENCOs, right?

Right.

Right. Okay. And I didn't quite catch what you said about the unit cost increase in LNG because you said it kind of fast. Was it something like 40% or something?

22.4% increase.

Oh, 22.4%. And -- because I remember you used to be saying it was going to be down a few percent at the start of the year.

Yes, that's been included. I mean KOGAS is expected to import cheap LNG about June of this year, so that -- through those LNGs we are able to reduce by 1%.

Okay. But your total full year unit cost increase for LNG is forecast at 22.4%?

The unit price for LNG.

Right. And the one thing I don't understand, because you were saying -- in January you were saying fuel cost will be up 14%, but you were also using KRW900 exchange rate and you were using like $75 per barrel for oil prices, something like that. So first of all why are you still using KRW900 exchange rate? And it seems to me like the 28% -- I don't know, it just seems like it would be dramatically worse if you use a KRW1,000 exchange rate.

Well basically we have official view that the KRW900 FX rate and based on that we formulated our budgeting figures. So that's why we're suggesting KRW900 FX rate. But if -- according to our sensitivity analysis, if Korean won depreciates by KRW100, then there will be about KRW1.2 trillion additional cost increase.

Right. Okay. And my question actually is related to the file that you sent around on the financials. The one item that I didn't quite understand was that you have other non-operating income of KRW465b for the first quarter compared to KRW315b the year before. Can you just tell me what's driving that? What are the large numbers in that?

One of the items including in other operating expense is decommissioning cost from KHNP. And that amount was KRW92.5b in 2008. And that on last year was KRW87b.

Okay that's in then the other expenses right, the other non-operating?

Yes.

Because I was talking about the non-operating income that you have like you have other income of KRW465b.

Right. That includes swap transaction related income and loss.

Sorry, FX or?

Swap transaction. FX swap. FX and interest swap. Currency swap or interest swap.

I mean you have an item, a line item called FX gain in non-operating. So wouldn't that include all the FX?

Right. That is for debt before swap transaction.

Okay.

So FX gain includes only FX translation and transaction gains. And in case of other income, non-operating income includes gains from currency swap.

Okay. So you are engaging in some derivatives hedging kind of thing?

Right.

Right. That's right.

Okay. That's --

If we see the number, in first quarter 2008 the swap transaction income was KRW230b and that of last year was KRW42b. And swap transaction loss in 2008 was KRW54.5b and that of last year was KRW15.3b.

Okay. Great. Okay, I think I understand everything. And that's about it, thanks.

Were you going to give out any guidance on the power purchase for resale? What do you think that will be up for this year?

Power purchase for resale has increased a lot actually because the number of IPPs has increased. In the past it accounted for about 4% of the total generation in Korea but now it's about 7%. And basically the total power demand was high.

And if you see the peak demand, in this year peak demand increased by 10% as compared to 2.2% last year. So peak was really high. It was mainly due to the winter temperature was lower than last year. So that's why we used peak demand generators a lot.

Right. And do you have any sense of how much that power purchase for resale, that line item will be in terms of expense for this year?

Well as you know it's a very difficult question. I mean, it's highly related with temperature and volume growth. So we don't have any specific guidance on power purchased for resale.

Okay. And quickly, the last question I had was on the tariff. I know you can't really talk about it, but I remember at the first quarter meeting -- or sorry the fourth quarter meeting we were talking about the fact that in April the Parliament would be decided and it would take about three months to sort out the tariff hikes. So we're looking at a time frame of maybe June or July. Would you guys still feel comfortable with that as sort of a time frame where something gets resolved, or do you think it will happen earlier or later?

Well we're still working on it. But why don't we talk about it after the conference call?

Okay.

Okay?

Thanks.

Thank you.

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

Yes, hi. Joseph Jacobelli from Merrill Lynch. Just a couple of quick questions. One is I think demand in the first quarter was probably above most people's expectations. Could you give us a brief profile of exactly what happened in the first quarter on the demand front? And how do you see it planning out for the rest of the year, maybe a couple of words on what you think about the summer in terms of the meteorology. That would be great.

And the second question would be with regards to the capital expenditure. Have you a) revised your official CapEx for the full year, I mean official CapEx as in the target CapEx? And b) are you still guiding towards a 80% conclusion of that CapEx for the full year, or will it be slightly higher or slightly lower? Thank you.

Okay. In terms of the revenue side first, as of the first quarter of 2008 we saw the demand grew by 9.4%. And this was mainly affected by the winter effect. And for the full year we expect it to grow by around 5.2%. It's a little bit conservative assumption, but this is our official number. And in the summertime it really depends on the peak demand. So it is a little bit difficult. But if the official peak demand assumption comes out, we will provide that to you.

And in terms of the cost side, we already talked about the fuel cost side, as Mr. Ji mentioned. And in terms of the depreciation cost, it's mainly related to the new construction of generation capacity. If you see the construction allowance in last year, it increased by 2,106 megawatts. And this year we expect the new capacity will be constructed by 2,340 -- 2,384 megawatts, newly constructed effect.

Last year, the depreciation cost increased by 2.5% for the full year, year on year. And the capacity addition amount is a little bit higher this year than last year. So depreciation cost can be expected by number.

And in terms of maintenance cost, last year it increased by 4%. And in terms of the overall period, last year's overall period is two times higher than this year. And in addition to that, we are driving the cost control measure this year because of the oil price surging up. So we expect the change in maintenance cost may be a little less than last year.

And in terms of CapEx, Mr. Ji will touch on that.

Yes, actually our forecast for 2008 is about KRW10.7 trillion. But we still have same idea about 75% to 80% of predicted amount will be actual CapEx for 2008, which means this year's actual CapEx will be around KRW8 trillion to KRW8.5 trillion.

Okay. Just to go back to the exact question Mr. Ji and Cecilia that I was asking, based on your CapEx projections for 2008 three months ago, relative to the projections that you have now or are likely to have, has there been an increase or a reduction? Because obviously the financial circumstances of the Company have changed between -- within the last four months. So has the CapEx side of -- your thinking towards the CapEx or the CapEx targets changed in any way?

And just to go back about demand and supply, I understand that the official forecast was maybe made a while back with regards to volume growth, but given that most people believe that this year we're going to see some kind of extreme weather, potentially more rainfall than usual or less rainfall than usual, whatever, have you taken that into consideration on the 5.2%? And if you haven't, what potentially is the upside on that 5.2%? What's the upside risk? Thank you.

In terms of volume growth assumption, we actually -- we will actually make changes looking at the temperature. This time the official number we can provide is 5.2%. But if that is amended, we will disclose that number as soon as possible, when that is decided.

And in terms of CapEx, you're right. Actually we decided to reduce CapEx together with the cost savings. So this year there could be some real change in the CapEx. But overall total CapEx could be about 75% to 80% of projected amount.

Understood. Thank you very, very, very much. Appreciate it.

Thank you.

Thank you.

The following question is by (inaudible) from GIC. Please go ahead sir.

Hi, good afternoon. Thanks for the call. Just following up on that swap transaction stuff that you answered to Geoff Boyd's question, the amounts are pretty big. And I'm just wondering these swaps were engaged in the normal course of business or there's a speculative element in these swap transactions? I thought you didn't really hedge much ForEx losses and things are included in the tariff calculations anyway, or tariff rise calculation. I'm just wondering whether these transactions were speculative how much capital do you have tied up in these swaps.

Well actually based on our internal risk management strategy we transacted a currency swap, turning our currency into Korean Won. It is a speculative trade.

Okay, these were just for the normal course of business and out of that you got a net gain of about KRW150b.

Say again.

Out of those normal transactions in the normal course of business you got a net gain of KRW180b.

That's right.

On top of that we provide you with exact amounts right.

Right.

Just nearing debt. Actually debt was calculated after swap basis, but if you want we can provide debt amount before swap transaction, for you to compare.

Okay, so what is the amount before the swap transaction?

We will provide that to you afterwards.

Just looking a little bit further out, I know it's a year away, but your expectations of what fuel costs are going to do in 2009. What are you expecting? Are you expecting a flattening off or continue to increase in double digits?

At this point we don't have any specific forecasts on that. Sorry about that.

Okay, thank you.

The following question will be given by Edmond Lee from JP Morgan. Please go ahead sir.

Hi, actually just a quick follow up, and particularly on the point on CapEx. And given that peak demand, as you mentioned, has risen so much during first quarter and if you look at the reserve margin level for last year during the summer months it was below 8%. So is there any concern also a possible power shortage during the summer months because although capacity addition will be up a little bit, it seems that peak demand is growing much more substantially? So is that a concern, and if so, are we likely to see any other resistance to CapEx forecast going forward?

Actually we are comfortable with the reserve margin ratio. And current CapEx plans were conservatively made actually. As you know we put every assumption and every cases as much as possible in the numbers and so we are comfortable with that.

In addition to that we have management system and demand control system and through those systems we can control about 5% to 6% of our demand growth. So, together with our new capacity addition about 3% increase and demand control system we might be able to manage the unexpected high demand growth.

Okay, so what would be --- I guess the view is that peak demand growth during the summer months because of all these measures probably may not grow that much.

You look at that and you cover that.

Because last year I noticed that the reserve margin was already at 7.9% and the capacity as you mention is only at 2,300. That's only sufficient to cover less than 4% of the increase in peak demand.

We have a demand control system and load management system so we can manage all the additional 5% to 6% growth.

Okay, great thank you very much.

Currently two participants are waiting with their question. The following question will be given by Jacobelli from Merrill Lynch. Please go ahead sir.

Hi, changing the pace a little bit completely from question. With regards to renewables I'd like to know if there are any updates in the last three months or so with regards to some Government targets with regards to how much megawatts of renewables must be installed by when? And also if the current Government, new Government is maintaining the old policy of helping out for the subsidies, for example solar or wind? Thank you.

In terms of renewable energy basically nothing has been decided yet. But there's a saying that Government is considering the introduction of minimum targets. About 5% emission. 5% of the emission should be represented by renewable energies. And if you look at current connection mix, the proportion of renewable energies is less than 1%. So it's just an idea at the moment. An early stage idea of Government. So at the moment we don't have any specific plan or policy.

Understood, thank you very much.

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

Thank you. I just have a quick question. Just wanted to clarify regarding the discussions on CapEx. Is it fair to assume that your guidance at the beginning of the year of KRW8 to 8.5 trillion CapEx is still intact?

Yes.

Thank you.

Currently no participants are waiting with questions. [OPERATOR INSTRUCTIONS]. The following question is for Nicholas Cunningham from Macquarie Securities. Please go ahead sir.

Good evening. Just one question. I would just like some comments on possible tariffs. You mentioned this earlier. I appreciate that you may not be able to fully discuss this at this point. But I just wanted your view first obviously on the change of Government, what that means for the outlook for tariff reform.

And secondly, I think this may have been asked previously with respect to what is driving that. You mentioned an energy situation in South Korea. So could you just give a quick comment on that at all?

In December last year the Government made an official comment that they will review the cost tariff system and also to attract consumers to use energy more rationally. It will consider the review of tariff hike, another tariff hike, but it is truly up to the Government decision whether or not it's old Government or new Government. So it is quite difficult for us to officially talk about the tariff. But as you can see due to the tariff regulated by the Government, KEPCO and the GENCO's profitability has been squeezed. So we and the Government are well aware of that situation so we will make every effort to get another tariff hike to the Government and we are working on that right now.

Are you just looking for a tariff hike or are you looking for a more comprehensive reform of the pass through mechanism, because obviously to date the current system hasn't really worked?

Actual boost.

Right.

Okay, and just finally again might not be able to answer this, but with a new Government as opposed to the previous Government, do you see that as a positive for tariff reform at all?

It's the general consensus that the tariffs in Korea are cheap, so people use it a lot. They don't conserve energy in terms of the electricity. So it is a big issue actually. So to get the energy rationally used something has to be changed. But this is my personal opinion and also KEPCO people and the Government.

We will talk about tariffs after the conference.

Okay, no problem thank you.

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

Sorry about that, just to follow up on the CapEx question. Given that in Asia Pacific region we are seeing a lot of upward pressure in terms of EPC costs as well as the costs of the machinery have your CapEx projections also factored in the fact that there are some upward inflationary pressures on the cost of building new power plants, transmission lines, etc., etc., or this is more of a net number? Thank you.

Well it definitely included inflation figures and everything.

Thank you.

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. The following question is by Geoff Boyd from CLSA. Please go ahead sir.

Okay, I don't want to drag out this coverage card. I just have one quick question. I'm still a little bit baffled about the fuel cost guidance because basically what you are saying is that you think that fuel costs will go up 28% and last year you had KRW11 trillion so that would take you up to KRW14 trillion in fuel. But now you are saying that if the currency rate is KRW1,000 then that would add another KRW1.2 trillion. So I've got KRW15.2 trillion on fuel, and then you are using $90 a barrel, so if we use anything close to R120 we'd be talking about perhaps another KRW1 trillion. So basically what you are saying is that you are expecting KRW16 trillion in fuel just for this year.

Well, in terms of oil price, we use the average price to buy, not the spot price. So if the energy -- yearly if the price to buy maintains $120 per barrel, definitely our costs further go up.

Okay.

Until our first quarter this year, the average price of Dubai is about $90 per barrel.

Okay, great, thank you very much.

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

I guess there are no further questions. So if you need more information please contact myself or IR staff any time and we will be able to help. Now we will conclude the conference call.

Once again thank you for joining our conference call today, and thank you for your interest in KEPCO. Thank you.