Korea Electric Power Corp (KEP) 2008 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 2008 second quarter earning results by KEPCO.

This conference will start with a presentation followed by (inaudible) a Q&A session. (OPERATOR INSTRUCTIONS).

Now we shall commence the presentation on the fiscal year 2008 second quarter earning results by KEPCO.

Hello, everyone, this is Cecilia Oh, Manager in charge of Investor Relations in KEPCO. On behalf of Korea Electric Power Corporation, I would like to thank you for participating in our conference call today, to announce our preliminary first half results -- earnings result of the fiscal year 2008.

Before beginning the announcement, please note that the financial data to be disclosed today are preliminary, unaudited and unconsolidated estimates prepared by essentially the earnings estimates of KEPCO and its six generation subsidiaries, or GENCOs, after adjusting for major inter-company transactions among KEPCO and the six GENCOs.

Such financial information has not been prepared in accordance with the generally accepted accounting principles of any country and are not indicative of the consolidated results of operations of KEPCO and its six GENCOs. Accordingly (inaudible - microphone inaccessible) not be relied upon or form a basis of any investment decision with respect to the securities of KEPCO including entry into any contract for the purpose of trading any securities of KEPCO.

Now, let me briefly run through the estimated 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 for the first six months.

The operating revenues went up by 8.3% to KRW14.8 trillion in first half 2008 from KRW13.7 trillion in first half 2007. This was mainly because the revenues from the sale of Electric Power increased by 8.4% to KRW14.6 trillion in first half 2007 from KRW13.5 trillion in first half 2007.

In terms of the volume of power sold, the overall growth was 6.8% which was mainly attributable to a 4.8% increase in sales to the residential sector, 8.1% increase in sales to the commercial sector and 6.9% increase in sales to the industrial sector. The average unit sales price of electricity rose by 1.8% to KRW75.51 per kilowatt hour from KRW74.21 per kilowatt hour, residential sector price grew by 4.3% to KRW92.41, commercial sector price fell by 2.7% to KRW90.81, industrial sector price was up by 8.2% to KRW63.81, in each case per kilowatt hour.

The major reasons for such changes were the increase in demand for power due to the increased use of heating in summer -- in winter and the tariff increase effective as of January 1, 2008 which resulted in a 1% increase in industrial sector tariff, a 3.2% decrease in commercial sector, 17.5% increase in night power usage, which accounted for 30% of residential sales.

Operating expenses increased by 24.6% to KRW15.1 trillion in first half '08 from KRW12.1 trillion in first half of '07. Looking at the main reason for such increase, the fuel cost increased by 34.4% accounting for 46% of the total operating costs in the first half of 2008.

Looking closely at the fuel cost by fuel type, fuel cost for LNG and coal increased by 41.8% and 71.6% respectively. On the other hand, fuel costs for oil decreased by 29.5% mainly because 2,370 megawatts of coal power plants were newly constructed and the amount of oil consumption decreased by 54.8% due to the recent rise globally of oil prices.

In terms of unit fuel cost, unit cost for coal increased by 47% and LNG and oil increased by 40.4% and 55.9% respectively.

Cost of power purchased from IPPs increased by 65.7% to KRW1.9 trillion in first half '08 from KRW1.2 trillion in first half 2007. This was mainly due to a 35.5% increase in the volume of power purchased and a 22.3% increase in unit purchase price. Such IPPs include independent power producers participating in the pool market as well as IPPs that have power purchase agreements with KEPCO.

Maintenance costs decreased by 1.1% to KRW958 billion in first half '08 from KRW968 billion in first half 2007. (Inaudible) KEPCO's maintenance cost decreased by 9.5% mainly as a result of cost saving measures in response to rising fuel prices.

On the other hand, the maintenance cost for the six GENCOs increased by 5% due to the fact that a 25% decrease in KHNP's maintenance cost, which mainly resulted from the decrease in planned overhaul period of nuclear facilities, was offset by an increase in maintenance cost for most other GENCOs.

(Inaudible) depreciation costs accounted for 17% of the total operating costs in first half '08 increased by 2.7% to KRW2.5 trillion in first half '08 from KRW2.4 trillion in the first half 2007. This was primarily because depreciation costs two GENCOs namely EWP and KOWEPO increased due to the additional construction of coal power plant, which were partially offset by a decrease in depreciation costs of the other four GENCOs, which resulted from the accelerated depreciation effect for machinery.

As a result net operating income decreased substantially, posting a KRW277 billion loss in first half of '08 as compared to KRW1.56 trillion profit in first half '07.

Non-operating income increased by 47.5% to KRW908 billion from KRW615 billion. This was mainly due to a 40% increase in investment income from affiliates to KRW171 billion in (inaudible - technical difficulty) from KRW122 billion in first half '07, as well as a 54.5% increase in other non-operating income mainly consisting of valuation gain on financial derivative, which was mainly due to the depreciation of Won in first half 2008. And interest income to KRW714 billion in first half '08 from KRW462 billion in first half '07.

Valuation gain on financial derivative and interest income accounted for 59% and 13% respectively of the other non-operating income in first half 2007 -- 2008.

Foreign currency valuation gain was down by 25.6% to KRW23 billion from KRW31 billion.

When it comes to the investment income from affiliates in first half '08, the increase was mainly due to the fact that first, net income of KOGAS was up by 60% due to a sales revenue increase. And secondly, KEPCO International Hong Kong's net income was up by 76% mainly due to a revenue increase from overseas business in the Philippines. And thirdly, LG Powercom's net income went up by 175% due to a substantial increase in its numbers of Internet customers.

Non-operating expenses increased by a 116% to KRW1.25 trillion in first half '08 from KRW580 billion in first half '07, mainly due to a substantial increase in foreign currency valuation loss, from KRW13 billion to KRW623 billion and a 20.3% increase in interest expenses to KRW440 billion. The significant increase in foreign currency valuation loss was mainly due to a 11.2% of Won depreciation against the US dollar in first half '08 as compared to 0.3% of Won appreciation against the dollar in '07.

Total interest bearing debt amounted to KRW23.1 trillion at the end of first half '08, which was a 17.8% increase from KRW19.6 trillion at the end of first half '07. The average interest rate of our debt increased to 5.1% in '08 from 4.6% in '07, due to the general rise in interest rates.

On the other hand, other non-operating expense mainly consisting of valuation loss in financial derivative, decreased by 29.2% to KRW136 billion in first half '08 from KRW191 billion in first half '07.

As a result of the aforementioned factors, the unconsolidated combined net loss of KEPCO and the GENCOs was KRW464 billion in the first half 2008 which was down substantially compared to net income of KRW1.04 trillion in 2007.

This concludes our earnings presentations for the first half of 2008 and now we are open to your questions.

Now Q&A session will begin. (OPERATOR INSTRUCTIONS).

Currently, two participants are waiting with their questions. The first question will be given by (inaudible) from GIC. Please go ahead, sir.

Hi, good afternoon. Just a question on your second quarter residential volume growth. But that seemed to slow down pretty significantly in the second quarter year-on-year, it was up 7% after the first quarter but it was only up about 4%, I think after the first half. Any idea what that's due to and are you still seeing a decline in the growth rate on the residential side in July and August.

One moment please. Residential consumption dropped in the -- in April, May and June. It was mainly due to the lower temperature compared to last year's.

And so, you are not seeing that as anything fundamentally, you know --

No, really no.

-- (multiple speakers) economy. I am sorry, you may have mentioned this in your run-down but the 16% increase in other operating expenses, what was that mainly due to?

Other operating expenses include labor cost and retirement benefit cost. We don't have the details in front of us right now, so after this conference call, I will provide it to you.

Okay. Thank you.

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

Hi, good afternoon and thanks for the presentation. Actually one of the questions that I wanted to raise has been asked by (inaudible) so the -- I guess the only question that I have is on the power tariff adjustment. Just wondering what is the current timetable on that or any guidance on that.

And then secondly, in terms of guidance or any guidance on gas cost increase and also coal cost increase. Just wondering what is the latest guidance on that.

Okay. When it comes to the tariff first, please understand we can't officially confirm the current status such as the timing and the rate changes before the government's final approval. But I can say that according to the [public news], it is expected the government may announce the tariff changes within August and once the tariff is approved by the Ministry of Knowledge and Economy, we will send you the details through our public filling and the [back sheet].

And on top of that according to the newspaper, the government mentioned that around 5% tariff increase is -- will take -- is expected to take place. But still we have not been confirmed yet by the government, so now we are waiting.

How about the one-off subsidy payment, is that still ongoing, the approval for that or is that not likely anymore?

Right, meanwhile the decisions to grant KEPCO the government subsidy of KRW835 billion has not been passed by the national assembly yet. When it takes place, KEPCO plans to report the subsidy as operating revenues. It is also a very sensitive issue, so please understand we cannot discuss more details on the tariff.

Okay.

(Inaudible) conference call. But most likely, we expect the decision to (inaudible).

Decision to take place soon?

Right.

Okay.

Granting the subsidy to the company.

Okay, okay. How about in terms of the latest guidance on fuel costs?

In the first half of -- in the first quarter earnings, we got conference call where we mentioned that year-on-year fuel cost is expected to increase by around 30%. But so far it's already gone up by 40% level and we expect more increase in the coal price in the second half because last year's fuel contract amount started to be introduced in the second half of this year.

So I think while we mentioned the 30% increase year-on-year in fuel costs is quite conservative and also it was based on KRW900 dollar exchange rate and $90 per Dubai oil prices. We should wait and see, but I think we may expect more increase in the second --.

Okay, okay. But then in other words (inaudible) revising on the, say on the gas cost front, no revised number on that?

Not yet.

Okay. Just wondering on the coal cost here. Within the coal cost that has been reported for the first half, if we look at the freight cost on a per ton basis, how much would that be in -- either in local currency terms or US dollar terms?

The freight cost for coal is around $10 to $13 per ton.

$10 to $13, yes.

Right.

Okay. Great. That's all my questions. Thank you.

The following question is by Geoff Boyd from CLSA. Please go ahead, sir.

Okay. Thanks very much for the call. I just want to focus also on the coal cost and I just want to get a couple of numbers from you. In terms of the first half coal cost, what do you think it was in terms of what went through the financial on a per ton basis? Like, was it closer to $80 plus this freight or $70 or what do you think it was per ton?

In the first half?

Yes.

In the first half of this year the amount introduced to KEPCO was the coal contracted in 2007 and at that time the coal price -- the coal contract price was around $63 based on CFR.

Okay.

And from the second half of this year, we expect coal contract price of around $89 per ton, is expected. (Inaudible).

And do you know like how much inventory would you have. Like in other words, when does that $89 hit you, does it hit you in September or does it hit you, right now? Like, do you have a few months inventory or --?

Inventory [days] is only like 20 to 30 days only.

Okay. And so that $89 price, that's the average for basically for the 80% of the coal -- because 20% you are getting in the spot market right?

Right.

And that $89 compares to a spot price of $150 right now or --?

Spot price is around $125.

Okay. And so I guess -- and so these contracts of $89 should be good mostly till June '09, is that correct?

$89 will be effective from June of this year, through June of next year.

Okay. So it expires in June '09 basically.

Yes.

Okay. And when will the negotiations take place for the June contract price, you know --?

Contract already started, starting from August.

That the negotiation has already started.

Right. (Inaudible) already started the negotiation but the contracted amount is very minimum yet still.

Right. I mean, okay, good, but like -- I guess what I'm saying is for our expectations for '09, for the second half of '09, for the new contract price is right, now the spot is $125 and -- I mean, what -- I mean presumably it will be going up. But I mean do you have any sense of what you think it will be -- or KEPCO thinks it will be?

We expect the current coal price contract will be affected a lot by the spot price increases. And currently going on core contract amount -- contract amount will be introduced starting from July next year. Though the big jump in coal contract prices by now will be affected our earnings starting from next year in the second half.

Okay, Okay. Well, yes, I mean, that's about it from me, I guess, so thanks very much.

The following question is by (inaudible - technical difficulty). Please, go ahead sir.

(Inaudible) your presentation. I have two questions and the first one is I would like to confirm your coal cost you mentioned for the year was $63 per ton. Does that exclude transportation cost?

That's excluding transportation cost.

Okay, and the second question is I calculated [a factored] tax rate in the first half of 2008 was at 20 -- let me see, is about 28%. Do you expect similar number for the full year?

Actually, it is expected the government will cut the corporate tax rate below this, but it's not been decided yet. So conservatively speaking, the effected tax rate would be -- will remain the same.

Okay, so you expect it will remain at 25% similar to that in the first half of the year?

Yes.

Okay, thank you.

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

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

Thanks for taking an additional question. I think there was a bit of news a few weeks ago about over-statement of the profits. Was that just related to parent company and subsidiaries and no effect on the consolidated profit number?

Could you repeat the question again?

Yes, a few -- I think, two weeks ago, there was some news that the Auditor General had discovered some anomalies in reported profits for KEPCO. I just wondered whether that was at the parent versus the subsidiary levels and there was no affect on consolidated profit. I think in fact the board of audit an inspection, I think.

Audit inspection you are talking about --.

It related at first I think, the 2006 together, there was like an over statement of profits for KEPCO?

Oh, well, well.

-- (inaudible). It -- was that just a netting out and the consolidated profit figure was unchanged or did it relate also to the consolidated figure?

Well, talking about the conclusion first that issue has nothing to do with the accounting and that does not affect KEPCO's consolidated profitability.

Right.

And actually the news report was not true and there was no accounting fraud or anything like that.

Okay.

And audit inspections just mentioned about evaluation factors in the report on our management result submitted to the government for management performance evaluation of KEPCO. The news [was] about the profit sharing of KEPCO and GENCOs, just between those companies. So, on a consolidated basis, nothing -- no [in tax].

All right, okay. And second question just on your timetable for capacity expansion, at the moment your nuclear power plants are working pretty hard and your coal plants are working pretty hard as well. Is there any incentives to accelerate your coal and nuclear capacity expansion?

Talking about the newly construction, new construction of coal and nuclear power plant.

Yes.

The basic national energy development plan for the next 20 years will be announced soon by the government. And that comes out in every five years.

All right.

And that includes the mix of generation, expansion of renewable energy, etc. And the public hearing will be held soon to finalize the plan. The most likely news reported that we will have eight nuclear power plants more through 2016 and after that through 2030 ten nuclear power plants more. Because we (inaudible - technical difficulties).

Yes.

So plus 8, plus 10, we will have 38 units of nuclear power plant in 2030 and aside from the nuclear power plant we have plans to build more coal power plant, for each year around 1,000 megawatt of coal power plant will be newly constructed. But currently power generated from coal and nuclear account for around 80% only. But in 2030 it may go up to 85%.

Okay, thank you.

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

I guess there are no further questions, if you have no further questions please conclude the conference call right now.

If you have further questions or any help, please contact our IR staff anytime.

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