Korea Electric Power Corp (KEP) 2009 Q1 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 2009 first quarter earnings result 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 2009 first quarter earnings result by KEPCO.

Hello everyone. This is Cecilia Oh, Manager in charge of Investor Relations at KEPCO. On behalf of KEPCO, I would like to thank you for participating in our conference call today to announce our preliminary earnings results for the first quarter of 2009.

Before beginning the announcement please note that the financial data to be disclosed today are preliminary, unaudited and unconsolidated estimates prepared by simply adding the earnings estimates of KEPCO and its six generation subsidiaries or GENCOs, after adjusting for major inter-Company transactions among KEPCO and the 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 GENCOs. Accordingly, these estimates should not be relied upon or form the basis of any investment decision with respect to the securities of KEPCO, including entering 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'll open up a Q&A session. Any periodic comparison is year-on-year basis for the first three months between 2009 and 2008.

Power demand volumes decreased 2.3% mainly due to the economic downturn. On the other hand power sales revenues went up by 4% mainly attributable to 4.5% tariff increase on average effective last November. As a result of this, operating revenues increased by 4.4% to KRW8.43 trillion.

Looking at the power volume growth by sector, demand in the commercial sector slightly increased by 2.8% thanks to the use of heating by electricity while demand in the industrial sector decreased by 6.5% mainly due to economic downturn. Due to a [frozen] consumer sentiment, the increase in sales volume for the residential sector was negligible.

The average unit sales price of electricity rose by 6.4% to KRW82.6 from KRW77.6. Looking closely at the unit price by sector, commercial sector went up by 2.7% to KRW94, industrial sector increased 11% to KRW73.8 and commercial sector price grew by 2% to KRW93.6, in each case per kilowatt hour.

This was mainly due to last year's 4.5% average tariff increase effective November 13. To be more specific tariffs for commercial and industrial sector increased by 3% and 8.1% respectively while tariff for residential sector remained unchanged.

Now let me explain the operating expenses. Operating expenses increased by 16.3% to KRW8.75 trillion. Looking at the main reasons for such increase, the fuel costs increased by 20.8% to KRW4.5 trillion, accounting for 51.5% of the total operating cost. This was mainly due to the increase in the FX rates and fuel purchase prices.

Looking at the fuel costs by fuel type, fuel costs for coal increased by 87.2% to KRW2.1 trillion accounting for 46% of the total fuel cost. This was mainly due to a 9.4% increase in coal generation, resulting from the construction of 3,240 megawatts of coal generation capacity as well as last year's relatively higher coal [purchase] prices, which were reflected in the first quarter of this year.

Fuel costs for LNG decreased by 21.9% to KRW1.59 trillion accounting for 34.9% of the total fuel cost. This was mainly due to a 35.1% decrease in LNG generation affected by the increased base load generation thanks to the construction of coal generation capacity as well as increased oil generation thanks to decreases in oil prices. Accordingly, fuel costs for oil rose by 70.2% to KRW653b, accounting for 14.4% of the total fuel cost mainly attributable to an 86.7% increase in oil generation.

Fuel costs for nuclear decreased by 6.1% accounting for 4.4% of the total fuel cost, primarily due to an 8.3% decrease in nuclear generation, affected by increases in planned maintenance periods.

Let's move on to the cost of power purchase from IPPs. Power purchase volumes decreased by 7.2%, mainly due to the decrease in power demand as well as an increase in base load generation thanks to the newly added coal generation capacity by GENCOs.

On the other hand power purchase price increased by 22.7% to KRW1.2 trillion. This was due to the fact that last year's LNG increase was reflected in the power price in January and February this year.

Maintenance costs increased by 37.4% to KRW533b. Such rise mainly came from 214% increase in maintenance costs for nuclear power capacity due to longer periods of its planned maintenance.

Depreciation costs increased by 5.4% to KRW1.31 trillion mainly due to the construction of new generation capacity.

And as a result of these, net operating income decreased substantially showing a KRW317b loss in 2009 as compared to KRW553 trillion in 2008.

Moving on to the non-operating side, non-operating income was KRW607b which was offset by non-operating expenses of KRW1.14 trillion. As a result of these, KRW530b of net operating loss was recorded in 2009. The main cause of the loss was mainly attributable to an increase in FX related loss.

Looking into the FX related figures, net foreign currency valuation loss was KRW588b which was offset by KRW288b of net financial derivatives income. As a result of this, net FX related loss was recorded at KRW300b in the first quarter of this year.

As a result of the abovementioned factors, the unconsolidated combined net loss of KEPCO and the GENCOs was KRW882b for the first three months in 2009 which was down substantially compared to the previous year's net income of KRW300b.

This concludes our earnings presentation for the first quarter of 2009. Now we are open to your questions.

Here we have the Head of the Treasury Department with us, Mr. J.P. Lee.

Thank you. Please go ahead with your questions.

Now Q&A session will begin. (Operator Instructions). The first question will be given by Mr. Edmond Lee from JP Morgan.

Hello. Hi Cecilia, hi Mr. Lee. Thanks for the conference call. I have let's see three questions I'd like to clarify.

One is on the capital expenditure during the first quarter. That has shown a significant increase compared to the same period of last year so I'm just wondering whether there's any specific reason for that.

And then also for the full year, what is -- whether there's any revision to the -- or actually what is the latest budgeted CapEx for the full year? That's my first question.

Question number two, on the PPA, power purchase agreements for the IPPs, I noticed that the volume amount for the first quarter of this year has also declined compared to last year, obviously offset by an increase in the portion that is purchased via the power pool. But I'm just wondering whether there's any specific reason for that and also implication from there.

Third question on interest expense capitalized. That also showed a significant decline to 12% compared to 25% for the year before. So for the full year of FY '09, I'm just wondering whether we should expect a much lower interest expense capitalized compared to last year as well.

And actually lastly one more, on the maintenance schedule. We have seen increased maintenance work on the nuclear plant during the first quarter and also the utilization on coal fired power plants also down a little bit compared to last year. I'm just wondering if there's any details on the full year maintenance schedule on both the nuclear unit and also the coal fired power plants, anything that we need to note.

So those are the four questions that I have.

Thank you very much for attending this conference. And I'd like to express the deep regret that our first quarter performance was not satisfactory to our investors.

Regarding your first question, capital expenditure increase compared to the last year's first quarter, the total amount was KRW3.26 trillion. And I think it was a little bit invested in the construction of the nuclear power plant. And also we have no significant increase in the investment of transmission distribution. But currently we are building one coal power plant and several nuclear power plants.

So the capital investment in generation facilities is increased significantly compared to the previous year. So we are expecting the total amount to be invested for the facilities will be KRW12.42 trillion this year, which will be a little increased compared to the last year KRW10 trillion.

Okay, regarding your power purchase agreements, I would like to let Ms. Oh speak to you.

Okay. Just to add a little bit more on the CapEx we plan to spend around 60% of annual CapEx during the first half of this year, along with the government's economic stimulus policy. And this year's CapEx budget amount as Mr. Lee mentioned is KRW12.4 trillion but as you know normally we spend about 80% to 85% of the budgeted figures as an actual CapEx. So in that sense this year's full CapEx is expected to be around KRW10.5 trillion.

Okay. That's now very clear, thank you.

And in terms of PPA the purchased amount alone decreased 41%. And the main reasons are first, power demand decreased by 2.3%. Secondly, additional base load coal capacity started commercial operation. And thirdly, IPP take longer periods of planned maintenance for their LNG capacity than they had in the previous year which resulted in a big drop in LNG utilization ratio from 50% to 29%.

And accordingly, IPP's participating in the pool market, the purchased amount increased by 33.9%. And that was due to an increase in maintenance periods of GENCOs and PPA IPPs.

(Inaudible).

Regarding your third question, the capitalization, the percentage decrease in 2009 from 25% to 12%. I would like to also let Ms. Oh to briefly explain to you.

Thank you.

I think the capitalization ratio is related to the total assets under construction. But I don't have the exact figure at the moment, so let me get back to you why capitalization ratio has changed significantly later on.

Thank you.

And the last question was maintenance.

Okay. The last question was the coal -- the increase of the maintenance period of the nuclear power plant. I'd like to explain about that. Last year due to very high fuel costs, our maintenance schedule for the nuclear power plants was significantly reduced. So using the low power demand in March and also a delayed maintenance schedule so we have prolonged the maintenance time of the nuclear power plants the first quarter this year. Also there were five year breakdown of our nuclear power plants. So that's the reason why we recorded a fairly high longer time of the nuclear power plant maintenance for this quarter.

I think the coal power plants utilization of this year was a little, maybe we only are adding 5,000 -- 500 megawatts one unit of [Hadong] Number 8 to the agreed -- expected maybe June or July this year. So I think that the basic proportions of coal power generation will not be changed. Also we are expecting not much difference in the proportions of generation by fuel type this year.

Okay. So it does mean that -- the reason I'm asking is that because demand has contracted. And given that more coal fired power plants are coming online, if we're just looking at the ratio then perhaps there should be -- if there were not as much maintenance work, is it fair to say that there is actually the flexibility for coal fired and nuclear to go up proportionately?

And the reason why I guess -- because last year, because of the tight supply situation last year, that as a result this year there will be more maintenance work. And as a result proportionately coal fired and nuclear may not go up too much as a percentage of total power generated.

Yes. Well, the nuclear power plants may account for around 35% or a little less. Also coal power plant will occupy about [30%] or about 40% this year. And we are trying to reduce the oil and the gas generation as much as possible to save cost. We are fully -- we are scheduled to fully operate the base load power plant throughout the year. So I think the percentage of fuel type, generation by fuel type will not be changed much compared to the last year.

Okay. Okay, great. Thank you.

Currently there are no participants with questions. (Operator Instructions). The following question is by Mr. Tien Doe from GIC. Please go ahead sir.

(technical difficulty) your fuel costs this year, what are you expect in won terms and in dollar terms your coal costs, your oil costs and LNG costs please?

Based on our budget in 2009, the total expected fuel costs is KRW17 trillion and that of last year was KRW16.5 trillion. And there's an assumption for this. Oil price $70 per barrel, bituminous coal $100 per tonne and won/dollar currency KRW1,200. But considering the recent trend of dropping oil prices, fuel costs will decrease further.

And that KRW17 trillion fuel cost assumes what level of volume growth for your overall?

This is based on GDP growth rate of 3%. We are expecting about more than 2% demand growth outlook. The actual figure is negative at the moment. And for the full year we expect that the demand would grow by negative 0.7% based on negative 2.2% GDP growth outlook.

Okay, right. Thank you.

The next question is by Mr. Geoff from CLSA. Please go ahead sir.

Okay. Thank you for the call. I was a little bit late joining, so I apologize if this question has been asked. But just on the interest rate capitalization, I noticed it was pretty low in the first quarter, only 12.5%. Traditionally it has been closer to 25%. So just wondering if that is going to be consistent with the rest of the year. That's question number one, what sort of rate should we expect?

And then number two, just on the tax effect in the first quarter. There seemed to be a positive tax effect on a pre-tax loss. So I'm just wondering what was the accounting on that and what sort of tax rate should we be assuming going forward. Is it consistent with prior years or has it changed? I guess that's question number two. And -- yes, that's pretty much it.

Okay just I'm afraid I don't have the exact information for the capitalization ratio, why it's decreased. But it's something related to the asset under construction, but the total number should be given to you later on. I'll get back to you soon. Sorry.

Okay. Let me complement a little bit, augment a little bit about capitalization. KEPCO's the interest cost from last year 19% decreased to 10% and also the KEPCO and GENCO's total 27% to 12%. That is somewhat related to the reduction of the coal power plant. And also we now are borrowing capital at a very competitive rate. And also let me give you the detailed information by another channel.

For your second question, tax effect the first quarter, as you know we suffered negative before-tax income. And that might be credited from this year's (inaudible) income, for KEPCO, only example, then we are now posting a negative KRW3.2b credit for before-tax income for the year and that is effective for five years. And also if it's changed to 10 years for this year's earning, and we -- our corporate tax rate is reduced from 25% to 22% this year. So this year, if we make a profit, then we'll have a great deduction from the before-tax net income.

Thanks very much.

To [the street] I will say KEPCO only KRW3.2 trillion.

Okay. Okay. And then just on the other two questions -- I'm sorry. Two more questions, I just quickly have.

One is on the maintenance expense. It was up quite a bit. I think it was up 37% in the first quarter, but I was told during the Korean call the guidance was that it would be up 5% or 6% for the full year. So is it just a matter of maintenance costs having been abnormally booked in the first quarter or -- why is it up so much more in the first quarter versus your full year guidance? Is it just what you were talking about in terms of the actual maintenance days, with more first quarter?

Let me just briefly explain about the maintenance cost. Actually we are now saving a lot of cost through the maintenance cost. So last year it was KRW2.3 trillion. But this year's budget was KRW2.9 trillion. But after our plan of cost saving, it is KRW2.4 trillion, that means a very little increase for the year.

So this is why we posted fairly high rate of growth in maintenance cost the first quarter, is that the government is pushing for the corporation to spend more than 60% in the first half of this year. So to cooperate the government policy, we are now spending a lot of maintenance cost for the first quarter and then second quarter. But after that we are sure that we will -- our cost reduction in the maintenance cost will be realized. So this year's total maintenance cost will not exceed much the last year's cost.

Does that answer your question?

Yes, I think that's good. And then just one last question is that the debt levels have expanded by about KRW3 trillion in the first quarter. And I know -- I remember at the end of the fourth quarter the guidance was something about having KRW37 trillion, if that, at the end of this year, based on your budget. Is that still the guidance? I think it was KRW30 trillion at the end of the first quarter. But I guess that's based on your $70 oil assumption and other assumptions, but is it still KRW37 trillion? And if so -- that's question one.

And question two is like the funding cost to produce incremental debt, is it -- like what is KEPCO financing it at, like around 5% or 6% or?

Our total debt at the end of 2008 is KRW27.1 trillion and it will be increased to the KRW37.1 trillion. But KEPCO is expected to borrow KRW8.8 trillion and another -- including GENCO we will borrow KRW14.8 trillion.

And so currently there is great liquidity in Korea and we had no problem to borrow at a very competitive rate. So a three year bond was only maybe 4.2%, and five year 4.5% to 4.7%. And even seven year to nine year bond were a little over 5%.

So I think there will be no problem for us, but we feel a little bit to borrow from foreign countries maybe, one, for nuclear power plant construction. And so KEPCO has overseas operations. So maybe to invest for the overseas, maybe coal and uranium mining, we will need some money. So we are expecting to borrow $600m for KEPCO and maybe our nuclear power subsidiary also try to borrow foreign debt a little bit.

Anyway currently we are suffering no problem at the domestic market, but we are now waiting for decrease of [CDF] to borrow from foreign countries.

Okay. That's understood. And would that KRW37 trillion for the end of this year, that's still sort of the official guidance or -- in terms of your total borrowing, or is that changed?

I think that we are now heavily borrowing to fill up the money needed for the operation. But we are now expecting there is a significant decrease in the need of -- in the amount of the needed capital. So in the second half the KRW37.1 trillion will be significantly reduced if we, maybe, go through the rate hike or other factors come to favorable.

Okay. No, understood. Yes, I never thought it would get as high as KRW37 trillion. That seems quite high. But anyway -- okay. That's great. Thank you very much.

Okay.

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

Hi there. Actually just one follow-up question that I forgot. In terms of the coal contracting position, I saw some number in the newswire in terms of the contracted portion at 59%. I was just wondering if you could provide any further details on that in terms of the expected trend for the second half and also for the -- for next year in terms of coal prices. In terms of the latest contracts that you have entered into, what have been the contract coal prices and also the main source of that?

As you said we now currently have secured 59% of coal maybe for this year. And we are now thinking about the price to purchase coal at $75 including freight per tonne. And now we are negotiating major companies in Australia and in Asia and China. Also our Company now has set the policy to incorporate the joint purchase of the coal, firstly for the Chinese coal. And by the end of this year we are trying to make a joint purchase of coal needed for the whole power generation subsidiaries.

And currently we are expecting the [coal] price will maintain the current level and maybe a little bit more decrease. But anyway our budget is reflecting a little bit higher price to have more room for the earnings and that we more conservative financial forecasts. Okay?

I mean in terms of the new contracts that have recently been signed, I suppose the delivery is not until say the fourth quarter of this year?

Yes. We now made several contracts that the price is not set yet. And also we are now a little bit -- quite much, maybe one-third -- more than one-third heavily depending on the spot market. And since the coal price is not as much fluctuated the rest of this year, now we are expecting to settle the coal purchase for the rest of this year very soon.

Okay. Thank you.

Currently there are no participants with questions. (Operator Instructions). Again currently there are no participants with questions. (Operator Instructions). The following question is by Mr. Josh Bae from UBS. Please go ahead sir.

Hi. Thank you for the call. My question is on the -- regarding the [Wulchong] Number 1. I understand that the nuclear power plant has gone into a halt. Could you please share with us any details on when the halt started and when it is expected to come back into operation?

Well the [Wulchong] nuclear Number 1, capacity 680 megawatt, the expected maintenance period will start from -- it already started May 1 and will be continued to next year, December, early December. The reason is that to exchange coal facilities, including pressure pipelines.

And the commercial operations, the effect of the unit is only 1% and -- maybe [1.3%] of the power generation. So I think there are some coal powered generators we added last year and also this year, this June one more 600 megawatt, will be offset the impact. Is that --

Yes. Thank you very much.

Currently there is no participant with questions. (Operator Instructions). Thank you. Once again currently there is no participant with questions. (Operator Instructions).

If you have no more questions then I'd like to briefly -- make a brief comment about our performance of the first quarter. Actually we made big loss in the last quarter last year and we are now fast recovering from the shock. And you will see our non-operating expense loss was mainly attributable to the foreign exchange valuation transaction.

And also we are expecting a rate hike that is very, now, seriously pushed by the Company and the government is very understanding. And if the economic recovery seems to be feasible, then there will be a rate hike to rationalize electricity use which is now over-consumed by the low level of electricity. And I think also other factors like foreign exchange rate and fuel prices turns to be a little more favorable. And then our economy is also recovering maybe a little more favorable than other countries.

So I think if you have any questions regarding our Company's forecast or performance, please don't hesitate to contact us. Anyway today if you have no more further questions, we'll conclude this conference call. And once again thank you very much for interest in KEPCO. And also accept our sincere regret for not showing satisfactory performance for the quarter and we will try to do our best to clarify our position very transparently to you. And finally, again, thank you for joining our conference call today.