Korea Electric Power Corp (KEP) 2009 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'll begin the conference of the fiscal year 2009 second quarter earnings results 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 second quarter earnings results by KEPCO.

Hello everyone, this is Cecilia Oh, Senior 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 half of 2009.

Before beginning the announcement, please note that the financial data to be disclosed today is a preliminary, unaudited and unconsolidated estimate prepared by simply adding the earnings estimates of KEPCO and its six generation subsidiaries, or GENCOs, after adjusting for major intercompany 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 the GENCOs.

Accordingly, these estimates should not be relied upon, or form a basis of any investment decision with respect to 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 cumulative, year-on-year basis for the first six months between 2009 and 2008.

The operating revenues went up by 5.9% to KRW15.7 trillion in 2009. This was mainly due to the average tariff increase of 4.5% in November 2008. And please note that the 3.9% tariff increase merely affected the financials because it went effective on Jun 27, 2009.

Operating expenses increased by 4.6% to KRW15.8 trillion. Looking at the main reasons of such increase, the fuel cost increased by 9.7% to KRW7.6 trillion. Fuel costs for coal and oil increased by 65.1% and 60.2% respectively, while fuel cost of LNG decreased by 35.2%. This was mainly due to a decrease in LNG generation, which was impacted by an increase in cogeneration with the addition of 2,370 megawatts of new coal power plants as well as an increase in oil generation resulting from lower oil prices.

Cost of power purchased from IPPs increased by 3.7% to KRW1.8 trillion. This was mainly due to the fact that the purchased volume decreased 12%, thanks to newly added base-load power plants by the GENCOs, and the decreased power demand growth.

Maintenance costs increased by 28.1% to KRW1.2 trillion. In particular, GENCOs' maintenance costs increased by 56.6%, mainly due to a 146.6% increase in KHNPs' maintenance cost affected by an increase in plant maintenance periods, as well as an early execution of their budget.

Depreciation cost increased by 5.8% to KRW2.6 trillion, primarily due to the completion of power plants construction. As a result of that, net operating loss of KRW93 billion was recorded in the first half of 2009, which decreased substantially from net OP loss of KRW277 billion in 2008.

Looking at the operating income on a quarterly basis, net operating loss of KRW317 billion in the first quarter of 2009 turned into the black with operating income of KRW225 billion in the second quarter of 2009. This was primarily because the sky-rocketed fuel prices in the second half of last year had come down significantly. And such effect was more reflected starting from the second quarter this year.

Let me move on to the non-operating side. During the first half of 2009, we posted net non-operating losses of KRW425 billion versus KRW345 billion in the first half of '08, while net assets related loss decreased to [KRW38 billion] from [KRW243 billion]. Interest expense increased 84.6% to KRW813 billion from KRW440 billion, mainly attributable to increased interest bearing debt as well as decreased capitalization of interest expenses.

As a result of the [other] mentioned factors, we recorded a net loss of KRW643 billion in the first half of 2009. For your reference, we posted a net loss of KRW464 billion during the same period of 2008. However, on a quarterly basis, we can see a great improvement in bottom line. Net loss of KRW2.2 trillion in the fourth quarter of last year substantially [trend] to net loss of KRW882 billion in the first quarter this year. And such loss turned positive to the net profit of KRW240 billion in the second quarter of 2009.

This concludes our presentation for the first half of 2009. Now we are open to your questions. Here we have Mr. J P Lee, KEPCO's Treasurer, for the Q&A session, please go ahead with your questions. Thank you.

Now the Q&A session will begin. (Operator Instructions). Currently, two participants are waiting with your questions. The first question will be given by Josh from UBS. Please go ahead, sir.

Yes, hi, thank you for the call. I have three questions. The first is on your maintenance cost. It seems maintenance cost increased significantly compared to last year; I think you mentioned KHNP earlier. If you could elaborate a bit what was the reason, that would be very helpful. And also, what should we expect for the full year maintenance expense compared to last year?

Second question is on power demand for the year. Year-to-date power demand was about flat year-on-year. Considering we're seeing some signs of recovery in the economy, what's your expectation for full year demand?

Third question is on your CapEx. How much CapEx should we expect for the full year? Thank you.

It's my honor to join this conference call. Let me refer to your first question, maintenance cost. We expect the yearly maintenance costs will be increased by about 13.6 % compared to last year. But in the first quarter, we have recorded a fairly high cost of maintenance, mainly due to the nuclear power plant maintenance by KHNP.

So maintenance, cost of nuclear power plants, by KHNP is increased by 147% in the first quarter. And --

First half.

In the first half of this year. And, as I said, the full year, the maintenance cost will be increased only by 13.6%.

And for the second question, will be our forecast of the sales for this year, we actually recorded the similar power sales volume for the first half, only a minus 0.3% decrease. With the assumption of a 2% downturn of the economy, with GDP, we still expect the electricity sales will be increased by 0.6%, compared to last year, this year.

So I think it might be enough for your question.

And regarding the CapEx? Just a second. We expect the capital investment will be about KRW9.7 trillion. And we already spent KRW6.8 trillion in accordance -- to comply with the government's policy of spending more in the first half of this year to boost the economy. And we expect to spend another KRW5.4 trillion; that comes to and end about KRW12.15 trillion for this year.

Just to add a little bit more. In terms of the maintenance costs, including the KHNP, KEPCO and the GENCOs' total maintenance cost [possession] is around KRW2.5 trillion. So, comparing it to the actual results of last year, we expect the maintenance costs to increase by around 8%. Thank you.

Hi, just a couple of follow-up questions. First of all, could I please confirm that the CapEx number, at KRW12.15 trillion you mentioned, is the actual spend, not the budget?

Secondly, just to confirm on the maintenance costs, so you're expecting an 8% increase year-over-year for the full year?

Yes, according to the budget, we expect that the capital expenditure should be about KRW12.2 trillion. But after our effort of cost saving, our maintenance cost will be KRW2.47 trillion, which is increased by 7.9% compared to last year's amount of 2.29% -- KRW2.29 trillion. This is the maintenance cost.

Capital expenditure is, as I said, KRW12.2 trillion. About 56% is already executed in the first half. Our expectation for the whole year, it will be a little bit reduced to save cost. So I think the KRW12.2 trillion will be reduced by some amount because we are now trying to save every corner of our budget.

Could you please elaborate a little bit on how much saving versus the budget we could expect? If you could give us some kind of range, that would be very helpful.

Well, actually our specific goal of reducing budget in 2009 is KRW1 trillion, of which 50% will be reduced by KEPCO and 50% by GENCOs. And the last amount item is the maintenance cost, the maintenance cost is actually -- will be increased only by 8% compared to last year. And the maintenance cost occupies about 55% of the cost of saving packet.

Thank you very much.

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

Hi there, Mr. Lee and Ms. Oh thanks very much for the presentation. I have three quick questions. One is on the other cost item. When I look at the first half, that particular item has come down by quite a lot in absolute terms, about KRW300 billion or 14.1%. I'm just wondering where that decline is coming from?

Second question regarding interest expense capitalized during the first quarter and also second quarter as well, we've seen a significant decline in the percentage of interest expense capitalized. Obviously that has to do with some of the green field projects being put into commercial operation, but I'm just wondering whether, for the full year, it's likely to be maintained at that sort of low level because it's quite low compared to the historical range?

And then part number three, question number three is regarding the fuel costs or the proposed fuel cost pass-through mechanism that the government was talking about. Wondering whether there's any further comments from you guys in terms of how -- when -- as to when we might see more about the concrete details about the mechanism and timing on trial runs, things like that?

I think your first question, the other items of the operating costs, actually we reduced the 14.1% for this quarter compared -- for this half compared with the last year. It is our [CS] policy to reduce our budget wherever it is possible and this comes to an end to achieve 14.1% cut in other expenses item.

Much portion of it is also affected by the government to reduce payroll of the employees and the incentives especially and also already we cut our salary and so there is no more increase in our salary. And also we are trying to reduce every item of the other expenses to reduce our costs.

And regarding your second question about interest, the capitalization of the interest is decreased from 27% to 14% because this year we have only one unit of a core power plant will be commissioned in June. And also the yearly expectation of the interest capitalization will remain at 14%

And regarding your third question about the coal and I -- yes the coal cost are linked to the pricing system. The government and KEPCO is now launching a study by an outside organization also the participants of inside in the government. We are now trying to finalize the study and the [reveals] of the relevant regulations by the end of this year and the new pricing system will be put into action in that year, not fully. They say maybe a pilot -- there's a pilot, maybe a part of the pilot program but to rationalize the consumption of the electricity and save costs -- save energy saving cost. So we are now strategically -- persuade the public to participate in the energy user rationalization.

So I think where KEPCO and the government is jointly putting much effort of -- secure price linked to a pricing system to be launched next year, mainly with the proposal of [reducing] the consumption of energy, of which the prices are too low compared to other -- the [cost of] services.

And it is too early yet to open the details of the timing of launching the new pricing system, but anyway we have a consensus with the government to have the system next year because it is absolutely necessary for rationalization of the energy consumption.

I'd just like to follow up on the -- first on that, the fuel cost pass-through mechanism. On the end user side, will it actually entail the unbundling of the end user tariff structure, so that in the end users' power bill, would the generation costs, part of the tariff, would be separated from the non-fuel part of it?

The major participants of studying the new pricing system is -- members are from NGO and from professional institutions. And we have several forums and maybe we will benchmark some of the countries and it will come out -- it will start in July and it will be winded up by December. And the government will [analyze] the full -- for each sector and how long it will be tested. Anyway, there will be some kind of testing period before fully launching the system.

Anyway, it is now being discussed very actively at the government and KEPCO is also pushing very hard to materialize the pricing system but it's too early yet to give you details of the policy.

Anyway, we have a consensus and also the NGO has a strong consensus with us that is quite reasonable in energy pricing.

Edmond, just quick. Just to recap on -- we and the outside experts have developed a cost pass-through system already. We already made a model to be applied to the Korean market. And we have a benchmark over a Japanese system. And currently Japanese system has a quarterly -- a monthly basis, a fuel cost [tax system]. They used to have a quarterly basis fuel cost tax [system] but they changed the system time from quarterly to monthly. And so we are not sure exactly what kind of system will be introduced to Korea. We are in the process of adjusting our current model.

Well the main factors to be considered in the pricing system is the fuel costs and the PPA power purchase cost and there's a cycle of adjustment. It might be a monthly, or a bimonthly or quarterly and the major concern is about the financial position of KEPCO and the prices to the consumers. And you can expect every option because the government still has no definite thing in mind.

Anyway, we already started ourselves but the government wanted to have another new study participating with various professionals from various fields of the society. So I think anyway, the government is now seriously considering to carry out that study and to materialize it after some testing period.

Thank you, just one very last question actually on tariff. Obviously, we just had a tariff hike announced late last month. But given that the -- obviously the return on equity right now to negative for the first half, say by next year may still be quite low. Would there be any chances of further tariff increases or has the discussion on that already started? Any comment on that?

Well, actually, our Company registered to the government double digit increase of a tariff this year ,but the government only gave us 3.9% on average and the government is still thinking more still that the price is too low. That results in overuse, overconsumption of electricity because we have no energy resources in Korea and we are depending on more than 99% from foreign countries imported energy.

So I think that another tariff increase incentive is definitely necessary for both the government and KEPCO to secure a reasonable return on equity. but we still do not expect the full guarantee of the government to secure us the return on equity.

Anyway, our [tactic] is to normalize it [to less than two] years, so there is still another big room for government and KEPCO to increase electric tariff from last year because we're already launching a very tight cost savings program. There is not much room for us to save more costs.

Anyway, the outside factors such as the foreign exchange rate and the fuel cost -- the fuel cost can be offset by the, as I said, the fuel cost linked to the pricing system and to normalize our securing of [ROI] at less than two years, we still need to pursue government more. But the government is hesitating in some way because the economic downturn is not fully recovered yet and the impact -- to minimize the impact of the electric prices to the low income consumer.

So it is kind of a [matrix] that they might be compromised, so consider every factor, the economy and also the KEPCO and the KEPCO shareholders and also the rationalization of electrical consumption. So I think now the government and KEPCO is going on the right path.

The last year was a very extraordinary year for KEPCO, the first loss in net income. But this year we are now recovering and I think the normalization will be dependent on several factors. But anyway, the government is trying to normalize the KEPCOs -- the financial position in the very short year -- in maybe a couple of years with minimum impact to consumers.

So I think that still we are uncertain about the future of the economy. So anyway, the deficit of the government net income -- the government doesn't want the net loss of KEPCO any more and we do not expect there will be any further -- may be losses of income except extraordinary items.

Okay, thanks very much for the detailed explanation, thank you.

You're welcome.

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

Okay great, thank you for the call. I just had one question following up on the other costs . Because, yes, you were talking a little bit about it but if you look at the first quarter, the other cost was actually up slightly year-on-year and then for the first half, it was down 14%. So it was down quite a bit in the second quarter, I think I have it down like 40% or 50% year-on-year.

So my question is, can we get more detail on this other cost and also guidance for the full year in terms of other costs because I can understand you're having costs savings but we didn't see any cost savings in the first quarter so they seemed to all come in the second quarter. So is that a one-time cost saving or can we expect that to continue right through the second half and into next

Well as I already explained, our effort for cost saving is quite attributable to the other expense item, of which about -- much portion is payroll. And the government already reduced the ceiling of the incentive from 500% per year to 330% -- 400%, with a new -- adding a new class, a super class. There's no company that's on the super class. We are recorded as the number one in the valuation and our incentive is 350%. That is the highest of a public company this year and already there is no more increase in payroll. And also with [a returned] -- our payroll, the percentages are different to the various grades of staff.

And for sure I can say that the 14.1% of decrease in expense items, there will not be much room for us to reduce them any more but the government -- the management will not allow to increase the [expense] item and definitely I can say is that, we will be maintaining the level, the 14% -- 15% to decrease the reduction in other expenses item because it is our serious strong will to cut every corner of the expense items.

Okay, what about for the full year, do you think other costs will be down 14% or do you think it will be down less than that or more?

It will be -- remain at 14% compared to the last year.

Okay, yes, okay that's about my only question then. Thank you very much.

Currently there are no participant questions. (Operator Instructions).

The following question is by Tien Doe from GIC, please go ahead sir.

Hi, good afternoon, thank you for the call. I have a few questions.

The first question is, could you update us on your fuel cost guidance? Is there any change versus what you were saying at the end of the first quarter?

The second question is on the maintenance expense again, I think before you were guiding that you thought there would be about 5,900 days of maintenance versus about 4,700 in 2008, which would be about a 25% rise in maintenance, but now you're guiding for about an 8% increase in the maintenance costs. So is that number of days of maintenance, is that down now versus compared to what you expected before?

The third question is just a housekeeping question. You've restated your anthracite coal costs for the first half of 2008, down from [114] to the [80s], I'm just wondering why there was that restatement.

The fourth question is on your Powercom stake, there are lots of rumors about what you intend to do with that. Would you be able to confirm or deny what you are intending to do with that in the near term?

And the final question is, I believe you've taken a 1.5% stake in an Indonesian coal company, Adaro Energy. Are you going to be doing more of this type of investment? And the strategy behind that, that is to secure better pricing or that is just to secure guaranteed volumes of coal? Thank you.

The fuel cost guidance -- regarding the fuel cost guidance, okay just a second, actually each year GENCO is responsible for securing their needed coal and we have -- they said that already an average year, 87% of coal needed for this year is already secured. And the price is about -- around the $90 and maybe the spot is less than $80, a little less than $80. Where we had maybe 13% not secured, I think they will buy maybe at some markets.

Anyway, long term and short term, the rate is [7 to 3] - 70% to 30% and we have already launched [joint purchase] but I think that is very negligible at this time.

For your second question, our maintenance expense increase in the first half is mainly due to the maintenance of the nuclear power plants by KHNP and it will remain that 8% compared to the last year, that is not much fluctuated. Anyway, I think our -- the portion of the maintenance cost will remain at the 8% increase compared the last year.

Regarding your third question, the cost of fuel cost, is that fuel cost?

It was the anthracite coal cost I think in the first half 2008 you'd previously stated it was about [$114] per tonne, but you've pushed that down to about [$80]?

Okay, actually whenever we send out the results these are all preliminary numbers, so after the actual numbers come out we put the numbers, so it may be different. But this year's number for last year would be correct.

Alright.

Okay, It's just to refer to the figures. Regarding the sales of our Powercom shares is not decided yet. We are now recruiting another consultant to analyze the benefit of the other effects of sale over the Powercom. And actually the energy group has intended to integrate here three companies, Dacom and Telecom and Powercom some time this year and they recently announced that it will be -- it must be delayed early next year because it will take time.

Our Board of Directors still are waiting for making a decision but as soon as [possible]. We have once studied it but that was not enough for us to assess, also we offered the higher cost of sale to energy group, but it was never set by them. So we are now thinking of various ways to maximize our sale of the Powercom shares and we are not actually -- we are not selling every -- all our portion at one time.

Anyway I think the result of our policy to sell Powercom will come some time later this year and we will decide maybe, hopefully by the end of this year and there will be some negotiations for the two -- regarding the sale of our Powercom shares. Maybe it might be the energy or it might be the third party or it might be the -- maybe now that the market -- I'm not sure. Anyway we should wait for another study and we'll make a decision at the very later time. So at this time we have nothing to say regarding the Powercom shares, but it's definitely to become one policy, KEPCO, to make a sale of Powercom shares, maybe in proportion that is not decided yet and it will take time.

The last question, in the Indonesian Adaro Energy we already are -- already sent out our supporting materials and we sent our -- the equity money yesterday actually. We are now acquiring 1.5% at around [5,000] -- or $56 million. And we are -- at the same time we are now securing around 3 million tonnes of coal. So our Company is in the position of acquiring some mines because it is the best time for KEPCO to be active in acquiring mines.

So I think the deal is already over and some more things to be further discussed at the relevant department. Anyway our [register is] made and you can just believe in the report of our purchase of the other raw energies, [are] the shares by 1.5%. And Adaro Energy as you know is the -- was number five and the second in Indonesia. It's a worldwide famous mine and actually the Company is expanding to produce more coal. So pricing was very attractive for us because we made a deal quite early and already I think the share price is going already much higher. Thank you.

Thank you.

The following question is by (inaudible) from [Barclays Capital]. Please go ahead sir.

Hello, thank you for the call. I'm sorry if this question has been asked earlier, I was not able to dial in. But perhaps you could discuss the euro and the Japanese yen bonds, convertible bonds that become portable towards the end of this year. Can you talk about the refinancing options for these bonds? Thank you.

Well we already -- we are following up the effects of our exchangeable bond secured by the KEPCO-owned securities. And where there is one time [excise] day of the exchangeable bond is November 23. Anyway the owners of the bond should be -- should notice us at the latest by October 23. We have no problem in raising capital to pay [excised] bond. Still, we don't know how it will be [expired] but I think the market is quite solid, we expect, and the exchange rate is going down. And our -- the start is much on the price at the market because of the big loss of the last year, and we have now increased the rate.

So we don't -- we have some [several] yen and the euro-denominated yen has low interest and the euro has about more than 2.8% interest rate. So regarding the refinancing we are thinking every option. If the Korean foreign reserve is enough, we can buy it at the local market and if the government wants to -- need more foreign exchange, we can think about refinancing at the foreign capital market.

So I think everything is open and we still cannot say how much portion will be exercised. Anyway it is our contingency because already at the US -- the SEC is our filing, Form 26-K we already reflected our -- the foreign exchange evaluation, so anything is possible regarding that bond. But we have no problem to how much portion it is exercised or not, so we are not feeling any burden. Anyway, our debt also gives us no negative effect because if we record some kind of loss, foreign exchange loss, then I think it might be another incentive for raising more tariffs. Well I think we should wait about -- by the end of October to exactly measure the effect.

Thank you. Sorry, can I just follow-up very quickly. Would you consider issuing foreign denominator convertible bonds to replace the existing ones if necessary?

Well we have no more (inaudible) KEPCO stocks and we do not consider issuing any of the convertible bond or exchangeable bond. So I think the refinancing, [buy] foreign currency, or we are buying foreign currency at the local market or raising capital at the foreign market, we're still [deciding] anything. And we will buy it a little later; the option is open to us. But definitely we have no intention to issue bonds any more, the convertible bonds any more.

Thank you very much.

Currently there are no participants with questions. (Operator Instructions).

Well if there's no more questions I will make a brief comment. KEPCO is now reinforcing our activities of investor relations and it is our [CEO's] policy to activate our investor relation activities.

And KEPCO also, as I said, offered -- suffered a very deep loss last year and we already have turned around to make a [plus side] -- to turn into the plus side. And our third quarter might be quite solid, our operating performance will be quite solid because our current (inaudible), our tariff structure, we are going to have a higher tariff in the summer because we've got the peak season. But there are many factors that will affect our income including our foreign exchange rate which we expect there will be no more big fluctuation, and also the fuel cost which is recently a little up but I think it will go [so stiffly] like last year.

And also we are now having strong support from the government and we are sure we are making -- we have -- as I said, there is one effect of the convertible -- exchangeable bond effect, but [combining] those factors KEPCO's normal operation is quite solid. And there is no more contingency excluding that exchangeable bond that will affect our net income for this year. And the government still needs the tariff increase -- not [enough] yet. So anyway I cannot represent the government position, it is my personal opinion.

Anyway, please contact us directly by mail or phone. Anything is welcome for us to give you any answers for your questions. Today, I really appreciate the participants at this meeting and we are a little bit not so sad, not like last time because we made a big loss.

Anyway, please, thank you very much for your much attention about KEPCO. And KEPCO will try to do our best to satisfy the investors by reducing cost and rationalizing our -- the revenues for our future and (inaudible) a more -- the normalizing the ROI or ROE. And KEPCO is now making a new vision [to be] world's top five utility for clean energy by 2020. And please consider our vision. It will be driven [by our CEO] in a very solid way.

Thank you very much for having time together with us at this conference call. And also I welcome any questions by mail or phone. Okay, thank you.

Is there any further questions?

I think there are no further questions. We will conclude this call, thank you very much. Thank you.