Korea Electric Power Corp (KEP) 2009 Q3 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 third 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 third quarter earnings result 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 nine months of 2009.

Before beginning the announcement, please note that the financial data to be disclosed today is preliminary, unaudited and unconsolidated estimates prepared by simply adding the earnings estimates of KEPCO and its fixed 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 nine months between 2009 and 2008. The operating revenues went up by 8% to KRW25 trillion in 2009. This was mainly due to the average sales increase of 4.5% and 3.9% in November '08 and June '09 respectively. Operating expenses decreased by 0.5% to KRW23.3 trillion.

Looking at the main items of the OP expenses, fuel cost increased by 1.9% to KRW11.3 trillion. Fuel cost for coal and oil increased by 47.5% and 16.8% respectively while fuel cost of LNG decreased by 35.7%. This was mainly due to 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 purchase power from IPPs decreased by 12.8% to KRW2.5 trillion. This was mainly due to the fact that the purchase volume decreased 9.1% thanks to newly added baseload power plants by the GENCOs as well as the decreased power demand growth.

Maintenance cost increased by 11.8% to KRW1.7 trillion. In particular, GENCOs maintenance cost increased by 25.9% mainly due to increases in some of GENCOs maintenance cost such as KHNP, affected by an increase in plant maintenance period as well as increased higher level of maintenance. Depreciation cost increased by 4.9% to KRW4 trillion primarily due to the completion of new power plant construction.

As a result, net operating income of KRW1.66 trillion was the credit in the first nine months of 2009, which increased substantially from net OP loss of KRW305b in 2008. Looking at the operating income on a quarterly basis, net OP loss of KRW317b in the first quarter of '09 turned into the black with operating income of KRW225b in the second quarter, and the third quarter substantially recorded a net OP income of KRW1.75 trillion.

Let me move on to the non-operating side. In the first nine months of 2009 we posted a net operating -- net non-operating losses of [KRW918b] versus KRW741b during the same period of '08 while net FX related loss decreased to KRW238b from KRW498b. Interest expense increased 17.8% to KRW1.2 trillion mainly attributable to increased debt as well as decreased capitalization of interest expenses.

As a result of the aforementioned factors, we reported a net income of KRW289b in the first nine months of 2009 as compared to a net loss of KRW789b during the same period of last year. On a quarterly basis, we can see a great improvement in bottom line. Net loss KRW2.2 trillion in the fourth quarter of last year, substantially shrank to net loss of KRW882b in the first quarter this year, and such loss turns positive to the net profit of KRW240b in the second quarter. And we recorded net income of KRW931b in third quarter of 2009, which is a substantial increased compared to net loss of KRW325b in the same period last year.

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

Now Q&A session will begin. (Operator Instructions). The first question will be given by Mr. Edmond Lee of JP Morgan. Please go ahead, sir.

Hi, good afternoon. Thanks very much for the presentation. Have, let's see, a couple of quick questions. One, I would just like an update on the fuel cost pass-through mechanism, whether there's any changes to the trend at all that, obviously, as before, the expected implementation for that is January 2011.

And also wondering whether by, say, early part of next year whether there might be any further details to, actually to be formally announced on how the pass-through mechanism might take form, the pilot scheme, that sort of thing. So that would be my first question.

Question number two is, obviously, recently, there have been some comment regarding that a turn point in the near term will be rather unlikely. But just wondering, regarding the longer term outlook, particularly given that the existing, the current rate of return for KEPCO is still quite low. So whether or not, the question would be whether or not the regulator might not lean to the fair rate of return for KEPCO being restored eventually.

And then number three, just wondering whether there might be any comment on the fuel cost situation for Q4, both in terms of the IPP tariff level and in terms of the fuel mix situation, whether we should also expect the coal power output portion to remain as high. So those three questions.

Okay, thanks very much. I'm Treasurer JP Lee. Okay, you have three questions. Thank you for being with us today. The answer to the first question, the fuel cost pass-through mechanism will be formally -- we expect to be formally adopted from January 2011. Next will be testing period we call it, pilot testing period. And the Ministry of Technology and Economy is the main actor to decide the mechanism. They are now reading the study from the third party and the mechanism is not decided yet and it can be changed next year during the pilot period. Anyway, also the Ministry of Planning and Finance strongly support a mechanism which is very reasonable for rationalization of consumer consumption and the price mechanism.

So the government roadmap is for now, sure, but there will be a much discussions about it. Maybe the adjustment will be made quarterly or monthly or bi-monthly. I think we do not have any details at this time but we expect it to be quite similar to other nations.

As to the second question, the tariff increased in the near term and in the long term it's something that should be decided by the government through the negotiation between KEPCO and Ministry. And actually we recorded an over KRW200b profit by the third quarter. In the fourth quarter we expect a little negative net profit. So to secure the appropriate rate of return we expect around 5.5% to 6%. Now we record around 5.8% and our policy is there to secure it completely in two years by the end of 2011 and maybe half by the end of 2010.

It's something to be further discussed with the government and the government doesn't want to let us in the very low profit margin because until the end of 2007, we are always has no problems to secure the fair rate of return, but last year was extraordinary. So in the coming two years, we hope to resume our full rate of return and also the government will be pursuing that goal. But one thing we should consider is that then the national economy is going smooth. If something, if the economy worsen, I think the government will require us to be more patient.

As to the third question, fuel cost in the fourth quarter, although there was a recent report that the fuel cost -- fuel prices will be going up a little bit maybe, not sharply but maybe from 15% or so. I think there was a news from Goldman Sachs yesterday. But we already secured at fairly good prices for this year so there is no fuel cost increase in the fourth quarter. Also we secured 30% of next year's coal at good prices and we expect that the current inventory is building up. And although the China and India need more coal in the coming period, I think the supply will not be so short.

But even though the oil price in going up very sharply - (inaudible) don't like it - but the coal prices will be stabilized. Maybe even though it increases we think that it will not be going up sharply. So I think we now have not bad prospect for the coal prices next year. So, anyway, we are doing our best to lower our coal purchase cost through the joint purchase system for secure of overseas production.

Actually, just to follow up a bit, you did mention that the fair rate of return of around 5.5% to 6% to be hopefully achieved by the end of -- over the next two years, the end of 2011. The related question I think -- I have two questions. One is, is there any rough estimates is terms of how much of additional tariff hike might be required? That is number one.

Number two is regarding the possible asset revaluation coming up. I just want to clarify any additional property revaluation reserve that may arise. I suppose that the additional asset base related to that should not be or might not be eligible for a return on it?

Yes, as to the first question, to secure the fair rate of return, how much should we increase the tariff is dependent upon some variants such as foreign exchange and the fuel prices. And the government will put every variable together and they will negotiate with us, and they will decide the level.

And the time is not decided yet and at this time the government and KEPCO is in no position to say that we will increase the tariff because of the sentiment of the people and the sluggishness of the government -- of the economy. But next year, we should rationalize the consumption of electricity maybe to reduce the (inaudible) assumption and to prevent the rate of electricity, and to levelize the international fairly low level of electricity prices which promotes over-consumption. So I think that there will be some tariff adjustment next year.

Anyway, the roadmap is through secure the fair rate of return in two years but I think the timing of tariff increase will be dependent upon the economic situation and also the other variables I already mentioned.

As to your second question, we are now planning to fully introduce IFRS, International Financial Reporting System, from 2011 and it will increase our net profit pretty sharply. And also the IFRS requires us to assess -- revaluate our tangible assets at fair value. So that's the reason why we are now implementing asset reassessment and it will be uploaded maybe in January next year. But also we announced how much it will go up, but actually it will be reflected in the financial statements from 2011, not next year. And that will decrease our debt ratio and so that will prevent us to cash flow outflow and that will offset sharp increase in net profit that will record by IFRS that prolong the [depreciation] period.

So I think everything is underway and we'll make a dual financial statement next year, one for comparison. I don't know if we disclose it or not, but anyway you can expect that the value of assets will go up pretty much.

So I guess the first period when we'll see profit and loss statement prepared based on IFRS would be for the full year of 2010 or from the first quarter of 2010 already?

We will start to report our financial statement from the first quarter of 2011, not next year.

Okay, great. Thank you very much for the very detailed explanation. Thank you.

Okay, you're welcome.

The following question is from Mr. Josh Bae of UBS. Please go ahead sir.

Yes, hi. Thank you for the call. My first question is on your CapEx. If I calculated correct, the first quarter to third quarter CapEx increased about 40% versus last year. So should we expect your annual CapEx to increase by that much versus last year or is this more a function of the CapEx being more front-end-loaded this year? To put it in a different way, what do you expect your actual CapEx to be for the full year 2009?

The second question is on the coal contracts. You mentioned you secured about 30% of the 2010 coal contracts. Could you please share with us what the price was and is this mainly from Indonesia or Australia?

And the last question is just on your tax rate, which seems pretty high. If you could give us some color on that, that would be very helpful. Thank you.

Okay, as for your first question, the CapEx for this year is expected to be around KRW13 trillion. And about 60% -- 63% will be put into the generation sector, one third is thermal and two third is nuclear. We have not many plants under construction thermal and we are now focusing on nuclear. And about 37% will go the transmission industrial sector. So we can say that this year our CapEx will be KRW13 trillion.

Thank you. I understand your CapEx budget is about KRW13 trillion. What should we expect the actual amount to be? I understand it's typically lower than the budgets.

I did not hear it will be lower. We are now expecting KRW13 trillion will be spent as a positive although we are reducing much on our maintenance expenses.

As to your second question, the coal, we already secure 30% of next year and the price is now at that $84.30. And the remaining is under negotiation and will be made in the early period next coming year.

And as to the third question, the tax rate, the government decided to decrease corporate tax from 25% to 22% and it will be further decreased, 20% from 2010. So this year, the corporate tax was decreased from 25% last year and to 22% this year. And for your confidence, we have a lot of tax credit due to the big loss last year and it will be deducted from the profit -- from the corporate tax accrued from this year for five years. The amount is around KRW700b.

Yes, thank you. Sorry, may I just confirm that you're saying that this year's actual CapEx spend would be pretty much in line with the KRW13 trillion budget that you announced at the beginning of the year?

Yes. The budget figure is KRW13.96 trillion.

Okay, thank you.

You're welcome.

Currently, there is no participant with questions. (Operator Instructions). The following question is from Ms. [Salina] of UBS. Please go ahead, ma'am. The following question is from Ms. [Salina] of UBS. Please go ahead, ma'am. Ms. [Salina], would you go on, would you continue your question?

We'll move on to the next question. The following question will be given by Mr. Edmond Lee of JP Morgan. Please go ahead, sir.

Hi. Yes, I actually have a follow-up just on the, follow-up question on the CapEx forecast. This year, I see the actual CapEx appears to be relatively higher compared to, say, the normal trend, partly because of the need to support the economy. Just wondering, in terms of the outlook for next year and the year afterwards, should we expect CapEx to return back to a more normalized level closer to KRW9 trillion, KRW10 trillion?

Okay, wait a second.

Hi Edmond. This is Cecilia.

Hi, hi there.

Okay, this year we expect the CapEx to be around KRW12 trillion to KRW13 trillion and next year around KRW13 trillion to KRW14 trillion. And in 2011, around KRW13 trillion and in 2012 around KRW14 trillion to KRW15 trillion. We have always mentioned that we spend about 90% -- sometimes 80% or 95% of the total budget of Capex.

Yes.

We did a survey and we got access from the generation companies and they're saying that KRW13 trillion is expected to be spent, as budgeted this year.

For this year.

Yes.

So perhaps this year is slightly exceptional in the sense that the amount of savings -- CapEx savings isn't that much. So can I assume that next year it may go back to the normal pattern, that perhaps the actual might be a little bit below, say 10%, 15% below the budgeted for next year?

Maybe, maybe, but we haven't set a budget yet for the next year so maybe I can answer that question later on.

Actually, quite recently, yesterday, there was a report from the Planning department that we have made the expenditure plan for the period of 2010 to 2012. And our [Asset] department said that that will be disclosed at this time but I think the data will be available. And it will impact recent developments such as the investment into electric vehicle infrastructure and RPS requirement observation and also the green growth or something like that. So I think anyway we will be very tight on our capital expenditure and if you give us the contact then we'll try to provide the details, the capital expenditure plan.

Sure, sure. Yes, thanks a lot.

Okay.

The next question is from Mr. [Gidmington] of Barclays Capital. Please go ahead, sir.

Hello, thanks for holding the call. Just wanted to follow up on the CapEx. Just trying to understand how you, KEPCO plans to finance the CapEx for next year, 2011, as well as the debt that's maturing in the next two years. Does the Company have any target debt-equity mix or any target currency mix? Thank you.

Yes. We have a detailed implementation plan to meet the required capital and we also expect we'll have a little more borrowing in the coming next few years. And we have a guideline that -- our debt ratio is currently rising rather steeply but we want to moderate the increasing debt rate. And the strategy is now being prepared by the Planning department reflecting the current situation and the future high expectation.

So I think that's something we can deliver you the information, maybe in a month or two, because we want to ramp up the mid-term capital expenditure plan. And the (inaudible) we disclose by now is something prepared early this year so I think the debt is substantially different from expected. But the basic principle, we (inaudible) debt, the sharply increasing debt ratio might halt our position. So we should be more conservative in borrowing and in our capital expenditure. So in some parts, like green growth, we will make a little more investment.

And also we do not make investment alone. We will try to induce the private sectors to participate in the new -- the future engine, maybe essential growth engine period of business.

Okay. If I can do a -- put in a follow-up question. The current government has state that they would like to try to reduce US dollar borrowings. Does that in any way affect your future funding plans?

Currently, we have very low rate of foreign currency portion. It was, at the swap, around [3%]. And if we refinance the put option of around KRW12.5b -- $12.5b -- sorry, $1.25b, that will be paid November 23 and November 24. Then if we refinance in Korean currency - which is still decided yet - if we pay in Korean currency, our foreign currency portion will be quite low. So that means that if we have an interest in borrowing foreign currency, I think we will increase our foreign borrowing next year to make a proper portfolio. Currently, our portion of the foreign currency ratio in our borrowings will be historically lowest round the year end.

Okay. Thank you.

Currently, there is no participant with questions. (Operator Instructions). The next question is from Mr. Josh Bae of UBS, again. Please go ahead, sir.

Yes, hi. Thank you. Just a couple of more questions. Firstly, there was some press articles of you potentially issuing $700m of debt within the year. If there's any information that you could share with us on that, that would be very helpful. Thank you.

We tried to refinance our production debt but we did not decide by today and we are seriously considering to raising money to buy the dollars -- to buy the foreign currency at domestic markets. And I am sure that I can give information of the decision maybe tomorrow. We still decided we will raise the money on foreign market or domestic market because the $700m global bond will have a more high interest rate if you make a profitable swap because the borrowing at the Korean market five-year interest rate is around less than -- maybe it's around 5.5%. But if you make a swap and borrow at foreign market, it is about 0.2% or 0.3% higher than that. So we are now comparing the advantage and disadvantages and this to be decided today or early tomorrow.

Thank you very much.

Currently, there is no participant with questions. (Operator Instructions).

Ladies and gentlemen, thank you very much for being with us. If you don't have any further questions, I would like to conclude the conference call. If you have any additional questions or need any help, please contact our IR staff any time. Again, thank you very much for your interest in KEPCO and thank you for joining our conference call today. At present I say goodbye now and I will be waiting for your contact. Have a good time.