Korea Electric Power Corp (KEP) 2009 Q4 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 fourth quarter earnings result by KEPCO. This conference will start with a presentation followed by the divisional Q&A session. (Operator Instructions). Now we shall commence the presentation on the fiscal year 2009 fourth quarter earnings results by the KEPCO.

Hello everyone. This is Cecilia Oh, Senior Manager in charge of Investor Relations at KEPCO. We would like to take this opportunity to announce our preliminary earnings results estimate for the fiscal year 2009. And on behalf of KEPCO I would like to thank you all for participating in our conference call today.

Before we begin the announcement please note that the financial information for fiscal year '09 to be disclosed today is preliminary and unaudited, estimated information. And the information for KEPCO and its six wholly owned subsidiaries has been prepared on a combined basis by simply adding the non-consolidated information of KEPCO and its six wholly owned generation subsidiaries or GENCOs, after adjusting for major inter-company transactions among these entities.

Such financial information has not been prepared in accordance with the generally accepted accounting principles of any country and is not indicative of the actual or 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.

Please also note that during the course of today's conference call certain forward-looking statements may be made based on our current plans and expectations. It should be noted that such statements involve risks and uncertainties and there is no assurance that we will achieve any plans or projected financial targets.

Now let us briefly run through the estimated financial results and then we'll open up a Q&A session. Any periodic comparison is made on a year-on-year basis for the fiscal year of 2009 and 2008.

Let us first start with a review of our operating income. Operating income stood at KRW1.3 trillion in 2009, which improved substantially from operating loss of KRW3.1 trillion in 2008. This was mainly attributable to a 7.5% increase in operating revenues thanks to a growth in demand for electric power as well as a 6.1% decrease in operating expenses mainly due to lower fuel prices and our cost control efforts.

Now let me look at the operating side more closely. Operating revenues went up by 7.5% to KRW33.7 trillion in '09. This was mainly attributable to a 2.4% rise in the sales volume of electric power due to a demand growth, and average tariff increases by 4.5% and 3.9% in November '08 and June '09 respectively.

Operating expenses declined by 6.1% to KRW32.3 trillion. As for the main items of the operating expenses, fuel costs fell 5% to KRW15.5 trillion. This was mainly because a decrease in LNG fuel cost more than offset an increase in coal fuel costs.

LNG fuel cost was KRW5.1 trillion in '09, which was down KRW2.8 trillion compared to the previous year. This was mainly due to 13 point, a 13% drop in LNG usage amount mainly because 3,740 megawatts of base-load power plants using coal, which is relatively cheaper than LNG, were newly constructed starting from second half of 2008. Also LNG fuel costs was down due to 26 point, a 26% drop in the average unit purchase price of LNG mainly due to a drop in international LNG prices.

On the other hand, coal fuel costs went up by KRW1.7 trillion to KRW8.2 trillion in '09 due to the operation of new coal power plants as well as an increase in average unit fuel prices for coal mainly affected by the FX rate hike.

Power purchase costs from IPPs fell 15.8% to KRW3.6 trillion. This was mainly due to 2% decrease in the purchase volume thanks to coal fuel power plants newly added by GENCOs. This is because most of IPPs use LNG power plants, which are generally more expensive than coal, and because of the additional coal plants from GENCOs we have less need to purchase from IPPs. Also unit power purchase price was down by 15.2% thanks to the drop in LNG prices.

Maintenance cost rose only slightly, 1.3%, to KRW2.3 trillion as a result of our cost cutting efforts. Depreciation costs went up 1.6% to KRW5.5 trillion primarily due to the completion of additional power facilities. Up to this point, it's been a review of the operating side.

Let us now move on to the non-operating side. We posted net non-operating losses both in '08 and '09. Net non-operating loss in '09 amounted to KRW1.1 trillion, which went up by KRW253b from KRW885b in '08. This was mainly because interest expense rose by KRW600b to KRW1.6 trillion in '09, while net FX related loss fell to KRW138b in '09 from KRW659b in 2008. The surge in interest expense is mainly attributable to an increased debt amount as well as a reduced amount of capitalized interest expenses. As a result of the above mentioned factors we recorded net loss of KRW78b in '09, showing a great improvement as compared to net loss of KRW2.95 trillion in 2008.

This concludes our presentation for the fiscal year of 2009. Now we will open the floor to your questions. Here we have Mr. Chang-Keun Shin, Vice President of KEPCO's Treasury Department. We also have people in charge of overseas business and tariffs for the Q&A session. For efficiency, translation will be provided. Please go ahead with your questions.

Now Q&A session will begin. (Operator Instructions). Currently four participants are waiting with their questions. The first question will be given by Edmond from the JP Morgan.

Hi, thanks very much for the presentation. I have specific questions on the tariff side so this would be for the tariff department. And I'd like to actually understand a bit more in terms of the timetable because in the past, in terms of tariff, regulation has been an area of disappointment for KEPCO. I'd like to understand from your perspective why you believe that the new government, the current government is taking the reform, the pass-through reform more seriously. So for instance what type of interaction you are currently having with the government division.

And also specifically on that, the fuel cost pass-through, I have a question on the timeline on the upcoming tariff setting standard. I understand that there will be a revision to include fuel cost pass-through clause. Any further approvals that might be required on that?

And also more specifically on the pass-through mechanism, just want to reconfirm that this will be a monthly adjustment mechanism.

And also regarding that on the public, the upcoming public consultation period, when is that expected to begin? And what if the public is against such a mechanism?

That's my first question on tariffs. I have other questions later -- shortly. Maybe that one first, thanks.

(Interpreted). First of all, allow me to address the issue of the timeline for the tariff restructuring. According to the current timeline, it will be readjusted on an annual basis. And in actual terms this has been taking place in Korea because if you look at the recent tariff adjustments that have been made, as you heard earlier during the presentation, already in June of last year we had a tariff adjustment. And in the previous year in November we also had a tariff adjustment. And therefore in reality there's been a tariff adjustment at least once per year.

As for the second part of your question concerning discussions and relations with the government about the pass-through system, we have already completed our discussions with the government last year. And even now we are currently going ahead with this agreement for adopting this new system, which will actually take place and be effective from 2011. Currently we are going through various trials in order to find out or in order to verify the system, but it will go ahead and be adopted from next year.

As for your question regarding whether this means that the overall tariff setting structure will need to be reformed, for that portion actually it is only the few cost areas that is going to be passed through. For the remaining side of the cost, including the supply cost and the other portions, that will be taking into consideration as has been done until now, in an overall cost analysis. And based upon that yearly adjustments or annual adjustments will be made.

As for the last portion of your question concerning the actual implementation method, what we will be doing throughout this year is to go ahead with the simulations and the trials to validate the system which will be fully implemented from next year. So we don't have a fully confirmed system set yet, but our basic guideline or the base is that the fuel cost pass-through system will bring about adjustments on a monthly basis as you mentioned in your question.

So in terms of the simulation, is that starting right now or is there like a timetable on that?

And also, I think I also asked about the -- I believe there's a public consultation on tariffs. That may not be the case on that.

Perhaps the other remaining questions that I have are quite straightforward. One is on the coal contracting position. I'd like to understand, to just reconfirm the number, if that is, if 50% is correct.

And I saw also the comment that the forecast is for average coal costs this year to be largely the same as last year. Is that already taking into consideration the fact that spot coal prices have risen quite sharply over the past few months? Or in other words, the 50% portion that is not yet contracted for, whether the assumption is based on the prevailing, the current spot coal prices.

And then lastly is regarding the IFRS accounting standard. Upon adoption of that I'm just wondering if there's any comment on possible net income upside. How does it affect the required tariff hike in order for capital to get back to a fair rate of return level?

(Interpreted). I'd like to answer the first portion of your question regarding the timeline for the simulation. We are currently setting up the system that will actually conduct the simulations. So that work will be completed by early March. So the actual simulation will take place from the latter half of the month of March until the month of October. And then with the results of that we'll go on to the next item that we will have to conduct.

Which leads us to the second portion of your question concerning the public acceptance for this issue. We have not set up or had any specific open discussion forum for the public regarding this matter. But we have had extensive discussions with the government last year as I explained earlier and throughout that process we have had some policy related discussion forums with the government over two or three times during that process. And we have come to an agreement in terms of the direction going forward.

The additional thing that we can look into however is as I mentioned earlier the simulation process will be completed in the month of October and after we get the results of the simulation there may be some additional areas where we would have to have further discussions. But that is to be looked at that time.

As for the coal question, let me answer the question. In terms of the expected coal amount for the year 2010, we've already secured 60% of the total amount we need for this year. And the secured unit price is around $83.4 per tonne including the freight cost and for the full year we expect it to be around $90 per tonne. And this already considered the recent hikes in the coal prices. So we expected the average coal unit price will be remaining at the same level as last year because last year's annual coal price was $89.06 per tonne.

Okay.

And as for the IFRS question, one moment please.

(Interpreted). Concerning your question about the IFRS, the major change that will take place will be depending on the different system that we adopt for depreciation. Currently we are -- according to the law we have to apply the accelerated method. But by changing that to the straight line method that will mean a lowering of our depreciation related costs and an increase of the increment which is expected.

Edmond?

Yes. But the lower, the net impact, no comment on that one?

It's difficult to answer that question at the moment.

Okay, that's alright. Thanks very much for that. Thank you.

The following question is given by Pierre Lau from the Citigroup. Go ahead sir.

Hi, hello, good afternoon. I'm Pierre Lau from Citigroup. I have three questions regarding your Company. The first one is, when we adopt IFRS revaluation for a potential asset value increment of KRW22.3 trillion, would this amount be include or exclude when the [government] calculate the ROE of our Company in future? This is question one.

The second question is how much CapEx are we going to spend in 2010 and 2011?

And the third question is for the overseas projects profit contribution, is there any target that the government -- that the Company would like to achieve say in three or five years' time? Thank you.

(Interpreted). Concerning your first question about the adoption of IFRS and its impact on the asset revaluation, actually that adoption of the IFRS is not expected to have any impact on the rate of return.

Do you mean that this KRW22.3 trillion would not be included in the ROE calculation?

(Interpreted). It is not included.

Okay, thank you.

(Interpreted). Concerning your question, your second question for the CapEx for 2010, the budget that we have for CapEx in 2010 is compared to the previous year, a reduction of 2%, meaning KRW12.3 trillion. And for the year 2011 we expect that to be KRW12.5 trillion.

Please wait while we interpret the third question once again.

Okay.

As for the overseas projects our target is to have the overseas revenues by -- in five years up to 5% to 6% of our total operating revenues, compared to our total operating revenues. That is our target.

So it -- how about profit? It's 5% to 6% of our operating revenue in five years' time and is there any target in terms of profit?

We don't provide the actual profits.

Okay. Okay, thank you. And indeed I have another three questions. The first one is you mentioned that the fuel pass-through will be expected to implement in 2011. And obviously in 2009 we would be still loss-making and I think we are expecting a tariff hike in mid 2010. But unless the Korean government is going to increase tariff a lot, so we -- it seems that this year our return is still lower than the fair rate of return. So do you expect that once the automatic fuel pass-through to be implemented our tariff will be substantially increased so that immediately we can get a fair rate of return after fuel pass-through implementation? That's question one.

And question two is in which month in 2011 do you expect automatic fuel pass-through would be implemented?

And the third question is what will be the generation mix for KEPCO in 2010 in terms of the energy for generation. Thank you.

(Interpreted). Your first question concerning the adoption of the fuel cost pass-through system and whether it will be directly linked to reaching the fair rate of return, we believe that just with the adoption of the fuel cost pass-through system alone we will not be able to see a very visible improvement in that respect. And, independent with the adoption of the fuel cost pass-through system, we will have tariff hikes both in 2010 and 2011 in order to reach our goal of 50% of fair ROR this year and 100% of fair ROR next year.

As for the actual timeline of when the fuel cost pass-through system will be adopted, we do not have a specific date and month defined yet. We are targeting for adoption in January of '11.

Concerning your third question about the generation mix, if I can give you some information of 2009, if you look at the overall 2009 figures, nuclear took up 36%, while coal took up 48%. And that means that the base load was 84%. And we believe that this year it will be similar to what we saw in last year. That is to say, for 2010 we have similar expectations, especially since in December of '09 we have completed the preventive review of Wolsong NPP. And also the Shingori NPP, the construction of that plant was completed. So we believe that that will definitely improve the overall situation.

One additional thing to note is that for this year 2010 we expect the additional construction of LNG generation of 1,570 megawatts.

So those generation of 1,570 megawatts when do we -- when would they be completed?

(Interpreted). That will be in May of 2010.

Okay thanks.

(Interpreted). Half of it would be completed in May and another half would be completed in November.

Okay. Thank you very much.

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

Okay, great. Hi. Thanks very much. Just a couple of questions. Number one, in terms of the guidance for this year on demand growth and fuel cost growth and operating, profit, what are the expectations there? And then I have a couple of other questions as well.

(Interpreted). For this year the forecast versus last year in overall is a 3.4% increase. First of all, the residential we expect the increase to be 1.6%, for commercial 4.8%, for industrial 4.3% and for others 6.7%, which brings it out to an overall forecast of 3.4%, as I mentioned earlier in the reply.

Yes. That's the 3.4% demand growth, right? That's nothing to do with the tariff hikes, right?

(Interpreted). Yes that's correct.

And then do you have any expectations on what the fuel costs and the power purchase cost will look like this year, based on your assumptions?

(Interpreted). As for the fuel cost we expect it to be, this year, about KRW16 trillion, which will be approximately 2% increase versus last year.

Okay. And what won exchange rate are you using?

(Interpreted). We are using KRW1,100 to the dollar.

And how about the oil price assumption?

(Interpreted). We're using the assumption of $80 per barrel.

Okay, great. And then just, I'm still a little bit confused on the fuel cost pass-through system in the sense that I'm trying to figure out exactly what you're passing through. In the sense that I thought the idea was that once you get to a fair rate of return, i.e. let's say the 6% return on capital or return on rate base, and then you have the fuel cost pass-through that sort of locks in that return.

So you're saying that you hope to get the 50% of your fair rate of return this year and then 100% next year. But then it was a little bit confusing to me because at one point you said there would not be a large tariff hike next year in order to get you to 100%. So I'm just trying to understand better what is the fuel cost in 2011, what is it going to be based on if it's not the 100% of the fair rate of return?

(Interpreted). First of all, concerning the fuel cost pass-through system what is it based on, it is basically the cost of the fossil fuels, that is to say oil, coal and LNG. And these three types of fossil fuels actually take up 90% of the overall fuel that we use. So we are basing our pass-through system based upon the price of these three types of fossil fuels.

As for the other portion of your question concerning the fair rate of return, and locking in the tariff based upon that and then adopting the pass-through system, of course, that seems logical. However, the current situation is that the adoption of the pass-through system has already been confirmed to be adopted from 2011. And other price adjustments in order to reach the fair rate of return is a separate system so they are not directly linked or coordinated in any way. However, by the time that the pass-through system will be implemented, that is to say by 2011, we believe that the situation for reaching fair ROR will have been improved. So it will be giving positive results hand in hand at that time, we believe.

Okay. Okay, I think I understand better. And my final question is just what do you expect the debt levels to be at the end of 2010?

(Interpreted). For end of 2010 we expect debt to be KRW8.3 trillion higher versus the previous year which means KRW41.1 trillion.

Okay. That seems like a pretty big increase. Okay, so the cash flow is still free cash flow negative, it seems, quite substantially.

(Interpreted). Yes.

Okay. And sorry, one final question. On the KRW22.3 trillion that is being revalued under the new accounting rules, do you know how much of that is land and how much is machinery or other depreciable items?

(Interpreted). Yes. I'd like to give you the information concerning that. For land it's 32%, meaning KRW7.1 trillion. Buildings will take up 4.2% which will amount to KRW900b. For structure 13.8%, meaning KRW4.1 trillion. Equipment and machinery 45.5%, amounting to KRW10.1 trillion. And others reaching 16 -- I'm sorry, KRW1.6b.

Okay, that's perfect. Thanks very much.

The following question will be given by (inaudible) from Nevsky. Please go ahead sir.

Hi there. Thanks very much for the call. And I've got three questions. First what is your price assumption for gas, the year-on-year change in dollars for LNG from KOGAS?

The second question is what is your estimate -- what percentage of your fair rate did you get in 2009?

And the last question is you've mentioned the two separate dynamics. First the fuel cost adjustments, second the increasing the percentage of the fair rate of return. Is there a cap on prices which we can expect? I mean, you're saying you need a 4% tariff hike. If that calculation said, right, we need a 15% tariff hike, it's unlikely that's going to happen. So what is the maximum percentage increase in tariffs you think the government would be comfortable with?

(Interpreted). Allow me to address your first question concerning the LNG prices. Last year the unit cost for LNG was, on the Korean won basis, per tonne, KRW740,000. This year it is expected to increase to KRW781,500 per tonne which means in terms of price a 5% increase and in terms of volume 21% increase. And the exchange rate that we used in this assumption was KRW1,100 to the dollar.

Okay.

(Interpreted). For your second question, for 2009 the fair rate of return was 5.6%. Okay? That's 5.6%.

And the actual return?

(Interpreted). We have not had the specific results yet for the actual rate of return. We expect it to be at the 1% level.

Concerning your last question regarding any cap or ceiling for the price increase, there isn't an actual criteria or standard that exists as an official cap. However, as you mentioned in the example within your question, it is true that a drastic increase in tariff such as 15% would be a little bit difficult to implement at once. And in those cases, if there is a very high price hike that needs to happen, then it will be a phased adoption of a price hike, not done at once. But I must mention also that it would be quite difficult to see such a big gap in terms of the calculation.

Okay. May I just follow on from that? Just to say that if your current -- you're currently achieving 20% of your fair rate at the moment. And you're targeting to go to 50% next year and 100% the year after. On my rough calculations that would necessitate a substantial increase in tariffs even if you assume that fuel costs don't change. So it seems that that target is quite unlikely to achieve within three years. Do you think it would be more realistic to assume you'd get to 100% of fair rate of return over a longer time period, like five or six years perhaps?

(Interpreted). Although I cannot give you any specific figures as of yet, we expect that with the price adjustments that will be made in this year and 2011 we will be able to reach the fair rate of return. However, as referred to in your question, if there are some additional variance that occur, that may have a major impact which might boost the needed price hike even further. In that case there may have to be reconsideration on the period over which we will achieve that goal.

I understand. And very lastly a further two questions. In your data release you didn't include the spread sheet on employee numbers, so for GENCOs and KEPCO. Please could you circulate that to everyone? It's always very useful to see.

And secondly what's the dividend policy for 2009? Are you announcing a dividend? Are you aiming to keep dividend per share flat? Or are you not going to pay a dividend, given the loss?

(Interpreted). Concerning your first question, the headcount for GENCOs and KEPCO, as of end of 2009 the figure is 37,000.

As for the dividend policy, due to the losses this year we believe it will be difficult to have a dividend payout. However, as soon as we turn into black, in that case we will have to go through discussions with the government. And we will probably proceed with the level we had previously, that is about 30%. And additionally, our mid to long-term goal for dividend is at around the level that I explained earlier, 30% of net profit for the period.

Also, if I may add a little bit more regarding your first question of the headcount, this year due to the discussions and agreement that we had with the government, the labor cost will be frozen at the current level. Also in the long term it is expected that the labor cost will continue to decrease, because for 2012 we are targeting for a total of 5,000 headcount reduction, 2,400 for KEPCO and 2,600 for the GENCOs.

Okay.

I think due to time restriction we will have one or two more questions only.

The last question will be given by [Ms. Sadami] from the Credit Suisse. Please go ahead ma'am.

Hi. Thank you for having this call. I just wanted to take a follow-up question on the debt side. I just wanted to know what your current debt amount was and what would the repayment schedule be for 2010 onwards? Of course, in relationship to that would be the fact that how would you be repaying this loan? Would you be raising new money? And would that be domestically or raised through foreign borrowings?

(Interpreted). As end of last year the debt level is KRW32.8 trillion. And for this year we are planning to raise an additional KRW13.8 trillion.

As for the repayment for the debt, we expect the level this year for repayment to be KRW5.5 trillion, for 2011, KRW5.3 trillion and for 2012, KRW5.1 trillion. And according to our budget, based upon our budget, we expect that to be done through a raise in capital from foreign currency -- about 16.8% of that will be raised through foreign currency. And that will be conducted, depending on our assessment of the situation of the financial market.

Okay great. That's all I needed to know. Thanks.

Well I think there are no more questions. So if you have further questions, please contact our IR staff any time. Once again thank you for your interest in KEPCO and thank you for joining our conference call today. Thank you.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.