Korea Electric Power Corp (KEP) 2010 Q1 法說會逐字稿

(Interpreted). Good afternoon. This is Kyo-hyung Lee, Head of Investor Relations team at KEPCO. We would like to take this opportunity to thank everyone for joining our conference call for the first quarter of 2010. Today's conference call will begin our presentation on the earning result followed by a Q&A session.

Please note that the financial information to be disclosed today is preliminary and non-consolidated basis, not consolidated basis, including our subsidiaries before the audit is completed. So some of the contents has not been audited and may change as a result of audit.

Please also note that during the call today certain forward-looking statements may be made based on our current plan and expectations. Also it should be noted that such statements involves risks and uncertainties. For your reference we had publicly disclosed the summary of income statements for KEPCO and its six wholly owned subsidiaries for investors' convenience only in the past. However, such information is only estimated figure and has not been reviewed by our external auditor and material differences had occurred compared to consolidated financial risk, including all of KEPCO's subsidiaries.

Considering public reporting risk, which may be occurring resulting from a release of the combined income statement including six GENCOs, such combined information will no longer be publicly available from this year. However, we will provide with supplemented data to help investors better understand KEPCO Group and to assist consolidated earnings forecast. Please kindly understand any inconvenience resulting from such changes in providing financial information. Please also note that from next year, consolidated financial results based on IFRS will be filed publicly on a quarterly basis.

From now on I would like to invite Ms. Cecilia Oh, our IR Senior Manager to give the presentation on earnings result.

(Interpreted). Good afternoon everyone. My name is Cecilia Oh, IR Senior Manager. Let us briefly run through the financial results starting with the operating income.

Net operating loss was recorded at [KRW1,009.7b], mainly resulted from an increase in expensive LNG generation due to a big jump in power demand for heating and a 17.6% increase in demand from industrial sector which is below supply cost and pressures from still high fuel prices.

Looking more closely the operating revenues went up 14.6% to KRW9,577b. The electricity revenues accounting for substantially all of the operating revenues increased 14.5% to KRW9,482b. Such increase was mainly attributable to an average tariff increase of 3.9% in June [2009] as well as a 12.4% rise in the power demand volume affected by a soared demand growth for heating amid an unexpected cold weather and economic recovery.

Operating expenses grew 5.3% to [KRW10,657b], of which power purchase cost increased 6.3% to KRW9,369b, due to a demand hike despite unit purchase price fall of 5.4% resulting from a decrease in prices of fuels like LNG and coal for generation.

Next, let me explain non-operating income side. Non-operating income turned out to be KRW934b, up by 45.5% compared with the previous year. This was mainly impacted by increased income from affiliates such as six GENCOs and KOGAS among others as well as ForEx related income due, mainly due to stronger won.

ForEx related income turned positive to KRW67b in 2010, from a ForEx related loss of KRW163b in 2009, which is attributable to ForEx valuation income impacted by strong won, which again was offset a little bit by derivatives related loss. Interest cost increased 7.7% to KRW276b mainly attributable to an increased debt amount.

As a result of the aforementioned factors, we again recorded net loss in the first quarter of 2010, like we had a net loss last year in the same period. However, the net loss showed a great improvement to KRW82b compared with the net loss of KRW882b in '09.

This concludes the presentation on earnings result for the first quarter of 2010. Next we will have Q&A session which will be hosted by our Treasurer, Mr. Chung Gun Shin.

(Interpreted). Good afternoon everyone. My name is Chung Gun Shin, VP of Treasury Department of KEPCO.

Before we jump into our Q&A session I would like to introduce our newly established IR Committee which was established recently. In accordance with our top management policy to value investors and strengthen IR function, KEPCO appointed 10 IR Committee members internally, including people in charge of major IR subjects such as tariffs, overseas business, Smart Grid etc, apart from the existing IR staff. And all of the members are now participating in this conference call today. From now on we will do our best for more active and more professional IR and to increase the corporate value by utilizing the IR Committee.

Now we are open to your questions. Please go ahead with your questions and we will be having this conference in simultaneous interpretation. So we will be accommodating all the Korean questions first. We will now go ahead with the Q&A session. Please begin with your questions. Thank you.

(Interpreted). We are having some technical difficulties right now. We cannot hear the questions. Would you please hold?

Now we will have a Q&A session. (Operator Instructions). First we would like to entertain questions in Korean first. The first questioner, please go ahead. (Technical difficulty). I think we are having a hearing problem in the sound quality.

(Interpreted). The question is about the outlook for the purchase of bituminous coal for the whole year of 2010. And also how much of bituminous coal has been secured for the year 2010 thus far.

And also what's your expectation as to the annual average price of bituminous coal for the year?

And there has been an increase in sales of electricity for Q1. And I would like to know how much of increase do you expect for the whole year in the year of 2010.

(Interpreted). Yes, I would like to answer your question as far as I have understood because we are having some sound quality problem. I would like to ask for your understanding for that.

Performance of purchase of bituminous coal in terms of US dollar, we paid $95.54 per tonne Q4 2009 and for the first quarter we think that we have paid $88.96 per tonne. And if you look at the proportion of our contracts, long term contracts accounted for 76% and short term accounted for 23%.

And for in Q1 we purchased mostly from Indonesia, accounting for 55%. We purchased 30% from Australia, 6% from China and we also imported coal from other countries for the remainder of the proportion. We paid $84.43 to Indonesia for our coal and also we paid $83.60 per tonne to China.

We would like to elaborate on our answers a little bit. To answer your second question, so your question was about how much bituminous coal we have secured for 2010 and our expectation as to the price level of bituminous coal. Here the unit price for this year is expected to range between $80 to $90 per tonne. Last year the price range was averaged at $86.06 per tonne.

And about 70% to 80% of our contracts will be long term based and 20% to 30% of our contracts will be short term contracts, which is quite contrast to what we had last year. We had short term contracts accounting for 32% of our total contracts. And the expected unit -- sorry, the percentage of that we expect for the bituminous coal, we expect that we will secure 69% of the necessary volume of bituminous coal this year.

And your last question is about our expectations as to the sales of electricity. Given 4.8% increase in GDP we expect our sales of electricity to go up by 6.7% compared with the last year, which will reach 42,792 gigawatt hours.

If you look at the type, by type of usage, the residential electricity sales is expected to increase 4.6% and the commercial usage is expected to increase 5.9% and the industrial usage is expected to increase by 8.2%.

The second question will come from [Mr. Kim Dong Joon] from UBS Securities. Please go ahead sir.

(Interpreted). There was an interview by [M.K. Yee] and there was no plan to increase gas rate this year. Is there any plan to increase tariff rate this year? Can you share your insight on that?

Second question is, you are going to link the price to inflation. Are you going to start implementing that next year or is it going to be delayed? What are some of the key developments following this year? So these are two questions from my side. Thank you.

First question is on the increase of the electricity tariff. And when do you believe will the price go up and also for the fuel cost adjusted tariff system, is there any possibility that will be delayed after next year.

And what are some of the key barriers of adopting that price system -- tariff system that is?

(Interpreted). I would like to briefly talk about the price increase plan for the power price. The electricity price was up by 3.9% last year. Six months prior to that, it was also increased by 4.5%. Electricity price is often increased in an annual basis. So after February last year, it will be later half of this year when we will be start discussing about price increase. There will be the municipal elections held in Korea, but price will not be increased or delayed because of that.

The current tariff system under current roadmap is well under plan. And this February we have already announced the related regulatory change and it will be implemented starting next year January. And there will be no change for that time being. Thank you.

Thank you. The next question will come from Woori Securities. Please go ahead sir.

(Interpreted). I have two questions. On an annual basis what's your projections as to the electricity, the amount of electricity generation?

And also what's your outlook on the fuel cost?

And also what is your plan for the generation mix for the year? In Q1 there has been a great increase in the use of LNG. So my question more specifically is how much of LNG will be used or increased going forward especially in the second half of this year?

As to the Smart Grid business, are there any plans that you would like to implement in the second half of this year and the first half of next year? Thank you.

(Interpreted). First about the power generation amount, this year we expect to generate power from coal. For 2010 on the annual basis if you look at the figures for expected capacity expansion, Shin Kori first one unit, will be completed adding 1,000 megawatts of power generation. An LNG power unit is also going to be added. Other renewable energy power plant and other power generation units will also be added.

As to the Smart Grid I would like to have another person to answer that question, who is in charge of that business.

(Interpreted). Good afternoon. I'm in charge of Smart Grid business. I'd like to answer your question briefly. In the second half of this year, or the first half of next year, we have some plans for the Smart Grid. First of all we're going to implement a test program in Jeju Island, which will cover the total five areas that we have planned. We have G20 summits scheduled for the second quarter of this year so we plan to speed up our test program.

Secondly, we are setting up KEPCO's Smart Grid master plan, which is to be reported and finalized by November this year. With the completion of this master plan we will have more details clearly as to the Smart Grid business.

And thirdly about our overseas business, we plan to announce our plan for our business in Australia and also we have plans to work more closely with the UAE as to the Smart Grid business.

Next we would like to take an English question. We have four questions waiting. First question is coming from Edmond Lee from Morgan Stanley.

Hi, it's Edmond Lee calling from JP Morgan actually. Some of my earlier questions have been answered. So I think the simple one that I've got, one is again relating to the proposed automatic fuel cost pass-through mechanism as well. I think earlier during the fourth quarter results, we learned that an internal trial run will begin by March of 2010, which is expected to last for six months or so. So I'd just like to hear if there were any progress on that.

And I think, just in follow up on the earlier question regarding the proposal for the fuel cost pass-through mechanism, I'm just wondering if there's any -- if the exact mechanism in terms of how quickly the fuel cost will be passed through, whether those details have been finalized or some of those may still yet to be decided. That's question number one.

And I think number two in terms of the relatively higher IPP power purchase cost during the first quarter, I suppose to some extent that's to do with the tight supply situation and also the very strong demand growth situation in the first quarter. So I'm just wondering for the remainder of this year, especially Q3, should we expect further similar situation whereby the capacity supply situation might be quite tight and as a result again KEPCO might need to rely quite a lot more on LNG power and also maybe from -- externally from IPP and as a result the power purchase cost might also remain at a quite high level? So those are the two questions.

Actually, one last one, the third one regarding the dividend payout policy. I'm just wondering if you have any comment on that one for this year.

(Interpreted). The fuel cost adjusted tariff system (inaudible - microphone inaccessible).

Thank you. We would like --

(Interpreted). (Inaudible - microphone inaccessible). LNG generation and that's why the purchase from the IPP has gone up. In May of this year we will be adding capacity especially from the KOSEP and also Incheon Airport which will be 890 megawatts as well as 200 megawatts respectively.

The increase in the purchase amount from IPP which uses LNG will likely go up until December of this year, which is the time when we will be adopting the new generation at Shin Kori which will be a capacity of 1,000 megawatts.

(Interpreted). As the Head of Treasury department at KEPCO I would like to first extend my sincere apology to our shareholders for not being able to pay out our dividend for the past two years. Our dividend guidelines for this year would be somewhat similar level as the 2008 level, which would be 30% of our net profit. However if our surplus profit is less than KRW1 trillion, we will be reconsidering this dividend payout ratio to build a sound financial structure.

For our mid and long term dividend policy, we will be fully taking account the internal rate of return on our investment and we will try to maintain the 30% level versus our net profit for our dividend policy. Also we will be taking into consideration the performance from our overseas business, especially the value created from our new growth engine as well as investment return that we gained from the overseas investment.

Hi, hello? Okay. I have two questions. First question is you mentioned that tariff hike would only be discussed in second half this year. Do you mean there is no any discussion at the moment? And when do you expect your Company will start negotiation with the government for potential tariff hike?

The second question. Previously you mentioned stimulation tests for the automatic fuel pass through would kick off in March. So what is the progress at the moment? Thank you.

(Interpreted). Could you please ask your second question once again?

My second question is, when you announced your 2009 result in February you said you would start to implement stimulation test for your automatic fuel pass through mechanism, and the test is supposed to start in March this year. I would like to know what is the progress so far. Thank you.

(Interpreted). On your question on the increase of the tariff rate, KEPCO is currently preparing for that. And we have completed calculating our gross cost of goods sold at the moment. And we are also preparing for the overall direction to increase the electric tariff rate. We are not planning to discuss this starting second half of this year. What we are aiming for is to actually implement this tariff rate increase starting second half of this year.

On your question on the fuel cost adjustment system, this may be repetitive of what I have said before, but we have amended the relevant regulation in February and we have started the pilot simulation. And we have completed building the overall system as of April of this year. Starting mid of April we are going to conduct an end user simulation.

(Spoken in Korean).

Okay. I just wanted to know about the debt here at KEPCO? What the total consolidated debt is and what the plan for the debt repayment is in this year. Would you be -- what is the current cash that you are sitting on? And would you be looking to raise more debt for the year in order to meet your maturities, or how would you be going about it?

(Interpreted). If you look at the overall debt outstanding, as of first quarter of this year KEPCO currently has an increase of KRW2.1trillion in borrowing or debt, which amounts to KRW23.4 trillion. Our GENCOs have increase of KRW2.4 trillion in debt which amounts to KRW11.85 trillion in total. The total outstanding debt therefore is up by KRW4.5 trillion to a record KRW34.9 trillion. And the overall guidance for our, this year's debt amount would be up by KRW8.3 trillion to a record KRW41.1 trillion.

And also if I may share the breakdown of this borrowing at KEPCO, as of end of last year -- or end of this year, we will be having increase of borrowing by KRW8.4 trillion from KRW21.8 trillion at the moment. And we will be repaying KRW3.6 trillion in debt as at the end of this year. So this will give us a total of KRW26.6 trillion in borrowing.

And as for six GENCOs, at end of last year their outstanding debt was KRW11 trillion. They will be borrowing additional KRW5 trillion this year and also repaying KRW1.5 trillion. So at the end of this year the outstanding debt will amount to KRW14.5 trillion.

So if you add all of that up, as of end of last year we had KRW32.8 trillion in debt. We will be borrowing KRW30.4 trillion more and repaying KRW5.1 trillion within this year. And that will give us overall debt of KRW41.1 trillion at the end of this year.

(Interpreted). Also as of end of March this year our cash and cash equivalent amount is KRW1.8 trillion.

Does that answer all of your questions? Then we will now move on to our next question.

(Interpreted). So far we -- now we would like to switch back to our Korean room. (Operator Instructions). Now we would like to go on to our next question? The next question will come from Shin Ji-yoon of KTB. Hello?

(Interpreted). I have some questions related to your tariff scheme. My question is about fair rate of return of your tariff scheme. What will be the profit and dividend if we can achieve the fair rate of return? I think that you have been very good as to the cost level. As far as I know this year your fair rate of return is going to be around 5% for the year 2010. So 5% of fair rate of return, is it going to be satisfactory enough to your investors? Do you think that when you have income or profit based on the fair rate of return is it going to be sufficient to cover all the funds that is necessary for your capacity investment?

(Interpreted). About the fair rate of return, it is calculated based on the CEPM method. And that's how we calculate our actual rate of return. We have set the rate of return at 5.6% recently. It's relatively low compared to some conditions that we're faced with. About a couple of years ago, back in 2006 it stood at 6.5%. So now the figure has become much lower.

There are some reasons for this. Number one, we are having lower interest rate. And also when we calculate our equity we also take into account the interest rate for our equity which has been falling for the last several years. And the risk coefficient remains quite low at the moment. In other words, we have this figure at a very low level because of the market conditions that I've mentioned.

I think we will have it adjusted a bit higher with improvements in the market conditions. If we achieve 5.5% of our fair rate of return, it's going to leave us with about KRW4.4 trillion in terms of income before taxes. That means we will have about KRW3 trillion of income in regressive terms. And if we could be utilizing some other funds like depreciation fund, then I don't think we will have any increases in debts going forward this year.

Does that answer your question?

(Interpreted). I'm just asking this. I'm not sure if you're serious about the shareholder value. If you really think seriously about your shareholder value, then I think equity investment needs to be sufficient with higher security of interest. Given the risk premium and all the other factors, I think the equity investment that the market expects from KEPCO is quite different from the actual equity investment that is now taking place within KEPCO. That's why I asked the question.

(Interpreted). Now we would like to move on to our next question. We don't have any questions remaining. (Operator Instructions). Next question will come from Goldman Sachs from Kim Rosa.

(Interpreted). I have two questions. On the accounting it seems that your customer cost is up. What is your annual guidance for that?

Second question is this year's guidance for EBIT, what is this year's guidance for EBIT for KEPCO?

We are preparing for the answer. We will be right back.

(Interpreted). I would like to answer that question. Our corporate tax expense is reflected after adjusting tax on the EBIT. So it's very difficult for us to have guidance for 2010. Just for your reference, in 2009, as of end of 2009 that is, our corporate tax expense was KRW42.7b. I'm sorry for not able to answer your question at this point.

One thing I would like to add is that consolidated basis tax expense was 114.8%. The reason the tax rate went up is because there was change in deferred corporate tax expense. Our corporate tax asset and corporate borrowing changed. That's why our valid tax rate went up significantly. In the first quarter, if you look at our corporate tax expense for the first quarter I can get back to you with that answer later on after looking at our data.

(Interpreted). My name is [Bun Kyu Soh]. I'm responsible for accounting. As you know the corporate tax expense is calculated in a very unique way. That is we use equity method. So what this is is that we use the net profit and we calculate the corporate tax expense and then add on to equity method. That is redundant actually somewhat. And we have duplicated taxation. That is in KEPCO that's why the corporate tax expense is relatively high because this tax is taken into account twice.

(Interpreted). Now the next question will come from Mr. [Echang Bum] of Woori Securities.

(Interpreted). I have a couple of questions. My question is about your nuclear business. As regard the UAE nuclear power plant contract, I understand that there are details that are being made clear right now. If you compare what's the situation today to what you were -- to the situation that you were in when you struck the deal, what's the difference?

And also going forward, I think it would a bit difficult for you to predict precisely what will happen going forward, but if there are any expected ROI's or other performance results that you expect from this nuclear power plant contract, could you please elaborate on them please?

(Interpreted). Your question was about our UAE contract. And also you asked whether there has been some changes since the deal was closed end of last year. At the end of last year we concluded and signed this contract. And we are pursuing the same contract as it was signed last year right now. We signed our main contract last year and we are now working on sub contracting at the moment.

(Interpreted). I'm in charge of overseas business. Right now your question was about the potential countries that we might export our nuclear power plants. There has been some important announcement made in Turkey. And this announcement was about the joint research to be conducted between Turkey and Korea. And also we are now negotiating with our counterparties in Jordan and other countries to seize our possible import -- or export opportunity. Since it's very competitive in the international market for nuclear power business, I will not be able to go over the details or expose the details about the possibilities in this market.

(Interpreted). Due to time constraints we will take the last question from our English room. Could you please go ahead with your question? Before we go into the question we have one final question from our Korean room. We have Mr. [Yu Dok Sung] from [EET Securities]. Please go ahead sir.

I have three questions. First is about your CapEx expense. If you look at the material, the CapEx number is different from what you have presented in your presentation material by about KRW500b. Why is the number changed? And why do you expect your CapEx spending to increase? And when do you expect the CapEx increase to take place?

Secondly could you disclose the basis for your cost calculation on a monthly basis?

And about your sale of your 10% equity in KPS, what's the time schedule and how much income or profit do you expect out of this equity sales?

(Interpreted). Due to the technical difficulties we couldn't listen to your question clearly. I apologize for that. I'm sorry. I'm in charge of this matter. We will get back to you to answer your question in writing. Our apologies. Is it okay with you?

(Spoken in Korean).

Okay. For the CapEx third quarter it was KRW2.7 trillion, equal to 21% of your full year budget. Do you expect the full year budget -- do you expect the full year CapEx to be lower than your budget KRW12.6 trillion? This is question one.

And question two is for the KRW12.6 trillion CapEx for the full year, how many percent are for overseas business. Thank you.

I'm sorry. What was your last part of the question? Out of KRW20.7 trillion of the CapEx how much is for the operations, operating pipeline? Was that your question?

(Technical difficulty) outside Korea.

I'm sorry I was not able to hear that word. Could you please repeat?

How many percent for overseas operations?

(Interpreted). To answer your first question on the overall CapEx that is budgeted for this year, which is KRW12.7 trillion, has not changed. And we don't foresee any factors that may change this CapEx that has been already budgeted. However this CapEx does not include our overseas CapEx. So aside from that, our overseas CapEx will be additional KRW1.1 trillion to KRW1.3 trillion. That is separate from this KRW12.7 trillion.

If you look at our historical figure on how much CapEx was invested versus budget, it has been around 69% to -- I'm sorry 96% to 98% range. And this year we also anticipate that the CapEx expenditure would range around 97% to 99% -- 98%. Thank you.

(Spoken in Korean).

(Interpreted). I would like to thank you all for participating in this conference call in which we have invited 10 people who have been newly appointed to our IT committee. We are having this conference call in a room located in a separate building. There have been some technical difficulties that we've experienced today. We will make sure to remove those difficulties going forward.

With this we would like to conclude the Q1 2010 conference call. Once again I would like to thank you all for participating in today's conference call. If you have any additional questions, please contact our IR team anytime. Thank you very much.

(Interpreted). Thank you very much. With that we would like to wrap up our conference call. 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.